RICHARD SIMMONS WINS EMPLOYMENT VICTORY BEFORE CALIFORNIA SUPREME COURT

On December 10, 2018, the California Supreme Court handed down its unanimous decision in Gerard et al. v. Orange Coast Memorial Medical Center, affirming the Court of Appeal ruling that hospital employees who work 12-hour shifts will be able to enjoy scheduling flexibility and confine their work schedules to a span of 12 ½ rather than 13 hours. The voluntary meal period waivers were found permissible even on shifts when employees happen to work more than 12 hours. Likewise, hospitals will no longer face the threat of tens of millions of dollars in liability for meal period violations for simply relying on the state regulations, called Wage Orders, that allow health care employees to voluntarily waive one of their two meal periods when they work long shifts. Hospitals with collective bargaining agreements (CBAs) are also relieved of the concerns that would have occurred whenever negotiated CBA provisions tracked the provisions in the Wage Order to allow meal period waivers.  The Sheppard Mullin team has represented Orange Coast Memorial Medical Center in this case since 2008.

“Sheppard Mullin is the only law firm to win an employment case before the California Supreme Court in 2018,” said lead partner Richard J. Simmons.  “Over the past year, the Supreme Court has ruled unanimously against employers and businesses in three high-profile cases: Alvarado v. Dart ContainerDynamex Operations v. Superior Court, and Troester v. Starbucks. Needless to say, we are extremely gratified that the Court has ruled unanimously in our client’s favor and we are also very appreciative of the California Hospital Association’s unending support for our position over the past few years.”

The Sheppard Mullin team was successful in obtaining summary judgment in the trial court on the meal period, rest period, pay stub, final pay, expense reimbursement, unfair competition and PAGA claims. The trial court also granted the Medical Center’s motion to deny class certification on all claims. After succeeding in the trial court, teams persuaded the Court of Appeal that first ruled against the Medical Center in 2015 to reverse its decision in 2017 and admit that it had erred.  Simmons and his team also assisted the California Hospital Association in drafting and enacting legislation (SB 327) that was unanimously approved by the California Assembly and the Senate and was signed into law in October 2015 to confirm the validity of our position. Notably, the Supreme Court independently concluded that the Medical Center’s legal arguments were correct, even without SB 327, which simply reinforced the same conclusion.

The Sheppard Mullin team comprised of expert attorneys was led by partner Richard J. Simmons and included Daniel McQueen, both of whom will be speaking at Castle’s upcoming Wage and Hour Seminars.

 

For more information about this significant employment victory, please click here.

CALIFORNIA’S SALARY HISTORY AND EQUAL PAY RULES CLARIFIED

California law prohibits employers from relying on a job applicant’s salary history information as a factor in determining whether to offer the applicant employment or what salary to offer.  It also requires employers to provide applicants the pay scale for a position if it is requested.

On July 18, 2018, Governor Brown signed legislation into law, AB 2282, that adopts clarifying changes to the existing rules regarding the use of an applicant’s prior salary information and the state’s equal pay rules.  The bill amends Labor Code Sections 432.3 and 1197.5, effective January 1, 2019.

1. Overview Of Changes

The clarifications to the salary history rules add definitions of the terms “pay scale,” “reasonable request” for the pay scale, and job “applicant.”  AB 2282 also states that the rules do not prohibit an employer from asking about an applicant’s salary expectations for the position sought.

The equal pay requirements in Labor Code Section 1197.5 prohibit employers from paying employees wage rates less than the rates paid to employees of the opposite sex or of another race or ethnicity for substantially similar work.  AB 2282 authorizes employers to make compensation decisions 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 specified factors under Section 1197.5, including a seniority or merit system.

2. The Historical Context In Which AB 2282 Was Enacted

California’s equal pay provisions have been embodied in Labor Code Section 1197.5 for decades.  Over the last several years, the rules have been revised and augmented by several bills enacted between 2015 and 2017.  The key bills are reviewed below.

In 2015, SB 358 amended Section 1197.5, effective January 1, 2016, to prohibit employers from paying wage rates less than those paid to employees of the opposite sex for substantially similar work.  Significantly, the legislation revised the defenses available to employers paying such differentials.

The following year, the legislature passed two bills in 2016 that further amended Section 1197.5.  AB 1676 established a new rule providing that prior salary cannot, by itself, justify a sex-based pay differential for employees performing substantially similar work.  SB 1063 independently expanded the prohibitions in Section 1197.5 that previously were confined to gender discrimination to include discrimination based on race or ethnicity.  These new rules took effect in 2017.

