Passing AB 1897 Means Greater Liability for Employers Who Use Labor Contractors

Editor’s Note: The following post appears in the latest issue of the California HR Newsletter.

Passing AB 1897 Means Greater Liability for Employers Who Use Labor Contractors

The Issue: Today, many employers rely on labor contractors or temporary employment agencies to sustain their operations. Occasionally, however, labor contractors fail to comply with labor laws and regulations by failing to (1) pay wages; (2) report and/or pay all required contributions and personal income tax withholdings; and (3) secure workers compensation for subcontractors. In such cases, are employers liable to subcontractors for these types of violations of their labor contractors?

The Solution: Historically, for the most part, no. However, California Assembly Bill (“AB”) 1897, a proposed law currently before the Assembly, would impose joint liability on employers for the violations of their labor contractors.

Analysis: On April 24, 2014, AB 1897 was passed by the state Assembly’s Labor and Employment Committee and will soon be considered by the Assembly’s Committee on Appropriations. The bill would greatly expand an employer’s duties by requiring employers to share with their labor contractors all responsibility and liability for the following: the payment of wages, the failure to report and pay all required employer contributions, worker contributions, and personal income tax withholdings, and the failure to obtain valid workers’ compensation coverage. This could have a significant impact on employers who depend on labor contractors for any number of functions, e.g., to fill seasonal or short-term work schedules, cover for employee absences, avoid layoffs, and pre-screen employees.

While the law currently prohibits employers from entering into a contract for labor or services with a construction, farm labor, garment, janitorial, security guard, or warehouse contractor, if the employer knows or should know that the agreement does not include sufficient funds for the contractor to comply with laws or regulations governing the labor or services to be provided, AB 1897 would expand liability for the above mentioned violations to all industries and all individuals who contract for labor or services. This bill would impose seemingly strict liability on any individual or entity that obtains or uses subcontractors from a labor contractor to perform work “within the usual course of business of the individual or entity.” As such, if AB 1897 were to pass, it would particularly burden small businesses, those without dedicated human resource or legal departments, due to their heavy reliance on contract and temporary employees.

The silver lining is that AB 1897 would not prohibit employers from agreeing to any otherwise lawful remedies against labor contractors for indemnification from liability created by acts of the labor contractor. Employers cannot, however, shift to labor contractors any of their responsibilities under the California Occupational Safety and Health Act. Labor contractors will also have the same opportunity to contract with employers for indemnification. Furthermore, the bill will provide that any waiver of its provisions is contrary to public policy and unenforceable. If AB 1897 becomes law, employers should be especially cautious in selecting a labor contractor and determine what level of contractor evaluation may limit their risk for non-compliant contractors. Unwary employers face the danger of liability for a labor contractor’s failure to meet these requirements.

Proposed California Paid Sick Leave Law Will Require Employers to Provide Paid Sick Leave to Employees

Are you a California employer currently providing paid sick leave to your employees? You may soon have to! California Assemblywoman Lorena Gonzalez (D-San Diego) recently introduced legislation (Bill AB1522) approved by the Assembly Labor and Employment Committee requiring employers in the State of California to provide their employees with paid sick leave.

This bill would enact the Healthy Workplaces, Healthy Families Act of 2014 to provide, among other things, that an employee who works in California for 7 or more days in a calendar year is entitled to paid sick days to be accrued at a rate of no less than one hour for every 30 hours worked. An employee would be entitled to use accrued sick days beginning on the 90th calendar day of employment. And employers would be subject to statutory penalties as well as lawsuits, including the recovery of attorneys fees by the aggrieved employee against employers, for alleged violations.

It is important to note that this type of bill is not new in California, as the San Francisco Paid Sick Leave Ordinance became effective on February 5, 2007 and all employers must provide paid sick leave to each employee — including temporary and part-time employees — who performs work in San Francisco.

The California Chamber of Commerce as well as other employer groups are opposed to this bill and view it as a job killer.

Stay tuned….

