Last year, jurisdictions across the nation issued new laws and regulations further complicating compliance issues for employers, particularly for multi-state employers. Some of the most significant developments related to new and proposed laws are seeking to make it easier to establish independent contractor misclassification claims, tighten restrictions on employee non-competes, expand mandatory paid leave, and close the pay gap for women and minorities. With many of these laws set to go into effect this year and a fresh slate employee-friendly legislation already being proposed, these trends will likely continue causing compliance challenges as we move into the new decade.
Lowering Standards for Independent Contractor Misclassification Claims
In 2019, several states issued or proposed laws making it harder for companies to label workers as independent contractors. Determining whether workers are misclassified has always been complicated, in large part, because the test for determining contractor status varies by the law and jurisdiction at issue. In response to the burgeoning gig economy and reports that contractor misclassification has cost states millions in tax withholdings and contributions, many state legislatures are actively passing or proposing new laws to make it easier for workers to claim they are employees.
- California: As we previously reported, in September 2019, California’s Governor Newsom signed AB5, codifying the “ABC Test” from the California Supreme Court decision in Dynamex Operation W. v Superior Court, 4 Cal. 5th 903 (2018). As of January 1, 2020, a California worker will be presumed to be an employee under California wage orders, unemployment insurance, and workers’ compensation laws unless the entity engaging the worker proves that the worker meets all three of the following factors:
- The worker is free from the control and direction of the engaging entities’ business in connection with the performance of the work, both under the contract for the performance of such work and in fact;
- The worker performs work that was outside the usual course of the engaging entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the engaging entity.
- The vast majority of companies with workers in California are covered by the new law, despite some notable exceptions to the new law, such as jobs that require professional or occupational licenses (e.g., accountants) and workers providing professional services (e.g., graphic designer and human resources). For those workers the more lenient factors under the Borello test,[1] the test in effect prior to AB5, applies to determine if they are misclassified.
- The fight over AB5 is not over yet. While AB5 remains largely intact for most California employers, the California Trucking Association and two independent motor-carriers won a preliminary injunction on January 16, 2020, granting at least temporary relief from AB5 for companies engaging truck drivers as contractors. The injunction is on interlocutory appeal with the Ninth Circuit. Whether it will last is uncertain.[2] Other legal and legislative efforts are also being pursued to limit or overturn AB5, but, for now, it is the law of the land.
- New Jersey: In 2019, the New Jersey legislature proposed several bills aimed at addressing independent contractor misclassification, including:
- ABC Test (S4204): This bill sought to establish a three part ABC Test, similar to California’s new law, for determining whether workers are independent contractors. But, unlike California’s law, this proposed bill did not exempt any industries.
- Stop Work Orders (A5838): This bill aimed to require the New Jersey Commissioner of Labor to issue a stop work order for any business locations that it determines are not in compliance with any wage, benefit, or tax law, which would include unpaid amounts related to misclassification claims.
- Additional Penalties (A5839): This bill sought to allow the New Jersey Labor Commissioner to assess additional fines for misclassification of independent contractors, including $250 per misclassified employee for the first violation, $1,000 per employee for each subsequent violation, and 5 percent of the misclassified worker’s gross earnings.
- New Jersey ultimately enacted A5838 and A5839, but the more controversial ABC Test bill was withdrawn. Efforts to make the ABC Test the law in New Jersey, however, are not dead. On January 14, 2020, the New Jersey legislature introduced S863, a slightly different version of the ABC Test. While it remains to be seen whether the renewed efforts will pass, New Jersey continues to explore ways to make it easier to bring and establish misclassification claims.
- New York: In 2019, New York considered several bills related to misclassification of independent contractors.
- Senate Bill S6699A: This bill sought to implement an ABC Test for independent contractor classification for purposes of New York’s wage payment and unemployment insurance laws.
- Senate Bill S6538: This bill contemplated extending wage payment and collective bargaining protections to gig economy workers through a new category of workers referred to as “dependent workers.”
- Currently, both of these bills are pending before the Senate Labor Committee. New York continues to propose bills addressing independent contractor misclassification, with AB A9508 and SB S7508, which would authorize the Commissioner of the New York Department of Labor to promulgate regulations regarding the classification of individuals providing services for a “digital marketplace company” and establish an ABC Test to evaluate independent contractor status.
