Wednesday, May 16, 2012
Public Employee not Entitled to Reimbursement of Attorneys’ Fees Incurred During Internal Investigation
Under Government Code section 995 and 996.4, a public entity is required to “provide for the defense of any civil action or proceeding” that is brought against an employee or former employee in his or her official or individual capacity or both, if the action or proceeding is brought on account of an act or omission in the scope of his employment. In Thornton v. California Unemployment Insurance Appeals Board, 2012 DJDAR 4796 (2012), the appellate court held that a law enforcement investigation into allegations of conflict of interest by an official at Unemployment Insurance Appeals Board did not constitute an “action or proceeding” as defined by the California Government Code. Consequently, the CUIAB official was not entitled to reimbursement for the legal fees she allegedly incurred responding to the investigation and defending herself against the allegations. The full text of the Thornton decision in available online at: Thornton Decision
California Court Enforces Implied Waiver of Class Action Claims in Employment Arbitration Agreement
Over the past several years, California courts have struggled with the concept of class action waivers in employment arbitration agreements. In AT&T v. Concepcion, the U.S. Supreme Court held that such class action waivers are enforceable, and that any state law to the contrary would be preempted by the Federal Arbitration Act (“FAA”). In practice, however, California appellate courts have expressed reluctance to apply Concepcion to prevent the consolidation of small wage and hour and/or other claims into larger, class-wide employment claims. Although federal law is controlling in this area, there is no doubt that Concepcion is at odds with the California Supreme Court’s statement, in Gentry v. Superior Court (2008), that class action waivers in employment arbitration agreements “frequently if not invariably” undermine the employees’ non-waivable statutory rights under the California Labor Code and wage orders.
Rather than address the conflict and acknowledge the supremacy of the federal standard, some California courts have looked for other ways to reach their preferred outcome. In Sanchez v. Valencia Holding Company (2011), for example, the appellate court sidestepped the tension between Concepcion and Gentry by scouring the arbitration agreement – which included a class action waiver – and finding it “unconscionable” for other reasons. Specifically, the court determined that a provision limiting appeals to arbitration awards in excess of $100,000, a provision requiring the appealing party to pay appeal costs in advance (subject to later reimbursement), and an exception clause that allowed the employer to seek recovery of company property in a judicial forum were so one-sided as to render the arbitration agreement “unconscionable” in its entirety. The wording of the Sanchez opinion left the distinct impression the court was reaching for ways to invalid the arbitration agreement without addressing the class action waiver language.
Similarly, in Mayers v. Volt Management (2012), the appellate court avoided dealing with class action waiver language by holding that another provision in the arbitration agreement – a clause that allowed the prevailing defendant to recover attorneys’ fees in an employment discrimination lawsuit – rendered the agreement unconscionable and unenforceable.
Against this background, the recent appellate decision in Kinecta Alternative Financial Solutions v. Superior Court (2012) stands in stark contrast. In Kinecta, the appellate court not only enforces a class action waiver, but does so despite the absence of express class action waiver in the arbitration agreement; i.e., the Kinecta court held that even though the arbitration agreement in question was silent as to whether the parties agreed to arbitrate class claims, the fact that the agreement only referenced the employee’s individual claims (not other employees’ claims) was sufficient to conclude that class-based claims could not be arbitrated. The full text of the appellate court’s decision is available online at: www.courtinfo.ca.gov/opinions/documents/B235491.DOC
The facts in Kinecta were straightforward: the employer and employee had entered into an agreement that required arbitration of all employment-related disputes. Notwithstanding the existence of the binding arbitration agreement, the employee filed a wage and hour class action against Kinecta in a California court. Kinecta moved to compel arbitration of the individual claims, and to dismiss the class allegations from the complaint. The trial court granted the motion to compel arbitration, but denied the motion to dismiss the class allegations, effectively requiring Kinecta to arbitrate the class-based claims. Kinecta appealed, and the appellate court agreed with Kinecta that it should not have been ordered to arbitrate class-based claims. The appellate court held that a party cannot be compelled to arbitrate class-based claims unless it has expressly agreed to do so. The arbitration agreement between Kinecta and its employee was silent on the issue of class-based arbitration. Because there was no express agreement to arbitrate class-based claims, such claims could not be compelled to arbitration, and the appellate court issued an order directing the trial court to dismiss the class allegations from the complaint. The Kinecta court noted, summarily, that the employee failed to make any evidentiary showing that the effective waiver of her class-based claims was “unconscionable” and thus unenforceable under the Gentry standards.
Despite the holding in Kinecta, the decision whether to include class action waiver language in an arbitration agreement remains a decision that requires careful analysis. An arbitration agreement that forecloses the right to pursue all forms of class-based relief is an agreement that will, in all likelihood, receive the closest scrutiny at some point in the future, and one that must be drafted to withstand all potential “unconscionability” arguments. If a class action waiver is appropriate for a particular employer, it should be included as an express provision of the arbitration agreement, and the agreement should be reviewed by HR professionals on an annual (or even more frequent) basis to ensure that it evolves with the courts in this area.
