By Clarice C. Liu, Esq., Published on January 20, 2020

The new year has ushered in a new landscape in employment law with a host of new legislation enacted in California.  By the end of the 2019 legislative session, Governor Gavin Newsom signed nearly 900 laws, many of which will have significant impact on employment relationships.  Some of the new laws which have become effective as of January 1, 2020 will be discussed below, as well as current legal challenges that are pending.

Independent Contractor Classification.

A landmark development in employment law in California – and an area that is still evolving – is the classification of employees and independent contractors.  Assembly Bill 5, which codified the California Supreme Court’s new tests for independent contractors as set forth in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2008) 4 Cal.5^th 903, was signed into law by Governor Newsom in 2019 and has become effective on January 1, 2020. This sweeping change regarding independent contractor classification would likely impact countless businesses and independent contractors across California, by making it much harder for businesses to classify their workers as independent contractors.  Challenges to AB 5 by various industries and businesses have been swift and numerous.

On January 2, 2020, for example, the Attorney General for the State of California released the title and summary of Initiative 19-0026 that would overturn AB 5 in part, with respect to app-based transportation providers and delivery drivers. The ballot was sponsored by Uber, Lyft and Doordash. Under California state law, the initiative’s sponsors may collect signatures to put the matter on the November 2020 ballot. As summarized by the Attorney General, the proposed initiative:

“Establishes different criteria for determining whether app-based transportation (rideshare) and delivery drivers are “employees” or “independent contractors.” Independent contractors are not entitled to certain state-law protections afforded employees—including minimum wage, overtime, unemployment insurance, and workers’ compensation. Instead, companies with independent contractor drivers will be required to provide specified alternative benefits, including: minimum compensation and healthcare subsidies based on engaged driving time, vehicle insurance, safety training, and sexual harassment policies. Restricts local regulation of app-based drivers; criminalizes impersonation of such drivers; requires background checks.”

As background, AB 5 has added section 2750.3 to the Labor Code, which expressly adopts the so-called “ABC” test under Dynamex for purposes of the Labor Code, Unemployment Insurance Code, and California Wage Orders. The bill’s statement of the three elements of the ABC test is identical to the language in the Dynamex opinion. Notably, the bill goes beyond the scope of the Dynamex decision, which applied the ABC test for purposes of the California Wage Orders only. Specifically, AB 5 provides that a person providing labor or services for remuneration shall be deemed an employee rather than an independent contractor unless the hiring entity can prove that the following conditions are satisfied:

1. the person is free from the control and direction of the hiring entity regarding how the work is performed;
2. the person performs work that is outside the normal course of the hiring entity’s business; and
3. the person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

The newly added Labor Code section 2750.3 provides that, if a court of law rules the three-part test cannot be applied to a particular context based on grounds other than an express exception to employment status, then the determination of employee or independent contractor status in that context shall instead be governed by the California Supreme Court’s decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello) Under the traditional test provided by Borello, a more flexible 10-factor test would apply.  Significantly, the most important factor under Borello is whether the person to whom service is rendered 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.

In addition to the ballot initiative which is under way, there are also pending lawsuits challenging AB 5.  For example, Uber and Postmates filed a lawsuit in the Central District of California challenging AB 5 as “irrational and unconstitutional.”  Uber, Postmates, and two drivers, allege in the lawsuit that AB 5 violates the Equal Protection and Due Process Clauses.  Similarly, the American Society of Journalists and National Press Photographers Association filed suit on behalf of freelance journalists challenging AB 5 arguing it violates the First Amendment.  The suit also argues that AB 5 is unfair in that it grants exemptions for other professions from the law while targeting freelance journalists.  Another challenge of AB 5 was made by the California Trucking Association, which filed a motion for temporary restraining order prohibiting the enforcement of AB 5 against any motor carrier operating in California. 

Until invalidated or otherwise modified, however, AB 5 is the law of California. It is important to note that AB 5 exempts various occupations from the “ABC” test.   These include, for example, licensed insurance agents, certain licensed health care professionals, persons practicing licensed professions (attorneys, architects, engineers, private investigators and accountants), registered securities broker-dealers or investment advisors, direct sales salespersons, commercial fishermen, and construction subcontractors. For many of these exempted categories, certain industry-specific threshold requirements must be met, in which case the applicable law will be governed by the Borello case. Certain “professional services” are subject also to the Borello test if the workers meet certain threshold requirements.

