Recent California Appellate Cases Continue Trend of Increased Scrutiny of Employer Pay Practices

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Two decisions from the California appellate courts in late December and early January reemphasize that employers must keep meticulous records to comply with the often complicated wage and hour laws governing compensation of their employees.  In particular:

  1. Employers must keep accurate records of all hours worked by employees. Failure to keep accurate records of hours worked by an employee relaxes the burden on that employee to prove he or she worked unpaid time.  While the employer has the opportunity to present evidence disputing the employee’s proof, the lack of accurate records works strongly in the employee’s favor.
  2. Employers must comply with section 226.2 of the California Labor Code, to pay piece-rate employees on an hourly basis for rest and recovery periods and other nonproductive time separate from any piece-rate compensation. According to the Court of Appeal, which rejected a constitutional challenge to the statute, the statutory definition of “other nonproductive time” as “time spent under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis,” is sufficiently clear for employer compliance.

Furry v. East Bay: Keep Accurate Records of Hours Worked to Avoid More Easily Provable Overtime Claims by Employees

In a case decided in December 2018 and ordered published in January 2019, Furry v. East Bay Publishing, LLC (Dec. 12, 2018) 2018 WL 6930903, the California Court of Appeal reinforced the legal principle that an employer’s failure to keep accurate and precise records of a non-exempt employee’s hours worked relaxes the employee’s burden of proving unpaid time worked.  At the same time, the court affirmed a judgment denying the employee regular or premium pay for meal periods, during which the employee had worked, because the employer had provided appropriate meal periods, and the employee had failed to show that the employer was aware or reasonably should have been aware that the employee was working through the meal periods.

With regard to the legal principle governing proof of unpaid hours worked, Furry’s evidence during a four-day bench trial established that the East Bay Publishing, LLC had not kept track of the hours that Furry worked, and that Furry had performed work during evenings and on weekends at employer-sponsored events and promotions.  Both a subordinate and a supervisor of Furry knew he was performing that work at times outside of normal business hours.

In these circumstances, the appellate court held that the trial court erred in completely denying to Furry relief on his overtime compensation claim, because imprecise evidence by an employee of hours worked can form a sufficient basis for damages when the employer fails to keep accurate records of the employee’s work hours.  Relying on Hernandez v. Mendoza (1988) 199 Cal.App.3d 721, 727, the Court explained that the failure of an employer to keep records of hours worked by an employee results in the application of a relaxed standard of proof for the employee to show the number of hours worked.  Once the employee has made this showing, the burden then shifts to the employer to produce evidence of the precise amount of work performed or to negate the reasonableness of the inference of the number of hours worked that could be drawn from the evidence the employee provided.

Because Furry’s work beyond normal work hours was established by his and others’ testimony, the fact of damage was established and, consequently, his estimates of hours worked were sufficient to prove the amount of damage.  The trial court erred in holding that he had failed to account for hours worked for which he was not compensated by sales commissions he received.  According to the Court of Appeal, the trial court should have used the evidence of amount of commissions paid to calculate the regular rate of pay, and therefore, the overtime rate and pay, not as a basis for denying relief.

Nisei v. California LWDA:  The Law Requiring Hourly Compensation to Piece-Rate Workers Is Sufficiently Clear to Withstand Constitutional Challenge

In Nisei Farmers League v. California Labor and Workforce Development Agency (Jan. 4, 2019) 2019 WL 99087, the California Court of Appeal denied a challenge to the constitutionality of a Labor Code provision effective January 1, 2016, which codified case law requiring employers with piece-rate workers to pay those workers separately on an hourly basis at a rate not less than minimum wage for rest and recovery periods and other nonproductive time.  The employers groups that brought the case had argued that their piece-rate compensation system took account of nonproductive time to pay sufficient compensation, and challenged the constitutionality of the statute on the grounds that it (1) was void for vagueness, and (2) retroactive and therefore a violation of due process as well as a taking of property.

The appellate court held that the plaintiffs failed to allege an adequate basis to find the statute, section 226.2 of the Labor Code, unconstitutional.  The Legislature had enacted section 226.2 to codify the case law in Gonzales v. Downtown LA Motors, LP (2013) 215 Cal.App.4th 36, and Bluford v. Safeway Inc. (2013) 216 Cal.App.4th 8644, which had “upended” the expectations of employers who had assumed that a piece-rate system that allegedly took account of and compensated for nonproductive work periods by the way the piece-rate was set complied with California’s wage and hour laws.

In Gonzales, 215 Cal.App.4th at 40-41, the Court of Appeal had held that automobile service employees were “entitled to separate hourly compensation for time spent waiting for repair work or performing non-repair tasks directed by the employer during their work shifts”.  Such compensation was required to comply with minimum wage, because the minimum wage law applies to each hour an employee works.  For similar reasons, the Court in Bluford, 216 Cal.App.4th at 872, held that employers must separately pay piece-rate employees at the rate of at least minimum wage for rest periods.  Both cases relied on the earlier case of Armenta v. Osmose, Inc. (2005) 135 Cal.App.4th 314, 317-24, in which the Court had held that, because California’s minimum wage law applies to each hour worked, an employer could not withhold payment of wages to an hourly employee for nonproductive time and average the wages paid over productive and non-productive time to assure that the average met minimum wage requirements.

