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Amid the confusion and tensions of the WGA-ATA dispute over packaging fees and agency ties to affiliated production entities, more than 7,000 termination letters have been sent out to non-franchised agents who once represented WGA members.[1] The mass firing was “mandatory rather than optional”[2] and 92% of writers who voted in favor of the Code of Conduct acted in concert as insisted by the Guild. As WGA West president David A. Goodman said, “when the guild takes action, we do so as a group… we don’t ask an individual member to take a stand. We do it together…”

The WGA has sent a strong message to the ATA through the coordinated firing, but there remains uncertainty as to how the average writer will procure employment when he or she no longer has ccess to the only person (other than the writer him/herself) that is legally entitled to procure employment—a licensed talent agent.[3]

Some members such as Shalom Auslander, signed the guild-mandated termination letter but openly lamented the “forced” mass firing in the face of guild discipline. In his letter to his agent, Auslander writes: “you’re not forcing me to quit the Guild (yet), but they are forcing me to fire you… if I don’t send you this letter by end of day today, I will be, in their words, subject to discipline. I will likely not be able to work in the industry again.” [4]

Playwright and TV writer Jon Robin Baitz became the first WGA member to openly challenge the guild’s directive to fire talent agents. In a letter to the union leaders, he wrote: “I am a union man, but … I cannot cut ties with my agents, because I would be forsaking … people who have helped me create a life.”[5]

The WGA has warned that members who defy the guild like Baitz and Auslander could face guild disciplinary action in accordance with Article X of the WGA’s constitution, for being in violation of Working Rule 23 that prohibits a member from entering into a representation agreement with a non-franchised agent.[6] Pursuant to Article X, members in violation can be “suspended, declared not in good standing, expelled from membership in the guild, be asked to resign, be censured, fined or otherwise disciplined…”[7]

While the guild has yet to declare the specific consequences faced by a writer who fails or refuses to terminate his/her agent[8], some writers are concerned that the guild’s planned sanctions may take the form of taking away health and pension benefits.[9]

A union’s right to prescribe its own rules, including grounds for discipline, is protected by federal labor law, but such right is limited by the National Labor Relations Act which prohibits a union from taking disciplinary action that “restrain[s] or coerce[s] employees in the exercise of their rights guaranteed in Section 7” (29 U.S.C. § 158(b)(1)(A)).[10]

According to the U.S. Supreme Court’s interpretation of § 158(b)(1)(A), a union can “enforce a properly adapted rule which reflects a legitimate union interest, impairs no policy Congress has imbedded in the labor laws, and is reasonably enforced against union members who are free to leave the union and escape the rule.”[11] Hence, a guild’s action that interferes with a member’s exercise of rights constitutes an unfair labor practice. For example, a coal workers’ union’s procedure of denying welfare and pension benefits to employees who change mines and consequently change unions was found in violation of § 158(b)(1)(A) because it restricts an employee’s free exercise of right to join or not join a labor union.

Writers who have cancer or are pregnant have reportedly felt that “they had no choice” but to sign the termination letters, in fear of losing healthcare and pension benefits.[12] Consistent with the above example, it would seem that the WGA’s withholding of pension and healthcare would be considered an unfair labor practice.

One option for writers who disagree with the WGA’s position but want to avoid disciplinary action would be to go “financial core,” a right granted by the Supreme Court in its NLRB v. General Motors[13] ruling that affords employees the right not to join (or resign from) the union, but still work union jobs, provided they pay their fees and a portion of their dues.

In the context of the WGA, going financial core allows writers to become non-union yet continue to receive the contractual benefits of a collective bargaining agreement (e.g., minimum scale, pension and healthcare) by paying a portion of union dues. This is an inherent right enjoyed by every union member, which cannot be waived or otherwise taken away by means of guild disciplinary action or rules.

However, declaring financial core status has its costs. For one, this strips non-members of their right to vote or hold union office. And more importantly, going fi-core is viewed by many union members as disloyal. Resignation from the WGA could result in ostracization by the union and exclusion from awards consideration.[14] Because of these feared repercussions, only 28 writers opted for financial core status during the WGA’s last strike in 2007-2008. As of last year, only 40 of 24,000 members of the WGA West are listed as financial-core non-members. In the WGA East, 11 of its 4,776 members are of the same status.[15] As former WGA president Patrick Verrone describes: “[T]hose who went financial core did not share in the adversity and should not share in [the Guild’s] victory.”[16]

[1] https://deadline.com/2019/04/writers-guild-agents-fired-total-hollywood-fight-packaging-1202599639/.

[2] https://deadline.com/2019/04/writers-guild-agents-fired-total-hollywood-fight-packaging-1202599639/. See also https://www.dir.ca.gov/dlse/TAC/TAC-39547%20Doughty%20v.%20Hess%20040517.pdf

[3] https://www.laboremploymentlawblog.com/2019/04/articles/collective-bargaining/wga-preemption-route-ata-dispute/.

[4] https://variety.com/2019/biz/news/wga-talent-agents-contract-battle-writers-1203194018/.

[5] https://variety.com/2019/biz/news/jon-robin-baitz-wga-agent-defy-fire-caa-1203190402/.