Rather than address the conflict and acknowledge the supremacy of the federal standard, some California courts have looked for other ways to reach their preferred outcome. In Sanchez v. Valencia Holding Company (2011), for example, the appellate court sidestepped the tension between Concepcion and Gentry by scouring the arbitration agreement – which included a class action waiver – and finding it “unconscionable” for other reasons. Specifically, the court determined that a provision limiting appeals to arbitration awards in excess of $100,000, a provision requiring the appealing party to pay appeal costs in advance (subject to later reimbursement), and an exception clause that allowed the employer to seek recovery of company property in a judicial forum were so one-sided as to render the arbitration agreement “unconscionable” in its entirety. The wording of the Sanchez opinion left the distinct impression the court was reaching for ways to invalid the arbitration agreement without addressing the class action waiver language.
Similarly, in Mayers v. Volt Management (2012), the appellate court avoided dealing with class action waiver language by holding that another provision in the arbitration agreement – a clause that allowed the prevailing defendant to recover attorneys’ fees in an employment discrimination lawsuit – rendered the agreement unconscionable and unenforceable.
Against this background, the recent appellate decision in Kinecta Alternative Financial Solutions v. Superior Court (2012) stands in stark contrast. In Kinecta, the appellate court not only enforces a class action waiver, but does so despite the absence of express class action waiver in the arbitration agreement; i.e., the Kinecta court held that even though the arbitration agreement in question was silent as to whether the parties agreed to arbitrate class claims, the fact that the agreement only referenced the employee’s individual claims (not other employees’ claims) was sufficient to conclude that class-based claims could not be arbitrated. The full text of the appellate court’s decision is available online at: www.courtinfo.ca.gov/opinions/documents/B235491.DOC
The facts in Kinecta were straightforward: the employer and employee had entered into an agreement that required arbitration of all employment-related disputes. Notwithstanding the existence of the binding arbitration agreement, the employee filed a wage and hour class action against Kinecta in a California court. Kinecta moved to compel arbitration of the individual claims, and to dismiss the class allegations from the complaint. The trial court granted the motion to compel arbitration, but denied the motion to dismiss the class allegations, effectively requiring Kinecta to arbitrate the class-based claims. Kinecta appealed, and the appellate court agreed with Kinecta that it should not have been ordered to arbitrate class-based claims. The appellate court held that a party cannot be compelled to arbitrate class-based claims unless it has expressly agreed to do so. The arbitration agreement between Kinecta and its employee was silent on the issue of class-based arbitration. Because there was no express agreement to arbitrate class-based claims, such claims could not be compelled to arbitration, and the appellate court issued an order directing the trial court to dismiss the class allegations from the complaint. The Kinecta court noted, summarily, that the employee failed to make any evidentiary showing that the effective waiver of her class-based claims was “unconscionable” and thus unenforceable under the Gentry standards.
Despite the holding in Kinecta, the decision whether to include class action waiver language in an arbitration agreement remains a decision that requires careful analysis. An arbitration agreement that forecloses the right to pursue all forms of class-based relief is an agreement that will, in all likelihood, receive the closest scrutiny at some point in the future, and one that must be drafted to withstand all potential “unconscionability” arguments. If a class action waiver is appropriate for a particular employer, it should be included as an express provision of the arbitration agreement, and the agreement should be reviewed by HR professionals on an annual (or even more frequent) basis to ensure that it evolves with the courts in this area.
California Supreme Court Issues its Much-Anticipated Ruling
On April 12th, after more than three years of legal briefs, the California Supreme Court finally issued its long-awaited decision in Brinker Restaurant Corp. v. Superior Court. Overall, the Brinker represents the triumph of common sense and a significant win for California employers, as it should stem the tide of class action claims filed against California employers alleging meal/rest period violations. For those interested in the Brinker decision, the full text of the California Supreme Court’s opinion is available at: http://www.courtinfo.ca.gov/opinions/documents/S166350.PDF .
To recap: Brinker Restaurant Corporation (“Brinker”) owns and operates restaurants throughout California. An hourly employee filed a class action lawsuit against Brinker on behalf of himself and the other hourly employees who staff Brinker’s restaurants. The lawsuit alleged that Brinker failed to provide employees with meal and rest breaks required by the California Labor Code and Wage Orders—or provided them at improper times—and that Brinker failed to pay the employees premium pay as required for missed breaks.
