Legal News & Tips

Good Faith Exception Applies to Penalties for Wage and Hour Violations

March 13, 2023 By Israel Samuels LLP Leave a Comment

By law, California employers who unlawfully make an employee work during all or part of a meal or rest period must pay the employee an additional hour of pay. In 2019, in the case of Naranjo v. Spectrum Security Services, Inc. (2019) (Naranjo II), the California Court of Appeal held that this extra pay for missed breaks (commonly referred to as “premium pay”) does not constitute “wages” that must be reported on statutorily required wage statements during employment) and paid within statutory deadlines when an employee leaves the job. The Supreme Court reversed this portion of Naranjo II holding, and concluded such premium pay constituted wages. The Supreme Court then remanded the matter to the Court of Appeal to resolve two issues (1) whether the trial court erred in finding Spectrum Security Services, Inc. (Spectrum) had not acted “willfully” in failing to timely pay employees premium pay which would bar recovery; and (2) whether Spectrum’s failure to report missed-break premium pay on wage statements was “knowing and intentional,” as is required for recovery of any penalty.

On remand, the Court of Appeal concluded (1) substantial evidence supported the trial court’s finding that Spectrum presented defenses at trial—in good faith—for its failure to pay meal premiums to departing employees and therefore, Spectrum’s failure to pay meal premiums was not “willful”; and (2) because an employer’s good faith belief that it is in compliance precludes a finding of a knowing and intentional violation of that statute, the trial court erred by awarding penalties, and associated attorneys’ fees.

Beware of placing too much reliance on the “good faith” belief exception created by the Court of Appeal as a bar to penalties for willful violations of wage and hour laws. Here, the issue was litigated, and the Supreme Court and Appellate Court differed on their application of the law thus affirming Spectrum’s good faith in not immediately paying premium pay or reporting it on wage statements.

Generally, the Courts have found an act to be willful if it was intentional. If you have any concern with how your business goes about assessing premium pay and other wage and hour requirements contact your employment or business attorney for his or her opinion.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

App-Based Driver and Delivery Business Workers are Classified as Independent Contractors – For Now

March 6, 2023 By Israel Samuels LLP Leave a Comment

In March, the California Court of Appeal in Castellanos v. State of California, issued an opinion that permits app-based driver and delivery businesses to properly classify workers as independent contractors.

The California Legislature’s codification of the holding in Dynamex (“AB5”), established a test to discern between employees and independent contractors. Workers are presumed to be employees with few exceptions. The consequence has been that it is nearly impossible for workers and businesses of any kind to lawfully engage with each other on an independent contractor basis and for businesses to retain independent contractors without incurring the risks of governmental audit and being deemed to have improperly classified workers resulting in significant reimbursements and penalties. Thus, application of AB5 has been the subject of extensive litigation.

In an action brought by the State of California against Uber and Lyft, the State claimed that these businesses violated AB5 by failing to classify their drivers as employees. In response, several app-based companies (including DoorDash and Instacart) asked California voters, in ballot measure Proposition 22, which passed in late 2020, to exempt app-based drivers and delivery businesses from AB5.

Despite Proposition 22, litigation over employee vs. independent contractor classifications continued. Those opposed to Proposition 22 contend that it is unconstitutional because it: (1) limits the State Legislature’s oversight of workers’ compensation for app-based drivers and delivery workers; (2) restricts these workers from collective bargaining; and (3) establishes an unachievable 7/8s majority vote to amend Proposition 22’s collective bargaining terms.

In Castellanos, a group of app-based drivers in California and the Services Employees International Union sought a writ of mandate, claiming Proposition 22 unconstitutionally limits the power of California’s legislature to govern by removing its abilities to grant workers the right to organize and give access to the state’s workers’ compensation program. The presiding California Superior Court judge agreed and ruled that Proposition 22 violates the California Constitution and is unenforceable, because it interferes with the state’s legislative authority and future ability to pass legislation. The Court of Appeal’s reversal of this ruling allows Proposition 22 to stand with the exception of its limitation on lawmakers’ ability to enact legislation that amends Proposition 22, such as allowing gig workers to unionize. On this issue, the Court of Appeal scuttled Proposition 22’s clause that restricts collective bargaining by workers because it invades the legislature and judiciary’s authority.

