The California Supreme Court dealt a severe blow to businesses, restricting the manner in which workers may be classified as independent contractors. On April 30, 2018, the Court issued a decision in Dynamex Operations West, Inc. v. Superior Court which significantly limits the ability to classify workers as independent contractors. Although the workers in the Dynamex decision were drivers, the ruling potentially impacts every industry.

Previously, California followed a multi-factor test which has now been replaced by a different standard referred to as the “ABC” test. Under the new analysis adopted by the Court, workers are presumed to be employees unless all of the following tests are met:

A. Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?

B. Does the worker perform work that is outside the usual course of the hiring entity’s business?

C. Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?

In its decision, the Court referenced that both federal and state governments have declared losing billions of dollars in tax revenue due to worker misclassification. As a result, employers can expect an increase in claims based on independent contractor classifications.

Businesses should conduct a review of their independent contractor arrangements to determine whether they meet the new ABC test. Contractor relationships that do not meet the test will require attention, which may include reclassifying workers. The manner in which reclassification is conducted should be given significant consideration to minimize the chance of a claim. Employers who misclassify employees face the potential for stiff fines and payroll tax obligations. Misclassification impacts additional areas as well, including the risk of claims for unpaid minimum wage, overtime, meal and rest break premiums, and benefits.

If you have independent contractors, it is a good time to work with an employment attorney to review those relationships, and reclassify workers if necessary in light of the Dynamex decision. Questions about how the ABC test affects your business may be directed to the employment attorneys at Ferruzzo & Ferruzzo, LLP. We are here to help.


California Supreme Court Ruling on Calculating Flat Sum Bonuses in Overtime Pay is Retroactive

March 2018

Most California employers are already aware that when they calculate an employee’s overtime rate, the employer must include all forms of pay made to the employee. Recently, the California Supreme Court issued an opinion clarifying how the overtime rate must be calculated when an employee is paid a flat sum bonus in a single pay period, when that flat sum bonus is not tied to an incentive for each hour the employee works.

In Alvarado v. Dart Container Corp. of California, the California Supreme Court determined that when calculating an employee’s regular rate of pay, the total compensation for the pay period must be divided by the number of non-overtime hours the employee worked, rather than the total number of hours worked by the employee. This ruling diverges from the federal formula, which uses a divisor of all hours actually worked by the employee in the pay period, including overtime hours.

Unfortunately for California employers, the Court made clear that its decision is retroactive. But in some positive news, the Court limited its opinion to flat sum bonuses like the one at issue in the Alvarado decision, where employees received a flat amount ($15 per day) as an attendance bonus to incentive employees to work on weekend shifts. The decision, therefore, is limited to flat sum bonuses similar to the attendance bonus discussed in the case. The Court stated that other types of non-hourly compensation, such as production or piecework bonuses or commissions, may warrant a different analysis.

As for the reason behind the court’s decision? The Court explained that California policy clearly favors an eight-hour workday/40-hour workweek, and that by requiring employers to pay premium wages for overtime, it creates an incentive for employers to hire more workers and a disincentive to increase the hours of existing workers. Ultimately, the Court stated that its decision was based on an obligation to discourage employers from imposing overtime work and favor the protection of employees’ interests.

Employers who pay non-exempt employees a flat sum amount in addition to an hourly rate are encouraged to speak with competent employment law counsel to review the manner in which overtime is calculated and paid, as well as their options in light of the California Supreme Court’s decision that the ruling is retroactive. Those interested in reading the California Supreme Court’s decision in Alvarado v. Dart Container Corp. of California may find it here:

New California Law Prohibits Employers from Inquiring About Salary History

Effective January 1, 2018, new California Labor Code section 432.3 makes it a violation of law to ask a job candidate about the compensation and benefits the candidate earned at the candidate’s prior position(s). An applicant may voluntarily disclose his/her prior salary history, as long as it is done without prompting or encouragement from the potential employer. If disclosed voluntarily, the employer may use this information for purposes of determining the salary and benefits that will be extended to the applicant.

Although, employers are prohibited from asking about salary history, an employer may still ask what compensation and benefits the applicant is seeking.

