Key California Employment Law Cases: October 2018

by Payne & Fears

This month’s key employment law cases address the test for independent contractor status, the legality of an incentive compensation system, and personal liability for wage and hour violations.

Garcia v. Border Transp. Group, LLC, Cal. Ct. App. Oct. 22, 2018

Summary: Defendants must satisfy Dynamex ABC test to establish independent contractor status as defense to wage order claims, but Borello multifactor test applies to non-wage-order claims.

Facts: Plaintiff leased a taxicab license and taxicab from defendants. Plaintiff brought several employment claims against defendants, including claims for whistleblower wrongful termination, unpaid wages, minimum wages, meal and rest break penalties, wage statement penalties, civil penalties under the California Labor Code Private Attorney Generals Act (“PAGA”), waiting time penalties, and unfair competition. Defendants filed a motion for summary judgment on all claims on the ground that plaintiff was an independent contractor and not an employee. Relying on the factors described in Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 256 Cal. Rptr. 543 (1989), defendant presented evidence that plaintiff set his own hours, used the cab for personal business, kept collected fares, used a radio dispatch service, entered into sublease agreements, held other jobs, and advertised services in his own name.The trial court granted summary judgment in favor of defendants. While plaintiff’s appeal was pending, the California Supreme Court decided Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903, 232 Cal. Rptr. 3d 1 (2018), establishing a new test for independent contractor status under the definition of employment found in the California Industrial Welfare Commission Wage Orders.

Court’s Decision: The California Court of Appeal reversed summary judgment on plaintiff’s claims brought under the applicable wage order but affirmed on the non-wage-order claims. The ABC test described by Dynamex only applies to claims brought under the wage orders and, as a result, the trial court properly relied on the Borello test to grant summary judgment on the non-wage-order claims. Further, the evidence did not support summary judgment on the wage order claims. Under the wage orders, there are three alternative definitions of “employ,” the second of which defines “employ” as “to suffer or permit to work” to which the ABC test applies. Here, defendant failed to present evidence satisfying the third prong of the ABC test; namely, that plaintiff was customarily engaged in an independently established trade of the same nature as the work performed.

Practical Implications: California law presumes the existence of an employer-employee relationship, and the hirer has the burden to prove that an individual is an independent contractor rather than an employee. To avoid costly misclassification cases, hirers should conduct an audit of their independent contractor classifications by applying each of the three employment tests set forth in the Wage Orders, including the Dynamex ABC test, along with the Borello multifactor test.

Certified Tire & Serv. Ctrs. Wage & Hour Cases, 28 Cal. App. 5th 1, 238 Cal. Rptr. 3d 825 (2018)

Summary: Compensation system that provides minimum base rate of pay for all hours worked exceeding statutory minimum wage, but which allows for increased hourly rate of pay for all hours worked during pay period when certain work is performed, complies with minimum wage and rest period requirements.

Facts: Plaintiffs worked as technicians for defendant automotive tire and repair company at various locations. Plaintiffs were paid according to a technician compensation program (“TCP”). Under the TCP, defendant paid technicians a base hourly wage for all hours worked that exceeded the statutory minimum wage. However, if technicians performed certain types of work billable to a customer during a pay period, a portion of the amount billed to the customer would be divided among the technician’s total hours worked during that pay period and, if the resulting amount was greater than the technician’s base hourly rate, defendant would pay the technician an hourly rate equal to that amount for each hour worked during the pay period rather than the technician’s base hourly rate. Thus, under the TCP, technicians never earned less than the base hourly rate but could earn an hourly rate in excess of the base rate if they performed qualifying work during the pay period. Defendant also provided its technicians with compliant meal and rest periods. Plaintiffs filed separate class action complaints, which were later coordinated. The first amended coordinated complaint identified two classes of employees: those who were not paid a separate minimum wage for nonproductive time, and those who were not paid for off duty rest periods. Following a bench trial that was limited to the sole issue of the TCP’s legality, the trial court determined that the TCP was legal because all work hours (including rest breaks) were paid at a rate that exceeded the statutory minimum wage, and the increased rates were not averaged to make up for unpaid time, but rather were averaged over all hours and paid in lieu of the base hourly rate only when those increased rates exceeded the base hourly rate.

