Employment Law

California Makes Seismic Shift With New ‘ABC’ Independent Contractor Test

By Esra A. Hudson, Partner, Employment and Labor | Eve Torres, Associate, Employment and Labor

The Dynamex Ruling

In a landmark decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Charles Lee), the California Supreme Court adopted a new legal standard for determining whether workers should be classified as employees or as independent contractors for purposes of California wage orders promulgated by the Industrial Welfare Commission (IWC). (Wage orders impose obligations relating to the minimum wages, maximum hours and a limited number of very basic working conditions (such as minimally required meal and rest breaks) for California employees.) The Court adopted the “ABC” test, utilized by other jurisdictions, which ultimately makes it much more difficult for businesses to classify workers as independent contractors.

The “ABC” test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring entity demonstrates that the worker in question satisfies all of the following three conditions:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

The Supreme Court also clarified that it interprets this standard as placing the burden on the hiring entity to establish that the worker is an independent contractor by proving that the worker meets each of the three ABC factors.

Background on the Dynamex Case

Dynamex Operations West, Inc. (Dynamex) is a nationwide package and document delivery company. Prior to 2004, Dynamex classified its California drivers as employees, but in 2004, the company converted all drivers from employees to independent contractors. In 2005, Plaintiff Charles Lee entered into an independent contractor agreement with Dynamex to provide delivery services for the company. In April 2005, three months after ending his work with Dynamex, Lee filed this lawsuit on his own behalf and on behalf of similarly situated Dynamex drivers, alleging that Dynamex’s misclassification of its drivers as independent contractors led to Dynamex’s violation of the provisions of IWC wage order No. 9, the applicable state wage order governing the transportation industry, as well as various sections of the Labor Code.

After an earlier round of litigation in which the trial court’s initial order denying class certification was reversed by the Court of Appeal, the trial court ultimately certified a class of Dynamex delivery drivers. The trial court’s certification order relied on Martinez v. Combs, 49 Cal. 4th 35 (2010), which held that “employ” has three alternative definitions: (a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship. Martinez, 49 Cal. 4th at 64.

Upon appeal, the Court of Appeal ruled that the wage order definitions discussed in Martinez are applicable to the employee or independent contractor question with respect to obligations arising out of wage orders. The Court of Appeal upheld the trial court’s class certification order with respect to all of plaintiffs’ claims that are based on alleged violations of wage orders. At the same time, the Court of Appeal concluded that insofar as the causes of action in the complaint were not governed by wage orders, the Borello standard is the applicable standard for determining whether a worker is properly considered an employee or an independent contractor.

S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989) was previously viewed as the seminal California decision on independent contractor classification. The Borello test’s principal factor is “whether the person to whom services is rendered has the right to control the manner and means of accomplishing the result desired,” which should be considered in addition to the following nine additional factors: (1) right to discharge at will, without cause; (2) whether the one performing the services is engaged in a distinct occupation or business; (3) 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; (4) the skill required in the particular occupation; (5) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (6) the length of time for which the services are to be performed; (7) method of payment, whether by the time or by the job; (8) whether or not the work is part of the regular business of the principal; and (9) whether or not the parties believe they are creating the relationship of employer-employee.

Dynamex then filed a petition for review challenging the Court of Appeal’s conclusion that the wage order definitions of “employ” and “employer” discussed in Martinez are applicable to the question whether a worker is properly considered an employee or an independent contractor for purposes of the obligations imposed by an applicable wage order, which this week’s Supreme Court ruling addresses.

What the Dynamex Ruling Means for Employers

This decision is a seismic shift in the law regarding independent contractor/employee classification. The Supreme Court is placing the burden on businesses to defend their classification of workers as independent contractors, according to the above “ABC” factors. While factor A (“worker is free from the control and direction of the hirer in connection with the performance of the work . . .”) is similar to the formerly applied Borello test, factors B and C are likely much more difficult for employers to establish for their workers currently classified as independent contractors.

The Supreme Court provided the following example for factor B (“the worker performs work that is outside the usual course of the hiring entity’s business”). When a retail store hires an outside plumber to repair a leak in a bathroom on its premises, the services of the plumber are not part of the store’s usual course of business, and the plumber meets factor B for independent contractor classification. However, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company, or a bakery hires a cake decorator, factor B is not met.

