Seyfarth Synopsis: The California Supreme Court, in Dynamex Operations v. Superior Court, has agreed to address the legal standard for determining whether a worker classified as an independent contractor is really an employee. The Supreme Court’s opinion is expected to be significant for anyone thinking of using independent contractors in California.

The Future of Work: A Surging Demand for Independent Contractors

Recent years have seen tremendous growth in the sharing economy, aka, the “gig economy,” which reflects the technological ability to quickly summon goods or services through a smart phone. While the new economy has grown rapidly, the relevant legal standards have not. Yet business owners continue to invest heavily into business models that have created tens of thousands of flexible jobs for workers classified as independent contractors. In the absence of legislative guidance tailored to the realities of the new economy, California courts and administrative agencies have struggled to apply the law developed during an earlier age.

The new economy is a powerful fact of life. According to Seyfarth’s “Future of Work” Outlook Survey, 45% of respondents expect their company’s demand for independent contractors to grow in the next five years. Companies in the areas of information technology and telecommunications are among those most likely to experience these developments, as opposed to companies in the areas of real estate and consumer staples. (A deeper analysis of our survey’s findings appears here.)

These survey responses provide a valuable snapshot, but employers are likely to change their tune based on the regulatory environment and any significant judicial rulings narrowing the use of independent contractors.

One such potential ruling could come in Dynamex Operations West, Inc. v. Superior Court. The California Supreme Court has agreed to review a Court of Appeal decision that stunned employers by expanding the definition of “employee.” That definition of employee arguably could encompass many individuals traditionally retained as independent contractors.

When determining whether workers were independent contractors, many companies previously considered how much control the company exerted over a worker and how much a worker economically depended on the company. This framework provided some consistency.

Taking a turn, the Court of Appeal in Dynamex adopted the Wage Order’s much-broader definition of “employ,” meaning “to engage, suffer or permit to work.” As a result, the Court of Appeal expanded the meaning of the term “employee,” arguably extending it to nearly every labor relationship a company would be likely to have with an individual. The potential ramifications of such a definition upon the future use of independent contractors cannot be overstated. Indeed, the U.S. Chamber of Commerce and California Chamber of Commerce have both warned that a decision to affirm the lower court’s expansive ruling “would effectively eliminate independent contractor status for any use in California.”

Consequences of Misclassification

Making it more difficult to properly classify an independent contractor would only increase the risks of costly litigation. By now, readers should know that misclassifying California employees as contractors has dire consequences, including statutory penalties of $5,000 to $15,000 for each “willful” violation. Failing to properly classify workers can create liability for back wages, penalties, fines, and the assessment of back taxes. Additional exposure can also arise when misclassified workers, who would otherwise be entitled to employee benefits, have not received those benefits. California state agencies in search of employment-tax revenues have increased their enforcement efforts, including audits. In fact, the California Labor and Workforce Development Agency has agreed to jointly investigate independent contractor misclassification with the IRS, reflecting both agencies’ desire to increase enforcement.

California employers with operations in other states should also note that increased misclassification enforcement is not peculiar to the Golden State. In July 2015, the U.S. Department of Labor’s Wage and Hour Division issued its Administrator’s Interpretation, concluding that “most workers are employees under the FLSA” in part due to the “expansive definition of ‘employ’ under the FLSA”; we previously observed this position to be an “unapologetic effort to restrict the use of independent contractors.” Today, it still remains to be seen whether the Trump Administration will redirect federal enforcement priorities away from independent contractor issues. But even if the federal government backs off of these issues, there is no indication that state governments and the ubiquitous plaintiffs’ bar will stop aggressively challenging independent-contractor classifications.

Scrutinize Your Existing Relationships with Independent Contractors

As always, employers should remain vigilant for new legal developments and should consult their employment counsel to scrutinize existing relationships with independent contractors.

Edited by Michael G. Cross.

Seyfarth Synopsis: The Court of Appeal, on rehearing, has superseded a 2016 decision that employers must reasonably accommodate work restrictions because of the disabilities of the employee’s associates. The superseding opinion recognizes that employers have no established duty to provide accommodations because of the disability of an employee’s associates.

Seyfarth’s One Minute Memo readers will recall that we reported, back in April 2016, on a classic case of “hard facts make bad law. In that case, Castro-Ramirez v. Dependable Highway Express, the Court of Appeal creatively held that California employers must accommodate employees who do not themselves have disabilities but who simply are associated with someone who has a disability.

