California is an excellent example. Its Supreme Court often announces law that is unique to the state and applies retroactively. Organisations must partner with legal counsel in order to anticipate future decisions. Otherwise, they risk serious class action and representative PAGA lawsuits for past or future conduct.
We have the pleasure to welcome Paul J., a partner in Seyfarth Shaw. Leaf. He draws on his vast experience in California employment laws to discuss the pitfalls and defenses of retroactively applying new California Supreme Court decisions.
What are the most important issues in California’s employment law?
It is a great place to work, and I am able to advise my clients on California employment law. My work covers a broad range of employment issues. I often deal with repeat cases such as (1) misclassification of independent contractors; (2) protecting my clients against retroactive application California’s new employment law that invalidates their previous operations; and (3) strategizing about how to handle PAGA claims, including updating arbitration agreements.
What is California’s ABC Test? Is it being used retroactively?
The California Supreme Court declared SG Borello & Sons, Inc v Department of Industrial Relations, 48 Cal. 3d 342 (1989), determines whether workers are employees or independent contractors. This nine-factor test does not automatically determine employee status. Even if several factors indicate employee status, a worker may still be considered an independent contractor.
Although businesses have relied on Borello to organize their workforces for almost 30 years, Dynamex was ruled in favor of the Superior Court. 5th 903 (2018). The California Supreme Court adopted a 3-factor test to replace Borello in certain cases. Because the ABC test expands the definition of employment in that if the hiring entity fails or does not establish any factor, the worker will be considered an employee.
The ABC test was made effective immediately after Dynamex. The ABC test required businesses to quickly assess whether any existing independent contractor relationships, even if legal under Borello, could pass.
A hiring entity that was not sure whether it could pass the ABC test had to change its business model or pivot to an employee model. This lawsuit is costly because misclassifying workers as independent contractors can lead to a host of derivative claims that could be brought through class action or PAGA lawsuits. These include willful misclassification, unpaid overtime and minimum wages, improper meal breaks, failure to reimburse business expenses and inaccurate wage statements. For each worker misclassified in an independent contractor role, penalties of up to $25,000 can be imposed for willful misclassification.
It is a great place to practice in, and I am able to advise my clients on California employment law.
In Vazquez, Inc, 10Cal. 5th 944 (2021), California Supreme Court ruled the ABC test retroactively applies. Even if hiring entities used workers as independent contractors when Borello was in control, the retroactive application of the ABC test resulted in four years of possible class action liability and one-year of PAGA liability for the Borelloperiod.
Do other important California court decisions regarding employment law apply retroactively?
Yes. The California Supreme Court applies its decisions retroactively whenever it announces new laws. These retroactive decisions, which are based on statutes, can result in four years of possible class action liability and one-year of potential PAGA liability. This is often applicable to multiple claims. Because a single claim for unpaid wage claims can lead to derivative claims. This includes penalties for incorrect wage statements, penalties untimely payments of wages, and attorney’s fees. Here are a few examples.
California businesses relied for approximately 70 years on a federal doctrine that said up to 10 minutes of work per day could be lost if it was not easy to track. The US Supreme Court endorsed this de minimis theory and applied it to California claims by both the Ninth Circuit (DLSE), which is the state agency responsible for enforcing California’s hour and wage laws. A California Court of Appeal also applied the federal de minimis doctrine to an employee compensation case. California courts have not ruled that the federal de minimis doctrine is inapplicable to California law.
But in Troester v Starbucks Corp, 5 Cal. 5th 829 (2018): The California Supreme Court rejected federal de minimis doctrine. Troester retroactively applied.
The California Court of Appeal ruled that an eight-hour rest period could be excluded by written agreement if it was not included in the 24-hour work week. The DLSE agreed that such sleep times should not be compensated. California courts have not reached an opposite conclusion.
But in Mendiola v CPS Sec. Sols., Inc, 60 Cal. 4th 833 (2015): The California Supreme Court announced for the first time that compensable sleep time can be granted to on-call workers. Mendiola was retroactive.
Multiple federal courts have held that premium pay, which is the hour of compensation an employee receives for a wrong meal or rest break, should be paid at the base hourly wage of the employee and not at the higher (and harder to calculate) regular rate. The first California Court of Appeal to address this issue was established in 2019.
However, Ferra and Loews Hollywood Hotel, LLC, 11 Cal. 5th 858 (2021) The California Supreme Court ruled that premium pay should be paid at the regular pay rate. Ferra was retroactive.
Three California Courts of Appeal ruled that premium pay was not a wage that could trigger penalties for incorrect wage statements or late payment of wages. Seven federal courts that apply California law were in agreement.
But in Naranjo v Spectrum Sec. Servs., Inc, 13 Cal. 5th 93 (2022), California Supreme Court renounced these authorities. Retroactive application of Naranjo has not been prohibited by the California Supreme Court.
California Supreme Court often applies its decisions retroactively when it announces new laws.
How can you protect your clients from retroactive application of the new California law?
I also create a defense that protects my clients against retroactive penalties. These penalties are often the most significant source of liability.
