2020 opens with numerous legal challenges to California’s new employment laws taking effect on January 1, 2020.  The new laws targeted by business groups are AB 5, which makes it more difficult for businesses to classify workers as independent contractors, and AB 51, which prohibits employers from requiring mandatory arbitration agreements with employees.  If this week is any indication about how 2020 will unfold on the employment legal front, it will be an interesting year.  Here are five key issues employers should understand about these legal challenges to AB 5 and AB 51:

1. Overview of AB 5 and AB 51

AB 5, which codifies the California Supreme Court’s ABC test for independent contractors as set forth in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018), was signed into law by Governor Newsom on September 18, 2019 and will become effective on January 1, 2020. The California Supreme Court ruled in Dynamex that in order for a worker to be properly classified as an independent contractor, the company must establish that the worker meets the ABC test:

  • Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
  • Part B: Does the worker perform work that is outside the usual course of the hiring entity’s business?
  • Part C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

AB 51, signed by the Governor in October, makes it an unlawful employment practice for an employer to require employees or applicants to “waive any right, forum, or procedure for a violation of” the California Fair Employment and Housing Act (FEHA) or the Labor Code, therefore prohibiting employers from requiring mandatory arbitration agreements from employees.

2. AB 5 challenge by Uber and Postmates

Uber and Postmates filed a lawsuit in the Central District of California challenging AB 5 as “irrational and unconstitutional.”  Uber, Postmates, and two drivers, allege in the lawsuit that AB 5 violates the Equal Protection and Due Process Clauses.  The lawsuit was filed on December 30, 2019.

App-based driving companies have also started the process of obtaining support for an initiative that would create an exemption for rideshare and delivery drivers from AB 5.

3. AB 5 challenge by freelance journalists

The American Society of Journalists and Authors Inc. and National Press Photographers Association have filed suit on behalf of freelance journalists challenging AB 5 arguing it violates the First Amendment.  The suit alleges that because AB 5 only permits freelance journalists to write 35 articles a year for the same publication, and if they write 36 articles or more, they become an employee, it violates the journalists’ First Amendment rights.  The suit also argues that AB 5 is unfair in that it grants exemptions for other professions from the law while targeting freelance journalists.  The lawsuit is American Society of Journalists and Authors Inc. et al. v. Becerra.

4. AB 5 challenge by the California Trucking Association

On December 24, 2019, the California Trucking Association (CTA) filed a motion for temporary restraining order prohibiting the enforcement of AB 5 against any motor carrier operating in California.  On December 31, 2019, Judge Roger T. Benitez of the U.S. Southern District Court of California granted the temporary restraining order, until the matter is heard on January 13, 2020.  Judge Benitez wrote that the CTA “have shown that AB-5’s Prong B is likely preempted by the [Federal Aviation Administration Authorization Act] because AB-5 effectively mandates that motor carriers treat owner-operators as employees, rather than as the independent contractors that they are.  In other words, because contrary to Prong B, drivers perform work within “the usual course of the [motor carrier] hiring entity’s business,” drivers will never be considered independent contractors under California law.”

5. AB 51 challenged in court by U.S. Chamber of Commerce

As previously written about here, on December 30, 2019, District Judge Kimberly J. Mueller of the Eastern District of California issued a temporary restraining order barring enforcement of AB 51.  The hearing for the preliminary injunction motion is set for January 10, 2020.

Happy New Year!

By Michael Thompson

Just two days before it was slated to take effect, California’s controversial new law on mandatory arbitration agreements is in legal limbo. AB 51, signed by the Governor in October, would make it an unlawful employment practice for an employer to require employees or applicants to “waive any right, forum, or procedure for a violation of” the California Fair Employment and Housing Act (FEHA) or the Labor Code. In other words, employers could no longer force employees to sign arbitration agreements. (Arbitration agreements entered into prior to the New Year are not affected by AB 51.)

But on Monday, December 30, 2019, District Judge Kimberly J. Mueller of the Eastern District of California issued a temporary restraining order barring California’s Attorney General, Labor Commissioner, and other relevant officials from enforcing AB 51. The court found that a collection of business groups led by the U.S. Chamber of Commerce “have raised serious questions regarding whether the challenged statute is preempted by the Federal Arbitration Act as construed by the United States Supreme Court.”

