Seyfarth Synopsis: Employers are starting to consider “on demand” pay for employees. Before considering whether to implement an “on demand” pay program, employers should consider laws on wage deduction and wage assignment as well as the administrative support needed for such a program.

Instant gratification is a fact of daily life, and there is no denying we have come to expect it. When we pay bills, we go online instead of to the post office. When we need a ride, we tap a button on our phones. When we watch movies, we go online instead of to a video store. This expectation has infiltrated our daily lives and, now, it has shown itself in the workplace.

Some gig economy companies offer “on demand” pay through a variety of technology solutions. To stay competitive, other employers are considering flexible pay structures for their own employees. But because the law treats contractors differently than employees, it is important to think through the various laws that may come into play, and to consider the administrative burdens these programs create. Below we describe some common on-demand pay programs and some key issues to consider when analyzing whether to implement on-demand pay for employees.

What is On-Demand Pay?

“On demand” pay refers to programs or “technology solutions” that allow employees to “withdraw” wages that they have already earned for work performed in a pay period before their regular pay date.

How Does On-Demand Pay Work?

On-demand pay programs come in various forms. Two main variations are (1) internal advancements directly from the employer to an employee and (2) advancements from a third party to an employee.

Under the first variation, an employer advances an employee’s wages upon request by the employee. At the end of the pay period, the amount advanced during the pay period is reconciled against the employee’s pay and the employee receives the balance of the net wages.

Under the second variation, a third party advances an employee’s wages upon request by the employee (after receiving a report from the employer). At the end of the pay period, the employer pays the employee the balance of net wages owed and pays the third party the amount previously advanced to the employee.

In addition to the above variations, some third parties have come up with creative accounting arrangements to avoid direct repayment from the employer to the third party.

Considerations?

In analyzing on-demand pay programs, employers should consider not only the administrative costs but the laws governing wage deductions and wage assignments. Legal caution is especially appropriate in California.

Wage Deduction and Wage Assignment Laws

Many states require employee authorization for deductions from pay in connection with advances or overpayments. Because of these requirements, employers should consider whether and when internal advances amount to “deductions” from wages that are subject to state law restrictions. This is an important consideration for employers with employees in many states, as wage deduction laws vary from state to state, and employers need to understand the wage deduction authorization requirements for each state (for example, in some states, a blanket authorization at the time of hire is permissible, while in other states it is not).

In California, deductions from final wages are not permissible. And that is so even if the deductions are authorized in advance by the employee! Employers considering on-demand pay must therefore closely analyze the reconciliation process (and whether the reconciliation of wages occurs at the end of a pay period or a later pay period) and build in safeguards as needed.

When advances are provided by a third party, other issues arise. Employers need to think about whether re-payment to a third party is an “assignment” of wages. California’s assignment law (Labor Code § 300(a)) prohibits employers from paying an employee’s wages to a third party, unless permitted by law.

Similar to wage deduction laws, wage assignment laws are complex and state-specific. Some states significantly limit how much money an employee can assign to a third party, or require specific authorizations. In California, an employee cannot assign more than 50 percent of wages at the time of each payment, and an assignment must be memorialized in a duly notarized writing signed by the employee and the employee’s spouse (if applicable). Such detailed regulations make wage assignment laws another important consideration to keep in mind when evaluating on-demand pay programs.

Administrative Burdens

Employers should also consider the administrative burdens that on-demand pay programs entail. These burdens can include such annoyances as obtaining required authorizations from employees, ensuring compliance with various state laws regarding deductions and advancements, and transmitting employee data to a third party.

Workplace Solutions

On-demand pay requires an analysis of many state specific laws, some of which are onerous (especially in California). Employers should also consider the administrative support needed to employ such a program safely and should weigh the benefits of such a program against the burdens imposed. We are here to help you if you have any questions or need assistance analyzing a specific program.

Seyfarth Synopsis: From Mark Zuckerberg to the mayor of Stockton, the concept of Universal Basic Income is catching fire. What is this newfangled concept, and what can employers expect in the new emerging economy?

UBI – What Is It?