Then, in 2017, the legislature passed two additional bills, AB 46 and AB 168, to further alter the landscape of legislation in the area.  AB 46 specified that the Equal Pay Act provisions prohibiting employers from paying lower wages to employees on the basis of gender, race, or ethnicity apply to both public and private employers.  AB 168 added a new Labor Code provision, Section 432.3, to prohibit employers from relying on salary history information as a factor in deciding whether to offer employment to a job applicant or what salary to offer.  It also directed employers to provide the pay scale for the position upon reasonable request.

3. The Salary History Provisions

AB 2282 was signed into law on July 18, 2018 in the context of these existing rules.  The clarifications and changes made are described below.

Labor Code Section 432.3 prohibits employers from relying on an applicant’s salary history in making a job offer to that applicant or in deciding what salary to offer.  It also prohibits employers from seeking salary history information, including compensation and benefits, about an applicant.  Section 432.3(c) requires employers to provide the pay scale for a position to an applicant upon reasonable request.

AB 2282 clarifies these rules by defining several important terms.  First, “pay scale” is clarified to mean “a salary or hourly wage range.”  And, the term “reasonable request” is defined to mean a request “made after an applicant has completed an initial interview with the employer.”  Section 432.3(k) defines the term “applicant” to mean “an individual who is seeking employment with the employer and is not currently employed with the employer in any capacity or position.”  This is described in the legislative history as a limited carve-out for using prior salary in a compensation decision in the case of a current employee, e.g., for purposes of giving raises or bonuses, so long as any wage differential from that compensation decision is justified by one or more specified factors under Labor Code Section 1197.5, including a seniority or merit system.

The legislation also provides another clarification in Section 432.3(i).  It states that nothing in Section 432.3 prohibits an employer from asking an applicant about his or her salary expectation for the position being applied for.

4. Amendments To Equal Pay Statute

Labor Code Section 1197.5(b)(4) states that “prior salary shall not justify any disparity in compensation” based on sex, race or ethnicity.  AB 2282 amends the statute to add:  “Nothing in this section shall be interpreted to mean that an employer may not make 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 this subdivision.”  This allows compensation decisions justified by a provision in 1197.5(b)(1), such as a seniority or merit system.

5. Practical Significance

The clarifications and carve-outs included in AB 2282 are significant.  The new definitions of pay scale and reasonable requests for pay scales make employer obligations more clear, as does the provision stating that employers are not precluded from asking applicants about their salary expectations for the position sought.  This clarification can be read in tandem with the rule in Sections 432.3(g)-(h) stating that (a) applicants are not prohibited from voluntarily disclosing salary history information without prompting to a prospective employer and (b) employers are not prohibited from considering such voluntarily disclosed information in determining the salary for that applicant.  It is also helpful that the legislation defines “applicants” to exclude individuals currently employed with the employer in any capacity or position.

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U.S. SUPREME COURT BLESSES ARBITRATION AGREEMENTS WITH CLASS ACTION WAIVERS

In Epic Systems Corp. v. Lewis, the U.S. Supreme Court held 5-to-4 on May 21, 2018 that class action waivers set out in arbitration agreements are alive and well despite claims that they interfere with employee rights under Section 7 of the National Labor Relations Act (“NLRA”). Putting policy considerations aside, Justice Gorsuch wrote in the blockbuster decision that the matter was clear “as a matter of law.” In the Federal Arbitration Act (“FAA”), Congress has directed federal courts “to enforce arbitration agreements according to their terms – including terms providing for individualized proceedings.” In reaching this decision, the Supreme Court opened the door, once again, to the use of properly drafted arbitration agreements that preclude employees from bringing or participating in class or collective action proceedings.

1. Overview Of The Three Court Of Appeal Decisions

The three cases reviewed by the Supreme Court each involved contracts between an employer and employee that provided for individualized arbitration proceedings to resolve employment disputes. Despite these agreements, each employee sought to litigate Fair Labor Standards Act (“FLSA”) and related state law claims through class or collective actions in federal court. They sought to extricate themselves from the obligation to arbitrate their claims on an individual basis by contending that, by requiring individualized proceedings, the agreements violated the NLRA.