Unless an appellate court intervenes, the TRO will remain in place while Judge Mueller considers a request by the plaintiffs for a preliminary injunction. The court set a January 10, 2020, hearing date on the preliminary injunction motion.

Ultimately, we can expect the parties to continue this fight all the way to the United States Supreme Court. This will be the latest chapter in a years-long tug-of-war over the use of arbitration agreements by employers in California.  Various California courts and legislators have sought to restrict employer efforts to remove employment claims from court to private arbitration. The US Supreme Court, meanwhile, has struck down various restrictions on arbitration agreements as being inconsistent with the favorable view of arbitration expressed by the Federal Arbitration Act.

So what do employers do in the meantime? Can you mandate arbitration agreements until further notice?

Even with California officials currently barred from enforcing AB 51, there is some potential risk to employers if AB 51 ultimately survives this court challenge. This is because AB 51 gives an employee a private right of action against an employer who forces the employee to sign an arbitration agreement or retaliates against the employee for refusing to do so. Employers who wish to implement or maintain mandatory arbitration policies should consult counsel and track developments in this litigation through the district court, the Ninth Circuit, and the US Supreme Court.

Alternatively, voluntary arbitration agreements will remain legal regardless of AB 51’s fate. Because plaintiff attorneys frequently challenge arbitration agreements on various fairness grounds, voluntary arbitration agreements have the added benefit of being easier for employers to enforce in court.

Stay tuned.

This Friday’s five article covers five reminders about the California minimum wage increase and its impact upon exempt employees:

1. As of January 1, 2020, the minimum wage in California increased from $12.00 per hour to $13.00 per hour for employers with 26 or more employees (the increase is from $11.00 per hour to $12.00 per hour for employers with 25 or fewer employees on January 1, 2020).

2. With the increase in the state minimum wage, there is a corresponding raise in the minimum salary required to qualify as exempt under the “white collar” exemptions. 

Therefore, on January 1, 2020, in order to qualify for a white collar exemption, the employee must receive an annual salary of at least $54,080 for large employers and $49,920 for small employers.

3. The salary for exempt employees must be a guaranteed, fixed amount.

4. To qualify as an exempt employee, the employee must perform more than 50% of their time performing exempt duties.

More information about the types of duties that qualify for the white collar exemptions can be read here.

5. Employers bear the burden of proof when establishing that an employee qualifies as an exempt employee.

Happy holidays!  As the year comes to an end, I wanted to share five of the most popular articles, podcasts, and videos we created in 2019.  I hope followers found our content helpful in 2019, and, as always, if you have any suggestions for topics or areas to discuss in 2020, please let us know.  Here is the five most popular articles, podcasts, and videos from 2019:

1. Article: Salary increases required for exempt employees in 2019

To qualify as an exempt employee, California requires that an employee must be “primarily engaged in the duties that meet the test of the exemption” and “earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” Labor Code section 515.  As of January 1, 2019, the minimum wage in California increased from $11.00 to $12.00 per hour for employers with 26 or more employees (the increase is from $10.50 per hour to $11.00 per hour for employers with 25 or fewer employees on January 1, 2019).  With the increase in the state minimum wage, there is a corresponding raise in the minimum salary required to qualify as exempt under the “white collar” exemptions.

2. Podcast interview with Andrea Borgen

In this podcast I had a discussion with Andrea Borgen, owner of Barcito, an all-day cafe and late-night bar in downtown Los Angeles. It was a fascinating discussion of various topics including legal updates for California employers and how to manage your own business.

3. Podcast: 5 Key Issues for Terminations in California

Not surprising that California employers are always interested in learning more on how to conduct a termination in a way that reduces potential liability.

4. Video: Bill AB 5 Passed: How will it impact independent contractors in California?

AB 5 is changing the landscape of work in California.  It will be interesting to see how industries and the gig economy adapt or if challenges to the law will be successful over the coming year.

