How Calif. Small Biz Can Navigate Evolving Employment Laws By Corinne Spencer and Brianna Pearlman (July 12, 2022) While California is home to some of the largest corporations in the world, California small businesses employ approximately 7.2 million people, or approximately 48.5% of the private workforce.
In fact, businesses with fewer than 20 employees have the largest share of small-business employment.
Unfortunately, this group of mom and pop employers that make up the backbone of the California economy are the most vulnerable to employment law violations because they may lack the resources or knowledge to protect themselves.
Often, these violations occur because employers are unaware of their legal duties, obligations and best practices to insulate their business.
Small-business owners not aware of legal developments may be missing out on additional protection and potentially subject to large-scale liability.
For instance, some small-business owners may not be fully informed about the potential implications of the U.S. Supreme Court’s June 15 decision in Viking River Cruises Inc. v. Moriana, which may strengthen the ability of arbitration agreements to protect employers from representative wage and hour claims under California’s Private Attorneys General Act.
But this is just one of many legal developments businesses both large and small must note.
This article will discuss five common employment-related errors for small companies — from arbitration missteps to wage and hour violations — and explore what employers can do to reduce risk in this ever-changing landscape.
1. Misclassification of the Workforce
Improper classification of the workforce exposes the employer to costly litigation, particularly for violation of wage and hour laws.
Misclassifying Employees as Independent Contractors
One of the most common mistakes made by small employers is misclassifying employees as independent contractors, particularly since it is less burdensome on the employer financially and physically at the outset.
However, in California, 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 workers’ 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 businesses may try to avoid the law by having independent contractor agreements between the hiring entity and a worker, the courts often reject these agreements and instead rely on their own tests.
The ABC Test
California courts have adopted the ABC test to determine whether a worker should be classified as an independent contractor or an employee. While the ABC test is not the only test used to determine a worker’s employment status, it is the most common and most likely to apply to small businesses.
The presumption in California is that a worker should be classified as an employee, rather than an independent contractor, unless all three of the following requirements are met:
- A for autonomy: The worker must be free from the control and direction of the hiring entity with regard to how the work is performed.
- B for business dissimilarity: The worker’s labor or services must fall outside the usual course of the hiring entity’s business.
- C for custom of the worker: The worker must be customarily engaged in an independent established trade, occupation or business of the same nature as that involved in the work performed.
Practically, the adoption of the ABC test has made it significantly more difficult for employers to properly classify workers as independent contractors rather than employees.
Thus, employers 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.
Misclassifying Nonexempt Employees as Exempt Employees
In addition to misclassifying employees as independent contractors, California small businesses sometimes tend to misclassify nonexempt employees as exempt employees, or employees that are not subject to the Fair Labor Standards Act’s wage and overtime provisions.
This misstep is based on an assumption that paying employees a salary — versus an hourly wage — qualifies the employee as exempt. Employers’ misconceptions of the law make them susceptible to violating wage and hour laws, and obligations.
As California requires employers to accurately track hours worked, pay overtime, and provide meal and rest breaks to its nonexempt employees, their misclassification implicates the employer’s failure to comply with these requirements.
With some exceptions, there are three requirements that must be met for an employee to be properly classified as an exempt employee:
- Minimum salary: The employee must be paid a salary that is at least twice the state minimum wage for full-time employment.
- Duties test: The employee’s primary duties must consist of administrative, executive or professional tasks.
- Independent judgment: The employee’s job duties must involve the use of discretion and independent judgment.
While these three requirements appear straightforward, each has its own technical aspect that must be observed, which can make classification challenging. An employer’s failure to properly classify an employee as exempt can lead to significant penalties and potentially class or representative action risk.
The cost of labor is significant for any business but cutting corners on classification to save money or effort is a substantial risk that exposes employers to civil, criminal and even personal liability. An audit of the workforce is a worthwhile exercise and expense.
2. Failure to Track Uninterrupted Meal and Rest Breaks for Nonexempt Employees
Small businesses tend to be more informal when it comes to tracking their employees’ hours, meals and rest periods.
Some employers allow their employees to take meal periods late or even skip meals so they can leave work early. Many business owners defer to the scheduling desires of their employees, and figure loyalty and good intention will prevent people from filing claims or lawsuits.
This false sense of security is an unfortunate commonality for small businesses. Many businesses learn the hard way that informal agreements and lax arrangements can lead to employee lawsuits.
For small companies, the greatest legal risk surrounding meals and breaks, other than ignorance of the law, is the failure to accurately track the meals and breaks. Some track time manually, which is generally less accurate than electronic timekeeping, which in turn gives rise to more human error and therefore liability.
As a reminder, nonexempt employees are entitled to receive uninterrupted meal breaks and rest breaks. Generally, for a typical eight-hour shift, employees are entitled to one uninterrupted meal break, and two uninterrupted rest breaks.
However, this can vary depending on the length of the employee’s shift, as demonstrated on the following chart:
Meal and Rest Breaks
|Shift Length||10-Minute Rest Breaks||30-Minute Meal Breaks|
|Less than 3.5 Hours||0||0|
|14+ Hours At least||4||2|
In order to comply with California’s stringent meal and rest break laws, an employer must relieve their employee of all work-related duties, relinquish control of the employee’s activities and allow them to take the entire break uninterrupted.
