California has some of the most employee-friendly laws in the country. Even well-intentioned employers may unwittingly run afoul of our ever-evolving laws, suffering severe consequences. To help others avoid the same fate, we’ve put together this list of top 7 reasons employers get sued.
Mistake 1: Classifying Workers as “Independent Contractors” Because They Can’t Afford to Hire Them as Employees
In certain industries, like entertainment, it is common for workers to be misclassified as independent contractors so that employers can save money. This practice is ripe for litigation, with companies like Uber, Federal Express and Lyft being sued for misclassifying workers.
Misclassifying workers as contractors allows an employer to avoid several key tax and other payments, like minimum wage, overtime compensation, unemployment insurance taxes, and Social Security and Medicare contributions (FICA taxes). Contractors are also not entitled to share in company benefit programs, like health insurance, 401k, paid vacation, family leave, and workers compensation.
Simply because an employee wants to be classified as a contractor or an employer issues him a 1099 does not make him an independent contractor. We discussed this topic at length in an article on Worker Misclassification, “Is My Assistant an Independent Contractor?” While contractor status does not have a fixed definition, the primary determining factor is degree of control.
An employer who misclassifies employees as contractors risks significant penalties and back wages, such as back pay for overtime, penalties for failure to pay overtime and provide meal and rest breaks.
Mistake 2: Using Non-Compete Agreements for Employees of All Levels to Protect Confidential Information
More employers, across industries, have begun to require employees to sign Non-Compete Agreements in an effort to keep them from working for competitors and sharing trade secrets. However, many companies are using these agreements to prevent even low-level employees like fast food workers from working for their competitors.
In California, Non-Compete Agreements are strictly prohibited except in very limited situations. California limits the reach of Non-Compete Agreements because they infringe upon an employee’s ability to work and earn a living. There are other ways companies can protect trade secrets besides using unenforceable Non-Compete Agreements.
Mistake 3: Refusing to Give Employees Their Final Check Unless Certain Conditions are Met
It is not uncommon for an employee who is terminated or quits to fail to return company property, such as laptops, cell phones or tools. While holding the final paycheck until such items are returned may seem reasonable, such actions carry huge penalties if the paycheck deadline is not met.
If an employee is terminated or quits and gives at least 72 hours’ notice, the final paycheck must be ready on the last day of work. If an employer terminates an employee on the spot, the final paycheck is due, immediately that day, and must include payment for all hours worked through the last day, including any overtime, and any accrued and unused vacation. An employee who quits without giving at least 72 hours’ notice must receive her final check within 72 hours of quitting. There are no exceptions to these rules.
If the final paycheck is not provided to an employee, as legally required, then waiting time penalties that are payable to the employee begin to accrue. The penalty equals one day of wages for each day the check is late (by counting calendar days, not business days), up to 30 days. Failure to provide the final paycheck in a timely manner can quickly become very costly for an employer.
Mistake 4: Classifying All Employees as Exempt, Whether They Are or Not
Improperly classifying workers as exempt can quickly lead to significant wage and hour penalties, as many companies in the restaurant industry have discovered.
Under federal and state law, there are two types of employees: exempt (not paid overtime, not entitled to meal and rest breaks) and non-exempt (entitled to overtime pay, meal and rest breaks).
An exempt employee is usually paid a specific annual salary regardless of the number of hours worked in a week, and is classified as a manager or other high-level executive, professional, or administrative employee. Some artists or outside sales staff may even be exempt.
Non-exempt employees include the rest of the employee spectrum, who receive hourly pay (even if it is annualized) for all hours worked in a pay period, including overtime. An employee may be paid an annual salary and have a fancy job title, but still be non-exempt.
Some employers will sometimes classify an employee as management, when the employee does not in fact manage anyone, all in an effort to avoid paying overtime. In California, to be a manager, an employee must manage at least two people, more than 50% of her work must be managerial, and she must be able to hire and fire other employees.
If an employee is misclassified as exempt, it is likely that his employer is not tracking the actual hours worked, which is a wage and hour violation. The wages and penalties an employer will be responsible for include back pay for overtime, penalties for failure to pay overtime and provide meal and rest breaks, just to name a few.
Mistake 5: Implementing a “Use it or Lose it” Vacation Policy
California law prohibits a “use it or lose it” vacation policy. An employee’s accrued vacation is a form of wages and cannot be taken away. When an employee is terminated or quits, any and all unused but accrued vacation must be paid out at the current rate of salary.
Employers are allowed, however, to place a reasonable cap on the amount of vacation time that may be accrued. While “reasonable” is open to interpretation, it is not unusual for an employer to cap it at one and half to two times the annual accrual.
For example, if an employer provides for two weeks’ accrued vacation per year and two times the annual accrual, then the accrual would be capped at four weeks. If an employee has four weeks of accrued but unused vacation time, the accrual would cease until such time as the employee uses some vacation time and falls below the cap.
Mistake 6: Terminating Employees Who Take a Leave of Absence , No Matter the Reason
An employee’s job is legally protected when that employee takes a leave for any number of reasons, including pregnancy, disability, worker’s compensation, family and medical leave, military leave, jury duty, etc. Also, since July 1, 2015, employees in California have the right to accrue and use paid sick leave.
The law also protects employees from retaliation for taking a leave. If an employee is terminated while he is on a protected leave or soon after he returns to work, the employer will have the burden of proving that the termination was for a legitimate, non-discriminatory business reason, unrelated to the protected leave.
Mistake 7: Paying Employees a Commission Without a Written Agreement
Many employers are unaware that, since January 1, 2013, California law requires employers to provide a written commission agreement to all employees who provide services in California and are paid a commission, regardless of whether the commission represents all or a portion of an employee’s compensation.
The written agreement must explain the method by which the commissions will be computed (e.g., a percentage of profits), how commissions are earned (e.g., when employer is paid by customer), and when they are paid. The commission agreement must be signed by the employer and a copy provided to the employee. The employer must also obtain a signed receipt of the agreement from the employee acknowledging both receipt of, and agreement with, the commission program.
While there is currently no penalty for failure to comply, lack of a written agreement can lead to a disagreement among the parties that may only be settled by costly litigation.
Please know that this list is not exhaustive and there are many other areas that can lead to employment litigation. Year end is the perfect time to evaluate the legality and viability of your current employment practices. To determine if any of these practices affect your business, please do not hesitate to contact us.
This article was also featured in Legal Ink Magazine.