Bucking the Gig Economy, the California Supreme Court Places Steep Hurdle on Classifying Workers as Independent Contractors

california-flagHistorically, California has applied a multi-factor test for evaluating whether a worker is an employee or independent contractor.  These factors – all of which must be considered with no single controlling factor – were developed almost 30 years ago by the California Supreme Court in S.G. Borello & Sons v. Department of Indus. Relations (Borello).  Under this test, consideration was given to the business’ right of control over the manner and means of completing the work, the method of payment, duration of the relationship, and the kind of work being performed, among other factors.  Although Borello examined these factors in the context of workers’ compensation laws, its multi-factor test has been applied to other types of legal claims.

In the new economy, businesses have considered arrangements outside of an employment relationship such as hiring freelancers or contract workers.  Based on an individualized analysis with no bright line rule, Borello’s multi-factor test has afforded businesses flexibility in structuring positions to support an independent contractor  relationship.  Yet, the consequences of misclassification are severe, exposing businesses to liability for minimum and overtime wages, denied rest and meal breaks, unreimbursed work-related expenses and tax liability.  While Uber and other gig economy companies have become embroiled in high-profile litigation over independent contractor issues, businesses across the spectrum are affected as well.

Dynamex Imposes Inflexible Standard

In Dynamex Operations West, Inc. v. Superior Court (Dynamex), the California Supreme Court has just upended Borello, by recognizing a different standard for determining whether workers should be classified as employees or independent contractor for purposes of California’s wage orders.  These wage orders impose obligations relating to minimum and overtime wages, reporting time pay, uniforms and meal and rest periods.

In Dynamex, delivery drivers filed a class action against defendant claiming that Dynamex had misclassified its delivery drivers as independent contractors, rather than employees, in violation of the applicable wage order.  Based on the definition of “employ” contained in the wage orders, the Court recognized that a worker is considered an employee of an entity that has “suffered or permitted” the worker to work in its business. The suffer or permit to work definition is broader and more inclusive than the traditional test adopted by Borello.

The Supreme Court interpreted the suffer and permit to work standard as placing the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be covered by the wage order.  The Court concluded that, in order to meet this burden, the hiring entity must establish each of these three factors:

(1) that the worker is free from the control and direction of the hiring entity in performing the work;
(2) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(3) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

The first factor is similar to the control factor recognized as a primary consideration under Borello’s common law test.  While businesses may structure the work arrangement in a manner to demonstrate an absence of control, the same is the not true under the second factor.  Even if the worker has a specialized skill, works from home and does not perform work under the direction or control of the hiring entity (factors considered under Borello), the mere fact that the worker’s services are part of the entity’s usual course of business defeats independent contractor status.  The Court cited as an example a bakery that hires cake decorators to work on a regular basis on its custom-designed cakes, which it found to be part of the hiring entity’s usual business operation.  On the other extreme, the Court found that a plumber hired by a retail store to repair a bathroom leak would not be considered to perform services that are part of the store’s usual course of business.  There are numerous consulting arrangements that are now vulnerable under this factor.

Similarly, the third factor places another significant hurdle to establishing independent contractor status because it requires the worker to independently decide to engage in this business relationship, as opposed to being designated as an independent contractor by the hiring entity.  The Court found that an individual meeting this requirement “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 business, and the like.”  Accordingly, this factor suggests that the worker would need to establish some sort of independent business entity or identity.

The Supreme Court has recognized that its ruling marks a major departure from past cases and defies guidance by the California Labor Commissioner following the Borello multi-factor test.  In adopting this broad standard for the employment relationship, the Court considered the economic consequences of classifying workers as independent contractors, with businesses avoiding payroll taxes and workers’ compensation obligations, and workers assuming financial burdens.

