Labor and Employment

On April 30, 2018, the California Supreme Court applied an expansive definition of independent contractor in a ruling that is sure to have a dramatic impact on many California businesses, and the burgeoning gig economy in particular.

In the case of Dynamex Operations W. v. Superior L.A. County, a class action was brought on behalf of a group of delivery drivers who were classified as independent contractors by delivery company, Dynamex. Dynamex argued that the drivers were properly designated as independent contracts under the totality-of-the-circumstances standard set forth in the Borello case—utilized by California businesses since 1989—which concentrated primarily on the degree of control the employer exercised over the worker. Dynamex’s drivers provided their own vehicles, paid their own transportation expenses (fuel, tolls, vehicle maintenance, and insurance), set their own schedules, and were generally free to choose the sequence in which they made deliveries and the routes they would take. They were also allowed to simultaneously work for other delivery companies.

The Supreme Court sided with the drivers, concluding that a worker is presumed to be an employee unless the company can establish that each of three factors exist under the “ABC” test: (A) that the worker is sufficiently free from the control and direction of the company; and (B) that the worker performs work that is outside the usual course of the company’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The Court said it wasn’t enough that Dynamex didn’t prevent the drivers from engaging in other work; it had to prove that the drivers actually performed delivery services for other companies. In addition, Dynamex was a “delivery company,” so its delivery drivers were performing the essential functions of the business. They were not comparable in that regard to an electrician or plumber who might do business with Dynamex as independent contractors.

This ruling, with its newly drawn legal parameters, is expected to significantly affect California’s freelance industry and gig economy. Business offering web-based food delivery services, courier and ridesharing services that are based on independent contractor workforces will likely be the most impacted. But this landmark ruling warrants an analysis across the board of many positions that were previously classified as independent contractors.

It is an old joke that the world can be divided into people who are good at math and those who go to law school.  Whether you believe the joke or not, math – or in this case, simple arithmetic – can be at the heart of many wage and hour questions.  On March 5, 2018, the California Supreme Court issued an opinion in Alvarado v. Dart Container Corp.  The Court articulated a rule on how an employee’s overtime pay rate should be calculated when the employee has earned a flat sum bonus during a single pay period.  Please be aware of the emphasized language:  flat sum bonus.

The Supreme Court’s decision in Alvarado details the procedure for applying a “flat sum bonus” in determining the regular rate of pay for purposes of overtime.  The “regular rate of pay” is the pay rate which is multiplied by the applicable overtime premium (time and a half or double time).   The Court relies heavily on the Department of Labor Standards Enforcement (“DLSE”) Enforcement Manual.  That manual divides the world of regular rate calculations involving bonus and incentive payments into two categories:  (1) those that are “production or commission based;” and (2) those that are paid as a flat sum.  In Alvarado, the flat sum bonus was an attendance bonus paid by the employer to employees who met the company’s attendance incentive goals.

The question was how are these non-hourly rate wages properly included in calculation of the regular rate.  The DLSE Enforcement Manual outlines acceptable approaches for including such bonus and incentive payments into the regular rate calculation.  Simply put, the law requires periodic bonus commission payments earned in a particular pay period be included in the determination of the “regular rate of pay” prior to calculating the overtime premium payment.  These sums are added to the regularly earned wages and then divided by a divisor to determine the “regular rate of pay.”  The question considered by the Alvarado Court is to what that divisor should be.  As the Court put it:

Specifically, we consider whether the divisor for purposes of calculating the per-hour value of the bonus should be (1) the number of hours the employee actually worked during the pay period, including overtime hours; (2) the number of nonovertime hours the employee worked during the pay period; or (3) the number of nonovertime hours that exist in the pay period, regardless of the number of hours the employee actually worked.

The Court concluded that the divisor should be the second of these options.  That is, dividing the flat sum bonus received in the pay period by the number of non-overtime hours the employee worked during the pay period.

