On April 30, 2018, the California Supreme Court, in Dynamex Operations West, Inc. v. Superior Court, clarified the proper test for California companies to apply before treating any worker as an independent contractor. This post discusses this important new holding.

Background on “Employee” vs. “Independent Contractor”

For some businesses and their workers, the question whether the worker is properly classified as an “employee” or an “independent contractor” is both important and challenging. For employees, the hiring business pays federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, provides worker’s compensation insurance and must comply with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees. The worker obtains the protection of the applicable labor laws and regulations, including protections against unlawful discrimination, harassment and retaliation.

If, on the other hand, a worker should properly be classified as an independent contractor, the business avoids those costs and responsibilities, the worker obtains none of the numerous labor law benefits, and the public may be required in some circumstances to assume additional financial burdens with respect to such workers and their families.

The proper classification analysis is, in the first instance, up to the hiring business. The decision is often made without the assistance of counsel and, where the classification lands on independent contractor, is frequently wrong. The consequences may not become known for months or even years. However, disgruntled employees misclassified as independent contractors often ultimately bring claims or suits under wage-hour laws. Worse, the California Employment Development Department (EDD), which administers unemployment insurance claims, can audit a business suspected of widespread misclassification and, in extreme instances, impound funds without notice to the business. Therefore, it is critical before a business classifies any worker as an independent contractor that it ensures the classification is accurate.

The DynamexCase and the ABC Test

Since 1989, California courts were historically guided in deciding the independent contractor question by “the seminal California decision on the subject,” S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations. This case provided employers, their lawyers, the state and the courts with several non-exclusive factors to consider in the employee/independent contractor analysis.

In the Dynamexlawsuit, two delivery drivers sued the company on behalf of themselves and similarly situated workers claiming that the company misclassified its drivers as independent contractors rather than employees. The California Supreme Court expressed the view that the multi-factor test previously announced in the S.G. Borellocase “makes it difficult for both hiring businesses and workers to determine in advance how a particular category of workers will be classified.” Therefore, the Supreme Court adopted a test previously adopted by some other courts known as the “ABC Test.”

Under the ABC Test, a worker is presumed to be an employee, unless the worker:

1. Is free from the employer’s control and direction;
2. Performs a service that is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
3. Customarily engages in an independently established trade, occupation or business.

What Should Employers Do

If anything, the stakes get higher all the time for companies that misclassify workers as independent contractors. Claims brought before the Division of Labor Standards Enforcement (DLSE), as well as civil lawsuits, including class action and private attorney general (PAGA) lawsuits are on the rise.

Before classifying one or a class of workers as independent contractors, companies should be sure they meet the applicable criteria. Additionally, the role of workers currently classified as independent contractors should be evaluated under the ABC Test. Given the complexity of this area of employment law, employers should consider working with their employment counsel to make sure they are in compliance.

On March 5, 2018, the California Supreme Court, in Alvarado v. Dart Container Corp., announced a new formula to determine an employee’s “regular rate” for overtime purposes when the worker received a flat bonus during the pay period. This post discusses this important new holding.

Background on Overtime Compensation and the “Regular Rate”

Most employers understand that, in California, employees are entitled to be paid overtime after working eight hours in any workday, 40 hours in any workweek, and on the seventh consecutive day of work in any workweek. The overtime rate is calculated at 1.5 times the employee’s “regular rate” after 8 hours and 2 times the “regular rate” after 12 hours on any workday or after the eighth hour on the seventh consecutive day in any workweek.

But many employers do not have a strong grasp of the formula involved in determining an employee’s “regular rate” used to calculate her overtime premium pay. Many improperly assume it is simply the worker’s base hourly rate. However, when calculating the “regular rate,” employers must also consider “remuneration” for work performed, with specific payments excluded—such as reimbursed expenses, reporting-time premiums, vacation or holiday pay, or discretionary bonuses—divided in any pay period by the total number of hours actually worked.