Although the opinion in Castellanos restores some rights for app-based driver and delivery businesses to classify workers as independent contractors, this is likely not the last word on the issue. The Castellano decision is fully expected to be appealed.

Before you decide to classify workers as employees or independent contractors it is essential that you discuss the matter on a worker-by-worker basis with a qualified California business and employment attorney.

Outside Salesperson Exemption Does Not Apply If Employer Controls Hours and Working Conditions

February 27, 2023 By Israel Samuels LLP Leave a Comment

In Espinoza v. Warehouse Demo Servs., Inc., the California Court Appeals addressed application of the Outside Salesperson Exemption that exempts workers from statutory overtime, minimum wage, and meal and rest break requirements.

In this case, Espinoza was an employee of Warehouse Demo Services (“Warehouse”), who worked in a Costco and performed demonstrations of products. Warehouse did not lease the space, but instead collected floor space rent on behalf of the companies whose products were demonstrated and then remitted payment on their behalf to Costco. Espinoza brought a class-action complaint alleging numerous Labor Code violations. Warehouse, however, argued that Espinoza fell within the outside salesperson exemption because she was engaged in selling outside of Warehouse’s place of business.

The trial court had held that Espinoza was covered by the exemption because Warehouse did not own or lease the site at which Espinoza worked. However, the Court of Appeals reversed. It held the correct inquiry is the extent to which the employer maintains control or supervision of the employee’s hours and working conditions. The Court of Appeals found Espinoza was assigned to work in a small, designated area at a fixed site; she was required to clock in and out for each shift; and she could not leave the area during her shift unless another employee relieved her, which does not comport with the purpose of the exemption. Therefore, Warehouse was determined to be liable to Espinoza, and potentially a class of employees of Warehouse similarly situated, for overtime, minimum wage violations, and meal and rest break violations.

Before you rely on the Outside Salesperson Exemption and do not pay statutory overtime, do not comply with the minimum wage laws, and/or do not require meal and rest breaks, discuss the matter with your legal counsel to ensure the Exemption will apply.

If All Requirements Are Met, Real Estate Agents are Independent Contractors as a Matter of Law

February 20, 2023 By Israel Samuels LLP Leave a Comment

In a recent case, a real estate agent brought a PAGA suit against his real estate brokerage. The Agent alleged that the brokerage’s real estate agents were misclassified as independent contractors.

The Court of Appeal affirmed the trial court’s holding that Section 650 of the Cal. Unemp. Ins. Code, rather than the ABC test or Borello tests, was the proper test for classification of real estate agents because of Assembly Bill 5’s exemption for real estate licensees. Thus, real estate licensees are independent contractors if: (1) “substantially all” of their remuneration comes from sales; and (2) the written contract provides that the licensee is an independent contractor. The Court of Appeals explained this meant that the brokerage’s real estate licensees “as a matter of law” were independent contractors and not employees. The Court of Appeal rejected the Agents arguments that the statute was unconstitutional and that the contract was unconscionable. Because PAGA claims can only be brought by “aggrieved employee[s],” the claim was properly dismissed.

If you are a real estate broker, or have a brokerage with associated real estate agents, protect yourself and your business. Contact your business attorney to ensure your Real Estate Agent Agreements expressly state that your agents are independent contractors.

Mandatory Employee Arbitration Agreements Permissible

February 13, 2023 By Israel Samuels LLP Leave a Comment

Recently, the Ninth Circuit Court of Appeals ruled Assembly Bill 51 (AB 51) is preempted by the Federal Arbitration Act (“FAA”) and upheld a preliminary injunction that blocks California’s ban on mandatory arbitration in employment. Therefore, California employers may require mandatory arbitration agreements as a condition of employment.

The Court of Appeals held that “under California law, an employee can ‘consent’ to an employment contract by entering into it, even if the contract was a product of unequal bargaining power, and even if it contains terms (such as an arbitration provision) that the employee dislikes, so long as the terms are not invalid due to unconscionability or other generally applicable contract principles.

It is still possible California may choose to petition for the case to be taken up by the Ninth Circuit en banc or for review by the United States Supreme Court.