The case did not consider how production based or non “flat sum” bonuses should be included in calculation of the regular rate of pay. The Court’s rationale in Alvarado, however, lends credence to the methods of calculation outlined in the DLSE Enforcement Manual at section 49.2.1.2. :

Compute the regular rate by dividing the total earnings for the week, including earnings during overtime hours, by the total hours worked during the week, including the overtime hours.

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What this means is that if employees receive a flat sum bonus – one not tied to productive activity or sales activity (such as commissions) the total earnings for the pay period are divided by the total hours of regular work in the week (excluding overtime).  A different rule applies for production bonus workers or commission workers which requires that all wages for the pay period be divided by the total hours worked during the pay period, including overtime hours.

Assembly Bill (“AB”) 2069 was introduced by the California Assembly on February 7, 2018. Currently, California employers can deny employment or impose discipline on cannabis users, regardless of whether such use is for medical purposes. AB 2069 would amend the Fair Employment and Housing Act (“FEHA”) to make it an unlawful practice for an employer to take adverse action against an applicant or employee because of a positive drug test for cannabis (by a medical cannabis card holder) or because of one’s status as a medical cannabis card holder.

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Beware. Routine criticisms of job performance when directed to employees engaged in a caring profession, may subject you to retaliation and whistleblower claims.

So you hire an employee, call her a brick layer. She is a horrible brick layer. You get in constant arguments with her concerning the quality of her brick laying. You say that the bricks must be square and aligned and she says, no they look better if they are crooked, uneven and “rustic.” Firing that employee for discharging her duties as a brick layer in a way the employer finds unacceptable is, in almost all cases, a low risk decision. Subjective dislike of an employee’s work performance is a time honored and well recognized “legitimate nondiscriminatory, nonretaliatory,” reason for termination.

But what if you employ professionals engaged in a helping profession (doctors, nurses, teachers, social workers, psychologists, etc.) or professionals engaged in activities that may affect public health (epidemiologists, doctors, certain engineers, etc.)? An employer of teachers who grows unhappy with a teacher’s performance of his teaching duties or an employer of doctors or nurses who grow unhappy with those health professionals discharge of their professional duties may not have the same protections that the employer of the brick layer enjoys. Why? Because California statutes and regulations recognize and protect certain professions against retaliation or interference with such professional work. For example, Business and Professions Code section 2056 protects health practitioners from retaliation for “advocating appropriate medical care,” and numerous regulations and laws similarly protect teachers. California Education Code section 56046 prohibits any employer from taking adverse action against a teacher for having advocated on behalf of a student or assisting parents in seeking or obtaining services or accommodations for students with exceptional needs. Such workers may also have substantial protections under the U.S. Constitution and section 504 of the federal rehabilitation act.

What this means is that employers who employ helping professionals should familiarize themselves with statutes, regulations and laws that may cloak an employee’s disagreement over what to do for their patient, student, or the public with “protected activity” status. Prior to taking any “he/she does a bad job” action against a helping professional or, anyone engaged in compliance activities, employers should carefully scrutinize whether their action could be viewed as interference with an employee’s protected “whistleblower” activities or opposition to improper teaching, medical, or public health activities by the employer.

We all understand the common meaning of the word “employer.” In California, “employers” need to keep track of the various rules and regulations, all of which have their own definitions of the word. Most frequently, the number of employees dictates whether a given statute or ordinance applies to the employer. In addition, California’s Fair Employment and Housing Act (“FEHA” or the “Act”), exempts certain “employers” from the application of the anti-discrimination laws found within the Act.

This blog post focuses on protecting the so-called “religious entity” exemption from the FEHA.

Employer versus Employer versus Employer – Various Definitions

The FEHA prohibits discrimination, harassment, and retaliation on a large list of protected class statuses, and is more expansive than the federal analog, Title VII. FEHA’s anti-discrimination provisions apply to “employer” – defined as any person who employs five or more persons, subject to certain exceptions. Relevant to this blog, Cal. Gov. Code § 12926(d) a “religious association or corporation not organized for private profit” is not an “employer” for the “unlawful practices” provisions of FEHA.