Takeaways for Business Owners

While this newly recognized standard provides greater clarity than the Borello multi-factor balancing test, it imposes a very high burden for employers seeking to classify workers as independent contractors.  It should be noted that the Borello test for now will continue to apply in contexts outside of California’s wage orders and should be evaluated as well.  Yet, Dynamex may effectively end up being the benchmark because it imposes a higher, more rigid standard applying to wage and hour violations that typically are the greatest source of exposure for businesses misclassifying workers as independent contractors.

Business owners and management should immediately, through the advice of employment counsel, review all current independent contractor arrangements to ensure proper classification under this new standard.  Before classifying a worker as a “consultant,” i.e., independent contractor, businesses will need to consider primarily whether the worker has an independent business and whether the nature of worker’s services is similar to the business’.  Decisions to treat a worker as a consultant motivated by financial reasons alone or because the individual works from home will now be suspect. Under appropriate circumstances, however, the California courts will likely continue to recognize independent contractor status for traditionally recognized independent contractors such as attorneys, accountants and construction trades who perform services independent of the hiring entity’s business.

 

Seeking to Pave the Way in the #MeToo Era, the California Legislature Veers off Course

By Andrew J. Sommer

shutterstock_me tooThe #MeToo movement, formed in the wake of sexual misconduct allegations against high profile public figures, has dramatically changed the discourse over harassment. Various politicians, celebrities and business leaders have been implicated in varying degrees, from engaging in sexual misconduct to tolerating a workplace with a pervasive culture of harassment and bias.  With this social movement gaining traction, the California legislature has introduced a flurry of bills seeking to change the perceived culture of workplace harassment but also revamp a host of existing general employment laws to add tools to the arsenal for employees and their attorneys.  As an example, the legislature has introduced the following bills since January 2018

SB 820 – Non-Disclosure Clauses in Settlement Agreements

In the #MeToo movement, the use of non-disclosure agreements to keep harassment allegations from coming to light has drawn significant public criticism. The California legislature has recently stepped into the fray, by introducing Senate Bill (SB) 820 to generally ban non-disclosure provisions in settlement agreements resolving claims of sexual assault or harassment, sex discrimination, or harassment and retaliation for reporting such claims. Specifically, the bill prohibits settlement agreements from containing any provision preventing the “disclosure of factual information” related to these types of lawsuits, except where the provision was included at the request of the claimant. Continue reading

Cal/OSHA Compels Hospitality Employers to Clean Up Their Act, Ergonomically Speaking

By Aaron R. Gelb and Andrew J. Sommer

Background About Ergonomics

An ergonomic hazard is a physical factor within the work environment that has the potential to cause a musculoskeletal disorder (MSD).  MSDs are injuries and disorders that affect the human body’s movement or musculoskeletal system; i.e., muscles, tendons, ligaments, nerves, discs, blood vessels, etc.  Common ergonomic hazards include repetitive movement, manual handling, workplace design, uncomfortable workstation height, and awkward body positioning.  The most frequent ergonomic injuries (or musculoskeletal disorders) include muscle/tendon strains, sprains, and back pains, Carpal Tunnel SyndromeTendonitis, Degenerative Disc Disease, Ruptured / Herniated Disc, etc., caused by performing the same motion over and over again (such as vacuuming), overexertion of physical force (lifting heavy objects), or working while in an awkward position (twisting your body to reach up or down to perform a work task).

MSDs are the single most common type of work related injury.  According to Bureau of Labor Statistics data, MSDs alone account for nearly 30% of all worker’s compensation costs.  OSHA estimates that work-related MSDs in the U.S. alone account for over 600,000 injuries and illnesses (approx. 34% of all lost workdays reported to the BLS), and employers spend as much as $20 billion a year on direct costs for MSD-related injuries and up 5x that on indirect costs (e.g., lost productivity, hiring and training replacement workers, etc.).