Brinker argued that the California Labor Code and Wage Orders require employers only to permit breaks to be taken, not to ensure the breaks are indeed taken. Brinker further argued that determining whether individual employees were denied breaks – or alternatively whether they chose not to take breaks that were provided by Brinker – required individualized inquiries that were not suitable for class action relief. Ultimately, the issue of whether the Brinker case was suitable for class certification moved its way through the courts, landing in the California Supreme Court with a request to determine several key issues of California wage and hour law:
Meal Breaks. The Brinker court held that employers are required only to provide meal periods, and then only if the meal periods are not validly waived in writing. An employer satisfies its obligation to provide meal periods by:
The Brinker decision also considered and rejected the so-called “rolling five” argument often raised by plaintiffs’ lawyers; i.e., whether an employer must provide a meal period for every 5 consecutive hours of work if the first period is taken before 5 hours of work have been completed. The Court held that a first meal period is required after 5 hours of work, while a second meal period is required only after 10 hours of work. Interestingly, the Court sent the case back to the trial court to determine whether the meal period claims were suitable for a class action in light of the high court’s clarification on the application of the law, and declined to establish a blanket rule that class action claims are per se inappropriate for meal period claims.
Rest Breaks. The Brinker decision explains that employers should calculate an employee’s rest time due by dividing the number of hours worked by four, “rounded down if the fractional part is half or less than half and up if it is more,” and multiplying it by 10 minutes. Employees are therefore entitled to 10 minutes’ rest for shifts from 3.5 to 6 hours, 20 minutes for more than 6 hours up to 10 hours, 30 minutes for shifts of more than 10 hours up to 14 hours, and so on.
Practical Considerations. Following the Brinker decision, California employers should review their policies and procedures to make sure that:
To recap: Brinker Restaurant Corporation (“Brinker”) owns and operates restaurants throughout California. An hourly employee filed a class action lawsuit against Brinker on behalf of himself and the other hourly employees who staff Brinker’s restaurants. The lawsuit alleged that Brinker failed to provide employees with meal and rest breaks required by the California Labor Code and Wage Orders—or provided them at improper times—and that Brinker failed to pay the employees premium pay as required for missed breaks.
Brinker argued that the California Labor Code and Wage Orders require employers only to permit breaks to be taken, not to ensure the breaks are indeed taken. Brinker further argued that determining whether individual employees were denied breaks – or alternatively whether they chose not to take breaks that were provided by Brinker – required individualized inquiries that were not suitable for class action relief. Ultimately, the issue of whether the Brinker case was suitable for class certification moved its way through the courts, landing in the California Supreme Court with a request to determine several key issues of California wage and hour law:
Meal Breaks. The Brinker court held that employers are required only to provide meal periods, and then only if the meal periods are not validly waived in writing. An employer satisfies its obligation to provide meal periods by:
- Relieving its employees of all duty
- Relinquishing control over their activities and permitting them a reasonable opportunity to take an uninterrupted 30-minute break
- Not impeding or discouraging employees from taking their meal breaks.
The Brinker decision also considered and rejected the so-called “rolling five” argument often raised by plaintiffs’ lawyers; i.e., whether an employer must provide a meal period for every 5 consecutive hours of work if the first period is taken before 5 hours of work have been completed. The Court held that a first meal period is required after 5 hours of work, while a second meal period is required only after 10 hours of work. Interestingly, the Court sent the case back to the trial court to determine whether the meal period claims were suitable for a class action in light of the high court’s clarification on the application of the law, and declined to establish a blanket rule that class action claims are per se inappropriate for meal period claims.
Rest Breaks. The Brinker decision explains that employers should calculate an employee’s rest time due by dividing the number of hours worked by four, “rounded down if the fractional part is half or less than half and up if it is more,” and multiplying it by 10 minutes. Employees are therefore entitled to 10 minutes’ rest for shifts from 3.5 to 6 hours, 20 minutes for more than 6 hours up to 10 hours, 30 minutes for shifts of more than 10 hours up to 14 hours, and so on.
Practical Considerations. Following the Brinker decision, California employers should review their policies and procedures to make sure that:
- Employees are provided an unpaid 30 minute meal period, no later than the end of the 5th hour of the work shift.
- Employees are provided a second unpaid 30 minute meal period no later than the end of 10th hour of the work shift.
- Employees can use meal periods for their own purposes and leave company property.
- Employees must record the time they begin and end each meal period.
- Employees are provided rest periods as follows:
- 3.5-6 hours of work: 10 minutes
- More than 6 hours of work, up to 10 hours: 20 minutes
- More than 10 hours of work, up to 14 hours: 30 minutes
- To the extent possible, rest periods are provided in the middle of each work period.
- Employees are not discouraged or impeded from taking their meal or rest breaks.
- Employees are provided with a reporting mechanism if they are not given the opportunity to take a mandatory break, and that prompt and appropriate action is taken.
Federal EEOC Announces New Guidelines for Use of Criminal History in Employment Decisions
Even though there may not be a strict legal definition of “malicious gossip,” employers should be aware of the characteristics that make gossip pernicious and that lead to the legal claims discussed below. An employee who communicates information about another employee with the desire to inflict injury or harm on the other is engaging in malicious gossip. The same is true of an employee who spreads rumors about a coworker’s personal or professional life that are untrue.
On April 25, 2012, the federal Equal Employment Opportunity Commission (“EEOC”) approved new enforcement guidelines entitled “Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act of 1964.” The new EEOC guidelines are available online at:
http://www.eeoc.gov/laws/guidance/arrest_conviction.cfm.