With lawmakers in a number of states, including Virginia, already proposing independent contractor legislation this year, companies should continue monitoring developments in this area.[3]
Growing Limitations On Non-competes
As we previously reported, states are continuing efforts to limit non-competition agreements for certain workers. Over the last several years, many states, including Massachusetts, California, Illinois, Maryland, Nevada, Rhode Island, Oregon, and Washington, have enacted laws restricting the use of employee non-competes. Although the type and scope of the restrictions vary by state, the limitations generally include:
- Limiting the post-employment duration of non-competes;
- Banning non-competes for certain “low wage” workers who are nonexempt under the Fair Labor Standards Act or who make less than a certain hourly rate;
- Requiring employers to pay former employees during the period of the post-employment restriction;
- Invalidating non-competes for employees who were terminated without cause; and
- Requiring non-competes to be governed by the law of the state where the employee works.
State regulators are also pursuing companies that use overbroad non-competes for their workforce. Both the Illinois and New York Attorneys General pursued claims against Jimmy John’s to prevent it from having non-competes with its sandwich makers. In November 2019, a coalition of nineteen Attorneys General sent a letter to the Federal Trade Commission (“FTC”) urging the commission to ban non-compete agreements in employment contracts nationwide. While the FTC has taken no formal regulatory action to date, it is considering placing nationwide limitations on non-compete agreements.
Given that lawmakers and regulators are likely to continue the trend of placing limitations on employee non-competes, employers should closely monitor laws and enforcement actions in jurisdictions where they have employees with non-competes. Employers may also need to rethink their strategies for using employee non-competes to protect against unfair competition while minimizing the risk of those agreements being unenforceable or potentially creating liability.
Paid Leave Continues Spreading Across the Nation
While no federal law currently requires paid leave for private employers, paid leave is increasingly becoming the mandate in more states. Already, more than ten states and several localities, including California, Massachusetts, the District of Columbia, New York City, and Chicago,[4] require some form of paid sick or family leave. Many of these laws will go into effect in the next few years, including:
- Massachusetts: Employees are eligible to take up to 26 weeks of paid leave per year for medical or family reasons starting January 1, 2021. On July 1, 2021, paid leave benefits will also be available for the care of a family member with a serious health condition.
- California: Beginning July 1, 2020, the maximum duration of paid-family-leave benefits increases from six to eight weeks annually.
- Connecticut: Starting January 1, 2022, employees are entitled to up to 12 weeks of paid leave per year to care for a newborn, a newly adopted or foster child, a seriously ill relative by blood or marriage, or close associate who is like a family member.
- New York: Employees are entitled to take up to 10 weeks of paid sick leave in 2020, and the amount of paid sick leave will rise to 12 weeks in 2021.
- Oregon: Beginning in 2023, workers are entitled to take up to 12 weeks per year of paid time off for family leave.
- Washington: Beginning January 1, 2020, employees are eligible for up to 12 weeks of paid leave each year when they have a qualifying family or medical event, 16 weeks if they have both, and 18 weeks in special circumstances (e.g., pregnancy complications).
- New Jersey: The maximum duration of annual paid family leave increases from six to 12 weeks beginning July 1, 2020.
In 2019, several states and localities passed laws requiring employers to offer paid time off for any reason. To date, only a few jurisdictions have issued these paid vacation laws, including Maine (effective January 1, 2020), Nevada (effective January 1, 2020), and Bernalillo County, New Mexico (effective July 1, 2020). Other states and municipalities, however, may follow their lead, such as New York City, which has a paid vacation bill pending.
Employers should make appropriate changes to their policies to comply with the expanding patchwork of leave laws. Developing the right paid leave policies often requires employers to balance various issues, including ease of administration, expense, compliance, and attractiveness of leave benefits to recruit the right talent. As we previously reported, this patchwork of laws also creates difficult compliance situations for employers when addressing leave requests that overlap with disability laws requiring leave as a reasonable accommodation.