Just Don’t Ask: With The Fair Chance Ordinance, San Francisco Joins A Growing Number Of Jurisdictions That Restrict Employers’ Pre-Hire Inquiries About Applicants’ Criminal Histories

In February 2014, San Francisco joined the growing number of jurisdictions that have enacted so-called “ban the box” laws. Like many of its counterparts, San Francisco’s Fair Chance Ordinance, which will become effective in August 2014, significantly limits employers’ abilities to inquire about and/or consider applicants’ and employees’ criminal records when making employment decisions.

Pursuant to the Ordinance, San Francisco employers are prohibited from asking about applicants’ criminal histories until either (a) after the applicants’ first live interview, or (b) after a conditional offer of employment has been extended. However, the Ordinance places considerable limits on obtaining and using any information obtained. Specifically, employers are prohibited from inquiring about or taking any adverse action against applicants or current employees based on: (a) any arrests not leading to a conviction, except for some unresolved (i.e., pending) arrests; (b) participation in or completion of a diversion or deferral of judgment program; (c) convictions that have been judicially dismissed, expunged, voided, invalidated or otherwise rendered inoperative; (d) convictions or other determinations of the juvenile justice system; (e) convictions older than seven years; and/or (f) information pertaining to any offense other than a felony or misdemeanor (e.g., infractions). Before making any inquiry about an applicant’s conviction history, the Ordinance requires that the employer provide the applicant in question with a notice promulgated by the San Francisco Office of Labor Standards Enforcement (“OLSE”).

The Ordinance also requires that employers engage in an individualized assessment and consider only directly-related convictions when making decisions about applicants. Employers also must consider the amount of time that has elapsed since the applicants’ convictions and any evidence of rehabilitation, inaccuracy of the applicants’ records, and/or other mitigating factors. Before making any adverse decision, employers are required to provide the employee with a written notice of their intention to make such a decision, detailing the reasons for the decision. In addition, if any background report was considered by the employer, the employer must also provide that to the applicant. Any affected candidate has seven days following receipt of the employer’s notice to submit evidence regarding: (i) the inaccuracy of the criminal history information; or (ii) rehabilitation or mitigating factors. If the employer receives such information from an applicant, it must delay its intended action and consider the additional information.

In addition to the above restrictions, the Ordinance contains strict anti-retaliation/interference provisions. The Ordinance also requires that employers post a notice of applicants’ and employees’ rights in a conspicuous place at every workplace, job site, or other location in San Francisco that is under the employer’s control and that is frequently visited by employees or applicants. In addition, any job postings must contain a notice that the employer will comply with the Ordinance’s requirements.

Though San Francisco’s ordinance is particularly stringent, the City is by no means alone in banning employers from inquiries about applicants’ criminal pasts: dozens of cities and several other states – including Hawaii, Massachusetts, Minnesota, and Rhode Island – have enacted similar “ban the box” legislation. Moreover, there are a growing number of organizations pushing for the enactment of similar laws and ordinances across the country.

Employers in jurisdictions that have already enacted “ban the box” laws should ensure that they avoid any impermissible inquiries. Employers in locations that have not yet been affected should closely monitor developments in their jurisdictions to avoid any exposure.

U.S. Supreme Court Ruling in Quality Stores Clarifies That Severance Pay is Taxable—in Most Cases

On Tuesday, March 25, 2014, the U.S. Supreme Court, in an 8-0 decision, ruled in Quality Stores, Inc., et al., 12-1408 that severance payments made to employees who are involuntarily terminated are taxable wages under the Federal Insurance Contributions Act (FICA). The Court reversed the Sixth Circuit Court of Appeals ruling in favor of Quality Stores, which was seeking a $1 million tax refund based on its argument that severance payments were not covered by FICA and were excluded from taxation based on the Internal Revenue Code. The Court’s ruling resolved a split between the Sixth Circuit and the Federal Circuit, and ended a legal battle with more than $1 billion at stake in potential tax refunds to employers involved in 11 separate cases with more than 2,400 refund claims.

