- Under California Senate Bill (SB) 1162, changes were made to employers' existing obligations to submit pay data reports effective Jan. 1, 2023.
- The California Rights Department (CRD) on Jan. 19, 2023, issued additional guidance in the form of frequently asked questions (FAQs).
- CRD added new definitions and requirements in the FAQs constituting a sweeping expansion of the reporting requirements on Feb. 22, 2023. Pay Data Reports for 2022 are due to CRD on May 10, 2023.
Most California employers are required submit Pay Data Reports (PDR) to the California Rights Department (CRD) on an annual basis, with Senate Bill (SB) 1162 modifying the existing pay data reporting law, SB 973, by requiring employers to report labor contractors in addition to its employees (see Holland & Knight's previous alert, "California Expands Pay Data Reporting and Mandates Pay Scale Disclosures," Oct. 18, 2022). The statute defines labor contractors as "an individual or entity that supplies, either with or without a contract, a client employer with workers to perform labor within the employer's usual course of business."
CRD's Departure from Statute and Case Law
SB 1162 obligates labor contractors who perform labor within an employer's "usual course of business," but the statute does not elaborate on what the "usual course of business" might be. Furthermore, no regulations implementing the statute are currently in effect, and CRD's own frequently asked questions (FAQs) reports that "CRD intends to issue regulations implementing this statute consistent with CRD's existing regulations. (California Code of Regulations, Title 2, Division 4.1)." The lack of definitions and regulations left significant ambiguity as to whom might be a contractor working within an entity's "usual course of business."
Many hypothesized CRD would use the definition of "usual course of the hiring entity's business" which now governs independent contractor classification per Dynamex v. Superior Court, 4 Cal. 5th 903 (2018) and AB 5, see Cal. Lab. Code Section 2750.3. Under the Dynamex standard, those who perform work in the usual course of the hiring entity's business are "workers whose roles are most clearly comparable to those of employees[,] includ[ing] individuals whose services are provided within the usual course of the business of the entity for which the work is performed and thus who would ordinarily be viewed by others as working in the hiring entity's business and not as working, instead, in the worker's own independent business." The California Supreme Court went on to offer examples of when work is within the "usual course of business" and when it is not:
- Labor Is Outside of the Usual Course of the Hiring Entity's Business: when a retail store hires an outside plumber to repair a leak in a bathroom on its premises; when a retail store hires an outside electrician to install a new electrical line; when work involves the use of specialized equipment and special expertise the hiring entity does not possess
- Labor Is Part of the Usual Course of the Hiring Entity's Business: when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company; when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes; when an art instructor teaches classes at a museum offering art classes on a regular basis; when an individual logger harvests trees and sells them to a sawmill under contract as the logging was "not merely incidental" to the sawmill's operations
CRD's Sweeping Interpretation as to Who Is a Reportable Labor Contractor
Rather than adopting codified definitions in California law or clear guidance from the California Supreme Court on what is and is not part of a hiring entity's usual course of business, CRD takes a completely opposite approach. CRD's Feb. 22, 2023, FAQ updates parrot the statutory definition ("A client employer's 'usual course of business' means the regular and customary work of the client employer") but blatantly expands the definition by further defining "regular and customary work." CRD defines "regular and customary work" to mean "work that is performed on a regular or routine basis that is either part of the client employer's customary business or necessary for its preservation or maintenance."1
Applying this vastly expanded definition, CRD offers the following examples of work that is part of the "usual course of business":
Example: Farmworkers contracted seasonally to pick fruit for a client employer's farm would be performing work within the client employer's usual course of business because the work is performed on a routine basis and is part of the client employer's customary business.
Example: Janitorial staff performing nightly cleaning and general maintenance of a client employer's premises would be performing work within the employer's usual course of business because the work is performed on a regular basis and is necessary for the maintenance of the client employer's customary business.
Work outside of the usual course of business includes:
Example: Catering staff contracted to serve food at a trucking company's tenth anniversary party would not be performing work within the client employer's usual course of business, assuming catering a party is an isolated occurrence for the company.
Example: Accountants hired to perform an external audit of a fitness company's financial statements would not be performing work within the client employer's usual course of business, assuming financial auditing is an isolated occurrence for the company.
Where Do We Go from Here?
Including work that is "performed on a regular basis and is necessary for the maintenance of the client employer's customary business" creates a nearly unlimited pool of who might be considered a labor contractor that must be reported. For example, under CRD's definition, a restaurant with persistent plumbing problems requiring frequent repairs by a plumber may well be a reportable labor contractor. Likewise, security guards at a construction site who are hired to keep trespassers out so work can continue could be reportable labor contractors for the construction company working at the site.
Companies that must submit PDRs should immediately examine whether their labor contractors are performing work in the "usual course of business" under CRD's expansive definition. CRD's statutory powers to compel production of records and fine employers are far-reaching – a $100 civil penalty per employee for failure to file a report, and $200 per employee for subsequent violations – in addition to statutory attorneys' fees.
It remains to be seen whether the PDR regulations ultimately promulgated include CRD's sweeping expansion in the FAQs, but with the PDR deadline fast approaching, employers should take caution and evaluate their contractor pools – and whether any contractors must be reported under the PDR – quickly.
1. CRD's definition of "regularly and customarily" also departs from how that term is defined under the FLSA – see 5 CFR 551.104 ("customarily and regularly means a frequency which must be greater than occasional but which may be less than constant. Tasks or work performed customarily and regularly includes work normally and recurrently performed every workweek. It does not include isolated or one-time tasks.").
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