[6] https://www.wga.org/members/membership-information/agency-agreement/agency-code-of-conduct-implementation-faq.

[7] https://deadline.com/2019/04/wga-disciplinary-trials-for-writers-who-dont-notify-guild-they-have-fired-their-agents-1202596193/.

[8] When asked whether the writers who did not e-fire their agents will be sanctioned by the WGA, Goodman replied that there’s “no plan to sanction any member who has not yet e-signed” because the guild is still early in the process of collecting the termination letters. See https://deadline.com/2019/05/writers-agents-fight-wga-questions-david-goodman-dissent-1202606278/.

[9] https://deadline.com/2019/05/writers-agents-fight-wga-questions-david-goodman-dissent-1202606278/.

[10]Under Section 7 of the National Labor Relations Act, employees have the right to unionize, to join together to advance their interests and employees, and to refrain from such activity. https://www.nlrb.gov/rights-we-protect/whats-law/unions/coercion-employees-section-8b1a.

[11] Scofield v. N.L.R.B., 394 U.S. 423, 430 (1969).

[12] https://deadline.com/2019/05/writers-agents-fight-wga-questions-david-goodman-dissent-1202606278/.

[13] N.L.R.B. v. General Motors Corp., 373 U.S. 734 (1963) (available at https://www.law.cornell.edu/supremecourt/text/373/734.

[14] The same sentiment is shared by other industry unions like SAG-AFTRA, which states fi-core are “viewed as scabs or anti-union by SAG-AFTRA”. https://www.sagaftra.org/financial-core.

[15] https://deadline.com/2018/12/hollywood-labor-strikes-loom-2019-actors-ad-agency-writers-agents-1202524437/

[16] https://variety.com/2008/scene/markets-festivals/wga-reveals-fi-core-writers-1117984266/.

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Signaling another positive development for interstate motor carriers operating in California, the United States District Court for the Central District of California (the “Central District”) recently dismissed a truck driver’s claims that motor carrier U.S. Xpress failed to provide a class of drivers with legally required meal and rest periods compliant with California law. See, Ayala v. U.S. Express Enters., Inc. et al. Case No. 5:16-cv-00137-GW-(KKx) (Order Granting Partial Summary Judgment). The Court, in granting U.S. Xpress’s motion for partial summary judgment, stated that it did not possess the authority to review the merits of the case since the Federal Motor Carrier Safety Administration (“FMCSA”) determined, in December 2018, that Federal law preempts California state law. The Central District applied the FMCSA’s order retroactively to the Ayala case, filed in 2016, stating that it was bound by the FMCSA order and would apply the order in similar cases unless and until the order was invalidated by the Ninth Circuit.

The Ayala case represents the first challenge to the FMCSA Preemption Determination before a California District Court – and, indeed, the FMCSA order’s first “win.” Only five months ago, FMCSA exercised its authority under Federal law, ruling that California’s Meal and Rest Break rules are preempted by the Federal Motor Carrier Safety Regulations and cannot be enforced against interstate motor carriers. In granting the petitions filed by the American Trucking Associations and by the Specialized Carriers and Rigging Association, the FMCSA reasoned that California’s Meal and Rest Break rules, although more stringent than those promulgated at the Federal level, provided no additional safety benefits beyond those already provided by the Federal Motor Carrier Safety Regulations, were incompatible with the Federal hours of service regulations, and caused an unreasonable burden on interstate commerce.

The FMCSA’s Preemption Determination, combined with the Order issued by the Central District in Ayala, appear to invalidate those decisions that had held that the California Labor Code was NOT preempted by Federal law. See, e.g., Dilts v. Penske Logistics, LLC [on July 9, 2014, the Ninth Circuit ruled that California’s Meal and Rest Break rules were not preempted by the Federal Aviation Administration Authorization Act of 1994].

The FMCSA’s Preemption Determination and the Ayala ruling not only represent a huge win for the trucking industry, but provide the industry with increased clarity as to regulatory standards applicable to interstate carriers in California, and effectively shield those carriers from the draconian penalties promulgated by the State for violations of the California Labor Code’s Meal and Rest Break rules.

Unfortunately, although these decisions are significant and encouraging, the ultimate legality of the FMCSA’s Preemption Determination, and indeed, of the Ayala ruling, remains in limbo. Currently, four petitions challenging the FMCSA’s Preemption Determination are working their way through the Ninth Circuit, including petitions filed by the Teamsters Union, by California’s Attorney General, and by the California Labor Commissioner’s Office. In addition, per the Order of the Court, the Ayala decision granting partial summary judgment to U.S. Xpress may be overturned on a motion for reconsideration if the Ninth Circuit invalidates the FMCSA’s Preemption Determination.

At this time, there is no indication that an opinion from the Ninth Circuit regarding the FMCSA’s ruling is imminent. The Circuit is yet to even hear oral argument on the subject. Rather, the petitions pending before the Ninth Circuit challenging the Preemption Determination are not expected to be fully briefed for three months. Until then – it appears that interstate motor carriers in California are in an excellent position to challenge the merits of thousands of pending wage and hour class actions filed by commercial vehicle drivers for violations of the California Labor Code’s Meal and Rest Break rules.