Factor C (“the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed”) limits independent contractor classification to an individual who “independently has made the decision to go into business for himself or herself.” A worker who meets factor C “generally takes the usual steps to establish and promote his or her independent business—for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers, and the like.”

It is not clear from this ruling whether the “ABC” test applies to claims brought by workers that do not arise from Wage Orders (e.g., claims for reimbursement for business expenses that arise from California Labor Code section 2802). However, businesses operating in California that treat any of their workers as independent contractors should re-evaluate the classification of their workers according to the “ABC” test to ensure full compliance with the law. If a worker is classified as an employee, the employer bears the responsibility of paying Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing workers’ compensation insurance and complying with state and federal statutes governing the wages, hours and working conditions of employees. Consequently, misclassification of workers can result in significant legal exposure with respect to wage and hour compliance.

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DFEH Launches Harassment and Diversity Survey

Why it matters

California employers, take note: The Department of Fair Employment and Housing (DFEH) has launched a statewide survey on antiharassment and diversity policies. Conducted through phone interviews with randomly selected California employers, the survey “seeks to develop a portrait of how California employers manage diversity and harassment issues,” the DFEH explained. Questions will cover sexual harassment policies, recruiting programs for women and minorities, and harassment complaint procedures, among other topics. “Knowing more about California employers’ harassment and diversity initiatives is key to the Department’s ongoing work to prevent workplace harassment and discrimination,” DFEH Director Kevin Kish said in a statement. “We expect the results of the survey to provide important insights for policy makers and the public alike.”

Detailed discussion

In May 2016, the Department of Fair Employment and Housing (DFEH) launched a Task Force on the Prevention of Sexual Harassment in the Workplace to study the issue of sexual harassment in California, the effects of ten years of harassment prevention training and the best practices to prevent harassment.

The new survey is an outgrowth of the Task Force’s efforts, the DFEH said.

California employers will be randomly selected to take part and will be contacted by phone. Questions will address employer policies on antidiscrimination, sexual harassment and general antiharassment policies, the agency said, as well as employer-sponsored trainings on harassment and diversity issues, recruiting programs for women and minorities, and harassment complaint procedures.

Only aggregate survey data will be released, and company names will not be recorded.

The Task Force previously issued a Workplace Harassment Guide for California Employers, offering DFEH-recommended practices for preventing and addressing all forms of workplace harassment, including harassment based on sex. With the possibility of a call from the DFEH in the near future, now might be a good time for employers to review the guide as well as their policies.

To read the DFEH press release, click here.

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They’re Back: DOL Issues Three New Opinion Letters

Why it matters

In a return to the use of opinion letters, the Department of Labor (DOL) released its first three under the Trump administration on the topics of travel time, garnishment of lump-sum payments for child support and payment for health-related rest breaks. On travel time, FLSA 2018-18 noted that compensable work time generally does not include time spent commuting to or from work, even if the job site varies from day to day. However, travel from job site to job site during a workday must be counted as hours worked for purposes of calculating wages, the Wage and Hour Division (WHD) said, as must business travel when it impacts regular work hours. With regard to the garnishment issue, the letter explained the “central inquiry is whether the amounts are paid by the employer in exchange for personal services,” in which case they will be subject to garnishment limitations. Alternatively, lump-sum payments that are unrelated to personal services rendered are not earnings. In FLSA 2018-19, the WHD considered payment for 15-minute breaks taken by employees because of a serious health condition. As short rest breaks primarily benefiting the employee are not compensable, these Family and Medical Leave Act (FMLA)-protected breaks do not need to be paid, the letter concluded.

Detailed discussion

Under the Obama administration, the Department of Labor (DOL) stopped the practice of issuing opinion letters, which answer specific questions that have been submitted to the agency and provide guidance for employers. With the change of administration, the DOL signaled its intent to return to the practice by reissuing some prior opinion letters.

Now the agency has gone one step further, releasing new opinion letters. In the first, FLSA 2018-18, the Wage and Hour Division (WHD) addressed the compensability of travel time for hourly technicians under the Fair Labor Standards Act (FLSA). The employer stated that its technicians do not work at a fixed location, instead moving around to different customer locations each day. Nor do the technicians have fixed schedules, leaving the employer confused about payment for time spent traveling to and from job sites, including plane flights.