According to the EEOC, the new guidelines are based on federal court decisions involving application of Title VII to employer use of criminal history in making employment-related decisions. The EEOC cites national statistics to support its position that criminal background-check policies have a disparate impact on certain protected racial and ethnic minorities. Under Title VII, employment policies that create a disparate impact on protected classes of employees may be deemed unlawful and grounds for civil or administrative enforcement actions, unless the employer can validate its policies as job related and consistent with business necessity.
The EEOC takes the position that blanket exclusion of applicants based on criminal history is a per se violation of Title VII. It should be noted that EEOC guidelines are advisory, and are not binding on federal courts as they interpret Title VII requirements. Still, the EEOC advises risk-averse employers to develop “targeted screens” to evaluate the nature of the crime, the time elapsed, and the nature of the employment position before screening out candidates due to criminal history. For those job applicants/employees identified by a targeted screen, the new guidelines encourage an “individualized assessment” to determine if excluding the specific employee/applicant based on criminal history is job-related and consistent with business necessity. In making this determination, the employer may consider a number of factors, such as:
On April 25, 2012, the federal Equal Employment Opportunity Commission (“EEOC”) approved new enforcement guidelines entitled “Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act of 1964.” The new EEOC guidelines are available online at:
http://www.eeoc.gov/laws/guidance/arrest_conviction.cfm.
According to the EEOC, the new guidelines are based on federal court decisions involving application of Title VII to employer use of criminal history in making employment-related decisions. The EEOC cites national statistics to support its position that criminal background-check policies have a disparate impact on certain protected racial and ethnic minorities. Under Title VII, employment policies that create a disparate impact on protected classes of employees may be deemed unlawful and grounds for civil or administrative enforcement actions, unless the employer can validate its policies as job related and consistent with business necessity.
The EEOC takes the position that blanket exclusion of applicants based on criminal history is a per se violation of Title VII. It should be noted that EEOC guidelines are advisory, and are not binding on federal courts as they interpret Title VII requirements. Still, the EEOC advises risk-averse employers to develop “targeted screens” to evaluate the nature of the crime, the time elapsed, and the nature of the employment position before screening out candidates due to criminal history. For those job applicants/employees identified by a targeted screen, the new guidelines encourage an “individualized assessment” to determine if excluding the specific employee/applicant based on criminal history is job-related and consistent with business necessity. In making this determination, the employer may consider a number of factors, such as:
- The facts or circumstances surrounding the offense or conduct.
- The number of offenses for which the individual was convicted.
- The applicant/employee’s age at the time of conviction or release from prison.
- The applicant/employee’s work history, and
- The nature of any rehabilitation efforts, such as training and education.
NLRB Offers Guidance on Social Media Policies
Earlier this year, the National Labor Relations Board (“NLRB”) released a report summarizing a series of recent NLRB cases that address employee social media postings and the lawfulness of employer policies that purport to restrict employee use of social media. In reviewing 14 NLRB decisions, the report illustrates the current NLRB’s pro-union bias, and paints a grim picture for companies that may be inclined to police employee activities on social media websites. The report also repeatedly returns to two fundamental points:
The complete text of the NLRB report is available online at:
http://www.nlrb.gov/news/acting-general-counsel-issues-second-social-media-report.
- The NLRB will invalidate broad or ambiguous social media policies on the grounds that such policies may interfere with “protected activities” as defined by law, such as discussions of wages or working conditions, or reports about alleged illegal activity in the workplace.
- Contrary to popular belief, many individual postings on Facebook, Twitter, etc., do not rise to the level of “protected activity.” Employees should understand that individual gripes and negative comments about co-workers or the company generally are not protected, and may result in legitimate employee discipline.
- Provide specific examples of the type of inappropriate comments, photos, etc., prohibited by the social media policy (e.g., “employees may not disclose trade secrets…”).
- Emphasize that the policy is not intended, and should not be construed, to interfere with the employees’ right to engage in concerted activity as protected by the NLRA.
- The NLRB construes common policy terms such as “inappropriate” or “unprofessional” as inherently vague, and will invalidate policies that purport to limit “inappropriate” postings, unless such terms are defined with clear examples and illustrations.
The complete text of the NLRB report is available online at:
http://www.nlrb.gov/news/acting-general-counsel-issues-second-social-media-report.
Wednesday, February 15, 2012
California Increases Penalties for Independent Contractor Misclassification
The classification of a new hire as an independent contractor should not be made rashly. Although it might be attractive, from an employer’s perspective, to avoid paying worker’s compensation insurance, paying for mileage reimbursement or other kinds of industry-related business expenses, the financial consequences of misclassifying an employee can be staggering when an employee sues.
Any employer who considers the use of independent contractors, or has already incorporated this classification into their business model, should re-think their decision, especially in light of newly added Labor Code Sections 226.8 and 2753, which prohibits employers from willfully misclassifying a person as an independent contractor -- subjecting employers to civil penalties of between five thousand to fifteen thousand dollars per violation.
