If there is a turning point for the esports industry, if it has not already occurred, it occurred this week.  A lawsuit filed last Monday in Los Angeles Superior Court by Turner Tenney, a 21-year old gamer known as Tfue, against Faze Clan, his gaming organization.  The lawsuit is an attempt by Tfue to void his contract with Faze Clan, and the case is a clear indication that esports interest is no longer limited to teenage boys.  Tfue is one of the world’s top players of Fortnite.  Faze Clan is an esports and entertainment organization that signs players to their teams to compete in Fortnite, Call of Duty, RainbowSix, Counterstrike Global Operations, and other games.  A quick look at the money these esports teams and players are generating shows how mainstream this industry has become.  In the media fallout since the lawsuit was filed, it has been reported that Tfue generates roughly $1 million per month in revenue only from his creator code, which does not include other sources of revenue such as endorsement deals and pay for appearances.  Tfue joined Faze Clan in 2018, and he has now filed a lawsuit alleging his contract with Faze Clan is invalid and unenforceable.

Esports industry has not been regulated, but the allegations in the lawsuit filed by Tfue have major implications for the esports industry, and not just for gamers and the organizations sponsoring the gamers.  Here are five issues involved in the lawsuit by Tfue and employment law implications the lawsuit may have for the entire gaming industry:

1. Tfue alleges Faze Clan violated California’s Talent Agency Act claiming that gamers are “artists” protected under the Act.

Dating back to 1913, California has had legislation protecting artists from unscrupulous agents and talent managers.  California’s Talent Agency Act (“TAA”) can be found in Labor Code section 1700 to 1704 and provides that talent agents :

  • be licensed (Labor Code section 1700.5),
  • submit its contracts to the Labor Commissioner for approval (Labor Code section 1700.23),
  • file fee schedules with the Labor Commissioner and post a copy in its office (Labor Code section 1700.24),
  • maintain records of fees earned from clients (Labor Code section 1700.26),
  • and prohibits certain activities such as sending artist to unsafe places or the employing minors (Labor Code sections 1700.32 – 1700.37).

Until this lawsuit, most of the litigation involving who is covered by the TAA involved who qualified as a “talent agency.”  However, the lawsuit filed by Tfue alleges that he is an “artist” who is covered by the TAA.  The term “artists” is defined by the statute as:

[A]ctors and actresses rendering services on the legitimate stage and in the production of motion pictures, radio artists, musical artists, musical organizations, directors of legitimate stage, motion picture and radio productions, musical directors, writers, cinematographers, composers, lyricists, arrangers, models, and other artists and persons rendering professional services in motion picture, theatrical, radio, television and other entertainment enterprises.

See Labor Code section 1700.4(b).  Tfue argues that he is a performer who creates on-line videos which “are viewed by millions, sponsors are willing to pay for Tenney to perform in and create videos that will, at least in part, promote their goods, services and brands.”

Under the TAA, unlicensed talent agencies “do not have authority to make binding promises on behalf of a performer” and therefore artists’ contracts with unlicensed talent agencies are non-binding and the artists can recover all fees earned by an unlicensed talent agency.  See Waisbren v. Peppercorn Productions, Inc., 41 Cal. App. 4th 246 (1995).

Therefore, if Tfue is able to establish that the TAA applies to gamers in the esports industry, he would be able to void his contract with Faze Clan, which is presumably not licensed as a talent agency under the TAA.  Reportedly under the contract, Faze Clan would be entitled to up to 80% of certain revenue streams generated by Tfue.

2. If the TAA applies to Tfue and other gamers, this ruling would have much broader ramifications to the entire gaming industry.

If Tfue is able to establish that he is a performer covered under California’s TAA, this would obviously cover other gamers and require esports organizations like Faze Clan to register under the TAA, and basically apply the entertainment industry regulations to this industry.

However, if the TAA applies to gamers, this could mean that the TAA also applies to the computer programmers writing the code for the games.  The TAA’s definition of “artists” includes “writers,” “composers,” “arrangers,” “and other artists and person rendering professional services in … other entertainment enterprises.”  This could have huge ramifications for the gaming companies that developed this software throughout California.

3. Tfue also alleges his contract with Faze Clan violated California’s prohibitions on competitive restraints.

The lawsuit also alleges that the contract entered into with Faze clan “contains several provisions that constitute illegal and anti-competitive restraints on trade in violation of [Business and Professions Code] section 16600.”  Employment contracts, non-competition agreements, and/or non-solicitation agreements can be challenged under Business and Professions Code section 16600.  That Section provides a very broad rule voiding any contract that limits an employee’s ability to engage in their profession:

Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

Faze Clan may counter that the restraints in the contract meet one of the exemptions to section 16600.  For example, one exception to Section 16600’s prohibition on restraining an employee’s ability to work is if the restraint is narrowly drafted.  Restraints on the pursuit of “only a small or limited part of the business, trade or profession” have been upheld by California courts.  However, as the court in General Commercial Packaging, Inc. v. TPS Package Engineering, Inc. explained, “[A] contract does not have to impair a party’s access to every potential customer to contravene section 16600…. [A] contract can effectively destroy a signatory’s ability to conduct a trade or business by placing a substantial segment of the market off limits.”  General Commercial Packaging, Inc. v. TPS Package Engineering, Inc., 126 F.3d 1131, 1132–33 (9th Cir.1997).

