Contributors

Christian Scali

Founder and Managing Shareholder

Jasmin B. Bhandari

Principal

While the courts sometimes give employers good holdings that provide a solid foundation for risk management and achieving 100% compliance, most other times, navigating the ever-shifting sands of California’s employment law decisions can be more like trying to tread water in quicksand. Recent rulings are no different – some good and some bad. But keeping abreast of developments and planning a strategy to deal with the changes can help keep you from being mired in a morass. Here’s what’s new, let’s talk about compliance strategies when your arms get tired.

Independent contractors

Employees do not have a threshold burden of showing they were hired before Dynamex’s ABC Test is applied. In Mejia v. Roussos Construction, Inc. (2022) 76 Cal.App.5th 811, a case involving a general contractor’s use of supervisors it claimed were independent contractors, who themselves hired installers (including Mejia), the trial court instructed the jury that before Dynamex’s ABC Test is to be applied, the plaintiffs had the burden to show that the company had hired them. The Appellate Court reversed, holding that the “suffer or permit to work” standard in Dynamex was not intended to include that the employees had a threshold burden of showing who had hired them.

Employees are not entitled to Labor Code § 203 “waiting time” penalties if the employer had “reasonable grounds” to believe the employee was an independent contractor. As previously reported here, California employers facing an attorney demand for waiting time penalties for allegedly failing to pay an employee (who the company mistakenly thought was an independent contractor) can take comfort in a recent Ninth Circuit Court of Appeal decision, Bijon Hill v. Walmart, Inc., No. 21-15180 (9th Cir. Apr. 26, 2022). In affirming the district court’s grant of summary judgment finding (1) that Hill was an independent contractor; and (2) that Walmart acted in good faith in its belief that Hill was an independent contractor, the court clarified two important points:

• Labor Code section 203 “wages” and “penalties” are only for employees, not independent contractors; and
• Violations of Labor Code section 203 are imposed for “willful” conduct.

The appellate court acknowledged that while Walmart had significant control over Hill’s modeling through the job locations, appearance, hours, poses, etc., there were many objective indicators of Walmart’s good-faith belief that the relationship was fairly characterized as that of an independent contractor: Hill arranged her own travel; there was no W-2; Hill worked for other companies, Hill’s work was for a short period. Thus, Hill was unable to create a factual dispute precluding summary judgment as to the good faith defense, and final judgment was for Walmart.

Wage and hour

Wage statements need not include rates and hours from prior overtime payments. Meza v. Pacific Bell Telephone Co. (June 17, 2022), no. B317119, 2022 Cal. App. LEXIS 532. In a class action, plaintiff claimed, inter alia, that Pac Bell had not provided lawful wage statements by failing to include rates and hours attributable to its overtime payments. The Appellate Court, in agreeing with Magadia v. Walmart Associates, Inc. (9th Cir. 2021) 999 F.3d 668 (at *17), affirmed summary adjudication because Labor Code § 226, subd. (a)(9) did not require the reporting of rates and hours from prior periods in connection with overtime adjustment payments. The Court could not read into the statute a requirement that the employer shall include hours and rates from prior pay periods when the Legislature omitted such a requirement. The Appellate Court also reversed the trial court’s order denying class certification, with directions.

Individual employers liable for wage violations. In Saviour-Iloff v. Lapaille (June 28, 2022), no. A163504; 2022 Cal. App. LEXIS 565, the Court examined the language of Labor Code § 558.1 (liability of employer or other person acting on behalf of an employer) and determined that it allowed claims against individual employers, finding that the term “may” in the statute “does not grant judicial discretion in imposing liability. Rather, we interpret the term as reflecting a recognition by the Legislature that the party prosecuting the wage violation may not need to pursue such liability in the event the employer satisfies any outstanding judgment.”

Meal break premiums are wages and must be calculated as such, disclosed on the wage statement, and must be accurately paid out on the final check. As previously reported here, on May 23, 2022, the California Supreme Court held in its decision, Naranjo v. Spectrum Security Services, Inc., that meal premium payments are wages, must be accurately disclosed on pay stubs and must be accurately paid out on the final check.

Employers do not have to compensate prospective employees for taking drug tests. In a win for employers, the Ninth Circuit in Johnson v. Winco Foods LLC, et al. (9th Cir. June 13, 2022), no. 21-55501; 2022 U.S. App. LEXIS 16166, a class action, upheld the district court decision entering judgment in favor of defendant, holding that control over a drug test as part of a job application is not control over job performance. The court also rejected the class’s contention that the class members were employees under a “contract theory” and that the drug test should be regarded as a “condition subsequent” to their hiring as employees pursuant to Civil Code section 1438, because the class members did not become employees until they satisfied the condition of passing the drug test.

