Employees Entitled to Compensation for Business Use of Personal Cell Phones Regardless of Plan Terms -- Cochran v. Schwan's Home Services, Inc.

California law requires that employers must reimburse workers for all "necessary expenditures" incurred in performing their jobs.  But what if the employee has already purchased an item for his own personal use and can continue using it for his employment at no extra cost.  Does the employer still have to pay for the benefit of using the employee's property?   

The Second District Court of Appeal held in Cochran v. Schwan's Home Services, Inc., that -- at least in the context of cell phone usage -- the answer is "yes."

In Cochran a group of employees claimed that they were owed reimbursement for business-related calls made on their personal cell phones.  In opposing class certification, the employer argued that “many people now have unlimited data plans for which they do not actually incur an additional expense when they use their cell phone."  As a result, the employer claimed that "determin[ing] whether an expense was incurred . . . will require an examination of each class member's cell phone plan.”  The appellate court rejected this argument.  

Instead, the court explained:

If an employee is required to make work-related calls on a personal cell phone, then he or she is incurring an expense for purposes of section 2802. It does not matter whether the phone bill is paid for by a third person, or at all. In other words, it is no concern to the employer that the employee may pass on the expense to a family member or friend, or to a carrier that has to then write off a loss. It is irrelevant whether the employee changed plans to accommodate worked-related cell phone usage. Also, the details of the employee's cell phone plan do not factor into the liability analysis. Not only does our interpretation prevent employers from passing on operating expenses, it also prevents them from digging into the private lives of their employees to unearth how they handle their finances vis-a-vis family, friends and creditors. To show liability under section 2802, an employee need only show that he or she was required to use a personal cell phone to make work-related calls, and he or she was not reimbursed. Damages, of course, raise issues that are more complicated.

Thus,

We hold that when employees must use their personal cell phones for work-related calls, Labor Code section 2802 requires the employer to reimburse them. Whether the employees have cell phone plans with unlimited minutes or limited minutes, the reimbursement owed is a reasonable percentage of their cell phone bills.

The exact calculation of reimbursement amounts was left to the trial court on remand.  But the ruling suggests that dividing the total plan cost by the proportion of minutes devoted to business use would be a proper rate of reimbursement.   

Of course, the logic of Cochran could be applied to any personal items that an employee may use for both personal and work purposes -- for example, tools, car insurance, computers, Internet access, or even a home office.  Cochran thus strongly suggests that employers may have a duty to reimburse the "reasonable percentage" of such costs which corresponds to the proportion of their use for work.    

 

 

Employees Entitled to Compensation for Business Use of Personal Cell Phones Regardless of Plan Terms -- Cochran v. Schwan's Home Services, Inc.

California law requires that employers must reimburse workers for all "necessary expenditures" incurred in performing their jobs.  But what if the employee has already purchased an item for his own personal use and can continue using it for his employment at no extra cost.  Does the employer still have to pay for the benefit of using the employee's property?   

The Second District Court of Appeal held in Cochran v. Schwan's Home Services, Inc., that -- at least in the context of cell phone usage -- the answer is "yes."

In Cochran a group of employees claimed that they were owed reimbursement for business-related calls made on their personal cell phones.  In opposing class certification, the employer argued that “many people now have unlimited data plans for which they do not actually incur an additional expense when they use their cell phone."  As a result, the employer claimed that "determin[ing] whether an expense was incurred . . . will require an examination of each class member's cell phone plan.”  The appellate court rejected this argument.  

Instead, the court explained:

If an employee is required to make work-related calls on a personal cell phone, then he or she is incurring an expense for purposes of section 2802. It does not matter whether the phone bill is paid for by a third person, or at all. In other words, it is no concern to the employer that the employee may pass on the expense to a family member or friend, or to a carrier that has to then write off a loss. It is irrelevant whether the employee changed plans to accommodate worked-related cell phone usage. Also, the details of the employee's cell phone plan do not factor into the liability analysis. Not only does our interpretation prevent employers from passing on operating expenses, it also prevents them from digging into the private lives of their employees to unearth how they handle their finances vis-a-vis family, friends and creditors. To show liability under section 2802, an employee need only show that he or she was required to use a personal cell phone to make work-related calls, and he or she was not reimbursed. Damages, of course, raise issues that are more complicated.

Thus,

We hold that when employees must use their personal cell phones for work-related calls, Labor Code section 2802 requires the employer to reimburse them. Whether the employees have cell phone plans with unlimited minutes or limited minutes, the reimbursement owed is a reasonable percentage of their cell phone bills.

The exact calculation of reimbursement amounts was left to the trial court on remand.  But the ruling suggests that dividing the total plan cost by the proportion of minutes devoted to business use would be a proper rate of reimbursement.   

Of course, the logic of Cochran could be applied to any personal items that an employee may use for both personal and work purposes -- for example, tools, car insurance, computers, Internet access, or even a home office.  Cochran thus strongly suggests that employers may have a duty to reimburse the "reasonable percentage" of such costs which corresponds to the proportion of their use for work.    