Increasing Focus on Pay Equity
Increasing scrutiny on pay equity is causing companies to focus on their pay practices like never before. Although pay discrimination is nothing new, lawmakers and regulators are actively trying to close the pay gap for women and minorities. In the last several years, more than 12 states, including California, Colorado, Illinois, New Jersey, New York, Massachusetts, Washington, and Oregon, have passed laws aimed at closing the pay gap.
- Banning Salary History: States and cities around the country are prohibiting employers from inquiring into the past salary history of applicants and employees when making hiring and promotion decisions. These salary history bans are not limited to just traditionally employee-favorable jurisdictions. Even conservative jurisdictions, such as Alabama, are banning the use of pay history to make compensation decisions.
- Changing the Standards for Pay Discrimination Claims: Some states have adjusted their laws by making it easier to establish pay discrimination claims, including:
- Adding new terminology to allow employees to more readily compare themselves to co-workers, including using terms such as substantially similar (California) or comparable work (Massachusetts). While the contours of this new terminology is still developing through judicial interpretations, these new terms are intended to lower the standards under state discrimination laws and present a lower threshold than the standards under Title VII and the Equal Pay Act.
- Limiting the factors employers can use to explain differences in compensation. For example, under Massachusetts’ law, employers can only use seniority merit systems that measure earnings by the quantity or quality of production, sales or revenue, geography, education, experience, training, or travel (if required by the job) to explain differences in pay. These limitations can restrict employers from using other legitimate, nondiscriminatory reasons that may explain pay differences.
- Requiring companies to explain the entire pay differential between employees. Under federal law and many state pay discrimination laws, employers typically only need to explain the difference in pay that is statistically significant. Having to explain the entire differential can be a steep burden for employers to overcome.
- Increasing the damages and fees for employees who win pay discrimination claims, which has appeared to entice the plaintiffs’ bar to more actively pursue individual and class pay discrimination claims.
Regulators have also aimed their enforcement efforts at pursuing systemic pay discrimination claims. In Fiscal Year 2019, OFCCP had, by far, its most record-setting year for financial recoveries, with a significant percentage of those recoveries due to class pay discrimination allegations. Similarly, EEOC has continued to vigorously investigate and aggressively pursue compensation discrimination class actions in the last few years.
Companies are also feeling pressure from the public, shareholders, and their own employees to be transparent about their pay practices and take proactive measures to address pay equity issues in their workforce. Activist shareholders are increasingly filing proposals to require companies to disclose pay gap numbers for their workers. Employees at some companies are taking to social media and other public forums to lobby their employers to disclose pay gap numbers for females and minorities.
In light of the increasing focus on pay equity, employers should closely review their pay practices and policies. Asking for salary history to make pay decisions is quickly becoming a thing of the past. Employers should consider removing this from their hiring practices, and, instead, ask prospective employees about their salary expectations.
Conducting proactive pay equity analysis, under privilege, is now more of a necessity than a best practice for employers, particularly for employers who operate in jurisdictions that present a higher risk of claims, such as California or Massachusetts, or are federal contractors or subcontractors subject to random OFCCP audits. Pay equity analyses are not only a critical tool for helping companies identify and remedy vulnerabilities in their workforce but can also help companies understand how to effectively message their pay practices to employees, shareholders, and the public.
Growing Marijuana Protections for Employees
Although marijuana remains illegal under federal law, a growing chorus of states and localities have legalized medical and recreational use of marijuana. As we reported, at least 33 states and the District of Columbia have now legalized cannabis for medical use and 11 states have approved recreational marijuana. While the majority of these state laws do not address whether employees can be disciplined or terminated for marijuana use, a number of states have gone a step further to limit an employer’s ability to discipline or terminate employees for off-duty medical marijuana use. For example, New Jersey law prohibits employers from taking adverse employment action against an employee or applicant “based solely on the employee’s status” as a registered medical marijuana patient.
Some states and localities have also passed laws barring employers from testing applicants for marijuana, such as New York City and Nevada. The New York City law, which will go into effect on May 10, 2020, exempts certain jobs that have the potential to impact the health or safety of employees or the public, such as commercial drivers and medical staff, or if such testing is required by federal contracts, grants, or other laws. Whether other jurisdictions will follow remains to be seen.
