Summer 2017, Issue 3

Employment Law Basics for the Family Law Practitioner: Understanding Employer Vulnerabilities and Employer Protections

Family law practitioners often must contend with businesses—their own, and those of their clients. These often involve sole proprietorships, general partnerships, S or C corporations, and limited liability companies that may be owned or controlled by spouses and other extended family members, and may have employees. Family trusts sometimes own such businesses and are likewise controlled by family members. Employees of these business entities are not barred from asserting their rights under California’s increasingly complex labor, employment, and wage and hour laws. Such claims could create hidden liabilities for you, or for your clients’ businesses. Employees may file putative wage and hour class actions, the lawsuit du jour for violations of the Labor Code, and applicable wage orders. There is no safe harbor protection merely because you or spouses who own or have an interest in a business are going through an acrimonious and costly divorce. Similarly, employees’ counsel need not refrain from filing costly employee suits against such companies (including wage and hour class actions, individual discrimination/harassment cases, and/or wrongful termination claims) just because of intra-family fighting for control of the family business; or because a cousin who handles a family’s real estate interests as manager of a limited liability company is embroiled in a bitter custody dispute or defending domestic violence.

These costly employee lawsuits can drain businesses of money and ruin employee morale. In the family law context, they can devalue core family assets that might otherwise be distributed as part of a marital dissolution, or be profitably maintained in an ongoing family business. Therefore, family law practitioners should understand some of the major areas of employer vulnerability in the area of employment law—wage and hour claims; how best to deal with marginal employees; and employment arbitration agreements, a powerful tool that employers may use to protect themselves from new and existing employees’ claims.

Wage and Hour Claims: The first major area of employer vulnerability is for wage and hour claims. Wage and hour claims, whether they are litigated as class actions, PAGA claims (“Private Attorney General Act”), or individuals’ claims, and whether they are brought in state or federal court or before the Labor Commissioner, can subject employers to hefty penalties and potentially large judgments including statutory attorney fees payable to counsel representing the aggrieved employee(s).

The following list of problem areas should be examined in an audit by a competent employment lawyer who knows what to look for and whose findings are protected by the attorney-client privilege: (1) paying employees for overtime in cash; (2) failing to pay overtime for all work in excess of eight hours in a day and forty hours in a week; (3) failing to have time records that accurately record an employee’s time; (4) failing to provide employees who work an eight (8) hour day with an unpaid thirty (30) minute meal break for every five (5) hours of work or securing a written waiver for a least one of the meal breaks; (5) failing to provide employees with paid ten (10) minute rest periods for every four (4) hours of work or major fraction thereof, e.g., three and three-quarter (3 ¾) hours; (6) failing to have paystubs that reflect the nine (9) items set forth in California Labor Code section 226; (7) failing to pay terminated employees immediately and failing to pay employees who quit within seventy-two hours; (8) failing to pay reasonable and necessary business expenses incurred by employees in accordance with California Labor Code section 2802; (9) misclassification of employees as salaried exempt even though they do not meet the tough California definition of exemption for executive/supervisory employees, professional employees, or administrative employees; (10) misclassification of employees as exempt outside sales employees; (11) misclassification of employees as independent contractors; (12) paying for overtime as straight time in cash or failing to calculate the regular rate of pay upon which overtime is based; (13) failure to provide duty-free meal periods and rest breaks; (14) knowing that employees work off the clock without paying them; (15) automatic deductions for meal periods; (16) tight schedules for truck/delivery drivers and other employees that do not allow them to regularly take meal and rest periods; (17) improperly designating someone an independent contractor who as a matter of law is an employee (discussed below); (18) paying an employee a flat amount for expense reimbursement, regardless of actual expenses incurred by employees in the performance of their work; (19) paying employees a daily flat rate that includes overtime; (20) failing to properly calculate an employee’s hourly wage by including bonuses earned through productivity into the hourly wage; and (21) using improper rounding in calculating work time to be paid the employee (also discussed below). While this is by no means an exhaustive list of wage and hour issues facing employers, it provides substantial guidance to employers and counsel on wage and hour areas on which to focus.