Universal Basic Income—“UBI”—is a form of social security, or a citizen’s stipend, to ensure everyone with a basic income from the state. The idea is to provide a basic degree of economic security: the recipient need not work or look for work, and the payment would come regardless of the individual’s other income. Countries like Finland and Canada have started to test UBI programs in certain jurisdictions, with some success.

Although the idea of UBI dates all the way back to the 18th century, the idea has received a lot of attention and support recently. Numerous Silicon Valley big game players have embraced the concept. Mark Zuckerberg of Facebook fame advocated for the concept during his Harvard commencement speech in 2017. Elon Musk of Tesla fame is another big supporter, opining recently that “we’ll end up doing universal basic income. It’s going to be necessary.”

Why has the concept been so revitalized? It all comes down to the future emerging job market. Elon Musk was very clear on this point: “there will be fewer and fewer jobs that a robot cannot do better. I want to be clear. These are not things I wish will happen; these are things I think probably will happen.” Indeed, back in March 2017, former President Barack Obama warned Congress that several reports found that as much as 50% of jobs could be replaced by robots by 2030. If that truly is the case, the diminished capacity for human workforce will leave many people without a job, and therefore without any other form of income.

Stockton Economic Empowerment Demonstration

It all seems very futuristic and distant—until we realize that UBI is already being tested right here in California! And, where better than in Stockton, California? Stockton has already faced great economic difficulty: as a city plagued by a loss in job opportunities and low wages, it even had to declare bankruptcy in 2012.

Beginning in the second half of 2018, the Stockton Economic Empowerment Demonstration (SEED) will pay $500 a month to a few hundred lower-income individuals. The money will come with absolutely no strings attached and will originate from the Economic Security Project (an organization aiming to raise awareness on UBI in the United States).

Stockton Mayor Michael Tubbs, Stockton’s youngest mayor in history, has been a prominent supporter of the program, seeing it as a way to alleviate some of the poverty pains the city has been experiencing with the growth of Silicon Valley and an increasingly heavy reliance on automation. The hope is to track the benefits of the distributions and use this as a pilot program for potentially expanding its use in other areas of California. Indeed, this hot topic of UBI is regularly discussed already by California state legislators and by gubernatorial candidates in California’s 2018 election.

What Does It All Mean?

Should we all just kick our shoes off and wait for the money to roll in? Probably best not to. UBI is meant to provide some security, but is in no way meant to replace working entirely. The program is just in its initial testing stages, and it is impossible to predict with any assurance the benefits and costs of running a UBI program on a larger scale.

Some studies indicate that people receiving a UBI would likely keep some form of employment, or take on part-time work. Indeed, researchers found that rather than decreasing employment, in areas using UBI, people in part-time work increased by a significant 17%. Like the surge of independent contractors in the new and emerging “gig economy,” employers could see a shift in the type of workers, particularly in low-wage positions that UBI tends to affect, and their expectations for benefits, flexibility, and pay.

Workplace Solutions:

So what should we do? In the emerging futuristic world we live in, keep an eye on the future of work. Team Seyfarth will keep an eye out and keep you abreast of this bizarre new world. Check out our wonderful future employer initiative. Meanwhile, if you have any queries, your friendly Seyfarth attorney is always happy to be your guide.

Edited By: Coby Turner

Seyfarth Synopsis: The California Supreme Court heard oral arguments yesterday morning in Dynamex Operations v. Superior Court, a case addressing the legal standard for determining whether a worker should be classified as an independent contractor or an employee. We expect the Supreme Court’s opinion will be significant for any entity using independent contractors in California.

The Story Thus Far

As outlined in a previous blog article, the decision in Dynamex Operations v. Superior Court will be extremely important for all companies that use independent contractors, especially those in the emerging “gig economy.” Misclassifying workers can have painful consequences, involving not only liability for unpaid wages and employee benefits but also statutory penalties for each violation considered “willful.”