In codifying Gonzales and Bluford in section 226.2 of the Labor Code, the California Legislature also, in section 226.2(b), created a safe harbor affirmative defense for employers that had previously failed to pay on an hourly basis for rest periods and nonproductive work by employees who were otherwise paid on a piece-rate basis.  The affirmative defense was only available to those employers that, (1) by December 15, 2016, made payments of actual sums not paid (or underpaid) for rest and recovery periods and other nonproductive work (or based upon an alternative payment calculation) during the period July 1, 2012 through December 31, 2015, and (2) had provided notice by July 1, 2016 to the Department of Industrial Relations of their election to make those payments.

The trial court had sustained demurrers to the employer groups’ complaint without leave to amend, and the Court of Appeal affirmed.  It agreed with the trial court that the statute was not void for vagueness.  Section 226.2 clarified the statutory requirements for piece-rate compensation by confirming, as of January 1, 2016, that employers were required to compensate piece-rate employees for rest and recovery periods and other nonproductive time separate from any piece-rate compensation.  Neither the term “other nonproductive time” nor the term “actual sums due” in the statute were unconstitutionally vague.

The statutory definition of “other nonproductive time” as “time spent under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis,” was “reasonably clear and specific and provide[d] adequate notice of the nature of the conduct that is being described.”  Moreover, section 226.2 was enacted to codify Gonzales, which, like Bluford, relied on Armenta.  This context of case law lent clarity to the statute.  In particular, Gonzales provided “fact-based concrete illustrations of what was meant by the term ‘other nonproductive time’”.  The phrase in the definition, “not directly related” was not unconstitutionally vague: many statutes have used the phrase “directly related”.  The constitution did not require the statute’s terms to contemplate all possible circumstances in which it would be applied.

The second ground for the employers’ constitutional challenge, that the statute was retroactive, also was without merit.  The safe-harbor affirmative defense, which required payment by employers of pre-January 1, 2016 unpaid compensation, did not constitute an unconstitutionally retroactive statute, because the compensation for prior rest periods and nonproductive work, on which the affirmative defense was conditioned, was based upon the law that was in effect at the time, before the adoption of section 226.2—i.e., the case law of Gonzales, Bluford and Armenta.  When the Gonzales and Bluford decisions were final, employers were required to separately compensate piece-rate employees for nonproductive uncompensated time and for rest periods.

The Nisei Farmers League case makes clear that employers cannot expect a judicial reprieve from the requirement of separate hourly compensation of piece-rate employees for rest periods and other nonproductive time.  The workability of such a compensation system remains in question.  Tracking nonproductive time will continue to be cumbersome.  And the potential liability exposure for failing to track and pay for it properly may continue to shift employers away from any piece-rate compensation in California.  This development could adversely impact employees who, in some circumstances, can earn higher pay on a piece-rate basis than as an hourly employee.

Expanded Protections for Employees – Expanded Exposure for Employers under California Laws Effective January 1, 2019

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In the last several months of 2018, the California Legislature enacted many new statutes to keep employers hopping – following a sea-change decision by the California Supreme Court earlier in the year in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), which adopted a test for classification of workers that imposes more restrictions on treating them as contractors instead of employees.  (https://weinbergerlawblog.com/2018/05/09/the-abcs-of-the-worker-classification-the-california-supreme-courts-new-dynamex-standard-expands-employee-protections/)

The new laws require employers (1) to amend their settlement agreement templates to eliminate certain confidentiality provisions when settling a sexual harassment claim; (2) to delete provisions in such agreements waiving employees’ rights to testify in legal proceedings about the harassment; (3) to expand training of supervisorial and non-supervisorial employees on sexual harassment and prevention of abusive conduct; (4) to protect employees from harassment by non-employees on all grounds prohibited by the California Fair Employment and Housing Act (FEHA), not just sexual harassment; and (5) to provide more accommodating space for a lactating employee to express milk.  (6) One new law expands protections against sexual harassment for persons in a contractual or professional relationship with an alleged harasser.  (7) Amendments to the Fair Pay Act clarify restrictions on an employer’s use of pay history and on questions about pay that an employer may ask of an applicant.

Employers should take heed of the following laws, some of which are effective January 1, 2019:

  • Do Settle, Do Ask and Do Tell: SB 820 adds section 1001 to the California Code of Civil Procedure to prohibit inclusion in a settlement agreement entered into on or after January 1, 2019 of “a provision . . . that prevents the disclosure of factual information related to a claim filed in a civil action or a complaint filed in an administrative action” for sexual harassment under section 51.9 of the California Civil Code or sexual harassment, discrimination, “or failure to prevent an act of workplace harassment or discrimination based on sex or an act of retaliation against a person for reporting harassment or discrimination based on sex, under the FEHA.  Except where a “government agency or public official is a party to the settlement agreement,” at the claimant’s request, the agreement may include a provision to shield his or her identity or facts that “could lead to the discovery of” the claimant’s identity.  Notwithstanding these prohibitions, a settlement agreement may prohibit disclosure of the amount paid in settlement.  Failure to comply with these prohibitions on contractual confidentiality provisions can form the basis for a civil action against an employer.