 

 

'Right to Control' and 'At-Will' Termination Are Keys to Employment vs. Independent Contractor Status -- Ayala v. Antelope Valley Newspapers, Inc.

Courts and agencies have traditionally invoked the familiar "multi-factor" common law test to distinguish between an employee and an independent contractor.  The trend over time, however, has been to focus ever more tightly on the single factor of who has "control" over the individual's work.  

In Ayala v. Antelope Valley Newspaper, Inc., the California Supreme Court has now made clear that the issue is even narrower than "control" -- it is the "right to control."   

As the parties and trial court correctly recognized, control over how a result is achieved lies at the heart of the common law test for employment. . . . Significantly, what matters under the common law is not how much control a hirer exercises, but how much control the hirer retains the right to exercise.

Thus, a company objecting that it has no history of micro-managing its workers may find that this argument carries little weight because, "That a hirer chooses not to wield power does not prove it lacks power." 

Rather, the "right" of control will inevitably flow from the rights set forth in the parties' contract.  It is extremely significant how Ayala formulates the litmus test for determining whether a contract creates a right of control.    

Whether a right of control exists may be measured by asking whether or not, if instructions were given, they would have to be obeyed on pain of at-will discharge for disobedience.

(Internal punctuation omitted).  The Supreme Court has thus essentially laid down a bright-line rule that a contractual power to fire at-will creates a corresponding right to control the performance of the work.

The newspaper delivery workers at issue in Ayala all had contracts providing the company with a "right to terminate the contract without cause on 30 days' notice."  The Court did not quite reach the merits.  However, it did reverse the trial court's denial of class certification on the ground that the contract terms might well negate the independent contractor status of the entire class.  This is a pretty strong indication that at-will termination is considered inconsistent with independent contractor status.

  

Finding of Independent Contractor Status for Tax Purposes is Binding for Wage and Hour Purposes -- Happy Nails & Spa v. Su

The legal determination of whether a worker is properly classified as an employee or an independent contractor triggers a variety of legal consequences under various statutes.  These include whether the employer is required to: (a) withhold and pay various federal and state payroll taxes;  and (b) whether the employer must comply with minimum wage, overtime and expense reimbursement under the California Labor Code or federal FLSA.  

These separate legal obligations are enforced by different governmental agencies which may each use slightly different tests for distinguishing between employees and independent contractors.  This could result in multiple prosecutions with different results -- e.g., that the same workers may be contractors for tax purposes but employees for wage payment purposes.  The Fourth District Court of Appeal opinion in Happy Nails & Spa of Fashion Valley L.P. v. Su, addressed this precise scenario. 

In 2004 the California Employment Development Department (the "EDD"), which is charged with collecting unemployment insurance taxes and paying benefits to employees, brought an action claiming that the manicurists at Happy Nails were employees subject to these provisions.  After an administrative trial an administrative law judge decided that they were properly classified as contractors.

In 2008, however, the Division of Labor Standards Enforcement ("DLSE"), which is charged with enforcing the California Labor Code and Wage Orders, brought its own action claiming the manicurists were  employees for purposes of the Labor Code. Despite the company's objection that the issue had already been decided the Labor Commissioner decided that Happy Nails was properly "subject to the civil penalties because the cosmetologists are employees, not independent contractors."    

The Appellate Court overturned this second decision however on the ground that it was barred by the result of the 2004 EDD determination.  In particular, the Court explained that different enforcement divisions of the same government are should be deemed to be in "privity" with one another.  Moreover, the independent contractor test used both agencies was essentially the same and, despite the passage of time, there had been no "material" changes in the facts.  Thus,

Giving preclusive effect to the Board's decisions [that the workers were independent contractors] fosters the integrity of both administrative and judicial proceedings. The California Supreme Court has held that “the possibility of inconsistent judgments which may undermine the integrity of the judicial system would be prevented by applying collateral estoppel to the [administrative] decision.”

The rule in Happy Nails will help employers avoid multiple challenges to the classification of their independent contractors.  But it is just as clearly a double-edged sword because an administrative determination that a contractor is misclassified will be equally binding in future actions for unpaid taxes or wages.  

In short, Happy Nails raises the stakes in administrative proceedings involving independent contractor status.           

Finding of Independent Contractor Status for Tax Purposes is Binding for Wage and Hour Purposes -- Happy Nails & Spa v. Su

The legal determination of whether a worker is properly classified as an employee or an independent contractor triggers a variety of legal consequences under various statutes.  These include whether the employer is required to: (a) withhold and pay various federal and state payroll taxes;  and (b) whether the employer must comply with minimum wage, overtime and expense reimbursement under the California Labor Code or federal FLSA.  

These separate legal obligations are enforced by different governmental agencies which may each use slightly different tests for distinguishing between employees and independent contractors.  This could result in multiple prosecutions with different results -- e.g., that the same workers may be contractors for tax purposes but employees for wage payment purposes.  The Fourth District Court of Appeal opinion in Happy Nails & Spa of Fashion Valley L.P. v. Su, addressed this precise scenario. 

