Seyfarth Synopsis: Employment-related cases pending before the California Supreme Court concern various questions that sometimes seem technical, but the answers they elicit will have big consequences. Questions raised by the current crop of cases include standing to sue, the availability of certain claims and remedies, federal preemption of California laws, what counts as compensable time, and—that perennial favorite—how to interpret the infernal PAGA statute.

We expect the California Supreme Court in 2019 to issue decisions addressing many important issues in private employment. Some topics easily warrant their own article or blog post, and will receive that treatment as the Supreme Court’s decisions emerge. But it’s not too soon to highlight some coming attractions.

Anti-SLAPP and Alleged Employer Motive

  • Is an employer’s anti-SLAPP motion to strike an employee’s suit affected by the employer’s alleged discriminatory motive? In Wilson v. Cable News Network, Inc., the Supreme Court has agreed to decide “whether an employee’s claims for discrimination, retaliation, wrongful termination, and defamation arise from protected activity for purposes of a special motion to strike,” and “what is the relevance of an allegation that the employer acted with a discriminatory or retaliatory motive?”

Application of CA Wage-Hour Law to Out-of-State Employers

  • Does California employment law apply to non-California residents who work in California on a transitory basis? In Ward v. United Airlines and Oman v. Delta Air Lines, the Supreme Court has accepted the Ninth Circuit’s request to address five questions:
    • (1) “Does California Labor Code section 226 apply to wage statements provided by an out-of-state employer to an employee who resides in California, receives pay in California, and pays California income tax on her wages, but who does not work principally in California or any other state?”
    • (2) Does the exemption in Wage Order 9 for collective bargaining agreements (CBA) under the Railway Labor Act bar a wage statement claim brought under California Labor Code section 226 by an employee who is covered by such a CBA?
    • (3) “Do California Labor Code sections 204 and 226 apply to wage payments and wage statements provided by an out-of-state employer to an employee who, in the relevant pay period, works in California only episodically and for less than a day at a time?”
    • (4) “Does California minimum wage law apply to all work performed in California for an out-of-state employer by an employee who works in California only episodically and for less than a day at a time?”
    • (5) “Does the Armenta/Gonzalez bar on averaging wages apply to a pay formula that generally awards credit for all hours on duty, but which, in certain situations resulting in higher pay, does not award credit for all hours on duty?

Arbitration

  • When is an arbitration remedy broad enough to preclude an employee’s resort to a Berman hearing? Under existing law, employers cannot necessarily compel employees to arbitrate wage claims unless and until employees have had the chance to bring those claims before the Labor Commissioner in a “Berman hearing.” In OTO, L.L.C. v. Kho, the Supreme Court has agreed to decide these issues:
    • “(1) Was the arbitration remedy at issue in this case sufficiently affordable and accessible within the meaning of Sonic-Calabasas A, Inc. v. Moreno (2013) … to require the company’s employees to forego the right to an administrative Berman hearing on wage claims?
    • (2) Did the employer waive its right to bypass the Berman hearing by waiting until the morning of that hearing, serving a demand for arbitration, and refusing to participate in the hearing?”

Compensability

  • Does an employee engage in compensable work while waiting for the employer to inspect a bag the employee chose to bring to work? In Frlekin v. Apple, Inc., the Supreme Court has accepted the Ninth Circuit’s request to decide this issue: “Is time spent on the employer’s premises waiting for, and undergoing, required exit searches of packages or bags voluntarily brought to work purely for personal convenience by employees compensable as ‘hours worked’ within the meaning of California Industrial Welfare Commission Wage Order No. 7?”
  • Is walking to and from a time clock compensable hours worked? In Stoetzl v. State of California, the Supreme Court has agreed to decide this issue: “Does the definition of ‘hours worked’ found in the Industrial Wage Commission’s Wage Order 4, as opposed to the definition of that term found in the federal Labor Standards Act, constitute the controlling legal standard for determining the compensability of time that correctional employees spend after signing in for duty and before signing out but before they arrive at and after they leave their actual work posts within a correctional facility?”

Liability for Wage Payment

Preemption—By the FAA and the LMRA

  • Is a PAGA suit for unpaid wages immune from arbitration? In its 2014 Iskanian case, the California Supreme Court acknowledged that the Federal Arbitration Act (FAA) preempts state laws against class-action waivers in arbitration agreements, but also held that representative PAGA actions are not subject to mandatory arbitration. Now, in Lawson v. Z.B., N.A., the Supreme Court has decide to whether a representative action under PAGA, seeking recovery of individualized lost wages as civil penalties under Labor Code section 558, falls within the preemptive scope of the FAA.
  • Does federal labor law preempt a claim for termination wages? In Melendez v. San Francisco Baseball Associates, the Supreme Court has agreed to decide this issue: “Is plaintiffs’ statutory wage claim under Labor Code section 201 subject to mandatory arbitration pursuant to section 301 of the Labor Management Relations Act because it requires the interpretation of a collective bargaining agreement?”

