In April 2018, we wrote about the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, which had clarified the standard for determining whether workers in California should be classified as employees or as independent contractors for purposes of the wage orders adopted by California’s Industrial Welfare Commission (“IWC”).

In Dynamex, the Court adopted the “ABC” test that has been used in some other jurisdictions.  Because Dynamex had adopted the “ABC” test for claims arising under IWC wage orders, there was some uncertainty after Dynamex regarding whether the new test would apply to claims that are not brought under a wage order.  The Dynamex Court did not consider or express a view about non-wage-order claims.

On October 22, 2018, the California Court of Appeal addressed that issue in Garcia v. Border Transportation Group, LLC, holding that Dynamex’s “ABC” test does not apply to claims not arising under a wage order.  The Garcia Court held that the widely used Borello standard applies to non-wage-order claims for determining whether workers are employees or independent contractors.

Although many wage-hour claims do arise under an IWC wage order, a number do not.  For example, certain claims for expense reimbursement under Labor Code section 2802, claims for wage statement violations under section 226, and claims for waiting time penalties under section 203 for an alleged failure to pay all wages due at the end of employment arise under the Labor Code only; there are no equivalent claims under any IWC wage order.

Following Garcia, entities doing business in California that have had actions filed against them alleging independent contractor misclassification based on Dynamex now have authority to argue that a number of claims should be dismissed.

When California employees bring lawsuits alleging minimum wage, overtime, meal period or rest period violations, they typically bring additional claims that are purportedly “derivative” of these substantive claims.  One of these derivative claims is for wage statement (i.e., paystub) violations, alleging that because the employee was paid not all wages he or she allegedly earned, the wage statements he or she was provided were not accurate.

The maximum penalty for a wage statement violation under the California Labor Code is $4,000 per employee.  With such a significant potential penalty, it is no wonder that plaintiffs’ attorneys typically tack on these types of claims, especially in proposed class actions, driving up the potential value of a case.

On May 8, 2018, however, the California Court of Appeal published an employer-friendly decision that could operate to defeat these claims in many cases – if it is not reversed by the California Supreme Court.

In Maldonado v. Epsilon Plastics, Inc., ___ Cal.App.5th ___ (B278022, Apr. 18, 2018), the Court of Appeal confirmed that a wage statement claim fails as a matter of law when it is based on the alleged failure to show all wages purportedly “earned” but the wage statements accurately reflect the wages paid to the employee.  The Court agreed with the employer’s “commonsense position that the pay stubs were accurate in that they correctly reflected . . . the pay received” and held that a failure to pay wages “does not mandate that [employees] also receive penalties for the wage statements which accurately reflected the[] compensation” they were paid.

The Court of Appeal’s decision in Maldonado is a welcome one for employers that have had to face wage statement claims that are tacked on by plaintiffs’ lawyers for the purpose of increasing potential exposure.  Because this is the first published opinion directly deciding this issue, employers now have the tool necessary to seek to strike these claims.

Of course, it is possible that the California Supreme Court will review Maldonado.  If it were to do so, it would not be entirely surprising for the Court to reverse the decision, as the Supreme Court has done in other employment cases in recent years where the Court of Appeal had issued employer-friendly interpretations of the California Labor Code.

Recently, a number of proposed class and collective action lawsuits have been filed on behalf of so-called “gig economy” workers, alleging that such workers have been misclassified as independent contractors. How these workers are classified is critical not only for workers seeking wage, injury and discrimination protections only available to employees, but also to employers desiring to avoid legal risks and costs conferred by employee status.  While a number of cases have been tried regarding other types of independent contractor arrangements (e.g., taxi drivers, insurance agents, etc.), few, if any, of these types of cases have made it through a trial on the merits – until now.

In Lawson v. GrubHub, Inc., the plaintiff, Raef Lawson, a GrubHub restaurant delivery driver, alleged that GrubHub misclassified him as an independent contractor in violation of California’s minimum wage, overtime, and expense reimbursement laws.  In September and October 2017, Lawson tried his claims before a federal magistrate judge in San Francisco.  After considering the evidence and the relevant law, on February 8, 2018, the magistrate judge found that, while some factors weighed in favor of concluding that Lawson was an employee of GrubHub, the balance of factors weighed against an employment relationship, concluding that he was an independent contractor.

The court’s decision was guided by the California Supreme Court’s multi-factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), which focuses on “whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.”  There are also a number of secondary factors.

