California employers are obligated to maintain a variety of records under the state and federal wage and hour laws. These include records regarding work time, meal periods, compensation, and several other types of information. As indicated by recent cases and several older ones, a failure to keep and produce required records can present serious ramifications. Indeed, as noted in the 2021 edition of Richard Simmons’ publication, California’s Meal and Rest Period Rules, it is imperative that employers adhere to California’s rules by making their time records their allies rather than their enemies. For example, earlier this year the California Supreme Court stated in Donohue v. AMN Services, 11 Cal.5th 58 (2021), that time records that show a late, short or missed meal period create a rebuttable presumption of a meal period violation. While employers can seek to overcome that presumption and prove no violation actually occurred, poor records can significantly increase an employer’s risks and lead to avoidable legal fees and defense costs.

1. The Landmark Decision In Hernandez v. Mendoza

More than 30 years ago, a California Court of Appeal decided an important case that shifts the burden of proof in wage-hour cases. The court examined the consequences employers may face if they fail to produce required information relating to an employee’s claims. Hernandez v. Mendoza, 199 Cal. App. 3d 721 (1988) established the principle that an adverse evidentiary inference can be drawn where an employer fails to produce required time records that accurately show all hours worked, including overtime work.

Specifically, the court determined that an employee met his burden by proving he performed work for which he was improperly compensated and produced sufficient evidence to show the amount and extent of that work as a matter of just and reasonable inference. The burden then shifted to the employer to come forward with evidence of the precise amount of work performed or evidence to negate the reasonableness of the inference to be drawn from the employee’s evidence. For example, if an employee testifies that he worked substantial amounts of overtime and the employer fails to produce accurate time records disproving the employee’s testimony, the employer will face exposure and an uphill legal battle.

2. The Employer’s Failure To Produce Records Hurt Its Regular Rate Of Pay Claim

In the September 22, 2021 case of Morales v. Factor Surfaces LLC, __ Cal.App.5th __ (2021), the court of appeal extrapolated from the Hernandez v. Mendoza decision to conclude that an employer who failed to keep required records of the compensation and commissions an employee received was required to treat all of the wages, including commissions, as salary for purposes of calculating the regular rate of pay. This increased the employer’s overtime liability because the methodology for calculating the regular rate of pay on commissions is more advantageous for employers than the methodology used to calculate the regular rate on salaries.

The employee testified that he was hired in 2016 to work six days a week for $120 per day, so his weekly salary was $720. He received a paycheck dated June 25, 2016 in the amount of $736.60. The court observed that the difference between $736.60 and $720 was likely attributable to commissions. But the employer failed to keep records required by statute indicating the portion of each weekly paycheck attributable to commissions.

Generally, the regular rate of pay for commissions is calculated by dividing commission earnings in a week by total hours worked. The employer then owes half the regular rate for each of the overtime hours in the workweek. However, where the employer agreed to pay the employee $120 per day for a six-day week, the court determined that a weekly salary was derived by the compensation records where the employer did not accurately record hours worked or the commission portion of the employee’s earnings. Because the regular rate of pay for a salaried employee is calculated by dividing the weekly salary by the non-overtime hours worked (40 hours) rather than total hours worked, the regular rate is higher under state law when an employee is paid a salary than when he is paid an equal amount in commissions. The court of appeal concluded that the trial court did not err by attributing Morales’s weekly paycheck to salary alone as opposed to speculating about the amount of commission paid each week.

3. There Is No Defense If Your Dog Ate The Records

The employer argued that it lacked proper records because they were located in a vehicle that was stolen and later recovered without the records. The court determined that the employer’s explanation was unbelievable. As a consequence of its failure to maintain the necessary records, the employer was required to divide the employee’s total earnings, including the $120 per day and the amounts alleged to be commissions, by 40 hours (instead of total hours) to compute the regular rate of pay. It was thus compelled to use the denominator of 40 hours rather than the total actual hours to calculate the regular rate of pay and overtime owed. This created larger liability for the employer than the sum that would have been owed had the employer kept the records required by law.

4. Practical Observations

There are lessons to be learned from each of these cases. First, employers should take their record-keeping and time-keeping obligations seriously and meet them head on. They should ensure their records are accurate, fully address their legal responsibilities, and show compliance with the law, including the obligation to provide 30-minute, duty-free meal periods that begin at proper times. Second, time-keeping systems should be devised and administered so they aid employers to demonstrate compliance. If they show violations or even suggest that violations may have occurred, they can create significant legal problems. Plaintiffs’ attorneys often cite records indicating the existence of missed, late or short meal periods as displaying a purported “violation rate,” even though they simply create a rebuttable presumption of a violation that can often be overcome with probative evidence. Employers should seek to avoid that presumption by taking proactive measures to make records their ally.

California’s time-keeping obligations are addressed in Chapters 7 and 13 of the Wage and Hour Manual for California Employers by Attorney Richard J. Simmons. The 2021 edition of the book is available from Castle Publications, LLC.

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