U.S. Department of Labor Proposes New Rule on Independent Contractors

On September 22, 2020, the U.S. Department of Labor (DOL) unveiled its long-awaited proposed independent contractor rule. The new rule sets forth a new standard for determining whether a worker can be classified as an independent contractor rather than an employee for purposes of the Fair Labor Standards Act (FLSA). However, employers will still need to be aware of and comply with state laws that apply stricter standards for independent contractor classification, such as the laws in many blue states, including California, New Jersey, and Massachusetts.

Under the FLSA, “employees” are subject to certain protections, such as minimum wage and overtime requirements, while “independent contractors” are not.  But neither the FLSA nor current DOL regulations define, as a general rule, what makes a worker an independent contractor, giving rise to a patchwork of tests and rules across states and in federal courts.  As questions of classification have grown in salience over the past decade with the rise of the “gig economy,” the DOL has attempted to fill the gap.  In 2015, the DOL under President Obama issued an “Administrative Interpretation” (AI) setting forth a six-factor “economic reality” test that was widely seen as setting a demanding standard for classifying workers as independent contractors.  Then, in 2017, the Trump DOL withdrew the 2015 AI, signaling a shift to a more forgiving, employer-friendly classification standard.  Pressure has been mounting for the DOL to issue the new rule this year in light of the upcoming presidential election, which could bring about another ideological shift within the DOL.

The proposed rule creates a five-factor test to determine whether a worker is an independent contractor for FLSA purposes.  Those factors are:
·         The Nature and Degree of the Worker’s Control Over the Work: This includes a worker’s ability to set his or her schedule, the extent or lack of supervision over the worker, and the worker’s ability to work for competitors of the employee.
 
·         The Worker’s Opportunity for Profit and Loss: This factor looks to whether the worker’s opportunity to succeed in his or her work relates to personal initiative, managerial skill, and business acumen.
 
·         The Amount of Skill Required: This includes whether the work requires specialized training or skills that the employer does not provide.
 
·         The Permanence of the Working Relationship: Under this factor, a working relationship that is definite in duration or sporadic is indicative of independent contractor status.
 
·         The “Integrated Unit”: This asks whether the worker is part of a “production line” (real or metaphorical) – i.e., something requiring the “coordinated function of interdependent subparts working towards a specific unified purpose” as opposed to providing “discrete, segregable services.”
 
No single factor controls, although the rule indicates that the most weight should be given to the first two factors, which are deemed as being most probative of a worker’s economic dependence on an employer.
Not only does the new rule provide a clear, unified federal standard on independent contractor classification, but it puts less emphasis on certain indicia that are relevant under current court-created tests, which the DOL view as less relevant under the modern economy.  For example, the DOL notes that falling transaction costs of hiring have led to shorter job tenures and that a knowledge-based economy means that independent contractors may not need to make significant capital investments of their own.  Accordingly, the proposed rule de-emphasizes the importance of job tenure and worker investments, which had been factors cited in tests created by courts on the issue.

The proposed rule has been submitted to Federal Register for publication.  Once published, the public will have 30 days to comment on it.  However, it is unclear whether the proposed rule will survive a potential change in control of the White House or Congress, or even be implemented in the first place.  If it does become final, the new rule will provide little comfort to employers in states like Massachusetts and California, which impose stricter tests for determining whether a worker can be classified as an independent contractor under state law.  In those states, employers will need to continue to apply the state-specific test, which may result in treating a worker as an employee even though the worker would qualify as an independent contractor under the federal test.

Jonathan Keselenko, Foley Hoag LLP, Boston, MA

The Muddled Rules for Reimbursing California Employees For Remote Work

With the pandemic continuing, many offices remain closed and many employees are performing their job duties remotely from home.  In certain states, like California, employers are statutorily required to pay for remote work expenses. 

This had led many employers with remote workers in the Golden State to reasonably to ask, “what types of expenses are we required to reimburse employees for out there?”  Unfortunately, the law is very unclear on this issue and there are no bright-line answers for employers that have California employees working remotely. 

Here is some background on this issue, along with some tips for compliance.

What Law Applies in California?

Wage and hour obligations for California employers generally come from three sources—the federal Fair Labor Standards Act (“FLSA”), the California Labor Code, and the wage orders issued by the California Industrial Wage Commission applicable in the particular industry.  The California employer must comply with all three of these.   

