On November 15, 2021, West Hollywood, California enacted an ordinance that establishes a local minimum wage, requires employers to provide paid and unpaid leave benefits, and governs how businesses advertise and distribute service charges. For businesses with employees performing work in West Hollywood, this trifecta could present considerable legal compliance and operational challenges, which compound for those with employees throughout California, particularly if they operate in nearby cities like Los Angeles and Santa Monica, where similar (not identical) laws exist.

Operative Dates: Different requirements will apply on different dates.

• Service Charges: The ordinance does not expressly say when its service charge provisions become operative, so absent future guidance from the city, these should take effect when the law does, 30 days after its final passage: December 15, 2021.
• Minimum Wage: These provisions become operative for all covered employers on January 1, 2022, but, as we explain below, the minimum wage rates will differ based on the type of establishment / worker or (for the first two years) how many employees a business has.
• Paid & Unpaid Leave: These provisions become operative on January 1, 2022 for “hotel employers” and “hotel workers,” whereas, for other entities, July 1, 2022 will be the start date.

Covered Employers & Employees: Generally, the law covers all employers with covered employees, but certain aspects will phase in at different schedules or rates.

Hotel employers are subject to the leave provisions before other employers, and will be subject to a heightened minimum wage rate for the first two years the law takes effect. Under the ordinance, a “hotel employer” is a person who owns, controls, or operates a hotel in West Hollywood. The ordinance further defines a “hotel” as being a commercial facility, not approved as a dwelling unit, which has guest rooms or suites, with or without meals or kitchen facilities, which are rented to the general public for overnight or other lodging and generally not intended to be the guest’s domicile. Additionally, however, a “hotel” includes:

• Accessory guest facilities such as, but not limited to, swimming pools, tennis courts, indoor athletic facilities, accessory retail uses and meeting facilities;
• Private clubs with guest rooms available for overnight lodging; and
• Any contracted, leased, or sublet premises connected to or operated in conjunction with the hotel’s purpose. 

Given the expansive definition of “hotel,” it might not surprise you to learn that the definition of “hotel employer” is also broader than a traditional hotel operator, and includes:

• A person or contractor who, in a managerial, supervisory, or confidential capacity, employs hotel workers to provide services at a hotel in conjunction with the hotel’s purpose; and
• A person or entity who owns, controls, and/or operates any contracted, leased or sublet premises connected to or operated in conjunction with the hotel’s purpose, or a person or entity who provides services at the hotel.

During the first two years the law is in effect, there will be two “non-hotel” minimum wage rates depending on whether an employer has 50 or more, or 49 or fewer, U.S. employees. Employers with California operations will note this “number of employees” threshold differs from the dividing line used for other state laws and from that commonly used in Southern California minimum wage ordinances (e.g., City of Los Angeles, County of Los Angeles, Malibu, Pasadena, and Santa Monica): 26 or more, and 25 or fewer, employees. The West Hollywood ordinance also includes a unique way of looking at business size.  Specifically, for 2022 and 2023, the ordinance will look to pre-pandemic staffing levels to determine business size by examining the average number of employees employed per quarter during 2019. Additionally, under the ordinance, multiple employers that constitute a single enterprise under the federal Fair Labor Standards Act are similarly deemed one enterprise for determining ordinance coverage.

Generally, the law defines an employee as any person who, in a particular week, performs at least two hours of work in West Hollywood and is entitled to payment of the state minimum wage. This standard is common in minimum wage ordinances throughout California, and is found in most generally applicable paid sick leave ordinances¹ in California (San Francisco is the exception²). What this should mean is all components of West Hollywood’s ordinance will not apply to employees not entitled to the state minimum wage, e.g., exempt executive, administrative, professional, and outside sales employees.

As with “hotel” employers, the ordinance paints with a broad brush concerning who qualifies as a “hotel” worker. Under the ordinance, a “hotel worker” is any individual whose primary place of employment is at one or more hotels and who is employed directly by the hotel employer or by a person who has contracted with the hotel employer to provide services at the hotel, including an employee who works in a restaurant or food and beverage service at a hotel, regardless of whether the restaurant is hotel-owned or operates out of a contracted, leased, or sublet space in a hotel.