In addition, the new law permits applicants to ask a prospective employer to provide a salary range for the open position. Employers must provide an applicant with the pay scale for the position, when it is requested.

What should employers do now?

  • If you haven’t reviewed your employment application for compliance with state and federal laws, now is the time. Revise your application to remove any requests for salary history information. Including an inquiry such as, “Pay Desired” is still permissible.
  • Prepare in advance before posting and advertising your open positions. Determine your pay ranges for each position in the event you receive inquiries from applicants.
  • It is important to update your hiring process, particularly your screening and interviewing guidelines. Do not include questions about prior pay or benefits. You may inquire about compensation and benefits desired.
  • Provide guidance and training to your managers and supervisors on interviewing best practices. They will need direction on how to respond to applicant inquiries about pay. They will also need to be reminded not to ask questions about prior compensation and benefits, as well as trained on how to handle an applicant’s voluntary disclosure of his/her salary history.

The text of the new legislation may be found here:

Assembly Bill No. 168 CHAPTER 688

If you have questions about your hiring practices, you may contact the employment attorneys at Ferruzzo & Ferruzzo, LLP.

Top 8 Things a Small Business Should Do To Protect Itself From Employee Liability

Employee lawsuits are extremely active in California, and small businesses are not immune. Understanding and complying with employment laws is more important than ever. Following is a list of things a small business should be doing to reduce the chance of employee liability:

  1. Understand the difference between exempt and non-exempt, and pay employees accordingly. Employees are not exempt from state or federal overtime laws, unless one or more exemptions apply. Become familiar with the Wage Order that applies to your business and review the job duties of each position in your business to determine whether an overtime exemption applies. If an exemption doesn’t apply, the employee must be treated as a non-exempt employee entitled to overtime pay.
  1. Provide legally-compliant meal and rest breaks to non-exempt employees and implement good timekeeping practices. Employers must provide non-exempt employees who work more than five hours in a workday with a minimum 30-minute unpaid, uninterrupted meal break, starting no later than the end of the fifth hour of work. Each day that an employer fails to provide an employee with a meal or rest break, the employee is due a premium equal to one additional hour of pay at the employee’s regular rate. Failing to provide compliant meal and rest periods expose a business to a potential class action and Private Attorneys General Act (PAGA) lawsuit. Keep good records of the employee’s time worked, including the time the employee began and ended her meal period. Overtime pay should be accurate, the employee’s itemized wage statement must be accurate, and final wages must be paid at the time of termination.
  1. Know when to classify individuals as employees and not independent contractors. If the business controls how work is performed, the location where work is performed and supplies the tools to perform the work, this is a good indication the worker will not be viewed as an independent contractor. True independent contractors generally have an established business, perform work unrelated to the business, make their services available to other companies, and control the means and methods of work. Potential liabilities for misclassification include liability for unpaid payroll taxes, unemployment benefits, disability insurance, workers’ compensation claims, and wage and hour claims. Significant civil penalties may be imposed by state and federal agencies.
  1. Review pay practices, particularly when hiring new employees. The California Fair Pay Act applies to all employers no matter the size, and includes protections against wage discrimination based on sex, race or ethnicity for substantially similar work. Set salaries based on requirements, expectations and qualifications of the employee and not solely based on the person’s prior earnings.
  1. Check with state, local city and county governments for ordinances, including minimum wage and sick pay laws that may impact your business. If you have employees working in Northern California, and some Southern California cities including Los Angeles, Long Beach, Malibu, Pasadena and Santa Monica, you may need to revise your policies. Post and provide employee required federal, state, and local employment notices. Posters must be conspicuously displayed, easily seen and read by employees and applicants. If 10 percent or more of a company’s workforce speaks a language other than English, posters must be displayed in that language. Many of these posters and pamphlets are available in multiple languages on state and federal agency websites.
  1. Consider implementing arbitration agreements with class action waivers if you employ non-exempt employees. Having an enforceable arbitration agreement in place can mean the difference between an individual arbitration and a class action lawsuit. Although, the company is responsible for paying the arbitrator’s fees, if it is determined that the employee waived her right to participate in a class action, it is a significantly less risk and ultimate cost to the employer. Generally, the arbitration process is confidential and may reduce the possibility of negative publicity that may occur with litigation.
  1. Understand paid sick leave and other leave obligations. California law requires all employers to provide paid sick leave in an amount that is the greater of three days or 24 hours each year, including to part-time and temporary employees. Employers may elect to use an accrual method of at least one hour of paid sick leave for every 30 hours worked. Check local jurisdictions where your employees perform work, as paid sick leave laws in some local cities provide even greater employee benefits. Other California leave obligations for small businesses include pregnancy disability leave, leave under the Fair Employment and Housing Act and/or Americans with Disabilities Act, time off for jury duty, voting time leave, military service leave, school appearance leave, and others.
  1. Don’t ignore employee issues. Employee problems may seem to start small, but can escalate very quickly. When an employer learns of an employee complaint, address the issue head-on to diffuse the situation and investigate where necessary. Ignoring the problem generally doesn’t make it go away, and more often than not we find that if the issue was addressed early, the issue can be contained.

