Today, Governor Newsom signed a bill that strengthens protection against misclassification of California workers as independent contractors. The bill - AB5 (available here) - will be codified as Labor Code 2750.3, among other amendments, beginning January 1, 2020. The effect of the bill is to expand the use of the so-called "ABC test" or "Dynamex" test for distinguishing an employee from an independent contractor. Under the ABC test, a person providing labor or services for pay (with narrow exceptions) is considered an employee, not an independent contractor, unless the hiring entity proves all of the following:
From the perspective of worker protection, AB5 was a necessary step to keep up with changes caused by smartphone technology. Smartphones and algorithms now allow companies to manage workforces remotely and allow workers to sign in and out of work at irregular, flexible intervals in a way that was not possible when most of the Labor Code was conceived of. That added degree of freedom does not change the fact that so-called "gig workers" are company workforces, and as such, they are meant to be protected by the Labor Code.
AB5 completes a job that the California Supreme Court started in its Dynamex decision, discussed previously in this blog. There, the Court adopted the ABC test for purposes of California's "wage orders," which contain requirements such as minimum wage, overtime, and meal- and rest-break requirements. However, the Dynamex decision did not adopt the ABC test for any other purpose, such as for provisions of the Labor Code not found in the Wage Orders, or for purposes of workers' compensation law. Therefore, a single worker's claim for overtime based on misclassification as an independent contractor would depend on the outcome of the ABC test, while the same worker's claim for unreimbursed business expenses would depend on the outcome of a different test. AB5 resolved these inconsistencies and provided Legislative confirmation of the Supreme Court's adoption of the ABC test. AB5 states that it generally applies retroactively to the maximum extent permitted by law.
AB5 has been strongly opposed by Uber and Lyft, which still classify their workers as independent contractors notwithstanding the Dynamex decision. How these companies, and other gig economy companies that rely on workforces made up of independent contractors, will react to the signing of AB5 remains to be seen.
Today, the California Supreme Court handed a significant victory to employers in the ongoing effort to use individual-only arbitration clauses to eliminate group wage claims. At issue was whether employees could seek to recoup underpaid wages under the California Labor Code's Private Attorneys General Act ("PAGA"). The decision, ZB, N.A. v. Superior Court (S246711), answered that question in the negative. It is available here.
PAGA claims can be brought by plaintiffs as representatives of the state of California to seek penalties for Labor Code violations suffered by groups of aggrieved employees. Unlike class actions, PAGA group claims cannot be eliminated through "individual-only" arbitration agreements. One of the key penalties employees have sought to recover through PAGA is found in Labor Code section 558, which deals with unpaid overtime wages, among other things. That section provides for a "civil penalty" consisting of a small fine for each violation "in addition to an amount sufficient to recover underpaid wages." Whereas most PAGA penalties are split 75/25% with the State, wages recovered under Section 558 are "paid to the affected employee" in full. Until today, employee advocates relied on PAGA and Section 558 to recover underpaid wages for groups of employees in various situations, including where arbitration agreements had eliminated other methods of enforcement.
Today's ruling will end that practice. In a detailed exercise in statutory interpretation, the Court concluded that Section 558's reference to an "amount sufficient to recover underpaid wages" was not part of the "civil penalty" in Section 558, and therefore not something that employees can collect via PAGA. This was a surprise. In the employment law trenches, there had been debate about whether a PAGA claim for underpaid wages under Section 558 could be compelled to arbitration, but it had generally been viewed as clear from the language of Section 558 that such wages were part of the "civil penalty" described in that section. If the Court misunderstood the Legislature's intent, the remedy at this point is an amendment to Section 558.
The most obvious ramification of the Court's decision is that arbitration agreements will be even more effective at preventing enforcement of the wage laws on a group basis. But there are other effects. Previously, PAGA cases could be brought to recover wages when a class action was not an appropriate vehicle for various reasons -- for example, if the numerosity requirement could not be met. In such cases, collecting wages through PAGA fulfilled the purpose of PAGA, which is to deputize citizens to enforce the wage laws on behalf of groups of aggrieved employees when the Labor Commission lacks the resources to do so. As of today, such wages can no longer be recovered through PAGA.