The ability to keep all aspects of a settlement confidential had been a motivating factor for some employers to resolve cases short of litigation, but the concern over how confidentiality has prevented employees and claimants from protecting themselves from serial predatory supervisors outweighed the possible consequence of pushing more employers to fight what they view as meritless claims rather than settle.  The ability to shield the amount of settlement could still incentivize employers to settle, but it is unclear whether the publicity surrounding settlement will outweigh any benefit that limited shield will provide.

  • Related Do Tell: AB 3109 adds section 1670.1 to the California Civil Code to make explicit what California public policy and case law already mandates:  Any provision in a settlement agreement “that waives a party’s right to testify in an administrative, legislative, or judicial proceeding concerning alleged criminal conduct or alleged sexual harassment on the part of the other party to the . . . settlement agreement, or on the part of the agents or employees of the other party, when the party has been required or requested to attend the proceeding pursuant to a court order, subpoena, or written request from an administrative agency or the legislature, is void and unenforceable.”   The law is effective as to settlement agreements entered into on or after January 1, 2019.  Any employers that had not already made clear in their settlement agreements that the agreement would not prevent the claimant from testifying in legal proceedings should amend their agreement forms immediately.
  • Further Related Do Tell: In addition to the prohibitions against certain contractual confidentiality provisions in settlement agreements, as described above, employers are prohibited, as of January 1, 2019, from requiring an employee “to sign a nondisparagement agreement or other document that purports to deny the employee the right to disclose information about unlawful acts in the workplace, including, but not limited to, sexual harassment.”  (Bus. & Prof. Code § 5(a)(2).)  The new law explicitly excludes a “negotiated” settlement agreement, where the employee has been given “notice and an opportunity to retain an attorney or is represented by an attorney.”
  • Expanded Training Requirement: SB 1343 expands the scope of employers that must provide training on prevention of sexual harassment and abusive conduct from those with 50 or more employees to those with five or more employees.  Employers with five or more employees must provide two hours of such training to supervisory employees and one hour of such training to non-supervisory employees within six months of employment and thereafter every two years.  The training must be provided by January 1, 2020.
  • Expanded Employer Liability for Discrimination/Harassment of Employees by Non-employees: The FEHA has been amended effective January 1, 2019, to expand protections of employees against harassment.  In determining whether a work environment is hostile in connection with a harassment claim under FEHA, that is, whether the conduct at issue is “severe or pervasive,” which is the rubric under which such cases are determined, “[a] single incident of harassing conduct is sufficient to create a triable issue regarding the existence of a hostile work environment if the harassing conduct has unreasonably interfered with the plaintiff’s work performance or created an intimidating, hostile, or offensive working environment.”  (Cal. Bus. & Prof. Code § 12923(b), (c).)  Therefore, evidence of a single incident can defeat an employer’s motion for summary judgment/adjudication of such a harassment claim.  The revised law states:  “Harassment cases are rarely appropriate for disposition on summary judgment.”

In addition, the liability of employers for harassment of employees by non-employees has been expanded, effective January 1, 2019, to include all prohibited harassment based upon all classifications (not just sex) under FEHA.  “An employer may . . . be responsible for the acts of nonemployees, with respect to harassment of employees, applicants, unpaid interns or volunteers, or persons providing services pursuant to a contract in the workplace, if the employer, or its agents or supervisors, knows or should have known of the conduct and fails to take immediate and appropriate corrective action.”  (Cal. Bus. & Prof. Code § 12940(j)(1).)

  • Expanded protections against sexual harassment for persons working under a contractual relationship: SB 224 amends section 51.9 of the California Civil Code to add the following categories to the list of professionals who could be found liable for sexual harassment to a person with whom the professional has a business or contractual relationship: an investor, elected official, lobbyist, director, and producer.  The other amendments to section 51.9 make a claim for sexual harassment easier to prove, (a) by adding that a plaintiff could show sexual harassment where “the defendant holds himself or herself out as being able to help the plaintiff establish a business, service, or professional relationship with the defendant or a third party;” and (b) by eliminating the requirement that the plaintiff show “there is an inability by the plaintiff to easily terminate the relationship.”
  • Expanded Lactation Accommodation: AB 1976 amends California Labor Code section 1031 to require employers to make reasonable efforts to provide a lactating employee with the use of room other than a bathroom to express milk in private.  Existing law required only that the employer make reasonable efforts to provide such a room other than a toilet stall.  The other amendments to this provision establishes safe harbors for an employer providing a temporary lactation area and for agricultural employers.
  • Clarified Employer Obligations under the Fair Pay Act: Effective January 1, 2019, the Fair Pay Act statute has been clarified by defining the terms, “pay scale” to mean “a salary or hourly wage range”, and “reasonable request” to mean “a request made after an applicant has completed an initial interview with the employer,” and “applicant” to mean an individual who is seeking employment with the employer and is not currently employed with that employer in any capacity or position.”  These definitions apply to the provision:  “An employer, upon reasonable request, shall provide the pay scale for a position to an applicant applying for employment.”  And the definition of “applicant” applies to the other provisions of the statute as well.

