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(323) 652-9451On 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:
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.
In Kilby v. CVS Pharmacy, the California Supreme Court clarified when employers must provide employees with seating at work. The applicable California state wage orders require employers to provide suitable seats to employees when the “nature of the work reasonably permits the use of seats.” Prior to the Kilby case, there was a lack of controlling precedent about the meaning of the phrase “nature of the work.”
To place the dispute into perspective, the employers argued that the decision whether seating was needed required analysis of an employee’s duties as a whole during a complete shift, as well as the layout of the workplace and the employer’s own business judgment. The employees’ position, by contrast, was that each particular task had to be examined; if any task could be performed while seated, the employer should be required to provide seating.
The Supreme Court adopted a middle ground. It held that the “nature of the work” element referred to the actual tasks performed by an employee at a particular location, rather than the “holistic” analysis urged by the employers. Focusing on the actual work done at a particular location would, according to the Court, enable courts and, presumably, employers, to determine objectively whether the “nature of the work reasonably permits the use of seats” based on a totality of the circumstances test. The circumstances to be considered include the frequency and duration of tasks as well as the feasibility and practicability of providing seating.
What Employers Should Do Given This Ruling
Recognizing the Kilby opinion is riddled with legalese and provides little clear guidance, California employers with employees who may be entitled to seating—particularly if a request has been made—should seek advice from their employment counsel.
Effective April 1, 2016, significant amendments to the California Fair Employment and Housing Act (FEHA) will take effect. These impact every employer, including out of state employers, with at least 5 workers in California. Here are the critical highlights of these amendments.
Mandatory Written Anti-Discrimination/Harassment Policy
Of greatest import, the amendments require every covered employer to have a written policy that:
In order to ensure that employees receive the written policy, employers may publish the policy through various means. These include: providing a copy to existing employees and during the hiring process, posting it in the workplace, and obtaining a written acknowledgement. Translation of the policy is required into every language that is spoken by at least 10% of the workforce.
Definitions
The amendments also contain definitions that are important in the context of gender discrimination.
Recordkeeping Requirement
Employers with 50+ employees are required to provide sexual harassment prevention training to supervisors at least every 2 years. The amendments require employers to retain materials related to this training, including sign-in sheets and course materials, for at least 2 years.
What Employers Should Do
Covered employers (5+ employees) should immediately review their policies to ensure they are in compliance with the amended regulations before April 1st. If you have any doubt whether your business is in compliance, we recommend you contact your qualified employment law counsel.
On October 6, 2015, California Governor Jerry Brown signed Senate Bill 358, amending California’s Equal Pay Act, which prohibits an employer from paying employees of one sex less than employees of the opposite sex for “substantially similar work.” This Bulletin briefly discusses this amendment and how it could impact California employers.
What is required for an employee to prove unequal pay?
Prior to the new law, an employee seeking to prove unequal pay had to demonstrate that he or she was not being paid at the same rate as someone of the opposite sex at the same establishment for “equal work.”
The new law, effective January 1, 2016, relaxes this standard, making it much easier for an employee to prove unequal pay. Under the new law, an employee need only show he or she is not being paid at the same rate for “substantially similar work” as measured by a composite of skill, effort and responsibility performed under similar working conditions. It is not necessary that the employees of opposite sexes perform the same or equal work.
What can an employee recover?
Employees have the option of pursuing a claim through the Labor Commissioner or filing a civil lawsuit. An employee who prevails through a claim with the Labor Commissioner may recover pay differential plus an equal amount as liquidated damages. An employee who successfully sues in court may recover pay differential damages, interest, litigation costs and attorneys’ fees.
How can an employer defend a claim or suit?
Even if there is a gender-based wage differential, an employer can escape liability if it can show that the differential is based on:
These factors were included in the law, as it existed prior to the October 6th amendment. However, the fourth factor has been changed to require an employer to show with competent evidence that any difference in compensation is not sex-based, is related to the position in question and there exists a “business necessity” for the wage differential. A “business necessity” is an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is intended to serve.
Additional “Wage Transparency” requirement
As amended, the law makes it unlawful for employers to prohibit employees from disclosing their wages to others, discussing their wages or inquiring about the wages of another employee.