The employers disagreed. They countered that the FAA protects agreements requiring arbitration from judicial interference. Furthermore, neither the saving clause in the FAA nor the NLRA demands a different conclusion. The Supreme Court held that Congress has instructed courts to enforce arbitration agreements providing for individualized proceedings. Neither the saving clause nor the NLRA suggests otherwise.

In declining to read a new right to bring class actions into the NLRA, the Supreme Court resolved a conflict among the Fifth, Seventh and Ninth Circuit Court of Appeals. It reversed the decisions of the Ninth Circuit in Ernst & Young LLP v. Morris and the Seventh Circuit in Epic Systems Corp. v. Lewis, while affirming the judgment of the Fifth Circuit in NLRB v. Murphy Oil USA, Inc.

The Supreme Court stated:

“The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written.”

a. The FAA Saving Clause

In its analysis, the Supreme Court examined the FAA saving clause, which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” This recognizes only “generally applicable contract defenses, such as fraud, duress or unconscionability. It does not permit defenses targeting arbitration either by name or by more subtle methods, such as by interfering with “fundamental attributes of arbitration.” The court determined that by challenging the agreements because they require individualized arbitration instead of class or collective proceedings, “the employees seek to interfere with one of these fundamental attributes.”

b. The NLRA Does Not Bar Class Action Waivers

Likewise, the Supreme Court rejected the employees’ NLRA claims. They asked the court to infer that class and collective actions are “concerted activities” protected by Section 7 of the NLRA, which guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively …, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Finding that Section 7 focuses on the right to organize unions and bargain collectively, the court observed that it does not mention class or collective action procedures or even hint at a clear and manifest wish to displace the FAA.

Here, the Supreme Court found it possible to give effect to both federal laws in issue, the FAA and the NLRA. It concluded that the NLRA does not prevent the use of class action waivers that restrict employees to arbitrating disputes in their individual capacity rather than in a class or collective proceeding.

2. The Ninth Circuit’s Decision In Morris

The Court gave close attention to the Ninth Circuit decision in Ernst & Young LLP v. Morris, 834 F.3d 975 (2016), where a junior accountant, Stephen Morris, entered into an agreement providing that the employer and Morris would arbitrate any disputes that might arise between them. The agreement specified individualized arbitration, with claims “pertaining to different employees to be heard in separate proceedings.” After his employment ended, and despite having agreed to arbitrate claims against the firm, Morris sued Ernst & Young in federal court. He alleged that the firm had misclassified its junior accountants as professional employees and violated the FLSA and California law by paying them salaries without overtime pay. Although the arbitration agreement provided for individualized proceedings, Morris sought to litigate the federal claims on behalf of a nationwide class under the FLSA’s collective action provision, 29 U.S.C. § 216(b). He also sought to pursue the state law claim as a class action under Federal Rule of Civil Procedure 23.

Ernst & Young replied with a motion to compel arbitration. The district court granted the request, but the Ninth Circuit reversed this judgment. The Ninth Circuit recognized that the FAA generally requires courts to enforce arbitration agreements as written, but reasoned that the statute’s “saving clause,” 9 U.S.C. § 2, removes this obligation, if an arbitration agreement violates some other federal law. It then concluded that an agreement requiring individualized arbitration proceedings violates the NLRA (29 U.S.C. § 157) by barring employees from engaging in the “concerted activity” of pursuing claims as a class or collective action.

3. The Supreme Court Disagreed With The Ninth Circuit

In expressing disagreement with the Ninth Circuit, the Supreme Court determined that the saving clause in the FAA did not support the claim that the agreement for individualized arbitration violated the NLRA. In the course of announcing its conclusion the Supreme Court issued several important reminders to lower courts regarding the value of arbitration, which it viewed as a means of resolving employment disputes in a convenient, efficient and fair way. For example, the Supreme Court reiterated:

(a) The NLRA does not guarantee class or collective action procedures in disputes before judges or arbitrators.

(b) Arbitrations offer “the promise of quicker, more informal, and often cheaper resolutions for everyone involved.”

(c) Congress directed courts to abandon their hostility and instead treat arbitration agreements as “valid, irrevocable, and enforceable.”

(d) There is an unmistakably “clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts.”

(e) Congress directed the courts “to respect and enforce the parties’ chosen arbitration procedures,” e.g., § 3 provides for a stay of litigation pending arbitration “in accordance with the terms of the agreement.”