We are happy to update you on later proceedings in that case. The unusual result that we criticized last year is no longer even arguably the law in California. The accommodation claim, which was the focus of the prior Court of Appeal decision, was abandoned by the plaintiff after the initial decision. In the decision upon rehearing, issued August 29, 2016, the Court of Appeal observed:

[N]o published California case has determined whether employers have a duty under FEHA to provide reasonable accommodations to an applicant or employee who is associated with a disabled person. We acknowledge that the reasonable accommodation subdivision of section 12940 does not expressly refer to persons other than an applicant or employee. . . . We only observe that the accommodation issue is not settled and that it appears significantly intertwined with the statutory prohibition against disability discrimination . . . .

While the Court of Appeal conceded that it could not rule on a question that the plaintiff had abandoned, the Court of Appeal emphasized that there is a cause of action for associational discrimination under both the FEHA and the ADA, and held that triable issues precluded summary judgment on the discrimination and retaliation claims.

(The California Supreme Court, meanwhile, has denied Dependable’ s petition for review.)

Workplace Solution: California law remains the same as it was before the original Castro-Ramirez decision: there is no established duty for an employer to grant a reasonable accommodation to an employee who is not disabled, but who is merely associated with someone who is. It remains the case, though, that employers must not discriminate against employees on the basis that they are associated with someone who has a disability. Caution in making employment decisions relating to employees with known disabled associates thus remains highly advisable.

Edited by: Michael A. Wahlander.

Seyfarth Synopsis: In what many employers will see as a “break” from workplace reality, the Supreme Court, in Augustus v. ABM Security Services, Inc., announced that certain “on call” rest periods do not comply with the California Labor Code and Wage Orders. The decision presents significant practical challenges for employers in industries where employees must respond to exigent circumstances.

On December 23, 2016, the California Supreme Court issued its long-anticipated decision in Augustus v. ABM Security Services, Inc., affirming a $90 million judgment for the plaintiff class of security guards on their rest break claim. The Supreme Court found that the security guards’ rest breaks did not comply with the California Labor Code and Wage Orders, because the guards had to carry radios or pagers during their rest breaks and had to respond if required.

The Supreme Court took a very restrictive view of California’s rest break requirements, concluding that “one cannot square the practice of compelling employees to remain at the ready, tethered by time and policy to particular locations or communications devices, with the requirement to relieve employees of all work duties and employer control during 10-minute rest breaks.” Thus, in the Supreme Court’s view, an employers may not require employees to remain on call—“at the ready and capable of being summoned to action”—during rest breaks.

See our One Minute Memo for more details on the decision and thoughts on the implications of this case for California employers. The Augustus decision presents significant practical challenges for employers, especially in industries in which employees must be able to respond to exigent circumstances.

Workplace Solution:

The holding that “on call” rest periods are not legally permissible should prompt employers to evaluate their rest-break practices. In industries where employees must remain on call during rest periods, employers should consider seeking an exemption from the Division of Labor Standards Enforcement. Lawyers in the Seyfarth California Workplace Solutions group can assist with other suggestions for responding to this decision.

(with apologies to the song artist)

Seyfarth Synopsis: The Ninth Circuit has suggested it might upset longstanding “on call” practices by making California employers liable for “reporting time” pay to employees who phone in ahead of their schedule, only to find that they are not needed for the day.

On October 5, 2016, a Ninth Circuit panel indicated that it might call on the California Supreme Court to answer whether “calling in” to work amounts to “reporting for work” under California’s Wage Order 7-2001. The panel, in Case No. 15-56162 (9th Cir.), considered an interlocutory appeal from a decision by federal district court judge George H. Wu in the case Casas v. Victoria’s Secret Stores, LLC, CV 14-6412 (C.D. Cal).

Casas involves an on-call scheduling practice common among retailers: “on-call” employees call in a few hours before the scheduled start time to see if they need to appear for work.  Plaintiffs argued that this required act of picking up the phone amounts to “reporting” for work under Wage Order 7’s Reporting Time Pay provision. To Plaintiffs, this means that employers who fail to use call-in employees must pay reporting-time pay (subject to some exceptions). The rules on reporting pay generally provide that an employee who reports for work, but who is not put to work or is furnished less than one-half the usual or scheduled day’s work, is entitled to at least two hours and up to four hours of reporting-time pay.

