The new decision in Beaumont-Jacques v. Farmers Group examines the test in determining a worker’s independent contractor status. In applying the “economic realities” test set forth by the California Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations, the Court focused on whether the worker had “meaningful discretion with reference to her efforts” in making the determination about whether her classification as an independent contractor was proper.

Case Facts
In this case, Plaintiff had an agreement with the company that set forth both parties understood and agreed Plaintiff would be working as an independent contractor. The agreement required Plaintiff to conform to the company’s regulations, operations, and certain standards. The agreement provided that either party could terminate the relationship at-will. Moreover, Plaintiff had “meaningful discretion” by recruiting agents and training them to work for the company. She would determine her own hours, vacation schedule, supervising her own staff, remitting payroll taxes for her own staff, paying her own expenses such as office lease, marketing costs and telephones. She also deducted these costs as a business expense in her personal tax returns and identified herself as self-employed in the returns.

Court’s Analysis
The court stated that the “pivotal inquiry looks at the ‘control of details’ – i.e., whether the [company] has ‘the right to control the manner and means of accomplishing the result desired.” As the court noted, however, this does not mean that once the company requires certain standards from the worker that this would automatically make the worker an employee:

The California Supreme Court has declared that “the owner may retain a broad general power of supervision and control as to the results of the work so as to insure satisfactory performance of the independent contract—including the right to inspect [citation], the right to make suggestions or recommendations as to details of the work [citation], the right to prescribe alterations or deviations in the work [citation]—without changing the relationship from that of owner and independent contractor . . . .” (McDonald v. Shell Oil Co. (1955) 44 Cal.2d 785, 790 (McDonald).)

The court explained that the key issue is that the company has the right to “oversee the results, but not the mean, of the work in question” in order for the independent contractor status to be upheld.

Applying this test in this case, the court held that Plaintiff was properly classified as an independent contractor because the Defendant did not control “to any meaningful degree the means by which [Plaintiff] performed and accomplished her duties” even though Plaintiff had to attend meeting with the company and was held accountable to reach very specific objectives. Finally, the court held that the fact that the agreement at issue here which allowed both parties to terminate the relationship upon 30-days’ notice did not support Plaintiff’s assertion she was an employee. Because the relationship could be terminated by either Plaintiff or the company, the court did not provide this issue any weight.

However, even though the court found that the Plaintiff in this case was properly classified as an independent contractor, employers should be careful in making independent contractor classifications. The relatively new Labor Code provisions adopted in 2012 added new penalties for “willful misclassification” of employees as independent contractors which cannot be treated lightly.

The Private Attorneys General Act (PAGA) is a Labor Code provision that permits aggrieved employees to recover civil penalties that are only recoverable by the California Labor and Workforce Development Agency (LWDA) and the Labor Commissioner. PAGA expands the scope of penalties available through wage and hour lawsuits.  PAGA is sometimes referred to as the “bounty-hunter law” because it allows a plaintiff to recover these civil penalties that were only recoverable by the Labor Commissioner, but it requires that the plaintiff provide 75% of the civil penalties recovered to the LWDA and the remaining 25% to the aggrieved employees.

However, as a result of frivolous lawsuits under PAGA, the legislature amended the law in 2004 to require plaintiffs to exhaust administrative remedies prior to commencement of a civil action under PAGA. Therefore, in order to exhaust the administrative remedies, a plaintiff must send a letter via certified mail to the LWDA and the employer listing the specific Labor Code violations, including the facts and theories to support the alleged violations. Then the LWDA may then send a letter back to the plaintiff informing them that it will or will not be pursuing the case. If the LWDA responds that it will not pursue the case, or simply does not respond within 30 days, the plaintiff may then proceed with a civil lawsuit to collect PAGA penalties.

Because the plaintiff must send this notice to the LWDA and the employer, the employer receives some advance notice about a potential lawsuit. And if the notice is properly drafted by the plaintiff, the employer should be able to understand the plaintiff’s legal theories and alleged violations. It is also important the employer contact employment counsel as soon as receiving a PAGA letter to the LWDA. This is because the employer has a short time period (33 days) to “cure” any alleged violations. The employer can correct any alleged violations, and provide written notice to the plaintiff and the LWDA describing the actions taken and that the plaintiff cannot recover PAGA penalties. It is critical that the employer review whether or not it should utilize this safe harbor cure provision to prevent plaintiff from recovering PAGA penalties with counsel. Quick action by the employer could preclude plaintiffs from being able to recover PAGA penalties before the lawsuit even begins.