In 2004 the California Employment Development Department (the "EDD"), which is charged with collecting unemployment insurance taxes and paying benefits to employees, brought an action claiming that the manicurists at Happy Nails were employees subject to these provisions.  After an administrative trial an administrative law judge decided that they were properly classified as contractors.

In 2008, however, the Division of Labor Standards Enforcement ("DLSE"), which is charged with enforcing the California Labor Code and Wage Orders, brought its own action claiming the manicurists were  employees for purposes of the Labor Code. Despite the company's objection that the issue had already been decided the Labor Commissioner decided that Happy Nails was properly "subject to the civil penalties because the cosmetologists are employees, not independent contractors."    

The Appellate Court overturned this second decision however on the ground that it was barred by the result of the 2004 EDD determination.  In particular, the Court explained that different enforcement divisions of the same government are should be deemed to be in "privity" with one another.  Moreover, the independent contractor test used both agencies was essentially the same and, despite the passage of time, there had been no "material" changes in the facts.  Thus,

Giving preclusive effect to the Board's decisions [that the workers were independent contractors] fosters the integrity of both administrative and judicial proceedings. The California Supreme Court has held that “the possibility of inconsistent judgments which may undermine the integrity of the judicial system would be prevented by applying collateral estoppel to the [administrative] decision.”

The rule in Happy Nails will help employers avoid multiple challenges to the classification of their independent contractors.  But it is just as clearly a double-edged sword because an administrative determination that a contractor is misclassified will be equally binding in future actions for unpaid taxes or wages.  

In short, Happy Nails raises the stakes in administrative proceedings involving independent contractor status.           

Employees Are Not Required to Exhaust Internal Expense Reimbursement Procedures Before Suing -- Stuart v. RadioShack

California employees have a right to be reimbursed for their work related expenses, such as business travel, equipment, materials, training, and even legal expenses.  On the other hand, companies typically have their own deadlines, rules, special forms, and  other procedural requirements which must be followed in order to request and receive reimbursement.

So what happens when an employee sues for reimbursement and the Company argues that his claim should fail because he did not make a proper request under its internal rules?

In Stuart v. RadioShack, the Northern District addressed this very question and held, in effect, that the requirements of the statute must override any internal reimbursement rules set by the employer. 

Indeed, California Labor Code section 2802 provides that "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties."  And Section 2804 further provides that "Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void." 

Thus, companies must reimburse employee expenses and the parties can't do anything to forfeit or limit these rights even if they wanted to.  According to the District Court, the employer's duty to reimburse expenses should be triggered by the same standard that applies in cases of "off-the-clock" work:

The Court concludes that a fair interpretation of [Labor Code] §§ 2802 and 2804 which produces “practical and workable results,” consistent with the public policy underlying those sections, focuses not on whether an employee makes a request for reimbursement but rather on whether the employer either knows or has reason to know that the employee has incurred a reimbursable expense. If it does, it must exercise due diligence to ensure that each employee is reimbursed.

The Bottom Line:  Employer's should continue to set internal deadlines and procedures for expense reimbursement.  However, they should also recognize that the failure to follow these procedures will ultimately not  be a defense to legal liability if they know or have reason to believe the expense was actually incurred.

Another Arbitration Agreement Containing A Class Action Waiver Found To Be Unenforceable

[In the interest of full disclosure – my firm represents Western Pizza in this case. Because of this, we are expressing none of our own analyses about the Court’s opinion, but are simply reporting the court’s findings.]

Octavio Sanchez works as a delivery driver for defendant. He filed a class action lawsuit alleging that the drivers not only are not adequately reimbursed for their expenses incurred in the performance of their job duties, but also as a result are paid less than the legal minimum wage. Sanchez signed an arbitration agreement that contained a provision that he would not participate in any class action litigation. Western Pizza filed a motion to enforce the arbitration agreement, which the trial court denied. Western Pizza appealed the lower court’s decision.

Western Pizza argued on appeal that:

  1. The enforceability of the arbitration agreement is a question for the arbitrator to decide;
  2. The Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) preempts California law to the extent that California law would prevent the enforcement of the agreement;
  3. The class arbitration waiver does not impermissibly interfere with the employees’ ability to vindicate their statutory rights, and therefore is enforceable;
  4. The terms of the arbitration agreement are neither procedurally nor substantively unconscionable.

The court, not the arbitrator decides the enforceability of the arbitration agreement

The court explained:

Accordingly, we conclude, consistent with the rule stated in Discover Bank, supra, 36 Cal.4th at page 171, that the question whether the arbitration agreement is enforceable based on general contract law principles, including the question whether it is unconscionable or contrary to public policy, is a question for the court to decide rather than an arbitrator, regardless of whether the FAA applies.

