United States: US Employment Litigation Round-Up For October 2018

Recent Cases And New Laws Affecting Employers

OSHA Issues Guidance Memorandum on Employer Safety Incentive Programs and Post-Incident Drug Testing

Regulatory Development: On October 11, 2018, the Occupational Safety and Health Administration ("OSHA") issued a guidance memorandum to its regional administrators and state designees clarifying the agency's position on workplace safety incentive programs and post-incident drug testing. In May 2016, OSHA published a final rule amending 29 C.F.R. § 1904.35 that, among other things, prohibits employers from retaliating against employees for reporting work-related injuries or illnesses. In the preamble to that rule and in other interpretive documents, OSHA explained that the prohibition against retaliation can apply to actions taken by employers in accordance with their workplace safety incentive programs and post-incident drug testing policies. However, OSHA provided little guidance to employers regarding how to determine when such actions would violate the anti-retaliation provision.

In response to a growing concern among employers regarding the May 2016 final rule, including what types of programs are permissible, OSHA's recent guidance memorandum emphasizes that the final rule "does not prohibit workplace safety incentive programs or post-incident drug testing." Rather, "[a]ction taken under a safety incentive program or post-incident drug testing policy would only violate 29 C.F.R. 1904.35(b)(1)(iv) if the employer took the action to penalize an employee for reporting a work-related injury or illness." In addition, OSHA provided specific examples of lawful workplace safety incentive programs and post-incident drug testing policies to assist employers in developing those programs and policies. For example, the memorandum explained that, in the case of safety incentive programs, "any inadvertent deterrent effect of a rate-based incentive program on employee reporting would likely be counterbalanced if the employer also implements elements such as: [a] an incentive program that rewards employees for identifying unsafe conditions in the workplace; [b] a training program for all employees to reinforce reporting rights and responsibilities and [that] emphasizes the employer's non-retaliation policy; [c] a mechanism for accurately evaluating employees' willingness to report injuries and illnesses." Likewise, "most instances of workplace drug testing are permissible" under the rule, including: (a) random drug testing; (b) drug testing unrelated to the reporting of a work-related injury or illness; (c) drug testing under a state workers' compensation law; (d) drug testing under other federal laws, and (e) drug testing to evaluate the root cause of a workplace incident that harmed or could have harmed employees, so long as the testing covers "all employees whose conduct could have contributed to the incident, not just employees who reported injuries."

Impact: Although OSHA 29 C.F.R. § 1904.35, as amended, does not prohibit safety incentive programs or post-incident drug testing policies, employers should ensure that their programs and policies do not discourage employees from reporting workplace injuries or illnesses. As OSHA explains, simply having a statement in a policy or program that the employer will not retaliate against an employee for reporting an injury or illness may not be sufficient if the policy or program otherwise deters employees from reporting. Accordingly, employers should review OSHA's guidance memorandum, including the specific examples of lawful policies and programs, in evaluating whether their policies and programs are likely to have a negative impact on employees reporting workplace injuries or illnesses.

Tenth Circuit Reaffirms That "Economic Realities" Rather Than Corporate Formalities Govern Independent Contractor Status

Decision: On October 3, 2018, the Tenth Circuit issued a decision in Acosta v. Jani-King of Oklahoma, Inc., in which it reversed the dismissal of the US Department of Labor's ("DOL") lawsuit against a janitorial company for misclassifying janitorial workers as independent contractors. Jani-King provided janitorial services to its customers by contracting with individuals, pairs of related individuals, or small corporate entities that were allegedly composed predominantly or entirely of individuals or pairs of related individuals to perform janitorial work on its behalf through franchise agreements. During the relevant period, Jani-King also began requiring its individual workers—both those already affiliated with Jani-King and those who were new—to form corporate entities, which would then become the named parties to the franchise.

The DOL filed suit against Jani-King, alleging that it misclassified the janitorial workers as independent contractors in violation of the Fair Labor Standards Act ("FLSA"). Specifically, the DOL asserted that based on the "economic realities test," the individuals who form corporate entities and enter franchise agreements as required by Jani-King "nonetheless personally perform the janitorial work on behalf of Jani-King" and are Jani-King's employees under the FLSA. The district court dismissed the complaint, holding that the DOL's complaint "ignores corporate forms" by imposing liability on Jani-King itself rather than the purported franchisees, none of whom was named as a defendant.

The Tenth Circuit reversed, explaining that employment status under the FLSA "is not limited to the contractual terminology between the parties or the way they choose to describe the working relationship." The fact that the workers themselves "are franchisees or have formed corporations does not end the inquiry"; rather, the court must conduct a proper assessment under the six-factor economic realities test to determine whether the individual workers are appropriately deemed Jani-King's employees or independent contractors, regardless of the contractual structure of their relationship.

Impact: Employers commonly use third-party corporate entities to secure services from independent contractors and rely on the existence of the separate corporate entity to ensure that the individual service providers are appropriately classified and treated as independent contractors. The Tenth Circuit's decision emphasizes that courts will look past the corporate structures themselves in assessing the "economic realities" of the relationship between the workers performing the work and the employer. If the "economic realities" suggest that the worker is in fact an employee, the existence of corporate intermediaries in the contractual relationship will not immunize the employer from liability under the FLSA. Thus, employers should independently assess and ensure that workers they retain through third-party corporate entities are appropriately classified.

California Appellate Court Rules That Dynamex Test Only Applies to Wage Order Claims

Decision: A California appellate court has ruled that the California Supreme Court's recent decision in Dynamex Operations West, Inc. v. Superior Court, which established a new test for determining whether to classify workers as an independent contractors, is limited to claims under the Industrial Welfare Commissions' Wage Orders. In Garcia v. Border Transportation Group, LLC, the plaintiff cab driver sued the defendant cab company alleging various wage and hour claims under the California Labor Code and California's Industrial Welfare Commission (IWC) Wage Order No. 9. The trial court dismissed the plaintiff's claims, concluding that the plaintiff was an independent contractor who simply leased a cab from the defendant.

