California businesses should prepare to implement a fresh list of New Year's resolutions, thanks to the influx of new laws, regulations and legal battles that have come about within the first hours of 2020. California has long been at the forefront of implementing industry-setting rules and employee-friendly regulations that impact business operations statewide, and this year is no exception. As summarized below, employers need to be aware of key updates to employment laws impacting all industries statewide, including new laws governing independent contractor classifications, arbitration agreements, settlement agreements, FEHA amendments, dress code policies, minimum wage, corporate diversity, and lactation break accommodations.
Independent Contractors Now Classified by “ABC” Test
Effective January 1, 2020, California imposed a new, more burdensome test for classifying independent contractors and distinguishing those workers from W-2 employees. Assembly Bill No. 5 (AB 5), requires that most hiring entities pass the arduous “ABC Test” in order to prove that a contractor or consultant is not a W-2 employee, with limited exception. Hiring entities who misclassify employees as independent contractors will be subject to severe penalties under the law.
California, like most other states, assumes that individuals who are paid compensation in order to perform services for an employer are employees, unless the employer can show otherwise. Under the ABC test, the hiring entity must demonstrate that the person: (A) 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) performs work that is outside the usual course of the hiring entity’s business; and (C) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. This standard applies equally to California-based employers, as well as out-of-state employers doing business in California. In Dynamex Operations West, Inc. v. Superior Court of Los Angeles, the California Supreme Court recently ruled that hiring entities must meet all three elements of the ABC test in order to prove that an independent contractor is not actually a misclassified employee.
In 2019, California lawmakers ratified AB 5 to “codify the decision in Dynamex” and “clarify its application” to ensure that workers who may previously have been misclassified as contractors become eligible to receive the same rights and protections of employees, including minimum wage, workers’ compensation benefits, unemployment insurance, paid sick leave and paid family leave, provided they are eligible under the law.
AB 5 recognizes a number of occupations that are exempt from the ABC test, which are instead governed by the independent contract test developed under the 1989 S.G. Borello & Sons, Inc. v. Department of Industrial Relations case. The Borello standard requires the court to examine whether the employer has sufficient control over the manner and means in which the work is performed to establish an employment relationship. These factors may include: (1) the amount of direction and supervision provided to the worker by the employer; (2) whether the worker holds themselves out as being engaged in a business or occupation distinct from the employer; (3) whether the work performed is an integral part of the employer’s business; (4) whether the worker supplies his own tools, personnel and other resources to perform the services required; (5) whether the service requires a special skill; (6) the duration of the work relationship; and (7) the method and manner of payment.
The list of professional positions exempt from the ABC standard include: licensed insurance agents, certain licensed health care professionals such as physicians, surgeons, dentists and psychologists, registered securities broker-dealers or investment advisers, direct-sales salespersons, real estate licensees, lawyers, licensed accountants, architects and engineers, commercial fishermen, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry.
The Borello test, and not the ABC test, also applies to bona fide business-to-business contracting relationships, which involve business entities contracting to provide services directly to another business entity. The same independent contractor standard applies to services contracts between contractors and subcontractors in the construction industry.
If an employer misclassifies its workers under the ABC or Borello tests, the employer can face private individual and class actions from misclassified employees, and, now, the state will also have the power to seek injunctive relief on behalf of those employees. Misclassified employees can bring claims against their current or former employers for violations of state and federal wage and hour laws, paid sick leave, paid family leave and other employee benefit laws. If an employer is found to have violated these laws, it can be held liable for the worker's unpaid wages, overtime, business expenses, or other compensation that the worker would have been entitled to if he or she was properly classified as an employee. Employers who willfully violate these laws face additional civil penalties ranging from $15,000 to $25,000, per misclassification.
On December 31, 2019, just hours before the new independent contractor law became effective, a federal judge granted a temporary restraining order to the California Trucking Association (CTA), preventing the state from enforcing AB 5 on any motor carrier operating in California. Meanwhile, Uber, Postmates, and a variety of other business owners and advocacy groups have filed lawsuits against the state, claiming that AB 5 is unconstitutional, confusing, and incomprehensible because it would require that they restructure their entire business models and likely cause them to stop doing business in California altogether. Employers who rely on the services and support of individual contractors to carry out business operations should pay close attention to these cases to determine if and how they will impact worker classification at the industry-level.