FLSA

The FLSA generally does not require an employer to reimburse employees for remote work expenses, unless the amount of those expenses is such that it effectively causes an employee to be paid less than the federal minimum wage (and/or applicable overtime compensation) for all hours worked.  The federal Department of Labor’s COVID-related FLSA guidance explains this.

Because California employees generally work well above the federal minimum wage (because California’s minimum wage is much higher – currently 12 or 13 dollars an hour depending on the number of employees), this is rarely an issue.  However, if you have employees who are paid close to minimum wage with significant business expenses, you need to look more closely at the types of business expenses they may be incurring in connection with remote work to assess whether the expenses are of such an amount that the employee effectively is netting less than minimum wage plus any applicable overtime for all hours worked. If so, expense reimbursement will be required under federal law.

California Law

California (along with a handful of other states) has a specific law that requires employers to reimburse employees for necessary business expenses that they incur.  California’s law on expense reimbursement is contained section 2802 of the California Labor Code.  This statute requires employers to reimburse employees for all expenditures necessarily incurred by the employee in direct discharge of duties for the employer, or in obedience to directions of the employer. 

Unfortunately, this is not as easy to apply as it may seem.  Making matters worse, in 2014, a California court issued a decision in a case called Cochran v. Schwan’s Home Service, Inc., muddying up the standard even more.  In the Cochran case, the court addressed expense reimbursement requirements in circumstances where employees are required to use their personal cell phones for work purposes.  The court held that if an employee is required to use a personal cell phone for business purposes, the employer must reimburse the employee.  This is true even if the business use of the personal phone does not cause the employee to incur expense in excess of their usual, flat monthly rate.  Unfortunately, the court did not specify how much an employer is required to pay in expense reimbursement, just that it should be a reasonable percentage of the employee’s bill. 

Neither the wage orders, the California Labor Commissioner’s office, nor the California courts, have provided further clarification for employers on the scope and amount of expense reimbursement that is required under California law.  Disappointingly, the California Labor Commissioner’s office has failed to issue COVID-specific expense reimbursement guidance for employers with remote workforces due to COVID.

This leaves employers uncertain about the extent of their expense reimbursement obligations related to employees working from home.  Rest assured that California plaintiffs’ attorneys will file class action and Private Attorney General Act lawsuits against employers, alleging that they did not comply with their expense reimbursement obligations under Labor Code 2802.  As such, all employers who are requiring California based employees to work remotely should think about the types of expenses their remote employees are incurring and issue them a reasonable amount of expense reimbursement to cover those expenses.  These expenses may include use of personal phones and other devices, use of home internet/WiFi, use of office supplies, increased electricity costs, and the like.  Of course, for most of these things, no employer will be able to determine the precise portion of an employee’s expense that is work-related. 

As such, employers faced with reimbursing California employees should generally decide on a flat monthly amount that they believe reasonably covers the work-related expense associated with working from home.  An employer also can limit employee expenses by providing employer-owned equipment (e.g. cell phones, laptops, printers, hotspots) for employees to use at home. Regardless of the monthly amount decided on by the employer, the employer should tell its California employees what the expense stipend is intended to cover (all home-related work expenses) and include a provision telling employees that if, in any month, they believe that the expense stipend is not sufficient to cover their specific remote work expenses, the employee should notify Human Resources, so that the employee’s expenses can be reviewed and a determination made as to whether additional reimbursement is owed.

Of course, if California employees are incurring driving-related expenses, or concrete expenses associated with purchasing items needed to perform their jobs, those expenses should be compensated at the IRS mileage reimbursement rate and/or actual cost, as applicable.

Finally, remember that California’s expense reimbursement law only applies to expenses that are “necessarily” incurred in direct consequence of the job duties or in complying with an employer’s directions.  This means that if an employee is incurring expenses that are wholly unnecessary or unreasonably exorbitant, they need not be reimbursed.  Employers may want to adopt a policy requiring employees to get advance approval for before purchasing any items to use for their remote work.  This will help avoid unreasonable expenditures and a dispute over whether to cover it.

The “necessarily incurred” standard also raises the question of whether employers are required to reimburse remote work expenses where a California employee voluntarily chooses (but is not required) to work from home.  If an employer has reopened its offices and employees are welcomed to return to the office to perform their jobs, but are permitted to voluntarily choose to continue working remotely, there is a very good argument that the employee’s remote work expenses are not “necessary” and need not be reimbursed, particularly if the employer has notified employees that home office expenses will not be reimbursed in this situation (because employees are free to report to work and not incur any such expenses).