Among other things, the court found that Grubhub did not control how Lawson made deliveries or what his appearance was during deliveries. GrubHub also did not require Lawson to undergo any training or control when or where Lawson worked – that is, Lawson had complete control of his schedule and territory.  And, Grubhub did not control how or when Lawson delivered the restaurant orders he chose to accept.  Whereas GrubHub controlled some aspects of Lawson’s work, such as determining the rates he would be paid, the court gave those minimal weight.  On balance, the court concluded that “the right to control factor weighs strongly in favor of finding that Mr. Lawson was an independent contractor.”

The court also considered the secondary factors under the Borello test.  Some secondary factors weighed in favor of an employment relationship – for example, Lawson’s delivery work was part of GrubHub’s regular business, the type of work did not require a significant amount of skill, and Lawson was not engaged in a distinct delivery business such that GrubHub was just one of his clients.  Yet, weighing all of the factors above, the court found that “Grubhub’s lack of all necessary control over [] Lawson’s work, including how he performed deliveries and even whether or for how long,” was paramount.

Lawson is certainly a welcome decision for companies hiring independent contractors to perform a part of their regular business.  Nevertheless, the court’s emphasis on the particulars of GrubHub’s relationship with Lawson, issues regarding Lawson’s credibility and the possibility that the California Supreme Court may moot this decision in Dynamex Operations West Inc. v. Superior Court (considering whether to replace Borello with a test that would make it easier for workers to show they are employees rather than independent contractors), argued just two days before the Lawson decision, mean that such companies should continue closely examining the manner in which they classify their workers.  Moreover, although Lawson should provide some support to relationships governed by California law, its impact in other jurisdictions may be negligible.  For now, employers should continue to keep in mind that there is no one deciding factor to determine whether someone performing work for a company is an employee or an independent contractor.  A number of factors must be considered.

Our colleagues Michael S. Kun, Jeffrey H. Ruzal, and Kevin Sullivan at Epstein Becker Green co-wrote a “Wage and Hour Self-Audits Checklist” for the Lexis Practice Advisor.

The checklist identifies the main risk categories for wage and hour self-audits. To avoid potentially significant liability for wage and hour violations, employers should consider wage and hour self-audits to identify and close compliance gaps.

Click here to download the Checklist in PDF format.  Learn more about the Lexis Practice Advisor.

This excerpt from Lexis Practice Advisor®, a comprehensive practical guidance resource providing insight from leading practitioners, is reproduced with the permission of LexisNexis. Reproduction of this material, in any form, is specifically prohibited without written consent from LexisNexis.

A year ago, employers across the country prepared for the implementation of a new overtime rule that would dramatically increase the salary threshold for white-collar exemptions, on the understanding that the new rule would soon go into effect “unless something dramatic happens,” a phrase we and others used repeatedly.

And, of course, something dramatic did happen—a preliminary injunction, followed by a lengthy appeal, which itself took more left turns following the U.S. presidential election than a driver in a NASCAR race. The effect was to put employers in a constant holding pattern as they were left to speculate whether and when the rule would ever go into effect.

The current status of the overtime rule is but one of several prominent issues to reckon with as wage and hour issues, investigations, and litigation remain as prevalent as they have ever been.

The articles in this edition of Take 5 include the following:

  1. The Status of the Department of Labor’s 2016 Overtime Rule
  2. Recent Developments Regarding Tip Pooling
  3. Mandatory Class Action Waivers in Employment Agreements: Is a Final Answer Forthcoming?
  4. “Time Rounding”: The Next Wave of Class and Collective Actions
  5. The Department of Labor, Congress, and the Courts Wrestle with the Definition of “Employee”

Read the full Take 5 online or download the PDF.

On November 30, 2016, the California Court of Appeal issued its opinion in Driscoll v. Granite Rock Company. The opinion provides guidance to California employers who enter into on-duty meal period agreements with their employees.

In Driscoll, the trial court had certified a class of approximately 200 concrete-mixer drivers who alleged they were not provided off-duty meal periods pursuant to California law. Those claims proceeded to a bench trial and the trial court found in favor of the employer. The employees then appealed.