Willfully Misclassifying Employees as Independent Contractors: Senate Bill 459 (2011), which added Labor Code section 226.8 states: “It is unlawful for any person or employer to engage in any of the following activities: (1) Willful misclassification of an independent contractor. ‘Willful Misclassification’ means avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” Excluded from the scope of the statute are attorneys and employees, but not CPAs and/or accountants. The penalty provision under the statute for willful misclassification states: “The person or employer shall be subject to a civil penalty of not less than $5,000.00 and not more than $15,000.00 for each violation, in addition to any other penalties or fines permitted by law.” Although the statute appears to have an intent requirement by using the term “willful,” the definition of the term “willfulness” is broad and courts will probably liberally construe the word in determining whether the statute has been violated.

The best way to avoid violating Labor Code section 226.8 is to understand the legal definition of the term, “independent contractor.” In California, the legal presumption is that any individual who is not an “independent contractor” is an “employee.” See Cal. Lab. Code § 3357 (“Any person rendering service for another, other than as an independent contractor, or unless expressly excluded herein, is presumed to be an employee.”). This means the Labor Commissioner, Department of Labor Standards Enforcement, Workforce Development Agency, and other agencies will view individuals as “employees” entitled to all the protections that “employees” receive under the Labor Code and applicable wage orders, unless the individuals meet the strict requirements of being labeled an “independent contractor.”

In applying the “economic realities” test adopted by the California Supreme Court,1 the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered include: (1) whether the person performing services is engaged in an occupation or business distinct from that of the principal; (2) whether the work is a part of the regular business of the principal or alleged employer; (3) whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work; (4) the alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers; (5) whether the service rendered requires a special skill; (6) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (7) the alleged employee’s opportunity for profit or loss depending on his or her managerial skill; (8) the length of time for which the services are to be performed; (9) the degree of permanence of the working relationship; (10) the method of payment, whether by time or by the job; and (11) whether the parties believe they are creating an employer-employee relationship. This last item may have some bearing on the question, but is not determinative since it is a question of law based on objective tests.

It is important to note that even if an employer does not have control over the work details of an individual, an employer-employee relationship can still be found if: (1) the principal retains pervasive control over the operation as a whole; (2) the worker’s duties are an integral part of the operation; and (3) the nature of the work makes detailed control unnecessary.2 Employers are mistaken if they believe that because they have a written contract with a putative independent contractor, independent contractor status is established. In addition, some employers believe that by merely issuing a 1099 form, rather than a W-2 form, independent contractor status is established. It is not.3

Rounding Time Clocks in Ways That Favor the Employer: In recent years, there has been a sharp uptick in the number of class actions filed against employers, alleging unlawful rounding of employees’ time, thereby unlawfully reducing an employee’s wages and entitling that employee to back pay, penalties, and other remedies. It is important to understand what constitutes a lawful, vs. unlawful, rounding practice.

Under the Fair Labor Standards Act of 1938, as amended:

It has been found that in some industries, particularly where time clocks are used, there has been the practice for many years of recording the employees’ starting time and stopping time to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour. Presumably, this arrangement averages out so that the employees are fully compensated for all the time they actually work. For enforcement purposes this practice of computing working time will be accepted, provided that it is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked.4

It is important to note that “the federal standard has been expressly adopted by the DLSE [California’s Department of Labor Standards Enforcement] and the adoption of the federal standard is ‘consistent with … the practice of California courts to look to [federal law] as guidance for interpreting analogous provisions of California law.’”5

The DOL “regulation permits employers to use a rounding policy for recording and compensating employee time as long as the employer’s rounding policy does not ‘consistently result in a failure to pay employees for time worked.’”6 “[A]n employer’s rounding practices comply with [the DOL rounding regulation] if the employer applies a consistent rounding policy that, on average, favors neither overpayment nor underpayment.”7 Conversely, an employer’s rounding policy violates the DOL rounding regulation if it “systematically undercompensate[s] employees,” such as where the defendant’s rounding policy “encompasses only rounding down.”8 Therefore, “assuming a rounding-over-time policy is neutral, both facially and as applied, the practice is proper under California law because its net effect is to permit employers to efficiently calculate hours worked without imposing any burden on employees.”9

As a result, employers who utilize time clocks that round time up or round down should make sure this policy is clearly stated in the employer’s employee handbook, and should periodically review the time clock data to assure, on average, the policy does not favor overpayment or underpayment.