There is also a strong public policy against enforcing agreements that restrict an employee’s ability to work in the profession they chose.  California Courts have noted, “the interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interest of the employers ….”

4. Are gamers employees, independent contractors, artists, or equivalent to an athlete on a team?

With esports being so new, there are still a lot of open questions about how gamers should be classified.  However, given that the industry is so diverse, there could be an argument made that there cannot be one paradigm that covers all gamers.  This is not like the NFL or NBA, nor is it like the traditional entertainment industry either.  As set forth above, any determination on this issue could have huge impacts beyond gamers, and it could change how gaming companies who develop the software operate as well.

5. Another potential issue: Who owns the gamer’s name and social media accounts?

It does not appear to be an issue in the litigation filed by Tfue, but another potential issue surrounding gamers is who owns their on-line gamer names, social media accounts, and identities?  For example, in 2012, a case arose involving a dispute between an employer and an employee over who owned a Twitter handle.  In PhoneDog v. Kravitz, the employer filed a lawsuit against the former employee to recover the use of the Twitter handle and brought causes of action for (1) misappropriation of trade secrets, (2) intentional interference with prospective economic advantage, (3) negligent interference with prospective economic advantage, and (4) conversion.  While Tfue’s case does not apparently involve this issue, the value of these accounts will likely be an issue in future litigation.  Given the level of views and followers on these accounts, and potential for revenue streams from these types of accounts, the issue of who owns the account, should a dispute arise, is a critical issue that should be addressed between the gamer and the esports organizations.  More information about the PhoneDog v. Kravitz case can be read here.

In April 2019, a jury in a California federal court awarded plaintiffs over $6 million in damages for missed meal breaks. Hamilton et al. v. Wal-Mart Stores Inc. et al. (Case No. 5:17-cv-01415-AB-KK).  The case involved 5,000 employees who worked at Walmart’s fulfillment center in Chino, California.  Plaintiffs brought a class action against Walmart alleging violations of the Unfair Competition Law (“UCL”) for failing to (1) pay for all hours worked, (2) pay all overtime wages, (3) provide meal periods, (4) provide rest breaks, (5) pay final wages, and (6) provide accurate itemized wage statements.  Plaintiffs also sought penalties under California’s Private Attorney General Act (“PAGA”).

In August 2018, the court certified six subclasses of the class action:

  1. Alternative Workweek subclass which was comprised of all current and former employees during the class period who were not paid overtime for working over eight hours in a day or over forty hours in a week and were not paid overtime pursuant to the company’s alternative workweek.
  2. Overtime subclass which was comprised of all current and former employees who worked over eight hours in a day or more than forty hours in a week and were not paid all overtime.
  3. Meal break subclass
  4. Waiting time penalty subclass
  5. Wage statement subclass

1. Employers must relieve the employee of all duty for meal breaks.

In Brinker Restaurant Corp. v. Superior Court, the California Supreme Court set forth the requirement for employers to provide meal breaks is “to relieve the employee of all duty and relinquish any employer control over the employee and how he or she spends the time.” 53 Cal. 4th 1004, 1038-40 (2012).  “The employer satisfies this obligation if it relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so.”

The Brinker court also established that employers do not need to ensure that employees took their 30-minute meal breaks.  The Brinker Court explained:

[Plaintiff] Hohnbaum contends an employer is obligated to “ensure that work stops for the required thirty minutes.” Brinker, in a position adopted by the Court of Appeal, contends an employer is obligated only to “make available” meal periods, with no responsibility for whether they are taken. We conclude that under Wage Order No. 5 and Labor Code section 512, subdivision (a), an employer must relieve the employee of all duty for the designated period, but need not ensure that the employee does no work.

The Court clarified that employers do not have to ensure that employees do not perform any work during their break:

The difficulty with the view that an employer must ensure no work is done—i.e., prohibit work—is that it lacks any textual basis in the wage order or statute. While at one time the IWC’s wage orders contained language clearly imposing on employers a duty to prevent their employees from working during meal periods, we have found no order in the last half-century continuing that obligation. Indeed, the obligation to ensure employees do no work may in some instances be inconsistent with the fundamental employer obligations associated with a meal break: to relieve the employee of all duty and relinquish any employer control over the employee and how he or she spends the time.

The Court provided that employers must meet the following requirements in order to meet their obligations of providing meal breaks: (1) provide the employee with at least 30 minutes uninterrupted, (2) permit the employee to leave the premises, and (3) relieve the employee of all duty for the entire period.

2. Plaintiffs in the Walmart case established that a security check required for employees to take meal breaks “discouraged employees from leaving the premises.” 

In this case, Walmart required the employees to complete a security check process when leaving the facility for lunch breaks.  Plaintiff’s alleged, and ultimately prevailed on the theory that this security checkpoint impeded or discouraged class members from taking compliant meal breaks as required under California law.