Arbitration Agreements
A California law intended to prohibit mandatory arbitration agreements in the workplace was put on hold by court order just two days before it was set to take effect on January 1, 2020.
Assembly Bill No. 51 (AB 51) would make it unlawful for employers to require California employees to arbitrate certain potential claims against the employer. The claims barred from mandatory arbitration agreements would include violations of any state laws governing terms, conditions or benefits of employment, such as the California Fair Employment and Housing Act (FEHA). AB 51 likewise bars any employer from threatening, retaliating, or discriminating against an applicant or employee for refusing to consent to waiving their rights as part of an arbitration agreement.
But on December 30, 2019, a California federal district court granted a temporary restraining order that prevented the law from going into effect as scheduled. AB 51 is now temporarily enjoined, pending a final determination by the courts as to its constitutionality. The court is scheduled to hear arguments on January 10, 2020 from both parties regarding the Chamber of Commerce’s motion for a preliminary injunction. Employers will have to stay tuned to learn the outcome of this significant decision, which will have a profound impact on the enforceability of mandatory arbitration agreements in the workplace.
No-Rehire Provisions Banned From Settlement Agreements
Employers are now banned from including no-rehire provisions in employee settlement agreements, according to a new California law that went into effect on January 1, 2020.
Previously, settlement agreements pertaining to litigation or separation from employment commonly contained provisions stating that the employee would not be entitled to or considered for rehire by the employer or any of its affiliates following separation of employment. This longstanding practice is now illegal, according to Assembly Bill No. 749 (AB 749), provided that the employee has raised claims against the settling party before a court of law, administrative agency, alternative dispute resolution forum, or through the employer’s internal complaint process.
The new law specifically prohibits any settlement agreements from prohibiting or otherwise restricting the employee from working for the employer or any affiliate, parent company, subsidiary, or contractor of the employer against whom the employee has filed a complaint. The exclusion of no-rehire provisions from settlement agreements is likely to impact settlement negotiations because this kind of restriction on future employment is no longer a viable bargaining chip for either party.
The only exception to this stringent rule occurs if the employer has made a “good faith determination” that the individual in question engaged in sexual harassment or sexual assault. Outside the realm of employment agreements, this law does not require employers to hire or continue to employ any person if there is a legitimate, nondiscriminatory or nonretaliatory reason for refusing to employ or terminate that person.
Moving forward, employers should be sure to update their internal protocol for responding to any employee who knowingly or unknowingly seeks subsequent employment with the employer or its affiliates after executing a settlement agreement. Employers must be careful not to assume that a person who was a party to a settlement agreement is precluded from working for the employer or an affiliate in the future. As with all candidates, employers must continue to make all hiring, promotional and other employment decisions based solely on legitimate business reasons that do not violate any applicable employment laws.
Statute of Limitations Extended for Discrimination Claims
Last October, California Governor Gavin Newsom approved another piece of significant legislation arising out of the #MeToo era, which impacts employees' ability to bring claims of unlawful harassment, discrimination and retaliation against their employers. Assembly Bill No. 9 (AB 9), which became effective on January 1, 2020, extends the time period that employees have to file charges of discrimination with the Department of Fair Employment and Housing from one to three years from the date of the alleged unlawful conduct.
As a result, employees have a significantly longer period to raise any claims that fall under the purview of the Fair Employment and Housing Act (FEHA), including but not limited to sexual harassment, discrimination, and retaliation for raising complaints about such issues in the workplace. By increasing the statute of limitations for these charges of discrimination to three years – significantly longer than the time period permitted by most other states and under federal law – California continues to be a frontrunner in implementing some of the most employee-friendly laws in the country.