On appeal, the California Court of Appeal for the Fourth Appellate District applied the Dynamex test to the Wage Order claims and held that the plaintiff's Wage Order-based claims should not be dismissed because the plaintiff worked exclusively for the defendant cab company and therefore was not "customarily engaged in an independently established trade, occupation, or business." However, the Court of Appeal also held that Dynamex applies only to claims based on the IWC Wage Orders, which use a broad definition of "employ" and are intended to extend protections to "the widest class of workers." Other wage and hour claims are still governed by the California Supreme Court's 1989 decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, which adopted a multi-factor test that focuses on whether the putative employer had the "right to control" the employee. The Court of Appeal thus upheld the trial court's dismissal of the plaintiff's Labor Code-based claims under Borello, holding that the plaintiff had not demonstrated that the defendant exercised control over his work.

Impact: After the California Supreme Court's employee-friendly decision in Dynamex, there has been some uncertainty about whether the Dynamex test applies to Labor Code claims as well as Wage Order claims. The Court of Appeal's decision in Garcia suggests that Dynamex may have a more limited impact than employers initially feared.

DOJ Argues Title VII Does Not Prohibit Discrimination Based on Gender Identity

Development: On October 24, 2018, the US Department of Justice ("DOJ") filed a brief in the US Supreme Court arguing that Title VII of the Civil Rights Act does not prohibit discrimination based on gender identity. The brief was filed in R.G. & G.R. Harris Funeral Homes, Inc. v. Equal Employment Opportunity Commission, a case originally brought by the Equal Employment Opportunity Commission ("EEOC") on behalf of a transgender employee whose employment was terminated because she planned to dress as a woman at work, which her funeral home employer considered to be a violation of its dress code. The Sixth Circuit ruled against the employer, concluding that discrimination against transgender individuals is sex-based discrimination prohibited by Title VII. The defendant has asked the Supreme Court to review the case.

The DOJ submitted its brief on behalf of the EEOC, but argued against the EEOC's previous position in the case, stating that "Title VII . . . does not apply to discrimination against an individual based on his or her gender identity." The DOJ reasoned that when Title VII was enacted, "sex" was understood as the "physiological distinction between male and female," and the funeral home's dress code did not create a disparate impact on one sex. However, the DOJ asked that the Supreme Court wait to grant certiorariuntil it has had the opportunity to consider whether Title VII applies to sexual orientation discrimination—an issue addressed in several other pending Supreme Court petitions.

Impact: The DOJ's brief demonstrates the impact of the attorney general's October 2017 announcement that the DOJ will no longer consider Title VII to prohibit discrimination based on gender identity. It also underscores the DOJ's sharp disagreement with the EEOC, which has continued to bring Title VII cases against employers for gender identity discrimination. Until the Supreme Court and other appellate courts provide more clarity on this issue, employers should consider reviewing their employment policies and hiring practices to ensure that they are treating transgender status as a protected category.

California Court of Appeal Holds That Individuals Can Be Personally Liable for Civil Penalties for Wage and Hour Violations

Decision: In Atempa v. Pedrazzani, the California Court of Appeal for the Fourth Appellate District recently held that individuals can be held personally liable for civil penalties under the California Labor Code. Two restaurant employees filed suit against their employer, Pama, Inc., and its owner, president, secretary and director, Paolo Pedrazzani, alleging wage and hour violations, including the failure to pay overtime and minimum wages. The employees sued on behalf of themselves and other alleged "aggrieved employees" pursuant to the Labor Code's Private Attorneys General Act of 2004 ("PAGA"). They sought to recover civil penalties under Labor Code sections 1197.1 and 558, which provide that an employer "or other person acting on behalf of an employer" who violates or causes a violation of those statutes "shall be subject to a civil penalty."

Following a bench trial, the trial court issued civil penalties against Pedrazzani individually as the "other person" who caused violations of the overtime and minimum wage statutes. The principal issue on appeal was whether, as a matter of law, "any individual other than the corporate employer can ever be found liable for civil penalties associated with statutory violations in the payment of wages . . . where . . . there is no allegation or finding that the corporate laws have been misused or abused for a wrongful or inequitable purpose." (Emphasis in original.) The Court of Appeal ruled that Pedrazzani could be personally liable for the civil penalties because sections 558 and 1197.1 authorize the labor commissioner to recover the civil penalties, and PAGA authorizes plaintiffs to recover the section 558(a) and 1197.1(a) civil penalties in place of the labor commissioner. The court explained that "[i]n California, the Legislature has decided that both the employer and any 'other person' who causes a violation of the overtime pay or minimum wage laws are subject to specified civil penalties." (Emphasis in original.) Neither of the statutes mentions the employer's business structure, the benefits or protections of the corporate form, or any potential reason or basis for disregarding the corporate form. "To the contrary . . . the business structure of the employer is irrelevant"; if there is evidence and a finding that a party other than the employer violates the overtime and minimum wage laws, "then that party is liable for certain civil penalties regardless of the identity or business structure of the employer."

In addition, the court held that the common law alter ego doctrine is "inapplicable" because the statutes "on their face" make Pedrazzani personally responsible for the statutory violations that he committed or caused to be committed as an "other person."

Impact: The Court of Appeal's decision serves as an important reminder for employers that compliance with wage and hour laws should be a primary concern. Under the decision, employees can hold individual owners, officers and agents personally liable for penalties associated with wage-and-hour violations, in addition to attorneys' fees and costs, without piercing the corporate veil.

Originally published 12 November 2018

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