The amendment to the Fair Pay Act also clarifies that the Act does not prohibit an employer from asking an applicant about the applicant’s salary expectations.  And it clarifies that prior salary is not justification for any disparity in compensation, and that an employer is not prohibited from making “a compensation decision based on a current employee’s existing salary, so long as any wage differential resulting from that compensation decision is justified by one or more of the factors” listed in section 1197.5 of the Labor Code.

Employers should have written pay scale information prepared before they receive a request for pay scale information, so that they can thoroughly think it through without the time pressure of responding to such a request.

Troester v. Starbucks: The CA Supreme Court Holds Routine Tasks that Take Minutes to Perform are not too Minute to Evade Compensation

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In a July 27, 2018 decision, the California Supreme Court in Troester v. Starbucks Corp., 5 Cal.5th 829 (2018), clarified that, where an employer requires an employee to perform several minutes of compensable work after the employee has clocked out for the day, California law requires the employer to pay the employee for the work, even if the additional time may be administratively difficult to capture.  California case law does not support the application of the “de minimis” rule, which is applicable under the federal Fair Labor Standards Act, to avoid payment.

In light of the Troester decision, employers should adopt or revise their practices and policies to capture all time employees spend on work routinely done:

  1. If employees have been performing such tasks before they clock in or after they clock out, the employer should make sure to capture that time and compensate the employees. Employers should arrange that such tasks be performed after clocking in or before clocking out.  No such tasks should be performed once an employee has clocked out.
  2. If the tasks required of an employee make it difficult for the employee to clock out after performing them, because, for example, the manner of clocking out is by a clock or a computer distant from the task and the exit, the employer should explore new technologies, perhaps using smart phones, for clocking in or out.
  3. Employers should adopt a strong policy prohibiting work before clocking in or after clocking out and provide periodic reminders to employees of that policy.
  4. Supervisors should be trained to remind employees of that policy and to check with employees to make sure they are not performing tasks off the clock for which they are uncompensated. Employers should consider making work off the clock reportable to HR as a disciplinary matter, while still making sure to compensate the employee for the work.

In Troester, the Court, upon request by the U.S. Court of Appeals for the Ninth Circuit, examined whether the “federal Fair Labor Standards Act’s de minimis doctrine . . . [applies] to claims for unpaid wages under California Labor Code sections 510, 1194 and 1197.  Section 510 states, among other things, that a workday consists of eight hours, and any hours worked in excess of eight hours in a day or 40 hours in a workweek must be compensated at an overtime rate of time-and-a-half.  Section 1194 authorizes an employee to file suit for any amount of wages that is paid at a rate of less than minimum wage and any unpaid overtime pay.  And section 1197 provides for the setting of the minimum wage and makes it unlawful for an employer to pay at a rate less than the minimum wage.

The Court concluded that California’s wage laws and regulations have not adopted the FLSA’s de minimis principle.  The Court also concluded that California’s own de minimis principle, which operates in other contexts, cannot be applied to wage and hour statutes in the context of an employer that requires “the employee to work ‘off the clock’ several minutes per shift.”  The Court left to another day the question of whether the de minimis principle could be applied in “circumstances where compensable time is so minute or irregular that it is unreasonable to expect the time to be recorded.”

While California wage orders have not directly addressed the de minimis rule used in federal cases, they define “hours worked” broadly to include “preliminary” and “postliminary” tasks that may be excluded under federal law.  And they place” more importance on the policy of ensuring that employees are fully compensated for all time spent in the employer’s control.”

In light of that emphasis under the Labor Code and Wage Orders, the de minimis principle was inapplicable in the circumstances presented in Troester.  The duties that the employee had to perform after clocking out related to closing the store (activating the burglar alarm, exiting the store quickly thereafter, locking the door to the store, walking coworkers to their cars and, from time to time, arranging for coworkers to re-enter the store or bringing in patio furniture that had been left outside).  The Court noted that these are compensable tasks; that they take only a few minutes per day to accomplish does not absolve an employer from its obligation to pay the wages attributable to them.

California law does not make time non-compensable simply because of the difficulty of keeping track of that time.  The Court was unwilling to impose on the employee the burden arising from the difficulty in keeping track of time worked.  In addition, the Court noted that the availability of class action lawsuits has made it possible and worthwhile to fashion a remedy for such lost wages.  And technological advances have made it feasible to track and record work time that was previously unmanageable to capture.

Strides and Work Yet to do: Progress for LGBT Attorneys in the Profession

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On September 27, 2018, the Los Angeles Daily Journal published a column I wrote regarding the progress made by LGBT attorneys in the profession, with strengthened laws protecting against discrimination and harassment and heightened focus on diversity and its benefits.  Whatever progress has occurred, there is still much work to do.  You can read the column at 2018-09-27 LA DJ

Epic Change in the Class Action Landscape: Supreme Court Holds Class Action Waivers in Employment Arbitration Agreements Enforceable

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In its May 21, 2018 decision in Epic Systems Corp. v. Lewis, 584 U.S. ___, 2018 WL 2292444, the U.S. Supreme Court closed the door on efforts by employees to avoid class action waivers in arbitration agreements.  Having previously held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that “courts may not allow a contract defense to reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent,” the Court in Epic stated that the same holds true in the employment context:

“[A]s a matter of law the answer is clear.  In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms – providing for individualized proceedings.”