Bottom line:  If you have not already done so, evaluate your remote work arrangements in California and any need to adopt new or revised expense reimbursement policies.  If you are late to the game, you can always issue retroactive expense reimbursement for prior months of required remote work by employees. 

Summary of the New DOL FFCRA Regulations

Last Friday, the Department of Labor (DOL) issued revised FFCRA regulations that will be formally published on September 16.  The unpublished version is available here.  These regulations were issued in response to an August 2020 ruling by a federal court in New York that invalidated some of the prior regulations as either inconsistent with the text of the FFCRA, or insufficiently explained by the DOL in its original regulations.  According to the DOL’s press release accompanying the revised regulations, the revisions do the following:

  • Reaffirm and provide additional explanation for the requirement that employees may take FFCRA leave only if work would otherwise be available to them.
  • Reaffirm and provide additional explanation for the requirement that an employee have employer approval to take FFCRA leave intermittently.
  • Revise the definition of “healthcare provider” to include only employees who meet the definition of that term under the Family and Medical Leave Act regulations or who are employed to provide diagnostic services, preventative services, treatment services or other services that are integrated with and necessary to the provision of patient care which, if not provided, would adversely impact patient care.
  • Clarify that employees must provide required documentation supporting their need for FFCRA leave to their employers as soon as practicable.
  • Correct an inconsistency regarding when employees may be required to provide notice of a need to take expanded family and medical leave to their employers.

These are the specific regulations that are revised:

29 CFR 826.20:  This regulation sets forth the qualifying reasons that FFCRA may be used.  The DOL revised the regulation to make clear, for every qualifying reason, that leave may not be used unless the employer has work available for the employee to perform, but the employee cannot work due to the COVID qualifying reason.

29  CFR 826.30:  This regulation is the one that explains that employers can exempt “health care providers” from FFCRA leave in certain circumstances.  The revised regulations change the definition of “health care provider” in response to criticism that the prior definition was too broad and a court order invalidating it.   The revised regulation states that a health care provider is (1) anyone deemed a healthcare provider under the FMLA, or (2) any employee who is capable of providing health services, meaning he or she is employed to provide diagnostic services, treatment services, or other services that are integrated with and necessary for the provision of patient care.  The revised regulations include specific examples of the types of employees who qualify as health care providers, and those who do not.  Any employer exempting health care provider employees from the FFCRA’s paid leave provisions should review the revised regulation to assess whether their employees still qualify for exemption.

29 CFR 826.90:  This regulation describes the notice that employees must provide of the need to use paid sick leave in order to qualify.  The revised regulation clarifies that advance notice may not be required for use of emergency paid sick leave and that notice may only be required after the first workday or portion thereof for which the employee uses paid sick leave.  After the first workday, notice should be provided as soon as practicable and may be provided by an employee’s family member or other spokesperson if the employee is unavailable.  For leave due to school closures, notice should be provided as soon as practicable.  If the closure is foreseeable, prior notice should be provided in advance of the need for leave.

29 CFR 826.100:  This regulation relates to the timing of documentation substantiating the need for FFCRA leave.  Consistent with the revisions to section 826.90, this revised regulation clarifies that documentation should be provided as soon as practicable (generally at the same time as the employee’s notice of the need for leave, described in 826.90).

Employers covered by the FFCRA should review their policies and practices to ensure they are in compliance with the revised regulations.

California Court Provides Guidance on “Unlimited” Vacation Policies

In recent years, some employers have implemented so-called “unlimited” vacation policies, mostly applied to exempt employees, that leave it up to employees and their supervisors to decide how much paid time off to take.  On April 1, 2020, the California Court of Appeal addressed for the first time whether California law requires an employer with an “unlimited” vacation policy to pay an employee for “unused” vacation upon the employee’s separation from employment.  The court held that on the specific facts of the case before it, the employer was required to pay its former employees for unused vacation, but also offered guidance as to what kind of unlimited vacation policy might relieve an employer of the obligation to pay out accrued but unused vacation upon an employee’s separation.