Federal OSHA’s Ergonomics Enforcement Policy

Nevertheless, federal OSHA has been lost in the woods for years searching for a coherent ergonomics enforcement policy.  In the final days of the Clinton Administration in November 2000, federal OSHA promulgated an extremely controversial midnight Ergonomics Standard, requiring employers to take measures to curb ergonomic injuries in the workplace.  Days later, utilizing the Congressional Review Act (CRA), the Republican Congress voted to overturn the ergonomics regulation and newly elected President George W. Bush signed the resolution of disapproval, repealing the ergonomics standard. Because the CRA prevents the agency from promulgating a substantially similar regulation, ergonomic injuries have since gone unregulated, other than sparing use of the general duty clause.

Although employers in states subject to federal OSHA jurisdiction have thus been able to adopt a wait-and-see approach with respect to ergonomics enforcement generally, and specifically how the Trump Administration will roll-out its overall deregulation agenda to workplace safety matters, some states with their own OSH Programs are stepping in to fill the void.

Cal/OSHA on Ergonomics

To no one’s surprise, California is one state pushing progressive new worker safety regulatory requirements, even as federal OSHA retreats in that area.  One significant new move by Cal-OSHA is the recently approved safety standard on Hotel Housekeeping Musculoskeletal Injury Prevention.

This standard, which focuses on ergonomic hazards associated with housekeeping positions, follows closely on the heels of a series of “panic button” ordinances enacted by several large cities across the country to protect housekeepers from sexual assault by hotel guests and/or visitors.

The standard, which will likely go into effect July 1st or possibly April 1st, applies to all lodging establishments that offer sleeping accommodations available to be rented by members of the public, from high-end hotels and resorts, to motels, inns and bed & breakfasts.  The standard specifically excludes from this definition hospitals, nursing homes, residential communities, prisons, shelters, boarding schools and worker housing.

Covered establishments will be required, under the new standard, to develop, implement and maintain a written Musculoskeletal Injury Prevention Program (“MIPP”) that is tailored to hazards associated with housekeeping.  Employers have the option of including the MIPP with their preexisting Injury & Illness Prevention Program (“IIPP”) or to create a standalone program specifically for housekeeping MSD risks.

Regardless of its form, the MIPP must be available to covered employees on any shift.  Notably, employees must also be able to access the MIPP electronically — a requirement that may pose a challenge to smaller establishments.

The required elements of a housekeeping MIPP will be familiar to any employer that has developed an IIPP, which should already include:

  • worksite hazard evaluations;
  • injury investigations;
  • hazard abatement efforts;
  • employee training; and
  • recordkeeping.

Notably, covered employers must also complete an initial worksite assessment within three months of the effective date of the standard, which assessment is intended to identify and address a variety of potential ergonomic risk factors, ranging from unpredictable trauma occurrences such as slips, trips and falls, to more traditional repetitive stress MSD concerns such as regular and frequent reaching above shoulder height, lifting, bending, kneeling, squatting, pulling and/or pushing.

Perhaps most controversial about Cal/OSHA’s new Hotel Housekeeping Ergo rule, though, is the agency’s effort to wade into operational concerns by requiring employers to assess “excessive work rates” as well as “inadequate recovery time” between tasks.

Covered employers should act promptly so they are prepared once the standard goes into effect— whether that is in April or July of this year.  Whether it is spring or summer, lodging establishments that wait to the last minute will be feeling the heat as they attempt to develop the required program and conduct the initial worksite assessment within three months of the standard’s effective date.

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For more information about Cal/OSHA’s new Hotel Housekeeping Ergonomics Rule and other Cal/OSHA developments, join Conn Maciel Carey attorneys for a complimentary webinar on July 10, 2018 – “New Cal/OSHA Issues California Employers Must Track.”