It further held that the protections for collective activity under section 7 of the National Labor Relations Act (NLRA) do not impede class action waivers in the employment context.  Although the NLRA “secures to employees rights to organize unions and bargain collectively,” it does not speak to “how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.”  The FAA and the NLRA are not in conflict; enforcing class action waivers in arbitration agreements pursuant to the FAA impacts no fundamental principle or provision of the NLRA.

The Court again emphasized that the “savings clause” in section 2 of the FAA authorizes courts to deny enforcement of arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” Therefore, section 2 permits as a defense to enforcement of an arbitration agreement (or class-action waiver in the agreement) only “generally applicable contract defenses, such as fraud, duress, or unconscionability.”  And such defenses may not target arbitration agreements “either by name or by more subtle methods,” for example, by challenging “fundamental attributes of arbitration,” like its individualized and less formal procedures.  The Court found that the employees’ defense to the arbitration agreements involved in Epic improperly targeted those very attributes.

In ruling that the NLRA does not prohibit class action waivers in employment arbitration agreements, the Court noted that section 7 “focuses on the right to organize unions and bargain collectively,” but “does not express approval or disapproval of class or collective action procedures.  It does not even hint at a wish to displace the” FAA.

What does Epic portend for the means of resolving legal disputes between employees and their employer?  Employers should consider the following consequences in managing the risks and costs of resolving disputes via class action procedures as compared to multiple individual actions:

  1. What policies an employer should adopt in response to Epic may depend upon how employees’ counsel adapt their strategies. If they start bringing multiple individual arbitrations, then employers may find that class action waivers do not serve the interests of efficient and less expensive resolution of legal disputes with employees.  One advantage of a class action is that it can fully and finally resolve all employee complaints regarding particular issues without having to engage in multiple lawsuits or arbitrations.  An employer in California that faces many individual arbitration proceedings, will, under the California Supreme Court decision in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000), have to pay any costs incurred by an employee that exceed what the employee would incur in bringing an action in court.  And depending upon the discovery permitted in those arbitrations, an employer could find it necessary to have company officials deposed multiple times in separate arbitrations.
  2. On the other hand, with individual arbitrations, an employer should find it easier to manage the risks of an adverse result in arbitration or litigation with regard to a particular employment practice or circumstances. It could focus on one or a few cases to determine the risk of liability exposure and then, depending on the outcome of those limited number of cases, determine whether and at what amount to try to settle all the cases or, rather, to dig in and defend the cases to the end.
  3. Another advantage of individual arbitration will be that an employer should find it easier to resist discovery of the identity of other potential claimants or of practices with regard to other similarly situated employees.
  4. In California, collective or representative claims under the Private Attorneys General Act (PAGA), Cal. Labor Code § 2698 et seq., are not subject to class action waivers in arbitration agreements.  In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court held that “a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents—either the [California] Labor and Workforce Development Agency or aggrieved employees—that the employer has violated the Labor Code.”  The U.S. Supreme Court refused to take up Iskanian.

The ABC’s of Worker Classification: The California Supreme Court’s New Dynamex Standard Expands Employee Protections

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I.  Introduction: Employers should review their practices in regard to using contractors’ services to comply with the expanded definition of “employ” under Dynamex.  

The gig economy – in which companies have expanded the use of independent contractors over employees – has raised concerns among employee rights advocates and some governmental officials over the welfare of workers.  That concern appears to permeate the April 30, 2018 decision by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, __ Cal.5th __, 2018 WL 1999120 (Apr. 30, 2018).

But the decision can be expected have a much broader impact, reaching to more traditional industries in which companies have often relied upon independent contractors, because of the expanded definition of “employ”.  The Court holds that, for purposes of the wage orders governing wage and hour obligations of California employers, the definition of “employ” presumes that a worker is the employee of a hiring entity, unless the entity can show (A) that the entity lacks control and direction over work performance, and (B) that the work in question is outside the usual course of the entity’s business, and (C) that the worker’s work for the entity is of the same nature as the independently established trade, occupation or nature in which he or she is customarily engaged.