FEHA, Cal. Gov. Code § 12950, also requires “all” employers, impliedly using the section 12926 definition and impliedly subject to the religious entity exemption – to post notices regarding employees’ rights under FEHA. But, most employers – including religious entities – are required to post a variety of other notices (minimum wage, payday notices, unemployment insurance, worker’s compensation, whistleblower rights, etc.) pursuant to various Labor Code, Unemployment Insurance Code, federal law, local ordinances, and the Department of Industrial Relations requirements. There are several vendors who supply “all in one” posters, updated annually. Most HR professionals and in-house counsel order these “all in one” posters from reputable sources, relying on them to be accurate.

FEHA also has a mandatory training component (commonly referred to as “AB 1825” training). For this purpose, an “employer” is defined in the FEHA regulations – Ca. Admin Code 11024 – as “any person engaged in any business or enterprise in California, who employs 50 or more employees to perform services for a wage or salary or contractors or any person acting as an agent of an employer, directly or indirectly.” Notably, there is NOT an express “religious entity” exemption from FEHA regulations. Such “employers” are required to conduct bi-annual anti-harassment training to educate supervisors on the prohibitions against harassment and discrimination in FEHA and Title VII – apparently, even if those “employers” are otherwise exempt from FEHA.

The Unresolved Question since 2002 – is a Nonprofit Religious Corporation Operating a School exempt from FEHA?

Certain religious entities have long been exempt under Cal. Govt. Code section 12926(d). But effective January 1, 2002, section 12926.2(f) was added, expanding the definition of “employer” to include religious non-profit educational institutions that are (1) non-profit public benefit corporations; (2) formed by, or affiliated with a particular religion; and (3) operate an educational institution as its sole or primary activity. However, the amendment left intact the ability for such institutions to restrict employment in all categories of employment to adherents of the religion, regardless of whether the duties of the positions are connected to a religious function.

There has only been one case interpreting the 2002 amendment to preserve the exemption for a school organized as a Nonprofit Religious Corporation, Henry v. Red Hill Evangelical Lutheran Church (2011) 201 Cal. App. 4th 1041. In that case, the Court seemed to find it relevant that the school was part of the church’s ministry, did not exist as a separate legal entity, was on church property and was adjacent to the church. Until 2017, no case had expressly protected the religious entity exemption for a school that is separately incorporated, is not on church grounds, but is nevertheless a religiously affiliated school organized as a Nonprofit Religious Corporation.

The good news for religious entities, especially nonprofit religious schools.

In December 2017, the San Francisco Superior Court ruled on an issue of first impression, and decided that a private high school, organized as a California Nonprofit Religious Corporation primarily for religious and educational purposes, is exempt from FEHA.

The judge correctly interpreted the 2002 FEHA amendment (§12926.2(f)(2)) that narrowed the exemption for public benefit corporations operating schools as applying only to public benefit corporations, not to all schools including those organized and incorporated as nonprofit religious corporations.

This may seem axiomatic based on the plain language of the statute, but it was a hard-fought issue at trial because of three facts: (1) the school was, for a time, incorporated as a public benefit corporation (and reincorporated after to the 2002 amendment), (2) unlike the school in Red Hill, this high school is a distinct corporate entity from any church and is not on church grounds, and (3) the school teaches secular (as well as religious) subjects.

The catch – waiver and estoppel may bar assertion of a statutory right.

Religious entities must take care to avoid inadvertently wiping out their religious entity status. In the same 2017 trial, the judge and jury ruled that the school, by its conduct, waived and should be equitably estopped from asserting its religious entity exemption from FEHA. “Waiver” means the intentional relinquishment of a known right (here, the FEHA exemption), or acting in a way that is so inconsistent with the intent to assert a right that the party should not be able to assert the right. Estoppel is a similar doctrine, and requires that the other party relied on the party’s words or conduct and suffered harm as a result. Often treated as interchangeable by courts, these equitable principals developed to protect an innocent who has justifiably relied on the other party’s conduct.