Based on the Ninth Circuit’s ruling, employers may require employees to sign arbitration agreements as a condition of employment. To decide whether to do so, and to ensure the arbitration agreement will be enforceable if they do, employers should consult with their business attorneys.

IRA Ownership of LLCs

February 6, 2023 By Israel Samuels LLP Leave a Comment

A recent phenomenon has been the advent of the IRA/LLC as a way for real estate investors and other investors who regularly invest in alternative assets with their retirement account.

An IRA/LLC is an investment structure whereby an IRA invests capital into a newly created limited liability company (“LLC”). The IRA owns the LLC units just like an IRA can own mutual funds or stock. Commonly an IRA/LLC is structured so that the IRA invests a designated amount of cash into the LLC in exchange for 100% of the membership units of the LLC. The LLC then, in turn, acquires the intended investment asset. For example, rental property. An IRA/LLC can also be formed with multiple IRAs owning the LLC with the ownership allocated between the different IRAs based on the amount each invested.

Self-directed IRA investors may prefer the IRA/LLC structure as it allows them to have signing control for the LLC to enter into contracts as well as access and signing authority on an LLC business checking account to more easily fund transactions and asset expenses.

When an IRA owns real estate the income and payments, as well as contracts and documents, flow through the IRA custodian. This requires interaction for instructions and authorizations for expenses or contracts with the custodian on the property. To avoid these interactions real estate investors may choose to use the IRA/LLC structure. The IRA owns the LLC, and the LLC, in turn, owns the real estate and operates the investments. The IRA owner can serve as manager of the LLC and, as manager of the LLC, the IRA owner has signing authority for the LLC for contracts and can use an LLC business checking account.

To establish an IRA/LLC, an investor must have a self-directed IRA account and a properly structured and restricted LLC. To ensure compliance, the IRA owner needs to operate the LLC in accordance with the laws affecting IRAs.

The first step is to create a self-directed IRA. A self-directed IRA is an IRA that can invest in any asset allowed by law. Common investments owned by self-directed IRAs are real estate, LLC, and LP interests, notes, private company stock, and VC/PE funds. Approximately 30 banks or trust companies, according to the Partnerships and Limited Liability Committee of the California Lawyers Association, offer self-directed IRAs. A self-directed IRA can be a traditional IRA, Roth IRA, or SEP IRA. The “self-directed” label means it can invest in assets off the public markets at the direction of the account owner. Most self-directed IRA accounts are funded by a transfer from an existing IRA at a brokerage to the new self-directed IRA account. Once the self-directed IRA account is established and funded with a transfer of cash from another retirement account, it is ready to invest into an alternative asset.

Once a self-directed IRA is established, then, the IRA must create a properly structured and drafted LLC. An IRA/LLC must be established as a manager-managed LLC and the manager may be the IRA owner so long as the operating agreement restricts certain actions that would violate the rules applicable to IRAs.

The federal tax code has significant restrictions on IRAs that limit with whom an IRA may transact business. These rules are known as the prohibited transaction rule. The rules will restrict the IRA owner from receiving compensation from the LLC and will restrict the LLC from transacting business with the IRA owner or persons disqualified associated with the IRA owner.

There are many ways the IRA/LLC structure if used incorrectly will be invalidated for tax purposes. In one case the IRA/LLC acquired precious metals which the IRA owner stored at his home. Precious metals can be owned by an IRA, however, the federal tax code requires that the metals be stored with a bank. The Tax Court ruled that the IRA owner violated the rules by storing the precious metals at his home and deemed the precious metals distributed.

In another tax court case the IRA owner was the manager of the IRA/LLC and took a salary for his services as manager. The Tax Court ruled that the salary to the IRA owner was a prohibited transaction and distributed the IRA.

IRA/LLCs are a popular and advantageous tool for self-directed IRA investors who need greater control in their investments. Real estate investors can benefit from an IRA/LLC by having easier transaction processes with the LLC and by having signing authority on an LLC business checking account.

If you have any questions about IRA/LLCs be sure to discuss them with a qualified business attorney.