(f) The FAA’s “saving clause recognizes only defenses that apply to “any” contract and establishes a sort of “equal-treatment” rule for arbitration contracts, permitting agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but offering no refuge for “defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” It does not save defenses that target arbitration either by name or by more subtle methods, such as by interfering with “fundamental attributes” of arbitration. The Supreme Court noted that the employees’ argument stumbled because they did not suggest their arbitration agreements were extracted by an act of fraud or duress or in some unconscionable way that would render any contract unenforceable. Instead, they objected to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes.

(g) Allowing any party in arbitration to demand class-wide proceedings despite the traditionally individualized and informal nature of arbitration would sacrifice the principal advantage of arbitration – it’s informality – and make the process slower, more costly, and more likely to generate procedural morass than fiscal judgment. Based on the Supreme Court’s earlier decisions and Epic Systems, courts may not allow a contract defense to reshape traditional individualized arbitration by mandating class-wide arbitration procedures without the parties’ consent.

4. Does Arbitration Make Sense?

In evaluating the Epic Systems decision, it is important that employers consider the pros and cons of arbitration agreements generally and then separately analyze the issues associated with class action waivers. For example, some of the potential cons often associated with arbitration agreements include the inability to appeal unfavorable decisions, the need for the employer to incur the costs of the arbitrator, the inability to effectively prevent PAGA claims from being pursued despite a class and collective action waiver, and the strategy of some plaintiff lawyers to seek to leverage the costs of multiple arbitrations against the employer. And, while it can be argued that arbitration is faster and less expensive than litigation in court, that is not always true.

It appears that the interest in utilizing arbitration agreements will increase as a result of the clear path created by Epic Systems. Yet, if history suggests anything, it can be predicted that while the proponents of arbitration will tout the advantages of the arbitration forum, opponents of arbitration will decry that it undercuts the right to a jury trial. These opponents will continue to mount attacks against arbitration agreements in court and in the legislatures. Each side has its own messaging, but it is now clear that the U.S. Supreme Court and many other courts have recognized that arbitration can benefit employees and employers by providing a fair, efficient, relatively quick and less expensive means of resolving many workplace disputes.

 

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LEGISLATION EXPANDS SEXUAL HARASSMENT TRAINING REQUIREMENT TO COVER ALL EMPLOYEES

The California Fair Employment and Housing Act (“FEHA”) prohibits discrimination and harassment, including the harassment of an employee based on sex or any other protected characteristic.  It also requires employers with 50 or more employees to provide at least two hours of prescribed training and education regarding sexual harassment, abusive conduct, and harassment based upon gender.  The training must be provided to all supervisory employees within six months of their assumption of a supervisory position and once every two years.

1. SB 1343

SB 1343 expands this requirement.  First, it lowers the threshold for coverage to employers who employ five or more employees, including temporary or seasonal employeesSecond, it requires at least two hours of sexual harassment training for supervisory employees and one hour for nonsupervisory employees.  This must occur by January 1, 2020, and once every two years after that.

The bill requires the California Department of Fair Employment and Housing (“DFEH”) to develop or obtain two online training courses on the prevention of sexual harassment in the workplace.  The DFEH must make the courses available for streaming or downloading on its Internet Website.  Further, the DFEH must provide existing informational posters and fact sheets, as well as the online training course regarding sexual harassment prevention so that they are available to employers and members of the public.

2. Summary By The Senate

Some of the features of the bill were summarized by the Senate Rules Committee as follows:

1. It reduces the employment threshold for harassment training from 50 to five employees.

2. It expands the number of employees who are required to attend the training from supervisorial employees to all employees. The training must be provided within six months of the employee being hired and once every two years.

3. It requires that all employers provide the sexual harassment training by January 1, 2020, but does not need to be provided again if the training is provided to an employee after January 2019.

4. It provides that the training may be done with other employees, as a group or an individual, and broken up into shorter time segments as long as the two-hour requirement is reached.

5. It requires that the DFEH provide a method to employees who have completed the training to print out a certificate of completion, but neither they nor their employer is required to retain the certificate.

6. It requires the DFEH to develop and make available on its Website a two-hour online training course on the prevention of sexual harassment in the workplace. The course must contain an interactive feature which requires the worker to respond to questions periodically in order for the course to continue.

7. It permits an employer to develop a two-hour training module instead of the online training course developed by the DFEH.

