independent contractors

A lot was happening this week in California’s employment law.  This week’s Friday’s Five is a round-up on the highlights:

1.       Los Angeles City Council votes to require employers to provide 6 days of paid sick leave.

The LA City Council approved a measure to require employers to provide employees up to six paid sick days per year.  This is double the requirement under California state law that went into effect July 1, 2015.  It is likely that the law will go into effect July 2016.  The rules do not apply to small businesses with 25 employees or less until July 2017.  The law still must be drafted by the city attorneys.

2.       Uber settles class action cases for $100 million.

The settlement was reached this week by Uber to settle two class actions, one pending in California and the other in Massachusetts.  The class actions alleged that Uber improperly classified drivers as independent contractors rather than employees, and was seeking damages resulting from the misclassification.  The settlement provides $84 million to be distributed to the drivers “in California and Massachusetts who have used the Uber App at any time since August 16, 2009” until the court approves the settlement agreement.  The settlement resolves these cases, but Uber will likely have to continually fight this issue.  For more on the factors a court would look to in determining if an independent contractor has been misclassified, see my previous articles here.

 

 

3.       “Restrictive” Scheduling bill is working its way through California’s legislature.

Senate Bill 878 proposes to require retail establishments, grocery stores, and restaurants to set employees schedules 28 days in advance, and impose penalties on the employer if the schedule is modified by the employer.  In addition to the “modification pay” the employer would be required to pay to the employee, if the employer does not comply with the proposed law, the bill also adds a $4,000 penalty for failing to accurately provide “modification pay”, another $4,000 penalty for any harm that results to the employee or “another person” due to a violation of the law, and the ability for the employee to bring suit under the Private Attorney Generals Act (PAGA), among other penalties.

4.       California HR consulting company cited for $1 million for misclassification of exempt employees.

TriNet Human Resources Corp. provides outsource human resources solutions for small and medium sized business, was cited by the U.S. Department of Labor for failing to pay time and a half to 267 employees who worked more than 40 hours per week.  The case shows how often times the test to determine if an employee is exempt or nonexempt is not black or white.  If an HR company can get into legal trouble over the issue, it shows that employers must approach the exempt classification of employees very carefully.

5.       Reminder that California regulations may require an update to sexual harassment policies.

As I’ve written about previously, new regulations issued by California’s Fair Employment and Housing Counsel set for additional steps employers should consider in regards to their discrimination, harassment, and retaliation policies.   These regulations are effective April 1, 2016.

As we approach the close of 2015, employers should take the time to review their employment law policies and practices.  I’m often asked where should the process start?  Here are five areas employers can focus on to start the audit process:

1.      Employee handbooks

Employers need to ensure their policies are up to date, and a few areas that saw updates that may need attention in regards to employee handbooks are the revisions to California’s paid sick leave, the enforceability of arbitration agreements that contain class action waivers, and equal pay protections.

Employers should review new laws taking effect in 2016 to ensure compliance.

2.      Ensure compliance with minimum wage increases

California minimum wage increases to $10 per hour effective January 1, 2016.

Employers need to remember that the state minimum wage also sets the salary basis for exempt employees, and therefore the minimum salary that must be paid to exempt employees will also be increasing.

3.      Wage and hour issues

There are so many wage and hour areas that employers need to ensure compliance with, but here are few to help start the audit process:

4.      Meal and rest breaks

Even though it is widely known by employers of their obligations to provide meal and rest breaks, there is still substantial litigation over this issue.  Therefore, employers should continually review their meal and rest break policies and practices to ensure compliance with the law.  To start, here is a link to a previous article about five things California employers should not forget about meal and rest breaks.

5.      Correct information is listed on employee pay stubs and new requirements for piece-rate employees

Employers should ensure their pay stubs provided to employees comply with the requirements of Labor Code section 226.  The DLSE provides a sample of what information a compliant pay stub should list for an hourly employee, but don’t forget about the requirement to report an employee’s accrued paid sick leave.

Employers should especially conduct this review if they paid employees on a piece-rate basis.  A new law, AB 1513, adds various Labor Code sections and places new requirements on employers who pay on piece-rate basis.  The law now mandates that employers pay piece-rate employees separately for the following activities:

  • Rest breaks
  • Recovery periods (for employees who work outside)
  • Non-productive time (defined by the law)

The law requires employers to calculate the regular rate of pay for each workweek, and then pay the piece-rate employees the higher of this regular rate of pay or the applicable minimum wage for rest break time.  The law also requires employers to pay piece-rate employees for “nonproductive time” which is defined as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.”  The nonproductive time is required to be paid at a rate no less than the applicable minimum wage rate.  Employers paying employees on a piece rate basis should review the new obligations with an employment law attorney to ensure compliance.