Resources for small business are available on federal, state and local websites such as the United States Department of Labor (DOL), the California Division of Labor Standards Enforcement (DLSE), the Employment Development Department (EDD), the Occupational Safety and Health Administration (OSHA), and the Small Business Administration (SBA). Competent employment law counsel can also interpret and serve as an additional resource for small business employers. Take steps to protect your business from employee lawsuits and learn the law. Prevention is key.

California Businesses Can’t Afford to Be Anything Less Than Vigilant About Employee Meal Break Rules


It happens time and time again. A client seeks counsel on a particular employment issue having nothing to do with a wage and hour claim. Yet, wage and hour concerns soon become the center of our discussion and the business realizes that potential wage and hour claims far overshadow the biggest employee issues the company thought it had.

Wage and hour class action lawsuits are as active as ever in California and the risk of wage and hour litigation forces many businesses to settle claims at a higher value than the underlying claim dictates. Businesses do this out of concern that if a claim gets too far, the haphazard timekeeping and non-compliant break issues that I see on a daily basis will come to light. But there is hope!

Business owners who educate themselves about California’s meal and rest break laws and who work hard to create compliant policies and procedures, while ensuring that those they’ve charged with implementing the policies and procedures are likewise educated, remain in the best defense position. But it doesn’t end there. Employers must be vigilant about reviewing time records every payroll period to ensure that there is follow-through, and that the policies and procedures that they’ve worked so hard to create are carried out.

As a refresher, here are the meal break rules for non-exempt employees in California…

  • If an employee works more than five hours in a day, s/he must receive a minimum 30-minute unpaid, uninterrupted meal break.
  • This meal break should start no later than the end of the fifth hour of work.

Start of Shift                 First Meal Period Should Begin No Later Than
8:00 a.m.                      12:59 p.m.
9:00 a.m.                      1:59 p.m.

  • If an employee works more than 10 hours in a day, s/he must receive a second unpaid, uninterrupted meal break of at least 30 minutes.
  • This second meal break must start no later than the end of the tenth hour of work.
  • Employees should not perform any work during the meal period and be free to leave the worksite.
  • Employees who work no more than six hours in a workday may voluntarily waive their first meal break.
  • Employees who work no more than 12 hours in a workday may waive their second meal break, as long as they took their first meal break.

Each day that an employer fails to provide an employee with a compliant meal period, the employee is due a meal break premium equal to one additional hour of pay at the employee’s regular rate. This payment must be included in the employee’s next paycheck.

Failure to pay a meal period premium can lead to more problems, including incurring potential waiting time penalties that are calculated at the employee’s daily rate of pay, multiplied by the number of days that the employee was not paid correctly, up to 30 days. The employee might also claim s/he received inaccurate wage statements, allowing the employee to seek up to $4,000 in penalties. Such violations also expose the Company to potential class action and Private Attorney General Act (PAGA) lawsuits which further aggravate the problems.

If you haven’t reviewed your timekeeping and break policies recently, or have been less than diligent about reviewing time records on a regular basis to ensure meal break compliance, every effort should be made so that it is a top priority.