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Last August, we wrote about a Chicago ordinance requiring hotel employers to, among other things, equip hotel employees assigned to work in guestrooms or restrooms with portable emergency contact devices. The emergency contact devices, referred to as “panic buttons,” may be used to summon help if the employee reasonably believes that an ongoing crime, sexual harassment, sexual assault or other emergency is occurring in the employee’s presence. The Chicago ordinance took effect July 1, 2018.

Shortly after the Chicago City Council approved the ordinance, AB 1761 was introduced in the California Assembly. While the bill passed the Assembly, it did not make its way into law. Similar to the Chicago ordinance, the California bill, among other things, would have required hotel employers to provide their employees with a panic button in order to summon immediate assistance when working alone in a guestroom.

While the California statewide bill did not pass, local ordinances in Sacramento and Long Beach (California) have since received approval. The Sacramento County Hotel Worker Protection Act of 2018 applies to hotels or motels with 25 or more rooms, located in the unincorporated area of Sacramento County. Not only does it require every hotel licensee to equip each employee who is assigned to work in a guest room or restroom with a panic button or notification device, it also requires every hotel licensee to develop, maintain, and comply with a written sexual harassment policy to protect employees against sexual assault and sexual harassment by guests. The policy must describe the procedures the complaining employee and hotel licensee shall follow in instances of alleged sexual assault and sexual harassment by guests. And, in Long Beach, hotels of any size must provide panic buttons to employees. The Long Beach ordinance also prohibits employers from retaliating against employees who decide to use their panic buttons.

Local panic button measures have expanded beyond California. Miami Beach, for instance, passed a measure effective August 1, 2019 requiring hotels and hostels in the City of Miami Beach to provide a safety button or notification device to each hotel or hostel employee that is a room attendant, housekeeping attendant, minibar attendant, or room service server. An employee may use the safety button or notification device if the employee reasonably believes there is an ongoing crime, harassment, or other emergency in the employee’s presence. Affected employers are also required to submit an affidavit with the annual renewal of the hotel’s or hostel’s City business tax receipt stating the hotel or hostel employer is in compliance with the ordinance.

Apart from the passage of local ordinances, “panic button” measures have made their way into several collective bargaining agreements across the country, including those in New York. As a result, the lodging industry should keep a close eye on these measures as they are gaining momentum nationwide.

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On April 29, 2019, the General Counsel of the National Labor Relations Board (“NLRB” or “Board”) issued Memorandum GC 19-06, which provides guidance to the Board’s regional offices on how to handle cases involving Beck objectors and how to allocate secondary expenses related to union lobbying activity after the Board’s March 1, 2019 decision in United Nurses & Allied Professionals (Kent Hospital), 367 NLRB No. 94 (2019). In Communications Workers of America v. Beck, the Supreme Court held that a union cannot use agency fees collected from a non-member employee—that is, an employee subject to a union security clause but who chooses not to be represented by the union—on activities unrelated to collective bargaining, contract administration, or grievance adjustment if the non-member employee objects to such an expenditure (a so-called “Beck objector”). 487 U.S. 735 (1998). As we recently explained in our March 2019 post covering Kent Hospital, the Board further limited the permissible uses of agency fees by ruling that lobbying costs incurred by a union fall outside the scope of a union’s statutory duties as the exclusive bargaining representative of non-member employees.

In Memorandum GC 19-06, General Counsel Peter B. Robb criticizes the approach mandated by prior General Counsels in Beck objector cases, which approach required employees who choose to dispute a union’s expense allocation through filing a charge with the Board to explain why the expenditure was not chargeable and provide, or at least point to, evidence in support of their position. The General Counsel explained that this approach “improperly forecloses Beck objectors from utilizing the Board as a viable forum for their chargeability challenges[,] is inconsistent with decisions placing the burden of proving union expenses are chargeable on the union,” and ends up requiring employees to participate in a union’s internal challenge procedure before filing a Board charge to obtain the evidence needed to show that the expenditures were improperly charged. According to the General Counsel, Beck objectors are no longer required “to explain why a particular expenditure is nonchargeable and to provide evidence or promising leads to support that contention.” Rather, Board investigators are now instructed to look to the union to obtain information about the union’s chargeability decisions for each major category of expenses and the union’s rationale for allocating expenses chargeable to non-member employees in mixed expenditure categories. The General Counsel did, however, note that “it would still be prudent to inquire as to a charging party’s particular objections and evidence” and that some union expenditures may be facially valid (such as, for example, the costs of an arbitration involving contract interpretation).

GC Memo 19-06 also places unions on notice to properly allocate secondary expenses connected to lobbying activities. As cautioned by the General Counsel, this does not mean simply deducting a lobbyist’s salary and benefits from the expenditures chargeable to Beck objectors, as “lobbying necessarily entails at least some spillover costs, such as overhead expenses, preparation of lobbying literature, reporting on lobbying efforts in union publications, and so forth.” Although unions are permitted to “reasonably prorate a percentage of its overhead costs as nonchargeable based on the overall percentage of nonchargeable expenses” and “absolute precision” is not required, unions must nonetheless make a good faith effort to identify these secondary expenses to avoid violating their duty of fair representation. Lest a union think that it can avoid proration of its overhead expenses when its lobbying activities are handled by an outside lobbyist, GC Memo 19-06 reminds unions of the likely secondary costs that must be taken into consideration even when an outside lobbyist is used, such as expenses related to hiring and overseeing the work of the lobbyist. Accordingly, the Memorandum makes clear that unions who fail to allocate some portion of secondary expenses to lobbying will be closely scrutinized. Finally, the regional offices were advised to fully investigate charges brought by Beck objectors, regardless of the amount of the expense at issue or the alleged overcharge.