8. It requires that an employer provide sexual harassment training for temporary or seasonal employees within two weeks of their date of hire if they will work for less than six months.

9. It requires that the sexual harassment information sheet developed by the DFEH or the employer on sexual harassment include a link to the online training course developed by the DFEH.

10. It requires that the DFEH make the sexual harassment information sheet and online course available in English, Spanish, Simplified Chinese, Tagalog, Vietnamese, Korean, and in any other language that is spoken by a “substantial number of non-English-speaking people,” as defined under existing law. The DFEH must provide the translated materials on its Website.  The bill requires that the online course be both dubbed and subtitled in the languages described above, with the exception of dubbing in English.

(The new training obligations and other legislative developments regarding sexual harassment are addressed in the new (17th) edition of the Sexual Harassment Training And Prevention Manual.  The new edition can be ordered from Castle Publications and will be available soon.)

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NEW LAW REQUIRES BOARDS OF DIRECTORS TO INCLUDE WOMEN

General corporation law provides for the formation of domestic general corporations by the execution and filing of articles of incorporation with the Secretary of State. Under that law, the business and affairs of these corporations are generally managed by the direction of their boards of directors, and each director is elected by shareholder vote, with certain exceptions.

Governor Brown signed SB 826 into law on September 30, 2018. The bill imposes a new requirement on a domestic general corporation or foreign corporation that is a publicly held corporation whose principal executive offices are located in California. Under the new rules set forth in Section 301.3 of the California Corporations Code, a corporation must have a minimum of one female on its board of directors no later than the 2019 calendar year. The bill increases the minimum number required to two female directors by the close of the 2021 calendar year if the corporation has five directors or to three female directors if the corporation has six or more directors.

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SUPREME COURT LAYS DOWN ABC’S OF EMPLOYEE VS. INDEPENDENT CONTRACTOR STANDARDS

On April 30, 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court, _____ Cal.5th _____ (2018), where it described a seismic shift in the standards used to examine independent contractor relationships, under the Wage Orders. Stating that a “hiring entity” will bear the burden of proof in “misclassification” cases, the Supreme Court announced a judicial crackdown against businesses that misclassify employees as independent contractors in order to derive an unfair competitive advantage over other businesses that comply with the law. As the discussion below shows, Dynamex is a game changer.

1. Fundamental Differences Exist In The Obligations Owed To Employees vs. Independent Contractors

The Court began its 82-page decision by identifying numerous responsibilities that employers have for employees that do not apply to independent contractors. It proceeded to make it clear that the responsibilities cannot be sidestepped by misclassifying employees as independent contractors. It then identified the standard that applies in deciding whether workers should be classified as employees or independent contractors for purposes of the California Wage Orders that impose obligations relating to minimum wages, maximum hours, overtime pay, meal and rest periods and other matters. The Supreme Court announced that, based on the Wage Orders’ “suffer or permit to work” standard, “hiring entities” must satisfy a three-part test, the “ABC test,” to establish that an individual qualifies as an independent contractor. This test applies to claims that derive directly from the obligations imposed by the Wage Orders. It does not necessarily follow that the same test will apply under different statutes, such as the reimbursement rules for business expenses that are obtainable only under Labor Code Section 2802. Employers should therefore recognize that the new test will not govern misclassification questions in every context.

2. Overview Of Case

The case arose when two delivery drivers filed a class action against Dynamex, a nationwide package and document delivery company. They alleged that Dynamex, referred to as a “hiring entity,” had misclassified drivers as independent contractors rather than employees. As a result of the alleged misclassification, the drivers asserted claims under Wage Order 9, which governs the transportation industry, as well as various sections of the Labor Code. They also claimed that Dynamex engaged in unfair and unlawful business practices under California Business and Professions Code Section 17200.

a. The “Suffer Or Permit To Work” Rule

The Supreme Court explained that the “suffer or permit to work” definition of “employ” contained in the Wage Order may be relied upon in evaluating whether a worker is an employee or an independent contractor for purposes of the obligations imposed by the Wage Order. It concluded that the suffer or permit to work definition must be interpreted broadly in order to provide the Wage Order’s protections to all workers who would “ordinarily be viewed as working in the hiring business.” Yet, it also cautioned there are limits on the scope of the suffer or permit to work definition, which the Supreme Court described as a “term of art.” For example, it cannot be interpreted literally in a manner that would encompass within the “employee category” the type of workers, like independent plumbers or electricians, who have traditionally been viewed as genuine independent contractors working in their own independent business. The Supreme Court thus injected a new question into the analysis – what is a “genuine” independent contractor?