Compensable work time generally does not include time spent commuting to or from work, the WHD said, but “[t]ravel between job sites after arriving at work, however, is compensable.” The use of a company car does not alone make the travel compensable, the letter added.

A trickier problem was figuring out how to compensate technicians for travel time such as taking a flight on Sunday for a training that begins on Monday, for example, when such workers do not have a regular workday. The WHD—after noting that in its experience, a review of employees’ time records usually reveals work patterns sufficient to establish regular work hours—suggested a few ways to calculate such compensation.

One method involved choosing an average start and end time for a workday; another option was negotiating with the employee to agree on a reasonable amount of time or a time frame in which travel outside of their home community is compensable.

“This is not an exhaustive list of the permissible methods for determining an employee’s normal start times or end times,” the WHD wrote. “But when an employer reasonably uses any of these methods to determine employees’ normal working hours for purposes of determining compensable travel time under [FLSA regulations], WHD will not find a violation for compensating employees’ travel only during those working hours.”

In the next letter, the WHD answered an inquiry about whether a nonexempt employee’s 15-minute rest breaks, which are certified by a healthcare provider as required every hour due to the employee’s serious health condition and covered under the Family and Medical Leave Act (FMLA), are compensable or noncompensable time. Employees who take these breaks are performing only six hours of work during an eight-hour shift, the employer said.

The Supreme Court has noted that the compensability of an employee’s time depends on “[w]hether [it] is spent predominantly for the employer’s benefit or for the employee’s,” the WHD explained. While short rest breaks up to 20 minutes in length primarily benefit the employer (and are therefore compensable), other types of rest breaks primarily benefit the employee and will not be paid, the letter noted.

“The specific FMLA-protected breaks described in your letter, however, differ significantly from ordinary rest breaks commonly provided to employees,” according to FLSA 2018-19. “As you note in your letter, the 15-minute breaks at issue here ‘are required eight times per day and solely due to the needs of the employee’s serious health condition as required under the FMLA.’ Because the FMLA-protected breaks described in your letter are given to accommodate the employee’s serious health condition, the breaks predominantly benefit the employee and are noncompensable.”

This conclusion was strengthened by the text of the FMLA itself, the WHD wrote, as the statute expressly provides that FMLA-protected leave may be unpaid.

The WHD offered one cautionary note, reminding the employer that workers who take FMLA-protected breaks must receive as many compensable rest breaks as their coworkers receive. “For example, if an employer generally allows all of its employees to take two paid 15-minute rest breaks during an 8-hour shift, an employee needing 15-minute rest breaks every hour due to a serious health condition should likewise receive compensation for two 15-minute rest breaks during his or her 8-hour shift.”

In the final letter, the WHD responded to a request for an opinion regarding whether certain lump-sum payments from employers to employees are earnings for garnishment purposes under Title III of the Consumer Credit Protection Act (CCPA). The employer asked for guidance because states are disparately applying the CCPA limits for child support withholdings.

The employer provided the agency with a list of 18 specific examples of the types of common lump-sum payment from employers to employees. “In determining whether certain lump-sum payments are earnings under the CCPA, the central inquiry for WHD is whether the employer paid the amount in question for the employee’s services,” the WHD said. “While not determinative, the frequency of payment may be a relevant part of the analysis.”

Three categories emerged from the list of 18 types of payments. First, the WHD identified lump-sum payments that qualify as earnings under the CCPA: commissions, discretionary and nondiscretionary bonuses, productivity or performance bonuses, profit sharing, referral or sign-on bonuses, moving or relocation incentive payments, attendance awards, safety awards, cash service awards, retroactive merit increases, payment for working during a holiday, termination pay, and severance pay.

“WHD considers these specific examples of lump-sum payments to be earnings under the CCPA because the reason for the underlying payment is to compensate the employee for personal services rendered,” the agency explained.

In the second category of lump-sum payments, certain portions qualify as earnings under the CCPA. Some of the payment for workers’ compensation and insurance settlements is designed to replace wages that would have been earned by the employee but for the work-related injury, or for back and front pay. However, any portion of the payment attributable to reimbursement for medical expenses or compensatory or punitive damages is not earnings under the CCPA, the WHD said.