What “knowing and intentional” conduct might support waiver and estoppel of a nonprofit religious school’s FEHA exemption?

In the 2017 trial, three facts supported waiver/estoppel: (1) having a handbook with a policy committing to enforce federal anti-discrimination laws, (2) providing supervisor anti-harassment training, and (3) posting the standard breakroom “all in one” posters on the wall.

We usually think of waiver and estoppel as equitable doctrines that prevent someone from having their cake and eating it too. But here, the school didn’t benefit in any way from failing to explicitly shout to its employees that they are not protected by FEHA, and the plaintiff didn’t suffer any added harm because of the school’s failure to tell her that it is exempt from FEHA. The school here tried in earnest to follow the laws, and can only be faulted for being extremely conservative in its approach to handbooks, training, and posters. It was trapped in a web of differing and unclear definitions in California’s various rules, ordinances and laws. The prudent employers we represent can sympathize: the school followed the laws that clearly do apply– having anti-discrimination policies consistent with federal law – and to be safe, to follow the laws that may be interpreted to apply to the school – posting the breakroom notices that FEHA says “all employers” must post (“employer” being defined differently for that subsection of FEHA) – and by adopting what any rational employer would view as a best practice – sending its supervisors to anti-harassment training.

What’s the risk?

The result of a finding of waiver/estoppel in a case like this could be that a school may be required to pay a jury award that is not subject to the Title VII damages cap (the federal anti-discrimination statute). A plaintiff who deliberately elected to pursue state law FEHA claims only, in order to avoid the Title VII damages cap, could blindside a nonprofit religious corporation which believed itself exempt from the FEHA. A plaintiff, who could otherwise only recover damages but not fees under her common law wrongful termination claim, now may also be able to recover attorney’s fees and expert witness fees under FEHA.

What should a religiously affiliated school or other nonprofit religious corporation with more than five employees do to avoid this trap?

1. Have your employee handbook, offer letter template, teacher contract template, parent/student handbook, and any standalone policies and related acknowledgment forms reviewed by competent employment counsel. These documents should contain a clear explanation of the religious entity exemption, and a declaration of intent to preserve, and not waive, the religious entity’s rights and protections, while still preserving the commitment to an environment free of harassment, discrimination and retaliation.

2. If you offer “AB 1825” anti-harassment training, be sure your trainer knows that the entity is a non-profit religious corporation and that the materials contain appropriate disclaimers and disclosures. If your company’s usual trainer doesn’t understand why that is important, look for one who does.

3. Consider modifying, or supplementing, the FEHA portions of the standard “all in one” breakroom employment notices to make employees aware of your religious entity exemption.

4. Have competent legal counsel review your Articles of Incorporation, Bylaws, and corporate practices, to ensure that the entity’s organizational documents and practices comply with the Nonprofit Religious Corporation Code.

5. If your entity is a religiously affiliated school incorporated as a Nonprofit Public Benefit Corporation, seek advice regarding whether it qualifies as a Nonprofit Religious Corporation. Religiously-affiliated schools organized as nonprofit public Benefit Corporations enjoy only a narrow exemption from FEHA, except regarding the hiring of persons holding religious positions.

Weintraub Tobin’s team of employment and corporate attorneys understand these issues and provide training, handbook and other document review, and guidance tailored to your specific industry.

Employers sometimes see a position elimination or reduction in force as a way of terminating employees that is kinder and gentler than termination for cause. Position eliminations and reductions in force allow an employer to say goodbye to an employee without having to lay out the reasons for the separation on the employee’s door step. It is, after all, easier to say the “business won’t support your continued employment,” than it is to say, “we don’t like your work.” While some people may embrace confrontation, my experience has been that most employers don’t like to frankly tell their employees that their work performance is inadequate. Employers or managers can feel nitpicky, impolite, and discourteous, when they document an employee’s performance deficiencies.