The extended time period to file a charge of discrimination means that employers should be prepared for claims to surface long after the underlying events giving rise to the complainant’s allegations have occurred, and potentially after the complainant, alleged harasser, witnesses, supervisors and/or other decision makers have left the company for outside employment opportunities. For these reasons, private and public employers should update their employee handbooks to encourage workers to promptly report any concerns about harassment or discrimination, so that they can be addressed and any relevant evidence can be obtained as swiftly as possible. Employers should additionally review their document retention policies to verify that employee personnel records are maintained and accessible for the duration of each employee’s employment, plus at least an additional four years (including pre-employment records, wage and payroll records, discipline, performance reviews, etc.).
FEHA Now Protects Against Race Discrimination Based on Hairstyle
It is well known that the FEHA prohibits discrimination in employment (and housing) against individuals based on a wide variety of protected characteristics, including race. The newest amendment to the FEHA is Senate Bill No. 188 (SB 188), which expands the definition of “race” to include “traits historically associated with race, including, but not limited to, hair texture and protective hairstyles.”
Under SB 188, all employers doing business in California that have five or more employees are prohibited from engaging in any discriminatory practice based on any race-related traits, such as hair texture or styles. The state updated the FEHA’s definition of race in order to clarify and modernize the societal understanding of professionalism, which, according to the legislature, has historically been linked to European features and mannerisms. Lawmakers additionally wanted to reflect the importance of an inclusive workforce, which recognizes and protects traits of black employees and members of other underrepresented races.
To be in compliance with this new law, employers must be sure to review and update workplace dress codes and grooming policies, and remove any criteria that may directly or indirectly prohibit, restrict or limit employees from wearing natural hairstyles, including, but not limited to, braids, twists and locks, which are now “protected hairstyles” under the law.
Statewide Increase in Minimum Wage
Effective January 1, 2020, California has increased the minimum wage for employees statewide. The minimum wage for employers with 1 to 25 employees has increased from $11.00 to $12.000 per hour, and the minimum wage for large employers with 26 or more employees has increased from $12.00 to $13.00 per hour.
Employers doing business in California should also be aware that certain municipalities have their own minimum wage laws, which are often higher than the state minimum wage rates. A number of those municipalities are ringing in the new year with new minimum wage thresholds. These wage rates generally apply to employees who work two or more hours per week within city limits.
Local minimum wage increases for January 1, 2020, include, but are not limited to: Los Angeles ($15.00 for businesses with 26 or more employees, $14.25 for employers with 25 or fewer employees); San Diego ($13.00); South San Francisco ($15.00); San Jose ($15.25); Belmont ($15.00); Cupertino ($15.35); City of Daly ($13.75); El Cerito ($15.37); Malibu ($15.00); Los Altos ($15.40); Menlo Park ($15.00); Mountain View ($16.05); Palo Alto ($15.40); Petaluma ($14.00 per hour for employers with 25 or fewer employees, $15.00 per hour for employers with 26 or more employees); Redwood City ($15.38); Richmond ($15.00); San Leandro ($15.00); San Mateo ($15.38); Santa Clara ($15.40); and Sunnyvale ($16.05).
Employers who have any employees that are based out of California, including any of the above-mentioned municipalities, must immediately update their timekeeping and payroll policies to meet or exceed these minimum wage rates, or otherwise risk significant legal consequences for violating state and local minimum wage and overtime laws.
Wage Payment Penalties Increased
The new year also means new penalties for employers who are found to have violated California’s wage payment laws. According to Assembly Bill No. 673 (AB 673), any employer who fails to pay wages to each employee as required by the California Labor Code (Sections 201.3, 204, 204b, 204.1, 204.2, 204.11, 205, 205.5, and 1197.5), will be subject to new civil penalties, in addition to, and entirely separate from any other penalties the employer may face from the Labor Commission or due to a private action. These new penalties include: (1) for an initial violation, a $100 penalty for each failure to pay each employee; and (2) for each subsequent violation, or any willful or intentional violation, a penalty of $200 for each failure to pay each employee, plus 25% of the amount unlawfully withheld.