In ruling against Walmart’s motion for summary judgment, the court recognized that “Walmart is correct that an employer ‘is not obligated to police meal breaks and ensure no work thereafter is performed.’ Brinker, 53 Cal. 4th at 1040.  ‘Work by a relieved employee during a meal break does not thereby place the employer in violation of its obligations and create liability for premium pay.’ Id.”  The court however ruled that “Walmart’s security check arguably ‘impedes or discourages’ associates from taking an ‘uninterrupted 30-minute break’ because employees have only two options: leave the premises and go through the security check even though the security check may eat up some part of their meal break or stay inside the facility.”  The court found that there was enough evidence to permit the jury to decide whether the security check point impeded or discouraged employees from taking meal breaks.  And during the trial in April 2019, the jury ultimately agreed with the plaintiffs that the security check point implemented by Walmart discouraged employees from taking their meal breaks.

3. Recently, other cases attempted to allege the theory that employees are “discouraged” from taking meal breaks.

Recently there have been other cases filed against California employers alleging that a practice or policy “discourages” employees from taking their meal breaks.  One case involved Taco Bell where the plaintiffs’ alleged that Taco Bell’s policy of requiring employees to remain on the company’s premises while eating a discounted meal prevented the employees from being relieved for a meal break.  Fortunately, the court in that case held in Taco Bell’s favor as the employees were not compelled to purchase the discounted meals, as it was a voluntary benefit offered to the employees.

4. Employees must be relieved of all duty during a break.

A similar argument was made in Augustus v. ABM Security Services, Inc. where security guards sued their employer arguing that they did not receive duty free 10-minute rest breaks because they were required to monitor their pager at all times.  In Augustus, the Court ruled that “one cannot square the practice of compelling employees to remain at the ready, tethered by time and policy to particular locations or communications devices, with the requirement to relieve employees of all work duties and employer control during 10-minute rest periods.”  The Court made it clear that the employee must be “free from labor, work, or any other employment-related duties.  And employees must not only be relieved of work duties, but also freed from employer control over how they spend their time.”

5. Employers must review how all company policies may impact meal and rest breaks.

The Walmart case is a good example of how a security policy had major implications on a wage and hour issue.  California employers need to review their policies to minimize the argument that an employee was “discouraged” from taking their meal or rest breaks because of the various policies that pertained to them.  The case also illustrates the difficulties arising from allegations that an employee felt discouraged from taking a break because of a company security policy.  However, as the $6 million verdict in this case establishes, it is well-worth a company’s effort to review policies and address potential issues prior to litigation.

This Friday’s Five post is a video (see below) covering five ways on how to fire employees with kindness and empathy:

  1. Try not to let the firing come as a surprise.
  2. Help the employee get another job.
  3. Work with employee on what others will be told about the firing within the office.
  4. Be respectful, but accurate in documenting performance.
  5. Develop end of employment checklist to ensure consistency.

The first three points are taken from Gary Vaynerchuk’s post here.

As the mid-point of the year approaches, employers should review their sexual harassment training obligations and ensure compliance, especially with the new law requiring sexual harassment prevention training for all employees by January 1, 2020 for employers with five or more employees.  Existing law already requires employers in California with 50 or more workers to provide at least two hours of sexual harassment prevention training to all supervisors.  The regulations regarding the training are becoming more and more detailed.  Here are five reminders about sexual harassment training and required anti-harassment polices:

1. Employers with 5 or more employees must provide sexual harassment prevention training to all employees (even nonsupervisory employees) by January 1, 2020. 

SB 1343 passed in 2018 and requires employers with 5 or more employees, including temporary or seasonal employees, to provide at least 2 hours of sexual harassment training to all supervisors. In addition, at least one hour of sexual harassment training is required for all nonsupervisory employees by January 1, 2020, and once every 2 years thereafter.

The bill does require that the Department of Fair Employment and Housing (“DFEH”) is to develop or obtain 1-hour and 2-hour online training courses on the prevention of sexual harassment in the workplace and to post the courses on the DFEH’s website. The bill requires the DFEH to make existing informational posters and fact sheets, as well as the online training courses regarding sexual harassment prevention, available to employers and to members of the public in specified alternate languages on the DFEH website.  At this point, the DFEH has not indicated when the training and materials will be available, but check back here throughout the year for updates.

2. Supervisor harassment prevention training must take place at least every two years.

Employers with 50 or more employees must provide at least two hours of classroom or other effective interactive training and education regarding sexual harassment to all supervisory employees who are employed as of July 1, 2005, and to all new supervisory employees within six months of assuming a supervisory position.  All covered employers must provide sexual harassment training and education to each supervisory employee once every two years.  In 2015, California required that a portion of the training also address “abusive conduct.”