The Lamps Plus Decision: U.S. Supreme Court Closes Another Door for Class Challenges to Employment Practices
Today the Supreme Court in Lamps Plus v. Varela, a 5-4 decision along partisan lines, again interpreted the Federal Arbitration Act (FAA) to limit the ability of employees to pursue legal grievances as a group. The case holds that when an arbitration agreement is ambiguous about whether or not the employee has the right to bring class claims in arbitration (i.e., some language in the agreement suggests that class proceedings are available, but other language suggests the contrary), the employee is prohibited from bringing class claims. The Ninth Circuit Court of Appeals had reached the opposite conclusion.
The Supreme Court’s stated rationale was that although the corporate defendant's arbitration agreement had required its employee to bring all claims in arbitration, the agreement had been ambiguous about whether the employee would have the right to bring class claims in arbitration; therefore, the Court could not be certain that the defendant had intended to consent to the employee having the right to bring anything other than individual claims in arbitration. Thus, the employee was foreclosed from bringing a class claim in any venue -- court or arbitration. Although the employee was challenging a single action by the Company that had allegedly harmed 1,300 employees, under the Court's ruling, every employee who had signed the arbitration agreement would be able to challenge the action only if he or she was willing to pursue an individual arbitration against the Company.
The practical impact of this particular decision may be limited because arbitration agreements drafted since 2011, when the Supreme Court decided AT&T Mobility v. Concepcion, tend to explicitly prohibit class proceedings in arbitration, rather than being ambiguous on that point. The Concepcion decision -- also a 5-4 decision along partisan lines -- struck down the ability of states to preserve access to class actions for their citizens in certain contexts.
From the perspective of defendants, the Lamps Plus ruling further cements the ability of arbitration agreements to eliminate class challenges by employees in any forum – even ambiguous agreements that some courts had previously held allowed class arbitration claims. From the perspective of employee advocates, the conservative majority of the Supreme Court has, over the past decade, expanded the FAA beyond Congress’s purpose in enacting that law in 1925, and in doing so has created a major barrier to enforcement of the laws protecting employees. Justice Ginsburg’s dissents in recent arbitration cases, including Lamps Plus, have called for legislative action: “Congressional correction of the Court’s elevation of the FAA over the rights of employees and consumers to act in concert remains urgently in order.”
California Limits Confidentiality in Settlements of Sexual Harassment and Gender Discrimination Claims
On September 30, 2018, Governor Brown signed into law SB 820, which prohibits provisions in settlement agreements that prevent “the disclosure of factual information related to a claim filed in a civil action or a complaint filed in an administrative action regarding … [a]n act of workplace harassment or discrimination based on sex, … or an act of retaliation against a person for reporting” such harassment or discrimination. See C.C.P. § 1001. The new law applies to agreements entered on or after January 1, 2019.
Aimed at preventing incidents of sexual harassment and gender discrimination from being hidden from public discourse, the new law will alter the calculus at the settlement stage. Employees will no longer need to be concerned about entering into agreements that prevent them from discussing issues they would prefer to discuss freely. Employers will no longer have the option of paying employees for silence about facts that may damage the employer's reputation.
The new law will still allow settlement amounts to be kept confidential, and will also allow confidentiality of the claimant's identity at the claimant's request.
The law appears to have a loophole: it applies only to “factual information related to a claim filed in a civil action or a complaint filed in an administrative action” – therefore, it does not appear to cover claims settled before an administrative complaint is filed.
If you have questions about confidentiality and sexual harassment settlements, feel free to contact Jhaveri-Weeks Law.
CALIFORNIA SUPREME COURT: EMPLOYEES GENERALLY ENTITLED TO PAY FOR EVEN SMALL AMOUNTS OF OFF-THE-CLOCK WORK
The California Supreme Court recently addressed whether employers are on the hook for small amounts of unpaid work that employees perform at the end of their shifts. The Court concluded that the plaintiff, a Starbucks shift supervisor, was entitled to be paid for tasks that required him to work between 4 and 10 minutes each day after clocking out. See Troester v. Starbucks Corp., S234969 (Cal. July 26, 2018), available here.