In December 2014, Judge Wu rejected this “call-in” claim. Judge Wu relied on both the common meaning of “report” and the legislative history of Wage Order 7 to hold that to “report for work” plainly means to physically appear at the work site. Thus, contrary to Plaintiffs, simply lifting a receiver or tapping a touchscreen does not require the employer to pay reporting time when the on-call employee never actually shows up for work.

The Plaintiffs took an interlocutory appeal to the Ninth Circuit.

Will the Ninth Circuit put the call on hold? At oral argument, a panel of Ninth Circuit judges indicated that the panel might, for all practical purposes, place Judge Wu’s decision on hold. Pregerson, Noonan, and Paez—the three circuit court judges who took the line from Judge Wu—expressed skepticism that federal court is the appropriate venue to decide the on-call issue. Both Judges Paez and Pregerson repeatedly suggested transferring the call to the California Supreme Court. Judge Paez went so far as to iterate the statutory certification standard—that federal courts should certify important questions of state law to the state supreme court—and concluded that “this in my view, it seems to me, like a very important question that affects a lot of people.” These statements suggest that it is possible, if not likely, that the panel will call on the California Supreme Court for its guidance as to what California law is on this topic.

But will the Supreme Court accept a transfer? As Judge Paez recognized, even though the Ninth Circuit might put in a call for help, nothing requires the California Supreme Court to answer. Nonetheless, Judge Paez seems confident the Supreme Court will take the call since it has accepted other related employment cases from the Ninth Circuit in the past (including, for example, Oracle and Kilby).

Legislatures, could you help them place the call? Regardless of the Ninth Circuit’s actions, the switchboards of legislative bodies could light up in the coming year with calls to regulate on-call scheduling. As reported in this blog, just last year San Francisco became the first jurisdiction to penalize employers for not using employees scheduled for “on-call” shifts. Under the so-called Workers Bill of Rights, when employers require employees to be available for work but do not actually engage the employee, employers must pay the employee between two and four hours of pay, depending on the duration of the on-call shift.

The California Legislature considered similar legislation in its most recent session. Like the San Francisco ordinance, subject to certain exceptions, it would have required employers to pay on-call employees who were not ultimately called in to work their shifts.  The legislation did not pass,  but it seems likely that the legislative initiatives—at both the municipal and state level—will not end the matter.

Call me (call me) on the line, Call me (call me) any, anytime. The bottom line is that at least for now, Judge Wu’s well-reasoned decision is good law. But be sure to dial up this blog in the coming months to see if that number remains in good working order. We’ll be holding on the line to monitor the messages that courts and legislative bodies leave for employers wishing to continue the time-honored tradition of on-call scheduling.

Seyfarth Synopsis: Does carrying a pager nullify a rest break? What about the possibility of being tapped on the shoulder by your boss? Or being called on your cell phone? The California Supreme Court considered these and other scenarios during an hour-long oral argument on September 29, as it asked, What does it mean to not “work” during a rest break? Although the question seems straightforward, the answer does not yet seem clear to the justices.

The case is called Augustus v. ABM Security Services Inc., S224853. We previously blogged about this important case here.

Though rest breaks are paid, Labor Code Section 226.7 prohibits employers from requiring “work” during those breaks. The trial court found that ABM owed damages—almost $90 million—to a class of 14,000 security guards, some of whom had to carry radios during rest breaks. The trial court’s broad rule—“if you are on call, you are not on break”—was reversed by the Court of Appeal, which said that “remaining available to work is not the same as performing work.” The consequence of not providing a rest break is an extra hour of pay for each day in which a break was not provided.

From the oral argument, it appears that the justices are struggling with how to craft a rule for what counts as “work” that would not, in Justice Goodwin H. Liu’s words, be a “recipe for litigation.” The justices actively questioned counsel for both sides, leaving it unclear whether a majority agreed with ABM’s position that simply being on call is not work, or with the plaintiffs’ position that any requirement (e.g., listen for your pager) would prevent an employee from putting on a “sleep mask” and headphones, and would nullify the entire rest break.

The justices explored whether there should be a distinction between (1) the mere potential of being called back to work during a break and (2) a requirement that employees be easily reachable during a break. And Justice Liu, who seemed most skeptical of ABM’s position, repeatedly asked whether employees could be disciplined for refusing to answer a summons to return from a break.