The new law, signed by Governor Jerry Brown on October 9, 2011, imposes civil penalties from $5,000 to $25,000 per violation and requires businesses to publicize violations on their company websites.
Section 226.8(a) sets forth the law’s objective, making it unlawful for any person or employer to willfully misclassify an individual as an independent contractor, and prohibiting businesses from charging fees or making any deductions from compensation for any purpose, including goods, materials, space rental, services, licenses, repairs, maintenance and fines, when such fees or deductions would have been impermissible had the individual not been misclassified.
Section 226.8(b) provides that, for each violation, an employer can face a penalty between $5,000 and $15,000 in addition to any other penalties permitted by law. These penalties may be increased to between $10,000 and $25,000 per violation if either California’s Labor and Workforce Development Agency (LWDA) or a court determines that an employer has engaged in a “pattern or practice” of willfully misclassifying its workers as independent contractors. For those who think they can avoid penalties by closing up shop and re-opening under a new business name, note that Section 226.8(h) authorizes penalties against successor companies if one or more of the same principals or officers is engaged in the same or a similar business.
One of the most troubling aspects of the new law is the ability to seek fines and penalties from individuals in addition to business entities. Section 226.8(h) provides that an employer’s third-party advisors, such as financial, accounting and human resources professionals, can be jointly and severally liable with the employer for fines and penalties. Labor Code Section 2753 broadens the scope even further, extending “joint and several liability” to any person who, for money or other valuable consideration, “knowingly advises an employer to misclassify an individual as an independent contractor to avoid employee status.”
Section 226.8(d) requires businesses to publicize a finding by a court or the LWDA that a violation occurred. An employer found in violation must prominently display a notice on its company website (or if the company does not have a website, in an area accessible to all employees and the general public) stating that (1) it has committed a serious violation of law by engaging in the willful misclassification of employees, (2) it has changed its business practices to avoid further violations, and (3) any employee who believes he or she is misclassified may contact the LWDA (with the LWDA’s contact information provided). The notice must be signed by a corporate officer and posted for one year. Licensed contractors will also be reported to the Contractors State License Board, which will initiate disciplinary proceedings against the offending contractor.
The California Labor Commissioner is charged with investigating complaints and pursuing civil actions for alleged violations of Section 226.8. Section 226.8 does not expressly create a private right of action and, based on the California Supreme Court’s reasoning in Lu v. Hawaiian Gardens, 50 Cal. 4th 592 (2010), a statutory private right of action should not be implied. However, given the expansive use of California’s Private Attorneys General Act (PAGA), which allows citizens to pursue civil penalties on behalf of the LWDA, businesses should anticipate a spike in private lawsuits (including representative class actions) seeking recovery of fines and penalties under Section 226.8 for alleged misclassification of workers.
Labor Code section 226.8’s ultimate impact will depend on how the LWDA and courts interpret the term “willful misclassification.” Section 226.8(i)(4) prohibits employers from “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” Without any clear statutory definition of these terms, California businesses can expect the courts to take an expansive view designed to protect individual workers. Adding to the uncertainty, the new law fails to provide a clear and objective test for determining whether an independent contractor is misclassified. Instead, businesses must look to prior case law for guidance on how the law will be applied.
An analysis of the misclassification issue begins with the seminal case, S.G. Borello And Sons, Inc. v. Department of Indust. Relations, 48 Cal. 3d 341 (1989), decided against the employer, who had classified farm laborers as independent contractors. The Court found that the essential first question in determining the appropriate classification of a laborer is who is in control of the work to be performed. In Borello, supra, the employers argued that the laborers managed their own labor, shared the profits and loss from the crop and agreed in writing that they were not employees, set their own hours, decided when to harvest each cucumber in order to maximize profit, used their own tools and were therefore properly classified as independent contractors. The Court disagreed with the employer and found that the grower exercised pervasive control over the operation as a whole and that all meaningful aspects of the business relationship, including price, crop cultivation, fertilization, insect prevention, payment and the right to deal with buyers were controlled by the buyer.
The more employer control over the details of the performance and quality of the work performed, the more likely it will appear that the relationship is one of employer to employee. But control is only the first step in the analysis as the Court lists several other factors to be taken into consideration, none of which are dispositive. Because no one factor is dispositive, the employer must take chances; it’s a crap shoot. The additional factors which support a true independent contractor classification include the following:
The only saving grace is that if litigation does ensue, the trier of fact can also be misled with the sheer number of factors that need to be sorted out in this kind of analysis. Consider Christler v. Express Messenger, 171 Cal. App. 4th 72, 77-78 (2009), where the jury got so tied into knots over the jury instructions related to a large class action filed for misclassification that they found on behalf of the employer, in a case that could easily have gone the other way. But no employer should breathe easy with independent contractors on payroll. Call a specialist and re-think the decision before you’re buried by the unforeseen litigation and penalty costs.
