The New San Francisco Living Wage Ordinance

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1 FEBRUARY 2004 The New San Francisco Living Wage Ordinance By Jeffrey M. Tanenbaum, Esq., and Marcie A. Keenan, Esq. Effective February 23, 2004, San Francisco employers will be subject to a much higher minimum wage pursuant to the new San Francisco Minimum Wage Ordinance (MWO), popularly (or unpopularly) known as the San Francisco Living Wage Ordinance. An Overview of the MWO Background The current federal minimum wage is $5.15 per hour, and the current state minimum wage is $6.75 per hour. The difference between the two is further compounded for many California employers because (a) California law provides a lower threshold for overtime eligibility and (b) California law prohibits crediting any tips toward wages. And now the MWO puts San Francisco employers at an even greater competitive disadvantage by initially setting a minimum wage of $8.50 per hour. 1 What Minimum Wage Do San Francisco Employers Now Have to Pay? As of February 23, 2004, the minimum wage in San Francisco will be as follows: 1. $8.50 through December 31, As of January 1, 2005, this will increase by an amount corresponding to the prior year s increase in the Consumer Price Index (CPI) for urban wage earners and clerical workers for the San Francisco-Oakland-San Jose, California, metropolitan statistical area. 1 As an example of the huge disparity created, a San Francisco restaurant would pay a waiter at least $12.75 for each hour worked in excess of eight hours in a day under the MWO. By comparison, a restaurant in a state that follows the federal minimum wage and overtime rules and allows a tip credit could pay $2.13 for the same hours of work. DOL FAQs 1 of 5

2 3. There is an exception for employers employing fewer than ten persons in a given week (full time, part time, or temporary) and 501(c)(3) nonprofits. For these small businesses and nonprofits the San Francisco minimum wage is as follows: Who Is Covered? a. The state minimum wage (currently at $6.75) through December 31, 2004 b. $7.75 from January 1, 2005, through December 31, 2005 c. Effective January 1, 2006, the phase-in for small businesses and nonprofits ends, and the full MWO wage then in effect will apply. The MWO applies to all employees who perform at least two hours of work for an employer within the geographic bounds of the city and who would qualify for a minimum wage under state law (12R.3). 2 The term employee also includes participants in a welfare-to-work program. The MWO defines an employer as any person as defined in Section 18 of the California Labor Code, and includes corporate executives or officers who directly, or indirectly through an agent, temporary service, or staffing agent or similarly entity, employs or exercises control over the wages, hours, or working conditions of any employee (12R.3). California Labor Code Section 18 defines a person as any person, association, organization, partnership, business trust, limited liability company, or corporation. What Else Do San Francisco Employers Have to Do under the New Law in Addition to Paying Higher Wages? In addition to paying the higher minimum wage, San Francisco employers have to take several other steps under the new law: 1. The San Francisco Living Wage/Living Health Division of the Office of Contract Administration or any other designated city agency (collectively referred to as the Agency) has created a notice concerning the MWO, including the current minimum wage rate and employee rights. San Francisco employers must post the required notices in English, Spanish, and Chinese as well as any other language spoken by at least 5% of the employees at the workplace. This will have to be posted each year. (12 R.5(b).) 2. San Francisco employers must provide each employee at the time of hire the name, address, and telephone number of their employer in writing (12R5(b)). 2 It appears that the purpose of the DWO is to govern the wages of all such employees actually performing work within the geographic boundaries of the city, and not just work performed for an employer who happens to be geographically located in the city, although the language of the DWO is not exactly clear on this point. 2 of 5