b. The Role Of The “ABC” Test

Under the suffer-or-permit-to-work framework, the Supreme Court concluded that in determining whether a worker is properly considered an independent contractor to whom the Wage Order does not apply, it is appropriate to look to a standard, commonly referred to as the “ABC” test that is utilized in other jurisdictions. Under this test, a worker is properly considered an independent contractor to whom a Wage Order does not apply only if the hiring entity establishes each of three elements:

(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.

3. The History Of Relevant California Decisions

The Supreme Court embarked upon a 40-page analysis of cases that proffered an historical review of the distinctions between employees and independent contractors under California law. The discussion began with a 1944 United States Supreme Court decision and reviewed later developments through the present. In the course of this historical analysis, the Supreme Court devoted particular attention to three California Supreme Court decisions that had each been heralded as “seminal” in their own right. These three pillars of California’s employee vs. independent contractor jurisprudence constructed between 1989 and 2014 included the decisions in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (“Borello”), Martinez v. Combs, 49 Cal.4th 35 (2010) (“Martinez”), and Ayala v. Antelope Valley Newspapers, Inc., 59 Cal.4th 522 (2014) (“Ayala”). Martinez, for example, identified the following three alternative definitions “to employ.” It means (a) to exercise control over the wages, hours, or working conditions, or (b) to suffer or permit to work, or (c) to engage.

a. The Burden Of Proof

After analyzing these cases, the Supreme Court firmly placed the burden of proof on the “hiring entity” in the wage and hour context, noting concerns inherent in relying upon a multifactor, “all the circumstances” standard for distinguishing between employees and independent contractors. Instead, based on the history and purpose of the “suffer or permit to work standard” in California’s Wage Orders, the Supreme Court decided to (1) place 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) require the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test – “namely (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (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.”

b. Analysis Of The Three Elements

(1) Part A – Focus on Control

After listing the three factors embodied in the ABC test, the Supreme Court elaborated on each of the factors. For example, under Part A, the decision explained that a worker who is subject, either as a matter of contractual right or in actual practice, to the type and degree of control a business typically exercises over employees would be considered an employee under the common law test as well as the “suffer or permit to work” standard. Further, as noted in Borello, depending on the nature of the work and overall arrangement between the parties, a business need not control the precise manner or details of the work in order to be found to have maintained the necessary control that an employer ordinarily possesses over its employees, but does not possess over a genuine independent contractor. The hiring entity must establish that the worker is free of such control to satisfy Part A of the test.

(2) Part B – Work Performed Outside Of The Usual Course Of Business

Under Part B, a separate question is examined independent of the question of control in Part A. This test inquires whether the worker performs work that is outside the usual course of the hiring entity’s business. Workers whose roles are most clearly comparable to those of employees include individuals whose services are provided within the usual course of the business of the entity for which the work is performed and thus who would ordinarily be viewed by others as working in the hiring entity’s business rather than working in the worker’s own independent business. For example, when a retail store hires an outside plumber or electrician to repair a leak or install an electrical line, the services are not part of the store’s usual course of business. Thus, the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services as an employee.

The decision explained that a focus on the nature of the worker’s role within a hiring entity’s usual business operation aligns with the additional purpose of the Wage Orders to protect companies that in good faith comply with a Wage Order’s obligations against those competitors in the same industry or line of business that resort to cost saving worker classifications that fail to provide the required minimum protections to similarly situated workers. Accordingly, a hiring entity must establish that the worker performs work that is outside the usual course of its business in order to satisfy Part B of the ABC test.

(3) Part C – Engaged In An Independent Trade, Occupation, Or Business

Part C of the test asks whether the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the hiring entity. The decision observed that the term “independent contractor,” when applied to an individual worker, ordinarily has been understood to refer to an individual who independently has made the decision to go into business for himself or herself. Such an individual generally takes the usual steps to establish and promote his or her independent business – “for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.