Prohibition of Arbitration Agreements.

Another fundamental change that would significantly impact employers and workers is AB which 51 which prohibits arbitration agreement as a condition of employment, continued employment, receipt of benefits, to waive any right, forum, or procedure to pursue a claim under the California Fair Employment and Housing Act (FEHA) and the Labor Code.  This new law bans mandatory arbitration agreements for FEHA claims, and prohibits employers from threatening or retaliating against employees for refusing to sign an arbitration agreement.  The new law also prohibits class action waivers and arbitration programs requiring employees to opt out if they do not wish to be subject to arbitration.

However, AB 51 permits mandatory arbitration provisions in settlement agreements and negotiated severance agreements, as well as arbitration agreements sanctioned by the Securities Exchange Act. AB 51 provides that it is not intended to invalidate arbitration agreements that are otherwise enforceable under the Federal Arbitration Act (FAA). Various United States Supreme Court decisions have sanctioned arbitration of employment disputes under the FAA.

On December 30, 2019, a federal court in California issued a temporary restraining order blocking AB 51 from going into effect. The Court granted the plaintiffs’ motion for a temporary restraining order brought by a coalition of national and state trade associations filed suit to enjoin AB 51 from taking effect. The trade associations argue that AB 51 is preempted by the Federal Arbitration Act (FAA), the federal law that governs the use of arbitration in employment disputes. The FAA has consistently been interpreted by courts to favor and promote the use of arbitration, and its preemptive scope is thus very broadly construed.

At a recent hearing on January 10, 2020, Chief U.S. District Judge of the Eastern District of California heard oral argument on the motion for preliminary injunction in the Chamber of Commerce’s challenge to AB 51. For now, the temporary restraining order remains in place and the matter has been taken under submission with supplemental briefing to be filed by the State and the Chamber of Commerce.

Revisions To Fair Employment and Housing Act.

Statute of Limitations Expanded for Fair Employment & Housing Act Claims – As it stands, employees must exhaust administrative remedies with the Department of Fair Employment and Housing as a precondition of filing a lawsuit for harassment, discrimination and retaliation. AB 9 has expanded the right of employees to file complaints with the Department of Fair Employment and Housing by extending the statute of limitations from one year to three years.  AB 9 extends the statute of limitations to three years to allow aggrieved employees a sufficient opportunity to bring these administrative claims.

Hairstyles – SB 188, also known as the CROWN Act, expands the definition of “race” under the Fair Employment and Housing Act (FEHA) to include “traits historically associated with race, including, but not limited to, hair texture and protective hairstyles,” including “braids, locks, and twists.” The legislative intent states that workplace dress code and grooming policies that prohibit natural hair, including afros, braids, twists and locks, have a disparate impact on black individuals. It further states that hair has historically been one of the determining factors of a person’s race and thus, hair discrimination targeting hairstyles associated with race constitutes racial discrimination.

Lactation Spaces – Under SB 142, employers will be required to provide employees the use of a room or other location that is in close proximity to the employee’s work area and that is free from intrusion for lactation purposes, which cannot be a bathroom. The location must be safe, clean and free of hazardous materials with a place to sit, a surface to place a breast pump and personal items and access to electricity. A sink and refrigerator (or other cooling device) must also be available.

Employers may use the lactation space for other purposes so long as employees who need to use it for expressing milk have priority. Employers with fewer than 50 employees may be exempt from these specific requirements if they can demonstrate undue hardship. This new law provides that failure to provide this break time or a compliant location is deemed to be a failure to provide a rest break as required, thus triggering the Labor Code penalty provision of one additional hour’s pay per violation.

No-Rehire Provision in Settlement Agreement.

Settlement agreements involving employment law claims often include a no-rehire provision in which the departing employee agrees not to seek employment with the company in the future.  AB 749 prohibits such no-rehire settlement agreement provisions starting January 1, 2020.