Finally, notwithstanding the ordinance’s expansive, and possibly hard to follow, coverage standards, there is a potential “out,” so to speak, for companies with unionized workforces. Specifically, any provision, or the law entirely, can be waived in a bona fide collective bargaining agreement if the waiver is explicitly set forth in such agreement in clear and unambiguous terms. Note, however, that unilateral implementation of terms and conditions of employment by either party to a collective bargaining relationship does not constitute a valid waiver of the ordinance’s requirements.

Minimum Wage: For the first year and a half, the ordinance’s rate schedule keeps employers on their toes. For “hotel” employers and employees, on January 1, 2022, the applicable rate will mirror that currently applicable under the Los Angeles Citywide Hotel Worker Minimum Wage Ordinance, which, additionally, Santa Monica incorporates for its hotel-specific minimum wage provisions. Beginning on July 1, 2022, and each subsequent July, the city will increase this rate based on changes to the consumer price index. Eventually, on July 1, 2023, the “hotel” rate will be “the” rate applicable to all employers. In the interim, the rates for “non-hotel” employers will increase every six months:

Under the ordinance, employers can pay “learners” 85% of the minimum wage during their first 160 hours of employment, and certain nonprofits might be able to pay some “Hardest to Employ” workers performing specific transitional jobs a lower rate for up to 18 months (the city must develop a process for handling determinations). Additionally, the law contains the ability for businesses to petition the city for a one-year waiver from the minimum wage requirements only if they can demonstrate compliance with the law would force them to reduce their workforce by more than 20% or curtail employees’ total hours by more than 30% to avoid bankruptcy or a shutdown of the business.

Job-Protected Leave: Employers with a California workforce might find “challenging” the task of developing paid sick leave policies and practices that comply in more than one city, let alone throughout the state(s). With a generally applicable state law, seven generally applicable local ordinances, and at least two industry-specific (hotels) ordinances, California has many paid sick leave requirements to consider.³ For any company that thinks it has “solved” how to comply in California, West Hollywood’s ordinance offers a challenge via its many uncommon requirements, most of which it lifts from the previously referenced Los Angeles Citywide Hotel Worker Minimum Wage Ordinance. The compliance concerns will be heightened for entities that have only a month and a half to figure things out, not only because, with the holiday season rapidly approaching, key staff might have planned time off work, but also because the law is very light on text (what the law does address we discuss below) and it is unlikely the enforcement agency will be able to quickly and comprehensively fill the gap the ordinance’s text leaves.

Paid AND Unpaid Leave: The ordinance requires employers to provide paid leave for non-exempt employees, but for reasons broader than any other generally applicable paid sick leave law in California: sick leave (undefined), vacation, or personal necessity (undefined). Essentially, what West Hollywood requires is what most employers would call “PTO,” making the law more akin to a “mandatory PTO” law, a type of law that is starting to appear in parts of the country (Maine, Bernalillo County, New Mexico, and Nevada). As a result, the ordinance creates additional legal and financial obligations for most employers under California wage payment law, which (subject to a potential CBA exception) requires payout of unused PTO when employment ends, something employers need not do with paid sick leave under state law (wage payment or paid sick) or local paid sick leave laws. West Hollywood’s ordinance includes yet another unique feature by requiring that, in addition to paid leave, employers must provide a standalone bank of unpaid leave that employees can use when they, or their immediate family member (undefined), is ill. Although many laws in California allow employees to be absent from work with legal protections but without pay, the length of these job-protected absences are built into the law up front.  In contrast, in West Hollywood, the length of the protected, unpaid absence available to an employee is uncertain as it only accrues incrementally as the employee works.

