By Cathleen S. Yonahara, Freeland Cooper & Foreman LLP

A recent decision from a California Court of Appeal addressed the issue of whether a worker without a work permit was entitled to minimum wage and overtime protections under federal and state law. Further, the court examined the novel issue of whether lodging and meals provided to an employee may be used to satisfy the minimum salary requirement for exempt employees.

Background Facts

Joy Holiday is a California-based tour company owned and operated by a married couple, Jessy Lin and Harry Chen. In 2008, Ming-Hsiang Kao, a Taiwanese national, began working as a Joy Holiday tour organizer in China. In March 2009, Kao traveled to California on a tourist visa, moved into Lin and Chen's home, and started working at Joy Holiday's Millbrae office.

Kao managed the company's website, fielded sales calls, and distributed travel brochures. He generally worked from 9:00 a.m. to 6:00 p.m. on weekdays and from 9:00 a.m. to 2:00 p.m. most Saturdays. He was paid $1,700 monthly, representing a gross amount of $2,500 with an $800 rent deduction.

After receiving an H-1B visa in February 2010, Kao was put on the company payroll and received itemized wage statements, which didn't include his hourly rate or hours worked. He signed a "work agreement" stating he was hired as the office manager, his monthly salary was $2,500, and he was "obligated to work 20 hours a week." The agreement further stated, "If you stay in the office beyond 20 hours a week, it will be your personal choice."

Kao testified that as office manager, he normally worked at least 10 to 12 hours daily. In January 2011, he was demoted to "nonmanager status," and his gross monthly salary was reduced to $2,000. Joy Holiday terminated his employment on May 25, 2011.

Worker Sues for Wage and Hour Violations

Kao filed a lawsuit for violations of the federal and state statutes regulating minimum wage and overtime pay, failure to provide adequate wage and hour statements, and failure to timely pay wages upon his termination. Joy Holiday argued that Kao wasn't an employee while he was awaiting his H-1B visa, and after he received the visa, he was an exempt employee.

At trial, the company's accountant valued Kao's total compensation package at $2,858.67 monthly, including his $2,500 gross salary (both the monetary payment and the rent value) and the calculated worth of a company car, cell phone, and employer-provided meals.

The trial court rejected all of Kao's statutory wage claims. The court concluded that:

1. Kao was a nonemployee "guest" entitled to no compensation during the 11-month period he worked at Joy Holiday before receiving his H-1B visa.
2. His total compensation package after he received the H-1B visa placed him above the minimum salary for an exempt employee.

Finally, the court rejected Kao's claim for failure to provide adequate wage and hour statements given his status as a nonemployee and then as an exempt employee, and excused Joy Holiday's delay in paying his final paycheck. However, based on an equitable theory of recovery for services rendered, the court awarded him $58,284 in damages for unpaid labor because he worked 50 hours a week rather than 20 hours as stated in the work agreement. Both parties appealed.

Was Kao an Employee While Awaiting H-1B Visa Approval?

The appellate court found that the trial court improperly concluded that Kao wasn't an employee during the 11 months he was waiting for H-1B visa approval. The Fair Labor Standards Act (FLSA) protects undocumented aliens, so Kao's initial lack of a work permit was irrelevant. The trial court apparently deemed him a "trainee" for the 11-month period before his work visa application was approved. However, only a person who receives training without any salary and whose work serves only his own interests is a nonemployee trainee under the FLSA and California law.

Here, the payments to Kao constituted a "salary" because Chen had invited him to the United States with the promise of $2,500 monthly, he was paid the same amount both before and after he received a work visa, and several checks made out to him included the notation "salary." Furthermore, he performed tasks that employees normally would perform, and Joy Holiday was the "primary beneficiary" of his 11 months of work.

Was Kao an Exempt Employee?

According to the court of appeal, the trial court also erred in its conclusion that Kao was an exempt employee after he received his H-1B visa. First, the exemption was inapplicable to his employment from January to May 2011 following his demotion to "nonmanager status" because California law limits exempt status to management-level administrative employees.

Second, the exemption was inapplicable to his employment as the office manager from February to December 2010 because he didn't receive the minimum salary required for exempt status. During his employment, the minimum monthly salary was $1,971.66 under the FLSA and $2,773.33 under California law. However, the highest monetary amount he received as office manager was $1,900 monthly, which is below both federal and state standards.

The trial court erroneously included nonmonetary benefits (e.g., employer-provided lodging, meals, cell phone, and use of a vehicle) in determining that the minimum salary requirement was satisfied. Under the FLSA, an exempt employee's salary rate is determined exclusive of board, lodging, or other noncash items of value an employer may provide him.

The appellate court concluded that California law is consistent with federal law on this point. California's salary requirement, like the federal requirement, is stated as a monetary amount. Moreover, the California Division of Labor Standards Enforcement has adopted the federal approach in finding that the value of employer-provided meals or lodging cannot be used as a credit against the required minimum salary.

Because the minimum salary for an exempt employee wasn't satisfied under the federal and state statutes, Kao was entitled to payment for all hours worked at his regular rate of pay—$28.85—plus overtime from March 2009 to May 2011.

Kao Was Entitled to Itemized Wage Statements

Joy Holiday initially provided no wage statements to Kao before he received his work visa and later provided statements that didn't list his hourly pay rates and hours worked because it treated him as an exempt employee. The appellate court found that the payments he received from March 2009 through January 2010 were wages and had to be accompanied by an itemized wage statement.

Furthermore, since Kao was a nonexempt employee, the wage statements he was given from February 2010 until his termination were inadequate because they were missing his rate of pay and hours worked. Accordingly, he was entitled to recover penalties of $50 for the initial pay period in which the violation occurred and $100 for each subsequent violation, up to a maximum penalty of $4,000, plus attorneys' fees and costs.

Kao Was Entitled to Waiting-Time Penalties

The trial court also improperly excused Joy Holiday's 5-day delay in giving Kao his final paycheck on the next regularly scheduled payday after his termination. His final paycheck was due immediately upon his termination. Since his final paycheck was provided 5 days after his termination, he was entitled to waiting-time penalties of his daily wage rate for 5 days. Kao v. Joy Holiday (California Court of Appeal, 1st Appellate District, 6/15/17).

Bottom Line

A company cannot refuse to pay a worker minimum wage and overtime simply because he hasn't yet received his work permit. Anyone who is suffered or permitted to work by an employer is an employee entitled to minimum wage and overtime protections. The employer bears the burden of proving that a presumed employee is an independent contractor or a trainee. Similarly, an employer bears the burden of proving an employee is exempt from overtime because he satisfies the minimum federal and state salary requirements.

Under California law, an employer and an employee may voluntarily agree to credit a specified amount of employer-provided lodging and meals against the minimum wage obligations for nonexempt employees. However, this case clarifies that employer-provided lodging, meals, and other nonmonetary compensation may not be considered when determining whether an employer satisfies the minimum salary requirement for exempt employees.

Cathleen S. Yonahara, an editor of California Employment Law Letter can be reached at Freeland Cooper & Foreman LLP in San Francisco, yonahara@freelandlaw.com.