3 3. San Francisco employers must retain payroll records pertaining to their employees for a period of four years and allow the Agency access to such records. Where these records are not maintained, there will be a presumption that the employer did not pay the higher San Francisco minimum wage. An employer can only overcome this presumption with clear and convincing evidence to the contrary. (12R.5(c).) 4. It is unlawful to discriminate or take adverse action against any person for exercising rights protected under the MWO. This prohibition on retaliation applies to any person who mistakenly but in good faith alleges noncompliance with the MWO. And further, any adverse action taken against a person within ninety days of the person s exercise of a MWO protected right creates a rebuttable presumption that the adverse action was in retaliation for the exercise of such rights. (12R.6.) How Will the New Law Be Enforced? In order to enforce the law, the Agency has been given the right to adopt guidelines or rules (12R.7(a)). The Agency has been given broad enforcement authority and may investigate any possible violations and order temporary relief pending completion of a full investigation or hearing (12R.7(b)). If, after a hearing, the Agency determines that a violation has occurred, it can order reinstatement, payment of back wages, and the payment of an additional administrative penalty in the amount of $50 to each employee or person whose rights were violated for each day or portion of a day the violation occurred or continued. If the employer does not comply with any such order, the Agency can file a civil action and request that various city agencies or departments revoke or suspend licenses, permits, etc., until the violation is remedied. (12 R.7(b) and (c).) The Agency can also order a violating employer to pay the city an additional sum of $50 for each day or portion thereof for each employee for whom the violation occurred or continued. 12 R.7(b). It is unclear whether this additional penalty amount only applies to situations where prompt compliance is not forthcoming after a hearing or to any violation. All of these sums are then updated annually for inflation, using the same CPI index that is used to increase the minimum wage, beginning January 1, (12R.7(b).) In addition, there is a bounty-hunter provision allowing a civil lawsuit by any aggrieved person or entity a member of which is aggrieved (clearly intended to cover unions) or any other person or entity acting on behalf of the public. The prevailing party is then entitled to legal and equitable relief and the payment of attorneys fees. (12R.7(c).) All of the rights under the MWO are also cumulative to any other rights under the law (12R.9). This means that all of the penalties and enforcement activity just described will likely be only a small portion of the claims made against an employer for a violation of the MWO. San Francisco employers can expect that any violation will give rise not only to allegations of violations of the MWO itself, but violations of the California Business & Professions Code alleging unfair business practices, and other violations of the California Labor Code, 3 of 5

4 including but not limited to claims brought under the new California Labor Code bountyhunter provision, which allows for an additional penalty of $100 per employee per pay period for the duration of the violation for a first violation and $200 per employee per pay period for a further violation, plus attorneys fees (California Labor Code 2698, et seq.). This new law applies to virtually any violation of the California Labor Code and/or a failure to timely pay wages due and owing (Labor Code Section 203) and/or failure to pay less than a statutory wage scale (Labor Code Section 223). Moreover, Labor Code Section 206(b) provides for payment of treble damages for willful failure to pay wages due and owing. Compliance Strategies San Francisco employers must give substantial thought to compliance strategies. Some possibilities include the following. Adjusting Schedules to Minimize Overtime The effect of the MWO is compounded for overtime. Thus, adjusting schedules to minimize overtime will be important for some San Francisco employers. Review of Employee Classifications The MWO only applies to employees who qualify for a minimum wage under state law. A review of an employer s classification of employees as exempt or nonexempt may be helpful to determine if some are really exempt but are being treated as nonexempt. It appears that the MWO should itself have no effect on the qualifications for exempt status for executive, administrative, or professional employees, since such status is based on actual duties performed and a monthly salary of at least two times the state minimum wage for full-time employment (California. Labor Code 515(a) (emphasis added)). Collective Bargaining Waiver The new law allows for a waiver under a collective bargaining agreement. If you have a union contract, you can consider this potential option. Mandatory Tip Pooling The Division of Labor Standards Enforcement (DLSE) does, reluctantly, accept a mandatory tip-pooling program for certain employees. However, such tip pooling must be only among employees who provide direct table service. (DLSE FAQ on Tips and Gratuities No. 4.) Voluntary Tip Pooling Employees can voluntarily pool or share tips (even among those not involved in direct table service), but this must be purely voluntary and cannot be expressly or implicitly required by an employer. 4 of 5

5 Service Charge The DLSE recognizes that at least some employers can impose a mandatory service charge (DLSE FAQ on Tips and Gratuities No. 6). This has the advantage of allowing an employer to recover the excess sums paid in wages over the MWO, while pointing out to customers exactly why they are being charged this fee. However, there can be disadvantages as well. A service charge may alienate some patrons and, if it reduces the amount of tips left for employees, it may cause good employees to leave. Please keep in mind that a mandatory service charge (no matter what it is called service charge, surcharge, minimum wage fee, etc.) would be subject to sales tax. Corporate Restructuring It may be possible for some smaller San Francisco employers to restructure to take advantage of the delayed implementation program for smaller employers Reducing Staff Unfortunately, reducing staff may be the only practical alternative for some Golden Gate Restaurant Association (GGRA) members. Relocation of Facilities or Workforce It may be possible to relocate some staff (office, bookkeeping, laundry, etc.) outside of the city. Sadly, some San Francisco employers will, undoubtedly, also need to consider completely relocating outside of the city. Conclusion The negative impact that the MWO will have on San Francisco employers, their employees, their patrons, and the city as a whole, will be significant. You should carefully consider your compliance strategies and discuss them with legal counsel. There are many traps for the unwary associated with noncompliance. If you have any questions or require further information regarding these or any other matters, please feel free to contact Jeffrey M. Tanenbaum at , Marcie A. Keenan at , or any of the attorneys in our Labor and Employee Benefits Group. Visit our web site at 5 of 5