The core provision of AB 749 specifically prohibits “an agreement to settle an employment dispute” from containing “a provision prohibiting, preventing, or otherwise restricting a settling party that is an aggrieved person from obtaining future employment with the employer against which the aggrieved person has filed a claim, or any parent company, subsidiary, division, affiliate, or contractor of the employer.” An “aggrieved person” is “a person who has filed a claim against the person’s employer in court, before an administrative agency, in an alternative dispute resolution forum, or through the employer’s internal complaint process.”

Three important carve-outs limit the scope and impact of AB 749:

1. Severance agreement exclusion. An employer and an “aggrieved person” are expressly allowed under the law to enter into a settlement agreement “to end a current employment relationship.” Given AB 749’s reference to “agreement to settle,” this law does not appear to apply to a severance agreement in which an employer seeks to prohibit an employee from returning to that employer if the employee has simply received severance in consideration for a waiver and release of potential claims.
2. Harassment exception. An employer and an “aggrieved person” are allowed to enter into a settlement agreement “restrict[ing] the aggrieved person from obtaining future employment with the employer, if the employer has made a good faith determination that the person engaged in sexual harassment or sexual assault.” “Sexual harassment” and “sexual assault,” for purposes of AB 749, follow the definitions established by existing California law. What constitutes a “good faith determination,” however, is not defined in AB 749. How and when those determinations should or must be made are also not addressed.
3. Rehire not obligatory. Nothing in AB 749 requires an employer “to continue to employ or rehire a person if there is a legitimate nondiscriminatory or nonretaliatory reason for terminating [the employment relationship] or refusing to rehire the person.” It does not provide any parameters for what constitutes a “legitimate nondiscriminatory or nonretaliatory reason.”

With this legislation, California joins Vermont, which passed a similar measure in 2018. The new law is also consistent with the Equal Employment Opportunity Commission (EEOC) position that including no-rehire provisions in settlement agreements may be considered unlawful retaliation, including for filing discrimination or harassment claims with the EEOC.

Penalties for Late Paychecks.

The newly enacted AB 673 amends Labor Code section 210 by addressing penalties when employers are late in paying wages according to these requirements. Current wage and hour law provides that the penalty is to be collected by the Labor Commissioner following a hearing or by an independent civil action.  Employees may also currently pursue a lawsuit under the Labor Code Private Attorneys General Act (PAGA), which allows an employee to act as the Labor Commissioner to enforce a civil penalty. The new law further provides that employees can pursue either a wage claim or a PAGA suit, but not both. AB 673 limits an employee from being able to pursue both statutory penalties and civil penalties for the same underlying wage violation. Instead, an employee now is entitled to recover either the statutory penalty or the civil penalty, but not both, for the same violation.

Practical Considerations.

To address the new laws, companies should review their current personnel practices and to develop policies and best practices to respond to the changing environment.

• Review and analyze the company’s utilization of independent contractors and the propriety of the classification.  Work in conjunction with legal counsel and tax/accounting professionals to make any corrections or reclassification, if appropriate.

• Review current employee handbook, policies, and offer letters to assess current arbitration provisions to ensure compliance with the mandate of AB 51, for example, making clear that the employee may choose not to enter into the arbitration agreement, and that the employee will not suffer retaliation in the event the employee chooses not to sign an arbitration agreement.

• Update employee handbook, policies and procedures to reflect a current equal employment opportunity statement including language to reflect prohibition of discrimination with the reference to hairstyle as part of the non-discrimination policy.

• Determine appropriate spaces for lactation in accordance with the new requirements. Evaluate current procedures for providing lactation accommodation, including developing and implementing a lactation policy for inclusion in employee handbooks or other policies.

• Review and revise settlement agreement templates to modify or delete “no-hire” provisions, and only include the provision as permissible by law.

• Provide training to supervisors and staff regarding the new development including payroll logistics, lactation space designation, and anti-discrimination and EEO policy regarding new basis of protected categories.

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The information provided in this article is intended for a general discussion of the subject matter and should not be construed as legal advice. For your specific circumstance, or inquiry about the issues addressed in this article or other employment law matters, please contact attorney Clarice Liu at (415) 288-8622 or [email protected].