5. Video: Top Employment Issues Facing the Hospitality Industry

The hospitality industry is facing many obstacles. Issues such as minimum wage, predictive scheduling mandates, paid sick leave requirements, joint employer issues, and employee required training increase the costs of operations.  Many restaurants are looking to automation to help minimize some of the costs.

Wishing you the best over the holidays!

I’ve been thinking a lot recently about whether entrepreneurs are born or if they are made over time.  I enjoy working with entrepreneurs; I love their spirit, drive, and persistence, even when the odds are stacked against them.  The perennial question will likely be debated for many years to come, but here are five qualities that I believe make a successful entrepreneur/business founder:

1. They don’t do it for the status.

A restaurant client of mine opened a new restaurant a few years ago and invited friends and family to the soft opening.  You would think that this would be a great time for the operator to celebrate his success and meet with the people attending the event, right?  He was one of the first people I saw walking up to the restaurant because he was in the parking lot picking up trash.  I’ve changed this story a bit to protect the identity of my client – but the essence is true – this successful entrepreneur was picking up garbage to ensure customers had a great first experience.

If an entrepreneur is doing it for the status, they will not do the dirty work, put in the long hours, or have the push that is required to have a chance at success.  Entrepreneurs understand they must do everything in their company – even pick up trash during the launch.

2. They can rely upon and follow their own instinct.

There are many different stats on the failure rate of startups – but the often cited percentage is that 90% fail.  Also, only 25% of small businesses will employ more than just the founder.  Entrepreneurs are confident in their own decisions and have the fortitude to be held accountable for their decisions.  It is a difficult lifestyle (often not discussed, but getting more attention recently) that can be very lonely.  In the likely event that the startup fails, the entrepreneur must be comfortable with the contacts, friends and family members who will criticize the entrepreneur’s attempt as being foolish.  But if the company succeeds, these same critics will be the first ones who would say that they always knew the entrepreneur “had it in them.”  Entrepreneurs don’t internalize the shame or the accolades, and they continue on following their own instincts.

3. They select great teams to rely upon.

Entrepreneurs have a great EQ and cultivate the people around them and on their team.  At first, when the company cannot afford other employees and executives, it is critical that they have friends and family that they can trust to receive honest feedback.  As the company grows, these positions are filled with other executives selected by the entrepreneur.  As Gary Vaynerchuk points out, “The higher you climb and the more the business grows, the stakes become a lot bigger. More and more people are depending on you to make the right decisions for them and the company. The league you’re playing in and the skill set required jumps from pickup ball to NBA very quickly.”  It is critical that the entrepreneur has skilled teammates.

4. They are comfortable with uncertainty.

One trait that I believe is essential for an entrepreneurs is the ability to be comfortable with uncertainty.  It may even extend beyond uncertainty, to include the ability to be comfortable with risk.  A lot of people who claim they are a start-up founder say they like the risk, but let’s face it, once there is a major setback or the company fails, most people go get another job.

5. They are realistic, but don’t let the status quo set their reality.

Yes, there are many obstacles facing the entrepreneur, and yes, no one has done this before, but the entrepreneur sees potential opportunities where others have not.  This takes a very refined skill of understanding reality, while also being opportunistic, just enough to see something that others have not seen before.  For Bill Gates and Paul Allen, this was the insight that PC’s would become a fixture in every business and house, when the companies that dominated the field, such as IBM, were certain that mainframe computers were the future.  For Jeff Bezos, it was the insight that he could take an on-line book sales company to become a company that could sell everything to everyone.

Are these qualities in a person’s DNA or are they learned over time?  I believe it is a bit of both – some natural tendencies in combination with hard work that can ultimately lead to a successful business.

Article by: Michael Thompson

On the Tuesday before Thanksgiving, a Los Angeles jury hit billionaire Alki David and two of his media companies, FilmOn and Alki David Productions, with an $8.25 million verdict on claims of battery, sexual battery, and sexual harassment brought by Mahim Khan, a former employee. After turkey and stuffing, the jury returned the next Monday, deliberated for one hour, and awarded Khan $50 million in punitive damages against David.

The case featured lurid allegations and was punctuated by shocking courtroom antics from David, but there are lessons that employers big and small can learn and apply to manage risk and address sexual harassment claims.

