As we head into the last quarter of 2024, it may be a good time to review these notable employment issues if your company has operations in California.
#1. Individual Discrimination and Harassment Claims
California is known for its employee-favorable courts, particularly when it comes to individual cases brought under the Fair Employment and Housing Act (FEHA), Govt. Code section 12965(b). In addition to substantive provisions, the FEHA provides for the recovery of attorney’s fees, costs and expert witness fees. These awards override standard cost-recovery provisions that apply to civil actions generally (CCP §1032). Unfortunately, this fee statute is one-sided. For prevailing employees, attorney’s fees are recoverable unless special circumstances would make the award unjust. For prevailing employers, these fees are not recoverable unless the court finds that the plaintiff’s action was frivolous. Therefore, even the weakest of claims gets filed in the hopes of securing a settlement at virtually no risk to the plaintiff employee.
In light of this risk of FEHA actions, employers should implement anti-discrimination and harassment policies and trainings and promptly address complaints before a claim can be filed. In addition, we have recently seen an increase in claims of harassment and discrimination from the LGBTQ+ community, so training about sensitivity to LGBTQ+ issues can be helpful.
#2. Independent Contractor vs. Employee
Another critical issue for California employers is correctly classifying workers as either employees or independent contractors. Though many employers seek to avoid the costly burdens of payroll taxes, workers compensation insurance, and benefits such as health insurance retirement plans and compliance with California’s ever-changing sick leave laws by hiring independent contractors instead of employees, there are many expensive risks. With Assembly Bill 5 (AB 5), the “ABC” test described in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018) became statutory law, and there is now a heavier burden on employers to establish the classification of workers as independent contractors. What used to be a balancing test of many factors to create an independent contractor relationship has now been limited to three characteristics which the employer must establish: (A) the worker is free from control and direction in the performance of their work; (B) the worker performs work outside the usual course of the hiring entity’s business; and (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. The most difficult factor to overcome is (B), since employers can no longer engage independent contractors to work on “regular” business matters. For example, a bakery can hire a plumber as an independent contractor, but a baker or cashier must be hired as an employee. Misclassification can lead to significant penalties, including back wages, taxes, and fines. Employers should conduct a thorough review of their worker classifications and seek legal guidance if there’s any uncertainty.
#3. Exempt vs. Nonexempt
Another issue that requires review on a yearly basis is the classification of employees as exempt or nonexempt. Exempt employees are those who are not covered by the overtime pay and certain other labor law requirements under both federal law (Fair Labor Standards Act or FLSA) and California law (the California Labor Code). To be properly classified as exempt, an employee must meet both parts of a two-part test: (1) the salary test and (2) job duties test. In California, the minimum salary for an exempt employee must be at least twice the state minimum wage for full-time employment (40 hours per week). Thus, every time the minimum wage increases, so does the minimum salary threshold for exempt workers. For 2024, for employers with 26 or more employees, the minimum annual salary is $66,560, which will increase to $68,640 on January 1, 2025.
The duties test depends on whether the employee would fall under the following job category:
- Executive - The employee’s primary (more than 50%) duty must involve managing the business or a department, supervising at least two other full-time employees, and having the authority to make significant personnel decisions.
- Administrative - The employee’s primary duties must involve office or non-manual work directly related to management or general business operations, and they must exercise discretion and independent judgment on significant matters.
- Professional - The employee must be engaged in work that requires advanced knowledge in a field of science or learning, usually acquired through prolonged education (e.g., lawyers, doctors, accountants).
There are exemptions for certain employees, such as computer professionals, creative professionals, and outside salespersons, who have specific job descriptions. Misclassifying an employee as exempt when they should be nonexempt can result in significant legal consequences for employers, including liability for unpaid overtime, penalties, and damages. It's crucial for employers to correctly classify employees based on their duties and compensation structure.
#4. Wage and Hour
- One of the risks of misclassifying workers as exempt when they are nonexempt is the possibility of a wage and hour class action, the bane of every California employer’s existence. One reason for the high cost of these cases is another one-sided attorney’s fees statute in the California Labor Code, particularly §1194, which allows employees who successfully sue for unpaid minimum wages or overtime compensation to recover their attorney’s fees and costs. Employers cannot recover attorney’s fees under this section even if they successfully defend against the claim. Though this statute was enacted to encourage employees to assert their rights in the courts without the burden of potential legal costs and to deter employers from engaging in unfair employment practices, there are often bad faith filings in California since it is difficult to establish bad faith.
- We are seeing an uptick in cases involving the “regular rate of pay,” business expenses, off-the-clock work, and missed penalties for untimely or incomplete meal or rest breaks. For example, employers can have difficulty calculating the “regular rate of pay,” which is an employee’s total earnings (including non-discretionary bonuses, on-call pay, shift differentials, or commissions) divided by the total number of hours worked in a workweek or pay period. This “regular rate of pay” is the rate used to calculate overtime, as well as to pay California’s paid sick leave and meal/rest break premiums for nonexempt employees. Failure to calculate (and pay workers) correctly can lead to non-payment of wage claims that have an assessment of penalties on a pay-period basis. Claims of missed hours or incorrect payments can add up on a worker by worker/class basis.
#5. Private Attorneys General Act (PAGA)
Among the biggest changes in 2024 are the amendments to the PAGA enacted in SB92/AB 2288. These statutes reformed the PAGA in the following ways:
- PAGA Penalty Structure: The 2024 amendments to PAGA introduced potential caps on the total amount of penalties that can be imposed for certain types of violations: 15% of the penalties sought where an employer has previously taken “reasonable steps” to comply with the provisions identified in the notice and 30% of the penalties sought when the employer takes those steps within 60 days of receiving the notice. This change aims to limit the financial burden on employers and prevent excessive penalty amounts. Also, while PAGA retains the default $100 per employee/pay period penalty, there is no longer the $200 per employee/pay period successive violation penalty unless there has been a finding by the California Labor & Workforce Development Agency or a court that the employer’s conduct was malicious, fraudulent, or oppressive.
- PAGA Standing: The 2024 amendments modified the requirements for standing to bring a PAGA claim. The changes specify that employees must have worked in the job position or performed the work that is the subject of the claim within the one-year PAGA statute of limitations period, thus narrowing the scope of who can bring a claim.
- PAGA Settlement Distribution: The new amendments to PAGA adjusted how settlements are distributed among affected employees and the state. A larger proportion of settlements must go directly to affected employees, while reducing the share allocated to the state.
- PAGA Manageability: The new PAGA statute codified the California Supreme Court’s ruling in Estrada v. Royalty Carpet Mills, Inc. that courts may limit the evidence that can be presented at trial. It also authorizes courts to limit the scope of any claim filed to ensure the claim can effectively be tried and permits courts to consolidate or coordinate claims against an employer that are legally or factually overlapping.
The 2024 amendments to the PAGA statute represent a significant shift in California’s labor law landscape. These changes aim to balance the interests of employers and employees by addressing concerns about excessive penalties, increasing transparency, and modifying procedural aspects of PAGA claims. Employers and employees alike should stay informed about these updates to navigate the evolving legal environment effectively.
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