3. Employers need to develop an anti-harassment policy that includes a complaint procedure.

All employers should have an anti-harassment policy of their own developed and distributed to all employees.  Employers are required to develop a harassment, discrimination, and retaliation prevention policy that meets the following requirements:

(1) Is in writing;

(2) Lists all current protected categories covered under the Act;

(3) Indicates that the law prohibits coworkers and third parties, as well as supervisors and managers, with whom the employee comes into contact from engaging in conduct prohibited by the Act;

(4) Creates a complaint process to ensure that complaints receive:

(A) An employer’s designation of confidentiality, to the extent possible;

(B) A timely response;

(C) Impartial and timely investigations by qualified personnel;

(D) Documentation and tracking for reasonable progress;

(E) Appropriate options for remedial actions and resolutions; and

(F) Timely closures.

(5) Provides a complaint mechanism that does not require an employee to complain directly to his or her immediate supervisor, including, but not limited to, the following:

(A) Direct communication, either orally or in writing, with a designated company representative, such as a human resources manager, EEO officer, or other supervisor; and/or

(B) A complaint hotline; and/or

(C) Access to an ombudsperson; and/or

(D) Identification of the Department and the U.S. Equal Employment Opportunity Commission (EEOC) as additional avenues for employees to lodge complaints.

(6) Instructs supervisors to report any complaints of misconduct to a designated company representative, such as a human resources manager, so the company can try to resolve the claim internally. Employers with 50 or more employees are required to include this as a topic in mandated sexual harassment prevention training, pursuant to section 11024 of these regulations.

(7) Indicates that when an employer receives allegations of misconduct, it will conduct a fair, timely, and thorough investigation that provides all parties appropriate due process and reaches reasonable conclusions based on the evidence collected.

(8) States that confidentiality will be kept by the employer to the extent possible, but does not indicate that the investigation will be completely confidential.

(9) Indicates that if at the end of the investigation misconduct is found, appropriate remedial measures shall be taken.

(10) Makes clear that employees shall not be exposed to retaliation as a result of lodging a complaint or participating in any workplace investigation.

In addition, employers are required to distribute the pamphlet, Sexual Harassment Is Forbidden by Law (DFEH-185), to all employees.  Employers should also routinely discuss the sexual harassment policy with employees at meetings and remind them of the complaint procedures and document these additional steps.  This additional training will show that the company is serious about preventing harassment and took affirmative steps to protect its employees.

4. The training must review certain topics.

In order to comply with California law, the training must explain the following topics:

  • The definition of sexual harassment under the Fair Employment and Housing Act and Title VII of the federal Civil Rights Act of 1964;
  • The statutes and case-law prohibiting and preventing sexual harassment;
  • The types of conduct that can be sexual harassment;
  • The remedies available for victims of sexual harassment;
  • Strategies to prevent sexual harassment;
  • Supervisors’ obligation to report harassment;
  • Practical examples of harassment;
  • The limited confidentiality of the complaint process;
  • Resources for victims of sexual harassment, including to whom they should report it;
  • How employers must correct harassing behavior;
  • What to do if a supervisor is personally accused of harassment;
  • The elements of an effective anti-harassment policy and how to use it;
  • “Abusive conduct” under Government Code section 12950.1, subdivision (g)(2).
  • Discuss harassment based on gender identity, gender expression, and sexual orientation, which shall include practical examples inclusive of harassment based on gender identity, gender expression, and sexual orientation.

  5. Trainers conducting the harassment prevention training must meet certain requirements.

A trainer shall be one or more of the following:

  1. “Attorneys” admitted for two or more years to the bar of any state in the United States and whose practice includes employment law under the Fair Employment and Housing Act and/or Title VII of the federal Civil Rights Act of 1964, or
  2. “Human resource professionals” or “harassment prevention consultants” working as employees or independent contractors with a minimum of two or more years of practical experience in one or more of the following: a. designing or conducting discrimination, retaliation and sexual harassment prevention training; b. responding to sexual harassment complaints or other discrimination complaints; c. conducting investigations of sexual harassment complaints; or d. advising employers or employees regarding discrimination, retaliation and sexual harassment prevention, or
  3. “Professors or instructors” in law schools, colleges or universities who have a post-graduate degree or California teaching credential and either 20 instruction hours or two or more years of experience in a law school, college or university teaching about employment law under the Fair Employment and Housing Act and/or Title VII of the federal Civil Rights Act of 1964.

Individuals who do not meet the qualifications of a trainer as an attorney, human resource professional, harassment prevention consultant, professor or instructor because they lack the requisite years of experience may team teach with a trainer, in accordance with 1. through 3. above, in classroom or webinar trainings, provided that the trainer supervises these individuals and the trainer is available throughout the training to answer questions from training attendees.

There is no silver bullet for California employers to avoid workplace disputes and litigation.  However, by focusing on a few key best practices, employers can reduce the likelihood of litigation, and if sued, the practices will make defending litigation much easier and can result in a better outcome.  Here are my top five employer practices to reduce employment liability:

 1. Develop a company culture of documentation.

It does not matter the type of employment litigation at issue – wage and hour claims, leave issues, or harassment claims – the better documented the situation is, it dramatically increases the odds of prevailing in litigation.  I believe there is a relationship in place that correlates the likelihood of avoiding a devastating judgment to the amount of documentation the employer has regarding the particular employee or group of employees involved in the litigation.