While an employer has no obligation to police meal breaks or ensure that the employee performs no work during the meal break, they may not prevent or discourage their employees from taking one.
If an employer fails to provide uninterrupted meal or rest breaks, or rather track those breaks, the employee may be entitled to one extra hour of pay — i.e., premium pay — at the employee’s regular hourly rate of pay, for a maximum of two penalty hours per day.
Further, as held in the recent May 23 California Supreme Court ruling in Naranjo v. Spectrum Security Services Inc., meal and rest period premium violations may trigger derivative wage statement and waiting time penalties.
This ruling should persuade small businesses to review their timekeeping and pay practices as expensive exposure can result from poor record-keeping.
3. Failure to Update Handbooks, Policies and Arbitration Agreements
Small businesses often prioritize operations and payroll over policies and paperwork.
However, outdated policies that violate the law expose businesses 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 small-business 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 small-business owners. 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 business owner should consider implementing them or updating them.
Of note, the recent U.S. Supreme Court decision in Viking River has refocused consideration on arbitration agreements because of the ruling that Private Attorneys General Act waivers are legal and can limit exposure on potential representative claims.
Businesses large and small should be reviewing whether arbitration agreements ought to be implemented with their employees.
Further, now that the Viking River decision is final, California employers should be on the lookout for the U.S. Court of Appeals for the Ninth Circuit decision in U.S. Chamber of Commerce v. Bonta, which will decide whether or not employers are banned from using mandatory arbitration agreements with their employees.
4. Failure to Invest in Human Resources Personnel or Consultants
Many businesses, 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 advisers has the potential to undermine a company’s profits 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.
5. Ignoring Agency and Regulatory Guidance
Many small employers are just simply unaware when it comes to compliance with employment laws.
However, ignorance of the law is not a valid defense if and when claims and/or lawsuits are filed. Accordingly, employers must stay ahead of the game by educating themselves on the constantly changing employment law landscape or risk costly litigation.
Small-business employers can turn to websites, including but not limited to those of the California Department of Industrial Relations, the U.S. Department of Labor, the U.S. Small Business Administration, and the California Department of Fair Employment and Housing.
As an example, the California Department of Industrial Relations website provides updates on the California Division of Occupational Safety and Health emergency temporary standards most recently as of May 6, which offer more relaxed guidelines on COVID-19 in the workplace.
Further, tracking updates from the governor’s office is a helpful practice to further understand bills and orders that may affect company business.
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 small employers avoid the “bury their head in the sand” approach when it comes to navigating California’s employment laws. Just because something has been done the same way for 20 years, or the employees chose the practice themselves, those businesses are not absolved of liability.
Rather, employers should be active participants and remain in the know on California’s broad employment law landscape. Otherwise, they expose themselves to costly litigation where ignorance of the law is never a valid defense.
Corinne Spencer is a senior employment counsel and chair of the labor and employment practice group and Brianna R. Pearlman is an associate at Pearlman Brown & Wax LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 Labor Code, § 3353.
 See, e.g., Cal. Code Regs., tit. 8, § 11150, subd. (2)(G).
 Toyota Motor Sales U.S.A., Inc. v. Superior Court (1990) 220 Cal.App.3d 864, 877 [“The agreement characterizing the relationship as one of ‘client — independent contractor’ will be ignored if the parties, by their actual conduct, act like ’employer — employee.'”].
 See, Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903.
 Labor Code, § 2775, subd. (b)(1)(A).
 Labor Code, § 2775, subd. (b)(1)(B).
 Labor Code, § 2775, subd. (b)(1)(C).
 See Labor Code, §512, subd. (a); Cal. Code of Regs., tit. 8, §§ 11010–11170 [wage orders of the California Industrial Welfare Commission].
 Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1040 [“The employer satisfies this obligation if it relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so.”].
 Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1040.
 The California Supreme Court on July 15, 2021, resolved a long-unsettled question of wage and hour laws, likely to the detriment of most California employers. In Ferra v. Loews Hollywood Hotel, LLC , the Court ruled that “the term ‘regular rate of compensation’ in section 226.7(c) has the same meaning as ‘regular rate of pay’ in section 510(a) and encompasses not only hourly wages but all nondiscretionary payments for work performed by the employee” as well. Thus, “premium pay for a noncompliant meal or rest period, like the calculation of overtime pay, must account for not only hourly wages but also other non-discretionary payments for work performed by the employee.” Of significance, Ferra applies retroactively, so employers should immediately audit pay practices to determine if true-up payments are necessary.
 See, e.g., Cal. Code of Regs., tit. 8, §§ 11010–11150, subds. 11(B). 14 T8CCR § 3203.
 Viking River Cruises, Inc. v. Moriana (2022) ___U.S.___ [___L.Ed.2d___].
 Chamber of Commerce of the United States v. Bonta (9th Cir. Feb. 14, 2022, No. 20-15291) 2022 U.S. App. LEXIS 4002.