Key California Employment Law Cases: November 2020

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Semprini v. Wedbush Securities., Inc., 57 Cal. App. 5th 246 (2020)

Summary: A compensation plan based solely on commissions, with recoverable advances on future commissions, does not qualify as “salary” for purposes of administrative exemption under California law.

Read our in-depth analysis HERE.

Brown v. TGS Management Co., 57 Cal. App. 5th 303 (2020)

Summary: Broad confidentiality provisions in an employment agreement that effectively prevent an employee from practicing his profession in perpetuity constitute a de facto noncompete agreement in violation of California Business and Professions Code section 16600.

Facts: Plaintiff Richard Hale Brown, a former employee of Defendant TGS Management Company, a securities trading firm, challenged in arbitration the validity of numerous provisions in his employment agreement restricting his right to compete with Defendant. These provisions included a two-year ban on “Directly Competitive Activity” and requirements that Plaintiff “keep all Confidential Information in strictest confidence and trust” during and after employment, which prohibited him from disclosing or using “Confidential Information” for his own benefit or the benefit of any party other than Defendant or Defendant’s clients. The agreement broadly defined “Confidential Information” as “information used or usable in, or originated, developed or acquired for use in, or about or relating to, the Business,” and defined “Business” to include “without limitation analyzing, executing, trading and/or hedging in securities and financial instruments and derivatives thereon, securities-related research, and trade processing[.]” The parties also had a bonus agreement providing that any earned, but “unpaid,” bonus would be forfeited if Plaintiff breached the confidentiality provisions. Plaintiff sought declaratory relief, and Defendant asserted counterclaims for breach of contract and declaratory relief. The arbitrator entered an award in Defendant’s favor, finding that Plaintiff had breached the employment agreement by copying “Confidential Information” regarding Defendant’s historical earnings to his phone and retaining that information post-termination. The trial court subsequently confirmed the arbitration award upon petition by Defendant. Plaintiff appealed.

Court’s Decision: The California Court of Appeal reversed and remanded. The court concluded that the arbitrator had exceeded his powers by enforcing an employment agreement which illegally restricted Plaintiff’s right to work free of contractual restraints on competition. The court concluded that the broad “Confidential Information” clause, along with other provisions in the employment agreement, effectively barred Plaintiff from doing any work in his chosen profession (securities trading), for the rest of his life, in violation of the statutory prohibition against noncompete agreements under California Business and Professions Code section 16600. The court also held that the unclean hands doctrine, raised by Defendant, was irrelevant to the question of whether the contractual provisions at issue constituted a de facto noncompete agreement as a matter of law.

Practical Implications: This case serves as a reminder that the limits on noncompete agreements imposed by section 16600 may be broadly interpreted to include de facto limitations resulting from various interacting contract provisions. Employers should avoid overbroad or overly restrictive confidentiality agreements to minimize the risk of such agreements being invalidated in the event of litigation.

Coughenour v. Del Taco, LLC, No. E072772, 2020 WL 6817570 (Cal. Ct. App. Nov. 20, 2020)

Summary: An employee who signed an arbitration agreement with an employer as a minor and continued employment for four months after reaching majority age had adequately disaffirmed the agreement and rendered it unenforceable by filing a lawsuit against the employer within four months of separation and eight months of reaching majority.

Facts: Plaintiff Sarah Coughenour, a former employee of Defendant Del Taco, LLC, sued Defendant alleging sexual harassment, wage and hour violations, and other claims under the Fair Employment and Housing Act. When Plaintiff first began her employment with Defendant at the age of 16, she signed a “Mutual Agreement to Arbitrate.” Defendant did not explain or provide copies of the agreement to Plaintiff. After reaching the age of 18, Plaintiff continued to work for Defendant for four months. Four months after her separation from employment, Plaintiff brought this lawsuit. Defendant moved to compel arbitration. The trial court denied Defendant’s motion, finding that Plaintiff’s filing of the lawsuit was a disaffirmance of the arbitration agreement within the meaning of Family Code section 6710, which allows a person to disaffirm a contract entered into while a minor within a “reasonable time” after reaching majority age. Defendant appealed. Defendant argued that Plaintiff had ratified the arbitration agreement by working for Defendant as an adult and that she had not disaffirmed within a reasonable time as required under Family Code section 6710.