When Kent Hospital was issued, we predicted that it would result in an uptick of unfair labor practice charges filed against unions by Beck objectors. Now, this result seems even more likely, given that Beck objectors no longer need to gather evidence for the Board prior to challenging the chargeability of a union expenditure and that the regional officers have been instructed to investigate all charges—regardless of their magnitude—brought by Beck objectors.

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Last year, the California Supreme Court decided Dynamex Operations West, Inc. v. Superior Court of Los Angeles, a landmark decision that dramatically increased the risk of misclassifying individuals as independent contractors. As previously reported, although Dynamex replaced the longstanding Borello standard with the “ABC” test, it also left two critical questions unaddressed. First, Dynamex did not address whether the ABC test applies retroactively. Second, Dynamex did not decide whether its scope was limited to coverage under the Industrial Wage Commission’s (“IWC”) Wage Orders or if its holding generally applied to the Labor Code as a whole. In the last five days, both questions have been answered.

On May 2, 2019, the Ninth Circuit found that Dynamex applies retroactively under California law in Vazquez v. Jan-Pro Franchising International, Inc., the most notable decision to date regarding Dynamex’s retroactivity. Shortly thereafter, on May 3, 2019, the Division of Labor Standards Enforcement (“DLSE”), California’s wage and hour enforcement agency, issued a letter opining the ABC test applies to both the IWC Wage Orders and any Labor Code provisions that enforce requirements set forth in the Wage Orders. Although neither the Ninth Circuit nor the DLSE can authoritatively interpret California law, these developments indicate that Dynamex’s scope—which governs hundreds of thousands of independent contractor relationships throughout the state—has continued to expand its already extensive reach.

Revisiting Dynamex and the ABC Test

Under the ABC test, a worker is presumed to have “suffered or permitted to work,” and thus, “an employee,” unless the putative employer proves:

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

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

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

Note that each of these requirements need to be met in order for the presumption that a worker is an employee can be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor. Prong B of the ABC test is particularly notable because it seemingly precludes businesses from using independent contractors to deliver or provide their core product or service. Under Borello, the longstanding prior standard, many companies and industries built the use of independent contractors into the core of their business models. Those companies and industries now face existential challenges in the legal paradigm created by Dynamex and its progeny.

Application of Dynamex by the Ninth Circuit in Vasquez

Vasquez’s lengthy procedural history began in 2008 with a putative class action filed in the U.S. District Court, District of Massachusetts by janitors against JAN-PRO, an international commercial cleaning franchisor. The janitors’ minimum wage and overtime claims stemmed from allegations that they were misclassified as independent contractors as part of JAN-PRO’s franchising model. Several of the plaintiffs resided in California, and as a result, the Massachusetts District Court severed the California plaintiffs and transferred their claims to the Northern District of California.

In the Northern District, JAN-PRO prevailed on a summary judgment motion as to the janitors’ minimum wage and overtime claims. The plaintiffs appealed. While on appeal, the California Supreme Court decided Dynamex, and the Ninth Circuit subsequently ordered the parties to brief the effect of Dynamex on their case.

In its opinion, the Ninth Circuit examined California precedent and found that applying Dynamex retroactively is consistent with the state’s “legal tradition” to apply judicial decisions retroactively. While the Court acknowledged that there is an exception to apply judicial decisions retroactively, it held that the exception is not applicable to the Dynamex decision. Rather, the Court reasoned that there is a strong presumption in favor of retroactivity, Dynamex only clarifies existing law, and that California state courts provide no indication of an intention to limit Dynamex to new cases. As part of its opinion, the Ninth Circuit acknowledged that the California Supreme Court’s denial of a petition asking it to state that Dynamex should be applied prospectively was only “a data point for us to consider.”

Although the Ninth Circuit properly remanded the case to the Northern District to decide the merits, it nonetheless offered “guidance” on the analysis. It urged the district court to focus on Prong B of the ABC test, raising the serious question of whether the janitors performed work outside the “usual course” of JAN-PRO’s business. As expected, although JAN-PRO markets itself as a “commercial cleaning company,” JAN-PRO has continued to argue that it is a franchising business and not a cleaning business—a contention that will likely prove dispositive either way on remand.

The DLSE Expands the Scope of Dynamex in New Opinion Letter

The day after the Ninth Circuit decided Vasquez, the DLSE issued an opinion letter which examined the scope of Dynamex’s ABC test and concluded that it goes beyond the four corners of the Wage Orders to also apply to the Labor Code. The DLSE reasoned that because the IWC Wage Orders lack independent enforcement power, but are instead premised on the legal authority of the Labor Code, “the IWC employer definitions are imported into the Labor Code provisions” that “enforce specific requirements directly set forth in the wage orders.”