Remedies

  • Can an employee seeking unpaid wages use the tort of conversion? In Voris v. Lampert, the Supreme Court has agreed to decide this issue: “Is conversion of earned but unpaid wages a valid cause of action?”

Rest Breaks & Meal Periods

  • Rest breaks for ambulance attendants on 24-hours shifts. In Stewart v. San Luis Ambulance, Inc., the Supreme Court accepted the Ninth Circuit’s request to decide these issues: (1) “Under the California Labor Code and applicable regulations, is an employer of ambulance attendants working twenty-four hour shifts required to relieve attendants of all duties during rest breaks, including the duty to be available to respond to an emergency call if one arises during a rest period?: (2) “Under the California Labor Code and applicable regulations, may an employer of ambulance attendants working twenty-four hour shifts require attendants to be available to respond to emergency calls during their meal periods without a written agreement that contains an on-duty meal period revocation clause? If such a clause is required, will a general at-will employment clause satisfy this requirement?” (3) “Do violations of meal period regulations, which require payment of a ‘premium wage’ for each improper meal period, give rise to claims under sections 203 and 226 of the California Labor Code where the employer does not include the premium wage in the employee’s pay or pay statements during the course of the violations?”

Standing for PAGA Claims

  • Can a PAGA plaintiff settle his individual wage and hour claims and still pursue his PAGA action as an “aggrieved employee”? In Kim v. Reins International California, Inc., the Supreme Court has agreed to decide whether an employee bringing an action under PAGA loses standing to pursue representative claims as an “aggrieved employee” by dismissing his or her individual claims against the employer.

Workplace solution. Some of the issues raised by the above cases may seem relatively minor, technical, or limited to particular industries. Yet many a significant class action has turned upon issues no more monumental. We will keep our eyes and ears on the Court’s progress and keep readers updated with the latest developments.

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.

            What happens when an employee makes a claim for unpaid wages, and wins?  The employee, as the prevailing party, has a statutory right to recover the attorney’s fees reasonably incurred in achieving the victory. 

            What happens when an employee makes a claim for unpaid wages (other than minimum wage or overtime)[1] and loses?  The employer, as prevailing party, could also recover its attorney’s fees reasonably incurred in defending against the meritless claim.  That’s about to change. 

            Effective January 1, 2014, Labor Code § 218.5 will provide that a prevailing employer can recover its defense costs only if it proves to the court that the employee brought the action “in bad faith.”  “In bad faith” is not defined in the statute, but it will probably mean something like “the claim was brought with knowledge that it was baseless or with intent to harm the employer.” 

            Governor Brown signed the legislation, SB 462, making this change on August 26, 2013.  The bill’s author, Sen. Bill Monning, D-Carmel, stated that this amendment corrects “an historic injustice” and “brings California into conformity with the overwhelming majority of states in the country.”  Many employers, however, see nothing unjust in being allowed to recoup expenses they have laid out in response to an employee’s unfounded claims. 

            The amendment was prompted by a 2012 California Supreme Court ruling holding that a prevailing employer in a meal-rest penalties case could not recover attorneys’ fees because such penalties are not “wages” and the Labor Code statutes permit fee recovery only in actions involving wages. Kirby v. Immoos Fire Protection, 53 Cal. 4th 1244 (2012).  Although there was no applicable fee-shifting statute in Kirby, the case implied that if the claims had involved wages instead of penalties, an award of attorneys’ fees to the prevailing employer would have been appropriate.  The reaction from SB 462’s sponsor — the California Employment Lawyers Association — was to try to protect plaintiff employees from that eventuality by requiring successful employers to prove bad faith. 

            Workplace Solution:   Employers hoping to recover attorney’s fees for successfully fending off non-minimum wage and non-OT claims for wages or benefits must prove that the claiming employee or former employee was a bad actor.  This new law makes it even more important to have good policies and practices in place to avoid facing wage claims in the first place.


[1]  California has a one-way, pro-employee fee-shifting provision in place for claims seeking unpaid minimum wages and unpaid overtime pay, by which the prevailing employee is entitled to attorney’s fees.  This new amendment does not change that rule.