Background on California Law Governing Vacation Policies

California law does not require employers to provide employees with paid vacation.  But when an employer does provide paid vacation, Labor Code section 227.3 requires employers to pay as wages any “vested” vacation time that separating  employees have not used.  Decades ago, in Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774, 784 (1982), the California Supreme court addressed when the right to vacation “vests” under section 227.3, stating:

The right to a paid vacation, when offered in an employer’s policy or contract of employment, constitutes deferred wages for services rendered.  Case law from this state and others, as well as principles of equity and justice, compel the conclusion that a proportionate right to a paid vacation “vests” as the labor is rendered.  Once vested, the right is protected from forfeiture by section 227.3  On termination of employment, therefore, the statute requires that an employee be paid in wages for a pro rata share of his vacation pay.

While Section 227.3 effectively prohibits so-called “use-it-or-lose-it” vacation policies, an employer may adopt a policy that creates a waiting period at the beginning of employment during which no vacation time is earned, and therefore none vests.  An employer may also adopt a policy that “caps” the amount of vacation an employee accrues, by precluding accrual of additional vacation time once an employee has reached a specified maximum.  Under such a policy, the employee does not forfeit vested vacation pay because no more vacation is earned once the maximum is reached, and therefore no more vests until such time as the employee uses accrued vacation, drops below the cap, and once again begins to accrue more vacation.

In order to pay a separating employee all “vested” vacation, an employer necessarily must keep track of how much vacation an employee earned and used during employment.  But what happens if an employer offers “unlimited” vacation to an employee, or allows an employee to take paid time off, but never notifies the employee of precisely how much paid time off the employee may take?  That is the question addressed by the California Court of Appeal in its recent opinion.

McPherson v. EF Intercultural Foundation, Inc.

EF Cultural Foundation, Inc. (EF) runs educational and cultural exchange programs between the United States and other countries.  While EF’s employee handbook included a policy providing most salaried employees with a fixed amount of paid vacation days per month based on their lengths of service, that policy did not apply to “area managers,” a handful of exempt employees tasked by EF to run the company’s programs within their regions.  While area managers could, with their supervisors’ permission, take paid time off, they did not accrue vacation days or track the number of vacation days they took, nor were they ever notified of any specific limit on the amount of paid days off they could take.

After their employment ended, three area managers sued EF, alleging the company failed to pay them accrued but unused vacation upon their separation from employment.  After a bench trial, the trial court found EF liable for failing to pay the plaintiffs unused vacation, finding the plaintiffs’ right to take vacation time was not truly “unlimited” but rather was “undefined.”  The trial court found that “vacation time vests under a policy where vacation time is provided, even if the precise amount is not expressly defined by the employer in statements to employees.”  The trial court explained that “offering vacation time in an undefined amount simply presents a problem of proof as to what the employer’s policy was.  That policy is implied through conduct and the circumstances, rather than through an articulated statement.”  The trial court concluded that based on the evidence presented at trial, the area managers were provided at least 20 days of vacation per year, therefore that amount vested annually for each plaintiff, and Section 227.3 required EF to pay them the unused portion when their employment ended.

The California Court of Appeal agreed with the trial court’s conclusion that Section 227.3 applied to the area managers “[o]n the particular, unusual facts of this case.”  The appellate court emphasized that the company did not provide the area managers “unlimited” vacation in practice, nor did the company publish a formal policy notifying the area managers they had “unlimited’ vacation, and therefore the trial court was correct in determining their right to vacation was undefined, not unlimited.  But the court was careful to note that although Section 227.3 applied to EF’s informal, unwritten vacation policy, that does not mean Section 227.3 “necessarily applies to truly unlimited time off policies.”  The court suggested that such a policy “may not trigger section 227.3” if the policy is in writing and it:

  1. Clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule—including employees’ ability to decide when and how much time to take off;
  2. Spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
  3. In practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
  4. Is administered fairly so that it neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.

Unfortunately, the court offered these criteria as only an “example” of an unlimited time off policy that might not require a payout of unused vacation upon the end of employment, and not as a bright-line rule.

The appellate court’s opinion makes it clear that not all unlimited vacation policies necessarily dispose of the requirement to pay some amount of “vested” vacation upon an employee’s separation.  Employers operating in California that wish to establish or continue unlimited vacation policies should review those policies, and modify them if necessary, to ensure they are consistent with the California court’s  guidance.