The Court of Appeal upheld the employer’s on-duty meal period agreements, noting that the employer’s “policies regarding meal periods [we]re particularly appropriate in the context of the ready mix concrete industry.” The Court of Appeal cited the 2012 decision in Brinker, where the California Supreme Court held that “[w]hat [off-duty meal practices that] will suffice may vary from industry to industry, and we cannot in the context of this class certification proceeding delineate the full range of approaches that in each instance might be sufficient to satisfy the law.” Relying on Brinker, the Driscoll Court concluded that “the issue of different industry practices is a factual determination. Here, while on the job, mixer drivers manage a rolling drum of freshly batched concrete at any given time throughout their work day. When a driver is able to take a duty-free lunch period is dependent on the state of the concrete in his or her truck, and the nature of the construction job to which the driver is attending.”

The Court of Appeal also rejected the employees’ arguments that the employer required employees to enter into on-duty meal period agreements. The trial court had “found that when a concrete-mixer driver requested to have an off-duty meal period, Graniterock granted that request, and relinquished all control of the employee for the 30-minute off-duty period.” The Court of Appeal concluded that doing so satisfied the Brinker standard.

The Driscoll decision is a welcome one for employers – especially those facing class actions – that use on-duty meal period agreements as it reaffirms their validity.

Perhaps in response to protests brought by employees and their advocates in recent years, states, counties, and cities across America have been increasing their minimum wage in piecemeal fashion. Few employers are fortunate enough to need worry about only one minimum wage—the federal minimum wage that is the floor below which employers may not go (unless an employer is not covered under the FLSA). Most large employers that operate in multiple states must now navigate a minimum-wage patchwork in which the hourly rate varies from state to state and, sometimes, between counties and cities.

Although the federal minimum wage is $7.25 per hour, 29 states and the District of Columbia have a minimum wage greater than the federal minimum wage. And those states are consistently increasing their minimum wage—New Jersey just passed legislation increasing its minimum wage from $8.38 per hour to $8.44 per hour, effective January 1, 2017, which is also when the Montana minimum wage will go from $8.05 to $8.15 per hour.

California is arguably the most difficult minimum-wage patchwork for employers to navigate. From a present minimum wage of $10 per hour, the California minimum wage will increase one dollar per hour each year until it reaches $15 per hour in 2022. But those increases also result in increasing the minimum salary that must be paid to employees who qualify for most overtime exemptions in California. Because most exempt employees in California must make at least twice the minimum wage on an annual basis, the current minimum salary for exempt employees who work for employers having more than 25 employees will increase from the present minimum of $41,600 per year to a minimum of $62,400 by 2022. (However, if the DOL’s rule goes into effect on December 1, 2016, requiring a new minimum salary of $47,476, then that will be the new floor below which employers may not pay their employees on a salary basis.)

In addition to minimum-wage increases on a statewide level, numerous California cities and counties have passed ordinances increasing their own minimum wages. From San Diego to Berkeley, the minimum wage in many cities has increased quicker than the state minimum wage. California’s minimum wage is presently $10.00 per hour. Employers in Santa Clara and Palo Alto, however, must pay their employees at least $11.00 per hour. Employees across the bay in Oakland must be paid at least $12.25 per hour. San Diego employers must pay their employees $10.50 per hour, as do Santa Monica employers that employ more than 25 employees.

California cities are not the only ones that have increased their minimum wage faster than their resident states. Employers in Albuquerque have had an $8.50 minimum wage since 2013, greater than the $7.50 required under New Mexico law. Similarly, Chicago has a $10.50 minimum wage, although Illinois mandates only $8.25. Seattle businesses that employ less than 500 persons must pay their employees $12.00 per hour, but Washington has a minimum wage of only $9.47.

A version of this article originally appeared in the Take 5 newsletter Five Critical Wage and Hour Issues Impacting Employers.”

Kevin Sullivan
Kevin Sullivan

The cities of Santa Monica, Pasadena, and San Diego have each recently passed ordinances increasing the minimum wage effective July 1, 2016. And two of them have passed ordinances providing for paid sick leave beyond that required by California state law.

Santa Monica

The City of Santa Monica has passed a new ordinance providing for a city-wide minimum wage of $10.50 beginning July 1, 2016, $12.00 beginning July 1, 2017, and $13.25 beginning July 1, 2018, $14.25 beginning July 1, 2019, $15.00 beginning July 1, 2020 for most businesses with 26 or more employees. There is a one-year lag for most businesses with 25 or fewer employees – i.e., the $10.50 minimum wage begins July 1, 2017.