Any employer who considers the use of independent contractors, or has already incorporated this classification into their business model, should re-think their decision, especially in light of newly added Labor Code Sections 226.8 and 2753, which prohibits employers from willfully misclassifying a person as an independent contractor -- subjecting employers to civil penalties of between five thousand to fifteen thousand dollars per violation.
The new law, signed by Governor Jerry Brown on October 9, 2011, imposes civil penalties from $5,000 to $25,000 per violation and requires businesses to publicize violations on their company websites.
Section 226.8(a) sets forth the law’s objective, making it unlawful for any person or employer to willfully misclassify an individual as an independent contractor, and prohibiting businesses from charging fees or making any deductions from compensation for any purpose, including goods, materials, space rental, services, licenses, repairs, maintenance and fines, when such fees or deductions would have been impermissible had the individual not been misclassified.
Section 226.8(b) provides that, for each violation, an employer can face a penalty between $5,000 and $15,000 in addition to any other penalties permitted by law. These penalties may be increased to between $10,000 and $25,000 per violation if either California’s Labor and Workforce Development Agency (LWDA) or a court determines that an employer has engaged in a “pattern or practice” of willfully misclassifying its workers as independent contractors. For those who think they can avoid penalties by closing up shop and re-opening under a new business name, note that Section 226.8(h) authorizes penalties against successor companies if one or more of the same principals or officers is engaged in the same or a similar business.
One of the most troubling aspects of the new law is the ability to seek fines and penalties from individuals in addition to business entities. Section 226.8(h) provides that an employer’s third-party advisors, such as financial, accounting and human resources professionals, can be jointly and severally liable with the employer for fines and penalties. Labor Code Section 2753 broadens the scope even further, extending “joint and several liability” to any person who, for money or other valuable consideration, “knowingly advises an employer to misclassify an individual as an independent contractor to avoid employee status.”
Section 226.8(d) requires businesses to publicize a finding by a court or the LWDA that a violation occurred. An employer found in violation must prominently display a notice on its company website (or if the company does not have a website, in an area accessible to all employees and the general public) stating that (1) it has committed a serious violation of law by engaging in the willful misclassification of employees, (2) it has changed its business practices to avoid further violations, and (3) any employee who believes he or she is misclassified may contact the LWDA (with the LWDA’s contact information provided). The notice must be signed by a corporate officer and posted for one year. Licensed contractors will also be reported to the Contractors State License Board, which will initiate disciplinary proceedings against the offending contractor.
The California Labor Commissioner is charged with investigating complaints and pursuing civil actions for alleged violations of Section 226.8. Section 226.8 does not expressly create a private right of action and, based on the California Supreme Court’s reasoning in Lu v. Hawaiian Gardens, 50 Cal. 4th 592 (2010), a statutory private right of action should not be implied. However, given the expansive use of California’s Private Attorneys General Act (PAGA), which allows citizens to pursue civil penalties on behalf of the LWDA, businesses should anticipate a spike in private lawsuits (including representative class actions) seeking recovery of fines and penalties under Section 226.8 for alleged misclassification of workers.
Labor Code section 226.8’s ultimate impact will depend on how the LWDA and courts interpret the term “willful misclassification.” Section 226.8(i)(4) prohibits employers from “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” Without any clear statutory definition of these terms, California businesses can expect the courts to take an expansive view designed to protect individual workers. Adding to the uncertainty, the new law fails to provide a clear and objective test for determining whether an independent contractor is misclassified. Instead, businesses must look to prior case law for guidance on how the law will be applied.
An analysis of the misclassification issue begins with the seminal case, S.G. Borello And Sons, Inc. v. Department of Indust. Relations, 48 Cal. 3d 341 (1989), decided against the employer, who had classified farm laborers as independent contractors. The Court found that the essential first question in determining the appropriate classification of a laborer is who is in control of the work to be performed. In Borello, supra, the employers argued that the laborers managed their own labor, shared the profits and loss from the crop and agreed in writing that they were not employees, set their own hours, decided when to harvest each cucumber in order to maximize profit, used their own tools and were therefore properly classified as independent contractors. The Court disagreed with the employer and found that the grower exercised pervasive control over the operation as a whole and that all meaningful aspects of the business relationship, including price, crop cultivation, fertilization, insect prevention, payment and the right to deal with buyers were controlled by the buyer.
The more employer control over the details of the performance and quality of the work performed, the more likely it will appear that the relationship is one of employer to employee. But control is only the first step in the analysis as the Court lists several other factors to be taken into consideration, none of which are dispositive. Because no one factor is dispositive, the employer must take chances; it’s a crap shoot. The additional factors which support a true independent contractor classification include the following:
- A lack of control by the hiring party;
- Independent contractors are typically not required to comply with instructions or polices of the hiring company;
- Are usually not trained by the company;
- Perform a service that is not integral to the nature of the company’s business;
- Conduct work which has an opportunity for profit or loss depending on their managerial skills;
- Are typically not required to perform work on the employer’s premises;
- Supply their own instrumentalities and tools;
- Have a significant investment in their business;
- Set their own work hours;
- Pay their own traveling and business expenses;
- Are usually paid by the job or at the end of the job;
- Are not hourly employees;
- Are generally able to delegate their work (i.e., substitute themselves or bring in an assistant);
- Do not have a long term continuing relationship with the hiring company;
- Determine the order and sequence of the work; and,
- Do not have to submit regular reports regarding the status of their work.