1. Get a Lawyer

David chose to act as his own lawyer at trial. But after he made numerous procedural missteps on the first day of trial, the court revoked his right to act as his own attorney. He never retained an attorney, and thus was unrepresented (and frequently absent) through most of the trial.

Now, most people would know to get a lawyer long before trial, but you don’t have to wait until you are served with a court summons to call up your employment counsel. Pre-litigation legal advice can help you make informed, strategic decisions that have enormous implications in court. A great trial lawyer may be able to explain away a problematic email to the jury, but an experienced attorney can make recommendations that may keep you out of the courtroom altogether.

So don’t hesitate to calling your lawyer when you receive that threatening demand letter. Or when the employee requests a copy of her personnel file. Or when you are thinking about terminating an employee who previously made a complaint to HR. Or when you get that note about something that happened at the company holiday party.

2. Individuals Can Be Personally Liable For Harassment

Take note that David was held personally liable for the $50 million punitive damages verdict, in addition to being jointly liable with his companies for the $8.25 compensatory award. In California, supervisors and coworkers can be held personally liable for harassment that they perpetrate. And while your employer may pay for your defense, any damages awarded against you are likely not insurable.

3. Consider the Stakes

The chances you will ever face a multi-million dollar verdict are (hopefully) remote. But that hefty price tag can obscure the very real costs and liability any employer could face. Many claims that employees bring, including sexual harassment under California’s Fair Employment and Housing Act, entitle prevailing employees (but frequently not prevailing employers) to recover attorney’s fees and court costs. Thus, you can expect the final judgment against David to be even higher than $58.25 million.

Beyond that, an employer has to retain attorneys to defend the lawsuit. Although certain insurance policies, such as EPLI, may cover the cost of defense, these policies frequently require the insured to cover some amount as a retention or deductible. Moreover, insurers consider past claims when determining the insurance premium to charge.

The point? An ounce of prevention is worth a pound of cure. Invest in your business by getting your employees trained on sexual harassment and other issues. (California law already requires most employers to provide two hours of sexual harassment training to supervisors and one hour to non-supervisors.) Develop written policies that inform your employees of expected standards of behavior and how they can report violations of those standards. Take complaints seriously and make sure they are timely investigated by someone (whether internally or externally) experienced and knowledgeable in conducting workplace investigations.

These steps may feel today like distractions and costs that are not tied to growing your business, but consider the $58.25 million-plus cost of not doing those things.

4. Harassment Can’t Be a Feature of Your Business

David’s companies produce extreme and graphic content, and the defendants argued that anyone who worked in the office had to expect an environment consistent with this product. David admitted to many antics, such as walking naked around the office, but attributed it to legitimate business interests of creativity. Do we think the jury bought that?

Again, this was an extreme case, but don’t assume that a jury will share your worldview on pranks and jokes in the workplace.

5. Give Mature Thought to Settlement

Trial can be unpredictable. Jury trials even more so. This was David’s fourth such trial this year. He suffered defeats of $5 million and $11 million in previous trials, but nearly won another trial where a jury reportedly split 8-4 in his favor. (A fifth trial and a retrial of that hung jury await.)  No two claims are exactly the same, but $0, $5 million, $11 million, and $58.25 million represents a wide range of outcomes.

David maintains his innocence, has vowed to continue fighting, and insists that he will never pay a penny of these verdicts. As a billionaire, he can likely afford to take that defiant stand, including appellate fees and the 10% interest that is likely to run on each judgment pending appeal.

Can your business afford that? We don’t know what amounts these plaintiffs demanded to settle with David, but employers are frequently faced with the prospect of paying way more than seems fair to settle claims, even seemingly frivolous claims. And sometimes settlement just isn’t possible because what the plaintiff wants is simply far beyond what is reasonable or possible.

But settlement represents a management of risk and cost. And those costs include time and attention. Khan sued David in March 2017. Even if an employer hires outside counsel, a lawsuit demands time and attention to respond to discovery requests, sit for depositions, and attend trial. Keep those costs in mind before you reject the prospect of early resolution.

6. Consider Arbitration

Khan v. David played out publicly in court and was covered daily by various publications. There was extensive coverage of the allegations and David’s various outbursts. Not ideal.

