Staying in the Loop: How California’s Public Sector Can Protect Itself Amidst Ever-Evolving Employment Laws

As people are returning to the workforce, California is aggressively adding jobs. For example, the state’s unemployment rate plummeted to a new low of 3.9% in July 2022. With the addition of jobs and employees, public sector organizations need to remain vigilant and stay up-to-date on the pertinent federal and state employment laws. This article will discuss four common employment-related errors for employers and explore what government entities can do to reduce risk in this ever-changing landscape.

Number One: Misclassification of the Workforce

Improper classification of the workforce exposes the employer to costly litigation, particularly for violation of wage and hour laws.

One of the most common mistakes employers make is misclassifying employees as independent contractors, particularly since it is less burdensome on the employer financially and physically at the outset. However, this misclassification can lead to a plethora of problems, as employees are entitled to many legal rights and protections that independent contractors are not, including but not limited to worker’s compensation benefits, meal and rest breaks and overtime pay.

Independent contractors are often self-employed and are generally free to work on multiple projects at the same time. They can choose when, where and how they perform the work. Employees, on the other hand, are generally subject to a high degree of control over their wages, hours and working conditions. While some organizations relied on having “Independent Contractor Agreements” between the hiring entity and a worker, the courts often reject these agreements and instead rely on their own test.

Federal courts have adopted the economic reality test to determine whether a worker should be classified as an independent contractor or an employee. However, as there has been confusion over the interpretation of the factors, on Jan. 6, 2021, the U.S. Department of Labor, under the prior administration, proposed a rule to clarify the economic reality test. The test provides five factors:

1. The nature and degree of the individuals’ control over the work.
2. The “opportunity for profit or loss” factor.
3. The “skill required” factor.
4. The “permanence of the working relationship” factor.
5. The “integrated unit” factor.

The clarification of the interpretation of the independent contractor status under the Fair Labor Standards Act (FLSA) was designed to promote certainty for stakeholders, reduce litigation and encourage innovation in the economy.

Notably, this economic reality test is now generally applicable across all industries. However, the DOL is challenging this rule and economic reality test and is appealing the decision in Coalition for Workforce Innovation, et al. v. Walsh E.D. Tex., No. 1:21-cv-00130. In light of the litigation and political tension surrounding this issue, public sector employers need to carefully track the relevant independent contractor criteria. They must be confident in their analysis before classifying any worker as an independent contractor and should err on the side of employee if there is any doubt.

In addition to misclassifying employees as independent contractors, businesses sometimes tend to misclassify non-exempt employees as “exempt” employees, or employees that are not subject to the FLSA’s wage and overtime laws. This misstep is based on an assumption that paying employees a salary (versus an hourly wage) qualifies the employee as exempt.

An employer’s misconception of the law makes them susceptible to violating wage and hour laws and obligations. As federal law requires employers to accurately track hours worked, and pay overtime to its non-exempt employees, their misclassification implicates the employer’s failure to comply with these requirements.

Number Two: Failure to Update Handbooks, Policies and Arbitration Agreements

Employers often prioritize operations and payroll over policies and paperwork. However, outdated policies that violate the law expose organizations to liability, and sometimes even class or representative actions. Failure to monitor and update policies, at least yearly, can be an expensive mistake.

For instance, all California employers are required to develop and implement an effective Injury and Illness Protection Program to protect the health and safety of an employer’s workforce. Yet, many employers are still unaware of this important regulation. Accordingly, their ignorance of the law exposes them to violations associated with their failure to provide a safe and healthy work environment.

Arbitration agreements, for alternative dispute resolution of employment claims, tend to be overlooked by smaller organizations. While these agreements have their pros and cons, and require individualized review, such agreements can help reduce the risk of costly litigation in court and every organization should consider implementing them or updating them.

Of note, the recent U.S. Supreme Court decision in Viking River Cruises Inc. v. Moriana has refocused consideration on arbitration agreements because of the ruling Private Attorneys General Act waivers are legal and can limit exposure on potential representative claims. Public entities, large and small, should be reviewing whether arbitration agreements ought to be implemented with their employees.

Number Three: Failure to Invest in Human Resources Personnel or Consultants

Many organizations, small and large alike, focus hiring efforts and compensation on strong performers from a productivity standpoint. However, the failure to invest in high-quality human resources personnel or advisors has the potential to undermine an entity’s productivity and reputation with a single claim. Payroll companies and some insurance carriers, under an employment practices liability insurance policy, offer resources and hotlines to mitigate risk, but in-house personnel are ideal.

Number Four: Ignoring Agency and Regulatory Guidance

Some decisionmakers are just simply unaware when it comes to compliance with employment laws. However, “ignorance of the law” is not a valid defense if/when a claim(s) and/or lawsuit is filed. Accordingly, employers must stay ahead of the game by educating themselves on the constantly changing employment law landscape or risk costly litigation.

Public sector employers can turn to websites, including but not limited to the California Department of Industrial Relations, Occupational Safety and Health Administration (OSHA), Cal/OSHA, and the DOL. The FirstStep Poster Advisor is a helpful tool to stay up to date on federal DOL poster requirements. Employers can also educate themselves by becoming members of online organizations or subscribing to various newsletters. Continuing education should be a critical component of any employer’s practice to identify, prevent, and mitigate risk.

In short, it is imperative that public sector officials avoid the “bury their head in the sand” approach when it comes to navigating California and federal employment laws. Rather, employers should be active participants and remain in the know on the broad employment law landscape by investing in reliable resources and advisors. Otherwise, they expose themselves to costly litigation where ignorance of the law is never a valid defense.