Aaron Buckley
Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

Unpaid Future Commissions Can Be Trebled under Massachusetts Wage Act, SJC Rules

In Massachusetts, a commission is a wage subject to the Wage Act when the amount of the commission “has been definitely determined and has become due and payable.”  Accordingly, an employer’s failure to pay a commission which had not yet become due and payable generally does not implicate the Wage Act, and employers cannot be held liable for treble damages stemming from the failure to pay such a future commission.  However, last week in Parker v. EnerNOC, Inc., the Supreme Judicial Court created an exception to this rule, holding that an employee is entitled to treble damages on an unpaid future commission as lost wages where the employer’s unlawful retaliation was the reason the commission did not became due and payable.

Parker concerned an employee’s Wage Act claims based upon her prior employer’s failure to pay her certain commissions.  The employee earned commissions on software sales contracts she secured for her employer.  As a result of a particular contract, the employee earned two different commissions – one payable when the sales contract first became guaranteed and another when the time period for the client to opt out of the contract had passed.  After the deal became guaranteed, the employee complained that she had not been paid the full amount of the first commission to which she was entitled.  After the employee complained, the employer terminated her employment.  After the termination, the opt-out period passed.  Had the employee remained employed with the employer, she would have been entitled to the second commission.  The employee sued, alleging that she had been terminated in retaliation for her complaints and that she had been denied her commissions in violation of the Wage Act.  She ultimately prevailed.  The trial court judge granted the employee treble damages on the first commission, but not on the second, on the basis that the second commission had not “become due and payable” as of the employee’s last day of employment.

The SJC reversed the trial court, ruling that the employee was entitled to treble damages on the unpaid portions of both commissions.  According to the SJC, nothing in the Wage Act required a commission to be due and payable as of the date of termination to be subject to the Wage Act.  Because the Wage Act prohibits retaliation against employees raising Wage Act claims, the SJC ruled, “commissions that are not yet due to be paid may nonetheless constitute lost wages if the employer’s violations of the act prevent payment of those commissions.”  As such, the employee was entitled to treble damages on those lost wages as a remedy for the employer’s retaliation prohibited by the Act, regardless of whether the commission was due and payable.

In light of the decision in Parker, employers should exercise caution when terminating employees who have earned commissions that have not yet been paid.  Parker makes clear that unpaid commissions – even if they are not due and payable at the time to termination – constitute lost wages under the antiretaliation provisions of the Act, and employees are entitled to treble damages on future commission where an employee can show that the commission did not become due and payable as a result of an employer’s retaliation prohibited by the Act.

Jonathan Keselenko, James Fullmer, & Chris Feudo
Foley Hoag LLP
Boston, MA

California Supreme Court Rules Employees Must Be Paid for Time Spent in Post-Shift Bag Checks

Last Thursday, in a unanimous opinion, the California Supreme Court held that the time employees spend on an employer’s premises waiting for and undergoing required exit searches of their bags and other personal items that they bring to work purely for their own personal convenience, constitutes “hours worked” for which the employees must be paid.

Apple Inc. requires its retail store employees to undergo mandatory searches of their bags, packages, purses, backpacks, briefcases, and personal Apple technology devices (e.g., iPhones), before leaving the store for any reason, including after completing their work shift and clocking out.  In 2013, several employees sued Apple in a California federal district court to recover wages for the time spent undergoing these security checks.  They brought their claims under both California law and the federal Fair Labor Standards Act (FLSA).  The employees estimated that the time spent waiting for and undergoing the exit searches typically ranged from five to 20 minutes, but could take up to 45 minutes on the busiest days.

The district court dismissed the FLSA claims after the United States Supreme Court’s 2014 decision in Integrity Staffing Solutions v. Busk, which held that time spent undergoing mandatory security screenings is not compensable “hours worked” under the FLSA.  The district court later dismissed the plaintiffs’ California law claims, holding that exit search time was not “hours worked” because the employees could avoid the searches by not bringing bags or other personal items to work.  The employees appealed.

The Ninth Circuit Court of Appeals then asked the California Supreme Court to weigh in on the issue.  In last Thursday’s opinion, California’s high court hinged its decision on the significant differences between the FLSA and California law in defining “hours worked.”  In 1947, the FLSA was amended to narrow the definition of “hours worked,” excluding activities that occur before or after employees perform the “principle activity” they are engaged to perform.  As a result, under the FLSA, some pre-shift and post-shift activities are not compensable, even when required by an employer.  In contrast, California’s wage orders generally define “hours worked” much more broadly, to include all the time an employee is “subject to the control” of an employer, and all the time an employee is “suffered or permitted to work, whether or not required to do so.”