The following example, drawn from a guide provided by the Society for Human Resources Management (SHRM) is instructive:

For example, if an employee works 32 hours at $12.00 per hour and 10 hours during the same workweek at $10.50 per hour, the weighted average (and thus the regular rate for that workweek) is $11.64. This amount is calculated by adding the employee’s $489 straight-time pay for the workweek ((32 hours x $12.00/hour) + (10 hours x $10.50/hour) = $489) and dividing it by the 42 hours the employee worked ($489 / 42 hours =$11.64 per hour regular rate). The overtime premium of $5.82 (half the regular rate) is added to the employee’s wages for each one and a half overtime hour worked, and an additional overtime premium of $11.64 is added to hourly wages for each hour of double time earned.

Against this background, we discuss the California Supreme Court’s holding in Alvarado v. Dart Container Corp.regarding how to calculate an employee’s “regular rate” when she has received a flat rate bonus during the pay period. 

The AlvaradoCase and the Flat Rate Bonus

The plaintiff, Hector Alvarado, worked in the warehouse of Dart Container Corporation. To incentivize employees to work on weekends, Dart offered a $15 attendance bonus when any employee worked a full shift on a weekend day. The $15 “flat rate” bonus was paid regardless whether the employee worked any overtime hours. Alvarado sued Dart, claiming it had used an improper formula to calculate his “regular rate” for overtime in those pay periods in which he received at least one $15 attendance bonus.

Dart moved for summary judgment, which was granted and affirmed on appeal. However, after considering the formula Dart applied, as well as the formula set forth in the Division of Labor Standards Enforcement (DLSE) Manual, the California Supreme Court reversed, and embraced the following calculation methodology:

1. Calculate the overtime compensation attributable only to an employee’s hourly wages by multiplying the employee’s hourly rate by 1.5 and by the number of overtime hours worked.
2. Calculate the overtime premium attributable only to the employee’s bonus by dividing the bonus amount by the total non-overtime hours worked and multiplying that value by 1.5.
3. Multiply the bonus overtime premium by total overtime hours worked and pay that amount in addition to the amount in step 1 as total overtime compensation.

This formula differs from the method used by Dart solely in that Dart divided the bonus amount by the total hours worked—both overtime and non-overtime. While this difference appears trivial, a failure to apply the proper formula will support a claim or lawsuit for unpaid wages. To make matters worse, the Supreme Court, acknowledging the “liberal construction” of California’s labor laws, held the new formula would be applied retroactively, as well as going forward.

What Should Employers Do

Employers who provide any type of nondiscretionary “flat rate” bonus, should immediately review and ensure their overtime “regular rate” calculation methodology is consistent with the new formula announced by the Alvarado v. Dart Container Corp. court. Given the complexity of this area of employment law, employers should consider working with their employment counsel in revising policies and methodology.

Employers must begin using a new version of the Form I-9 issued by the U.S. Citizens and Immigration Services (USCIS) no later than September 18, 2017 or face potentially large fines. The Form I-9 is the document employers must use to verify the identity of new hires to ensure they are authorized to work in the United States.

What’s Different?

The changes to the Form are subtle. There are changes to the instructions and the list of documents approved to verify eligibility. A Consular Report of Birth Abroad (Form FS-240) was added as a List C document, and all the certifications of report of birth issued by the State Department (Form FS-545, Form DS-1350, and Form FS-240) have been combined.

The List C documents have been renumbered, except for the Social Security Card. All changes are described in detail in the newly revised Handbook for Employers: Guidance for Completing Form I-9 (M-274).

Storage and Retention Rules

Employers must be able to present the Forms to government officials for inspection within 3 business days of a request. Employers who choose to keep paper copies of the documents their employees present may store them with the employee’s Form I-9 or with the employees’ records. However, the USCIS recommends that employers keep Form I-9 separate from personnel records to facilitate an inspection request.

Employers are required to retain an employee’s Form I-9 until the later of (1) the date the employee began work for pay + 3 years, or (2) the date employment was terminated + 1 year.

Potential Penalties for Failure to Follow Form I-9 Rules

In 2016, Immigration and Customs Enforcement (ICE) announced increases for Form I-9 violations. For example, the minimum and maximum fines for simple Form I-9 violations increased to $216 and $2,156, respectively. Additionally, minimum and maximum fines for first offenses of Unlawful Employment of Unauthorized Workers has increased to $539 and $4,313 per worker, respectively.

Employers with lingering questions about the new Form I-9 should contact their employment counsel.