When a worker has not independently decided to engage in an independently established business but instead is simply designated an independent contractor by the unilateral action of a hiring entity, there is a substantial risk that the hiring business is attempting to evade the demands of an applicable wage order through misclassification. A company that labels as independent contractors a class of workers who are not engaged in an independently established business in order to enable the company to obtain the economic advantages that flow from avoiding the financial obligations that a Wage Order imposes on employers unquestionably violates the fundamental purposes of the Wage Order. The fact that a company has not prohibited or prevented a worker from engaging in such a business is not sufficient to establish that the worker has independently made the decision to go into business for himself or herself.”
Accordingly, in order to satisfy Part C of the ABC test, the hiring entity must prove that the worker is customarily engaged in an independently established trade, occupation, or business.

4. Summary Of The ABC Standard

The Supreme Court emphasized that the hiring entity must establish the existence of each of the three parts of the ABC standard in order to establish that a worker is an independent contractor. Thus, unless the hiring entity establishes that (A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance for the work and in fact, (B) the worker performs work that is outside the usual course of the hiring entity’s business, and (C) the worker is customarily engaged in an independently established trade, occupation, or business, the worker should be considered an employee and the hiring business an employer under the suffer or permit to work standard in the Wage Orders. The hiring entity’s failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is covered by the Wage Order as an employee.

Notably, the Supreme Court cautioned that the interpretation of the suffer or permit to work standard should not yield inappropriate results. For example, it recognized that the Wage Orders are not intended to apply to the type of “traditional independent contractor – like an independent plumber or electrician –” who has never been reasonably viewed as an employee of a hiring business. Consequently, the Wage Orders should not be interpreted to apply to such persons.

 

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DIR INCREASES EXEMPTION RATES FOR COMPUTER EMPLOYEES & PHYSICIANS

California Labor Code Sections 515.5 and 515.6 provide overtime pay exemptions for computer software employees who satisfy tests relating to the amount of their pay and duties.  They also provide an overtime pay exemption for some physicians and surgeons.  In order to qualify for either exemption, an employee’s hourly rate of pay must not be less than statutorily specified rates.

The California Department of Industrial Relations (“DIR”) is responsible for adjusting the rates October 1st of each year to be effective on January 1st of the following year.  The adjustments are based on an amount equal to the percentage increase in the California Consumer Price Index for Urban Wage Earners and Clerical Workers.

1. Computer Software Employees

On October 19, 2018, the DIR issued a memorandum announcing increases in the rates that will take effect on January 1, 2019.  The DIR adjusted the computer software employee’s minimum hourly rate of pay for the exemption from $43.58 to $45.41.  It also increased the minimum monthly salary from $7,565.85 to $7,883.62, as well as the minimum annual salary from $90,790.07 to $94,603.25.  This reflects the 4.2% increase in the California Consumer Price Index for Urban Wage Earners and Clerical Workers.

2. Licensed Physicians

On the same date, the DIR announced an increase in the amounts necessary to utilize the overtime exemption for licensed physicians and surgeons.  Under Labor Code Section 515.6, licensed physicians and surgeons are exempt from the overtime requirements in Labor Code Section 510 if certain criteria are met.  One of the criteria is that the employee’s hourly rate of pay is not less than a specified amount.  The DIR announced that this hourly rate will increase from $79.39 to $82.72, effective January 1, 2019.

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NEW LAW PROHIBITS SEEKING AND RELYING UPON SALARY HISTORY INFORMATION OF JOB APPLICANTS

Governor Brown signed AB 168 into law on October 12, 2017, in response to concerns that the use of salary history information in the hiring process can perpetuate prior discrimination and suppress wages of women. The legislation adds new Labor Code Section 432.3 to California law, effective January 1, 2018. It prohibits all employers from seeking and relying on salary history information in the recruiting, hiring, and wage setting processes. Notably, the bill adds a new provision to the Labor Code and does not amend the Fair Employment and Housing Act (“FEHA”).

1. General Features Of AB 168

Specifically, it prohibits employers from the following:

(a) Relying on the salary history information of a job applicant as a factor in determining whether to offer employment to the applicant or what salary to offer.

(b) Seeking salary history information, including compensation and benefits, about a job applicant, either orally or in writing, personally or through an agent.
It also requires employers to provide the pay scale for a position to a job applicant upon reasonable request.

2. Coverage

The bill will apply to all employers, including state and local government employers and the Legislature. However, it does not apply to salary history information disclosable to the public pursuant to federal or state law. The bill expressly provides that a violation of its provisions would not constitute a misdemeanor.