So that leads to the question of, what should employers document?  Conversations with employees, reviews, days absent and the reason for the absence, performance issues (both good and bad).  With email and the ability to scan documents or take pictures of documents on a phone, there is almost no excuse not to have nearly every critical discussion, disciplinary action or time off request documented.  The only issue preventing employers from documenting issues is not stressing the need to do document these items with management.

2. Focus on maintaining good time records.

Employers have the burden to record and maintain accurate time records under California law.  If the employer knows employees are not properly recording their time, the employer needs to enforce a policy to have employees accurately record their time, even if it requires disciplinary action.

Some bad time keeping practices to avoid include the following:

  • Records that do not record the employee’s actual time working. For example, the employee records their start and stop time at the same time every day even though the employer knows it changes.
  • Not keeping time records long enough. The statute of limitations can reach back four years in wage and hour class actions, and these records will be the primary issues in most cases.
  • Not recording all required information. For example, employers are required to record employee’s meal periods under the IWC Wage Orders.
  • Not keeping the time records in a manner that is usable. Maintaining records in a form that makes reviewing the records almost impossible is almost equivalent to not maintaining them in the first place.  Some thought should be put into how an employer is keeping old time record information and how that data could efficiently be reviewed in the future if needed.

3. Having multiple people with institutional knowledge and knowledge of company policies over time.

Is there one person with full knowledge of the employment policies implemented by the company?  Institutional knowledge about the various policies put into place by the company, when they were implemented, and why they were implemented is critical knowledge and information in defending litigation.  This information should not reside with just one person but should be shared with a few executives so that this institutional knowledge can be preserved.

4. Communicate goals and performance expectations to employees routinely.

The basic HR functions are key here – conduct employee reviews routinely and accurately.  The reviews will likely be the primary focus in a wrongful termination, discrimination or retaliation claim.  Reviews need to be accurate.  While the reviews must be professional, they need to note the employee’s deficiencies.  It is hard to counsel employees on performance issues, but it is critical that these issues are addressed with employees in writing.  I wrote recently about common misunderstandings about disciplining employees in a prior post here.

5. Consider offering severance agreements if this is a potential dispute with a departing employee.

If an employer believes that there is a potential dispute with a departing employee, the employer may choose to pay some severance in exchange of a release of claims by the employee.  If done properly, an employee’s acceptance of a severance agreement would effectively waive any and all claims that he or she may have against the company (see my prior post here on common questions about severance agreements).  If there is any potential for a dispute about any issues that arose during employment, entering into a severance agreement could be an effective way to avoid costly and time-consuming litigation.  However, employers need to approach severance agreements with caution, as California has recently passed legislation prohibiting certain confidentiality clauses in agreements with employees (see prior post about 2019 California legislation here), and employers need to ensure their severance agreements comply with California law.

Employment Practices Liability Insurance, often referred to as EPLI, can be a great resource for some employers in California.  However, just like any other major purchasing decision, employers must be very careful when purchasing this insurance, as often times they can be surprised about what the insurance does not cover and the loss of control over the defense of lawsuits.  This Friday’s Five covers five issues employers must be aware when considering EPLI insurance:

1. Usually wage and hour claims, and class actions are excluded from EPLI coverage.

It is normal practice for insurance companies to exclude coverage of wage and hour issues and class action claims.  This is normally the large liability ticket issue that an employer is attempting to protect against when purchasing an EPLI policy, but then are surprised to learn that these types of claims are not covered once sued for a wage and hour claim or named in a class action lawsuit.

2. Similarly, liability for California’s Private Attorney General Act representative actions is usually not covered.

Just as class actions usually are not covered, insurance companies usually carve out coverage for wage and hour claims under California’s Private Attorney General Act (PAGA) representative actions.  These representative actions can carry substantial liability for employers.  For more information about PAGA claims, see a prior post here.

3. Intentional acts cannot be insured under CA law.

California law prohibits an insurance company from covering willful acts as set forth in Insurance Code section 533.  The policy rational behind this law is to discourage intentional acts that cause harm or property loss to others.  If it is an intentional act, California law prohibits insurance from covering the act.  Therefore, if an employment lawsuit alleges willful acts took place as part of the allegations, it is also likely not going to be covered by insurance.  This prohibition on covering intentional acts can be used by insurance companies to exclude coverage for employment claims of sexual harassment, discrimination, and retaliation.

4. Loss of control of defense counsel.

Most insurance policies will dictate which law firm must be used to defend the case.  This is another surprise to many employers who have used a law firm for many years in setting up employment policies, handbooks, and procedures, only to find out that some other law firm that may not have experience in the employer’s industry, and does not have the trusted relationship built over a number of years, suddenly defending its interests in litigation.  Unlike items 1 through 3 above, employers can negotiate this term with the insurance company, but this negotiation is better done when purchasing the policy or renewing the policy.  Employers are advised to not wait until a lawsuit is filed and the insurance company assigns its preferred law firm to your case to start the discussion of which law firm should be defending the case.  Employers should negotiate this term up front so that they have the option to select its preferred law firm to defend any litigation.