Non-profit corporations may apply for a deferral if they meet certain requirements.

Effective January 1, 2017, there are also new paid sick leave requirements, with accrual limits as follows:

  • 1, 2017: 32 hours for small businesses (25 or fewer employees); 40 hours for larger businesses (26 or more employees)
  • 1, 2018: 40 hours for small businesses; 72 hours for larger businesses
  • Accrual rate is one hour for every 30 hours worked
  • Employees can carry over accrued sick leave annually (calendar year, fiscal year, or hiring date) up to the accrual cap
  • Employers can provide sick leave at the start of the year as a whole rather than by accrual, as long as this provides leave consistent with the required accrual amounts
  • Other sick leave plans will comply if equal to or more generous than the ordinance
  • Sick leave use follows California State guidelines.

Here are links to Santa Monica’s fact sheet of the new ordinance and the new ordinance itself.

Pasadena

Effective July 1, 2016, the minimum wage for hours worked within the geographic boundaries of the City of Pasadena will $10.50. The minimum wage will be $12.00 beginning July 1, 2017, and $13.25 effective July 1, 2018.

The Pasadena ordinance also requires that employers give a written notice of employees’ rights under the new ordinance to current employees and new employees at the time of hire.

Like Santa Monica’s ordinance, non-profit corporations may apply for a deferral concerning the Pasadena ordinance if they meet certain requirements.

Here is a link to the Pasadena ordinance that has specific details on the new requirements.

San Diego

The City of San Diego passed its own ordinance increasing the minimum wage to $10.50 (essentially, effective immediately) and $11.50 effective January 1, 2017 for each hour worked within the geographic boundaries of San Diego. Non-profit corporations may apply for a deferral for the San Diego ordinance if they meet certain requirements.

The new ordinance also provides for paid sick leave beyond state requirements: Employers must provide an employee with one hour of earned sick leave for every thirty hours worked by the employee within the geographic boundaries of the City of San Diego, but employers are not required to provide an employee with earned sick leave in less than one-hour increments for a fraction of an hour worked. Earned sick leave must be compensated at the same hourly rate or other measure of compensation as the employee earns from his or her employment at the time the employee uses the earned sick leave.

Additionally, employees may determine how much earned sick leave they need to use, provided that employers may set a reasonable minimum increment for the use of earned sick leave not to exceed two hours. Employers may limit an employee’s use of earned sick leave to forty hours in a “Benefit Year” (which is defined as a “regular and consecutive twelve-month period, as determined by the employer”), but employers must allow employees to continue to accrue earned sick leave based on the formula above. Unused earned sick leave must be carried over to the following Benefit Year.

Here is a link to the San Diego ordinance that has specific details on the new requirements.

Kevin Sullivan
Kevin Sullivan

On March 31, 2016, the California legislature passed a bill that will gradually increase the state minimum wage to $15 per hour by 2022. Governor Jerry Brown is expected to sign the bill on April 4, 2016. This increase will impact employers statewide. Not only will it affect the wages of many non-exempt employees, but it will also result in an increase in the minimum salary paid to employees who qualify for most overtime exemptions.

The bill calls for the minimum wage to increase to $10.50 per hour effective January 1, 2017, $11.00 per hour effective January 1, 2018, and then an additional one dollar per hour each year until it reaches $15 per hour effective January 1, 2022. (For employers with 25 or fewer employees, each of the minimum wage increases would start a year later such that $15 per hour minimum would not go into effect until January 2023.)

Importantly, once the minimum wage reaches $15 per hour, it may then be further increased annually by up to 3.5% to account for inflation based upon the national consumer price index.

Built into the bill is an “off-ramp” provision that allows the governor to pause any scheduled increase for one year if either economy or budget conditions are met. Once the $15 per hour minimum wage has been reached, the “off-ramp” provision expires.

While this increase will certainly have an impact on labor budgets for employers with hourly, non-exempt employees, the impact on employers with salaried, exempt employees cannot be ignored. Because most exempt employees in California must make at least twice the minimum wage on an annual basis, the current minimum salary for exempt employees who work for employers having more than 25 employees will increase from $41,600 to $43,680 effective January 1, 2017. It will then increase to $45,760 effective January 1, 2018, $49,920 effective January 1, 2019, $54,080 effective January 1, 2020, $58,240 effective January 1, 2021, and $62,400 effective January 1, 2022.