Private arbitration could have avoided this publicity. Additionally, many plaintiff’s counsel view juries as more sympathetic and likely to award outsized verdicts than arbitrators, and may value settlement accordingly. Give serious thought to whether arbitration agreements with your employees makes sense for your business.

Of course, you will want to talk with employment counsel about the downsides of arbitration, including the increased costs borne by the employer. And don’t forget the various changes to California law regarding arbitration coming into effect in 2020.

As 2019 comes to an end, it is a great time to audit employment policies and practices.  The next series of posts will be a review of a few practices California employers should review on a periodic basis.  Obviously, it is important to work with a qualified attorney to ensure compliance, but I wanted to highlight a few issues on these topics that employers can use to start a self-audit that then can be used to save time and money when reviewing with an attorney.

Five areas to audit regarding the hiring process in California:

1. Are applications seeking appropriate information?

2. Are new hires provided with required policies and notices?

3.  Are new hires provided and acknowledge recommended policies?

  • For example, many employers implement meal period waivers for shifts less than six hours.

4. Are hiring managers trained about the correct questions to ask during the interview?

5. Does the company provide new hires (and existing employees) with arbitration agreements?

  • California employers should review with an attorney if implementing arbitration agreements in their workforce given the U.S. Supreme Court’s ruling in May of 2018 upholding the use of arbitration agreements in the employment context.  My prior article on the U.S. Supreme Court’s ruling in Epic Systems Corp. v. Lewis is here.
  • For employers that have an arbitration agreement in place, the agreement needs to be updated to comply with AB 51 by January 1, 2020.  AB 51 prohibits employers from requiring any applicant for employment or any employee to waive any right, forum, or procedure under the California Fair Employment and Housing Act (FEHA) or the Labor Code as a condition of employment, continued employment, or the receipt of any employment-related benefit. AB 51 is California’s renewed attempt to outlaw the practice of employers requiring employees to submit to binding arbitration. Whether AB 51 is preempted by the Federal Arbitration Act is something to be monitored closely.

Happy Thanksgiving!  I hope everyone is getting some time to relax and enjoy some time with their families (and eat some great food).  Entering the holiday season, it is a good time to review employer’s obligations to accommodate requests for time off for holidays and best pay practices during holiday leaves.  This Friday’s Five covers five reminders for employers about holiday leaves and pay:

1. California employers are not required to provide employees time off for holidays.

There is no requirement that California employers provide time off (except for religious accommodations – see below) for holidays. California’s DLSE’s website states the following:

Hours worked on holidays, Saturdays, and Sundays are treated like hours worked on any other day of the week. California law does not require that an employer provide its employees with paid holidays, that it close its business on any holiday, or that employees be given the day off for any particular holiday.

2. California employers are not required to pay for time off for holidays, nor are they required to pay additional wages if employees work on holidays.

Likewise, there is no requirement that employers pay employees extra pay or “holiday pay” for work performed on holidays. Employers can voluntarily agree to pay employees extra pay for work that is required during holidays, but these terms would be governed by policy set forth by the employer. Therefore, employers are urged to make sure their holiday pay policies are clearly set forth.

California’s legislature has proposed bills that would require certain employers to pay employees double time for work done on Thanksgiving, but none of these bills have become law.  For example, the “Double Pay on the Holiday Act of 2016” proposed to require an employer to pay at least 2 times the regular rate of pay to employees at retail and grocery store establishments on Thanksgiving. None of these attempts by the legislature have been successful yet in requiring California employers to pay any extra “holiday pay.”

3. Employers must provide reasonable accommodations for employees who cannot work on certain holidays due to religious observances.

Employers need to be aware of any religious observances of their employees since employers need to provide reasonable accommodations for employees due to religious reasons. The analysis of reasonable accommodation is required is a case by case analysis based on the company’s type of business and the accommodation requested by the employee. If the employer’s operations require employees to work during normally recognized holidays, such as a restaurant, then this should be communicated to employees in the handbook or other policies and set the expectation that an essential function of the job requires work during normal holidays.

4. If an employer does pay for time off during holidays, the employer does not have to allow employees to accrue holiday paid time off.