General Principles: Briefly, before we get into what nuts and bolts do exist, employers should keep in mind the following, which relates to many “cap”-related issues. For both the paid and unpaid leave provisions, the ordinance primarily (or solely) discusses a standard as it relates to “full-time” employees who work at least 40 hours per week (or less if an employer’s policy has a lower threshold). It discusses how full-time employees working fewer hours, or part-time employees (those who work fewer than 40 hour per week), accrue an amount proportionate to what a full-time employee would. Where there are gaps in “hard numbers” outside of accrual, as written it appears that “proportionality” might also apply (subject, of course, to agency clarification).

Accrual, Caps, Carry-Over & Mandatory Payout: Presumably (the law is silent), leave begins to accrue when employment begins or when the law becomes operative, whichever is later. Under the ordinance, a full-time employee must accrue at least 96/52 hours of paid leave each week – with accrual based on weekly hours worked up to, but not exceeding, 40 – with other employees accruing a proportionate amount. This equates roughly to 1.85 hours if an employee works 40 or more hours in a week. This differs from the state law accrual rate, and all generally applicable local paid sick leave laws in California, use: one hour of paid leave for every 30 hours worked. Accordingly, on a weekly basis, some employees might accrue more paid leave under West Hollywood law than they would under state law, with others accruing less. For example:

Additionally, the law requires a full-time employee to accrue at least 80/52 hours of unpaid leave each week, applying the same accrual principles as paid leave.

As you might already expect, given 52 as the denominator, 96 hours of paid leave and 80 hours of unpaid leave would be the most an employee could accrue in a year. Unused paid and unpaid leave carries over each year. For unpaid leave, accrual stops when an employee’s leave bank contains 80 hours. However, with paid leave, employees continue to accrue until their paid leave bank contains 192 hours (or a higher amount an employer sets). When employees accumulate 192 paid leave hours, another “different-from-most-laws” requirement kicks in: employers must provide a cash payment once every 30 days for accrued leave that exceeds the “cap,” paid at the rate the employee is being paid at the time of cash-out. Additionally, employers, if they want, can offer employees a cash-out option even before they accumulate 192 paid leave hours, but they cannot make employees cash out leave.

Requesting & Using Leave: Employees must be eligible to use accrued paid and unpaid leave after their first six months of employment or the date set per company policy, if earlier. A six-month waiting period to use leave is longer than the 89-day period the state law allows generally (and the 90-day period set by some local laws in California). This is another example of disharmony between state and local law that could make compliance more challenging.

For paid leave, the law appears to set a 96-hour annual use cap for full-time employees. For unpaid leave, after an employee exhausts all paid leave for that year, employers must allow full-time employees to take up to an additional 80 hours of accrued unpaid leave if they or their immediate family member is ill.

Employers must make leave available upon an employee’s request and cannot unreasonably deny a request. This is the extent of the law’s discussion on administering leaves. For example, it does not define what is “unreasonable” (or “reasonable”) or discuss how much notice employees must or should provide for foreseeable or unforeseeable absences as most laws do. Unfortunately, though West Hollywood took this language from the Los Angeles Citywide Hotel Worker Minimum Wage Ordinance, that law also provides no guidance, and there are no relevant FAQs, or any regulations. It is hoped that the enforcement agency will address this issue.

Service Charges: Under the ordinance, a “service charge” is a separately designated amount a business charges and collects from customers for either service by employees or that customers might reasonably believe is for those services or paid or payable directly to employees. This includes charges on receipts, invoices, or billing statements under the term “service charge,” “table charge,” “porterage charge,” “automatic gratuity charge,” “healthcare surcharge,” “benefits surcharge,” or similar language. It does not, however, include a tip or gratuity, and the following service charge provisions do not apply to any tip, gratuity, or money (or part thereof) a customer paid, gave or left for an employee over and above the actual amount due for services for goods, food, drink, or articles.

Minimum Wage & Credits Cards: Notably, employers cannot consider service charges when determining whether they paid the employee the minimum wage, as they might be able to under federal and California law. Employers cannot subtract a credit card payment processing fee or cost, and must pay the employee the entire service charge amount.