5. Loss of control over settlement of lawsuit.

Once the insurance company agrees to cover the liability of a lawsuit, it can dictate whether to settle a case and for how much.  Insurance companies can look at a covered claim differently than an employer who is defending the lawsuit.  For example, companies facing litigation are concerned that settling for too high of an amount may bring on additional copy-cat lawsuits.  Insurance companies view settling the case with different concerns, such as risk for that one case, and their concerns may not be in line with the employer’s.  Once an insurance company is covering a risk, the employer loses control on the potential resolution of the case.  Employers need to understand this dynamic in assessing whether an EPLI policy is a good fit for their business.

Many employers have been able to effectively manage risks using EPLI policies, but there are many issues that must be understood prior to purchasing these types of policies.  EPLI policy costs are rising, and employers should work with their broker and current employment attorney in assessing whether an EPLI policy meets their needs, and go into the purchase well-informed in order to make the best cost-benefit analysis.

In working with employers are various sizes, backgrounds, sophistication, and industries, I’ve seen a lot of confusion and simple misunderstandings about what constitutes employee discipline and how to properly document employee performance issues or discipline.  This Friday’s Five reviews five common misunderstandings about discipline and documentation:

1. If it was not a formal write-up put in the employee’s file, then the action does not constitute disciplinary action.

There is no legal definition of what constitutes a write-up.  Likewise, there is no legal requirement of what needs to be placed in an employee’s personnel file.  Therefore, documentation about verbal warnings, e-mails, letters, even notes on napkins can be evidence to support an employer’s position that an employee was terminated because of performance issues.  The key item employers need to remember is if the employee challenges the reason for the termination, the employer has support for the termination decision, either through testimony and/or documentation.  The documentation can come in any form and does not have to be a formal write-up that is maintained in the employee’s personnel file.  However, this is not to say that employers can do away with formal employee reviews and write-ups, as these are good practices to maintain.

2. Verbal warnings do not have to be documented.

If there is no record of a verbal warning, it is very difficult to prove later that the employee had been counseled about the issue.  Managers should always document a verbal warning in some manner, such as in a manager’s log or e-mailing themselves the specifics about the verbal warning.  By preparing an e-mail and sending it to human resources or even to himself or herself, a manager creates a great time-stamped record that is excellent evidence should there ever be any litigation concerning a termination.

3. Employees must sign disciplinary documents for them to be effective.

Some employers do not think a write-up for an employee is valid unless the employee signs the write-up, but this is not true.  While it is a good policy to have some system that proves the employee was presented with the write-up, it is not required that the employee sign the document.  It is common that an employee will refuse to sign such documents because they do not agree with them, but this should not prevent the employer from documenting the discipline.  To alleviate this issue, employers can provide a line on the document that states the employee does not necessarily agree with the write-up, but is signing the document only to acknowledge receipt.  If the employee still refuses to sign the document, the manager administering the writ-up should simply record on the bottom of the document that it was presented to the employee, the date, and that the employee refused to sign.

Another method to avoid the argument that the employee never received the written warning is to email the employee.  This creates a great record of when the warning was prepared and sent to the employee, which will be hard for the employee to argue was never provided to them.

4. Employers must follow a progressive disciplinary policy and cannot fire employees on their first offense.

While employers may choose to implement a progressive discipline policy that starts discipline with a verbal warning and progresses to a second or third written warning prior to termination.  However, if using a progressive disciplinary system, employers should be careful to preserve the employee’s at-will status and reserve the right to not follow the progressive disciplinary system.  If the employee is at-will, they can be terminated at any time, even after their first small infraction of a company policy.  For more information about at-will employment, click here for my previous article.

5. Disciplinary documentation should be as broad as possible.

While write-ups and performance documentation should address the overall issue that the employee needs to improve, employers need to avoid general statements without providing specific examples.  For example, instead of writing-up an employee for having a “poor attitude,” the employer should provide a specific performance issue, such as the employee’s response to a customer was rude and not professional and set forth what the employee said.  The employer should also document the time, date and facts of the incident.  Write-ups should also list the conduct that is expected of the employee in the future.

This Friday’s Five lists five action items employers should utilize when conducting harassment investigations:

1. Selecting the investigator

Employers should take time to train an in-house person who can conduct harassment investigations.  This person, usually someone from Human Resources (but it does not need to be) should have additional experience and training about how to investigate these claims.  First, the person needs to be able to conduct appropriate investigations to limit the liability to the company.  Second, the person’s experience and training will likely be closely examined, if not challenged by opposing counsel if the case develops into litigation.  Therefore, someone with experience and who is well credentialed is preferred.

2. The investigation must be free of any appearance of influence or bias

The investigator must not have any personal involvement with any of the parties who are a part of the investigation.  To avoid any appearance of undue influence, the investigator must not be subject to any control or supervisory control from the alleged harasser.  This means that for smaller companies, or in cases where the owner or president of the company is alleged to have harassed someone, it is recommended that an outside third-party that is independent from the company be hired to conduct the investigation.