Written Operating Agreements Essential for LLCs

January 24, 2023 By Israel Samuels LLP Leave a Comment

A Limited Liability Company (LLC) falls somewhere between a general partnership and a more formal corporation. It provides protection for individual members and offers significant tax incentives. Thus, LLCs are a common way to structure small businesses.

An LLC needs a strong operating agreement drafted with a specific understanding of small business needs. This contractual foundation is especially important for budding entrepreneurs. A well-drafted contract can mitigate some of the issues that new companies face.

An operating agreement is used by members or managers of an LLC. The operating agreement ensures that all of the rules are followed and that everyone understands how the company will proceed. An operating agreement for a limited liability company is, in essence, a contract. Except for a few statutory and modifiable rules, the drafter gets to design the majority of the rules that the entire company is to follow and abide.

One of the most important sections in the operating agreement is the capital contribution section. A capital contribution section usually addresses what happens if members fail to contribute their portion of the initial start-up capital. This section also addresses what happens if a member wants to withdraw their capital contributions, ownership of the assets in the company and whether or not the company can require additional contributions.

Many times, members want the ability to pull out money from their capital contributions. This can become a problem, where there is a large group of people pooling funds for a common purpose. If a member withdraws money at any time, it makes it difficult for the company’s management to make decisions such as purchasing real property, assets, taking on employees, etc. Management must then consider if the company can make such a significant financial commitment if members have the ability to constantly move funds out of the company. 5

The capital contribution section is also important if the Company owes money to a judgment creditor. It is possible that a charging order issues against their membership distributions. A clever manager of the Company might say that the member can pull out their capital contributions in the form of distribution. However in this case, if the LLC has protection in the operating agreement which explicitly states that members or managers do not have the authority to pull that money, the judgment debtor can find themselves in a better position.

An operating agreement should require that all assets acquired by the company be in the company name. This is to ensure that there is no dispute over the ownership of an asset, especially if there are many assets collected by the company and multiple members. This is usually done by either acquiring title in the name of the LLC or transferring title to the LLC shortly after purchase. Other times, an asset might be part of the capital contribution, if so, it is important to have clear ownership lines drawn.

Finally, the additional capital contribution clause is one that the drafter should make sure not to overlook. It is crucial for the drafter to understand each member’s financial position and ability to contribute additional funds should the need arise. If the drafter decides that the additional contribution clause is going to allow members or managers to request more contributions there should be a limit on the total capital contribution amount that can be requested in a certain period of time.

If you are creating an LLC, or have created a LLC, but do not have a written operating agreement, contact your business attorney and get one!

Members of an LLC Can Vote to Dissolve to Prevent Objecting Members from Purchasing their Interests

January 17, 2023 By Israel Samuels LLP Leave a Comment

In Friend of Camden, Inc. v. Brandt (2022) (“Brandt”) the California Court of Appeal for the Second District has answered the question whether, after the commencement of a dissolution lawsuit, does the affirmative vote of 50% of the members of a limited liability company to dissolve remove the objecting members’ right to purchase the initiating members’ ownership interest under Corporation Code Section 17707.03(c)?

Under Corp. Code §17707.03(c)(1), after a dissolution lawsuit has been filed, members opposing dissolution may avoid dissolution by purchasing the ownership interests of the members initiating the lawsuit, at fair market value (FMV). Should the parties be unable to agree on the FMV, the court, upon the application of the defendant, is required to stay the dissolution proceeding and establish the FMV. Once the court has granted defendant’s stay, plaintiff cannot prevent the buyout by dismissing the lawsuit.

In Brandt, plaintiff who owned a one-percent interest in a limited liability company (LLC) filed a lawsuit seeking judicial dissolution of the LLC. In response, defendants, the other members of the LLC who together held 50 percent of the membership interests, filed a motion to avoid the dissolution by purchasing plaintiff’s one-percent interest. In turn, plaintiff, together with other members owning 49 percent of the membership interests in the LLC, for a total of 50 percent, voted to dissolve the LLC 39 days prior to the hearing on defendant’s motion and the trial court’s eventual order imposing a stay. Thus, the issue in Brandt was whether plaintiff’s vote to dissolve the 4

LLC, after commencement of lawsuit and after defendants had filed their motion, extinguished defendants’ right to purchase plaintiff’s one-percent interest and avoid dissolution of the LLC.