Accordingly, the DLSE declared that California Labor Code provisions which implicate obligations under the wage orders are therefore subject to the ABC test, including Labor Code sections: 226 (itemized wage statements); 226.7 (meal and rest periods ); 510 (overtime); 512 (meal and rest periods); 1182.12 (minimum wage); 1194 (overtime); 1194.2 (liquidated damages); 1197 (minimum wage); and 2802 (reimbursement of expenses).

The DLSE also recognized a narrow exception for waiting time penalty claims under section 203, noting that the analysis turns on whether the claim is derivative of concurrent minimum wage and overtime claims: “Thus, where section 203 serves to enforce the underlying minimum wage and overtime obligations of the wage orders, application of the ABC test to these claims would be appropriate.” That is, the DLSE explained that Dynamex would apply to section 203 except in the rare circumstance where a worker asserts a standalone section 203 claim not premised on underlying minimum wage and/or overtime claims.

As mentioned above, while the DLSE is the administrative agency authorized to enforce California’s employment laws, including the Wage Orders, the California Supreme Court (most notably in Dynamex itself) has repeatedly held that the DLSE’s interpretations are not entitled to deference ordinally accorded to formal administrative regulations, and that courts must independently determine the meaning and scope of the provisions of the Wage Orders. That being said, companies that utilize independent contractors (and particularly those who use them at scale) would be wise to take the DLSE’s enforcement posture into account when evaluating potential exposure.

Key Takeaways

As a result of Vasquez, companies defending misclassification claims in the Ninth Circuit now face additional liability for up to several years before the April 2018 Dynamex decision. In addition, the DLSE’s opinion letter has essentially confirmed that it hopes to expand rather than just maintain Dynamex’s broad sweep, increasing the already-heightened regulatory pressure on companies who use independent contractors.

As your company assesses its retroactive and future risk of misclassification, we offer you Ghandi’s simple and frank advice: “The future depends on what you do today.” To that end, the list below identifies action items that can be taken now to mitigate the risk of future misclassification claims:

  • Identify all 1099 recipients that are paid to individual social security numbers for the last four years to identify the risk associated with potentially misclassified employees.
  • Conduct a risk analysis to confirm all independent contractors are properly classified.
  • Confirm in your risk analysis that the independent contractors do not provide services that are part of your core business offerings.
  • If necessary, reclassify independent contractors and start burning down your statute of limitations.
  • Establish a checklist and process for onboarding independent contractors that contemplates the ABC test.
  • In light of the U.S. Supreme Court’s recent decisions affirming the validity of arbitration agreements, including those that contain class action waivers, consider including private arbitration agreements to resolve any disputes that arise from your relationship. Given that class actions often fail to account for the individual interests and experiences of putative class members, and are generally considered less efficient but more expensive than private arbitration, including such provisions in your independent contractor agreements may be beneficial to both parties.
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Last year, the California Supreme Court decided Dynamex Operations West, Inc. v. Superior Court of Los Angeles, a landmark decision that dramatically increased the risk of misclassifying individuals as independent contractors. As previously reported, although Dynamex replaced the longstanding Borello standard with the “ABC” test, it also left two critical questions unaddressed. First, Dynamex did not address whether the ABC test applies retroactively. Second, Dynamex did not decide whether its scope was limited to coverage under the Industrial Wage Commission’s (“IWC”) Wage Orders or if its holding generally applied to the Labor Code as a whole. In the last five days, both questions have been answered.

On May 2, 2019, the Ninth Circuit found that Dynamex applies retroactively under California law in Vazquez v. Jan-Pro Franchising International, Inc., the most notable decision to date regarding Dynamex’s retroactivity. Shortly thereafter, on May 3, 2019, the Division of Labor Standards Enforcement (“DLSE”), California’s wage and hour enforcement agency, issued a letter opining the ABC test applies to both the IWC Wage Orders and any Labor Code provisions that enforce requirements set forth in the Wage Orders. Although neither the Ninth Circuit nor the DLSE can authoritatively interpret California law, these developments indicate that Dynamex’s scope—which governs hundreds of thousands of independent contractor relationships throughout the state—has continued to expand its already extensive reach.

Revisiting Dynamex and the ABC Test

Under the ABC test, a worker is presumed to have “suffered or permitted to work,” and thus, “an employee,” unless the putative employer proves:

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

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

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

Note that each of these requirements need to be met in order for the presumption that a worker is an employee can be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor. Prong B of the ABC test is particularly notable because it seemingly precludes businesses from using independent contractors to deliver or provide their core product or service. Under Borello, the longstanding prior standard, many companies and industries built the use of independent contractors into the core of their business models. Those companies and industries now face existential challenges in the legal paradigm created by Dynamex and its progeny.

Application of Dynamex by the Ninth Circuit in Vasquez

Vasquez’s lengthy procedural history began in 2008 with a putative class action filed in the U.S. District Court, District of Massachusetts by janitors against JAN-PRO, an international commercial cleaning franchisor. The janitors’ minimum wage and overtime claims stemmed from allegations that they were misclassified as independent contractors as part of JAN-PRO’s franchising model. Several of the plaintiffs resided in California, and as a result, the Massachusetts District Court severed the California plaintiffs and transferred their claims to the Northern District of California.