 

Federal Arbitration Act (FAA) does not preempt California law

The court held that under the FAA, the validity and enforceability of an arbitration agreement is governed by state contract law:

Under California law, the question whether an arbitration agreement is unenforceable, in whole or in part, based on general contract law principles is a question for the court to decide, rather than an arbitrator. (Discover Bank, supra, 36 Cal.4th at p. 171; Balandran v. Labor Ready, Inc. (2004) 124 Cal.App.4th 1522, 1530; see Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1365.) This includes the determination whether an arbitration agreement is unconscionable or contrary to public policy. (Discover Bank, supra, at p. 171.) Discover Bank concluded that the FAA, and particularly the opinion by the United States Supreme Court in Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444 [123 S.Ct. 2402], did not conflict with California law on this point and that the California rule therefore governs.

The Enforceability of the Class Arbitration Waiver

The court set out the factors established in Gentry v. Superior Court to determine whether the class action waiver is unenforceable:

Gentry stated that a trial court determining whether a class arbitration waiver impermissibly interferes with unwaivable statutory rights must consider: “[(1)] the modest size of the potential individual recovery, [(2)] the potential for retaliation against members of the class, [(3)] the fact that absent members of the class may be ill informed about their rights, and [(4]) other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.” Gentry continued: “If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘ vindicate [their] unwaivable rights in an arbitration forum.’

(citations omitted). The court found that these factors supports the lower court’s holding that the agreement was unenforceable: the amounts at issue for reimbursement are modest, retaliation against low wage earners is “significant,” and most of the drivers here are immigrants with limited English skills “who are likely to be unaware of their legal rights.”

Unconscionability Of The Agreement\

The court held that the arbitration agreement was distinguishable from the agreement used in Gentry:

The record here does not indicate a distorted presentation of the benefits of arbitration to the degree that was present in Gentry, supra, 42 Cal.4th 443. The arbitration agreement states that the purpose of the agreement is “to resolve any disputes that may arise between the Parties in a timely, fair and individualized manner,” but otherwise does not extol the benefits of arbitration. The arbitration agreement does not limit the limitations periods, the remedies available, or the amount of punitive damages. It states, “Except as otherwise required by law, each party shall bear its own attorney fees and costs,” and therefore incorporates any statutory right to recover fees rather than creating a presumption against a fee recovery. Thus, the arbitration agreement neither contains the same types of disadvantages for employees as were present in Gentry nor fails to mention such disadvantageous terms. Moreover, the arbitration agreement expressly states that that the agreement “is not a mandatory condition of employment.”

The court still found, however, that there were elements of unconscionability in the agreement:

We conclude, however, that the record indicates a degree of procedural unconscionability in two respects. First, as in Gentry, the inequality in bargaining power between the low-wage employees and their employer makes it likely that the employees felt at least some pressure to sign the arbitration agreement. Second, the arbitration agreement suggests that there are multiple arbitrators to chose from (“the then-current Employment Arbitration panel of the Dispute Eradication Services”) and fails to mention that the designated arbitration provider includes only one arbitrator. This renders the arbitrator selection process illusory and creates a significant risk that Western Pizza as a “repeat player” before the same arbitrator will reap a significant advantage. These circumstances indicate that the employees’ decision to enter into the arbitration agreement likely was not a free and informed decision but was marked by some degree of oppression and unfair surprise, i.e., procedural unconscionability. We therefore must scrutinize the terms of the arbitration agreement to determine whether it is so unfairly one-sided as to be substantively unconscionable.

(citations and footnote omitted).

The court also held that the agreement did not provide for a neutral arbitrator. This is despite the fact that the arbitration agreement contained a clause that both parties had to agree to the arbitrator before the arbitrator could bind the parties. The court explained that “it seems likely that an employee in Sanchez’s position would not feel free to reject the arbitration provider designated by his employer under the terms of the agreement even after a dispute had arisen.”

In conclusion, the Court stated:

The arbitration agreement here includes a class arbitration waiver that is contrary to public policy and an unconscionable arbitrator selection clause, as we have stated. These are important provisions that, if they were not challenged in litigation, could create substantial disadvantages for an employee seeking to arbitrate a modest claim. Although it may be true that neither of these provisions alone would justify the refusal to enforce the entire arbitration agreement (see Gentry, supra, 42 Cal.4th at p. 466; Scissor Tail, supra, 28 Cal.3d at p. 828), we believe that these provisions considered together indicate an effort to impose on an employee a forum with distinct advantages for the employer. As in Armendariz, supra, 24 Cal.4th at page 124, we conclude that the arbitration agreement is permeated by an unlawful purpose. Accordingly, the denial of the motion to compel arbitration was proper.

The opinion, Sanchez v. Western Pizza, can be viewed at the Court’s website for a short period of time in Word and PDF.

This opinion comes on the heels of others that have also rejected arbitration agreements with class action waivers. And while the California Supreme Court left open the possibility that waivers may be enforceable in Gentry v. Superior Court, the recent line of lower appellate decisions (see Franco v. Athens Disposal Co.), including the decision in Sanchez v. Western Pizza, seems to have all but closed the door on any such possibility.

 

IRS Lowers Mileage Rate For 2009

The IRS announced that it will be lowering the IRS mileage rate in 2009.  Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be 55 cents per mile for business miles driven. This is a change from 50.5 cents in the first half of 2008 and 58.5 cents in the second half.