Court’s Decision: The California Court of Appeal affirmed, rejecting plaintiffs’ attempt to analogize this case to unlawful compensation structures where employers failed to pay employees an hourly rate for nonproductive time or rest breaks, and instead only looked to the total pay at the end of the pay period to make sure the total was equal to or greater than the amount employees would have been paid if they had received the minimum wage rate for all hours. See Armenta v. Osmose, Inc., 135 Cal. App. 4th 314, 37 Cal. Rptr. 3d 460 (2005) (hourly compensation system that included off-the-clock work); Gonzalez v. Downtown LA Motors, LP, 215 Cal. App. 4th 36, 155 Cal. Rptr. 3d 18 (2013) (piece rate compensation system that did not pay an hourly rate for unproductive time); Bluford v. Safeway Stores, Inc., 216 Cal. App. 4th 864, 157 Cal. Rptr. 3d 212 (2013) (piece rate compensation system that did not pay an hourly rate for rest breaks); and Vaquero v. Stoneledge Furniture LLC, 9 Cal. App. 5th 98, 214 Cal. Rptr. 3d 661 (2017) (commission-based compensation system that did not pay an hourly rate for rest breaks). Unlike the compensation structures in Armenta, Gonzalez, Bluford and Vaquero, defendant paid its technicians at least the statutory minimum wage for all hours worked, including time spent on rest breaks.

Practical Implications: Employers are not prohibited from crafting creative and innovative incentive compensation systems for their employees. However, an incentive compensation system must ensure that employees are guaranteed a minimum wage for each hour worked, including rest breaks and non-productive time, and that regular rates for overtime purposes properly include nondiscretionary incentive compensation.

Atempa v. Pedrazzani, 27 Cal. App. 5th 809, 238 Cal. Rptr. 3d 465 (2018)

Summary: Individuals may be subject to civil penalties under California Labor Code sections 558 and 1197.1 without a finding or allegation of alter ego status.

Facts: Defendant Pedrazzani, an individual, incorporated defendant Pama, Inc. (“Pama”). Pedrazzani was the owner, president, secretary, and director of Pama, which operated an Italian restaurant. Plaintiffs were two individuals employed by Pama to work in the restaurant. Plaintiffs jointly filed an action against Pedrazzani and Pama, asserting several individual wage and hour claims for failure to pay overtime and minimum wages, along with a claim under the California Labor Code Private Attorneys General Act (“PAGA”) seeking civil penalties against both defendants under Labor Code sections 558 (assessing penalties for wage order violations) and 1197.1 (penalties for minimum wage violations). Following a bench trial, the trial court awarded plaintiffs civil penalties in the amount of $31,074 pursuant to sections 558 and 1197.1. The penalties were assessed against both defendants, jointly and severally. The trial court also assessed post-judgment interest, attorney’s fees, and costs against Pedrazzani only, with fees later determined to be $351,014. Defendants appealed. Following the appeal, Pama filed for bankruptcy and dismissed its appeal at the request of the trustee of Pama’s bankruptcy estate, leaving only Pedrazzani’s appeal. On appeal, Pedrazzani argued that the trial court erred in finding he was liable for civil penalties, interest, fees, and costs because Pama was the corporate employer of which he was only an individual officer, and there was never any allegation or finding that he was Pama’s alter ego or that he acted outside the scope of his agency.

Court’s Decision: The California Court of Appeal affirmed the award against Pedrazzani. Although there is a general presumption that the Legislature generally does not intend to alter or displace the common law (including the common law’s alter ego doctrine), sections 558 and 1197.1 clearly and unambiguously state that penalties therein can be assessed against both the employer and any other person who causes the violations without regard for the identity or business structure of the employer. Under the plain language of the statute, the alter ego doctrine does not apply. Since there was no dispute that Pedrazzani qualified as such other person, the trial court did not err in assessing the penalties against him.

Practical Implications: This case serves as a stark reminder that corporate officers, directors and others can be held personally liabile for wage and hour violations. As a result, they should strive to ensure their organization is complying with California wage and hour laws.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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