The Marginal Employee: The third major area of employer liability exposure is dealing with the marginal employee. Every organization has marginal employees who do not want to be held accountable for their performance and blame any work problems on a lack of training, some form of discrimination, or co-workers whom the marginal employee contends are given favorable treatment. Marginal employees seem to believe an employer owes them a job, and thus they may have a false sense of entitlement.

When an employer tries to correct a marginal employee, the employee may resist, or may sabotage the employer’s efforts and thwart their manager’s or supervisor’s attempt to exercise authority over the employee. In fact, marginal employees often see every attempt to hold them accountable as an act of “retaliation,” “unjust/unfair” treatment, “unlawful discrimination,” or any combination of these. Sometimes the marginal employee resorts to claiming health problems when an employer attempts to hold them accountable, in reliance upon a distorted perception that claiming health problems will blunt any attempt to discipline and/or terminate them. Finally, a marginal employee may attack the manager or supervisor with charges of discrimination or unfairness. In a union environment the marginal employee may respond with numerous unfounded grievances to counter the employer’s disciplinary or termination decisions.

In dealing with the marginal employee, an employer should employ these tactics: (1) decide the organization will no longer tolerate marginal employees who cost the organization profit, productivity, and a loss of morale (because employees who do their jobs are disheartened by marginal employees who work less and are not held accountable by management); (2) establish a measurable, objective, and reasonable performance standard for the marginal employee to meet in a reasonable period of time; (3) clearly communicate to the marginal employee, preferably in writing with a witness present, the performance standard the employer wants met; (4) document all conversations with the marginal employee, including poor performance incidents and discipline imposed as a result of the employee’s failure to meet the prescribed performance standards; (5) if the marginal employee claims to be a whistleblower or charges the employer with unlawful harassment and/or discrimination, assure the charges are promptly and impartially investigated, even if the employer believes that the employee’s claims have no merit; (6) before seriously disciplining the marginal employee (including suspension without pay or termination), present the marginal employee with a letter of proposed suspension or termination outlining the facts that led the employer to make the proposed decision to suspend or terminate the marginal employee. At that point, suspend the employee for a brief period of time pending a final decision on the level of discipline, up to and including termination of employment. The employer should also provide an opportunity for the marginal employee to respond in writing or in person, before making the final decision to impose a suspension and/or termination; and (7) seek the advice of competent legal counsel to coach the employer through the termination process.

These techniques will place an employer in a greater position to defend the employer’s actions before a jury or an arbitrator, should an employee file suit against the employer.

Employment Arbitration Agreements for New and Existing Employees: One of the most important legal tools an employer possesses in protection against both the prospect of a jury hearing in an employment law case and the potential assessment of significant damages against the employer, is an employment arbitration agreement. Juries are not generally an employer’s friend, given they are often made up of people who are themselves employees. As finders of fact in the employment context, jurors can be emotional and may be swayed by passions and prejudices that may even be unrelated to the facts of the case. For example, jurors in a wrongful termination case could improperly consider the personal and unrelated experiences of a friend or relative who filed their own wrongful termination case against an employer and won a large judgment, and thus find against an employer in a multi-million-dollar case. Employers should not place the fate of their company in the hands of jurors who are generally unsympathetic to the injuries, particularly financial injuries, that employees sometimes inflict upon employers, such as theft or embezzlement. And jurors can be oblivious to the day-to-day challenges employers face in running a business and keeping it open and profitable.

In the view of the employment law authors of this article, the top eight (8) reasons employers generally prefer arbitrators (and not lay person juries) making important employment and wage and hour law decisions are: (1) arbitrators are usually professionals trained to base their decisions on the facts and the law, and not on passions and emotions; (2) employers and their counsel can review the background and credentials, and sometimes even the prior decisions, of arbitrators before they are selected; (3) employers have only limited information about jurors before they are selected to decide an employer’s case; (4) juries are typically composed of employees who may not have had to make difficult employment and wage and hour decisions subject to employee claims; (5) all parties’ legal rights in arbitration are the same as in a court, except that an arbitrator chosen by the parties makes the final and binding decision instead of a jury; (6) arbitration is designed to speed the process and reduce fees and costs; (7) arbitration hearings move forward more reliably than courts on the scheduled date(s); and (8) generally, an employer’s case before an arbitrator is a tighter process that leads to earlier resolution.