Employers of heavy truck drivers continue to have liability under California’s meal and rest break laws until all statutes of limitations have expired for violations occurring before December 28, 2018. On December 28, 2018, the Federal Motor Carrier Safety Administration (FMCSA) issued an order, in response to two industry petitions, reversing a ten year old policy, and concluding that California’s meal and rest break rules were preempted by the Motor Carrier Safety Act of 1984 (49 U.S.C. § 31101, et seq.) Since then, there had been a question as to whether that order was retroactive. On June 21, 2021, the California Court of Appeal for the Second District of California held that the order is not retroactive, setting the stage for California meal and rest break claims over violations occurring before the date of the order to proceed. Luckily most such claims are limited to 3 years, though an “add-on” claim under California’s Unfair Competition Law can extend the statute of limitations by 1 year for certain remedies.

Military employees

Don’t skimp-out on your returning military leave employees. In Belaustegui v. Int’l Longshore & Warehouse Union (9th Cir. June 7, 2022), no. 2:19-cv-09955-FLA-AFM, 2022 U.S. App. LEXIS 15611, a court allowed a returning service-member’s retaliation claim to proceed under the Uniformed Services Employment & Reemployment Act (USERRA). An entry level longshore employee left his position to enlist in the U.S. Air Force and served a tour of nine years of active duty. On his return he requested a promotion to the position he claimed he would have had if he had not served in the military. His request was denied and he filed suit for discrimination under USERRA. The Ninth Circuit permitted his claim to proceed, holding that USERRA protects returning service members and that certain hours credits and elevation in longshore worker status, as set forth in a collective bargaining agreement, qualify as “benefits of employment” and defendants’ failure to reinstate him to the position he was reasonably certain to have attained absent military service could violate the USERRA.

Arbitration

PAGA is largely eviscerated, but subject to resurrection. We previously reported on the U.S. Supreme Court’s 8-1 decision in Viking River Cruises v. Moriana (June 15, 2022) U.S. Supreme Court No. 20-1573, which held that the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, holding that PAGA representative or collective action waivers in arbitration agreements are unenforceable was reversed in large part. Employees may now waive the right to arbitrate their PAGA representative claims provided the arbitration agreement contains appropriate language. The SCOTUS left open two issues, however. First, it allowed Iskanian’s holding that total waivers of PAGA standing violate public policy to remain in force. Second, it provided a roadmap to the California Legislature to revamp and resurrect the PAGA statute.

Luggage loaders and ramp supervisors are exempt from the Federal Arbitration Act (FAA). On June 6, 2022, the U.S. Supreme Court in Southwest Airlines Co. v. Saxon, held that the § 1 exemption under the FAA for a “class of workers engaged in foreign and interstate commerce” applies to luggage loaders and ramp supervisors. The Court held that although the employment contracts of certain airline employees who load and unload cargo from vehicles that travel across state and international borders contained arbitration provisions, these contracts are not covered by the Federal Arbitration Act (FAA), because these employees fall within the scope of the FAA’s § 1 exemption for transportation workers “engaged in foreign or interstate commerce.”

Failing to provide native language translation of arbitration agreement to non-English speaking employee can result in invalidation of agreement. Unconscionability is one remaining defense to the enforcement of arbitration agreements. Unconscionability has two prongs: procedural unconscionability and substantive unconscionability. Both must be present to invalidate an arbitration agreement. And the courts apply a sliding scale, such that the more procedural unconscionability that exists, the less substantive unconscionability needs to exist for the agreement to be found unenforceable. Therefore, it is very important to have strong policies and processes around the presentation and execution of arbitration agreements in employment. In Nunez v. Cycad Management, LLC (2022) 77 Cal.App.5th 276, the court of appeal found a non-negotiable arbitration agreement in English, without an adequate explanation or translation, was procedurally unconscionable and not enforceable against a non-English speaking employee. The court also found it was substantively unconscionable because it allowed the arbitrator to shift attorney fees and costs onto the employee and drastically limited the employee’s ability to conduct discovery. While it appears that evidence of a mere explanation of the agreement’s terms would have appeased the court (not requiring a full translation be provided to the employee), in the event the plaintiff disputes that the explanation occurred, the employer is on far more solid footing if an actual translation is provided.

