Arizona Industrial Commission Implements New Minimum Wage Act Emergency Regulations

On November 7, 2006, Arizona voters approved Proposition 202, which establishes Arizona’s first state minimum wage law.  The increase in minimum wage from the federal rate of $5.15 to the new Arizona rate of $6.75 went into effect on January 1, 2007, less than two months after Proposition 202 was passed by voters.  Due to this extraordinarily short time frame between passage of the initiative and its effective date on January 1, 2007, the Industrial Commission of Arizona, the agency charged with implementing and enforcing the regulations pursuant to the new law and the Governor’s order, has recently approved temporary Emergency Regulations to implement the law.

There has been no opportunity for public comment on the drafting of the Industrial Commission’s Emergency Regulations.  Likewise, the Industrial Commission did not publish or make available any of its draft regulations. Instead, the regulations were unilaterally implemented and went into effect on January 1, 2007.  The Industrial Commission intends to begin the formal rule making process in January 2007 for the adoption of permanent regulations.  Although interested parties can submit comments to the proposed regulations and even testify on the subject at hearings, it is very likely that the permanent regulations will be very similar to the Emergency Regulations issued in December.

Several of the key provisions of the Emergency Regulations that could potentially impact Arizona employers are discussed in detail below.  At the end of this E-Alert are several recommended action items for employers to reduce the costs and risks in implementing the new law.

Guidance on Definition of “Employee” and “Wage”

Definition of Employer

The Minimum Wage law applies to employees, but not independent contractors.  If a company intends to utilize the services of a worker as an independent contractor, the Minimum Wage law places the burden of proof on the employer to establish by clear and convincing evidence that the individual was properly classified as an independent contractor rather than an employee.  According to the Emergency Regulations, independent contractor status will be determined by the “economic realities” of the relationship.  The non-exclusive factors that may be considered are: (1) the degree of control that the alleged employer has over the manner in which the work is performed; (2) whether the worker’s opportunities for profit or loss is dependent on the worker’s managerial skill; (3) the worker’s investment in equipment or material, or employment of other workers; (4) the degree of skill required for the work; (5) the permanence of the working relationship; and (6) the degree to which the services rendered is an integral part of the alleged employer’s business.  (R20-5-1205(A)).

Definition of Wage

Unlike the federal Fair Labor Standards Act (FLSA), the new Arizona law applies only to minimum wages, not to overtime liability.  The definition of wage in the Arizona law is different than the FLSA.  The primary differences deal with the tip credit.  The Emergency Regulations also include guidance permitting tip pooling (R-5-1207(A)).

Also, unlike the federal law, the Arizona statute is silent on whether employers can count the cost of food, lodging, or other facilities customarily furnished to employees towards their payment of wages.  However, the Emergency Regulations do provide that an employer may include as a credit toward minimum wage the reasonable cost to an employer of furnishing an employee with board, lodging, or other facilities.   Under the Emergency Regulations, the term “reasonable cost” means not more than the actual cost to the employer of the board, lodging, or other facilities furnished to an employee.  While reasonable cost does not include a profit to the employer or to any affiliated person, reasonable cost may include the cost of operation and maintenance, but should not exceed the fair rental value of the item. The Emergency Regulations also separately list items and costs that may not be credited towards the computation of wages under the Arizona statute, including: tools; equipment; uniforms, including suits, dresses, aprons, and all other garments worn by an employee as a condition of employment; laundry or cleaning of uniforms; maintenance of tools, equipment, or uniforms; breakage or loss of tools, equipment, or uniforms; and any other item required by the employer to be worn or used by the employee as a condition of employment or for the primary benefit or convenience of the employer.  (R20-5-1207(B)).

New Guidance on Recordkeeping

When investigating a complaint against an employer, the Industrial Commission is specifically authorized to review the employer’s records regarding all employees, not merely the employee who is the subject of the complaint.  The Emergency Regulations require that records not kept at the “place or places of employment” must be made available to the Industrial Commission Labor Department within 72 hours following notice from the Department.  (R20-5-1209(A)).

The Minimum Wage statute requires employers to post notices about the law, make disclosures to employees about their businesses’ name, address and phone number upon hire, and to maintain payroll records for four years showing the hours worked each day and the wages paid to all employees.  The Emergency Regulations require the following records to be kept for non-exempt employees:

• Name in full, as used for Social Security recordkeeping purposes, and on the same record, the employee’s identifying symbol or number if such is used in place of the employee’s name on any time, work, or payroll record;

• Home address, including zip code;

• Date of birth, if under 19;

• Occupation in which employed;

• Time of day and day of week on which the employee’s workweek begins. If the employee is part of a workforce or employed in or by an establishment all of whose workers have a workweek beginning at the same time on the same day, then a single notation of the time of the day and beginning day of the workweek for the whole workforce or establishment is permitted;

• Regular hourly rate of pay for any workweek and an explanation of the basis of pay by indicating the monetary amount paid on a per hour, per day, per week, per piece, commission on sales, or other basis, including the amount and nature of each payment;

• Hours worked each workday and total hours worked each workweek;

• Total daily or weekly straight-time earnings or wages due for hours worked during the workday or workweek, exclusive of premium overtime compensation;

• Total premium pay for overtime hours. This amount excludes the straight-time earnings for overtime hours recorded under subsection (B)(8) of this Section;

• Total additions to or deductions from wages paid each pay period including employee purchase orders or wage assignments. For individual employee records, this includes the dates, amounts, and nature of the items that make up the total additions and deductions;

• Total wages paid each pay period; and

• Date of payment and the pay period covered by payment.