The only saving grace is that if litigation does ensue, the trier of fact can also be misled with the sheer number of factors that need to be sorted out in this kind of analysis. Consider Christler v. Express Messenger, 171 Cal. App. 4th 72, 77-78 (2009), where the jury got so tied into knots over the jury instructions related to a large class action filed for misclassification that they found on behalf of the employer, in a case that could easily have gone the other way. But no employer should breathe easy with independent contractors on payroll. Call a specialist and re-think the decision before you’re buried by the unforeseen litigation and penalty costs.
Thursday, January 26, 2012
Wage Theft Prevention Act
As the recent front page news about Nike’s one-million dollar settlement for not paying overtime to its Indonesian workers makes clear, there are employers who take regular short cuts in the wage context by not fully paying employees for all hours worked. Examples of these short cuts include situations where employers simply refuse to pay all wages for hours worked, pay below minimum wage, or intentionally misclassify employees as independent contractors. Some of the worst examples occur against “undocumented workers, with the biggest dollar values being stolen from native born workers.” See, Kim Bobi, Author of Wage Theft In America – Why millions of Workers are not getting paid – and what we can do about it.
However, taking short cuts in the wage context is not the answer for most sensible California employers whom have gone through Olympian like contortions to follow the mandates of the Labor Code in relationship to the payment of wages. For many employers, a single employee’s success with the Labor Commissioner has been sufficient to cause an extensive overhaul of polices and practices related to the payment of wages – and for other employers, the threat of costly, practically door-closing litigation has resulted in the same extensive overhaul.
So after nearly a decade of fierce litigation in the wage context, could it be possible to further burden employers with new legislation regarding the payment of wages? Apparently the answer is a resounding “yes,” as legislation to address wage theft took effect on January 1, 2011 which applies to California’s private employers: the Wage Theft Prevention Act of 2011. The legislation must be broken down in three separate parts in order to digest:
First, five sections of the Labor Code have been amended: Section 98 (allows an employee to recover liquidated damages in hearing with the Labor Commissioner, i.e., a pre-determined sum that must be paid if a party fails to perform – pay wages and the damages are difficult to quantify); 226, Section 240 (extends time required for an employer who fails to satisfy a judgment, to maintain a bond from six months to two years, and allows the Labor Commissioner to seek an accounting of assets if the bond is not maintained); Section 243 (an employer convicted of a second violation under this section will be liable for wages, interest, or damages, an accounting of assets may be required and the employer may be subject to additional sanctions); Section 1174 (extends time an employer is required to maintain payroll records from two years to three years and an employer may not prevent an employee from maintaining a personal record of his hours worked); Section 1197 (provides that an employer who fails to pay the required minimum wage must pay restitution to the employee in the amount of unpaid wages in addition to a penalty or penalties).
Second, five sections of the Labor Code have been added: Section 200.5 (requires the DLSE file a request for entry of judgment on a civil penalty or fee against an employer within three years from the date the penalty or fee became final. Once the DLSE begins such an action, the judgment must be entered immediately); Section 1194.3 (allows an employee to recover attorney’s fees and costs incurred in enforcing a court judgment for unpaid wages); Section 1197.2 (increases sanctions for wage violations by imposing new civil and criminal penalties against noncompliant employers. The severity of penalties, both criminal and civil are linked to the amount of the wages owing and to the number of employees that are owed wages); Section 1206 (provides that, notwithstanding any other provisions of law, the Labor Code establishes minimum penalties for failure to comply with wage-related statues and regulations).
Third, and addressed separately as it is the most comprehensive addition to the Labor Code, is Section 2810.5 which essentially requires that employers provide non-exempt employees with a written statement at the time of hiring. The information required to be provided to new hires has been standardized in template form, which can be found on the DLSE webpage. See, www.dir.ca.gov/dlse/LC_2810.5_Notice.pdf. Employers do not need to rely on the template, but must include in any individualized model all the information contained within the DLSE template. Much of the new information required to be provided to new employees resembles the original requirements of a good wage statement pursuant to Labor Code 226 by requiring that new employees are provided the rate or rates of pay, the basis for the rate of pay, i.e., commission, overtime, piece rate, allowances claimed for meal or lodging, regular paydays, the employer’s legal name and contact information. However, this mimicry of Labor Code 226 is not all that the new provision requires and employers should seek a more comprehensive review by, at minimum, examining the DLSE template.