While it remains to be seen what rule the high court ultimately crafts, here are the main options raised in briefing and at oral argument:

  • Any possibility of “fetching” or “hailing” nullifies a break: this least employer-friendly position, adopted by the trial court, was met with skepticism by Justice Leondra L. Krueger and others. Justice Liu, however, asked both sides why there should not be a blanket prohibition of employers contacting employees during rest breaks. This rule would have the virtue of “simplicity.” ABM responded that this would be a “really bad rule,” and plaintiffs did not vigorously defend Justice Liu’s proposal either, acknowledging that employers may have emergency reasons for calling an employee back.
  • The Brinker rule: Plaintiffs proposed the standard set in Brinker for meal breaks: an employer provides a compliant break “if it relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted [10]-minute break, and does not impede or discourage them from doing so.” On-call time would not satisfy Brinker, Plaintiffs argued, because being “on call” is a “duty.”

It’s unclear whether this rule could garner a majority. Justice Werdegar (Brinker’s author) pointed out that the “relieved of all duty” requirement governing meal breaks is absent from the rest break statute, and that rest breaks are paid. At the same time, though, she and other justices asked ABM why the Brinker rule could not also apply to rest breaks.

  • Being on-call does not nullify a break: this employer-friendly position, adopted by the Court of Appeal, was advocated by ABM. The justices did not explicitly mention the appellate court’s opinion during oral argument. At one point, however, the Chief Justice did remark that being on call seems like “work,” to which ABM responded by explaining that “work” is the actual performance of duties, not being available to perform them.

When asked specifically what overarching rule the Court should craft, ABM advocated a hybrid of Brinker and Mendiola (which held that on-call time must be paid). Under ABM’s proposed rule, an on-call rest break would be valid if the employee was given a “reasonable opportunity for an uninterrupted break,” during which the employee could engage in personal activities. Carrying a pager could ease any restrictions on an employee’s mobility, ABM pointed out, and would thus satisfy its proposed rule.  This rule would have the merit of distinguishing true rest breaks from “sham breaks” that are frequently interrupted in practice.

  • The “Liu “presumption”: Justice Liu, after calling ABM’s rule something that “sounds reasonable” but that is hard to implement in practice, proposed a presumption that a break is compliant if there is no on-call policy, if employees are free to do what they want, and if there is a “policy and practice” of not interrupting breaks unless there is an emergency. The other justices did not pick up on Justice Liu’s proposal.

The Supreme Court’s decision is expected within the next 90 days (by December 27). We will share a full analysis of the decision as soon as it is issued.

Edited by Michael A. Wahlander.

Seyfarth Synopsis: A court has temporarily suspended the deadline for employers to elect the statutory “safe harbor” for purposes of complying with recent legislation that makes it even more difficult for employers that pay with a piece rate rather than an hourly rate for any portion of an employee’s work.  

As we previously reported, the California Legislature’s enactment of AB 1513 (commonly known as the “piece rate pay law”), which became effective on January 1, 2016, has created significant challenges for California employers that pay employees on a piece-rate basis for any part of their work. This new law requires employers to pay piece-rate employees separately for rest and recovery periods and for “other non-productive time,” based on a specific formula, and requires detailed disclosures in wage statements.

AB 1513’s “Safe Harbor” for Past Violations

AB 1513 creates an affirmative defense to wage claims for employers that follow the law’s very specific “safe harbor” provisions. To come within the safe harbor, employers must (1) provide written notice of their intent to utilize the safe harbor procedures by no later than July 1, 2016, and (2) pay employees for all previously uncompensated rest and recovery periods and other non-productive time, plus interest, for the period from July 1, 2012, through December 31, 2015, by December 15, 2016.

Challenge to the Piece Rate Pay Law

An agricultural employer group, Nisei Farmers League, filed a lawsuit challenging AB 1513 on constitutional grounds. The lawsuit argues that AB 1513 is unconstitutionally vague, fails to provide employers with fair notice of its requirements, and is impermissibly retroactive. The League sought to enjoin enforcement of certain provisions of AB 1513, including the safe harbor, pending a trial of their claims.