3. Voluntary Disclosures

The bill states that it does not prohibit an applicant from voluntarily and without prompting disclosing salary history information to a prospective employer. Furthermore, if such a voluntary disclosure occurs, the bill does not prohibit the employer from considering or relying on that voluntarily disclosed salary history information in determining the salary for that applicant.

4. Reliance On Prior Salary

The bill reiterates the provisions in Labor Code Section 1197.5. It notes that nothing in the legislation should be construed to allow prior salary, by itself, to justify any disparity in compensation.

5. The San Francisco Ordinance

It bears noting that San Francisco has adopted an ordinance that is similar. However, the San Francisco ordinance is two-sided. First, it prohibits employers from seeking or using salary history information. Second, it prohibits employers in the city from releasing salary information regarding a current or former employee without the individual’s consent.

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DOL ANNOUNCES NEW PROGRAM TO EXPEDITE WAGE PAYMENTS

On March 6, 2018, the U.S. Department of Labor (“DOL”) issued a news release announcing a new pilot program that is designed to expedite resolution of inadvertent overtime and minimum wage violations under the Fair Labor Standards Act (“FLSA”). The pilot program is called the “Payroll Audit Independent Determination” (“PAID”) program. According to the DOL, it will ensure that more employees receive back wages they are owed – faster. Further, employees will receive 100% of the back wages paid, without having to pay any litigation expenses, attorneys’ fees, or other costs that may be applicable to private actions.

1. Payment Without Litigation

The DOL explained that the PAID program facilitates resolution of potential violations, without litigation, and ensures employees promptly receive the wages they are owed. Under this program, the Wage and Hour Division will oversee resolution of the potential violations by assessing the amount of wages due and supervising their payment to employees.

2. Resolution Through Cooperation

Notably, the Division will not impose penalties for liquidated damages to finalize a settlement for employers who choose to participate in the PAID program and proactively work with the Division to fix and resolve their potential compensation errors. Employers may not participate in the PAID program if they are in litigation or currently under investigation by the Division for the practice at issue. Employers likewise cannot use the pilot program repeatedly to resolve the same potential violations, as the program is designed to identify and correct potentially non-compliant practices. Settlements will be limited in scope to only the potential violations at issue.

3. Prospective Compliance Is Key

The program further requires employers to review the Division’s compliance assistance materials, carefully audit their pay practices, and agree to correct the pay practices at issue going forward. These requirements improve the employers’ compliance with their minimum wage and overtime obligations, which helps ensure employees’ rights are protected.

The DOL announced that the Division will implement the pilot program nationwide for approximately six months, after which it will evaluate the program and consider future options. The Division encourages employers to proactively audit their compensation practices to identify potential non-compliant practices. More information concerning the program is available at www.dol.gov/whd/paid.

 

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RECENT MINIMUM WAGE HIKE HAS MULTIPLE DERIVATIVE CONSEQUENCES

As most readers know, the California minimum wage increased from $10.50 to $11.00 an hour as of January 1, 2018 for employers with 26 or more employees. Employers with 25 or fewer employees must pay a minimum wage of $10.50 an hour. Employers should remember that minimum wage increases have multiple consequences that are discussed in Section 6.4(b) of the Wage And Hour Manual For California Employers, 21st Edition, which has been updated for 2018.

 

For example, the increase in the minimum wage impacts (1) the minimum salary that must be paid to exempt employees, (2) the minimum hourly rates that union employees must receive to qualify for the state overtime and paid sick day rule exemptions, (3) the minimum sums commissioned employees covered by Wage Orders 4 and 7 must receive to qualify for the state overtime exemptions, (4) the split-shift premium rate, (5) the meal and lodging credits that are available, (6) the hourly rates paid employees who are exempt from the tool and equipment rules because their trade or craft customarily requires them to provide tools and equipment, (7) the uniform maintenance allowance, (8) the minimum rates that must be paid employees of organized camps, and (9) the minimum rate that must be paid to employees compensated on a piece-rate basis for non-productive time. Employers who are covered by any of these rules should examine the effect of the minimum wage increase.

 

An illustration is the minimum salary that must be paid to employees under the state executive, administrative, and professional exemptions. It increased from $840 to $880 per week as of January 1, 2018. Failure to adjust salaries, as needed, can result in claims that employers have misclassified employees as exempt or not paid the requisite salary levels. Of course, employers must continue to meet the duties and responsibilities test set forth in the law.

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