Given these advantages, what is an arbitration agreement, and what are its components? An arbitration agreement is a separate “stand alone” agreement signed by both employer and employee. An employer’s assertion that an arbitration provision included as part of an employee handbook is legally binding on an employee will be challenged as a matter of law. It is not binding on the employee. Separate arbitration agreements should cover any and all past, present, and future disputes between employers and employees.

Employment arbitration agreements should be executed by all new employees; employees who receive promotions, changes in pay or positions; and employees with contracts; and should always be included as part of a broader executive employment agreement with top managers and supervisors.

The components of a valid employment arbitration agreement are: (1) the agreement may not limit the damages normally available under anti-discrimination statutes; (2) there must be sufficient discovery to adequately arbitrate statutory claims; (3) there must be a written arbitration decision that permits judicial review sufficient to ensure arbitrators comply with statutory requirements; and (4) employers must pay the arbitrator’s fees and costs, separate and apart from the employees attorney fees and costs.10 It is good practice for employers to make certain that their arbitration agreements are professionally translated into the employee’s primary language if the employer wants the employee to be bound by the agreement.

Since the right to formal and binding arbitration of employee disputes is important, here are four (4) tips for employers to avoid losing that right: (1) make certain that the employer’s counsel does not waive the right to compel arbitration. If employer’s counsel attempts to waive the employer’s right to arbitration, consider changing counsel, because statistically employers fare better before arbitrators than before juries; (2) if the employer has a valid employment arbitration agreement and the employee files a complaint in superior court, immediately request that the employees’ attorney dismiss the case and file in arbitration instead. If the employee’s counsel declines, then the employer should immediately file a motion with the court to compel arbitration; (3) remember that if one of the employee’s claims is for penalties for wage and hour violations under the PAGA, the court will retain that portion of the lawsuit for trial in court. The employer’s counsel should request that the PAGA portion of the case be stayed until the remaining claims are adjudicated in final and binding arbitration; and (4) make certain that the employer’s arbitration agreements are clear, unambiguous, and provide a class action waiver that clearly requires individual wage and hour claims to be resolved through final and binding arbitration. This is important, because recently, the California Supreme Court decided that arbitrators, and not the courts, will be the real decision-makers as to whether an arbitration agreement contains a lawful class action waiver, requiring that class action claims be resolved through final and binding arbitration.11

In sum, the family law specialist who is able to identify some of these major areas of employer vulnerabilities in the area of employment law, particularly wage and hour claims and dealing with marginal employees—and who can also understand that employment arbitration agreements are a powerful tool employers can use to protect themselves—is in a better position to advise and ultimately protect clients who own businesses from a devaluation of their assets while they are dealing with the resolution of critical life changing family law issues.

1 S. G. Borello & Sons, Inc. v. Dept. of Indus. Relations, 48 Cal. 3d 341 (1989).

2 Yellow Cab Coop. v. Workers Comp. Appeals Bd., 226 Cal. App. 3d 1288 (1991).

3 Toyota Motor Sales v. Superior Court, 220 Cal. App. 3d 864, 877 (1990).

4 29 U.S.C. § 201 et seq.; U.S. Dep’t of Labor (“DOL”), 29 C.F.R. § 785.48(b).

5 See’s Candy Shops, Inc. v. Superior Court, 210 Cal. App. 4th 889 (2012) (citing Alonzo v. Maximus, Inc., 832 F. Supp. 2d 1122, 1126 (C.D. Cal. 2011)).

6 Alonzo, 832 F. Supp. 2d 1122.

7 Id.

8 Eyles v. Uline, Inc., 2009 WL 2868447 (N.D. Tex.); Austin v. Amazon.Com, Inc., 2010 WL 1875811 (W.D. Wash.); Chao v. Self Pride, Inc., 2005 WL 1400740 (D. Md.).

9 See’s Candy Shops, Inc., 210 Cal. App. 4th 889 (citing Gillings v. Time Warner Cable LLC, 2012 WL 1656937 (C.D. Cal)).

10 Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013).

11 Sandquist v. Lebo Auto., Inc., 205 Cal. Rptr. 3d 359 (2016).