Although the penalties for unpaid wages can seem small when the California Supreme Court retroactively applies new law, they can have severe consequences. One employee can be penalized for one unpaid penny for incorrect wage statements. The employee may also receive up to $4,000 in damages and up to 30 days of compensation for failing to pay the wages at the time of separation. These penalties are maximum $3,600 for employees earning the $15 California minimum wage. For each unpaid penny of wages, that’s $7,600 in penalties and attorneys’ fees. Companies are soon facing serious liability when they multiply this number by hundreds of employees or thousands, which includes employees who earn more than the minimum wage and can trigger longer waiting times penalties.
California law allows an employer to assert a good faith defense against wage statements and waiting time penalties. This applies if it believes it was following the law at that time, if it later changed the law or if it was unclear.
Just because the California Supreme Court decides to rule on a case does not mean that it is able to resolve a dispute in good faith. The California Supreme Court frequently takes up cases in order to settle a dispute between lower and federal courts. Sometimes, it is so hard for federal appellate courts to predict how the California Supreme Court would decide an issue in state law that they ask California Supreme Court to do it.
As in the retroactively applied California Supreme Court case discussed above, this Court does not often address whether a good-faith dispute defense applies. Companies are required to hire lawyers to determine whether they are subject or not to penalties. Many companies find themselves forced to settle cases at high prices because of the threat of huge penalties.
The resulting owed wages when the California Supreme Court retroactively applies new law are often very small. However, the derivative penalties that result from those unpaid wages could be severe.
Should the California Supreme Court modify how it applies retroactively or prospectively employment decisions?
Yes. Yes. Effective immediately from prospective applications, all final California Supreme Court decisions. Employees who are entitled to additional wages by a new California Supreme Court decision should immediately begin receiving those wages.
The California Supreme Court should grant a grace period before any derivative penalties arising from these wages can be applied. Some businesses have huge workforces that are controlled by third parties. This makes it difficult to make changes immediately. Some businesses are not able to quickly comply with the new law. It is unfair that employers who are diligent and well-intentioned but are unable to pay the new wages immediately, or simply require time to comply, should be penalized.
Employers are given advance notice of any new laws by the legislature before they become effective. This gives employers ample time to amend and avoid penalties. This should also apply to new rules issued by the California Supreme Court. Retroactively applying new law to existing cases without the California Supreme Court stating whether there is a good faith dispute defense exists requires employers to be able to forecast the future and to engage lawyers. Employers cannot consult the California Supreme Court to get a clear understanding of California’s employment law and protect themselves against future penalties.
Troester, Mendiola have shown that employers can’t rely solely on the DLSE’s interpretations of California law. The California Supreme Court could ignore those agency interprets and retroactively apply contrary laws without specifying if the good faith dispute defense applies. Employers cannot rely solely on the opinions of the California Courts of Appeal and federal courts. As shown by Ferra or Naranjo the California Supreme Court may disagree with these courts and retroactively apply contrary laws without addressing the good-faith dispute defense.
Businesses must engage lawyers in order to anticipate future legal changes due to the absence of a reliable self help guide, other than a California Supreme Court opinion. Employment lawyers, even judges, cannot predict the outcome of a California Supreme Court case.
Ferra, for example, shows that even if lawyers interpret a statute according to the California Court of Appeal’s interpretation and the multiple federal courts have interpreted it, the California Supreme Court can disagree with that interpretation and make its decision retroactive. This could lead to employers who follow their lawyers’ advice and publish court opinions to years of liability for unpaid penalties and compensation.
Businesses must engage lawyers in order to stay ahead of legal changes because there is no reliable self-help guide, other than a California Supreme Court opinion.
The California Supreme Court ruled that premium pay must always be paid at the “regular wage”. This phrase is an art term with a long-standing meaning. It is used in statutes, Wage Orders and other documents to distinguish the only other compensation metric: the hourly base wage.
Because premium pay is not required at the regular wage rate, the Wage Orders and statute that require it are different. Ferra was not apparent before. The California Court of Appeal and several district courts agreed that premium pay is paid at the hourly base wage. This is because, if the legislature meant premium pay to be at the regular pay rate, it could have stated so as it did elsewhere in statutes.
This retroactivity problem can be solved by the California Supreme Court when it announces new laws. It will then decide whether good faith dispute defense is available. Employers may be penalized if these legal changes are obvious. However, penalties can be unfair if legal changes are not anticipated. Employers should not have to spend money on good faith dispute defense or accept excessive settlements.
What is the Private Attorney General Act? And what does it mean that the US Supreme Court allows individual PAGA claims for arbitration?
PAGA is a California statute which allows employees to bring civil suits to recover civil penalties for themselves, their employees and the State of California. It was created to address violations of the California Labor Code. PAGA lawsuits are common because of a series of cases that began with the California Supreme Court’s Iskanian v CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (2014), which states that PAGA claims can’t be waived or forced to individual arbitration.