The Issue

In agreeing to review the case, the California Supreme Court defined the issue on appeal as to whether, in a misclassification case, a class may be certified based on the expansive definition of employee as outlined in the Wage Order language construed in Martinez v. Combs (2010), or on the basis of the common law test for employment set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989). In short, the Supreme Court focused on whether to continue using the Borello test and on what test, if any, to apply instead.

The definition of employment identified in the Wage Orders is broader than the prior common law test. The Wage Orders define “employ” broadly to mean “to engage, suffer or permit to work.” In contrast, Borello focuses instead on a multi-factor balancing test that depends on the unique facts of each situation and that is more likely to recognize the existence of an independent contracting relationship.

Oral Argument

Dynamex Operations Goes First

In its opening argument, Dynamex praised the Borello test as a tried and true California rule and warned against the danger that uncertainty in the classification of workers would pose to California’s booming “gig economy.” Dynamex raised concerns with any judicial adjustment to the definition of employment that would usurp the legislature role.

Justice Kruger, however, wondered whether judicial adoption of a bright-line rule would not be more instructive for employers, and suggested, as a possibility, adopting the ABC test followed in such jurisdictions as New Jersey and Massachusetts. The ABC test says that three conditions must all concur for a worker to be an independent contractor: (1) freedom from actual control over the work, (2) work beyond the usual course of business and off company premises, and (3) engaging in an independent trade. Unless A, B, and C all concur, then the worker is an employee.

Chief Justice Cantil-Sakauye raised an additional response to Dyanamex’s plea to leave this issue to the Legislature: if the ABC test is a stricter version of the Borello test, then why should the Supreme Court be precluded from adopting a new version of the test to ensure clarity in enforcement when, after all, it was the Supreme Court that had adopted the Borello test in the first place? Finally, Justice Kruger and Dynamex had a robust discussion about adopting a modified rule, where the ABC test would govern for some Labor Code provisions, but a different test may apply to others. Dynamex opined that this result would be confusing for employers and might result in individuals being employees for some purposes but independent contractors for others.

Aggrieved Independent Contractors Respond

In their responsive argument, the workers portrayed what they saw as the sorry plight of California independent contractors. The workers called independent contracts the new “serf-class”: people who work hard while receiving none of the Labor Code’s basic employee benefits. They argued that the Supreme Court should adopt a new, broader definition of employee to protect workers from harm. The workers seemed open to several outcomes, including (a) a broader definition for some Labor Code provisions, (b) the definition outlined in the Wage Orders, or (c) any other new employment test  that the Supreme Court might come to favor.

Justice Liu seemed skeptical about a broader test. He referred to an “Amazon Analogy.” Although most people know Amazon sells goods online, many people also view Amazon Prime (with its delivery services) as within Amazon’s usual course of business. Justice Liu then asked: if the Supreme Court were to adopt a strict interpretation of the ABC test, at what point would Amazon be considered a shipping business, meaning that all drivers who ship Amazon Prime goods would be employees of Amazon under the second ABC prong? This analogy caught the attention of Justices Cuellar and Justice Chin, who both seemed to appreciate how complicated, and blurry, a new test could be.

Dynamex Makes A (Brief) Comeback

In its rebuttal, Dynamex took up Justice Liu’s “Amazon Analogy” to argue why a flexible test is needed to ensure just results. Two Justices followed up. The first was Justice Liu, who asked whether other jurisdictions have applied the ABC prongs strictly. The second was Justice Chin, who closed oral argument with a pointed question that represents the concerns of many observers: which employment test best fits the modern economy? Dynamex responded that the body of developing case law as well as the uniformity of Borello’s application has suited California well and that it provides all of the factors needed to fully determine employment relationships.

Our Crystal Ball

Although one cannot read the minds of seven justices, we sense the Supreme Court will likely reject the call to leave this matter for the Legislature and will lean instead toward a judicially fashioned test that, in the view of most justices, will best fit the needs of the modern economy. The Supreme Court’s decision is expected within the next 90 days.

As always, we will remain vigilant and on the scene. Look for more updates about this case as they come out and in the meantime do not hesitate to reach out to your friendly neighborhood Seyfarth attorney for guidance or with any questions you might have.

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.