Applying this definition, the California Supreme Court concluded the employees were “subject to [Apple’s] control” when they waited for and underwent security checks, because these checks were required for Apple’s benefit.  The court rejected the district court’s conclusion that the security checks were essentially voluntary because employees could avoid them by not bringing personal items to work, reasoning that the realities of 21st-century life mean employees have little choice but to bring mobile devices and other personal items to work.

This decision illustrates two realities for all California employers.  First, California employees must be compensated for time engaged in pre-shift and post-shift activities that might not be compensable elsewhere.

Second, California employers should ensure employees are compensated for required activities that involve even very small amounts of time.  In 2018, the California Supreme Court held that the federal de minimis rule, under which small amounts of time need not be compensated under certain circumstances, does not apply to wage claims brought under California law.  As a result, claims for unpaid wages brought under California law are more difficult to defend.  Employers should therefore be vigilant about capturing and compensating employees for all time spent under the employer’s control, including security checks and other activities that might begin and end very quickly.

Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA

Federal Court Issues Preliminary Injunction Prohibiting Enforcement of AB 51, California’s Anti-Arbitration Law

Today a federal court issued a preliminary injunction prohibiting the state of California from enforcing Assembly Bill 51, the state’s new anti-arbitration law.  Earlier, on December 30, 2019, the court issued a temporary restraining order prohibiting the law’s enforcement, just two days before it was scheduled to take effect.

The anti-arbitration law is being challenged in a federal lawsuit filed in December 2019 by a number of pro-business organizations seeking a permanent injunction against enforcement of AB 51.  The business groups argue that AB 51 is preempted by the Federal Arbitration Act (“FAA”).

In the court’s minute order issued today, Judge Kimberly J. Mueller of the U.S. District Court for the Eastern District of California indicated she will explain her reasoning in a detailed, written order to be issued “in the coming days.”

Today’s order means California employers may continue to require employees to sign mandatory arbitration agreements as a condition of employment.  It also means the court continues to find the plaintiffs’ argument that AB 51 is preempted by the FAA to be persuasive.

Federal Court Issues Temporary Restraining Order Prohibiting Enforcement of California’s Anti-Arbitration Law

Today a federal court issued a temporary restraining order prohibiting the state of California from enforcing Assembly Bill 51, the state’s new anti-arbitration law, at least until another hearing scheduled for January 10, 2020.  The new law was scheduled to take effect January 1, 2020.

The temporary restraining order was issued in the federal lawsuit filed earlier this month by the U.S. Chamber of Commerce and other pro-business organizations seeking a permanent injunction against enforcement of AB 51.  The business groups argue that AB 51 is preempted by the Federal Arbitration Act (“FAA”).

In the order, the U.S. District Court for the Eastern District of California found the “plaintiffs have raised serious questions regarding whether the challenged statute is preempted by the Federal Arbitration Act” and that allowing the new law to take effect even temporarily could “cause disruption in the making of employment contracts” in California.

Today’s order means California employers can continue, at least until January 10, 2020, to require employees to sign mandatory arbitration agreements as a condition of employment.  It also means the Court found the plaintiffs’ argument that AB 51 is preempted by the FAA to be persuasive.

January 1, 2020, Means New Pay Rules – Are You Ready?

On January 1, 2020, a number of new pay rules will become effective. While these changes may not directly impact many employees, they could cause pay compression under many compensation plans. Pay compression issues trigger employee morale issues, and adapting to those issues may mean that more than just those at the bottom of pay scales will need to have their pay adjusted. This ripple effect, of course, could be costly. Further, if the employees are covered by union contracts, how these new rates are rolled in, and whether pay compression concerns may be addressed, are mandatory subjects of bargaining. While a union contract cannot violate the law, the effects triggered by compliance are subjects of bargaining.

The following will briefly summarize what employers should be aware of and address in some form:

Federal law changes –

  • The salary level for most exempt executive, administrative and professional employees under the Fair Labor Standards Act (“FLSA”) will increase from $455 per week (or $23,660 per year) to $684 per week (or $35,568 per year). Thus, unless currently exempt employees paid below this new threshold are given salary increases, they will lose their FLSA exempt status.
  • Some employees meet the FLSA’s exemption test if they are “highly compensated” and meet at least one of the duties criteria for being considered an exempt executive, administrative or professional employee. The current pay rules for these employees require that they receive at least $455 per week on a salary or fee basis and receive at least $100,000 on a non-discretionary basis. The rule, though, allows a short window to catch-up the pay to meet the $100,000 threshold if the employee falls short of the expected $100,000+ annual pay.

