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Employment Law
MCLE Self Study
Edited by Barbara Kate Repa

Employment Law
How Employers Lose Lawsuits
By Steven M. Schneider

California has its own unique, and growing, employment law requirements. And the cost to employers who fail to comply with them can be staggering, as Farmers Insurance learned recently upon being hit with a verdict in excess of $93 million-all but approximately $1 million of which was affirmed on appeal-for not paying overtime to its claims adjusters.

Here are some common employer attitudes that can result in wage-and-hour and other employment law actions.

IT'S JUST A ONE-PERSON CLAIM
The Cortez case is a good example of the harm that can arise from a single employee's charge. In Cortez v. Purolator Air Filtration Prods. Co. (23 Cal. 4th 163 (2000)), Rosalba Cortez had worked for her employer for several years before being terminated. Cortez had been working a ten-hour workday, four days a week. When the employer was unable to provide documentation for such an alternative schedule as required under state law, Cortez sued under California's Unfair Business Practices Act (Cal. Bus. & Prof. Code § 17200), claiming unpaid overtime for herself and approximately 175 other employees.
Section 17200 allows a plaintiff to assert a representative action on behalf of the general public for alleged unfair competition-including "any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue, or misleading advertising." An employer who does not comply with California's wage-and-hour law requirements is deemed to gain a business advantage over competitors who do follow the law, which qualifies as a claim under section 17200.
The California Supreme Court ruled that not only was Cortez entitled to overtime pay but also the other employees were entitled to restitution authorized by section 17200. This decision demonstrates that what an employer might initially view as a nuisance claim brought by one person can be transformed into a class-type lawsuit.

In addition, employers should pay particular attention to the following areas, which are fertile fields for lawsuits.

Policies that may affect many. The mere fact that most employees do not complain about a workplace policy does not guarantee that one complaint will not lead to a multitude of claimants. An employment class action or section 17200 representative lawsuit can include not only current employees but also former employees within the four-year statute of limitations period (Cortez, 23 Cal. 4th at 178-79), as well as those who were discouraged from applying for certain jobs because of an employer policy. (Frank v. United Airlines, Inc., 216 F. 3d 845 (9th Cir. 2000).)

Decentralized hiring. People tend to gravitate to those who share their backgrounds and traits, or follow practices they have used previously, but over time these human tendencies can create racial or gender segregation. For example, in Sandoval v. Saticoy Lemon Ass'n (747 F. Supp. 1373 (C.D. Cal. 1990)), a lemon-packing plant simply hired workers who asked supervisors for work. The supervisors assigned jobs largely along gender lines, with women working almost exclusively as graders, packers, sorters, and carton formers; men usually performed as general laborers, forklift operators, night watchmen, and equipment operators. In addition to the female workers currently employed, the court certified subclasses of female applicants who had been rejected or deterred from applying because of their awareness of Saticoy's allegedly discriminatory policies.

Dangerous safety policies. Systematically assigning certain duties to one gender based on assumptions about strength, physical ability, or desire for the work may also be viewed as discriminatory. For example, in Int'l Union, United Aerospace and Agricultural Implement Workers of America v. Johnson Controls, Inc. (499 U.S. 187 (1991)), a battery manufacturer prohibited placing women who were pregnant or capable of bearing children in jobs that might expose them to lead. The employer promulgated this rule after eight employees became pregnant while maintaining blood levels of lead in excess of the level deemed critical by government authorities for workers planning to have families. The U.S. Supreme Court held that the rule was facially discriminatory since it applied only to women and not to men, whose lead exposure might also have affected their fertility.

The power of the EEOC. A single employee complaint to the Equal Employment Opportunity Commission (EEOC) alleging discrimination can trigger the agency's decision to file a representative action on behalf of a group of employees. (EEOC v. Dinuba Med. Clinic, 222 F.3d 580 (9th Cir. 2000).) Although such EEOC actions carry a maximum per-employee damages limit that does not apply to California claims, as with section 17200 representative lawsuits, they do not impose the stringent procedural requirements that apply to class actions.