On June 30, 2016, one day before the deadline to elect the safe harbor, the court entered an Order to Show Cause re Preliminary Injunction and Temporary Restraining Order. This Order restrains the Department of Industrial Relations from enforcing the deadline until at least July 18, 2016, the date of the hearing on the Order to Show Cause. If the court enters a preliminary injunction at the hearing, the DIR will be enjoined from enforcing the deadline until thirty days after the preliminary injunction expires, and from enforcing the payment requirement until 197 days after the preliminary injunction expires. If the court does not enter a preliminary injunction, then the deadline will become effective ten days later (on July 28, 2016).

What Does This Mean for Piece Rate Employers?

The Order provides piece-rate employers with some additional time (at least until July 28, 2016, and longer if the court enters a preliminary injunction) to decide whether to invoke the safe harbor if they have not already done so. Employers that already made this election may have additional time to comply with the back-pay requirements if the court enters a preliminary injunction on July 18. In either case, the many California employers struggling to comply with the unclear and burdensome requirements of AB 1513 should watch this legal challenge closely.

Seyfarth Synopsis: Hernandez v. Sprouts Farmers Market, Inc., a case stemming from a phishing scam, emphasizes the need for California employers to implement comprehensive data protection and data breach notification policies and practices for personal employee information under the CDPA.

A story of a company suffering a data breach tops newspaper headlines almost daily. So how can you stay out of the “fuego,” and stay compliant with California laws about your employees’ and customers’ data?

California’s Data Protection Act—“Army Of One”

In 2003 California passed the nation’s first data breach notification statute: the CDPA. Since then, over 30 states have enacted similar statutes, but California remains the national leader in privacy and data security standards.

The CDPA mandates that any business that “owns or licenses personal information about a California resident shall implement and maintain reasonable security procedures and practices appropriate to the nature of the information, to protect the personal information from unauthorized access, destruction, use, modification, or disclosure.” And it requires a company to notify affected individuals of a data breach “in the most expedient time possible and without unreasonable delay.”

The CDPA takes a very broad view of personal information, defining the term to include:

  • An individual’s signature,
  • A person’s physical characteristics or description,
  • Information collected through an automated license plate recognition system, and
  • An individual’s employment and employment history.

The CDPA also requires that if a company experiences a data breach and decides to offer “identity theft prevention and mitigation services” to affected persons, then it must provide these services to affected persons for at least 12 months and at no cost. Additionally, unlike many other state laws about data breaches, the CDPA requires a company affected by a data breach to submit a sample of the data breach notification letter to the California Attorney General.

“Vultures” Go Phishing At Sprouts

What’s Phishing? In a phishing scam, a fraudulent email message appears to be legitimate, and often directs one to a spoofed website in order to dupe the recipient into divulging private personal information. The perpetrators then use this information to commit identity theft.

In March 2016, a Sprouts employee received an email purportedly from a Sprouts senior executive, asking for the 2015 W-2 statements of all Sprouts employees (which contain social security numbers). In reality, the email was sent by a third-party and was a phishing scam.

When the Sprouts employee received the phishing email, the W-2 forms of thousands of current and former employees were compiled and sent to the third-party. Sprouts later realized the error and notified the affected individuals of the data breach.

Shortly afterwards, a former Sprouts employee filed a class action lawsuit against the company, alleging violations of the CDPA and the California Unfair Competition law. The suit alleges essentially that the employer should have had procedures and policies in place to protect employee information from a phishing attack because such attacks are commonplace in the information age. A First Amended Complaint was filed on May 25, 2016, and Sprouts has not yet filed its response.

Sprouts highlights that it is important for California employers to have a data protection and data breach notification plan. Such a plan is instrumental to head off attacks by hackers and bad actors seeking private employee data to commit identity theft.

“Anything But Me”—What’s An Employer To Do?

The California Attorney General has issued annual reports analyzing data breach notices and providing recommendations to companies and employers for implementing data breach plans, including recommending that companies and employers:

  • Implement the Center for Internet Security’s Critical Security Controls as the “minimum level of information security” if they handle personal data.
    • The Attorney General has stated that“[t]he failure to implement all the Controls that apply to an organization’s environment constitutes a lack of reasonable security.”
  • Implement “strong encryption” for personal information on laptops and other portable devices, and consider full encryption on desktop computers when not in use.
  • Encrypt digital personal information when moving or sending personal information out of their secure network.
  • Encourage individuals affected by a breach of Social Security numbers or driver’s license numbers to place a fraud alert on their credit files and make this option very prominent in their breach notices.
  • Make multi-factor authentication available on consumer-facing online accounts that contain sensitive personal information.
  • Provide training to employees and contractors on data security controls.
  • Improve the readability of breach notification letters.