    On January 1, 2020, the new pay amounts applicable to these employees will be:
     $684 per week to be paid on a salary or fee basis, and
    Total compensation for the year must be at least $107,432.

  • Employers should consider conducting an FLSA compliance audit to review their exempted classifications, as well as their time and attendance practices and pay practices, which could avoid or greatly reduce employer liability should they be found to have somehow—even inadvertently—violated the Act.

State law changes 

In addition to complying with Federal law, employers must also comply with the minimum wage and overtime requirements under state law.

  • Many states have more stringent requirements for employees to be exempt from overtime than the FLSA, and the rules of whichever law is more favorable to employees will apply. A number of states have higher salary level thresholds for exempt status than those under the FLSA. Employees in those states must be paid per those state thresholds in order for them to considered exempt under state law.
  • On January 1, 2020, the minimum wages in many states will increase, and many states have minimum wages greater than the $7.25 per hour Federal minimum wage. As with overtime rules, whichever law mandates the higher minimum rate, that higher rate will apply. Among the states increasing their regular minimum wage rates on January 1 are:
     California (from $12.00 to $13.00 per hour);
    – Illinois (from $8.25 to $9.25 per hour);
     Maryland (from $10.10 to $11.00 per hour);
     Michigan (from $9.45 to 9.65 per hour); and
    Minnesota (from $9.86 to $10.00 per hour).
  • Employers should also be aware some local units of government have their own minimum and living wage requirements. In these local jurisdictions, the higher minimum wage will apply.

Next Steps: What should employers do?

Employers should evaluate whether they are in compliance with these new legal requirements by conducting an internal audit and, if an audit finds any areas of non-compliance, employers should make any necessary changes to their pay policies and practices. As mentioned above, as employers adjust to these changes, any audit should be conducted so as to survive judicial scrutiny if the pay program is ever challenged, particularly under federal law. Under federal law, employers can assert a “good faith” defense to an FLSA claim, and if successful, they may be able to avoid assessments of liquidated damages, damages that are usually an amount equal to the amount of unpaid wages or overtime at issue. To successfully assert this defense, courts usually expect employers to have their audits conducted a reputable wage and hour attorneys or sophisticated consultants.

For more information about compliance, contact any WHDI member.

California Governor Gavin Newsom Signs Series of Noteworthy Employment Bills

Sunday, October 13, 2019, was the last day for Governor Gavin Newsom to approve or veto bills passed by the state Legislature. This year’s approved employment-related bills generated quite a buzz, and for good reason. This e-Update surveys some of the most significant changes that will impact California employers. Paul, Plevin will review these and other new laws at the firm’s annual Employment Law Update on Friday, November 1st at the Hilton San Diego Resort & Spa on Mission Bay.

All new laws take effect January 1, 2020, except as indicated below.

Assembly Bill 5 – Employee versus Independent Contractor Status

Assembly Bill 5 codifies the “ABC” test adopted in Dynamex Operations v. Superior Court to determine whether a worker is an employee or independent contractor. The Dynamex decision was limited to only certain parts of the Labor Code, but Assembly Bill 5 extends the “ABC” test to virtually all California workers, excluding certain specifically enumerated industries and occupations (e.g. doctors, investment advisors, and hairdressers). In addition to various complete exceptions, this bill allows contracts of certain employers and industries to be governed by the more forgiving Borello multi-factor “economic realities” test, provided they meet a set of listed requirements.

Assembly Bill 9 – More Time To Bring Discrimination and Harassment Claims

The Stop Harassment and Reporting Extension Act extends the period for an aggrieved employee to file a complaint alleging harassment, discrimination, or other unlawful practices with the Department of Fair Employment and Housing (DFEH) from one year to three years. The new limitations period does not apply to claims that have already lapsed if a complaint was not filed with the DFEH.