California employers need to reimburse employees for miles driven for business purposes under Labor Code section 2802.  The California Supreme Court clearified some of the rules pertaining to expense reimbursement last year in Gattuso v. Harte-Hanks (click here for more analysis of the case).  The Court also held that the mileage reimbursement rate can be negotiated by parties as long as it fully reimburses the employee, and the amount does not necessarily have to be the IRS mileage rate, which is contrary to the DLSE’s opinion on the issue. 

New Ruling On Meal Breaks and Itemized Wage Statements: Brinkley v. Public Storage, Inc.

A recent case, Brinkley v. Public Storage, Inc. (October 28, 2008) is getting quite a bit of attention due to its ruling on employers’ duty to provide meal breaks. The court in Brinkley (out of the Second Appellate District), agreed with the holding of the appellate court in Brinker v. Superior Court that employer only had to provide meal breaks and not ensure that they were taken. Since the California Supreme Court granted review of Brinker, it is not controlling law, and this is why Brinkley is getting a lot of attention. (While Brinkley is good law for now, the issue will be ultimately decided by the Supreme Court in the Brinker case, and as many commentators have stated, it is likely that the Supreme Court will issue an order granting and holding Brinkley making it un-citable law until Brinker is decided.)

The Brinkley decision also addressed another hotly litigated wage and hour issue involving itemized wage statements, which is being overlooked given the meal break drama. Labor Code 226 requires employers to place certain information on the employee’s pay stub. In Brinkley, the Plaintiff alleged that defendant violated Labor Code section 226, subdivision (a), which requires employers to provide pay stubs that list (among other items): “(1) gross wages earned, (2) total hours worked by the employee . . . and (9) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee.” Plaintiff alleged that Public Storage violated this statute because certain pay stubs listed a mileage reimbursement rate that was different than the actual rate employees received.

In regards to section 226, the court noted that:

Section 226, subdivision (e) provides that an employee “suffering injury as a result of a knowing and intentional failure by an employer to comply with subdivision (a)” is entitled to recover the greater of actual damages or specified statutory penalties. The trial court found that defendant did not knowingly and intentionally violate section 226, subdivision (a). We agree.

Defendant met its burden of production by filing a declaration stating that the misstatement of the associated mileage rate was inadvertent and, when discovered, corrected. This evidence showed that plaintiff could not establish an essential element of his claim, namely that defendant intentionally and knowingly failed to provide required information on its paystubs. The burden of production thus shifted to plaintiff. Plaintiff, however, produced no evidence of knowing or intentional conduct by defendant.

The court also found that Plaintiff failed to show that he or any other proposed members of the class action suffered any injury. The court stated:

Plaintiff argues that the receipt of an inaccurate paystub ipso facto constitutes injury within the meaning of section 226, subdivision (e). This interpretation, however, renders the words “suffering injury” surplusage and meaningless. Such an interpretation is disfavored. We hold that section 226 means what it says: a plaintiff must actually suffer injury to recover damages or statutory penalties.

The present case is distinguishable from Wang v. Chinese Daily News, Inc. In Wang, the paystubs stated that the employees worked 86.66 hours regardless of the number of hours actually worked, the length of the pay period, or the number of work days in the pay period. This caused the employees to suffer injury because they might not be paid for overtime work to which they were entitled and they had no way of challenging the overtime rate paid by the employer. Here, by contrast, plaintiff was not underpaid or given insufficient information to challenge the payments he received. This inadvertent technical violation of section 226 caused no resulting damages.

(citations omitted).
 

CA Supreme Court Holds Non-Competes Are Generally Unenforceable and Release of "Any And All" Claims Not Unlawful

In Edwards v. Arthur Andersen LLP, the California Supreme Court ruled on the following issues: (1) To what extent does Business and Professions Code section 16600 prohibit employee noncompetition agreements; and (2) is a contract provision requiring an employee to release “any and all” claims unlawful because it encompasses nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802?

Noncompetition Agreements
Noncompetition agreements are governed by Business & Professions Code section 16600, which states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The statute permits noncompetition agreements in the context of sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5).

Under the common law, as still recognized by many states today, contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed.  Andersen argued that California courts have held that section 16600 embrace the rule of reasonableness in evaluating competitive restraints.

The Court disagreed with Andersen, and noted:

We conclude that Andersen’s noncompetition agreement was invalid. As the Court of Appeal observed, “The first challenged clause prohibited Edwards, for an 18-month period, from performing professional services of the type he had provided while at Andersen, for any client on whose account he had worked during 18 months prior to his termination. The second challenged clause prohibited Edwards, for a year after termination, from ‘soliciting,’ defined by the agreement as providing professional services to any client of Andersen’s Los Angeles office.” The agreement restricted Edwards from performing work for Andersen’s Los Angeles clients and therefore restricted his ability to practice his accounting profession.

The Court found that this agreement was invalid because it restrained Edwards’ ability to practice his profession.