3. The investigation must ask the right questions

The EEOC provides the following examples of questions to ask during a sexual harassment investigation:

Questions to Ask the Complainant:

  • Who, what, when, where, and how: Who committed the alleged harassment? What exactly occurred or was said? When did it occur and is it still ongoing? Where did it occur? How often did it occur? How did it affect you?
  • How did you react? What response did you make when the incident(s) occurred or afterwards?
  • How did the harassment affect you? Has your job been affected in any way?
  • Are there any persons who have relevant information? Was anyone present when the alleged harassment occurred? Did you tell anyone about it? Did anyone see you immediately after episodes of alleged harassment?
  • Did the person who harassed you harass anyone else? Do you know whether anyone complained about harassment by that person?
  • Are there any notes, physical evidence, or other documentation regarding the incident(s)?
  • How would you like to see the situation resolved?
  • Do you know of any other relevant information?

Questions to Ask the Alleged Harasser:

  • What is your response to the allegations?
  • If the harasser claims that the allegations are false, ask why the complainant might lie.
  • Are there any persons who have relevant information?
  • Are there any notes, physical evidence, or other documentation regarding the incident(s)?
  • Do you know of any other relevant information?

Questions to Ask Third Parties:

  • What did you see or hear?
  • When did this occur? Describe the alleged harasser’s behavior toward the complainant and toward others in the workplace.
  • What did the complainant tell you?
  • When did s/he tell you this?
  • Do you know of any other relevant information?
  • Are there other persons who have relevant information?

4. The investigator must make credibility assessments

The EEOC again provides some guidance on the factors to use when determining which witnesses are more credible:

  • Inherent plausibility: Is the testimony believable on its face? Does it make sense?
  • Demeanor: Did the person seem to be telling the truth or lying?
  • Motive to falsify: Did the person have a reason to lie?
  • Corroboration: Is there witness testimony (such as testimony by eye-witnesses, people who saw the person soon after the alleged incidents, or people who discussed the incidents with him or her at around the time that they occurred) or physical evidence (such as written documentation) that corroborates the party’s testimony?
  • Past record: Did the alleged harasser have a history of similar behavior in the past?

None of the above factors are determinative as to credibility. For example, the fact that there are no eye-witnesses to the alleged harassment by no means necessarily defeats the complainant’s credibility, since harassment often occurs behind closed doors. Furthermore, the fact that the alleged harasser engaged in similar behavior in the past does not necessarily mean that he or she did so again.

5. The investigation’s final determination

After making credibility determinations and evaluating the facts, management of the company must make a determination about whether or not the harassment occurred.  The parties should be informed of the determination.  Even if the employer determines that harassment did not occur, the EEOC takes the position that the employer should take steps such as preventative training and continued monitoring.  For example, even though the underlying harassment may not have occurred, a supervisor could still be held liable for retaliating against the employee who filed the harassment complaint.  Therefore, it is important for employers to inform the parties involved of the outcome, unacceptable behavior as a result of the determination, and to ensure ongoing compliance with the company’s findings and legal obligations.

This Friday’s Five is a video (see video below) that reviews the ABC test for independent contractors as set forth in the California Supreme Court’s ruling in Dynamex Operations West, Inc. v. Superior Court, (2018) 4 Cal.5th 903.  The five issues I discuss in the video include:

1) Part A of the test requires 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

2) Part B of the test requires that the worker performs work that is outside the usual course of the hiring entity’s business; and

3) Part C of the test requires that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

4) The contractor must actually be in business for themselves.

The court in Garcia v. Border Transportation Group, LLC (2018) 28 Cal.App.5th 558, explained that “Dynamex makes clear that the question in part C is not whether [Border Transportation] prohibited or prevented [plaintiff] from engaging in an independently established business.”  Instead, the analysis is if the plaintiff “independently has made the decision to go into business for himself or herself” and “generally takes the usual steps to establish and promote his or her independent business – for example, through incorporation, licensure, advertisements, routine offerings to provide services of the independent business to the public or to a number of potential customers, and the like.” Id. at 572-573.

5) The Dynamex ABC test only applies to wage-order claims, and the Borello test applies to all other claims.

The court in Border Transportation explained:

[Dynamex] did not reject Borello, which articulated a multifactor test for determining employment status under the Worker’s Compensation Act. Nor did it address the appellate court’s ruling that “insofar as the causes of action in the complaint . . . are not governed by the wage order” and predicated solely on the Labor Code, “the Borello standard is the applicable standard for determining whether a worker is properly considered an employee or an independent contractor.”

Border Transportation, 28 Cal.App.5th at 571.

The Borello Test

So employers not only have to comply with the ABC test, they also have to comply with the factors set forth in Borello for all non-wage order labor code issues.  The “most significant consideration” is the putative employer’s “right to control work details.”  S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations (Borello), (1989) 48 Cal. 3d 341, 350.  Recently, the California Supreme Court noted that under the right-of-control test, it is “not how much control a hirer [actually] exercises, but how much control the hirer retains the right to exercise.” Ayala v. Antelope Valley Newspapers, Inc., (2014) 59 Cal. 4th 522 at 533.

