California Supreme Court

Determining whether a California worker is an independent contractor or an employee has always been difficult. Judges deciding the issue have complained that the test used by California courts “provides nothing remotely close to a clear answer.” Then there was the nail salon that was told by one state agency that its workers were employees and by another that they were independent contractors. So there’s no question that the law in this area has been messy.

On Monday, it got considerably messier. That’s when the California Supreme Court issued its decision in Dynamex Operations West, Inc. v. Superior Court. For years — even decades — judges, government agencies, and lawyers have interpreted the law to say that the key to distinguishing between employees and independent contractors was whether the company had the right to control the manner and means by which the worker accomplished the desired result. So if drivers for a gig-economy car service decided what days to work, when to start work on a particular day, where to work, what to wear, when to take breaks and for how long, and when to quit for the day, there was an excellent chance that they’d be considered independent contractors,

Under the California Wage Orders, which guarantee employees a minimum wage, maximum hours, overtime compensation, meal and rest breaks, and more, that is no longer the case. Now, according to the California Supreme Court, companies must meet a three-prong test to establish independent contractor status (“the ABC test”).

  • A) The company must not be able to control or direct what the worker does, either by contract or in actual practice. This is similar to the test used in the past.
  • B) The worker must perform tasks outside of the hiring entity’s usual course of business. So if you’re a driver for a ride service, a delivery person for a delivery service, or a seamstress for a clothing company, you can’t be an independent contractor no matter how little control the company has over you.
  • C) The worker must be engaged in an independently established trade, occupation, or business. It’s not enough that the company doesn’t prohibit the worker from having his own business or working for others. Instead, the court will look at factors such as whether the business is incorporated or licensed, whether it’s advertised, and whether it offers services to the public or other potential customers.

It is the employers burden to satisfy all three prongs to establish that the worker is an independent contractor. If it fails to establish one, the worker is entitled to be treated as an employee under the Wage Orders. (The Wage Orders themselves are not particularly helpful in this regard. For example, they circularly define “employee” as ” any person employed by an employer.”)

The Court spent 80+ pages explaining its rationale. Nowhere in that lengthy analysis was any recognition of the upheaval this opinion will cause. Millions of workers in the state that were considered independent contractors will now be deemed employees. This will require employers who have done everything they could to follow the law as it was then understood to reevaluate the nature of the relationship with many of their workers and either modify the relationship or provide them the pay and treatment required by the Wage Orders. They also face litigation, including potential class actions, from workers complaining that they were misclassified. And since this case only addresses the wage order definition, they need to apply different standards (which can lead to different conclusions) in deciding how to characterize workers for purposes such as workers compensation and payroll taxes. As I said, a messy situation just got messier.

Calculating the correct overtime pay rate in California has long been a complicated process.  The basic overtime rate is defined as one and a half times an employee’s “regular rate” of pay.  This purportedly “regular” figure may change from pay period to pay period when an employee earns shift differentials, different hourly rates for different jobs, or lump sum bonuses.  Such was the case in Alvarado v. Dart Container Corporation of California.

In Alvarado, the California Supreme Court considered the correct method of calculating overtime when an employee is paid a flat sum bonus.  The parties offered competing calculations to the Court.  The employer’s method spread the per-hour value of the bonus across all hours worked in a given pay period—including overtime hours.  The employee argued that the bonus should only be spread across the non-overtime hours worked.  In choosing between the two approaches, the Court emphasized California’s pro-employee policies:  “[W]e are obligated to prefer an interpretation that discourages employers from imposing overtime work and that favors the protection of the employee’s interests.”  The Court found that plaintiff’s version was “marginally more favorable to employees.”  Unfortunately, this doesn’t tell the whole story.  The opinion apparently requires employers to calculate the regular rate based on the “relevant pay period.”  This is inconsistent with established California and Federal principles that require regular rate calculations be performed on a weekly basis.  A “friend of the court,” or Amicus brief, was filed in this case on this very issue, and we are hopeful that the Court will issue an amended opinion, or other clarification.worker marking paper next to calculator

In the meantime, let’s look at an example. Suppose an employee works 90 hours in a two-week pay period (including ten hours of overtime), and the employee receives $15 per hour and a $100 bonus.  The value of the bonus must be calculated by dividing the $100 by the 80 non-overtime hours worked, which comes out to $1.25 per hour.  This would then be added to the employee’s straight time rate for an effective regular rate of $16.25 per hour.  Of course, the next step is to multiply the regular rate by 1.5 to obtain the basic overtime rate, and then multiply the number of overtime hours worked by the overtime rate.

The fun didn’t end there.  The Court drew a distinction between flat sum bonuses, like the one at issue in Alvarado, and bonuses that increase in rough proportion to the hours worked—such as piecework or commission bonuses.  In these cases, the Court stated “the payment of the bonus itself constitutes base compensation, including base compensation for overtime work, in which case one might be able to argue that only the overtime premium need be added.”  In other words, different bonuses require different overtime calculations.  Adding insult to injury, the Court proclaimed this interpretation is to be applied retroactively.

The big takeaway here is that employers must take a closer look at their bonus plans and overtime calculations to ensure compliance with the new standard.  Isn’t math fun?

Copyright: paylessimages / 123RF Stock Photo
Copyright: paylessimages / 123RF Stock Photo

Most of the California Wage Orders say that: “All working employees shall be provided with suitable seats when the nature of the work reasonably permits the use of seats.” The problem with that requirement is that no one knows how to define “suitable seats,” “nature of work,” and “reasonably permits.”