The recent settlement creating a $228 million fund by Federal Express in a multistate class action brought in 2005 alleging that drivers were misclassified as independent contractors.  However, the parties are encountering some reluctance from the court in obtaining court approval of the settled.  This case is a good example that entering into a settlement with the opposing party does not necessarily end the case.  Parties in a class action must still obtain court approval of the settlement.  This Friday’s Five provides a list of five items to understand about the settlement process of class actions.

1.      The judge must approve the settlement to protect the interests of absent class members

The judge is tasked with the roll of protecting the absent class members who will be impacted by the settlement.  The judge will review the claims asserted by the plaintiffs, how strong the claims are, and the likelihood of success on the claims in reviewing the terms of the settlement.  Therefore, it is usually contingent upon plaintiffs’ counsel to set out a detailed evaluation of the claims and potential risks in continued litigation when seeking the court’s approval.  Judicial approval requires the judge to review the judgment of experienced counsel and make a determination that the agreement is “fair, adequate and reasonable” in context with the risks and delay of continued litigation.

2.      Notice to the absence class members must be given

The California Rules of Court provide that, in the event the court grants preliminary approval and certifies a settlement class, “notice of the final approval hearing must be given to the class members,” which shall “contain an explanation of the proposed settlement and procedures for class members to follow in filing written objections to it and in arranging to appear at the settlement hearing and state any objections to the proposed settlement.”  The court will likely require notice to be provided to as many of the class members as possible, and that the notice is sent to each individual class member if practicable.

3.      Court will review plaintiff’s attorneys fees and the incentive awards provided to the named plaintiffs

It is likely that the named plaintiffs will seek an incentive award, which is a payment beyond the payment they will receive with the other class members.  Courts approve these payments for the named plaintiffs’ work in bringing the case and participating in the litigation.  As for the plaintiffs’ attorney’s fees, the court will look to the monetary and nonmonetary results achieved for the class members.  Plaintiffs’ fees are usually based upon a percentage of the total recovery for the class members, with “lodestar” cross-check.  The lodestar method cross-check examines the plaintiffs’ attorneys’ reasonable hours spend on the case multiplied by a reasonable rate per hour.

4.      The court ensures the settlement was not collusive

In determining whether a class action settlement is fair, the court will look to whether the settlement was reached through “arm’s-length” negotiations.  Therefore, if an independent mediator was involved in helping the parties reach the settlement, the parties will explain the mediation process to the court.  The court will also look to whether plaintiffs’ counsel conducted sufficient investigation and discovery into the claims in order to make a reasonable determination of the strengths and weaknesses of the case.  The experience of the class counsel is also taken into account by the court.  Finally, the judge will review the number of objectors to the settlement in addition to how many of the class members opted out of the settlement in evaluating the fairness of the settlement.

5.      After preliminary approval, the court holds a final fairness hearing

Once the court has preliminarily approved the class action settlement, notice has been provided to all of the class members, the class members have the opportunity to file an opt-out or objection to the settlement, the court will hold one last fairness hearing.  At this point in time, the parties can submit to the court all of the information pertaining to how many class members participated in the settlement, how many opted out of the settlement, and if there were any objectors.  Objectors also have the ability to appear at the fairness hearing.  Managing Class Action Litigation: A Pocket Guide for Judges, explains:

If objectors and unrepresented class members appear at the fairness hearing, it is important to permit them to fully voice their concerns. For class members who feel strongly enough about their injuries to appear, the fairness hearing is their “day in court.” Judges in settlements involving tort claims such as the Agent Orange and silicone gel breast implant litigation held multiple days of hearings to accommodate the interests of class members.

The Federal Express case illustrates that the process of obtaining court approval may take multiple attempts to cure issues the court has with any number of the items set forth above.  Indeed, the FedEx settlement is only at the initial preliminary approval stage, and the court has set the final fairness hearing to take place on March 24, 2016.  What is the lesson to learn from this case?  The work is not done once a settlement is reached, the parties still have to obtain the court’s approval.