Being named as a defendant in a class action lawsuit can be overwhelming, especially for a quickly growing company. However, with planning, a company can minimize the impact of the litigation on its existing operations and put forth the best defense. Here are seven items a company can do as part of this planning process when it is first 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. 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 the allegations in the complaint, and if the Plaintiff is seeking damages under PAGA, 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.

3. Gather time records and personnel files for the Plaintiff.
The personnel file for the named Plaintiff will have to be produced early in the case. In addition, the information in the personnel file will (hopefully) document any performance issues or other possible defenses the company has to the Plaintiff’s allegations. Also, if the company has implemented an arbitration agreement, it will be important to determine if the Plaintiff has signed it and whether or not there is an argument that in signing the agreement the Plaintiff cannot bring a class action.

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. It is also likely that the company will have to produce these early in the litigation as well.

6. Review any applicable insurance policies.
The company should review all insurance policies it has to see if any of them could potentially cover the litigation. Most employment practices liability insurance (“EPLI”) policies exclude class action lawsuits from coverage, but there may be coverage for defense costs, or there may be something unique about the litigation facing the company that triggers coverage. It is also important to assess whether the lawsuit needs to be tendered to the insurance company.

7. Develop a plan about how to communicate the existence of the class action with current employees.
Word usually starts to spread quickly among the employees about the existence of the lawsuit. The company, with advice from counsel, should determine whether it wants to be proactive about communicating with the employees about the lawsuit, as well as what can and cannot be said to employees. At the minimum, a person within the company should be designated to handle any questions about the lawsuit. This will ensure a consistent message is used.

Who was the first person to recognize Steve Jobs’ potential and offer him a job? It was Nolan Bushnell. By the way, Bushnell is also the founder of Atari, co-inventor of the video game Pong, founder of Chuck E. Cheese, and is a serial entrepreneur. Given Bushnell’s track record in business, and having the badge of honor of the first person to hire Steve Jobs is more than enough evidence that managers, CEO’s, and human resources personnel should listen to his thoughts on hiring.

Bushnell’s recently published book, Finding the Next Steve Jobs, sets forth what he refers to as “pongs”, or general flexible rules managers should abide by in order to find, hire, and retain the best and most creative employees. I starting reading the book after I was fortunate enough to meet Nolan at Paul Allen’s Living Computer Museum opening in April [see picture – from left to right: Chris Espinosa (Apple’s 8th employee), Nolan Bushnell, Bob Frankston (co-creator of VisiCalc), Robert Zaller (co-founder of MITS and co-inventor of the Altair), me, and Eric Zaller]. Bushnell makes some excellent points in regards to finding and hiring the best and most creative employees and provides some examples on how to interview applicants to see their true personalities. The following are a few points Bushnell discusses in the book, and a very good reminder to anyone involved in the hiring process.

Creative employees are arrogant.
Only the arrogant have the strength to push for their ideas. They will continue to push their ideas far past the point any other individual would have relinquished to the pressure to give in or to conform to the “norm.” Arrogance does have its place, it is the vehicle creatives use when their solutions do not match anyone else’s views, which must be the case by definition of being creative. I’ve written before that arrogance can buy a company a lot of lawsuits, especially if a manager or the CEO is arrogant. An arrogant employee cannot create the same level of liability for a company, but they still must proactively be handled and discussed with other the other members of the team. On the other hand, managers and a CEO must be able to manage their arrogance in order to avoid looking like a bully, buying the company a lot of litigation.

Hire creative people and find a position for them. Don’t hire for a position.
Bushnell advocates the idea that a company can find great employees through everyday interactions with people. The truly creative and passionate people will standout, it does not matter what job they are doing, their skills will carry over to their work in any job.

Ignore the applicant’s resume during the interview.
Bushnell also provides some great examples of how to conduct an interview to determine if the applicant is a good fit for the company. He recommends asking applicants about their top ten favorite books, listening to how they describe their life (“The passionless tend to be blamers.”), and asking applicants questions that have no right answers. This allows the interviewer to see how the applicant analyzes a problem.

Finding the Next Steve Jobs is a great resource for anyone in the human resources profession, and for anyone who has the responsibility of finding great employees for their company.

Employees of AirTouch who worked for the cellular provider filed a putative class action alleging that the AirTouch employees were entitled to additional wages under California’s “reporting time pay” requirements. The plaintiffs alleged that they were owed reporting time pay for days on which they were required to attend store meetings, which lasted only a short period of time, but were not scheduled to work after the meetings.