However, Andersen argued that section 16600 has a “narrow-restraint” exception and that its agreement with Edwards survives under this exception.  Andersen pointed out that a federal court in International Business Machines Corp. v. Bajorek (9th Cir. 1999) upheld an agreement mandating that an employee forfeits stock options if employed by a competitor within six months of leaving employment. Andersen also noted that another Ninth Circuit federal court in General Commercial Packaging v. TPS Package (9th Cir. 1997) held that a contractual provision barring one party from courting a specific customer was not an illegal restraint of trade prohibited by section 16600, because it did not “entirely preclude[]” the party from pursuing its trade or business.

In refusing to accept the “narrow-restraint” exception for noncompetition agreements in California, the Court stated:

Contrary to Andersen’s belief, however, California courts have not embraced the Ninth Circuit’s narrow-restraint exception. Indeed, no reported California state court decision has endorsed the Ninth Circuit’s reasoning, and we are of the view that California courts “have been clear in their expression that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” [citation] Section 16600 is unambiguous, and if the Legislature intended the statute to apply only to restraints that were unreasonable or overbroad, it could have included language to that effect. We reject Andersen’s contention that we should adopt a narrow-restraint exception to section 16600 and leave it to the Legislature, if it chooses, either to relax the statutory restrictions or adopt additional exceptions to the prohibition-against-restraint rule under section 16600.

The Court’s ruling basically eliminates the validity of non-competition agreements under California that are not expressly provided for in Section 16600.

Contract Provision Releasing “Any and All” Claims
The second issues in the case was whether Andersen's condition of Edwards’s obtaining employment that Edwards execute an agreement releasing Andersen from, among other things, “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to [Edwards’s] employment by, association with or compensation from” Andersen.

Edwards argued that Labor Code section 2804 voids any agreement to waive the protections of Labor Code section 2802 (which provides that employers must reimburse employees for all business related expenses that the employee incurs) as against public policy.

The Court noted that Labor Code section 2804 has been interpreted to apply to Labor Code section 2802, making all contracts that waive an employee’s right to reimbursement null and void. Therefore an employee’s right to be reimbursed for business expenses provided under Labor Code section 2802 are nonwaivable, and any contract that does purport to waive an employee’s right would be contrary to the law.  Edwards maintained, therefore, the agreement was an independent wrongful act that would support another claim he was alleged for intentional interference with prospective advantage.

The Court disagreed with Edwards, and concluded that a contract provision releasing “any and all” claims does not encompass nonwaivable statutory protections, such as the employee indemnity protection of Labor Code section 2802.  Therefore, such agreements are still valid and enforceable under the law.

Outdated IRS Rules on Employee Cell Phone Usage Likely To Change

A recent LA Times Article reports that the current IRS rule for expensing employer-provided cell phones is likely to be changing soon. The current rule permits employers to treat employee cell phone reimbursement as a deductible business expense only if the employee has kept a detailed log of every call and the reason for the call.

A bi-partisan bill to dispense with this log-keeping requirement (which is almost universally ignored in practice anyway), is co-sponsored by Reps. Sam Johnson (R-Texas) and Earl Pomeroy (D-N.D.), and has already passed the House.

The cellphone tax law was set "in 1989 when cellphones were huge and when it cost a lot of money to make a phone call," Johnson said. "Nowadays they're a dime a dozen and the cost is way down. If you don't log all your telephone calls, you're going to have some IRS weenie after you. That's why we're trying to get the law changed -- because it just doesn't make any sense anymore."

A change appears likely. When pressed by Johnson at a hearing this year, Treasury Secretary Henry M. Paulson said that updating the rules sounded "like the right idea to me." And the IRS' Advisory Committee on Tax Exempt and Government Entities, calling the rules "burdensome for any employer," recommended last month that the agency loosen reporting requirements for employers and that Congress change the law.

According to the Times article, "Nationwide, about 5.5 million people have cellphone service paid for directly by their employers -- and they are a group that makes up 2.4% of all wireless subscribers." Given the wireless industry's interest in preserving and growing this market, we are willing to bet that the the new legislation is a lock in the coming year.

IRS Mileage Rate To Increase 8 Cents July 1, 2008

The IRS announced yesterday that the IRS mileage rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008.  Click here to see the IRS press release.  This is an increase of eight cents from the 50.5 cent rate in effect for the first six months of 2008. Click here to read a Washington Post article on the topic.

What does this mean for California employers?

California's DLSE has maintained that employers are required to reimburse employees for business miles driven at the IRS mileage rate in order to comply with California Labor Code section 2802.  However, just last year, the California Supreme Court ruled in Gattuso v. Harte-Hanks (as discussed previously on our blog here) that the reimbursement rate does not have the be the IRS mileage rate but can be negotiated by parties as long as it fully reimburses the employee. The Court stated:

We agree that, as with other terms and conditions of employment, a mileage rate for automobile expense reimbursement may be a subject of negotiation and agreement between employer and employee. Under section 2804, however, any agreement made by the employee is null and void insofar as it waives the employee’s rights to full expense reimbursement under section 2802.
So if employers wish to reimburse employees at an amount lower than the IRS mileage rate, it is recommended that the agreement be documented and that the employer take into account any facts that would either increase or decrease the amount needed to fully reimburse the employee. 