Seyfarth has ample experience assisting companies and employers to develop these protocols. If you have any questions about implementing a CDPA compliant data protection and data breach notification plan for employee personal information, please reach out to a member of Seyfarth’s Global Privacy and Security (GPS) Team.

Edited by Coby M. Turner.

Seyfarth Synopsis: Limitation on an actor’s ability to work in certain films struck down as an unlawful restraint of trade. 

California, mecca of the film and media production industries in the U.S., is notorious for outlawing non-compete agreements. It is one of the few states that generally prohibits the unlawful restraint of one’s profession or business, with limited exceptions. (See Cal. Bus. & Prof. Code § 16600 et seq.). Last year’s decision in ITN Flix, LLC v. Hinojosa, 2015 WL 10376624 (C.D. Cal. May 13, 2015), illustrates that courts may strike down such unlawful non-competes, even outside the traditional employer-employee context.

What is this Case About? 

In 2004, film producer Gil Medina met actor Danny Trejo, who had worked on several successful films with director Robert Rodriguez (think Sin City and the Spy Kids franchise).  Medina approached Trejo with an opportunity to star in a multiple picture action feature film franchise built around a “vigilante character” to be portrayed by Trejo. The following fall, Medina and an independent production company, ITN Flix, LLC produced the film, entitled Vengeance.

Thereafter, Trejo and Medina/ITN Flix (who went on to become the Plaintiffs in the legal case) entered into a “Master License Agreement” (“MLA”) and an “Acting Agreement” (“AA”). The contracts purported to limit Trejo in playing vigilante characters in other films or appearing in films “similar” to Vengeance, and imposed a term of “at least” eight years on these (and other) contractual obligations. The contracts also (ambiguously) paved the way for Medina/ITN Flix to recover as commission part of the proceeds of the commercial exploitation of certain rights.

Vengeance was subsequently released, but only to a few small markets. By 2009, the film still had no significant release date. Even a 2012 collaboration with Steve Wozniak (the co-founder of Apple) and his wife, Janet, whereby the Wozniaks would appear in several new scenes that would be added to the film and also be included in a mobile application game entitled Vengeance: Woz with a Coz, failed to bring commercial success to the ill-fated Vengeance.

The legal trouble began in 2010, when director Rodriguez released a film called Machete, in which Trejo starred as—wait for it—a “vigilante character.” Unlike Vengeance, Machete garnered much acclaim and commercial success. Then, in 2013, director Rodriguez released a sequel to Machete entitled Machete Kills, which was not as successful, but still raked in millions of dollars.

In November 2014, viewing the success of the Machete films as their failure, the Plaintiffs (Medina and ITN Flix) sued Rodriguez, Gloria Hinojosa (talent agent who helped broker Trejo’s appearance in the Machete films) and their affiliated entities for, among other things, intentional interference with contract, violation of the Lanham Act, and unjust enrichment. Plaintiffs argued that Trejo’s appearance in the films without Rodriguez’s and his affiliates’ disclosure of Plaintiffs’ business relationship with Trejo constituted breach of contract, and further argued that Rodriguez and had a “legal and/or contractual duty” to disclose the business relationship between Plaintiffs and Trejo to third-party investors of Machete.

Hinojosa and entities related to her requested dismissal of the entire action in early 2015, followed by Rodriguez’s Motion to Strike Pursuant to California’s Anti-SLAPP statute and Motion to Dismiss the Lanham Act claim.

How California Law Made This Case More Peculiar Than It Already Was

The court first assessed the viability of the motion to dismiss, which alleged that the MLA and AA were so vague so as to be unenforceable, and constituted unlawful restraints of trade in violation of Section 16600 of the California Business and Professions Code. In response, the Plaintiffs argued that the contracts were not vague, and insisted that Utah law governed the contracts, so the “restraint” clause was enforceable. Even if California law applied, Plaintiffs argued that it was “widely recognized” that certain reasonable exclusivity agreements could be enforceable, especially as regards contracts in the entertainment industry. The court did not buy Plaintiffs’ argument in any way, shape, or form.

            First, Section 16600 maintains that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extend void.” The court harkened back to the California case Edwards v. Arthur Anderson LLP, which noted that California courts have “consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility,” because the statute is designed to protect “the important legal right of persons to engage in businesses and occupations of their choosing.”