Extended record keeping period
The amendment extends the time period for employers to keep records pertaining to employees’ terms and conditions of employment (including wages and job classifications) from two to three years.
What Should Employers Do?
Commentators suggest this amendment may cause a significant uptick in claims and lawsuits alleging unequal pay–this remains to be seen. However, there are unquestionably steps employers should take to protect themselves against an unequal pay claim:
If you have questions about this amendment, you should consult with experienced employment law counsel.
California employers should be aware of significant new state laws which take effect on January 1, 2014. These include:
Protected Categories Expanded to Include Military and Veteran Status. – Assembly Bill 556 adds “military and veteran status” to the list of categories protected from employment discrimination.
Prohibition of “Unfair Immigration-Related Practices” – Assembly Bill 263 prohibits employers from engaging in “unfair immigration-related practices,” which could include contacting or threatening to contact immigration authorities, because an employee asserts protected rights under the California Labor Code. Other immigrant protection legislation effective Jan. 1, 2014 includes SB 666 (business license revocation for threatening to report immigration status), and AB 524 (authorizes criminal extortion for threatening to report immigration status).
Domestic Worker Bill of Rights – Assembly Bill 241 creates a Domestic Worker Bill of Rights. This provides specific overtime pay for a “domestic work employee who is a personal attendant.” The bill has many specific definitions and exclusions.
Heat Illness Recovery Periods – Senate Bill 435 expands meal and rest break prohibitions to include “recovery” periods necessary to prevent heat illness. Penalty mirrors premium for failing to provide meal or rest breaks (i.e., one additional hour of pay for each workday that meal, rest, heat illness recovery period not provided). Unlike the meal and rest period rules which provide a clear guidance on timing, however, the need for a heat illness recovery period is subjective and determined by the employee. Employers with outdoor workers need to ensure their Heat Illness Prevention programs comply with Cal-OSHA regulations.
Leaves Required for Victims of Certain Crimes – Two important new laws. Senate Bill 288 provides protections for victims of certain crimes (including solicitation for murder and vehicular manslaughter while intoxicated) who take time off from work to appear in court proceedings. SB 400 extends protections for victims of domestic violence or sexual assault or victims of stalking, including time off to appear at legal proceedings and to seek medical/psychological treatment. This law adds a reasonable accommodation requirement—which can include implementation of safety measures—for victims of domestic violence, sexual assault or stalking.
Expanded Scope of Whistleblower Protections – California Labor Code Section 1102.5 already provides protections for employees who report violations of federal or state statutes. Senate Bill 496 expands this protection to include suspected violations of a local rule or regulation, and will include reporting violations to “a person with authority over the employee or another employee who has authority to investigate, discover or correct the violation.”
I recognize I’m about 3 years too late with this post. The truth, however, is that employers can be forced (or strategically choose) to reduce their workforce even outside a recession.† So, without further apology, here are my 6 steps to effecting a layoff in a way that eliminates, or at least reduces, your exposure to employment-related discrimination or retaliation claims and suits:
1. Be forewarned about the WARN Acts. The biggest challenge for employers contemplating a “mass layoff,” plant closure, etc. can be WARN Act compliance. California employers are required to comply with the Federal WARN Act (29 U.S.C. 2101, et seq.) and the more rigorous California version (Cal. Labor Code Secs. 1400, et seq.). The specific ins and outs of what triggers Act compliance, exceptions and consequences are unbloggably‡ complicated. You should consult a knowledgeable employment lawyer* on this–no exceptions!
2. Offer severance in exchange for a release. I feel like a flight attendant describing how to use a seat belt, but I’m amazed that there are employers that do not premise a severance payment on execution of a release/waiver of claims. In order to “buy your peace,” the severance must give the employee something to which he/she is not already entitled. In other words, don’t propose the release after you’ve already agreed to pay severance. This kind of release/waiver agreement needs to comply with certain requirements, including timing and lack of ambiguity. You cannot demand the employee sign the waiver on the spot. Depending on the circumstances, you’ll need to allow the employee some time to consider the terms. Again, involve experienced employment counsel.*
3. Develop, and preserve evidence of, objective, nondiscriminatory criteria justifying both the need for the workforce reduction and why the affected employees were selected. Maintain this evidence for up to 4 years. I’m thinking here of meeting minutes, Power Point decks, etc.