IRS Mileage Rate Set For 2008

The IRS announced the standard business mileage rate for 2008 is 50.5 cents per mile.  The IRS posted the following on its website yesterday:
The Internal Revenue Service today issued the 2008 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

* 50.5 cents per mile for business miles driven;
* 19 cents per mile driven for medical or moving purposes; and
* 14 cents per mile driven in service of charitable organizations.

The new rate for business miles compares to a rate of 48.5 cents per mile for 2007. The new rate for medical and moving purposes compares to 20 cents in 2007. The rate for miles driven in service of charitable organizations has remained the same.
California's DLSE has maintained that employers are required to reimburse employees for business miles driven at the IRS mileage rate in order to comply with California Labor Code section 2802.  However, this year, the California Supreme Court ruled in Gattuso v. Harte-Hanks (as discussed here) that the reimbursement rate does not have the be the IRS mileage rate but can be negotiated by parties as long as it fully reimburses the employee. The Court stated:
We agree that, as with other terms and conditions of employment, a mileage rate for automobile expense reimbursement may be a subject of negotiation and agreement between employer and employee. Under section 2804, however, any agreement made by the employee is null and void insofar as it waives the employee’s rights to full expense reimbursement under section 2802.
UPDATE:  On June 23, 2008, the IRS announced that the mileage rate would increase effective July 1, 2008 to 58.5 cents a mile for all business miles driven.  Click here to read updated post. 

Gattuso v. Harte-Hanks: Positive Ruling for Employers

In Gattuso v. Harte-Hanks, the California Supreme Court shed some light on the relatively unexamined issue by the courts of expense reimbursement. At issue in the case was whether Harte-Hanks could reimburse its outside sales force for mileage by paying a higher “lump sum” in the form of wages and/or commissions, as opposed to paying a specified sum for each mile driven. The Supreme Court ultimately held that employers may reimburse employees under the lump sum method, but also provided an excellent examination of:

  • Employer's obligations under alternative methods of reimbursing employees for expenses,
  • Who bears the burden of proof when challenging the reimbursement amount (short answer: the employee - as explained below),
  • Whether employers and employees can independently negotiate an expense reimbursement amount (short answer: yes, and this amount does not have to be the IRS mileage rate), and
  • What a court needs to consider in determining whether expenses incurred by the employee were “reasonable” and, therefore, reimbursable (short answer: this is a individualized analysis for each employee).

1.      Reimbursement Method One: Actual Expense Method

The Court first examined the actual expense method that employers can utilized in reimbursing employees for business costs. The Court held that the actual expense method is the most accurate, but it is also the most burdensome for both the employer and the employee. The actual expenses of using an employee’s personal automobile for business purposes include: fuel, maintenance, repairs, insurance, registration, and depreciation. 

To calculate the reimbursement amount using the actual expense method the employee must keep detailed and accurate records of amounts spent in each of these categories. Calculation of depreciation will require information about the automobile’s purchase price and resale value (or lease costs). In addition, the employee must keep records of the information needed to apportion those expenses between business and personal use. This is generally done by recording the miles driven for business and personal use.  Then the employee submits this information for the employer to calculate the reimbursement due. 

2.      Method Two: Mileage Reimbursement Method

The Court recognized that employers may simplify calculating the amount owed to an employee by paying an amount based on a “total mileage driven."  The Court recognized that the mileage rate agreed to between the employer and employee is “merely an approximation of actual expenses” and is less accurate than the actual expense method. Therefore, the employee may challenge the amount of reimbursement. However, if the employee challenges the amount reimbursed, the employee bears the burden to show how the “amount that the employer has paid is less than the actual expenses that the employee has necessarily incurred for work-required automobile use (as calculated using the actual expense method), the employer must make up the difference.” 

Therefore, the employee must prove his case by producing the records of: fuel, maintenance, repairs, and depreciation, among other items as discussed above under the actual expense method. This analysis involves what the employee actually spends, and whether the expenses were “reasonable." This is a very difficult hurdle to overcome as the records required to meet the burden of proof under Gattuso need to be very detailed. In addition, the Court all but said that in determining what is “reasonable” requires an individualized review by the judge, which supports the argument that these types of cases are not appropriate for class-wide treatment.

The Court also held that the reimbursement rate can be negotiated by parties as long as it fully reimburses the employee, and the amount does not have to be set at the IRS mileage rate, which is contrary to the DLSE’s opinion (I guess depending on which opinion letter you read). The Court stated:

We agree that, as with other terms and conditions of employment, a mileage rate for automobile expense reimbursement may be a subject of negotiation and agreement between employer and employee. Under section 2804, however, any agreement made by the employee is null and void insofar as it waives the employee’s rights to full expense reimbursement under section 2802. 

3.      Method Three: Lump Sum Payment

Under this method, the employee need not submit any information to the employer about work-required miles driven or automobile expenses incurred. The employer merely pays a fixed amount for automobile expense reimbursement. The Court stated that these type of lump sum payments are often labeled per diems, car allowances, and gas stipends. 