Quality argued that its severance payments to terminated employees were actually supplemental unemployment compensation benefits (SUB), which are not considered “wages” under the Internal Revenue Code. According to the company, “a SUB payment is a type of payment that—although made by an employer to [its] former employee—nonetheless does not meet the statutory definition of ‘wages’ because it is not remuneration for services.” The Court noted that the severance payments were made only to employees and were based on employment-driven criteria including the position held, the employee’s length of service with the company and salary at the time of termination. Relying on the “broad definition of wages under FICA,” the Court ruled that severance payments to employees who are terminated involuntarily are taxable under FICA.

However, in its decision the Court noted IRS revenue rulings that severance payments tied to the receipt of unemployment compensation benefits “are exempt not only from income tax withholding but also FICA taxation.” Thus, employers appear to continue to be able to make severance payments that are exempt from income tax withholding and FICA through a carefully crafted structure linking the severance payments to the employee’s receipt of unemployment compensation benefits.

If you have any questions about the impact of this decision, please contact Mark Nelson or Alejandra Lara, or any other member of the Labor & Employment Group.

Hiring Employees Who May Be Bound by Post-Employment Restrictive Covenants? Caution, Restrictions May Apply

Employers frequently want to hire talented employees who are bound by post-employment restrictive covenants (e.g., non-competes, or customer/employee non-solicitation covenants). Often, a plain reading of the prospective hire’s agreement raises questions about whether joining your company would violate the agreement. This requires strategic, and sometimes creative, planning. Depending on your jurisdiction, deciding to hire an employee despite their post-employment restrictive covenants may involve taking a calculated risk that some parts of the post-employment restrictions are not enforceable, while deciding that there are some aspects your company can live with and that you expect the new employee to follow. The following provides some basic guidance.

1. Assess the business impact of the restrictions by determining the precise scope and duties of the prospective job. Even though the individual may be subject to post-employment restrictive covenants, the job for which you intend to hire him/her may not fall within the restrictions. Or, inasmuch as most restrictive covenants will expire — sometimes in a matter of months — you may decide that the company can tailor the scope of the intended position so that the new employee can still add value, but not perform work that would violate the individual’s obligations to his/her former employer. Can the person be employed in a capacity that does not violate the restrictions until they lapse? Can the person be employed outside the geographically restricted area or assigned to existing customers different from those of the former employer?

2. Review and analyze the legal risk. Analyze the true legal risk of proceeding. By “true” legal risk, I mean the likelihood that the former employer will succeed if it takes legal action, as well as the likelihood the former employer will actually take legal action. This should include an analysis of the scope of the restrictions and their enforceability given the applicable state law, whether the action will be brought in federal or state court, as well as an assessment of the likelihood that a court will enforce the restrictions. This will vary according to the applicable state law and circumstances. You should also consider more practical issues such as the former employer’s litigation history, the importance of the potential hire to the former employer, and the extent to which employment with your company differs from the prior employment. Other practical considerations should include a review of the industry and whether post-employment restrictions are commonplace, whether the two companies compete for the same customers, and a frank review of your company’s flexibility in defining the scope of the intended position.

3. Hire away, or don’t, but proceed with caution. Having analyzed the legal risk and business impact of the restrictive covenants on your proposed hire, determine whether you are comfortable proceeding with the hire in the intended position, or if there is a different, or modified position, that would still suit the company’s needs while lessening the legal risk. Analyze and take available appropriate steps to minimize the risk of being sued, or, if sued, the risk of a lengthy or costly suit. Communicate, in writing, what you expect of the new employee. For instance, you and counsel may reach the conclusion that the prospect’s non-competition restrictions are overly broad and will not be enforced under the circumstances, but that a court is likely to enforce a customer non-solicitation covenant. Accordingly, you may decide to move ahead with the hire, and plan to keep the new employee away from former customers.