            Second, the court highlighted California’s peculiar approach to restraint provisions in contrast to overarching Ninth Circuit law on the topic. California does not adopt the “narrow-restraint exception” to Section 16600, as other courts in the Circuit have adopted. California courts have emphasized the public policy behind disallowing such an exception, and have maintained that the “policy of the state… should not be diluted by judicial fiat.” Instead, the court pointed out, California courts have entirely relegated to the State Legislature the task of altering the reach of Section 16600.

            Third, the court analyzed whether the restraint provision would pass muster even in a Utah court. Usually, Utah courts may uphold a covenant not to compete so long as it is reasonable. For such a covenant to be valid and enforceable, it must be supported by consideration, completely free of bad faith dealing during negotiations, and must be necessary to protect the goodwill of the business. Notwithstanding such provisions, the court found that under both California and Utah law, the contracts were unenforceable, primarily because the restraints were not reasonable or narrow, and to the extent they were, any and all restraints are illegal under Section 16600. Further, the court found it “clearly unreasonable” for Plaintiffs to place an almost decade-long restraint on Trejo’s career.

The court also considered whether the provision regarding Plaintiffs’ ability to collect commissions on commercial exploitations of its “licensed rights” (i.e., a license to Trejo’s name and likeness in “vigilante character” films) constituted a restraint on Trejo’s career, and answered affirmatively. Trejo is a particular character actor, not cast in a wide variety of types of films and is “most recognizable for portraying, characters that operate outside the justice system and dispense justice or injustice.” Such an actor, the court concluded, is particularly vulnerable to the type of restraint present in the MLA and AA contracts. Further, the court rejected the assumption that charging a fee or commission is not a “restraint” and saw no reason Plaintiffs should be able to charge Trejo a fee for engaging in conduct (i.e., acting in a particular type of movie as a particular type of character) that they could not otherwise prohibit. As such, the court found the commission provision to be an unlawful restraint on trade under both California and Utah law.

What This Means in Terms of Employee Mobility in California

ITN Flix teaches the importance of taking care to draft contract provisions that limit or purport to limit an individual’s exercise of his business or trade, regardless of the individual’s industry. Such care is needed when drafting agreements with independent contractors as well as with employees at the beginning or end of employment.

ITN Flix also illustrates that California’s general public policy against non-competes is not limited to the traditional employer-employee scenario.  Indeed, a divided Ninth Circuit Court of Appeals panel in Golden v. California Emergency Physicians Medical Group recently held that a “no re-hire” provision in a settlement agreement could, under certain circumstances, constitute an unlawful restraint of trade under California law.

Without the backstop of non-compete agreements, California employers can nonetheless employ some best practices to ensure their employees do not share any valuable information with competitors.  Such best practices include:

  • Robust confidentiality and invention assignment agreements.
  • Effective entrance and exit interview protocols.
  • Employee education programs that create a culture of confidentiality whereby employees understand the value of protecting company data.
  • Effective trade secret protection measures that take into account new technologies and threats, including cyber threats and social media/cloud computer issues.

Please see our recorded webinar on Trade Secret Protection Best Practices: Hiring Competitors’ Employees and Protecting the Company When Competitors Hire Yours for more details.

Counting moneyWe normally write about how California law differs from American law generally. Today, though, we highlight a recent California case that rejected the notion that California law should deviate from analogous federal wage and hour law. That case is Alvarado v. Dart Container Corp. of California. More detailed information appears here.

In Alvarado, the California Court of Appeal ruled that an employer complies with California law when it uses the federal method of calculating the regular rate of pay in determining the overtime premium pay owed on a “flat sum” bonus.

Why are we writing about this? Well, under both California law and federal law, employers must pay overtime premiums based on the regular rate of pay. The regular rate is also important in California because it is the rate at which benefits under the California Paid Sick Leave Act must be paid to non-exempt employees (unless the 90-day lookback method is used). Therefore, knowing how to calculate the regular rate is important to ensure that employers make these payments properly.