In permitting lump sum expense reimbursement payments, the Court held:

We agree with Harte-Hanks, and also with the trial court and the Court of Appeal, that section 2802 does not prohibit an employer’s use of a lump-sum method to reimburse employees for work-required automobile expenses, provided that the amount paid is sufficient to provide full reimbursement for actual expenses necessarily incurred. 

The Court made it clear that employers paying a lump sum amount, however, have the extra burden to separately identify the amounts that represent payment for labor performed and the amounts that represent reimbursement for business expenses.


Gattuso v. Harte-Hanks Supreme Court Decision Forthcoming Next Week

The California Supreme Court announced today that it will be issuing a decision on November 5 at 10:00 a.m. in the closely watched mileage reimbursement case.  The Supreme Court issued the following notice:

GATTUSO (FRANK) v. HARTE-HANKS SHOPPERS, INC.
S139555 (B172647; Los Angeles County Superior Court – BC247419)
Argued in San Francisco 9-06-07

This case includes the following issue: May an employer comply with its duty under Labor Code section 2802 to indemnify its employees for expenses they necessarily incur in the discharge of their duties by paying the employees increased wages or commissions instead of reimbursing them for their actual expenses?

Opinion(s) in the above case(s) will be filed on:

Thursday, November 5, 2007 at 10:00 a.m.

Independent Contractors - Approach With Caution

FedEx is still litigating its classification of its drivers as independent contractors. FedEx lost a case recently in California in Los Angeles and the court ruled the company owes 200 drivers $5.3 million in expenses.  In addition, the California Employment Development Department (EDD), which is responsible for collecting payroll taxes, assessed FedEx Ground owed more than $7.88 million in back payroll taxes because it also held the drivers were misclassified as independent contractors. The audit covered the period July 2001 to June 2004 and concluded that some of the drivers were properly classified as independent contractors, but found the “single-route” drivers were employees. 

As these cases illustrate, California employers need to approach the independent contractor classification very carefully.  If a worker is properly classified as an independent contractor it can save the company money and give the workers great flexibility.  However, misclassifying employees as independent contractors exposes the company large damages for unreimbursed expenses, unpaid overtime, back payroll taxes, and many other items.

For guidance on whether employers have properly classified its workers as independent contractors, the California Division of Labor Standards Enforcement (“DLSE”) provides an explanation of the “economic realities” test. The DLSE maintains that the most indicative fact determinative of whether a worker is an employee or an independent contractor depends on whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. The DLSE also sets forth the other factors that are considered when determining an employee’s status:

  1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
  2. Whether or not the work is a part of the regular business of the principal or alleged employer;
  3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
  4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
  5. Whether the service rendered requires a special skill;
  6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
  8. The length of time for which the services are to be performed;
  9. The degree of permanence of the working relationship;
  10. The method of payment, whether by time or by the job; and
  11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

Further details about the DLSE’s position on who classifies as an independent contractor can be found here. The DLSE’s information provides a great starting point for employers to audit their classifications of employees, but each case may present different facts, and the economic realities test may change depending on the jurisdiction (i.e., civil court or an EDD assessment) and whether state or federal law is at issue.

DOL On-Line Self Assessment For Restaurateurs Employing Minors

The U. S. Department of Labor’s Wage and Hour Division website provides a self assessment tool for restaurants that employ minors. The assessment covers common violations of the Fair Labor Standards Act (FLSA ). Restaurant owners should note that this assessment does not cover California state law items. The assessment covers items that the DOL found in the past to be some of the most common problems encountered in restaurants, and therefore, are likely issues a DOL investigator will look for in a restaurant.

Here is a list of a few of the items covered in the assessment:

Do any workers under 18 years of age do the following:
1. Operate or clean power-driven meat slicers or other meat processing machines?

2. Operate or clean any power-driven dough mixer or other bakery machines?

3. Operate, load, or unload scrap papers baler or paper box compactors?

4. Drive a motor-vehicle on the job?


Do any workers under 16 years of age do the following:
5. Cook?

6. Bake?

7. Clean cooking equipment or handle hot oil or grease?

8. Load or unload goods from a truck or conveyor?

9. Work inside a freezer or meat cooler?

10. Operate power-driven bread slicers or bagel slicers?

11. Operate any power-driven equipment?

12. Work from ladders?

13. Work during school hours?

14. Work before 7:00 a.m. on any day?

15. Work past 7:00 p.m. between Labor Day and June 1?

16. Work past 9:00 p.m. between June 1 and Labor Day?

17. Work more than 3 hours on a school day, including Fridays?

18. Work more than 8 hours on any day?

19. Work more than 18 hours in any week when school was in session?

20. Work more than 40 hours in any week when school was not in session?

21. Do you employ any workers who are less than 14 years of age?

22. Do you fail to maintain in your records a date of birth for every employee under 19 years of age?

Click here to take the entire assessment. At the end of the assessment, there is a rules summary that explains an employer’s responsibility under the FLSA for the issues on the assessment.