4. Review the list of affected employees. “Issue spot” each employee to evaluate the risks associated with the layoff. These include, not only risks of a claim that an individual employee was the victim of discrimination, but also that the architecture of the reduction disparately impacts a protected class. Look at age (40+), race, gender, disability and religion, FMLA leave, etc. Here, again, use knowledgeable employment counsel* to assist in this analysis.
5. Have upper level management, one or more layers removed from immediate managers and supervisors, decide who will be affected by the layoff. This helps reduce the likelihood of claims that an individual manager had a nonobjective discriminatory or retaliatory reason to select a given employee. It also strengthens the theme that the layoff was objective and necessary, as opposed to a mere “pretext” for an unlawful termination.
6. On the day of the layoff, meet separately, in-person, with each affected employee. Ideally, have an additional manager or HR representative in the room. Resist the urge to say more than necessary about the layoff. Remember that anything said to the employee, if later believed by a judge or jury, can be used against the company if a claim or litigation results. Having the second “witness” in the room reduces the likelihood or believability of a fabrication.
Good luck. Oh, and did I mention the importance of involving experienced employment counsel?*
†Yes, I’m aware there are people far smarter than I who believe we haven’t yet escaped the recession.
‡As far as I know I coined this term.
*Shameless use of link for self-promotion is acknowledged. The question becomes whether, by pointing out and acknowledging the self-promotional use of repeated links to my LinkedIn profile which, by implication, advertises me, variously, as “experienced” and “knowledgeable” employment counsel, I am somehow absolved of the sin of shameless self-promotion, or whether, the fact that, in addition to the link, I also used this footnote to attempt to absolve myself of said shameless self-promotion, is itself equally, or even more, shameless. To quote Bill Murray, “We’re getting into a weird area here.”
Not everyone is cut out to play the boss. While I suspect there are a few sadists who actually enjoy the act of firing an employee, most people hate delivering bad news and learning you’re now jobless usually ranks near the top of the bad news heap.
From the point of view of a lawyer who represents employers in lawsuits, however, I view the process of termination to be extremely important. It can be tempting, when one is forced to deliver the news, to sugarcoat. Most sugar-coating doesn’t really make anyone feel better. For example, “you’ll always be part of the family,” or “you’ll thank me someday for this chance at a fresh start,” might have worked for George Clooney in “Up In The Air,” but it’s a pretty stupid thing to say in the real world.
One brand of sugar-coating that can be really dangerous concerns mischaracterizing a termination for poor work performance as something other than what it is. In particular, suggesting a sub-par employee is being “laid off” creates substantial risk. If the “redundant” employee is replaced anytime in the near future, it sets the stage for him or her to argue, in a subsequent discrimination lawsuit, that the lack of work was merely a pretext. That the actual goal was to eliminate the employee on the basis of some protected characteristic (i.e., race, gender, disability, religion). This kind of evidence plays well at trial: like all of us, jurors love to hear about conspiracies and cover-ups.
One way for employers to make the act of termination less of a surprise–and therefore less painful for everyone involved–is to make termination the final step in a progressive discipline policy. Implementing such a policy starts with a frank discussion with the underperforming employee that is documented by a dated, written record of the discussion. This type of discussion does not even need to be characterized as discipline, but rather a coaching tool.
If verbal discussions (documented) do not improve performance, the next step should be a written notice that describes the problem, proposes a solution and is provided to the employee concurrently with the verbal discussion. The employee should be asked to sign this document, and perhaps there will be a space dedicated for any response the employee might have. lf the problem persists, the possibility of one or more additional written notices/warnings can be provided, but the message communicated should be that, after a defined number of written notices/warnings, termination will result.
A progressive, documented discipline policy serves two really important purposes. For me–your lawyer–it is important evidence if a wrongful termination or other lawsuit results from the employment relationship or termination. Perhaps more importantly, though, it gives the employee every chance to succeed.