Employers Must Include Most Bonuses and Commissions When Calculating Overtime Pay


Employers use commissions and bonuses to reward and retain their employees. However, when designing these incentive plans employers often don’t consider the impact they have on an employee’s overall compensation and the employer’s potential liability if wages, particularly overtime earnings, are not paid correctly.

The Fair Labor Standards Act (FLSA) and California wage and hour wage and hour law require employers to factor into the payment of overtime, most non-discretionary bonuses and commissions when computing a non-exempt employee’s overtime rate.

Non-discretionary bonuses and commissions are earnings that are tied to employee performance or production and are paid on a routine basis.  For example, if an employee earns $20.00 per hour plus a bonus based on the employee’s performance or the performance of the company, the overtime rate is not simply 1.5 times or 2.0 times the employee’s $20.00 hourly rate.  The bonus earned by the employee must be included in the calculation of the employee’s “regular rate of pay” for purposes of determining the overtime premium that was earned during the work hours in which the employee earned the bonus.  Purely discretionary bonuses that are not tied to work or production, such as a holiday bonus, are not included when calculating overtime pay.

The Department of Labor publishes a helpful tutorial on how to calculate overtime pay when non-discretionary bonuses are earned.  The Department of Labor’s tutorial may be found here (Note: The DOL’s examples reflect federal law.)  Employers may also wish to consult an employment attorney regarding overtime rate calculations when they offer non-exempt employees bonuses or commissions, as these calculations are often complicated.

New Federal Law Implementing Paid Sick Leave for Some Federal Contractors Effective January 1, 2017

By Colleen M. McCarthy, Esq.

October 2016

The U.S. Department of Labor published its Final Rule on September 30, 2016 granting paid sick leave to certain employees of federal contractors and subcontractors covered by the new law.  The Final Rule applies to certain new federal contracts and replacements for expiring contracts that result from solicitations issued on or after January 1, 2017, or that are awarded outside the solicitation process on or after January 1, 2017.  The Final Rule implements Executive Order 13706 signed by President Obama in September 2015.

There are four major categories of contractual agreements to which the new law applies:

  1. Procurement contracts for construction covered by the Davis-Bacon Act;
  2. Service contracts covered by the McNamara-O’Hara Service Contract Act;
  3. Concession contracts, including any concessions contracts excluded from the   McNamara-O-Hara Service Contract Act by 29 CFR 4.133(b); and
  4. Contracts in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public.  Certain narrow exclusions apply.

Any subcontract of a covered contract that falls into any of these four categories is also subject to the new paid sick leave requirements.  The Final Rule contains certain narrow exclusions from coverage, as well as a narrow exemption for employees who perform work necessary to the performance of a covered contract, but who are not directly engaged in performing the specific work called for by the contract, and who spend less than 20 percent of their work time performing work in connection with the contract.

An employee engaged in performing work on, or in connection with a covered federal contract (with narrow exception), must receive at least 56 hours of paid sick leave per year.  Employers may choose to offer the paid sick leave on an accrual basis, which provides one hour of paid sick leave for every 30 hours worked on, or in connection with, a covered contract, or the lump sum method which provides an employee with at least 56 hours of paid sick leave at the beginning of each accrual year.

Employees are entitled to carry over accrued but unused paid sick leave from one year to the next, but employers may limit the amount of accrued paid sick leave to a maximum 56 hours at any time. Employers are not required to payout unused sick pay at the time of termination.  However, if an employee is rehired by the same employer within 12 months, the accrued but unused time must be reinstated.

Employees may use paid sick leave for their own or for family care absences (including caring for the employee’s child, parent, spouse, domestic partner, or any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship), as well as absences resulting from domestic violence, sexual assault, or stalking.  Certification of the absence is permitted under some circumstances.

Employers must notify eligible employees of the amount of accrued and available paid sick leave in writing at the end of each pay period or each month, whichever interval is shorter.

The Department of Labor estimates that the new law will provide paid sick leave to 1.15 million workers.   Employers who contract with the federal government directly, or indirectly as a subcontractor, are encouraged to review the Final Rule and revise their paid sick leave policies before January 1, 2017 if necessary.  The U.S. Department of Labor’s Fact Sheet on the Final Rule is linked here