The second set of factors that the court will look at under the Borello test are as follows:

(a) whether the one performing services is engaged in a distinct occupation or business;

(b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;

(c) the skill required in the particular occupation;

(d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;

(e) the length of time for which the services are to be performed;

(f) the method of payment, whether by the time or by the job;

(g) whether or not the work is a part of the regular business of the principal; and

(h) whether or not the parties believe they are creating the relationship of employer-employee.

Finally, the Borello test has five additional factors borrowed from the Fair Labor Standards Act (FLSA) in making a determination of a worker’s classification:

(i) the alleged employee’s opportunity for profit or loss depending on his managerial skill;

(j) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers;

(k) whether the service rendered requires a special skill;

(l) the degree of permanence of the working relationship; and

(m) whether the service rendered is an integral part of the alleged employer’s business.

In Rodriguez v. Taco Bell Corp., 896 F.3d 952 (9th Cir. 2018), an employee brought a putative class action alleging that Taco Bell’s discounted meal policy effectively denied employees the ability to take a duty free meal break.  At issue in this case was Taco Bell’s policy of offering a discounted meal from the restaurant during the employees’ meal breaks as long as the employees ate the meal on the company’s premises.  The ability to purchase discounted meals was voluntary.  The policy was implemented to prevent theft.  The employees argued that because they were required to remain on the company’s property in order to obtain the discounted meal they employees were not provided a duty free meal break.  The court rejected Plaintiff’s argument and held that Taco Bell’s policy complied with California law.  Here are five issues California employers should understand about the decision:

1. Meal and rest break requirements

The court in Rodriguez v. Taco Bell explained that California requires non-exempt employees be afforded rest breaks and meal periods after working a certain number of hours. See Cal. Labor Code §§ 226.7, 512.  At issue in this case is the Labor Code’s requirement that employees who work more than five hours in a day be afforded a meal period of “not less than 30 minutes” and employees who work more than ten hours in a day must be provided a second meal period of the same duration. Labor Code 512(a).  The court also noted that California Industrial Welfare Commission (“IWC”) Wage Order 5-2001 “requires employees be relieved of ‘all duty’ during the meal period. Cal. Code Regs., tit. 8, § 11050, subd. 11(A).”

The court also explained that if a meal or rest break is not provided according to California law, employees are entitled to the remedy of premium wages of “one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.” Cal. Labor Code § 226.7(c).

2. Discounted meal policy did not establish control over employees

The court found that Taco Bell’s meal policy was compliant under California law because the company relieved the employees of all duty and relinquished control over their activities.  Taco Bell did not require its employees to purchase the discounted meal, there was no evidence that Taco Bell pressured its employees to purchase the discounted meals, employees were free to purchase meals and full price and leave the company premises.  In addition, there was no evidence to show that employees were required or pressured to work while on premises during the meal period.  In fact, Taco Bell had a policy prohibiting this, “as employees were required to take rest breaks and meal periods away from ‘[t]he food production area’ and ‘[t]he cash register service area.’”

3. Voluntary nature of the discounted meal policy was key issue in case

Plaintiff argued that employers must pay employees whenever they control the employees, even if the employee is not required to work, as set forth in Morillion v. Royal Packing Co., 22 Cal.4th 575 (2000). In Morillion, the employer required employees to travel to work on employer-provided buses, and the employees had no option to drive themselves.  There, the court held that employer’s work rules “prohibited employees from using their own transportation to get to and from the fields” where they worked, and therefore this time was considered work time and the employees had to be paid.  The court in Taco Bell also noted however that the Morillion court made it clear that if the employer provided optional transportation that the employee was not required to use, the travel time would not need to be compensated.  The court in Taco Bell explained that this scenario is more similar to Taco Bell’s voluntary discount meal program.

4. Employers must relieve employees of all duty during breaks

The court in Taco Bell did note that “an employer may so burden the use of employee’s break time that the employees must be considered ‘on duty.’”  The court explained:

In Augustus, the employees were required to carry a device so that the employer could reach the employee during the break if services were needed. Augustus, 211 Cal.Rptr.3d 634, 385 P.3d at 832. The California Supreme Court said that such an arrangement was “irreconcilable with employees’ retention of freedom to use rest periods for their own purposes.” Id. In Madera, the employees were not only on call, but were forbidden to conduct any personal business. See Madera, 204 Cal.Rptr. 422, 682 P.2d at 1089.

5. Remember to record meal breaks

Although not an issue in the case, the Wage Orders require that meal breaks taken by the employees must be recorded by the employer. See Wage Order No. 5 (7)(A)(3) (“Meal periods, split shifts intervals and total daily hours worked shall also be recorded.”).  The California Supreme Court held in Brinker Restaurant Corp. v. Superior Court that, “[i]f an employer’s records show no meal period for a given shift over five hours, a rebuttable presumption arises that the employee was not relieved of duty and no meal period was provided.”  Brinker Restaurant Corp. v. Superior Court, 53 Cal.4th 1004, 1053 (2012).

However, there is no similar requirement for employers to record 10-mintute rest breaks.

For more information about meal and rest breaks, see my prior article here.