Federal Appeals Court Concludes that Employer Violates Fair Credit Reporting Act by Including Liability Waiver in Mandated Disclosure

gavelEmployers procuring credit reports for applicants or current employees must navigate exacting disclosure and procedural requirements under the Fair Credit Reporting Act (FCRA).  In a question of first impression in the federal courts of appeal, the U.S. Court of Appeals for the Ninth Circuit recently ruled in Syed v. M-I, LLC that a prospective employer violated the FCRA when it obtained a job applicant’s consumer report after including a liability waiver in the required disclosure document.  The FCRA imposes procedures for procuring and using a “consumer report,” defined essentially as information procured by a consumer reporting agency bearing on an applicant’s “credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living,” for establishing eligibility for employment.  These procedures include requiring that before obtaining the consumer report, the prospective employer disclose that it may obtain the applicant’s consumer report for employment purposes and provide the means for the applicant to withhold authorization.

Although the prospective employer in this case, M-I, provided the mandated disclosure, it incorporated into the same document an agreement that the applicant, Sarmad Syed, waive his right to sue M-I and its agents for violation of the FCRA.  Syed filed a class action lawsuit against M-I seeking statutory damages, punitive damages and attorney’s fees and costs.  Continue reading

U.S. Supreme Court to Decide Validity of Class Action Waivers

us-supreme-court-4Circuit Split on Class Action Waivers

The U.S. Supreme Court has  agreed to review the validity of class action waiver clauses in employment arbitration agreements to resolve a conflict among the federal appellate courts.  As our firm has explained in prior blog posts, the U.S. Court of Appeals for the Ninth Circuit – the federal appellate court for the Western United States – has concluded in Morris v. Ernst & Young, LLP that a company violates the National Labor Relations Act (NLRA) by requiring employees to sign agreements precluding them from bringing class actions or other collective actions regarding their wages, hours, or other terms and conditions of employment.  The U.S. Court of Appeals for the Fifth Circuit in NLRB v. Murphy Oil USA, Inc. has concluded to the contrary that the NLRA does not invalidate collective action waivers in arbitration agreements, and the U.S. Court of Appeals for the Seventh Circuit in Epic Systems Corp v. Lewis has agreed with the Ninth Circuit’s position.  The Supreme Court has granted review in all three cases and consolidated the appeals because they raise an identical issue.

Given the current eight-member configuration of the Supreme Court, it is uncertain whether the Court’s review Continue reading

Trump Picks Fast Food Restaurant CEO Andrew Puzder as Labor Secretary: Seismic Shift Is Anticipated in Agency’s Rulemaking and Enforcement

By: Andrew J. Sommer

President-elect Donald Trump has chosen Andrew Puzder as his Secretary of Labor, according to Trump’s transition team. Puzder is the CEO of CKE Holdings, the parent company of Carl’s Jr. and Hardee’s, and has been a vocal critic of the Obama Labor Department’s overtime regulations and efforts to increase the federal minimum wage. As labor secretary, Puzder will oversee the federal apparatus that investigates violations of minimum wage, overtime and workplace safety laws and regulations.

An increase in the federal minimum wage and an expansion in overtime eligibility have been priorities for the outgoing Secretary of Labor Thomas Perez. On Perez’s watch, the DOL has issued new overtime regulations increasing the minimum salary threshold level in order to qualify an employee as exempt from overtime. Puzder has denounced this new overtime rule, the status of which is presently uncertain after a Texas federal court temporarily blocked the rule from taking effect. The U.S. Court of Appeals for the Fifth Circuit has just granted the DOL’s request to expedite its appeal from the preliminary injunction order. The appeal is unlikely to be decided before Donald Trump is inaugurated as the next president on January 20, 2017.

Accordingly, under Puzder’s leadership, the DOL could very well withdraw the pending appeal before a decision is issued by the Fifth Circuit and otherwise not support the new overtime rule. Even if the overtime rule eventually takes effect, Puzder’s arsenal will include the authority to engage in rulemaking to roll back or modify the overtime rule, consistent with the notice and comment process under the federal Administrative Procedures Act. In an op-ed piece earlier this year in Forbes, Puzder said that the overtime regulation will “add to the extensive regulatory maze the Obama Administration has imposed on employers, forcing many to offset increased labor expense by cutting costs elsewhere.” He expressed the opinion that this cost cutting would result in reduced opportunities, bonuses, benefits and promotions.