California law requires an employer to pay “reporting time pay” under the applicable Wage Order, which states:

Each workday an employee is required to report for work and does report, but is not put to work or is furnished less than half said employee’s usual or scheduled day’s work, the employee shall be paid for half the usual or scheduled day’s work, but in no event for less than two (2) hours nor more than four (4) hours, at the employee’s regular rate of pay, which shall not be less than the minimum wage.

AirTouch would schedule store meetings that all employees were required to attend.  The meetings were scheduled at least four days in advance and were usually held on a Saturday or Sunday before the stores opened.  The meetings lasted from one hour to an hour and a half. Plaintiffs argued because the employees were required to report for the work meetings, which only lasted one to one and a half hours, and then did not work after the meetings, the employees were entitled to two hours of pay under the reporting time pay requirement. 

In rejecting plaintiffs’ argument that the Wage Orders required employers to always pay employees two hours of work when required to report to work, the court stated the following:

To simplify, the issue may be framed by the following question: If an employee’s only scheduled work for the day is a mandatory meeting of one and a half hours, and the employee works a total of one hour because the meeting ends a half hour early, is the employer required to pay reporting time pay pursuant to subdivision 5(A) of Wage Order 4 in addition to the one hour of wages?

The answer to this question is no, because the employee was furnished work for more than half the scheduled time. The employee would be entitled to receive one hour of wages for the actual time worked, but would not be entitled to receive additional compensation as reporting time pay. Although somewhat lengthy and cumbersome, Wage Order 4’s reporting time pay provision is not ambiguous. There is only one reasonable interpretation of subdivision 5(A) as it pertains to scheduled work—when an employee is scheduled to work, the minimum two-hour pay requirement applies only if the employee is furnished work for less than half the scheduled time.

It is important to note a few critical facts of this case. The employer scheduled the meeting times and provided employees with at least four days’ notice of the scheduled meetings. Also, the employees always worked at least half the duration of each scheduled period for the meetings. The case, Aleman v. AirTouch Cellular can be read here.

Your company has updated its employee handbook, but the work is not over in California. Here are a few reminders of additional steps employers should review after conducting a handbook update and on a periodic basis. Of course this list is not comprehensive, but it comprises of a few items that sometimes take a backseat to the employee handbook update.

1. Ensure wage notice statements are issued and are correct.

Labor Code section 2810.5 requires employers to provide written notice to employees about specific employment items. For example, the law requires that employers provide notice to employees of their rate(s) of pay, designated pay day, the employer’s intent to claim allowances (meal or lodging allowances) as part of the minimum wage, and the basis of wage payment (whether paying by hour, shift, day, week, piece, etc.), including any applicable rates for overtime. The notice must also contain the employer’s "doing business as" names, and that it be provided at the time of hiring and within 7 days of a change if the change is not listed on the employee’s pay stub for the following pay period.  The recommended notice published by the Division of Labor Standards Enforcement can be downloaded here.  Also the DLSE publishes frequently asked questions that address many issues regarding the notice here. 

2. Start Using New Form I-9 By May 7, 2013.

By May 7, 2013, employers will be required to use the new I-9 Form. The new Form I-9 can be downloaded from the U.S. Citizenship and Immigration Services website here. It would be a good time to review the “Handbook for Employers, Guidance for Completing Form I-9” published by the USCIS.

3. Place all commission agreements in writing.

Beginning January 1, 2013, when an employee is paid commissions, the employer must provide a written contract setting forth the method the commissions will be computed and paid. The written agreement must be signed by both the employer and employee. Commission wages are “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” Commissions do not include (1) short-term productivity bonuses, (2) temporary, variable incentive payment that increase, but do not decrease, payment under the written contract, and (3) bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.

4. Conduct pay stub audit.

Under Labor Code 226, employers must keep copies of employees’ itemized pay statements for at least three years, at the site of employment or at a central location within the state of California. The law was amended, and as January 1, 2013 it clarifies that the term “copy” means either a duplicate of the statements provided to employees, or a computer generated record that shows all information required under Labor Code 226. In addition, the law sets a new deadline for employers to either provide a copy or permit the employee to inspect the personnel file within 30 days after the employer receives the request.