(R20-5-1210(B)). 

The Emergency Regulations somewhat ease these recordkeeping requirements for exempt salaried and outside sales personnel as defined by federal regulation 29 CFR § 541, by requiring employers to maintain only records set forth in (1)-(5), (11) & (12) above.  However, the Emergency Regulations also require a record of the “basis on which wages are paid” so as to be able to determine if the minimum wage has been “exceed[ed],” including whether the employee works “full time or part time.” (R20-5-1210(C)).  The regulations also permit employers to maintain proof of a fixed schedule (in lieu of actual hours worked) for employees working on a fixed schedule, provided records are maintained of any aberrations to such employee’s scheduled hours.  (R20-5-1210(D)). 

Lack of Regulations Regarding Employee Access to Records

The new Minimum Wage law grants to employees and their representatives the right to inspect payroll records for the requesting employee.  The Emergency Regulations fail to address this aspect of the law and do not dictate the terms or conditions under which employers must provide access to their payroll records.  Because this is an aspect of the law that could be abused by employees and could burden employers, we recommend that employers consider adopting policies for dealing with employee requests to review payroll records.

Regulations Regarding Sanctions and Penalties

The Minimum Wage statute also provides that any employer who violates the recordkeeping, posting or other requirements of the new law are subject to a penalty of $250 for the first violation or $1,000 for each subsequent or willful violation of the “recordkeeping, posting, or other requirements” established by the Industrial Commission.  The “other requirements” that will be subjected to the monetary penalty are not defined, although the Emergency Regulations also include a provision for “hindering an investigation,” which is defined as follows:

An employer shall be deemed to have hindered an investigation under the Act if the employer engages in conduct, or causes another person to engage in conduct, that delays or otherwise interferes with the Department’s investigation.  Conduct that hinders an investigation includes:

• Obstructing or refusing to admit the Department to any place of employment authorized under the Act;

• Obstructing or refusing to permit interviews authorized under the Act;

• Failing to make, keep, or preserve records required under the Act or this Article;

• Failing to permit the review and copying of records required under the Act and this Article; and

• Falsifying any record required under the Act or this Article.

(R20-5-1212).  The regulations also give the Industrial Commission the power to levy unspecified civil penalties for “for engaging in conduct that hinders an investigation of the Department.”  (R20-5-1217).

The Minimum Wage statute also requires employers who fail to pay the minimum wage to pay treble the amount of underpaid wages, plus interest. Neither the statute nor the Emergency Regulations address whether employers who discover and correct minimum wage violations before a complaint is filed would be subject to any penalties or interest.  However, the regulations do contain the following requirement:

An employer who makes retroactive payment of wages, whether done voluntarily or as otherwise ordered to do so, shall record and preserve, as an entry on the pay records, the amount of such payment to each employee, the period covered by such payment, and the date of payment.

(R20-5-1210(F)).

Investigative Authority

The law also gives the Industrial Commission and the courts the authority to order payment of unpaid wages and civil penalties, as well as other relief.  While the law is not explicit regarding the procedures of the Industrial Commission in conducting hearings and ordering the payment of penalties, the Emergency Regulations create an enforcement process whereby the Commission investigates “administrative complaints” and utilizes the Administrative Law Judge hearing process similar to the procedure utilized for workers’ compensation and OSHA matters. (See R20-5-1213 through 1216).  The additional equitable relief could include injunctions, special reporting requirements or monitoring requirements, special notices to employees or other remedial measures for employers.  (See also R20-5-1217).

Lack of Specific Guidance Regarding Retaliation

The most dangerous aspect of the Minimum Wage law for employers is the provisions giving employees the right to bring claims for alleged retaliatory actions taken against them.  The law includes large damages and unfair presumptions for adjudicating the new retaliation claims.  The Emergency Regulations do not include provisions adding to or specifically addressing the retaliation claims.

Recommended Action Items for Employers

With the effective date of the new law January 1, 2007, it is essential for Arizona employers to modify their recordkeeping policies and monitor their payroll practices to achieve compliance with the Act.  The form of the required poster for the new law is attached to the original email.  A copy must be conspicuously posted in the same place as other employment posters.

Employers must begin providing a disclosure form to employees hired after January 1, 2007 disclosing the corporate name, address and telephone number of the employer.

Because of the danger of retaliation claims under the new law, employers should consider adopting policies that encourage or require employees to report promptly to appropriate representatives of the company any information about possible minimum wage violations.  Otherwise employers might make a termination decision and later face a retaliation claim based on allegations that the employee raised minimum wage issues before the termination.

Employers should also consider adopting procedures to apply to employee requests to inspect payroll records.  Those procedures should also deal with how employees may designate a representative to inspect the records on their behalf.  Proper procedures should minimize the costs to the employer for complying with employee payroll record review requests and discourage the use of such requests as a tool by unions to harass the employer.

Employers should also review their employee handbooks to revise or adopt provisions to be consistent with the new law and the recommendations above.

If you would like advice regarding the new law or need assistance with updating your policies and handbook provisions to implement the new law, contact the Ogletree Deakins attorney with whom you normally work.

Note: This article was published in the January 3, 2007 issue of the Arizona eAuthority.