FEDERAL LAW SAYS WE CAN DO THIS
One major mistake California employers can make is to assume they only have to comply with federal employment law, not with state laws on the same subject matter. The truth is that when faced with conflicting federal and state employment legislation, employers usually must comply with the more employee-protective laws. (See Tidewater Marine Western, Inc. v. Bradshaw, 14 Cal. 4th 557 (1996).) California has a number of them.

Meal penalties. The federal Fair Labor Standards Act (FLSA) does not require employers to provide any meal periods. However, with a few exceptions, California law requires employers to provide a meal period of at least 30 minutes to employees who work at least five hours a day, and a second meal period to employees who work at least ten hours a day. (Cal. Lab. Code § 512.) Employers risk penalties of one hour of additional pay for each missed meal period, in addition to paying for on-duty meal periods. (Cal. Lab. Code § 226.7.)

Professional exemption for nurses. Under the FLSA, registered nurses are usually exempt from overtime under the executive, administrative, or professional exemption-although whether the professional exemption will continue under federal overtime regulations effective August 23, 2004, is still uncertain. Under California law, the professional exemption generally is not available to registered nurses, with only limited exceptions. (Cal. Lab. Code § 515(f).)

Disability discrimination. Under the federal Americans With Disabilities Act (ADA), a disability must be an impairment that substantially limits a major life activity. (42 U.S.C. § 12102(2).) Under the California Fair Employment and Housing Act, under which most claims here are filed, the impairment simply has to be a limitation. (Cal. Gov't Code § 12926.1(c) and (d)(2).) Also under federal law, when determining whether an individual is substantially limited in a major life activity, mitigating measures-such as medication, equipment, eyeglasses, and hearing aids-must be taken into account. (Sutton v. United Air Lines, Inc., 527 U.S. 471 (1999).) State law does not consider mitigating measures. (Cal. Gov't Code § 12926.1.)

THAT'S THE CONTRACTOR'S RESPONSIBILITY, NOT OURS
Two or more businesses that exercise control over working conditions may be deemed joint employers-individually responsible for complying with employment laws controlling the workers they employ. That means that a company found to be a joint employer of a group of workers may be held liable for back wages for overtime and minimum-wage violations. The company may also be liable for interest on the wages due, attorneys fees, court costs, and penalties for failing to pay the employees on time-even if another entity hired them, supervised them, and had the responsibility to pay them. (Cal. Lab. Code §§ 98.1, 203, 210, 218.5, 1193.6, and 1194; A.B. 223 and 276; and S.B. 179.)

An entity will qualify as a joint employer if it satisfies the legal definition of an employer: in California, someone who "employs or exercises control over the wages, hours, or working conditions of any person." (Cal. Indus. Welfare Comm'n Wage Order 4, § 2(H).) The federal definition includes any person acting "in the interest of an employer in relation to an employee." (29 U.S.C. 203(d).) Not surprisingly, the courts do not rely on either of these vague definitions when determining whether an entity qualifies as an employer or joint employer. Instead, they often apply a multifactor "economic-realities" test. (Bureerong v. Uvawas, 922 F. Supp. 1450, 1467-71 (C.D. Cal. 1996).) Under this test, the more dependent a worker is on an entity, the more likely the entity will be considered the worker's employer or joint employer.

In examining the economic realities indicating workers' dependence, courts concentrate on whether the employing entity:
1. has the power to hire and fire the workers
2. supervises or controls work schedules or employment conditions
3. determines the rate and method of payment, and
4. maintains employment records for the workers.

When courts have found joint employers. Courts have repeatedly emphasized that the term employer is defined broadly when applying the economic-realities test. (Torres Lopez v. May, 111 F.3d 633, 639 (9th Cir. 1997).)

A finding of all four of the factors listed above suggests that the entity will qualify as an employer. (Bonnette v. California Health & Welfare Agency, 704 F.2d 1465, 1469-70 (9th Cir. 1983)). However, even in their absence, a court might still consider an entity to be an employer or joint employer. For example, in Antenor v. D & S Farms (88 F.3d 925, 938 (11th Cir. 1996)), the court found that a company could qualify as a joint employer even though another company had hired the workers and assigned them jobs, directly supervised them, disciplined and discharged them, and paid their wages.