5. Ensure all personnel records are maintained properly.

When reviewing which records should be maintained in an employee’s personnel file, it is important to keep in mind why an employer would ever have to produce a personnel file – to support its employment based decisions. Therefore, employers should typically maintain personnel files with the following documents: signed arbitration agreements, sexual harassment compliance records for supervisors, sign acknowledgements of policy by employee (for example, confidentiality/proprietary information agreements, meal and rest break acknowledgments, handbook acknowledgments), Wage Theft Protection Act notice, commission agreements signed by both the employer and employee, warnings and disciplinary action documents, performance reviews, documents of any grievance concerning the employee, documents pertaining to when the employee was hired, records pertaining to last day of work and documenting reason for departure from employment.

An employer is not required to allow employees to use medical marijuana as a reasonable accommodation under California’s Fair Employment Housing Act (FEHA). The California Supreme Court held that it is not a violation of California law for an employer to terminate an employee who tests positive for marijuana, even though the employee was prescribed the marijuana for medical purposes under California’ Compassionate Use Act of 1996.

The case, Ross v. Ragingwire Telecommunications, Inc., addressed the conflict between California’s Compassionate Use Act, (which gives a person who uses marijuana for medical purposes on a physician’s recommendation a defense to certain state criminal charges and permission to possess the drug) and Federal law (which prohibits the drug’s possession, even by medical users). Ragingwire terminated plaintiff’s employment based on a positive test for marijuana even through the plaintiff provided a doctor’s note explaining that he was prescribed marijuana to alleviate back pains.

The Supreme Court explained that the employer’s decision to terminate plaintiff was not illegal:

Nothing in the text or history of the Compassionate Use Act suggests the voters intended the measure to address the respective rights and duties of employers and employees. Under California law, an employer may require preemployment drug tests and take illegal drug use into consideration in making employment decisions. (Loder v. City of Glendale (1997) 14 Cal.4th 846, 882-883.)

Plaintiff’s position might have merit if the Compassionate Use Act gave marijuana the same status as any legal prescription drug. But the act’s effect is not so broad. No state law could completely legalize marijuana for medical purposes because the drug remains illegal under federal law (21 U.S.C. §§ 812, 844(a)), even for medical users (see Gonzales v. Raich, supra, 545 U.S. 1, 26-29; United States v. Oakland Cannabis Buyers’ Cooperative, supra, 532 U.S. 483, 491-495). Instead of attempting the impossible, as we shall explain, California’s voters merely exempted medical users and their primary caregivers from criminal liability under two specifically designated state statutes. Nothing in the text or history of the Compassionate Use Act suggests the voters intended the measure to address the respective rights and obligations of employers and employees.

The Court also provided that a reasonable accommodation, as required under California’s FEHA, does not include an employer’s permission to use illegal drugs:

The FEHA does not require employers to accommodate the use of illegal drugs. The point is perhaps too obvious to have generated appellate litigation, but we recognized it implicitly in Loder v. City of Glendale, supra, 14 Cal.4th 846 (Loder). Among the questions before us in Loder was whether an employer could require prospective employees to undergo testing for illegal drugs and alcohol, and whether the employer could have access to the test results, without violating California’s Confidentiality of Medical Information Act (Civ. Code, § 56 et seq.). We determined that an employer could lawfully do both. In reaching this conclusion, we relied on a regulation adopted under the authority of the FEHA (Cal. Code Regs., tit. 2, § 7294.0, subd. (d); see Gov. Code, § 12935, subd. (a)) that permits an employer to condition an offer of employment on the results of a medical examination. (Loder, at p. 865; see also id. at pp. 861-862.) We held that such an examination may include drug testing and, in so holding, necessarily recognized that employers may deny employment to persons who test positive for illegal drugs. The employer, we explained, was “seeking information that [was] relevant to its hiring decision and that it legitimately may ascertain.” (Id. at p. 883, fn. 15.) We determined the employer’s interest was legitimate “[i]n light of the well-documented problems that are associated with the abuse of drugs and alcohol by employees — increased absenteeism, diminished productivity, greater health costs, increased safety problems and potential liability to third parties, and more frequent turnover . . . .” (Id. at p. 882, fn. omitted.) We also noted that the plaintiff in that case had “cite[d] no authority indicating that an employer may not reject a job applicant if it lawfully discovers that the applicant currently is using illegal drugs or engaging in excessive consumption of alcohol.” (Id. at p. 883, fn. 15.) The employer’s legitimate concern about the use of illegal drugs also led us in Loder to reject the claim that preemployment drug testing violated job applicants’ state constitutional right to privacy. (Id. at pp. 887-898; see Cal. Const., art. I, § 1.)

