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Employee or Independent Contractor? California’s New "ABC" Test

The decision whether to classify a worker as an employee or an independent contractor can have a significant impact on both the worker and the business. As an employee, a worker is entitled to the protections of the labor laws, including payment of minimum wage and overtime, meal and rest breaks, paid sick leave, and other workplace protections. An employer is also responsible for paying an employee’s federal Social Security and payroll taxes, employment taxes, unemployment insurance taxes, and providing worker’s compensation insurance. On the other hand, independent contractors obtain none of these numerous labor law benefits, and the business does not bear any of these costs or responsibilities.

Although in some circumstances classification as an independent contractor may be advantageous to workers as well as to businesses, many unscrupulous employers misuse the independent contractor label to circumvent the labor laws and to obtain an unfair competitive advantage over competitors who properly classify similar workers as employees.  The result is that many California workers have been denied proper compensation and the labor law protections to which they were entitled.

California’s New “ABC” Test for Independent Contractors

In a recent decision Dynamex Operations West, Inc. v. Superior Court (SC S222732 4/30/18), the California Supreme Court cracked down on the misclassification of workers as independent contractors and created a new “ABC” test to determine when a worker should be properly classified as an employee. Under this test, a worker is properly considered an independent contractor only if the employer establishes: (A) that the worker is free from the control and direction of the employer in connection with the performance of the work; (B) that the worker performs work that is outside the usual course of the employer’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 for the employer.

Misuse of the independent contractor label may subject an employer to significant liability for unpaid wages, overtime, missed meal and rest breaks, and other Labor Code violations.

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Expansion of the California Equal Pay Act

Expansion of the California Equal Pay Act

In 2017 California enacted several amendments to Labor Code section 1197.5, which resulted in significant expansion of the California Equal Pay Act. While the old law prohibited wage disparity between employees of the opposite sex, under the new law, the protections have been expanded to prevent a wage disparity between employees who are of a different race or ethnicity.

In deciding to expand the protections of Equal Pay Act, the California legislature found that the gender wage gap in California remained steady, with women earning only 84 cents on the dollar compared to men. However, for minority women the disparity is even more substantial, with African American women in California making just 63 cents and Hispanic women less than 43 cents for every dollar earned by white non-Hispanic men.

Due to the history of women receiving lesser pay than men for the same jobs, under the new law, an employee’s prior salary history can no longer be used as justification for a wage disparity.

Exceptions to the California Equal Pay Act

As with prior versions of the law, there are exceptions. The prohibitions against wage disparity apply to employees who are doing substantially similar work, when considering skill, effort, and responsibility, and when performed under similar working conditions. An employer will not be in violation of the law when a wage differential is based on one or more of the following legitimate factors:

  • A seniority system.
  • A merit system.
  • A system that measures earnings by quantity or quality of production.
  • A bona fide factor other than sex, race or ethnicity, such as education, training, or experience relevant to the job position and the needs of the business.

An employer is also required to demonstrate that factors relied upon were applied reasonably and account for the entire wage differential. In other words, the employer must prove that any wage disparity is entirely unrelated to an employee’s gender, race or ethnicity.

An employee who was the victim of wage discrimination in violation of the equal pay laws is entitled to recover twice the wages he or she lost due to the employer’s discrimination, plus interest and attorney’s fees.

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Los Angeles Mandates Minimum Wage Increase and Paid Sick Leave

Los Angeles Mandates Minimum Wage Increase and Paid Sick Leave

New Minimum Wage Ordinances in the City of Los Angeles have increased the minimum wage for employees who work for an employer within the City limits for a minimum of two hours during any particular week. The new ordinances also require employers to provide employees with paid sick leave.