Other immediate measures that Puzder could take to shift or reverse the direction of the DOL would be to modify interpretive guidance issued under the Obama Administration. For instance, Puzder will likely modify an administrative interpretation by the DOL’s Wage and Hour Division regarding the joint employer doctrine. Under Obama, the DOL has cracked down on employee misclassification and been vocal about its belief that most workers should be treated as employees, insinuating that in a majority of cases, it would hold employers accountable for the specific obligations of an employer-employee relationship. The Wage and Hour Division has offered an administrative interpretation under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act that broadened the definition of joint employment. Under that doctrine, two employers may be responsible for the violations of each other because of how they jointly use the same employees or because of the control an employer exercises over the employees of an intermediary employer such as a contractor or staffing agency.

Puzder’s authority to impact regulatory and enforcement actions will extend to the DOL’s administration of guest worker programs, allowing foreign nationals to immigrate to the United States and work on a temporary basis, as well as the DOL’s coordination with the Department of Homeland Security over the enforcement of immigration laws in the workplace. It is uncertain what will happen under a Labor Secretary Puzder, whose past immigration stance is at odds with the President Elect’s. In an op-ed piece Puzder authored in The Wall Street Journal last year, he counseled Republican presidential candidates to come up with a vision of how to deal with immigration, including the 11 million undocumented workers already in the country. He supported a “path to legal status” that would be “short of citizenship” so long as the undocumented pass a background check, pay a fine and learn English, among other measures.

Ultimately, employers may benefit most from Puzder’s authority to reallocate agency resources away from agency enforcement actions for labor law violations. Under Obama, the Wage and Hour Division has been very active in enforcing labor laws and investigating industries and workplaces with a history of labor law violations. Puzder could slow down enforcement and conduct fewer investigations. The first few months of a Puzder Labor Department may be telling as we continue to read the tea leaves to assess how employers will be affected by the change in administration.

More New Laws for California Employers

By Andrew J. Sommer

Following a flurry of activity in the final days of California’s legislative session, this past month Governor Jerry Brown has signed into law various employment bills addressing everything from state employee pensions to expanding overtime eligibility and regulating employment agreements. This continues the tide of new employee-friendly laws in the Golden State. Below is a summary of the major new state laws impacting private sector employers.

In Monumental Shift, California Bars Employers from Selecting Out-of-State Forums for Resolving Employment Disputes

Historically, employers have had the option of writing into an employment agreement the requirement that disputes arising from that agreement be litigated in an out-of-state court provided that there is some connection to that state forum by, for example, the employer maintaining a corporate headquarters there. However, in enacting Senate Bill (SB) 1241, California has by legislative fiat barred employers from requiring that California employees litigate any resulting disputes out of state.

Specifically, SB 1241 prohibits any contract entered into, modified or extended on or after January 1, 2017 from requiring an employee who primarily resides and works in California to litigate or arbitrate outside of California “a claim arising in California.” Employers are also prohibited from using such contracts to deprive employees of any substantive protection under California law.

A significant concern is that SB 1241 authorizes employees to bring lawsuits to bar enforcement of voidable agreements due to forum selection and choice of law provisions, and in doing so may recover attorney’s fees. Accordingly, it is imperative that employers ensure that, as of the first of the year, any such agreements entered into with employees, including confidentiality, executive and severance agreements, not require litigation or arbitration of disputes outside of the state, or the waiver of California employment law protections. Just as significant, an employer’s attempt to enforce such an unlawful contract may place it in the defensive position of battling a lawsuit by a plaintiff’s attorney whose motivation is the recovery of attorney’s fees.