While the opinion is likely to result in years of litigation and appeals ferreting out the uncertainties the new standard creates, hiring entities should promptly review their hiring and contracting practices to adapt, in the following ways:

  1. Companies should carefully review their practices for hiring contractors to perform work at their facilities. The initial question should be whether, in light of the expanded definition of “employ” and “employer” under California’s wage orders, retaining workers as contractors rather than employees provides a sufficient benefit to the company to justify either the risk of liability based on misclassification or a restructuring of the relationship between the company and the worker.
  2. If the work performed by workers retained by a company is the kind of work normally performed in the usual course of its business, then it should consider taking steps to classify those workers as employees. While in many cases, the determination that the work is or is not what is normally performed in the usual course of business will be clear, in other cases, the company should seek legal counsel for advice on how such close calls are likely to be resolved in the courts.
  3. If a company wants to classify as contractors workers whose work is not in the normal course of the company and who are customarily engaged in an independently established trade of the same nature as that work, then the company needs to establish safeguards to assure that it does not assert control or direction over the performance of the work. A company should seek legal counsel to establish appropriate safeguards.
  4. If a company wants to classify as contractors workers whose work is not in the normal course of the company and over whose work performance it lacks control and direction, it should make sure that the workers are customarily engaged in an independently established trade, occupation or business of the same nature of that work.
  5. When taking these steps, companies need to consider that the Dynamex decision emphasizes the strong public policy focused on protecting workers, which underlies the expansive definition of “employ”. Therefore, courts are likely to bend toward finding an employment, rather than independent contractor, relationship.

II.  In Dynamex, the California Supreme Court justifies the expansion of the “employee” classification based upon the purpose of California Wage Orders to protect worker’s wages and benefits.

In Dynamex, the Court focused on one of the three definitions of the term “to employ” – “to suffer or permit to work” – in the California wage orders that establish wage and hour obligations for California employers, and interpreted that definition broadly to include as employees “all workers who would ordinarily be viewed as working in the [business that hired them].”  (Emphasis in original.)

A.  The “ABC Test” imposes on companies the burden to justify classification of workers as contractors by showing all prongs of a three-part test related to the level of control over work performance and the nature of the work.

The Court further determined that, a company, which the Court refers to throughout the opinion as the “hiring entity,” has the burden to rebut the presumption of an employment relationship, to justify treatment of the worker as an independent contractor “to whom a wage order does not apply.”  The presumption is rebutted only if the hiring entity can show:

“(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.”

This so-called “ABC standard” broadens the circumstances in which a worker must be deemed an employee and a hiring entity deemed an employer subject to the wage and hour obligations under the wage orders.

B.  The Dynamex decision addresses the definition of “employ” and “employer” in the context of California wage orders, but leaves open whether the definition will be expanded to apply to other labor statutes.

The California Supreme Court described its precedent pertinent to the issue of employee-contractor classification.  The prior cases used a narrower (although not narrow) test to determine whether a worker for a hiring entity was an independent contractor or employee.  In a case addressing whether farmworkers should be classified as employees or independent contractors for purposes of applying the workers compensation statutes, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), the California Supreme Court had instructed that, in determining what test to employ in interpreting the term “employee” in a statute or wage order, a court had to focus on the statutory purpose of the protective legislation.  Therefore, the Court

“concluded that in determining whether a worker should properly be classified as a covered employee or an excluded independent contractor with deference to the purposes and intended reach of the remedial statute at issue, it is permissible to consider all of the various factors set forth in prior California cases, in Labor Code section 2750.5, and in the out-of-state cases adopting the six-factor test.”

In other words, the Borello Court “was not adopting ‘detailed new standards for examination of the issue.’”  Factors established by statute or pertinent treatises could “overlap those pertinent under the common law.  [Citation.]  Each service arrangement must be evaluated on its facts, and the dispositive circumstances may vary from case to case.’”  A six-factor test used in other states could be pertinent as well.

The Dynamex Court characterized Borello “as call[ing] for application of a statutory purpose standard that considers control of details and other potentially relevant factors identified in prior California and out-of-state cases in order to determine which classification (employee or independent contractor) best effectuates the underlying legislative intent and objective of the statutory scheme at issue.”

The Court next described its decision in Martinez v. Combs, 49 Cal.4th 35 (2010), in which the Court addressed “the meaning of the terms ‘employ’ and ‘employer’ as used in California wage orders, although not in the context of whether workers were employees or independent contractors.  The Court explored the history of how the term “employ or suffer or permit” a person to work came to be used in the definition in California wage orders.  Derived from statutes regulating and prohibiting child labor adopted in the early 1900s throughout the country, the terms were used to expand the protection of the laws to relationships that did not fit in the common law master and servant relationship.  The intent was to “reach[] irregular working arrangements the proprietor of a business might otherwise disavow with impunity.”  And the Court observed that the use of those terms in the wage orders was useful in “reaching situations in which multiple entities control different aspects of the employment relationship . . . .”  Ultimately, the Court concluded that the wage orders’ definitions of the employment relationship are applicable in a civil action.

In the last case discussed by the Court, Ayala v. Antelope Valley Newspapers, Inc., 59 Cal.4th 522 (2014), a wage and hour class action alleging that newspaper carriers had been misclassified as independent contractors rather than employees, the Court teed up and left open the question “whether in a wage and hour class action alleging that the plaintiffs have been misclassified as independent contractors when they should have been classified as employees, a class may be certified based on the wage order definitions of ‘employ’ and ‘employer’ as construed in Martinez . . . or, instead, whether the test for distinguishing between employees and independent contractors discussed in Borello, is the only standard that applies in this setting.”