Under the new ordinances, which first went into effect on July 1, 2016, the minimum wage rate will continue to rise over the next five years until reaching $15/hour for all employees working in the City of Los Angeles by the year 2021. The applicable minimum wage rates and annual increases depend on the number of people employed by a particular employer as detailed in the following Minimum Wage Chart:

Increase Date Employers with 25 or fewer Employees Employers with 26 or more Employees
7/1/2016 $10.00 $10.50
7/1/2017 $10.50 $12.00
7/1/2018 $12.00 $13.25
7/1/2019 $13.25 $14.25
7/1/2020 $14.25 $15.00
7/1/2021 $15.00 $15.00

 

In addition to the minimum wage increase, under the new ordinances, employees who work in the City of Los Angeles for the same employer for 30 days or more within a year, will now be entitled to 48 hours of paid sick each year based on the following guidelines:

  • Employees will be entitled to take up to 48 hours of sick leave in each year of employment, calendar year, or 12-month period.
  • Employers must provide sick leave either: 1) by providing the entire 48 hours to an employee at the beginning of each year of employment, calendar year, or 12-month period; or 2) by providing the employee one hour of sick leave per every 30 hours worked.
  • Paid sick leave shall accrue on the first day of employment or July 1, 2016, whichever is later.
  • An employee may use paid sick leave beginning on the 90th day of employment or July 1, 2016, whichever is later.
  • Accrued unused paid sick leave shall carry over to the following year of employment and may be capped at 72 hours. An employer may set a higher cap or no cap at all.
  • If an employer has a paid leave or paid time off policy or provides payment for compensated time off, that is equal to or no less than 48 hours, no additional time is required.
  • An employer shall provide paid sick leave upon the oral or written request of an employee for themselves, a family member or for any individual related by affinity whose close association with the employee is the equivalent of a family relationship. An employee may also be required to provide reasonable documentation of an absence from work for which paid sick leave is or will be used.
  • An employer is not required to provide compensation to an employee for accrued or unused sick days upon termination, resignation, retirement, or other separation from employment.
  • If an employee separates from an employer and is rehired by the employer within one year from the date of separation, previously accrued and unused paid sick time shall be reinstated.

Employer Requirements

Under the new minimum wage ordinances, employers are required to do the following:

  • Pay hourly minimum wage for hours worked by employees within the City of Los Angeles.
  • Post the Office of Wage Standards Wage Notices in a conspicuous place at any workplaces or job sites in multiple languages, including any language spoken by at least five percent (5%) of the employees at the workplace or job site.
  • Keep payroll records for a period of four (4) years.
  • Provide employees with the employer’s name, address, and telephone number in writing at the time of hire.
  • Employers are prohibited from retaliating against any employee exercising rights under the Minimum Wage and Wage Enforcement Division Ordinances.

Remedies

Employees who are denied the required minimum wage increases or paid sick leave are entitled to the following, among other, remedies:

  • Payment of wages unlawfully withheld;
  • Payment of Sick Time Benefits unlawfully withheld; and/or
  • An additional penalty of up to $120 to the Employee and up to $50 to the City for each day that either violation occurred or continued.
  • In cases of retaliation, the employee may be entitled to reinstatement, as well as triple the wages, sick time and penalties owed.
  • An employee may also file a lawsuit in civil court.

Additionally, employers who violate the provisions of these Minimum Wage Ordinances may be subject to administrative fines for each and every day that a violation occurs.

Resources:

Los Angeles Minimum Wage Ordinance

Los Angeles Office of Wage Standards Ordinance

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Court of Appeals Reinstates NFL's Four-Game Suspension of Tom Brady

Court Reinstates NFL’s Four-Game Suspension of Tom Brady

In overturning the lower court’s decision and reinstating the NFL’s four-game suspension of Tom Brady, the United States Court of Appeals for the Second Circuit, ruled that NFL Commissioner, Roger Goodell, “properly exercised his broad discretion under the collective bargaining agreement” and that his procedural rulings did not deprive Tom Brady of fundamental fairness.

The Court reasoned that “In their collective bargaining agreement, the players and the League mutually decided many years ago that the Commissioner should investigate possible rule violations, should impose appropriate sanctions, and may preside at arbitrations challenging his discipline.”  The Court also noted that “Although this tripartite regime may appear somewhat unorthodox, it is the regime bargained for and agreed upon by the parties, which we can only presume they determined was mutually satisfactory.”

In essence, the Court of Appeals held that since the NFL disciplinary system was something negotiated and agreed-upon by the parties, it is therefore not the court’s place to interfere with the Commissioner’s rulings or the labor arbitration process. The lesson from the Court’s ruling is that if the players are not comfortable with the current arbitration procedure, the issue must be resolved through negotiations and in the collective bargaining agreement rather than through court intervention.