Also new on the DLSE webpage which supports amended Labor Code Section 1174, is a smart phone application created for those employees who have invested in iphone/ipad technology. But there is nothing smart about this: although the application provides employees a tool to keep track of their working hours, the utility is really nothing more than a simple time tracker, as subject to human error as writing down one’s hours on a pad of paper. However, what’s really troubling about the application is that it appears to be sanctioned by the DLSE, potentially lending records credibility which have otherwise been falsified or carelessly maintained. The only true accomplishment of the publication of the smart phone application is the warning it poses for employers to be more diligent than ever in recording and maintaining employees’ work hours. In the event that a dispute over work hours does arise, employers should require that employees regularly review and sign that their employer recorded work hours are accurate.
But in spite of the increased burden to private employers, with the passing of AB 469, it remains to be seen whether the legislation will be just another employer burden to bear – or will accomplish it’s goal – the protection of California workers from employer wage theft.
However, taking short cuts in the wage context is not the answer for most sensible California employers whom have gone through Olympian like contortions to follow the mandates of the Labor Code in relationship to the payment of wages. For many employers, a single employee’s success with the Labor Commissioner has been sufficient to cause an extensive overhaul of polices and practices related to the payment of wages – and for other employers, the threat of costly, practically door-closing litigation has resulted in the same extensive overhaul.
So after nearly a decade of fierce litigation in the wage context, could it be possible to further burden employers with new legislation regarding the payment of wages? Apparently the answer is a resounding “yes,” as legislation to address wage theft took effect on January 1, 2011 which applies to California’s private employers: the Wage Theft Prevention Act of 2011. The legislation must be broken down in three separate parts in order to digest:
First, five sections of the Labor Code have been amended: Section 98 (allows an employee to recover liquidated damages in hearing with the Labor Commissioner, i.e., a pre-determined sum that must be paid if a party fails to perform – pay wages and the damages are difficult to quantify); 226, Section 240 (extends time required for an employer who fails to satisfy a judgment, to maintain a bond from six months to two years, and allows the Labor Commissioner to seek an accounting of assets if the bond is not maintained); Section 243 (an employer convicted of a second violation under this section will be liable for wages, interest, or damages, an accounting of assets may be required and the employer may be subject to additional sanctions); Section 1174 (extends time an employer is required to maintain payroll records from two years to three years and an employer may not prevent an employee from maintaining a personal record of his hours worked); Section 1197 (provides that an employer who fails to pay the required minimum wage must pay restitution to the employee in the amount of unpaid wages in addition to a penalty or penalties).
Second, five sections of the Labor Code have been added: Section 200.5 (requires the DLSE file a request for entry of judgment on a civil penalty or fee against an employer within three years from the date the penalty or fee became final. Once the DLSE begins such an action, the judgment must be entered immediately); Section 1194.3 (allows an employee to recover attorney’s fees and costs incurred in enforcing a court judgment for unpaid wages); Section 1197.2 (increases sanctions for wage violations by imposing new civil and criminal penalties against noncompliant employers. The severity of penalties, both criminal and civil are linked to the amount of the wages owing and to the number of employees that are owed wages); Section 1206 (provides that, notwithstanding any other provisions of law, the Labor Code establishes minimum penalties for failure to comply with wage-related statues and regulations).
Third, and addressed separately as it is the most comprehensive addition to the Labor Code, is Section 2810.5 which essentially requires that employers provide non-exempt employees with a written statement at the time of hiring. The information required to be provided to new hires has been standardized in template form, which can be found on the DLSE webpage. See, www.dir.ca.gov/dlse/LC_2810.5_Notice.pdf. Employers do not need to rely on the template, but must include in any individualized model all the information contained within the DLSE template. Much of the new information required to be provided to new employees resembles the original requirements of a good wage statement pursuant to Labor Code 226 by requiring that new employees are provided the rate or rates of pay, the basis for the rate of pay, i.e., commission, overtime, piece rate, allowances claimed for meal or lodging, regular paydays, the employer’s legal name and contact information. However, this mimicry of Labor Code 226 is not all that the new provision requires and employers should seek a more comprehensive review by, at minimum, examining the DLSE template.
Also new on the DLSE webpage which supports amended Labor Code Section 1174, is a smart phone application created for those employees who have invested in iphone/ipad technology. But there is nothing smart about this: although the application provides employees a tool to keep track of their working hours, the utility is really nothing more than a simple time tracker, as subject to human error as writing down one’s hours on a pad of paper. However, what’s really troubling about the application is that it appears to be sanctioned by the DLSE, potentially lending records credibility which have otherwise been falsified or carelessly maintained. The only true accomplishment of the publication of the smart phone application is the warning it poses for employers to be more diligent than ever in recording and maintaining employees’ work hours. In the event that a dispute over work hours does arise, employers should require that employees regularly review and sign that their employer recorded work hours are accurate.
But in spite of the increased burden to private employers, with the passing of AB 469, it remains to be seen whether the legislation will be just another employer burden to bear – or will accomplish it’s goal – the protection of California workers from employer wage theft.
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