In the Northern District, JAN-PRO prevailed on a summary judgment motion as to the janitors’ minimum wage and overtime claims. The plaintiffs appealed. While on appeal, the California Supreme Court decided Dynamex, and the Ninth Circuit subsequently ordered the parties to brief the effect of Dynamex on their case.

In its opinion, the Ninth Circuit examined California precedent and found that applying Dynamex retroactively is consistent with the state’s “legal tradition” to apply judicial decisions retroactively. While the Court acknowledged that there is an exception to apply judicial decisions retroactively, it held that the exception is not applicable to the Dynamex decision. Rather, the Court reasoned that there is a strong presumption in favor of retroactivity, Dynamex only clarifies existing law, and that California state courts provide no indication of an intention to limit Dynamex to new cases. As part of its opinion, the Ninth Circuit acknowledged that the California Supreme Court’s denial of a petition asking it to state that Dynamex should be applied prospectively was only “a data point for us to consider.”

Although the Ninth Circuit properly remanded the case to the Northern District to decide the merits, it nonetheless offered “guidance” on the analysis. It urged the district court to focus on Prong B of the ABC test, raising the serious question of whether the janitors performed work outside the “usual course” of JAN-PRO’s business. As expected, although JAN-PRO markets itself as a “commercial cleaning company,” JAN-PRO has continued to argue that it is a franchising business and not a cleaning business—a contention that will likely prove dispositive either way on remand.

The DLSE Expands the Scope of Dynamex in New Opinion Letter

The day after the Ninth Circuit decided Vasquez, the DLSE issued an opinion letter which examined the scope of Dynamex’s ABC test and concluded that it goes beyond the four corners of the Wage Orders to also apply to the Labor Code. The DLSE reasoned that because the IWC Wage Orders lack independent enforcement power, but are instead premised on the legal authority of the Labor Code, “the IWC employer definitions are imported into the Labor Code provisions” that “enforce specific requirements directly set forth in the wage orders.”

Accordingly, the DLSE declared that California Labor Code provisions which implicate obligations under the wage orders are therefore subject to the ABC test, including Labor Code sections: 226 (itemized wage statements); 226.7 (meal and rest periods ); 510 (overtime); 512 (meal and rest periods); 1182.12 (minimum wage); 1194 (overtime); 1194.2 (liquidated damages); 1197 (minimum wage); and 2802 (reimbursement of expenses).

The DLSE also recognized a narrow exception for waiting time penalty claims under section 203, noting that the analysis turns on whether the claim is derivative of concurrent minimum wage and overtime claims: “Thus, where section 203 serves to enforce the underlying minimum wage and overtime obligations of the wage orders, application of the ABC test to these claims would be appropriate.” That is, the DLSE explained that Dynamex would apply to section 203 except in the rare circumstance where a worker asserts a standalone section 203 claim not premised on underlying minimum wage and/or overtime claims.

As mentioned above, while the DLSE is the administrative agency authorized to enforce California’s employment laws, including the Wage Orders, the California Supreme Court (most notably in Dynamex itself) has repeatedly held that the DLSE’s interpretations are not entitled to deference ordinally accorded to formal administrative regulations, and that courts must independently determine the meaning and scope of the provisions of the Wage Orders. That being said, companies that utilize independent contractors (and particularly those who use them at scale) would be wise to take the DLSE’s enforcement posture into account when evaluating potential exposure.

Key Takeaways

As a result of Vasquez, companies defending misclassification claims in the Ninth Circuit now face additional liability for up to several years before the April 2018 Dynamex decision. In addition, the DLSE’s opinion letter has essentially confirmed that it hopes to expand rather than just maintain Dynamex’s broad sweep, increasing the already-heightened regulatory pressure on companies who use independent contractors.

As your company assesses its retroactive and future risk of misclassification, we offer you Ghandi’s simple and frank advice: “The future depends on what you do today.” To that end, the list below identifies action items that can be taken now to mitigate the risk of future misclassification claims:

  • Identify all 1099 recipients that are paid to individual social security numbers for the last four years to identify the risk associated with potentially misclassified employees.
  • Conduct a risk analysis to confirm all independent contractors are properly classified.
  • Confirm in your risk analysis that the independent contractors do not provide services that are part of your core business offerings.
  • If necessary, reclassify independent contractors and start burning down your statute of limitations.
  • Establish a checklist and process for onboarding independent contractors that contemplates the ABC test.
  • In light of the U.S. Supreme Court’s recent decisions affirming the validity of arbitration agreements, including those that contain class action waivers, consider including private arbitration agreements to resolve any disputes that arise from your relationship. Given that class actions often fail to account for the individual interests and experiences of putative class members, and are generally considered less efficient but more expensive than private arbitration, including such provisions in your independent contractor agreements may be beneficial to both parties.
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In connection with last month’s ruling from a Washington, D.C. district court reinstating the U.S. Equal Employment Opportunity Commission’s (“EEOC”) collection of employer pay data previously stayed by the Office of Management and Budget (“OMB”) (Component 2 of the revised EEO-1 form), as previously reported here, the EEOC announced on May 2, 2019 that it has opted to collect Component 2 data for 2017 in addition to 2018. On April 25, 2019, the district court ordered the EEOC to collect a second year of pay data from select employers, giving the EEOC until May 3, 2019 to advise whether it would collect 2017 or 2019 data.