Finally, only one example of lump-sum payments on the employer’s list did not qualify as earnings under the CCPA: buybacks of company shares. As the company’s intent is to reduce the number of its shares on the open market, not to compensate the employee for personal services rendered, such payments are not subject to the CCPA garnishment limitations, the WHD wrote.

To read FLSA 2018-18, click here.

To read FLSA 2018-19, click here.

To read CCPA 2018-1NA, click here.

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New Jersey Court Permits Title VII Suit to Continue

Why it matters

A New Jersey federal court found the plaintiff’s allegations of verbal abuse and touching—as well as his ultimate termination—sufficiently severe and pervasive to move his Title VII hostile work environment and retaliation action forward. Milko Mateo worked at a Nestle Waters distribution facility, where he alleged his supervisor and coworkers regularly made anti-gay remarks in his presence, with one coworker subjecting him to unwanted touching and threats of physical violence. Mateo said he complained to human resources but no investigation took place. He was later terminated after an altercation with a coworker and filed suit. Nestle moved for summary judgment, arguing that the plaintiff failed to provide evidence that he suffered severe and pervasive harassment. The court disagreed, denying the motion. A reasonable jury could find that the plaintiff was subjected to sustained verbal abuse and touching by his coworkers, the court said, and that the employer retained a heterosexual worker who engaged in the same altercation for which the plaintiff was terminated.

Detailed discussion

Milko Mateo began working at the Nestle Waters North America (NWNA) distribution center in Kearny, NJ, in May 2012. According to his federal court complaint, he was subjected to anti-gay remarks from his coworkers and supervisor from the beginning. One coworker in particular made repeated, sexually graphic comments while touching Mateo, he alleged, sometimes in front of their supervisor.

Mateo claimed that he documented this behavior to human resources in the summer of 2012, but no investigation took place and nothing happened to stop the harassment. Another coworker who made anti-gay comments in Mateo’s presence also threw knives at him in the lunchroom, Mateo said. In 2013, he was involved in an altercation over the placement of fans in the warehouse, with a coworker who repeatedly used a derogatory Jamaican term for a gay man. Both men received written warnings. After a subsequent incident involving a time clock, in which words were exchanged between Mateo and another employee, Nestle terminated him.

Mateo then filed an eight-count complaint alleging violations of Title VII and the New Jersey Law Against Discrimination with claims of discrimination, retaliation and a hostile work environment.

The employer moved for summary judgment, disputing when Mateo first made his complaints and arguing that the allegations were not severe or pervasive enough to constitute a hostile work environment.

While acknowledging that Title VII is not a “general civility code,” U.S. District Judge Kevin McNulty denied the employer’s motion. “NWNA has not met its burden of proving that Mr. Mateo could not convince a jury that he experienced ‘severe or pervasive’ harassment,” the court said.

The plaintiff testified to several serious incidents in the workplace that a jury could find “severe or pervasive,” including repeatedly being called a derogatory term for a gay man, the graphic sexual comments along with the touching that accompanied them, and the threats made with knives. These examples were sufficient to support his hostile work environment claim, the court found.

Disagreement over when Mateo first reported allegations of harassment and whether the employer took prompt and adequate remedial action also weighed in favor of denying the motion for summary judgment, the court said, as factual disputes remained in place.

Similarly, the court denied the summary judgment motion on the plaintiff’s sex discrimination and retaliation claims, finding more disputed material facts with regard to an inference of discrimination and pretext on the part of NWNA. In addition to the temporal proximity between Mateo’s complaints and his termination, he was the only person fired, while other (heterosexual) individuals involved in the alleged altercations were not, the court pointed out.

To read the opinion in Mateo v. Nestle Waters North America, Inc., click here.

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ALJ Wants Lowe’s to Talk About Salary

Why it matters

Workers are allowed to discuss their salaries, a National Labor Relations Board administrative law judge (ALJ) told Lowe’s Home Centers in a decision, finding that multiple versions of the employer’s rule violated the National Labor Relations Act (NLRA). Lowe’s maintained a nationwide Code of Business Conduct and Ethics with a “Confidential Information” rule that covered “all non-public information” relating to Lowe’s business, “such as customer, budget, financial, credit, marketing, pricing, supply cost, personnel, medical records and salary information.” Both this rule and a subsequent revision prohibited employees from discussing salary information with the potential for discipline if violated, the ALJ said. As employee discussions regarding wages are “the core of Section 7 rights,” the rules ran afoul of Section 8(a)(1) of the NLRA, the ALJ found, ordering Lowe’s to rescind them and inform employees of the change.