For the full court of appeals opinion click here

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Employment Law Updates

The Healthy Workplaces Healthy Families Act 2014

The Healthy Workplaces Healthy Families Act of 2014 went into effect on July 1, 2015. Under the new law, California employers are now required to provide paid sick days to certain employees.  Paid sick time accrues at a minimum rate of one hour of paid sick time for every 30 hours worked. Employees are entitled to use accrued sick days beginning on the 90th day of employment. Accrued paid sick days will carry over to the following year of employment.

No Retaliation for Accommodation Request

On July 16, 2015, California enacted Assembly Bill No. 987, making it unlawful for an employer to retaliate or otherwise discriminate against an employee for “requesting” accommodation for a physical or mental disability or religious belief or observance, regardless of whether the accommodation was granted. The new law clarifies that a request for reasonable accommodation based on religion or disability constitutes protected activity under Government Code Section 12940 of the Fair Employment and Housing Act. An employee may not be subject to relation for making such a request.

California Cheerleaders are Employees

On July 15, 2015, California passed a new law adding section 2754 to the California Labor Code. Under the new law, cheerleaders working for California professional sports teams must now be classified as employees, and are  protected by existing State and Federal employment laws, including minimum wage and overtime laws and anti-discrimination and harassment statutes.

 

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Summary of California's Equal Pay Act

An Employee’s Right to Equal Pay

California and Federal laws generally prohibit an employer from paying its employees less than the rates paid to employees of the opposite sex. This applies when the employees’ jobs require substantially similar work, when considering their skill, effort, and responsibility, and are performed under similar working conditions. (Cal. Labor Code section 1197.5.) As an example, an employer would not be permitted to pay a female secretary less than a male secretary working in the same office and performing the same job duties. To do so would violate the equal pay laws.

Exceptions to the Equal Pay Rule

While prohibiting wage discrimination, the equal pay laws, do not prevent employers from compensating employees of the opposite sex differently for legitimate reasons, including based on a seniority system, a merit system, a system which measures earnings by quantity or quality of production, or another system based on any bona fide factor other than sex, such as education, training, or experience. In other words, an employer can still reward its employees for good work performance without violating the equal pay laws. To qualify for an exception, it is the employer’s burden to prove that a wage disparity is based on a legitimate reason entirely unrelated to the sex of the respective employees.

Prohibition against Retaliation by Employer

Under California law, an employer is prohibited from retaliating or discriminating against an employee in any way for enforcing his or her rights under the equal pay laws. An employer also cannot prevent an employee from disclosing his or her own wages, discussing the wages of other employees, inquiring about the wages of other employees, or assisting or encouraging other employees to exercise their rights under the equal pay laws.

An Employee’s Remedies for Wage Discrimination

Wage discrimination is viewed as a very serious matter in California, which is reflected in the remedies available to an aggrieved employee. An employee who was the victim of wage discrimination in violation of the equal pay laws is entitled to recover the wages he or she lost due to the discrimination, plus interest. The employee is also entitled to recover an additional equal amount from the employer as liquidated damages. For example, this means that an employee who was deprived of $15,000 in wages due to his or her employer’s violation of the equal pay laws would be entitled to recover the unpaid $15,000 with interest, plus an additional $15,000 with interest, for a total recovery in excess of $30,000. In the event a law suit is necessary to recover these damages, an employee may also be entitled to an award of attorney’s fees. An employee who was subjected to retaliation for enforcing the right to equal pay may also be entitled to reinstatement and reimbursement for lost wages and work benefits resulting from the retaliation.

Conclusion

Wage discrimination is a serious matter that should not be overlooked by California employers or employees. California employers should be cognizant of the applicable laws when setting a pay scale for its employees. Similarly, California employees should be aware of their rights to equal pay and when those rights have been violated. When in doubt, it is important to consult with an experienced employment attorney.

Additional Resources:

California Labor Code

California Division of Labor Standards Enforcement (DLSE)

California Department of Fair Employment and Housing

Wage Discrimination

 

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