If an employee leaves employment before the holiday arrives, the employer is not required to pay the employee for the day off.  But the employer’s policy regarding holiday pay must clearly set out that this benefit does not accrue to employees and that they must be employed during the specific holidays to receive the holiday pay.  Often the employer will also require that the employee works the days leading up to and following the holiday in order be eligible for the holiday pay.

5. If a pay day falls on certain holidays, and the employer is closed, the employer may process payroll on the next business day.

If an employer is closed on holidays listed in the California Government Code, then the employer may pay wages on the next business day.  The DLSE’s website explains this, and other considerations, for the timing requirements for payroll.

In O’Grady v. Merchant Exchange Productions, Inc., the California Court of Appeals held that a mandatory service charge could potentially be found to be a gratuity that must be distributed to service employees.  The issue in the case is whether a “service charge” can be a “gratuity” that Labor Code section 351 requires to be distributed, only to non-managerial employees actually serving customers.

Plaintiff, Lauren O’Grady, is a banquet server and bartender at the Julia Morgan Ballroom in San Francisco, which is operated by defendant Merchant Exchange Productions.  Plaintiff brought this class action alleging that her and the other non-managerial service employees were entitled to the 21 percent “service charge” added to every banquet bill.  Plaintiff alleged that the service charge constituted a gratuity that should be distributed to the non-managerial service employees pursuant to section 351.

The complaint alleged that the way the service charge was presented to customers “ was reasonable for [the customers] to have believed they were gratuities to be paid to the service staff.  Indeed, because of the way these charges are depicted to customers, and the custom in the food and beverage industry that gratuities in the range of 18-22% are paid for food and beverage service, customers have paid these charges reasonably believing they were to be remitted to the service staff.”  Plaintiff alleged causes of action under the Unfair Competition Law (Business & Professions Code Section 17200), intentional interference with advantageous relations, breach of implied contract, and unjust enrichment.

1. Labor Code section 350 and 351 protects gratuities as property of the employee.

The court explained that tips are protected under California law, and “[t]he Legislature wanted to protect employees from employers who used their positions to unfairly command a share of the employee’s tip.”  (Chau v. Starbucks Corp., 174 Cal.App.4th 692, 696, 699 [“section 351 was enacted to prevent an employer from pressuring an employee to give the employer tips left for the employee.”].)  Section 350 defines “gratuity” to “include any tip, gratuity, money or part thereof that has been paid or given to or left to an employee by a patron of a business over and above the actual amount due the business for services rendered or for goods, food, drink, or articles sold or served to the patron.”

Section 351 provides that “No employer or agent shall collect, take or receive any gratuity or part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as part of the wages due the employee from the employer.”

2. The Court held that the term “service charge” can have different meanings.

The court also explained that the term “service charge” can have many different meanings, and “simply calling something a ‘service charge’ hardly ever explains what it is – or why it is being imposed.”  Therefore, the court held that at the early stage in this case, plaintiff had at least plead enough facts and a potential theory for recovery to continue with the lawsuit and avoid having it dismissed at this stage.

3. Prior holdings in Searle v. Wyndham International and Garcia v. Four Points Sheraton LAX.

Defendant argued that two cases, Searle v. Wyndham Internat. (2002) 102 Cal.App.4th 1327 and Garcia v. Four Points Sheraton LAX (2010) 188 Cal.App.4th 364, established a mandatory service charge which is automatically added to a customer’s bill and which a customer is required to pay is not a gratuity as a matter of law.

In Searle, a San Diego hotel charged a 17 percent service charge to every room service order, which was given to the server.  A customer sued complaining that the charge was deceptive because the guests were not informed that this service charge was given to the employee, and there was an additional line of the receipt for a tip.  The court in Searle held that this was not a deceptive practice.  Garcia involved a city ordinance for hotels near LAX “that in plain effect directed certain hotels to treat their mandatory service charges as owed ‘to workers who render the services for which the charges have been collected.’”  (Garcia, supra, 188 Cal.App.4th 364, 370.)  Both of these cases contain language that because service charges are mandatory, the employer can do what it wants to with the service charge.  Indeed, Garcia also clearly sets forth that “[a] gratuity is not a service charge…Thus, a service charge by definition is not a gratuity.  The Legislature has made clear that amounts due for services (which include service charges) are not gratuities.”  (Garcia, 188 Cal.App.4th 364, 377.)