Calculating the regular rate includes all items of remuneration paid to non-exempt employees, except for those items that are specifically excludable. The regular rate thus includes almost all payments, including non-discretionary bonuses. Employers, in paying those bonuses, sometimes forget to add overtime premium pay. The employer in Alvarado remembered to make that payment, but used a method of calculating the regular rate that an employee then challenged

The employee was paid a $15 attendance bonus for working weekend shifts. The employer calculated the overtime pay due on this bonus by using the FLSA method of calculating the regular rate of pay. Under the FLSA regulations, an employer may derive the regular rate of pay by simply adding the bonus to the other includable compensation paid and then dividing the sum by the total number of hours worked. The regulations provide an example: an employee works 46 hours in a week, earns $12 an hour, and receives a $46 production bonus for the week.  Under the FLSA formula, the regular rate of pay would be $13 an hour [(46 hours x $12/hour) + $46 bonus] / 46 hours].

California statutes do not specifically address how to calculate the regular rate of pay in computing the overtime pay due on a non-discretionary bonus. Thus, like many employers, the employer in Alvarado used a formula that was consistent with the FLSA formula.

The California Department of Labor Standards Enforcement, meanwhile, has taken a different, peculiarly Californian position: the DLSE has opined that the regular rate must be the sum of all compensation divided by only the regular (non-overtime) hours worked.  Otherwise, the DLSE has reasoned, the regular rate would be diluted in a way that would conflict with a general California public policy discouraging the use of overtime hours.

The Alvarado court, noting the absence of specific statutory guidance on this subject, rejected the DLSE’s position. The Court of Appeal held that the DLSE’s view was not valid and that employers do not violate California law when following the federal standard.

Now, California employers who pay “flat sum bonuses” in the same pay period that they are earned should be able to rely on the FLSA regulations for calculating overtime payments.  It turns out that, in this particular respect, California is not so different after all.

After the U.S. Supreme Court’s landmark marriage-equality decision this summer (Obergefell v. Hodges, discussed in here), we now have full equality between same-sex and opposite-sex spouses under federal and state law. That decision affects healthcare benefits for employers with California employees, as summarized below:

Defining the Term “Spouse”

Since federal law does not define spouse for health plan purposes, many health plans historically relied on a state law definition for the term “spouse.” In some cases, this resulted in different coverage options for same-sex spouses, depending on the state in which they lived. In other cases, plans were written in a manner to provide spousal coverage only for opposite-sex spouses. After Obergefell, employers should review their health plan documents to make sure they are defining spouse in a way that does not exclude same-sex spouses.

Imputed State Tax Income

The U.S. v. Windsor decision in 2013, and later IRS guidance, confirmed that employers offering health benefits to same-sex spouses can treat those benefits as non-taxable for purposes of federal tax. But Windsor left open the issue whether those benefits were taxable at the state level. Now, after Obergefell, it is clear that health benefits provided to same-sex spouses are no longer taxable to the employee under either federal or state law. Employers should no longer impute income for the cost of health coverage provided to same-sex spouses.

Domestic Partnerships/Civil Unions

Note that Obergefell does not apply to unmarried same-sex partners who are in a domestic partnership or civil union. Before Obergefell, many employers extended health coverage to domestic partnerships and civil unions, particularly in states where same-sex marriage was not legal. Now that marriage equality exists for all spouses, some employers have begun to eliminate coverage for domestic partnerships and civil unions, but employers with employees in California should proceed cautiously in modifying these benefits.

California has robust domestic partner laws that grant registered domestic partners many of the same rights and responsibilities of married couples. For example, since 2004, California law has required that insured health plans offered to California employees must provide health coverage to registered domestic partners on the same basis as offered to opposite-sex spouses.

To be clear, the law doesn’t require employers to provide health coverage to registered domestic partners if coverage isn’t provided to opposite-sex spouses. The law also covers only “registered” domestic partners (domestic partnerships where the individuals are of the same sex, and opposite-sex domestic partnership where one partner is age 62 or older). But if the insured plan covers spouses, then it must also cover registered domestic partnerships. (Note that employers with self-funded health plans are exempt from this requirement.)

Since Obergefell, many clients have asked whether they must continue to offer coverage to registered domestic partners—especially since they now offer health coverage to all spouses, regardless of orientation. The answer remains, Yes.

There is nothing in Obergefell that changed the domestic partner coverage requirements for insured health plans in California. In fact, the California Secretary of State’s website includes a reminder that Obergefell does not invalidate or change any of the California Family Code sections related to registered domestic partners.

If you have any questions about how the Obergefell decision affects your health plan, you can always reach out to the authors, and to our Benefits and California Workplace Solutions teams.