Photo: Rob Young

1. CEOs and founders need to be involved in the hiring process. This is simply something too important for a company to leave to other people.  Sam Altman, of Y Combinator, wrote:

The vast majority of founders don’t spend nearly enough time hiring. After you figure out your vision and get product-market fit, you should probably be spending between a third and a half of your time hiring. It sounds crazy, and there will always be a ton of other work, but it’s the highest-leverage thing you can do, and great companies always, always have great people. You can’t outsource this—you need to be spending time identifying people, getting potential candidates to want to work at your company, and meeting every person that comes to interview. Keith Rabois believes the CEO/founders should interview every candidate until the company is at least 500 employees.

Founders interviewing employee number 1 to 500 sets to tone for the company in many ways in addition to the value mentioned by Sam. First, meeting all new hires illustrates that the employees are valued. Second, it shows that the founders are approachable and should the employee have any complaints they could discuss the issues with the founders. Granted once the company passes the 50 employee mark, it becomes more difficult to have a personal relationship with everyone in the company, but at least the founders are meeting everyone working at the company. This proves to the employees that they are valued. Usually the company’s open door policy states that if the employee has any complaints, they are free to discuss it with their supervisor, and if appropriate their concerns can be escalated to the founders/CEO. Meeting with employee during the hiring process can give teeth to the open door policy, and promote the practice of speaking with the founders if any employees have concerns about work.

2. Try working with the applicant first. I don’t care how many interviews someone has conducted, no one can determine if an applicant will be a good fit in a company over an interview at lunch. No matter how good you believe your interview questions are at finding out the applicant’s true values, work ethic, and knowledge base, anyone with an internet can study-up on how to handle almost any type of interview scenario and look amazing during the interview. How does a company get past this problem? Sam Altman again has some great advice and recommends hiring the applicant as an independent contractor and giving her a day or two of work on a noncritical project. I recommend that companies may take it one step further, and depending on the circumstances, it may even be appropriate to hire the applicant as an employee with the idea that they are to only work on one short project during the nights or weekends. There is nothing in the law that prevents a company from hiring employees for a day or two to see how they would work, that is the idea behind at-will employment.

3. Don’t assume all workers are the same in under the law. Not everyone hired can be classified as independent contractors or exempt employees.  These legal terms have very specific tests that must be met, and failure to properly classify workers could expose the company to large penalties. If everyone in a company is classified as an independent contractor or an exempt employee, more likely than not, there is a problem that needs to be addressed, and the company needs to evaluate its HR function more carefully.

4. Develop an employee handbook. All new hires should be given a handbook that sets out the company’s practices and procedures. Handbooks are not legally required in California, but there are required policies that companies must have depending on their size. A handbook is the perfect way to communicate the required policies to all new hires in a consistent and documented manner.

5. Have a new hire packet. The legal documents required to be provided to a new employee is becoming very detailed. Companies should standardize a new hire packet that meets all legal requirements.

Uber and Lyft have been sued in separate class action lawsuits in California by drivers challenging

Picture via Mic V

the two companies’ classification of the drivers as independent contractors. The plaintiffs in the two cases argue that the drivers should be classified and paid as employees, which triggers many additional Labor Code provisions for the drivers than if they are classified as independent contractors.

The cases are good reminders to California employers, and start-ups especially, about how difficult the analysis can be in some cases. For example, in early March 2015, the judge denied Uber’s motion for summary judgment on the issue (the opinion is embedded below). Employers should take the following five lessons from this pending litigation:

1. The independent contractor analysis is becoming extremely difficult to apply in technology companies or “sharing economy” companies.
Part of the difficulty arises from the fact that the test to determine whether a worker is properly classified was developed before these new business models existed, and as the judge noted in the Uber case, “many of the factors in that test appear outmoded in this context.” With this ambiguity in the existing law, employers should approach with caution.

2. The burden is on the employer to prove that the workers are properly classified as independent contractors.
If the putative employee establishes a prima facie case (i.e., shows they provided services to the putative employer), the burden then shifts to the employer to prove, if it can, that the “presumed employee was an independent contractor.” Narayan v. EGL, Inc., 616 F.3d 895, 900 (9th Cir. 2010). Employers need to be ready to rebut this burden of proof.

3. The primary factor of the analysis is the control over the worker.
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), 48 Cal. 3d 341, 350 (1989). The Supreme Court has further emphasized that the pertinent question is “not how much control a hirer exercises, but how much control the hirer retains the right to exercise.” Ayala v Antelope Valley Newspapers Inc., 59 Cal. 4th 522, 533 (2014). In addition, it does not matter if the worker agreed that he was an independent contractor, the determination is made based on the factors of the test.