Employers are reminded once again that they must have a standalone arbitration agreement and not to include one in the employee handbook. On February 4, 2022, a California Court of Appeal held that an arbitration agreement in an employee handbook is not an agreement, even if the employee signs an acknowledgement form, acknowledging receipt of the handbook and agreeing to be bound by all policies contained in it. Mendoza v. Trans Valley Transport (2022) 75 Cal. App. 5th 748. The plaintiff was Spanish-speaking and did not receive a copy of the employee handbook or the acknowledgement forms in Spanish. Plaintiff asserted that he could not read them and that nobody told him what they said, other than that he needed to sign them to work for Defendants. The trial court denied the motion to compel arbitration. The Court of Appeal affirmed. The court noted there was no place on the arbitration provision itself for Plaintiff to acknowledge his agreement to the provision in writing; nothing in the handbook drew the reader’s attention to the arbitration provision or distinguished it from other provisions, and certain stylistic elements in the handbook served to deemphasize the importance of the provision; and the handbook specifically stated that it was intended to be informational, not contractual, could be changed by the employer at any time, and did not create a contract of employment. The court also noted that the acknowledgement forms Plaintiff signed (even if he had been able to understand them) did not mention arbitration. The court held there simply was no express or implied agreement to arbitration (despite the fact that he received a copy of the handbook and continued working for Defendants).

Retaliation

California Supreme Court makes it easier to prove whistleblower retaliation claims. In Lawson v. PPG Architectural Finishes, Inc. (Jan. 27, 2022) 12 Cal.5th 703, the California Supreme Court resolved an inconsistency concerning the proper evidentiary standard necessary to prove a whistleblower retaliation claim. It held that “section 1102.6 … provides the governing framework. …First, it places the burden on the plaintiff to establish by a preponderance of the evidence, that retaliation for an employee’s protected activities was a contributing factor in a contested employment action. …Once the plaintiff has made the required showing, the burden shifts to the employer to demonstrate, by clear and convincing evidence, that it would have taken the action in question for legitimate, independent reasons even had the plaintiff not engaged in protected activity.’”” (Id. at pp. 379-380.).

California’s appellate courts were previously divided on whether to apply:

• the U.S. Supreme Court’s three-part burden shifting framework established by McDonnell Douglas v. Green, under which (1) the employee first must establish a prima facie case of retaliation; (2) the employer then has the burden to show a legitimate reason for the adverse employment action; and (3) the burden then shifts back to the employee to show the reason given by the employer is pretextual; or
• the “contributing-factor standard” under which: (1) an employee must demonstrate by a preponderance of the evidence that the whistleblowing activity was a contributing factor to the adverse action taken by the employer against them; and then (2) the employer has the burden to show by the higher clear and convincing evidence that it would have taken that action in any event for legitimate, independent reasons, regardless of the employee’s alleged protected activity.

After considering the legislature’s intent behind and the legislative history of Labor Code § 1102.6, the plain text of the statute, as well as how other courts have addressed and interpreted similar statutes at the federal level, the California Supreme Court rejected the McDonnell Douglas burden-shifting standard in favor of the far more employee friendly “contributing-factor” standard.

The implications of this ruling are that whistleblowers can meet their burden of showing their whistleblowing activity was just one factor that contributed to the adverse action, even when there are other, legitimate factors for the employer’s decision. Moreover, the heightened burden of proof on the employer will likely make it even more difficult for employers to prevail in whistleblower cases both at the summary judgment and trial phases of a case.

This decision has already been consistently applied by California’s appellate courts. Last month, in Vatalaro v. County of Sacramento (June 1, 2022) 79 Cal.App.5th 703, Vatalaro appealed from a grant of summary judgment as to her Labor Code § 1102.5 claim that she had been terminated for complaining that she was working below her service classification. The County argued that Vatalaro’s claim failed, in part, because it had showed that it had a legitimate, nonretaliatory reason for terminating her. The Appellate Court affirmed but noted that the County’s legitimate, nonretaliatory reason for terminating Vatalaro was not the relevant standard under Lawson.

Paga

Court creates split in authority on whether PAGA claims can be dismissed on manageability grounds; California Supreme Court poised to decide. Last year, an appellate court concluded in Wesson v. Staples the Office Superstore, LLC (2021) 68 Cal.App.5th 746 that courts have inherent authority to strike unmanageable PAGA claims. On March 23, 2022, the Court of Appeal for the Fourth District of California, in Estrada v. Royalty Carpet Mills, Inc. (2022) 76 Cal.App.5th 685, refused to apply the unmanageability standard to PAGA claims, relying instead on the California Supreme Court’s decisions in Arias v. Superior Court (2009) 46 Cal.4th 969 and Kim v. Reins International California, Inc. (2009) 9 Cal.5th 73, which make clear that PAGA claims are unlike conventional civil suits and, in particular, are not class actions. The court found that allowing dismissal of unmanageable PAGA claims would effectively graft a class action requirement onto PAGA claims, undermining the core principle of these authorities. This decision created a split in authority on this issue. On May 2, 2022, the California Supreme Court granted review of Estrada.