Assembly Bill 51 – Prohibition on Mandatory Arbitration Agreements

This new law makes it a criminal misdemeanor for an employer to require an applicant or employee to enter into an agreement to arbitrate any claims under the Fair Employment and Housing Act or the California Labor Code. Arbitration agreements in place before January 1, 2020 will still be enforceable, as long as they are not extended or modified after that date. While the drafters of the bill attempted to avoid preemption by the Federal Arbitration Act, that question will likely be tested in the federal courts.

Assembly Bill 673 – Recovery of Civil Penalties

Employees will be able to obtain penalties as part of a Labor Commissioner hearing to recover unpaid wages. Under the current law, penalties must be paid to the State, but this new law allows workers to personally collect the penalty instead. An employee, however, still cannot “double dip”; he or she has to choose between recovering statutory penalties under these provisions or enforcing civil penalties under the Private Attorney General Act.

Assembly Bill 749 – “No Rehire” Provisions Prohibited in Settlement Agreements

This new law prohibits an agreement to settle an employment dispute from containing a provision that prohibits, prevents, or otherwise restricts the claimant from working for the employer against which the claimant filed a claim, or any affiliated entity. An employer and employee are permitted, however, to agree to end a current employment relationship or restrict the employee from obtaining future employment with the employer, if the employer made a good faith determination that the employee engaged in sexual harassment or sexual assault. Further, an employer is not required to continue to employ or rehire an employee if there is a legitimate, non-discriminatory or non-retaliatory reason for terminating or refusing to rehire the employee.

Assembly Bill 1554 – Flexible Spending Accounts

This new law requires employers to notify, in a prescribed manner, an employee who participates in a flexible spending account of any deadline to withdraw funds before the end of the plan year. “Flexible spending accounts” include but are not limited to: (1) dependent care flexible spending accounts; (2) health flexible spending accounts; and (3) adoption assistance flexible spending accounts. The required notice shall be provided by two different forms, one of which may be electronic.

Senate Bill 142 – Lactation Accommodations

This new law, largely based on the San Francisco ordinance for lactation accommodations passed in 2017, further expands protections for lactating workers by requiring employers to provide a lactation room, other than a bathroom, that shall be “in close proximity to the employee’s work area, shielded from view, and free from intrusion.” The lactation room must also (1) be safe, clean, and free from toxic or hazardous materials; (2) contain a surface to place a breast pump and personal items; (3) contain a place to sit; and (4) have electricity. Employers must also provide access to a sink with running water and a refrigerator in close proximity to the employee’s workspace. This law also requires employers to develop and implement a lactation accommodation policy, include it in employee handbooks, and provide it to new employees or when an employee raises parental leave. Employers with fewer than 50 employees may seek an exemption to these new requirements if they can demonstrate undue hardship.

Senate Bill 778 – Sexual Harassment Training Deadline Extension

This bill is emergency legislation, and therefore took effect immediately upon signing on August 30, 2019. This new law delays the deadline to complete supervisor and non-supervisor sexual harassment training under the FEHA from January 1, 2020 to January 1, 2021. However, new non-supervisory employees must still be provided at least one hour of sex harassment training within six months of hire, and new supervisory employees must be provided training within six months of the assumption of a supervisory position.

Senate Bill 83 – Expansion of Paid Family Leave

This new law extends the maximum duration of paid family leave (PFL) benefits from six weeks to eight weeks beginning July 1, 2020. Workers paying into the California State Disability Insurance (SDI) program may receive such PFL benefits to (1) care for a seriously ill child, spouse, parent, grandparent, grandchild, sibling, or domestic partner, or (2) to bond with a minor child within one year of the birth or placement of the child through foster care or adoption. Additionally, this new law allows state government employees that pay into the Nonindustrial Disability Insurance (NDI) program to receive six weeks of paid leave. Further, this law requires the governor to propose by November further benefit increases—in terms of duration and amount—and job protections for individuals receiving PFL benefits.

Senate Bill 188 – Hairstyle Discrimination

The Creating a Respectful and Open Workplace for Natural Hair (CROWN) Act, expands the definition of “race” under the FEHA and the Education Code to include both hair texture and protective hairstyles that are closely associated with race. The Act bans not only general employment discrimination, but also dress codes and grooming policies that prohibit “natural hair, including afros, braids, twists, and locks,” which would have a disparate impact on black applicants and black employees. FEHA exceptions for bona fide occupational qualifications and security regulations still may apply. California is the first state to codify this rule.

Fred Plevin
Paul, Plevin, Sullivan & Connaughton LLP