Furthermore, the four factors are not exhaustive. For example, in Rutherford Food Corp. v. McComb (331 U.S. 722, 729 (1947)), the U.S. Supreme Court found that workers were employees of a company because they had been sufficiently "integrated" into that company's production force. Courts also find joint employers when two companies share an employee's services. In MidContinent Pipe Line Co. v. Hargrave (129 F.2d 655, 658-59 (10th Cir. 1942)), the court held that a petroleum company and its carrier jointly employed security personnel when the two companies used the personnel to protect their property during a labor strike.

California recently enacted its own unique law regarding joint employers. (S.B. 179.) That statute imposes liability and civil penalties on "any person or entity" that enters into a "contract or agreement for labor or services with a construction, farm labor, garment, janitorial, or security guard contractor" and knows or should know that the contract does not include sufficient funds to allow the contractor to comply with federal, state, and local laws and regulations governing the labor or services to be provided. Aggrieved employees can sue for the greater of actual damages or $250 per employee per initial violation and $1,000 per employee per subsequent violation, plus attorneys fees and costs.

YOU'RE NOT OUR EMPLOYEE, YOU'RE AN INDEPENDENT CONTRACTOR
An independent contractor is a self-employed worker hired to perform services for another. Hiring parties have numerous obligations to employees that they do not owe their independent contractors. The label applied, however, is not dispostive of worker status, which must often be determined in a lawsuit. Some courts will even disregard written agreements workers have signed acknowledging their independent contractor status.

Right-to-control test. The right-to-control test focuses on the control the hiring party has over the services performed by the worker. This test is generally used by the Internal Revenue Service and California's Employment Development Department to determine liability for employment and payroll taxes. It is also used by many other state tax, unemployment, and workers compensation authorities and by the courts in a variety of contexts, including most civil rights actions.

The economic-realities test. This test, usually applied in FLSA wage-and-hour cases, focuses on the extent to which the worker is economically dependent on the hiring party.

YOU DON'T GET OVERTIME BECAUSE YOU'RE A MANAGER
It can be a costly mistake to assume that an employee who happens to have the word manager or administrator in his or her job title is exempt from state overtime laws. The California exemptions require a two-part analysis: the salary-basis test and examination of employee duties. The salary-basis test requires a showing that the employee receive a fixed salary that currently totals at least $2,340 per month, which is two times California's minimum wage for full-time employment. An employer slipup could result in loss of exempt status and liability for unpaid overtime.

Presuming that a manager meets California's salary-basis test, the next step is to determine whether he or she is primarily engaged in the duties that meet one of the articulated exemptions, such as the administrative, executive, or professional exemption. This test is anything but precise. For example, for California's executive employee exemption to apply, a worker must:
1. manage the company or a recognized department or subdivision
2. customarily and regularly direct the work of two or more employees
3. have the authority to hire, fire, discipline, or promote
4. customarily and regularly exercise independent judgment, and
5. be engaged in the above duties for more than half of his or her working time.

Under California law, the most relevant duties are those actually performed by the employee-a critical inquiry for employees with borderline status. For example, a manager who underperforms and as a result primarily engages in clerical tasks instead of managing could be determined to be misclassified as exempt. (Ramirez v. Yosemite Water Co., Inc., 20 Cal. 4th 785 (1999).)

Another common pitfall is to assume that an employee properly classified as exempt from overtime provisions under federal law is also exempt under California law. Many of the exemptions are titled the same and largely include the same elements; however, the application of those tests differs significantly. For example, federal law evaluates the exemptions discussed above on a qualitative basis, examining the employee's primary duty, while California law takes a quantitative approach, focusing on the actual time spent performing exempt and nonexempt tasks. (Ramirez v. Yosemite Water Co., 20 Cal. 4th at 797.) Specifically, California law requires that an employee qualifying for the executive, administrative, or professional exemption spend "more than one-half of the employee's worktime" on exempt tasks. (Cal. Lab. Code § 515(2)(e.)

Steven M. Schneider (sms@msk.com) is a partner at Mitchell, Silberberg & Knupp in Los Angeles, where he specializes in labor/employment and wrongful competition law and litigation.

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