Non-competition/non-solicitation

California resident may rely on Labor Code § 925 to challenge non-compete/non-solicitation clause in California while litigation enforcing those provisions is pending in another jurisdiction. In 2017, the California Legislature enacted Labor Code § 925 which generally permits (subject to some qualifications both in the statute and recent case law) a California resident to nullify an employment contract that contains a choice of law or forum selection clause designating the law of a state other than California as applicable law or designating that state as the forum state. On March 1, 2022, a court of appeal in LGCY Power, LLC v. Superior Court (2022) 75 Cal.App.5th 844 upheld the right under Labor Code § 925 of a California resident plaintiff to countersue in California their former employer who brought non-competition/non-solicitation and violation of trade secret claims against him in Utah. Sewell, who in the context of having signed an employment agreement containing non-compete and non-solicitation provisions and a forum selection provision designating Utah as the forum state and governing law, was sued by his former employer for breach of his employment agreement’s non-compete and non-solicitation provisions and for violations of trade secrets. Instead of countersuing in Utah (which would be an unfavorable forum for him), Sewell brought a countersuit against his former employer in California, where he was a resident. His former employer moved to dismiss. The motion was denied. And the employer took a writ. The court of appeal denied the writ, holding that Labor Code § 925 (generally prohibiting non-California choice of law/forum provisions) is an exception to California Code of Civil Procedure § 426.30(a), the compulsory cross-complaint rule that would otherwise have required Sewell to file his cross claims against LGCY in the Utah action. The court held that Sewell had implicitly satisfied the requirement of Section 925 that he request the trial court to void the contract under the statute (Sewell could not void the contract without a judicial determination). As a result, Sewell was entitled to pursue his claims in a separate action in California under Labor Code § 925 to invalidate that contract and seek affirmative relief from the employer (including attorney’s fees) for enforcing an unconscionable contractual provision that is void under California public policy.

The Ninth Circuit recently came to a similar conclusion under similar circumstances, suggesting the result may be the same whether the dispute is in state or federal court. In DePuy Synthes Sales Inc. v. Howmedica Osteonics Corp., 28 F.4th 956 (9th Cir. 2022) a motion to transfer venue was property denied where the forum-selection clause in the employment agreement was void under California Labor Code § 925. In September 2017, Jonathan Waber was hired by a subsidiary of Stryker Corporation (Howmedica Osteonics Corp.) under an employment agreement that contained a restrictive one-year non-compete clause and forum-selection and choice-of-law clauses requiring adjudication of contract disputes in New Jersey. Waber subsequently left Stryker’s subsidiary and went to work for DePuy Synthes Sales, Inc., a competitor. Stryker threatened Waber with enforcement of the non-compete clause. Waber responded with notice of exercise of his right to void the forum-selection and choice-of-law clauses under Labor Code § 925. DePuy and Waber immediately followed that with a declaratory relief action in United States District Court for the Central District of California, seeking a ruling that, among other things, the forum-selection clause and choice-of-law clauses were void, that California law governed the dispute, and that the non-compete clause was void under California Business & Professions Code § 16600. Stryker filed a motion to dismiss or to transfer venue to the USDC for the District of New Jersey. The district court denied Stryker’s motion. DePuy then added HOC as a defend and amended the complaint. The district court later granted partial summary judgment in favor of DePuy and Waber, holding that sections 925 and 16600 rendered the forum-selection, non-compete, and non-solicitation clauses in Waber’s contract void and unenforceable. After resolving procedural matters, the court entered final judgment in favor of DePuy and Waber and HOC appealed both the order denying transfer and the judgment.

The Ninth Circuit affirmed. The court explained that while a determination of venue and transfer issues under 28 U.S.C. § 1404(a) ordinarily requires consideration and balancing of several recognized private and public interest factors, the existence of a valid forum-selection clause in a contract alters the usual transfer analysis and calls for the consideration of modified public and private interest factors. This is referred to as the “modified Atlantic Marine analysis.” As to the predicate question of whether the forum-selection clause was valid, however, the court held that California Law, not federal law, governed. In so holding, the court rejected HOC’s argument that the United States Supreme Court’s decision in Steward Organization, Inc. v. Ricoh Corporation, 487 U.S. 22 (1988), preempted all state laws controlling how parties may agree to or void a forum-selection clause. Because Waber had satisfied the prerequisites of section 925, the forum-selection clause was deemed invalid, and, thus, the modified Atlantic Marine analysis did not apply. The court held the district court did not err in its conclusion that the traditional public and private factors applicable to a transfer motion weighed against transfer. For largely the same reasons, the court affirmed the partial summary judgment in DePuy and Waber’s favor.