Detailed discussion

In April 2017, charging party Amber Frare filed a complaint with the National Labor Relations Board (NLRB) that Lowe’s Home Centers violated the National Labor Relations Act (NLRA) with its original and revised Code of Business Conduct and Ethics (the Code), to which its employees are bound.

The Code includes a “Confidential Information” rule that states:

“Employees must maintain the confidentiality of information entrusted to them by Lowe’s or its suppliers or customers, except when disclosure is authorized by Lowe’s General Counsel and Chief Compliance Officer or disclosure is required by law, applicable governmental regulations or legal proceedings. Whenever feasible, Employees should consult with the company’s General Counsel and Chief Compliance Officer before disclosing confidential information if they believe they have a legal obligation to do so. Confidential information includes all non-public information that might be of use to competitors of the company, or harmful to Lowe’s, its suppliers or customers, if disclosed. It includes all proprietary information relating to Lowe’s business such as customer, budget, financial, credit, marketing, pricing, supply cost, personnel, medical records and salary information.”

A subsequent revision to the Code defined “Confidential Information” as “material, non-public information, and proprietary information relating to Lowe’s business such as customer, budget, financial, credit, marketing, pricing, supply cost, personnel, medical records or salary information, and future plans and strategy.”

Lowe’s responded to the complaint, arguing that the Confidential Information provision did not prohibit employees from discussing salary information with each other but instead referred to situations involving a person entrusted with nonpublic information relating to the employer’s business. It also argued that its business justifications for the rule outweighed employees’ Section 7 rights.

But administrative law judge (ALJ) Amita Baman Tracy reached the opposite conclusion. “Employee discussions regarding wages, the core of Section 7 rights, are ‘the grist on which concerted activity feeds,’” she wrote. “As such, the Board has consistently held that rules or provisions which prohibit employees from discussing wages are unlawful.”

The ALJ also noted the new standard established by the NLRB in The Boeing Company, where it applied a new balancing test to matters involving allegedly unlawful employer rules as well as the creation of three categories of employment policies.

Category 3 features rules the NLRB designated as unlawful to maintain because they would prohibit or limit NLRA-protected conduct, and the adverse impact on NLRA rights is not outweighed by justifications associated with the rule. An example of a Category 3 rule: one that prohibits employees from discussing wages or benefits with one another.

“In this instance, both versions of the Confidential Information provision may be read to preclude employees from discussing their salary information with one another, as well as nonemployees such as union representatives and Board agents, which the Board has found to infringe on employees’ Section 7 rights to discuss terms and conditions of their employment with others,” Tracy wrote.

The ALJ rejected the employer’s contention that the use of the term “entrusted” in the rule indicated a focus on keeping proprietary information confidential, not a ban on employees discussing salaries. “[T]he Confidential Information rule could not be read as [Lowe’s] offers,” according to the decision. “To the contrary, the Confidential Information rule precludes discussion of salary information. In addition, employees face discipline if they violate the Confidential Information rule in the Original and Revised Code. Therefore, the Confidential Information rule is unlawful.”

Tracy read the Boeing holding “to designate any rule prohibiting employees from discussing salary information as per se unlawful, thus bypassing the need to conduct a balancing test.” Even when conducting a balancing test, however, “the adverse impact on employees’ Section 7 rights outweighs [Lowe’s] asserted business justifications,” the ALJ wrote. “Most importantly for this analysis, [Lowe’s] failed to present any legitimate business justifications for precluding disclosure of salary information in its Confidential Information rule.”

The employer’s reasons—to prevent employees from engaging in insider trading, to avoid unethical business conduct and unfair competition, and to comply with antitrust laws—were nothing more than “bare assertions,” the ALJ said. “Thus, even applying the Boeing balancing test, [Lowe’s] Confidential Information rule, both versions, which prohibit discussion of salary information is unlawful under Section 8(a)(1) of the Act.”

Having concluded that the employer engaged in unfair labor practices, the ALJ ordered Lowe’s to rescind the Confidential Information rule and notify employees of the change.

To read the decision in Lowe’s Home Centers, LLC, click here.

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