Diversity in the Board Room
In late 2018, California legislators approved Senate Bill No. 826 (SB 826) that requires publicly-held companies (foreign or domestic) headquartered in California to have at least one female on its Board of Directors, effective on or before December 31, 2019. The purpose of this legislation was to increase female representation in the board room and to enhance diversity amongst those decision makers, thereby facilitating cultural change in the workplace. The law further requires that by the end of the 2021 calendar year, corporations with five directors must have at least two female directors, and corporations with six or more directors must have at least 3 female directors. In this context, a female is any person who self-identifies her gender as a woman, regardless of the person’s designated sex at birth.
In August 2019, and again in November 2019, business advocacy groups challenged the legality and constitutionality of SB 826, arguing that SB 826 is unenforceable due to its “sex-based quota” and alleged gender discrimination. The government is expected to file its responses to these allegations in the near future. Until one or both of these cases results in a ruling invalidating SB 826, the law remains in effect today. Companies who fail to timely update their board representation with the Secretary of State face a fine of $100,000 for the first violation and up to $300,000 for subsequent violations. California-based companies should stay tuned.
New Rules for Employee Lactation Breaks
California is one of many states that has specific laws governing the timing and logistics of lactation breaks in the workplace. California law requires that employers provide a reasonable amount of break time for employees to express breast milk for an employee’s infant child, and that an employer must endeavor to provide the employee with a private room or other location, other than a bathroom, in close proximity to the employee’s work area, in order to express milk.
Now, Senate Bill No. 142 (SB 142) has been enacted to clarify the types of spaces and conditions that are appropriate for expressing breast milk during the workday. Under SB 142, the employer must provide a lactation room or location that: (1) is safe, clean, and free of hazardous materials; (2) contains a surface to place a breast pump and personal items; (3) contains a place to sit; (4) has access to electricity or alternative devices, including, but not limited to, extension cords or charging stations, needed to operate an electric or battery-powered breast pump; and (5) has access to a sink with running water and a refrigerator or other cooling device suitable for storing milk in close proximity to the employee’s workspace.
Notably, these lactation areas can be temporary or permanent. Employers who identify a multipurpose room as the designated lactation space for employees are required to accommodate lactation breaks above other uses, but only for the time the multipurpose room is in use for lactation purposes. Employers in multi-tenant buildings or worksites occupied by multiple employers can provide a shared space for lactation in the building if the employer cannot provide a lactation space within its own workspace.
Failure to permit an employee reasonable break time or adequate space to express milk will now be considered a failure to provide a rest period under California’s meal and rest period laws. Although employers are not required to pay employees during pumping breaks, an employer who fails to provide an employee with reasonable break time or space for lactation will be required to pay the employee one additional hour of pay at the employee’s regular rate for each rest period that is not provided.
Employers are subject to all requirements of AB 142 unless they meet the statutory exemption standard. Employers who are exempt from AB 142 include those who have less than 50 employees, and who can demonstrate that the accommodations under this law would impose an undue hardship by causing the employer significant difficulty or expense when considered in relation to the size, financial resources, nature, or structure of the employer’s business. If that employer can demonstrate that the requirements of AB 142 would cause an undue hardship, the employer must alternatively accommodate the employee by providing her the use of a room or other location, other than a toilet stall, in close proximity to the employee’s work area, for the employee to express milk in private.
Next Steps
Business owners, managers and Human Resources professionals would be wise to audit their written policies, agreements and general practices to ensure compliance with California’s new employment law standards and regulations.
Employers in the midst of negotiating employment, settlement or severance agreements should be careful to remove no-rehire clauses, and cautiously review all arbitration agreements to ensure that they comply with the arbitration laws that are in effect at the time the agreement is executed, or otherwise allow for the agreement to be modified to adjust to changes in the law. Employers must also pay close attention to updated minimum wage regulations and employee classifications. A seemingly small or inadvertent misstep in employee pay rates, rest breaks, or other benefits or terms and conditions of employment can result in steep penalties, government audits and class actions, which are increasingly common in today’s legal landscape.
Employers who have questions regarding their obligations under the new California laws, or who have questions regarding modifications to any handbook, policy or practice should contact experienced employment counsel for assistance.