The Brandt court held that since Plaintiff had voted to dissolve the LLC prior to the trial court’s issuance of a stay, the vote of 50 percent of the LLC membership interests to dissolve the LLC must be given effect and, thus, it instructed the trial court to dismiss the buyout proceeding as moot and direct the parties to wind up the activities of the LLC.

LLC Members have significant rights when it comes to involuntary dissolution of the LLC. If you are a member of an LLC divided with others over whether to continue to do business of the LLC, contact your business attorney to discuss how to best approach the situation.

Paying Employees On-Time

January 10, 2023 By Israel Samuels LLP Leave a Comment

On December 28, 2022, the California Third Appellate District in Parsons v. Estenson Logistics, LLC, addressed the timely payment of wages under California law.

Labor Code section 204, subdivision (d), provides that wages for employees who are paid weekly are deemed timely if paid “not more than seven calendar days following the close of the payroll period.” The question before the Court in Parsons was “what happens if the seventh calendar day falls on a Saturday?” 3

The Plaintiff employee Parsons argued the wages must be paid on that Saturday. The Defendant employer Estenson argued the wages may be paid the following Monday, because Code of Civil Procedure section 12a provides that weekends are holidays, and further provides, “If the last day for the performance of any act provided or required by law to be performed within a specified period of time is a holiday, then that period is hereby extended to and including the next day that is not a holiday.”

The trial court agreed with Estenson and granted summary judgment in its favor on a wage and hour claim brought by Parsons. The Court of Appeals affirmed.

If you pay weekly wages and the seventh day after the close of the payment period falls on a Saturday, payment need not be made until Monday. However, check with your business attorney as this is one decision by an Appellate Court that may be challenged in other Appellate jurisdictions by employee rights groups.

Pay Scale Disclosure Law Guidance

January 3, 2023 By Israel Samuels LLP Leave a Comment

In late December 2022, the California Labor Commissioner’s office released guidance in the form of Frequently Asked Questions (“FAQs”) on the state’s new pay scale disclosure requirements under the Equal Pay Act, which went into effect on January 1, 2023.

The FAQs identify which employers will be subject to the pay disclosure requirements and the content of the mandatory disclosures.

Under Labor Code 432.3, “an employer with 15 or more employees must include the pay scale for a position in any job posting.” According to the FAQs, the Labor Commissioner will count employees using the same methodology applied for Supplemental Paid Sick Leave using the definition from Labor Code 1182.12. Therefore, the disclosure requirements apply if an employer has at least one employee located in California, so long as it employs “directly or indirectly, or through an agent or any other person” 15 or more people.

The FAQs also indicate if a position can be filled in California, either remotely or in person, then the pay scale must be included in the job posting.

A pay scale is limited to the “salary or hourly wage range the employer reasonably expects to pay for a position.” A set hourly rate or set piece rate may be included in place of a pay scale if an employer “intends to pay a set hourly amount or a set piece rate amount, and not a pay range.”

Bonuses, tips, and other benefits are not required to be included in the pay scale. Employers may voluntarily provide information on “compensation or tangible benefits provided in addition to a salary or hourly wage.” However, according to the Labor Commissioner, “other forms of compensation may be considered for equal pay purposes.”

Where wages are based on a piece rate or commission, the employer must include the piece rate or commission range the employer reasonably expects to pay for the position.

The Labor Commissioner’s guidance clarifies that employers cannot link to the salary range in an electronic posting or include a QR code in a paper posting. The pay scale must be included on the posting itself.

The Equal Pay Act also requires that employers keep records of a job title and wage rate history for each employee for the duration of the employment plus three years after the end of the employment. These records are open to inspection by the Labor Commissioner, which will then use to determine whether there is a pattern of wage discrepancy.

All job postings posted on or after January 1, 2023, must contain the required pay scale information. Employers must carefully review job postings before they are published. Failure to comply may subject the employer to penalties ranging from $100 to no more than $10,000 per violation.

The best approach is to vet your job listings with your business or employment attorney before they are published to assure compliance and to obtain answers to any related pay transparency questions you, as an employer, may have.