The legal question for the Court was whether there is a so-called "de minimis" exception (i.e., an exception for very small amounts of time) to California's rule that employees must be paid for all time worked. The federal law governing overtime pay – the Fair Labor Employment Standards Act – includes such a de minimis exception.
The Court held that California’s laws are stricter, requiring payment for the type of post-clock-out work that the Starbucks employee performed, even though the unpaid time was as brief as four minutes per day. The Court left open the question of whether unpaid work activities in other cases might be “so irregular or brief in duration” that it would be reasonable to require employers to compensate for them.
The Court offered several reasons for its decision: First, it noted that statutory wage-and-hour protections for employees in California are “scrupulously guarded against encroachment." Compare Augustus v. ABM Security Servs., Inc. (2016) 2 Cal.5th 257, 262 (strictly enforcing right to ten-minute rest periods). Second, the Court pointed out that when unpaid work is being performed but the working time is difficult to track, there is little reason why “the employee alone should bear the burden of that difficulty.” Third, the Court pointed out that class action procedures are premised upon the ability to challenge violations that are small as to a particular individual but are significant in the aggregate. And fourth, the Court noted that new technologies make it easier to track employee work time today than was the case in 1946, when a key federal case on the de minimis issue was decided.
The case provides helpful guidance concerning when employers in California may be held liable to employees who have routinely performed small amounts of unpaid work.
Employee or Independent Contractor? New Dynamex Test from California Supreme Court Provides Needed Clarification
In a landmark decision, the California Supreme Court has adopted a new test for whether a worker is an employee or an independent contractor under the California Wage Orders governing entitlement to minimum wages and overtime pay, the right to meal and rest breaks, and many other aspects of employment. See Dynamex Operations W., Inc. v. Sup. Ct. of L.A. Cnty., S222732 (Cal. Apr. 30, 2018).
Prior law provided several definitions of "employee" under the Wage Orders, including a broad but cryptic definition stating that anyone who was "suffered or permitted to work" was an employee. Interpreted literally, this definition made little sense, because it would cover even a quintessential independent contractor, such as the plumber who comes to fix your sink. For that reason, the "suffer or permit" standard had been a looming uncertainty for years. The Dynamex decision ends the uncertainty by adopting the so-called "ABC Test" for when a worker has been "suffered or permitted" to work such that she or he is an employee under the Wage Orders. Under Dynamex's ABC Test, a worker is not an independent contractor under the California Wage Orders unless the hiring entity proves: "(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."
From the perspective of the plaintiffs' bar and workers' rights community, the adoption of the ABC test will be a welcome development in countering what felt to many to be flimsy efforts to disguise employee workforces as collections of independent business owners. The facts of the Dynamex case involved delivery drivers who had been classified as employees, but who were then reclassified as independent contractors doing the same delivery work but with fewer protections and at less cost to the defendant.
The Court's newly adopted test should make class certification more likely in independent contractor misclassification cases: Because each prong of the ABC test must be satisfied by the employer, if even a single prong will stand or fall on a classwide basis, a strong argument for commonality will exist.
In addition to protecting employees, the Court expressed a desire to ensure that employers would understand in advance how to classify their workers. Clarification of the standard should be a welcome development for all stakeholders, although the ruling may result in some employers' current policies falling out of an arguably grey area and into the realm of clear misclassification. The Court also expressed a desire to level the playing field by ensuring that companies that classify their workers as employees will not be at a disadvantage to competitors who might otherwise have taken an aggressive view of the vagueness of the law to classify similar workers as independent contractors.
The Court's holding was limited to the context of the California Wage Orders, with the Court specifically declining to rule on the employee--independent contractor distinction under California Labor Code provisions that are not part of the wage orders. However, similar developments under those laws seem likely in the wake of Dynamex.
William Jhaveri-Weeks is the founder of The Jhaveri-Weeks Firm, a San Francisco-based civil litigation practice for individuals and organizations.