Disclosure to Customers: Before a customer makes a purchase or selection, in a way they might easily and reasonably deduce what the service charge is for a business must disclose the charge with “clear and conspicuous notice,” i.e., “in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks, in a manner that is clearly visible in context and clearly calls attention to the language.”

If the service charge is characterized and separately designated as “optional,” the designation must be written in a manner that requires the customer to affirmatively opt to pay the charge. Businesses cannot automatically add an optional charge and require customers to affirmatively opt out.

Notice & Distribution to Employees: Employers must disclose in writing to each employee its service charge distribution plan. Employers must equitably distribute the entire service charge to employee(s) who directly or indirectly contribute to the customer’s chain of service, which cannot include employees whose primary role is supervisory or managerial. Note, however, that different rules apply in the following scenarios (unless, before the law took effect, an employer had a practice of pooling and distributing to non-management/non-supervisory employees other than the following employees, which they can continue to use after the law takes effect); specifically, the ordinance provides that amounts collected for:

• Hotel banquets or hotel-catered meetings must be paid to employees who actually worked the event;
• Hotel room service must be paid to the employees who actually delivered the food and beverage;
• Hotel porterage service must be paid to employees who actually carried the baggage.

Additionally, unless a different law requires otherwise, within seven days of collection, healthcare-related surcharges must either be deposited into segregated employee-controlled accounts (including but not limited to Flexible Spending Accounts, Health Savings Accounts, or Premium-Only Cafeteria Plans) or paid to employees in wages. The ordinance does not allow employers to keep any part of a healthcare-related surcharge.

Payday Requirements: Service charges must be paid no later than the next payday following collection; however, cash amounts must be paid at the close of business on the day collected. Each payday, for the relevant pay period, employers must report the amount of charges collected and distributed to the employee.

Other Relevant Provisions

Notice, Posting & Recordkeeping: At the time of hire, employees must be provided, in writing, the employer’s name, address, and telephone number, and, generally, employers must inform employees of their possible right to the federal and state earned income tax credit (state law already requires employers to provide this information (and more)). Employers must conspicuously post, at any workplace or job site where any employee works, the city bulletin concerning the current minimum wage rate and of employee rights under the ordinance, in English, Spanish, and any other language spoken by five percent of employees. For no less than three years, employers must keep employees’ payroll records, and records showing compliance with service charge provisions.

Prohibitions: Except for bona fide CBAs, employees cannot waive their rights under the ordinance. Employers cannot reduce the hours or benefits of, refuse to hire, discharge, displace or otherwise discriminate or take adverse action against any employee or other individual to pay wages less than the minimums the law establishes. Additionally, employers cannot directly fund the wages and benefits the law requires by reducing the pension, vacation, or other non-wage benefits of any employee or by increasing charges to employees for parking, uniforms, meals, or other work-related materials or equipment. Similar restrictions exist under the ordinance’s retaliation provision that prohibits the following adverse actions against a person exercising rights protected under the law: reducing their hours, wages or benefits, and demoting, suspending, discharging, or otherwise discriminating or taking another adverse action. Moreover, taking adverse action against an employee within 90 days of a person’s exercising protected rights raises a rebuttable presumption of retaliation. Finally, employers cannot implement a policy that counts leave taken under the ordinance as an absence that may result in discipline, discharge, suspension, or any other adverse action.

Penalties, Damages & Enforcement: Generally, whether through an administrative complaint or a lawsuit, employees could be awarded legal or equitable relief that includes but is not limited to: back wages and sick leave unlawfully withheld; reinstatement; penalties up to $100 to each person whose rights were violated for each day the violation occurred or continued; injunctive relief; and reasonable attorneys’ fees and costs. For willful violations, the amount of damages or penalties could be tripled.

Next Steps: Given the short period of time between the law being enacted and taking effect, employers, especially those subject to all the law’s requirements on January 1, 2022, should consider discussing the law with counsel sooner rather than later.