4. The secondary part of the analysis is an evaluation of 13 factors.
In Borello, the California Supreme Court set out the secondary indications relevant to the analysis of whether a worker is an independent contractor or employee:

  1. whether the one performing services is engaged in a distinct occupation or business;
  2. 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;
  3. the skill required in the particular occupation;
  4. whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
  5. the length of time for which the services are to be performed;
  6. the method of payment, whether by the time or by the job;
  7. whether or not the work is a part of the regular business of the principal; and
  8. whether or not the parties believe they are creating the relationship of employer-employee.

As the court in Uber noted, the Borello case also “approvingly cited” five additional factors:

  1. the alleged employee’s opportunity for profit or loss depending on his managerial skill;
  2. the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers;
  3. whether the service rendered requires a special skill;
  4. the degree of permanence of the working relationship; and
  5. whether the service rendered is an integral part of the alleged employer’s business.

5. The analysis usually does not turn on one factor.
As the court noted in Uber’s case:

…rarely does any one factor dictate the determination of whether a relationship is one of employment or independent contract. Here, numerous factors point in opposing directions. As to many, there are disputed facts, including those pertaining to Uber’s level of control over the “manner and means” of Plaintiffs’ performance.

While the Uber and Lyft cases are relatively in the early stages of litigation and the Plaintiffs still have to move for class certification, the cases are a good reminder of the difficulties surrounding the classification of independent contractors and how important to conduct this analysis of independent contractors early on in the relationship. For start-ups without the financial backing that Uber and Lyft have, just the initiation of this type of litigation would severely injure the company’s chances of success due to the monetary and time resources that litigation sucks up, in addition to having to shift focus on the primary business goals, and large potential liability if the workers were misclassified.

O'Connor v Uber Technologies – Order Denying Uber's Motion for Summary Judgment

1. Meal and rest breaks.
If you did not know of this exposure already existed in California, can I recommend some reading here, here and here?

2. Exempt vs. non-exempt classification of employees.
The default under California law is that every employee is entitled to overtime pay at a rate of time and a half or double of the employee’s hourly rate of pay. An employee is not entitled to overtime if the employer meets its burden in establishing that the employees qualifies under one of legally proscribed exempt positions (the positions are called exempt because the employee is exempt from the overtime requirements). Some exempt positions are:

  • Executive
  • Administrative
  • Professional
  • Outside sales
  • Computer professional
  • Commissioned sales

Exempt positions have very nuanced requirements that must be met in order for the employee to properly be considered exempt from the overtime pay requirement. For a company to make a determination of whether an employee is exempt, it must approach this determination carefully, and ensure the employee is pay enough in a salary and performs duties required by the exemption. The company should also consider documenting the specific exemption the employee qualifies for. For a list of the possible exempt positions under California law, the DLSE published one here.

3. Off the clock work.
Employees must be paid for all hours that the employee is subject to the employer’s control. Generally, if the employer knows or has reason to believe that an employee is working, that work must be paid for. To prevent off the clock claims, employers should develop clear policies on time keeping and prohibiting off the clock work, as well as having a well thought out complaint mechanism for employees to utilize. A complaint procedure is a good defense for claims of off the clock work made after the fact.

4. Proper calculation of overtime.
Generally, employers must pay one and one-half times the employee’s regular rate of pay for all hours worked in excess of eight hours up to and including 12 hours in any workday, and for the first eight hours worked on the seventh consecutive day of work in a workweek. In addition, employer must pay double the employee’s regular rate of pay for all hours worked in excess of 12 hours in any workday and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek.

In addition, the “regular rate of pay” include not only the employee’s hourly rate, but also the amount of piecework earnings and commissions earned by the employee. These additional earning must be calculated into employee’s regular rate of pay. The employee’s time and a half or double time overtime must be calculated on this higher regular rate.

5. Independent contractor misclassification.
As I’ve written about previously, the classification of whether a worker is an independent contractor or an employee is a multifactor test. Failure to conduct this analysis properly can expose employer to substantial civil penalties.
 

1. Classifying all employees as independent contractors
To qualify as an independent contractor, the employer has the burden of proof to establish that the worker is actually an independent contractor and not an employee. I’ve discussed the parameter of this “economic realities” test here.  In addition to owing unpaid minimum wages and potential unpaid overtime, the employer also faces steep penalties for misclassifying independent contractors.