US Supreme CourtOn March 22, 2016, the United States Supreme Court issued its much anticipated decision in Tyson Foods, Inc. v. Bouaphakeo, a donning and doffing case in which a class of employees had been awarded $2.9 million following a 2011 jury trial that relied on statistical evidence. (A subsequent liquidated damages award brought the total to $5.8 million.)

In a 6-2 opinion, the Supreme Court affirmed that award.  While the Supreme Court’s decision may not have been the outcome many were expecting, the Court did not issue a broad ruling regarding the use of statistical evidence in class actions, and the decision may prove to have limited application.

In 2007, Tyson Foods employees at a meat processing facility in Iowa filed suit under both state law and the Fair Labor Standards Act (“FLSA”), alleging that they were not paid overtime for the time spent donning and doffing protective gear.  Because Tyson Foods did not have records of the amount of time employees actually spent in those activities, employees’ filled the “evidentiary gap” at through the presentation of representative evidence. This included not only employee testimony and video recordings, but, most importantly, an expert study showing the average time employees spent in such activities as observed by the expert.

In seeking to reverse the jury award, Tyson Foods argued to both the Eighth Circuit Court of Appeals and the Supreme Court that the amount of time spent donning and doffing varied from person to person – and that some persons did not work sufficient time to be entitled to overtime in any event – such that individualized issues predominated over common ones. And Tyson Foods argued that the use of statistical evidence presented it from presenting individualized defenses.

In making these and other arguments, Tyson Foods sought a broad ruling prohibiting the use of statistical evidence in class actions. The Supreme Court rejected that request, concluding that such a rule would “reach too far.” And it explained that its landmark 2011 Wal-Mart v. Dukes decision “does not stand for the broad proposition that a representative sample is an impermissible means of establishing class-wide liability.”

Instead, the Supreme Court held that a “representative or statistical sample, like all evidence, is a means to establish or defend against liability. Its permissibility turns not on the form a proceeding takes — be it a class or individual action — but on the degree to which the evidence is reliable in proving or disproving the elements of the relevant cause of action.” It further explained, “Whether and when statistical evidence can be used to establish classwide liability will depend on the purpose for which the evidence is being introduced and on ‘the elements of the underlying cause of action’ . . . .”

Under the facts presented to it, the Supreme Court  concluded that statistics could be used to infer the amount of time Tyson Foods employees spent donning and doffing because those statistics could have been used in individual suits by the employees.

Importantly, in reaching its conclusion, just as it declined to issue a blanket rule forbidding the use of statistical evidence, the Court also declined to issue a broad rule affirming the use of statistical evidence in all class actions.

The Court noted that its opinion “is not to say that all inferences drawn from representative evidence in an FLSA case are ‘just and reasonable.’ . . . . Representative evidence that is statistically inadequate or based on implausible assumptions could not lead to a fair or accurate estimate of the uncompensated hours an employee has worked.”  In other words, a defendant can challenge an expert’s methodology, which Tyson Foods did not do.

The Court concluded its discussion of representative evidence by declining to issue any broad rule: “The Court reiterates that, while petitioner, respondents, or their respective amici may urge adoption of broad and categorical rules governing the use of representative and statistical evidence in class actions, this case provides no occasion to do so. Whether a representative sample may be used to establish classwide liability will depend on the purpose for which the sample is being introduced and on the underlying cause of action. In FLSA actions, inferring the hours an employee has worked from a study such as [the expert’s] has been permitted by the Court so long as the study is otherwise admissible. . . . The fairness and utility of statistical methods in contexts other than those presented here will depend on facts and circumstances particular to those cases.”

While the decision is a victory for Tyson Foods employees, it is those sentences quoted directly above that will likely limit the decision from having widespread application.  The decision will no doubt be cited by plaintiffs’ counsel in class and collective actions to support their efforts to use statistical evidence to establish both liability and damages in their cases, even where there are individuals who have not been harmed. And defense counsel in those cases will just as certainly point to language in the decision that would indicate that it is a narrow ruling limited to its facts.

Not unimportantly, one issue left unaddressed by the Court pertains to Tysons Foods’ argument that uninjured class members should not recover damages.  The Court declined to address that issue, holding that that question was not fairly presented to it in this case because the damages award has not yet been distributed and  the record does not indicate how it will be done. Accordingly, Tyson Foods may raise a challenge to the allocation method when the case returns to the trial court for distribution of the award to address persons who were not injured.