This discomfort can result in inflated job performance evaluations (giving, for example, a marginal employee a satisfactory rating and a satisfactory employee a “walks on water” rating). But real dangers can arise when employers try to avoid an honest communication with employees. That is because employment cases are less about “what” an employer did. It is lawful to fire an employee. It is unlawful to fire an employee for unlawful reasons (such as the employee’s race or religion). As a result, the question in most wrongful termination cases is: Did the employer have a legitimate lawful reason for the termination? Courts can’t open up the employer’s head and find the reason, so courts look to surrounding facts and circumstances to determine the employer’s motives.

In order to prevail in a discrimination claim against a defendant, a plaintiff must establish, for example, that she was adequately performing her job, that she is a member of a protected class, that she suffered an adverse job action, and some additional fact or facts would suggest that the plaintiff’s protected class status was a factor in the employer’s adverse employment action.

The burden then shifts to the defendant to state a legitimate nondiscriminatory non-retaliatory reason for the adverse employment action. (Something like, “his performance was inadequate,” or “he stole money from the cash drawer,” etc.) The burden then shifts back to the plaintiff to present evidence that the stated legitimate reason for the termination or adverse employment action is a pretext for illegal discrimination. Often plaintiffs can do this by pointing to the fact that similarly situated persons not in a protected class or who engaged in the same conduct were not fired or did not suffer the same adverse employment action as the plaintiff.

Another way for a plaintiff to meet the burden of establishing pretext is by showing that the stated reason is a false reason. That is the hidden danger of claiming the need for a reduction in force or a business restructure in lieu of terminating an employee for cause. Employers often think, mistakenly, that simply saying your position has been eliminated can avoid all the messiness and explanation required of a termination for cause. This just isn’t true. Employers can still be challenged by an employee who claims that the reduction in force is merely a pretext for a discriminatory (and illegal) termination of employment. Reductions in force can be complicated things. After a company makes a decision to reduce the number of full-time positions, it will have to establish or demonstrate a legitimate business objective (to reduce costs, reduce or eliminate losses, etc.) and to demonstrate that its selection of the plaintiff for the position elimination was not itself discriminatory. Many employers who rely on a position elimination don’t bother to do the ground work of establishing a neutral selection criteria that results in the selection of candidates for a reduction in force. Without that ground work being done, employers can end up with egg on their faces when a plaintiff says “okay, you had to eliminate a position, but why my position?” Another danger is that employers will claim a reduction in force may re-fill the position that they told the plaintiff they were eliminating. Such a fact, if proven, could easily support a claim that the employer’s stated reason for termination was a pretext for discriminatory intent.

Finally, you should recall that an employer who has to change reasons for an adverse employment action is already helping a plaintiff prove that the stated reason is a pretext for an illegal reason for termination.

The Division of Labor Standards Enforcement (“DLSE”) recently issued updated guidance regarding rest breaks that reverses its previous position, which permitted employers to require that employees stay on work premises during their rest periods. In this new guidance, the DLSE states that employers “cannot impose any restraints not inherent in the rest period requirement itself,” including forbidding employees to leave the premises. This guidance follows the California Supreme Court’s determination that rest breaks, like meal breaks, must be “duty free.” In Augustus v. ABM Security Services, Inc. (2016) 5 Cal.5th 257, the California Supreme Court determined that a company policy regarding security guards to keep their radios or pagers on during their rest breaks, and to respond if needed, violated the California Labor Code and Wage Orders. The DLSE has expanded this ruling to require that employers permit employees to leave the work premises during their rest break, while noting that “[a]s a practical matter … the employee can only travel five minutes from a work post before heading back to return in time.”

California employers should review their employment policies to ensure compliance with this updated guidance. Weintraub’s Labor & Employment attorneys have extensive experience counseling and auditing employee handbooks. Please contact any member of our team for assistance in updating your policies.

Visit our Labor & Employment Blog here: https://www.thelelawblog.com/2017/12/articles/labor-law/dlse-issues-new-guidance-on-rest-breaks-is-your-handbook-up-to-date/.