Employers have until September 30, 2019 to report 2017 and 2018 W-2 wage data and hours worked for employees within 12 specified pay bands. The EEOC has announced that it expects to begin accepting data submissions in mid-July, to facilitate compliance with the court-mandated deadline.

In the meantime, employers must still submit Component 1 demographic data on race, gender and ethnicity by May 31, 2019.

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In a 2010 decision, Stolt-Nielsen S. A. v. Animalfeeds International Corp., the United States Supreme Court held that parties may not be compelled to submit to class arbitration under the Federal Arbitration Act (FAA) unless there is a contractual basis for concluding that they agreed to do so. The Court held that such an agreement could not be presumed from the fact that the arbitration agreement is “silent” on the issue of class arbitration or the mere fact that the parties agreed to arbitrate.

Nine years later (nearly to the day), on April 24, 2019, the Supreme Court in Lamps Plus, Inc. v. Varela reaffirmed and extended its holding in Stolt-Nielsen and held that even an arbitration agreement that is ambiguous as to whether class arbitration is permitted was insufficient to provide the “necessary ‘contractual basis’ for compelling classwide arbitration.”

The case arises out of a 2016 data breach of Lamps Plus, where the tax information of roughly 1,300 employees, including that of Frank Varela, was compromised. Varela sued his employer in federal court in California after learning of the breach and of the subsequent filing of a fraudulent income tax return in his name.

Lamps Plus moved to compel Varela’s claims to arbitration on an individual basis pursuant to his signed arbitration agreement. The district court granted the motion, but only authorized arbitration on a classwide basis. The Ninth Circuit affirmed the ruling on appeal, holding that the language in Varela’s arbitration agreement—which provided that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment”—was “ambiguous” as to whether it authorized class arbitration. Applying state law contract interpretation principles and the canon contra proferentem (i.e., the anti-drafter rule), the Ninth Circuit reasoned that the ambiguity must be construed against the drafter—i.e., Lamps Plus.

On appeal, after disposing of a jurisdictional argument, the Supreme Court accepted the Ninth Circuit’s finding that Varela’s arbitration agreement was ambiguous as to class arbitration. But it nevertheless found that “an ambiguous agreement can[not] provide the necessary ‘contractual basis’ for compelling classwide arbitration” under the FAA. Citing the “‘fundamental’ difference between class arbitration and the individualized form of arbitration envisioned by the FAA”—i.e., the former lacking the efficiency, simplicity and speed of the latter—the Court held that it could not infer Lamps Plus’s consent to participate in class arbitration absent a clear and affirmative agreement to do so.

The Court also rejected the Ninth Circuit’s application of contra proferentem, stating that the canon—which favors interpretations consistent with public policy when the intent of the parties cannot be ascertained—cannot be used to supplant the parties’ affirmative consent to arbitrate on a classwide basis, as is necessary under the FAA.

This decision comes on the heels of another 5-4 Supreme Court decision from last term, Epic Systems Corp. v. Lewis, in which the Court confirmed the enforceability of class action waivers in arbitration agreements.

In her dissenting opinion, Justice Ginsburg, joined by Justices Breyer and Sotomayor, bemoaned the Supreme Court’s trend in sanctioning purported “take-it-or-leave-it” arbitration agreements and “hobbl[ing] the capacity of employees and consumers to band together in a judicial or arbitral forum.” The Justice nevertheless pointed to some companies’ exclusion of sexual harassment claims from their arbitration policies that “ameliorate the harm this Court’s decisions have occasioned.”

In his dissent, Justice Breyer disagreed that the Ninth Circuit and the Court had jurisdiction to hear Lamps Plus’s appeal, contending the underlying order was interlocutory because the district court directed arbitration to proceed under the FAA.

In her dissent, Justice Kagan, joined by Justices Ginsburg, Breyer, and Sotomayor (in part), challenged the majority’s refusal to apply the state contract interpretation principle of contra proferentem to resolve the ambiguity in the contract. Justice Kagan contended that, under the FAA, state law governs interpretation of arbitration agreements so long as that law treats other types of contracts the same way. Since the rule of contra proferentem is “as even-handed as contract rules come,” Justice Kagan reasoned that it should have been applied to interpret the arbitration agreement against Lamps Plus and in Varela’s favor.

Chief Justice Roberts delivered the opinion of the Court, in which Justices Thomas, Alito, Gorsuch, and Kavanaugh joined. Justice Thomas filed a concurring opinion. Justices Ginsburg, Breyer, Sotomayor, and Kagan filed dissenting opinions.

The sum total of the Court’s line of arbitration cases reaffirm an employer’s ability to avoid class and collective actions through properly drafted arbitration agreements. That said, the Court has not yet provided employers like relief from representative actions under the California Private Attorney General Act (PAGA). To take full advantage of Court’s latest opinions concerning class waivers and class arbitrations, it is essential that employers consult with legal counsel to ensure that their arbitration agreements are compliant and updated.