In Viking River Cruises, Inc. v Moriana, at 142 S. Ct. 1906 (2022), however, the US Supreme Court ruled that (1) a plaintiff can have his individual PAGA claims compelled into arbitration, and (2) a representative PAGA case brought on behalf other employees must be dismissed after the individual PAGA claim of the plaintiff has been compelled into arbitration. These rulings are important because they allow businesses avoid representative PAGA claims and class actions while still remaining in arbitration.
If legal changes are not anticipated, penalties can be unfair. Employers should not have to spend money on good faith dispute defense or accept excessive settlements.
Businesses still face real PAGA risk, however.
First, the California Supreme Court granted review in Adolph V Uber for consideration of the second holding of Viking River. This statutory standing issue could be decided by the California Supreme Court in a manner that allows a representative PAGA claim on behalf of other employees to proceed to court regardless of whether the plaintiff is arbitrating an individual PAGA claim.
Some employers still have the option to bypass Adolph, and enjoy all of the benefits of Viking River. Some businesses require all employees to sign an arbitration agreement that includes a waiver of the PAGA. This means that even though Viking River has canceled the PAGA standing section of , and the trial courts still have jurisdiction over representative PAGA claims once the plaintiffs have been compelled by Adolph to arbitrate their individual PAGA claims individually, no one will be able to take part in representative PAGA actions. This conclusion is based on executed waivers and not standing. Adolph is therefore irrelevant. Businesses must use this argument if the court intends to stop a representative PAGA case until Adolph is decided. Employers have great settlement leverage if the court does not decide to dismiss the case.
If this approach is followed then an employer could face a flood in individual arbitrations. This assumes that opposing counsel has access the majority of the workforce. Employers are required by California law to pay any costs associated with mandatory arbitration. This means that they may be responsible for significant arbitration costs, including filing fees and arbitrator fees.
Employers can include mass arbitration protections in their arbitration agreements to reduce these risks. This includes a process that allows for the arbitrator to rule on a few test cases, while the remainder of the portfolio is stayed. No arbitration fees are incurred.
What other trends are you seeing in California’s employment law?
Employers should be aware of the following future developments:
According to current trends, the California Supreme Court could declare it illegal for employers not to round up employee time punches. In Donohue v AMN Servs., LLC, 11 Cal., it already prohibited rounding employee meal period time punches. 5th 58 (2021). The California Court of Appeal in camp v Home Depot USA, Inc, 2022.WL 13874360 (Cal. App. Oct. 24, 2022) – Employers must keep track of the time employees work. Rounding is illegal, even if the rounding benefits the employee overall.
California Assembly Bill 51 prohibits employers from requiring employees to sign arbitration agreements. These agreements must cover claims under the California Fair Employment and Housing Act and the California Labor Code. The Ninth Circuit will decide whether AB 51 is invalidated by the FAA in Chamber of Commerce of the US v Bonta.
Although PAGA claims do not need to meet the requirements of a class action, some courts have ruled that PAGA claims must still meet a similar standard for manageability. Recently, the California Supreme Court granted review in Estrada, Inc, which was 76 Cal. App. App.
What attracted you to employment law?
In my first job, I was a commercial litigator at Kirkland & Ellis LLP. This allowed me to learn from incredibly smart attorneys who dealt with ‘bet-the-company’ cases. However, the nature of such litigation meant that I was unable to work with clients and help them manage their day-today business operations because it was so ‘one-and-done’. In 2015, my friends who practice employment law convinced me that this would enable me to better integrate with my clients. I joined Seyfarth-Shaw in 2015.
Employment lawyers have delivered on every front. Working with multiple clients gives me a deep understanding of their businesses. The lessons I have learned from litigation allow me to anticipate future legal precedents and modify the policies and practices of my clients to minimize their liability. I enjoy the challenge of creating creative legal solutions that best suit my clients’ business needs.
It is easy for me to be passionate about my work because of my deep interest in employment law. The National Hispanic Bar Association recognized me last year as one of the top 40 lawyers in the US.
Could you please share any information about your 2023 plans?
Because of my interest in policy, a case will be argued before the California Supreme Court to define a broad area of California employment law. Personally, I would like to spend more time traveling with my parents and wife, writing op-eds on US foreign policy (I have written extensively on China’s rise), playing pickleball and riding my Peloton more.
Paul J. Leaf, Partner
2029 Century Park East, Suite 3500, Los Angeles, California 90067-3021, USA
Tel: +1 213-270-9724
Fax: +1 310-551-8449
Paul J. Leaf works as a partner at Seyfarth Shaw LLP’s Los Angeles office. He represents companies in employment and commercial disputes. His practice focuses on representative PAGA actions and wage-and-hour class actions. Paul defends businesses against claims of harassment, discrimination, breach, fiduciary duty and wrongful termination. He also represents them in non-solicitation, non-compete, and non-solicitation cases. Paul loves to draw on the lessons of litigation and anticipate future legal developments in order to create forward-looking personnel policies that his clients can use to avoid lawsuits.
Seyfarth Shaw LLP offers legal advisory, litigation and transactional services to clients around the world. Seyfarth Shaw employs approximately 900 lawyers in 17 offices. This group is consistently ranked among the top law firms nationally.