Typically, the company’s offer letter is a good place to memorialize such expectations. In our scenario, the offer letter should state, as a condition of employment, that the new employee does not possess and/or will not use his former employer’s confidential information and that the employee will not solicit former clients (as well as any other restrictions that your company expects to be followed). The employee, especially if sophisticated or if represented by an attorney, may seek indemnification for any legal action taken by his former employer. Determine whether you are willing to entertain such a request. Consider also what type of an “out” you have, both of the employment relationship and/or indemnification, i.e., what recourse does the company have if ensuing litigation is going badly or you find the new employee was not truthful about not taking any confidential information from the former employer?

4. Protect your company from the beginning. Companies often get into trouble when recruiting a prospective employee long before the actual hire. Employees may pitch their importance by showing you their customer list or sales volume, but these items are likely to be considered confidential by their employer, if not trade secrets. Further, the employee may offer to bring with them a junior colleague and provide you with confidential information about the employee or may start contacting customers about his or her intentions. Those actions may have already violated the person’s restrictive covenants. Ground rules for such activity should be established during the interview process, in writing, if possible. Also obtain written confirmation that the potential hire is not under any undisclosed restrictions and communicate, in writing, that the prospective employee is not to disclose or use confidential information or trade secrets and is not to take or bring any property or information belonging to the employer. Follow through and make sure the person complies fully with those requirements.

Although there is no way to prevent a suspicious former employer from challenging your company’s hire of one of its employees, following this guidance will place your company in a better position in the event of such a challenge.

Taylor v. Nabors Drilling and California’s SB 292 Clarify that Sexual Harassment Need Not Be Motivated by Sexual Desire

On January 13, 2014, the California Court of Appeal decided in Taylor v. Nabors Drilling USA, L.P., 222 Cal. App. 4th 1228 (2014), that a person may maintain an action for sexual harassment when subjected to verbal attacks on his or her heterosexual identity, regardless of whether the attacks were motivated by sexual desire. This ruling came soon after the implementation of SB 292, which became effective in California on January 1, 2014. This bill revised the definition of sexual harassment under California Fair Employment and Housing Act (“FEHA”) to specify that sexually harassing conduct “need not be motivated by sexual desire.” As a result, to prove harassment “because of sex,” plaintiffs need only show that there was evidence that gender was a substantial factor in the harassment.

Both Taylor and SB 292 explicitly reject the view adopted by the California Court of Appeal in Kelley v. Conco Companies, 196 Cal. App. 4th 191 (2011), which held that a plaintiff failed to prove sexual intent because there was no evidence that heterosexual harassers sexually desired the male plaintiff. The court made this decision despite the fact that the defendant and coworkers in Kelley used “graphic, vulgar, and sexually explicit” language to express sexual interest and solicit sexual activity from the plaintiff.

Taylor and SB 292 resolve any ambiguity created by the Kelley decision, and make clear that a showing of sexual desire is not an essential element of a claim of sexual harassment—thereby affirming and solidifying California authority published before Kelley. Thus, it is clear that a plaintiff may establish an inference that an alleged harasser’s conduct is sexual by producing: (1) evidence of the alleged harasser’s sexual desire; (2) evidence that the alleged harasser is motivated by general hostility towards the particular gender of which plaintiff is a member; or (3) comparative evidence about how the alleged harasser treated members of both sexes in a mixed-sex workplace.

These developments in California sexual harassment law have important consequences for employers. To avoid a greater occurrence of suits, employers must now scrutinize offensive comments by same-sex employees objectively, based on the content of the remarks, not the intent of the speaker. Employers can minimize liability through adequate complaint protocols, instituting zero tolerance policies, and encouraging employees to report any inappropriate workplace behaviors. These actions may prevent alleged harassing conduct from being deemed sufficiently severe or pervasive. Employers should also stress that bullying, such as the use of homophobic epithets to heterosexual employees (Taylor), subjects the employer to liability. Accordingly, employers should update their policies and handbooks to reflect the change, as well as provide employees relevant information and a copy of the updated policy. Lastly, employers may consider additional training for supervisors or issuing a memo, advising them of SB 292 and their responsibilities to administer policies in conformity with the new law.