Still Ignoring Employment Laws? There are “$8.3 Million” Reasons to Start Paying Attention

By: John A. Mavros

On March 8, 2018, the California Labor Commissioner – the agency tasked with enforcing labor laws – cited fitness and boot camp company Camp Transformation Center (the “Camp”) $8.3 million for “wage theft” and labor law violations.  After a complaint in May 2017, the Labor Commissioner investigated the Camp’s pay practices and found multiple wage and hour violations dating back to August 2014. The citation should be a warning to all fitness business owners that ignoring employment laws can have catastrophic results.  This article explains what led to this citation and how to avoid the same fate.

Do Not Misclassify Your Employees

The Camp paid its trainers “for each class taught” likely because it believed (mistakenly) that its trainers were independent contractors – not employees.  While the Labor Commissioner calls this “wage theft,” the citation was largely based on the fact that trainers were misclassified and, as a result, were not paid minimum wage and overtime properly.  

How do you know if someone is misclassified as an independent contractor? It is a multi-factor test, but the key factor is whether the employer has the “right to control” the individual.  Note that it does not matter if the company uses a contractor title, or if the person calls himself a contractor. The critical factor is whether the actual relationship evidences an employment relationship.  Courts will generally look at the factors listed below. An employment relationship is more likely to be found if:

1. The company has the right to control how the person performs his/her job;
2. The company supplies the equipment, tools, and place of work;
3. The company pays by the hour, rather than by the job;
4. The work performed is part of the regular business of the company.
5. The services are to be performed over a long period of time.

There are numerous other factors to consider, but the lesson here is not to assume that your trainer (or any other person) is an independent contractor unless you have consulted legal counsel.

Pay Employees for All Hours Worked

Once the Labor Commissioner found that the trainers were not independent contractors, the citation amounts were calculated based on the fact that employees were not paid for all hours worked.  Because the trainers were only paid for each session worked, any hours worked outside of the actual training session equated to unpaid minimum wage and overtime (where applicable). As a result, the Labor Commissioner found that the Camp was responsible for over $1.5 million in unpaid minimum wages and unpaid overtime.  

All employees must clock in and out for all hours worked.  Do not allow your employees to engage in work “off-the clock” by performing tasks without being clocked in and paid for it.  It is crucial that employees are paid for all time spent engaged in business tasks. For trainers, this could include any work calls to members, prep time, actual training time, mandatory meeting time, clean up time, and travel between worksites.  Employees are also entitled to reimbursement for mileage if they travel for business purposes.

Comply With Any Meal and Rest Period Laws and Require Detailed Time Records

The Labor Commissioner’s investigation also found that receptionists were not provided required meal and rest breaks.  The citation included $392,106 for meal and rest period violations. Federal law does not mandate meal periods, but California, along with 22 other states and territories do.  This includes, but is not limited to, New York, Illinois, Massachusetts, Nevada, Oregon, Washington, and Colorado.

In California, non-exempt employees must be provided the opportunity to take an uninterrupted meal break of at least 30 minutes before working more than 5 hours.  Employees must clock out for meal periods and clock back in before returning to work. Additionally, non-exempt employees must be authorized and permitted to take two 10 minute rest breaks for every four hours worked, or major fraction thereof.  Anything over two hours is considered by the courts to be a “major fraction.”

All non-exempt employees (i.e. receptionist, admin, or other office employee) must be provided meal and rest periods in compliance with local laws.  Fitness business owners must ensure that employees are following company policy by consistently clocking in and out for meal periods and by accurately logging their time.

Identify Split Shifts and Pay Premiums

In California, non-exempt employees who work a “split shift” must be paid a “split shift premium.”  A split shift occurs where the employer establishes a work schedule that is interrupted by an unpaid nonworking period, other than a bona fide meal or rest period.  An example of a split shift could occur where a trainer prepares for a training session, delivers that training session to members, and is not scheduled for another training session until two hours later.  The two scheduled work periods separated by the unpaid nonworking time in between would constitute a split shift. Key to the determination of whether a split shift occurs is who caused the unpaid nonworking period between two working periods.  If the employee requests the nonworking period to be part of his or her schedule, no split shift premium is due. A split shift only occurs where the nonworking period is caused by the employer.

Generally, non-exempt employees who are paid minimum wage and who work a split shift must be paid a split shift premium of one hour of pay at the minimum wage in addition to the wages earned for the hours actually worked.  The calculation of a split shift premium for a non-exempt employee who earns more than minimum wage will be paid the difference between what she actually earned and what she would have earned had she been paid the minimum wage for the entire shift plus an extra hour at the minimum wage.  

The Labor Commissioner cited the Camp for nearly $6,000 in unpaid split shift premiums.  The more employees (or misclassified independent contractors) one has who are being compensated close to the minimum wage, the greater the potential exposure for unpaid split shift premium pay.

Implement Written Policies

Finally, every fitness business with employees should have a compliant employee handbook that reinforces compliant wage and hour policies.  Without written policies, any company will have a hard time proving that it was complying with the law.

Conclusion

The Labor Commissioner’s $8.3 million citation should be a wake-up call to fitness business owners that wage and hour laws cannot not be ignored.  A good start includes (1) ensuring that all employees are classified properly, (2) implementing written wage and hour policies, and (3) confirming that those policies are followed in practice.  Following these simple steps can minimize risk and avoid costly citations and lawsuits down the road.

This article provides an overview of the law and is not intended to be, nor should it be construed as legal advice for any particular fact situation.  For additional information regarding how this issue may affect your business, please contact the author, John A. Mavros, Partner at Fisher & Phillips, LLP at (949) 851-2424 or [email protected]