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On April 25, 2019, a Washington, D.C. federal judge ruled that all employers with 100 or more employees and federal contractors with 50 or more employees have until September 30, 2019 to submit their 2018 pay data to the U.S. Equal Employment Opportunity Commission (“EEOC”), reflecting how much the employers paid workers of different sexes, races and ethnicities last year. This data is to be submitted as Component 2 of the EEO-1 form, and will supplement the EEOC’s long-running collection of employers’ demographic data.

The decision accepts the deadline proposed by the EEOC, following the court’s March ruling reinstating the data collection adopted by the Obama administration to root out gender- and race-based pay gaps, which was rolled back by the Trump administration in 2017 for various reasons, including paperwork burden.

The EEOC previously indicated that it did not have the infrastructure to accept and secure employers’ pay data.

The EEOC must issue a statement on its website informing employers of the September 30, 2019 deadline by April 29, 2019, and must provide periodic compliance updates to the court.

The EEOC was also ordered by the court to collect a second year of pay data in 2020, and has until May 3, 2019 to post on its website and advise the court whether it will collect 2017 or 2019 data from employers.

This decision and the corresponding reporting obligations now placed on employers underscores the EEOC’s continuing focus on unlawful pay disparities in the workplace and the need for employers to consider conducting self-auditing practices to ensure compliance with pay equity laws.

Employers who would like more information on how to meet these new reporting obligations or the process for conducting pay equity audits are well-advised to contact any one of Sheppard Mullin’s Labor and Employment attorneys or their regular employment counsel.

The case is NWLC et al. v. OMB et al., case number 1:17-cv-02458, U.S. District Court for the District of Columbia.

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California lawmakers passed over a dozen employment-related bills last year that imposed new or different obligations on California employers. Just as employers may be finally settling into the new world order and getting into compliance with the litany of new laws, there are two new legislative updates that employers must be aware of. These new pieces of legislation serve as an important reminder that employment laws are constantly changing, and employers caught flat footed may be left to suffer the consequences.

In a welcome change from Sacramento, on February 26, 2019, the California Senate introduced Senate Bill 778, which is designed to clarify when employers are required to provide sexual harassment training and education to employees under California’s Fair Employment and Housing Act and when retraining is required.

Last year, the Legislature enacted Senate Bill 1343, which expanded an employer’s sexual harassment training and education obligations. Under the new law, and by January 1, 2020, employers with 5 or more employees (including temporary or seasonal employees), must provide at least 2 hours of sexual harassment training to all supervisory employees and at least one hour of sexual harassment training to all nonsupervisory employees. Employers must provide the required training within six months of hire and once every 2 years thereafter. The existing law specifies that an employer who has provided this training to an employee after January 1, 2019 is not required to provide sexual harassment training and education by the January 1, 2020 deadline.

After this law was enacted, confusion arose among employers who were already providing anti-harassment training to their nonsupervisory employees. Due to the deadline imposed by the new law, some of these employees would have to participate in the training twice in a 2-year period, at cost to the employer and providing little additional benefit to the employee.

The Senate introduced S.B. 778 to clear up some of the confusion regarding these new training requirements in two important ways. First, S.B. 778 extends an employer’s deadline to provide sexual harassment training and education by a full year, resetting the compliance deadline to January 1, 2021. Second, the bill makes clear that an employer who has provided the required training and education to an employee in 2019 is not required to provide refresher training and education again until two years thereafter. As a result, employers already offering compliant training in 2019 can delay refresher training until 2 years after the date of the training, rather provide another round of training by the January 2021 deadline.

Apart from proposed legislation, employers must also be aware of new poster and handbook regulations that have already taken effect. Effective April 1, 2019, California Code of Regulations, tit. 2, § 11095 imposed two new requirements that change the mandatory notices that must be posted in the workplace. First, every employer covered by the California Family Rights Act (“CFRA”) and/or New Parent Leave Act (“NPLA”) is required to conspicuously post a notice explaining the two Acts’ provisions and providing information concerning the procedures for filing complaints of violations of the Acts with the Department of Fair Employment and Housing. Previously, only employers covered by the CFRA, i.e. employers with 50 or more employees, had to post this type of notice. Now, employers with 20 to 49 employees will need to post the new notice on their premises, and employers with 50 or more employees will need to update their existing notice.

Second, this updated regulation imposes a new requirement on what must be contained in an employer’s handbook. If the employer publishes a handbook that describes other kinds of personal or disability leaves available to its employees, that employer must include a description of CFRA and/or NPLA leave in the next edition of the handbook that is published following April 1, 2019. The regulations make clear that the employer may utilize a single notice that explains both pregnancy disability leave and CFRA and/or NPLA leave requirements.

Take-Aways

While these new changes may appear technical in nature, it is nonetheless crucial that employers heed these new developments and react accordingly. For employers navigating the new regulations related to sexual harassment training, Senate Bill 778 provides additional clarity regarding the time frame by which employers must be in compliance and an employer’s responsibilities vis-à-vis employees who have already been providing sexual harassment training and education. As concerns California’s updated handbook and poster requirements, employers who previously may not have had to post any notices regarding certain types of leave are now required to do so. And for those employers who already post notices regarding available leaves, it is necessary to revisit those posters to ensure they include all of the required items of information.

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