The Dynamex Court determined that basing the applicability of the wage order on its definition of employment in the wage order, rather than the Borello standard, was appropriate.  Two rationales compelled use of that definition:  First, courts “must respect the IWC’s [California’s Industrial Welfare Commission’s] legislative authority to promulgate the test that will govern the scope of the wage order.”  Second, the “wage order . . . purposefully adopts its own definition of ‘employ’ to govern the application of the wage order’s obligations that is intentionally broader than the standard of employment that would otherwise apply.”

In light of the purposes of the wage orders and the inherent “disadvantages, particularly in the wage and hour context,” of relying upon “a multifactor, all the circumstances standard for distinguishing between employees and independent contractors,” the Court found it appropriate “to interpret that standard as: (1) placing the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the wage order’s coverage; and (2) requiring the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test . . . .”

III.  Conclusion

On its face, the new standard for classifying workers as independent contractors or employees to determine applicability of the obligations under the wage orders appears to offer more certainty to companies.  The presumption that workers are employees supports that certainty.  The three factors that a company must show to justify classifying workers as independent contractors leave substantial room for interpretation.  But the Court’s strong admonition about the breadth of the wage orders’ definition of “employ” and “employer” in light of the history of those definitions when they were first adopted, indicates that courts are likely to side with workers in interpreting any ambiguity in the factors.  Application of the expanded standard to worker classification issues in other statutory contexts, where the definition of “employ” and the purpose underlying the statute may differ, is uncertain.

Exemptions and Limits: Recent Appellate Decisions Limit Exposure to Payroll Liability

Standard

The pendulum of enforcement of wage and hour claims appears to be swinging toward protecting employers against undue liability.  In the past few weeks, the U.S. Supreme Court has generously interpreted an exemption to the Fair Labor Standards Act overtime requirement, to include service advisors at automobile dealerships.  A few weeks after the National Labor Relations Board reinstated the Obama-era Browning-Ferris decision (for now) easing the test for finding joint employer liability, California appellate courts in two cases involving joint employers have protected, in one case, a staffing company, and in a second case, a client of a staffing company, against wage and hour liability.

The lessons of these cases are:

  1. Employers can expect the United States Supreme Court to give a less aggressively employee-oriented interpretation to wage and hour laws and regulations, but employers are still best served by carefully adhering to the applicable rules.
  2. Employers and staffing companies should carefully review their agreements with each other to be clear on which party is responsible for establishing and enforcing policies to comply with wage and hour laws. Employers and staffing companies should consider including in their agreements representations and warranties of compliance with wage and hour laws, as well as indemnification provisions.
  3. To minimize risk of liability for wage and hour violations, employers should assure that they are in compliance with those laws, even if the staffing companies they use are not vigilant in such matters. And staffing companies should assure that they are doing what is necessary, to the extent feasible, to comply with such laws with regard to employees they place.

Encino Motor Cars:  Service Advisors Employed by Auto Dealers Are Exempt Employees.

In its April 2, 2018 decision in Encino Motorcars, LLC v. Navarro, the U.S. Supreme Court held that service advisors employed by automobile dealerships are exempt from overtime pay requirements under the federal Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201 et seq.  Section 213(b)(10)(A) of the FLSA “exempts from its overtime-pay requirement ‘any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles . . . , if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles . . . to ultimate purchasers.”  In this case which involved statutory interpretation and construction of the FLSA exemption provisions, the Court reversed a decision by the U.S. Court of Appeals for the Ninth Circuit, which had narrowly interpreted the exemption to exclude service advisors.

This was the second time the case had come before the Court.  In a 2016 decision, the Court had held that it was error for the Ninth Circuit to defer to a 2011 U.S. Department of Labor regulation that had stated that the term “salesman” in section 213(b)(10)(A) of the FLSA excluded service advisors.  According to the Court, the regulation “undermined significant reliance interests in the automobile industry by changing the treatment of service advisors without a sufficiently reasoned explanation.”  In the prior case, the Court had left open the issue of whether, absent such deference, the term “salesman” included service advisors.

In the current case, after explaining that “[s]ervice advisors ‘interact with customers and sell them services for their vehicles,’” the Court held:  “Under the best reading of the text, service advisors are ‘salesm[e]n’ and they are ‘primarily engaged in . . . servicing automobiles.’”  In reaching this conclusion, the Court relied on the “ordinary meaning” of “salesman,” in part based on the definition of the term in the Oxford English Dictionary.  Relying on the definition of “servicing” in same source, the Court explained that service advisors “are integral to the servicing process.”

The Court rejected the Ninth Circuit’s invocation of the “distributive canon” of interpretation, by which the lower court had matched the statutory term “salesman” with “selling” and the terms “partsman” and “mechanic” with “servicing,” thereby concluding that the FLSA excluded service advisors (salesmen who were primarily engaged in servicing automobiles) from the overtime-pay exemption.  According to the Supreme Court, under the ordinary, disjunctive meaning of “or” in the statute, the term “salesman” could be matched with “servicing,” and, thereby, include service advisors in the exemption.  And the context of that provision “favors the ordinary disjunctive meaning of ‘or’”:  “narrow distributive phrasing” under the distributive canon was “unnatural,” because “the entire exemption bespeaks breadth.”  In sum, the “more natural reading is that the exemption covers any combination of [the statute’s] nouns, gerunds, and objects.”