4. The Court distinguished Searle and Garcia from the facts in this case.

In this case, the court distinguished the Searle and Garcia cases in finding that “[n]either Searle nor Garcia involved what we have here—an employee who alleges that what the ballroom customer meant for employees to have is being kept by the employer.”  The court ultimately held that “[n]either, or both together, should be read, as defendant does, as categorially establishing that what may be called a ‘service charge’ by an employer can never be a gratuity.”

The Court noted that in addition to private agreements (as was the case in Searle) or by legislative command (as in Garcia), plaintiff here is alleging that custom in the hospitality industry is to treat amounts designated as “service charges” as gratuities for employee.  The court stated, “In other words, custom or usage can serve as a common law augmentation of section 350 and 351.”

The court held that plaintiff’s theory that a mandatory service charge could potentially be considered a gratuity by the customer, and therefore property of the server, not the employer, could proceed given the uncertainty of what is meant when a customer pays a “service charge.”

5. California employers should clearly notify customers and employees about mandatory service charges.

Based on the holding in O’Grady, California employers should review their descriptions of mandatory service charges, and if the employer wishes to retain these amounts and does not distribute them to the service employees, this must be made clear to the customers and employees.  This can be done through various notices (such as on contracts with customers, menus, and receipts) that the mandatory service charge is not a gratuity or a tip that the server receives, but it is an amount retained by the company.

Being named as a defendant in a class action or Private Attorneys General Act (PAGA) lawsuit can be overwhelming, especially for a growing company. However, with planning, a company can minimize the impact of litigation on its existing operations and put forth the best defense. Here are five steps a company can take as part of this planning process, upon being notified of an existing lawsuit.

1. Contact employment counsel.
A lawyer who has experience in employment law and class actions should be contacted as soon as possible. There are certain deadlines that begin to run when a lawsuit is filed, and any delay could adversely affect the company’s defense. If the company does not know of an employment lawyer, a good start is to reach out to trusted advisors for recommendations, such as the company’s corporate lawyer or accountant. Wage and hour litigation, especially in California, is very unique, and it is recommended that the company utilize a lawyer that has experience in this area.

2. Obtain arbitration agreement (if any) signed by plaintiff, and plaintiff’s personnel file and time records.
If the company has implemented an arbitration agreement, it will be important to determine if the plaintiff has signed it, and if it bars the plaintiff from bringing a class and representative action. If there is a binding arbitration agreement in place, a motion to compel arbitration will likely be one of the first motions filed with the court.

In addition, the personnel file for the named plaintiff will need to be produced at some point in the case, and it should be provided to counsel as soon as possible.  Also, the information in the personnel file will document any performance issues or other possible defenses the company has against the plaintiff’s allegations.

3. Review allegations with counsel to see if the safe harbor provision of the Private Attorney General Act (PAGA) could apply.
With the advice of counsel, there should be a review of both the allegations in the complaint, and if the plaintiff is seeking damages under PAGA, also the PAGA notice sent to the Labor Workforce & Development Agency (“LWDA”). PAGA provides the employer a short window of time (33 days from receiving the PAGA notice) to “cure” any alleged violations. If the employer cures the problems within the time period, the plaintiff cannot recover penalties under PAGA. Whether or not any items need to be cured, and the process for utilizing this safe harbor, should be reviewed closely with counsel.

4. Begin constructing a list of all employees who have worked in similar positions as the plaintiff during the last four years (which is likely the statute of limitations).
In California, the statute of limitations for most wage and hour class actions is four years from the date the complaint is filed. Therefore, the employees who have worked in the same or similar positions as the plaintiff will likely be the group of employees the plaintiff is seeking to represent in the class action. It is important to know how many of these employees there are. For example, if there are too few this could be a defense to class certification.

5. Gather employee handbooks and policies that were in effect during the last four years.
The litigation will likely revolve around what policies the company had in place, and whether the policies were legally compliant. The company’s counsel will have to review these policies and handbooks.