As we wrote in March 2014, the Ninth Circuit Court of Appeal had some suitable seating class action cases when it asked the California Supreme Court to clarify what those terms mean. Then last week, as reported in Law360 (subscription), the California Supreme Court invited the Division of Labor Standards Enforcement to file by August 21, 2015 an amicus brief expressing its view on how to define those terms. After that, the parties will have 20 days to respond.

The only thing that’s remotely close to clear at this point is that California employers are facing class action exposure for not following a law that no one knows how to follow. Employers who don’t provide seats for employees should consider doing so if it’s feasible given the job and work environment. On the other hand, given studies showing that sitting is bad for you, it’s may be just a matter of time before employees start suing employers for making them sit.

On July 30, we blogged about the recent efforts of the National Labor Relations Board to hold corporate  franchisors, such as McDonald’s, liable for the acts of individual franchisees toward employees under the theory that  the “parent” company is a “ joint employer.”  We opined that this effort was a “stretch” to deviate from traditional principles on the part of the federal agency, and which threatened the viability of franchising as a business model.

On August 28, 2014, the California Supreme Court provided a dose of fresh air, clarity, and common sense to this issue by holding that Domino’s Pizza could not be the joint employer of a worker who accused a franchisee operator of harassment. The opinion upheld the granting of summary judgment in favor of Domino’s. It also reaffirmed the decades-old analysis which focuses on the degree of real control the corporate franchisor may exercise over the employment practices of the franchisee in  light of the “totality of the circumstances.”

The Supreme Court reversed the opinion of the Court of Appeals (which we lamented in this June 2012 post), and sent a clear message to trial courts that it’s permissible to summarily dismiss claims of “joint employment” where the plaintiff lacks sufficient facts to demonstrate “control” on the part of the franchisor parent. As the court stated:

A franchisor [may] impose comprehensive and meticulous standards for marketing its trademarked brand and operating its franchises in a uniform way. To this extent, the franchisor ‘controls’ the enterprise. However, the franchisee retains autonomy as a manager and employer.  It is the franchisee who implements the operational standards on a day-to-day basis, hires and fires store employees, and regulates workplace behavior.

This sensible opinion from the high court of California will likely influence other state and federal courts, including those federal circuit courts that may hear appeals from the NLRB on the issue of “joint employment.” You can read the opinion here (pdf).    

Here’s yet another post from Dave Faustman. This time he discusses today’s decision in Iskanian v. CLS Transportation, in which Fox Rothschild LLP represented the employer.

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Today, the California Supreme Court issued its long-awaited decision in Iskanian v. CLS on whether employees signing arbitration agreements can be required to waive participation in class actions.

The California Supreme Court acquiesced in recent U.S. Supreme Court precedents and declared that its prior decisions refusing to enforce class action waivers were no longer operative law. The Court found that the Federal Arbitration Act (“FAA”) preempts the subject matter, and that federal law requires the enforcement of class action waivers. Thus, Mr. Iskanian must bring his case in arbitration, and only on behalf of himself. This is a clear win for the employer. The Court also held that the National Labor Relations Act’s protection of “concerted activity” does not prohibit class action waivers. Another good result.

In a curious twist, however, the Supreme Court refused to dismiss the companion “representative action” under the California Private Attorney General Act (“PAGA”), holding that asking an employee to waive the right to participate in such a case was against California “public policy.” The employer had argued that there was no principled difference between a class action and a PAGA representative action, and that both should be subject to federal preemption.

Justice Liu, writing for the majority, disagreed: “We conclude that the rule against PAGA waivers does not frustrate the FAA’s objective because…the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the Labor Workplace Development Agency.” Such reasoning may be vulnerable on appeal to the U.S. Supreme Court. In the meantime, what the PAGA action will look like upon remand remains quite a procedural muddle, which the California Court did not really try to resolve. It will take a little while to sort this out, but for now employers should continue to seek waivers of class and representative actions in their arbitration agreements.

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Congratulations to Dave, Yesenia Gallegos, Cristina Armstrong, Namal Tantula, Chip Zuver, Lorraine Harris, and everyone else who contributed to this result. Here’s a copy of the Iskanian opinion.

On April 3, 2014, the California Supreme Court heard oral argument in front of a packed courtroom in Iskanian v. CLS Transportation, a case involving the enforceability of class/representative action waivers in employment arbitration agreements under California law.  This is a very important decision for employers in California, and one that is very close to us at Fox Rothschild, since our own David Faustman argued the case.

At issue is whether the Court will follow the US Supreme Court’s lead and put the “Gentry” test to rest for good.  Overruling “Gentry” will allow employers to include class action waivers in their employment arbitration agreements, and will not force them to arbitrate on a class-wide basis unless they specifically agree to.  Another important issue is whether representative claims under PAGA can also be waived.

This case has a big practical impact for employers in California.  There is nothing that takes the wind out a plaintiff’s attorneys’ sails than being presented with a signed arbitration agreement (one that is not unconscionable under California law), and that includes a class action and representative action waiver.  Most attorneys do not want to take on this issue and would rather look for an easier target.  Let’s hope that the California Supreme Court gets it right, and holds that such waivers are fully enforceable.  A decision by the California Supreme Court should be issued this summer.  Stay tuned.