Court’s Decision: The California Court of Appeal affirmed. The court found that Plaintiff had neither expressly nor impliedly ratified the arbitration agreement after reaching majority age. Plaintiff’s continued employment with Defendant for four months after reaching majority did not “show her performance of acts from which affirmance might be reasonably implied” or serve as “an acknowledgment that she was giving up her right to disaffirmance.” In so holding, the court emphasized that Plaintiff was unaware of the significance of the agreement she signed as a minor, and that it was not established that Plaintiff continued to work for Defendant with the awareness that she would still be subject to the agreement or that she could disaffirm the agreement once she turned 18 years old. Moreover, the court held that Plaintiff had disaffirmed the arbitration agreement within a reasonable time of reaching majority age. Plaintiff’s filing of the lawsuit constituted notice of disaffirmance, and filing the lawsuit within eight months of reaching majority age was a “reasonable time” within which to disaffirm.

Practical Implications: This case highlights the public policy against contracting with minors and the risks employers face when entering into arbitration agreements with minors. Employers that employ individuals who began working for the employer as minors should require those employees to expressly reaffirm, upon reaching age of majority, any employment and arbitration agreements that were executed when the employee was a minor.

People v. Super. Court (Cal Cartage Transp. Express, LLC), 57 Cal. App. 5th 619 (2020)

Summary: The Federal Aviation Administration Authorization Act does not preempt application of California’s “ABC” test to determine whether a federally licensed interstate motor carrier has correctly classified its truck drivers.

Facts: Petitioner, the City of Los Angeles, brought an enforcement action against Defendants, several federally licensed trucking companies operating out of the Port of Los Angeles, seeking to compel them to reclassify their owner-operator truck drivers as employees instead of independent contractors. Defendants filed a motion in limine seeking a determination that California’s “ABC” test, as applied to motor carriers, was preempted by the Federal Aviation Administration Authorization Act (“FAAAA”), which preempts state laws “related to a price, route, or service of any motor carrier . . . with respect to the transportation of property.” The trial court granted the motion, reasoning that the “ABC” test makes it functionally impossible to use independent contractors in the trucking industry, and that the use of employees would drastically increase the cost of freight. Petitioner sought a writ of mandate directing the trial court to vacate its order. Although the California Court of Appeal originally denied the petition, the California Supreme Court granted Petitioner’s petition for review and ordered the court of appeal to hear the issue.

Court’s Decision: The California Court of Appeal granted the petition and directed the trial court to vacate its order on Defendants’ motion in limine and enter a new order denying that motion. The court relied on the California Supreme Court’s decision in People ex rel. Harris v. Pac Anchor Transportation, Inc., 59 Cal. 4th 772 (2014), which held that the FAAAA did not preempt California’s Unfair Competition Law (“UCL”) in a misclassification case. The court of appeal determined that, like the UCL, the “ABC” test is a generally applicable law that does not implicate a concern about regulation of motor carriers or the transportation of property and does not require the use of employees. Specifically, the court of appeal observed that motor carriers, like Defendants, could use independent contractors by satisfying the business-to-business exemption, which would allow the trucking company to use independent contractors if several requirements are met. In sum, the court of appeal held that Defendants had not demonstrated that the use of the “ABC” test would prohibit them from using independent contractors or otherwise directly affect motor carriers’ prices, routes, or services.

Practical Implications: The issue of FAAAA preemption of the ABC test (or similar laws from other states) will likely end up in the United States Supreme Court due to the split in authority across the nation’s federal and state courts. The Ninth Circuit Court of Appeals is currently reviewing an identical issue regarding FAAAA preemption of California’s ABC test and many other states are considering similar laws. Employers in the transportation industry should evaluate their use of independent owner-operators and determine whether those relationships would satisfy the Business-to-Business exception to AB 5.

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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