There is one notable exception, however. SB 1241 exempts from its provisions any contract with an employee who is individually represented by legal counsel in negotiating the terms of the agreement. Consequently, if employers are negotiating a severance or settlement with a current or former employee represented by counsel, it is important that this representation be memorialized in the agreement should the employer consider selecting another state’s forum or laws for any resulting dispute. It should be noted here that this law does not impact existing California law that requires the application of California substantive law to employment disputes where there is an important public policy interest at issue.

Limitation on Criminal Background Inquiries Now Includes Juvenile Court Proceedings

California Labor Code section 432.7 prohibits an employer from asking an applicant for employment to disclose, or from using as a factor in determining any condition of employment, information concerning an arrest or detention that did not result in a conviction, a referral or participation in any pre-trial or post-trial diversion program, and a conviction that has been judicially dismissed or ordered seal. AB 1843 amends this law to prohibit as well any inquiry into “an arrest, detention, processing, diversion, supervision, adjudication or court disposition that occurred while the person was subject to the process and jurisdiction of juvenile court law.”

Expanded Overtime Eligibility to Certain Classes of Employees

Governor Brown just signed into law several bills that expand overtime eligibility for certain categories of employees. Under existing law, California’s agricultural workers are entitled to overtime wages when they work more than 10 hours in a work day or more than 60 hours in a work week. Assembly Bill (AB) 1066 incrementally lowers the threshold hours for qualifying for overtime wages so that they are consistent with California’s standard overtime rule.

Beginning January 1, 2019, agricultural workers will be eligible for overtime after nine and a half hours worked in a work day, or work in excess of 55 hours in a work week. Beginning January 1, 2020, that overtime threshold will be reduced to nine hours in a workday or 50 hours in a work week. The following year, that number will be reduced to eight and a half hours in a work day or 45 hours in a work week. Eventually, effective January 1, 2022, the overtime basis will be in line with state law, i.e., eight hours in work day or 40 hours in a work week.

To address the concerns of small, independent farms, for businesses with 25 or fewer employees the multi-year phase in is deferred until 2022. The new law also vests with the Governor authority to temporarily suspend the scheduled implementation of the overtime requirements provided that implementation of the scheduled state minimum wage increase is suspended as well.

Similarly, California has expanded overtime protections for teachers employed by private elementary and secondary schools. Existing law exempts from overtime those private school teachers earning at least twice the state minimum wage for full-time employment and meeting other criteria. AB 2230 revises the earning standard for this exemption effective July 1, 2017. On or after that date, the law provides that the overtime exemption applies to private school teachers earning: 1) no less than 100 percent of the lowest salary offered by any school district; or (2) no less than 70 percent of the lowest salary offered by the school district or county in which the private elemental or secondary academic institution is located. In either instance, the comparable position must require a valid California teaching credential and not be pursuant to an emergency permit, intern permit or waiver.

Another new employment law impacts domestic workers. Specifically, SB 1015, removes the sunset provision to the Domestic Worker Bill of Rights, which granted overtime protections to California’s privately hired domestic workers. Thus, this bill has made the law’s provisions permanent.

New Disclosures Required Regarding Protected Leave

AB 2337 requires that California employers provide specific written disclosures to employees upon hire concerning the existing entitlement to leave due to domestic violence, sexual assault or stalking under Labor Code section 220.1. The bill tasks the California Labor Commissioner with developing a form that employers may elect to use to comply with this provision.

Takeaways for Employers

As a result of these developments, we recommend that California employers update their template employment agreements to ensure that the forum selection and choice of law provisions are compliant. It is also important that any existing employment agreements modified or extended on or after January 1, 2017 be similarly updated.

California employer should modify their job applications to make clear that any inquiry into an applicant’s criminal background excludes juvenile court proceedings, among other categories of prohibited inquiry under existing law. In addition, employers are advised in light of AB 2337 to update their employee handbooks to ensure that employees are notified of their right to leave due to domestic violence, sexual assault or stalking, as well as protection from retaliation for exercising those rights.