(footnote omitted).

The plaintiff also alleged a cause of action for wrongful termination in violation of public policy. Generally, at-will employees can terminate or be terminated from their job at any time, but an employer cannot terminate an employee for reasons that violate a fundamental public policy of the state. The Court rejected plaintiff’s position that there was a fundamental public policy that permitted him to use medical marijuana and be under its influence while at work. The Court stated, “Nothing in the [Compassionate Use Act’s] text or history indicates the voters intended to articulate any policy concerning marijuana in the employment context, let alone a fundamental public policy requiring employers to accommodate marijuana use by employees."

A further clarification that medical marijuana use is not protected under disability laws came in 2012 from a Ninth Circuit Court of Appeals that held individuals seeking to stop cities from closing medical marijuana dispensaries under Title II of the ADA were not protected by under the ADA.  The case is James v. City of Costa Mesa, which held that the ADA does not protect against discrimination on the basis of marijuana use, even though permitted under certain circumstances under California law, marijuana use is not authorized by federal law, and therefore is not protected under the ADA. It is therefore likely that a court would also recognize that a patron does not have a right under Title III of the ADA, which applies to public accommodations, to use medical marijuana in public establishments, like restaurants.

This will be one of our most attended webinars, and there is still time to sign up. The webinar will cover legal issues facing California employers under the new Labor Code section prohibiting employers from asking applicants and employees for social media passwords, privacy issues when conducting background checks, alternatives to social media policies, and when policies addressing these issues are necessary. It is taking place at 10:00 a.m. PST January 15. Visit our website for registration information.

California passed a new law taking effect January 1, 2013 that prohibits employers from “requiring or requesting” employees and applicants to provide their passwords to social media accounts. This law was passed after a few cases made the news where employers were actually asking for this information. As I argued before, this law was probably not necessary as California law probably already prohibited this type of conduct to begin with.

However, now that the law is taking effect, there are also new questions that employers are facing under the law. For example, if an employer has the right policies in place that limit an employee’s expectation of privacy, it is pretty well established that the employer may monitor the employee’s internet use and record this. However, under the new law, what if an employee accesses their social media accounts during work? Or on a break? Can employers still monitor employees and record the employee’s login and password information?

I would argue that employers can still monitor employees’ internet use as long as they have made the proper disclosures through a handbook or policies that limit the employees’ expectation of privacy in using the company network or computers. The new law only prohibits employers from requiring employees to divulge their passwords. If the employer notifies the employees that it is recording all activity by the employees on the company network or computers, then the employees have made a voluntary decision to continue to access their account knowing that their employer is monitoring and/or recording the activity. Granted, the law is just going into effect next week, so obviously there is no case law to rely upon in making this argument, so employer will have to wait to see how the law is ultimately interpreted by the courts. 

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There was a good reminder to everyone over Christmas about online “privacy.” Randi Zuckerberg, the sister of Facebook co-founder and CEO Mark Zuckerberg posted a picture of her and her family on FB, and it was shared by another person on twitter. The photo was one of the Zuckerberg family using Facebook’s new Poke functionality (which by the way, is a way to send pictures through Facebook that are deleted from the recipient’s machine after a set period of time). A third party posted Randi’s photo online, and Randi’s apparently did not like the fact that the photo was reposted. Randi did not know how the third party got a copy of the picture, but it became apparent that the third party was connect to Randi through a mutual friend and saw the picture posted in her newsfeed. After the issue of how the picture was shared and it was not the result of some underhanded means to gain access to the picture, Randi still commented that people should “always ask permission before posting a friend’s photo publicly.”

I think there is another lesson here that I’ve preached about before: everything you post on the internet is public – even if you think you are only sharing it with your “friends.” However, there is a dichotomy of views that is becoming more apparent. Even though posting items on the internet makes them public to a lot of people to see – maybe even more people than you imagine as Randi’s case shows – there is still an increasing sense that people have a privacy interest in their information posted on the internet. For example, California’s new law (Labor Code section 980) making it illegal in a couple of days for employers to ask applicants or employees for their social media passwords in order to conduct a background check on the applicant/employee. This is also apparent in Randi’s comment that her picture, posted on Facebook and which her “friends” could see, still thought she has some privacy expectation in the photo. Mathew Ingram at Gigaom believes that privacy online is becoming more complicated. I have to agree – with laws being passed like California’s law prohibiting employers from asking for social media passwords, what could be considered private online is becoming more complex.

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