2. Treating all employees as exempt employees and not paying overtime.
An employee cannot agree to work without being paid overtime unless they qualify as an exempt employee. To qualify as an exempt employee, generally, the employee must perform certain duties, and must be paid a certain threshold in wages (usually at least two times the equivalent pay of minimum wage based on a 40 hour week).  

3. Not having a handbook and written policies.
Even if startup companies have no money, the Labor Code still applies. They still have to pay more than minimum wage, provide and record meal and rest breaks, issue wage notices to new employees, and otherwise comply with California law. A handbook, new hire packet, and standardized set of written policies is a good place to start.

4. Not providing clear offer letter with at-will provisions and clear understanding of who owns social media accounts and passwords.
Companies should providing a writing setting forth the employee’s compensation, stock option rights, at-will status, as well as who owns the rights to social media accounts and the passwords to access the accounts. Much better to have this set out early in order to avoid costly litigation and disruption in your business later.

5. Not having the right employment law counsel.
Startup owners should have a relationship with an attorney that actually practices California employment law. Have an agreement with them that for basic quick questions there will be little if no charge. I often tell my clients that if it takes a quick phone call to review a decision about an employment issue, there will be no charge. Of course this has to be within reason, as your lawyer sells his or her time to make a living.  So to make this easier on your lawyer, do the work before you call, and just double check that the decision you have made, or the letter you drafted is good-to-go. Otherwise, calling your lawyer and asking him to draft the letter will take him time (usually more time that the client could have done it in) and will increase the cost of legal services.

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.

Over the weekend, Governor Brown signed S.B. 459 into law (among other employment bills) which makes employers liable for civil penalties of $5,000 to $15,000 for each violation of “willful misclassification” of employees as independent contractors. In addition, if it is found that the employer has a pattern and practice of misclassifying independent contractors, the penalties can increase to a minimum of $10,000 to $25,000 per violation. The new law adds Sections 226.8 and 2753 to the Labor Code. 

The new law imposes the penalties for a “willful misclassification,” which is defined as:

"Willful misclassification" means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.

Click here to read more information about the factors considered in determining whether a worker qualifies as an independent contractor and other areas of liability employers face in addition to this new law. 

Internet Posting

In addition to the substantial civil penalties, employers who violate the law are also required to post a notice on their website, or if the employer does not have a website they must post it in an area available to employees and the general public, for one year about the violation. The notice must contain the following information:

(1) That the Labor and Workforce Development Agency or a court, as applicable, has found that the person or employer has committed a serious violation of the law by engaging in the willful misclassification of employees.
(2) That the person or employer has changed its business practices in order to avoid committing further violations of this section.
(3) That any employee who believes that he or she is being misclassified as an independent contractor may contact the Labor and Workforce Development Agency. The notice shall include the mailing address, e-mail address, and telephone number of the agency.
(4) That the notice is being posted pursuant to a state order.

The law gives the Labor Commissioner the power the collect the civil penalties. There is also an argument that individual litigants may recover a portion of the civil penalties by bringing a Private Attorneys General Act (PAGA) claim. However, PAGA was not amended to specifically deal with the new labor code sections created by the new law, so there will undoubtedly be litigation over the extent the new law is actionable under PAGA, or the legislature may amend PAGA to clarify this issue.

The intent of the legislature is clear by passing this law – it does not want independent contractors to be used in California.  Employers must therefore be very careful in conducting the analysis of whether employees are properly classified as independent contractors.

The US House of Representatives introduced a bill (H.R. 5107), Employee Misclassification Prevention Act, that if passed would amend the FLSA to required employers who employ “non-employees” to keep records of classification of the non-employees. The bill refers to non-employees, which is targeting employers’ classification of independent contractors.

Should the employer fail to maintain the records required under the proposed bill, a presumption would be created that the worker is an employee – not an independent contractor. The employer could only then overturn this presumption by presenting “clear and convincing evidence” that the worker is properly classified.

The bill would also require employers to provide written notice to any non-employees about their classification. Among other items, the notice would need to state:

Your rights to wage, hour, and other labor protections depend upon your proper classification as an employee or non-employee. If you have any questions or concerns about how you have been classified or suspect that you may have been misclassified, contact the U.S. Department of Labor.

The notice would also need to include additional information that Department of Labor deems necessary by regulation at a later date.

Violation of the proposed bill’s requirements carries a civil fine of $1,100 per worker, which could increase to $5,000 for willful repeat violations.

The bill (H.R. 5107) can be read here. From what I could gather, it appears that the bill has a strong chance of becoming law. This is definitely one I will be keeping my eye on in coming months.