Moreover, the Court rejected the principle applied by the Ninth Circuit “that exemptions to the FLSA should be construed narrowly.”  Because the text of the statute gives no indication “that its exemptions should be construed narrowly,” courts should give them “a fair (rather than a ‘narrow’) interpretation.”  (Citing A. Scalia, Reading Law.)  The lack of any reference in the statute’s legislative history to service advisors was not persuasive in excluding service advisors from exemptions, in light of a fair reading of the clear statutory text.  “If the text is clear, it needs no repetition in the legislative history; and if the text is ambiguous, silence in the legislative history cannot lend any clarity.”

SerranoStaffing Company that Provides for Meal Breaks Held Not Liable for Failure of Employees to Take Such Breaks at Company at which They Are Placed.

In Serrano v. Aerotek, Inc., __ Cal.App.5th __, 230 Cal.Rptr.3d 802 (March 21, 2018), a California Court of Appeal held that Aerotek, a staffing agency that had placed temporary employees with its client Bay Bread, LLC, was not liable for meal breaks missed by those employees.  The Court based its conclusion on two grounds:  (1) Aerotek had satisfied its obligations under Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1041, to provide meal periods, and (2) Aerotek could not be held vicariously liable as a joint employer, with Bay Bread, of the employees, because, under Brinker, Aerotek’s provision of compliant meal periods precludes liability even if it was aware that its employees were not taking the breaks.

The facts establishing that Aerotek had satisfied its Brinker obligations included that, in addition to having a compliant meal period policy, its contract with Bay Bread “required Bay Bread to comply with applicable laws, Aerotek provided its meal period policy to temporary employees and trained them on it during orientation, and the policy required them to notify Aerotek if they believed they were being prevented from taking meal breaks,” and prohibited retaliation resulting from such a notification.

Aerotek could not be held vicariously liable even if, as the Court assumed, it was a joint employer with Bay Bread, because the determination of whether a joint employer is liable under the California Labor Code for a violation by its co-joint employer depends not on principles of agency or joint and several liability, but rather on “the duties imposed under the particular statute at issue.”  Under section 226.7 of the Labor Code and Brinker, whether an employer is liable for a co-employer’s violations depends on the scope of the employer’s own duty under that provision.  The applicable wage order governing meal breaks contained no provision imposing liability on an employer “for a co-employer’s breach of the co-employer’s own duty to provide compliant meal periods.”

Castillo:  Settlement of Wage and Hour Class Action Against Staffing Company Bars Subsequent Claims Against Client Companies.

In a case decided a few weeks after Aerotek, the California Court of Appeal, in Castillo v. Glenair, Inc., ___ Cal.App.5th __, 2018 WL1790683 (Apr. 16, 2018), held that a wage and hour class action lawsuit brought against a company by an employee placed at the company by a staffing company was barred by the settlement of a prior class action against the staffing company, which had included a broad release of the agents of the staffing company, as to the very same claims asserted in the pending case against the company where the employees had been placed.

In the prior case, a different plaintiff represented by different attorneys had filed a complaint asserting class claims against staffing company GCA Services Group of Texas, L.P., for unpaid minimum wages, overtime wages, meal and rest break violations, related Labor Code violations and unfair business practices under section 17200 of the Business and Professions Code.  The agreement settling that case was on behalf of all class members, generally listed ten wage and hour claims as “Released Claims,” and included “agents” of GCA among the “Released Parties”.  Castillo, the representative plaintiff in the pending Castillo v. Glenair case did not opt out of the settlement of the prior case, as had been permitted by the order approving the Settlement.

In Castillo, Glenair moved for summary judgment, based upon the settlement of the prior case.  The trial court granted the motion, and the Court of Appeal affirmed, concluding that the claims were barred by the doctrine of res judicata, based upon the settlement of the prior lawsuit, for two reasons.

First, the Court concluded that Glenair was “in privity” with GCA.  In other words, the subject matter of the pending case and the prior case was the same – “namely, both cases involve the same wage and hour causes of action arising from the same work performed by the same GCA employees (the Castillos) at GCA’s client company Glenair.”  And both companies were responsible for payment of their wages, with respect to which any errors were corrected by the settlement of the prior lawsuit.  “[W]ith respect to the Castillos’ wage and hour causes of action, the interests of Glenair and GCA are so intertwined as to put Glenair and GCA in the same relationship to the litigation here.”

Second, the Court concluded that, because Glenair was an agent of GCA “with respect to GCA’s payment of its employees” (including the Castillos), the release included in the settlement of the prior lawsuit explicitly reached agents of GCA.  “… GCA authorized Glenair [as its agent] to collect, review, and transmit GCA employee time records to GCA” for purposes of GCA making appropriate payments of compensation to its employees.[1]

[1]           It is unclear whether, under the arrangement between Aerotek and Bay Bread in Serrano v. Aerotek, Inc., Bay Bread would have been found to have been an agent of Aerotek, because Aerotek had an account manager on Bay Bread’s site, who reviewed time records of temporary Aerotek employees, and Bay Bread was not as involved in collecting information for payroll for Aerotek.