Courts trying to reconcile these conflicting laws have reached varying conclusions. One court recently found that taking adverse action against employees for medicinal marijuana use could violate state marijuana and disability discrimination laws, even for federal contractors subject to the Drug Free Workplace Act.
The conflict between federal and state marijuana laws has created a number of legal and practical challenges for employers. Employers operating in jurisdictions that have legalized marijuana will need to consider how to enforce their drug-free workplace programs and an overall legitimate interest in maintaining a safe and productive workplace in light of these changes, including:
- whether to test applicants or employees for marijuana use;
- whether to accommodate employees for using marijuana to treat their medical conditions, and, if so, what types of accommodations are required; and
- how to update policies and job descriptions in light of these changes.
With the tight labor market and studies showing an increasing number of individuals using marijuana for recreational or medicinal reasons, employers will also need to consider whether they can effectively recruit if their drug-free programs reject applicants or terminate employees for off-duty marijuana use.
Mandatory Arbitration Agreements under Fire
Although the U.S. Supreme Court has continued to issue favorable decisions for agreements requiring employees to arbitrate claims against their employers, state legislatures are increasingly trying to limit or ban the use of mandatory arbitration agreements for harassment, discrimination, and other employment claims.
- California (AB51): In October 2019, California passed a new law prohibiting employers from entering into mandatory arbitration agreements for nearly all types of employment law claims under California law. Right before AB51 was set to begin on January 1, 2020, as we reported, a federal judge in the Eastern District of California issued a temporary restraining order halting enforcement of the bill. On January 31, the judge temporarily enjoined the law, finding that the Federal Arbitration Act (“FAA”) likely preempts AB51. At this point, it is unclear whether the law will survive.
- New York (S6577): Effective October 11, 2019, this law bans mandatory arbitration agreements covering employment discrimination claims under New York laws. This law will likely be challenged on preemption grounds, given that, in June 2019, a New York federal court held that the precursor to this law, banning mandatory arbitration agreements of harassment claims, was preempted by the FAA.
- Illinois (SB 1829): Effective January 1, 2020, Illinois prohibits use of mandatory arbitration agreements requiring employees to arbitrate discrimination, harassment, or retaliation claim. The law applies to any contract, agreement, clause, covenant, or waiver where an employer requires an employee or prospective employee to accept as a non-negotiable material term in order to obtain or retain employment. Like the California and New York laws, SB 1829 is likely to be challenged on preemption grounds.
While it is unclear whether these laws will survive legal challenge, employers should continue to monitor developments in this area and review their arbitration agreements to see if they comply with the new slate of laws. Employers may also proactively want to consider potentially carving out of their arbitration programs certain claims, such as harassment, or limiting the use of arbitration agreements to certain positions that present a high-risk of class claims.
[1] S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341 (1989). The primary consideration under the Borello test is whether the company engaging the worker has the right to control the manner and means of accomplishing the result desired. In addition to this “right to control” test, Borello instructs courts to consider a variety of other factors, including: (1) whether the principal has the right to fire the worker at will, without cause; (2) whether the worker holds themselves out as being engaged in a distinct occupation or business from that of the principal; (3) the kind of occupation, with reference to the locality, and whether it is usually done under the direction of the principal or by a specialist without supervision; (4) the skill required in the particular occupation; (5) whether the principal provides the instrumentalities, tools, and the place of work for the worker; (6) the length of time for which the services are to be performed; (7) the method of payment, whether by the time or by the job; (8) whether the work is part of regular business of the principal; and (9) whether the parties believe they are creating an employee-employer relationship.
[2] On February 10, 2020, a federal judge in the Southern District of California granted in-part cross motions to dismiss the suit. The court left intact the plaintiff’s claim that AB5 is preempted by the Federal Aviation Administration Authorization Act of 1994, but it dismissed the claims alleging that AB5 illegally restricted motor carriers from engaging in interstate commerce and was preempted by regulations promulgated by the Federal Motor Carrier Safety Administration.
[3] Virginia (HB 801) establishes a presumption that an individual performing delivery services or construction labor services for a contractor is an employee of the contractor unless an ABC Test is satisfied.
[4] Eligible employees in Chicago and New York City earn up to 40 hours of paid sick leave during a 12-month period. In Washington D.C., depending on the size of an employer, employees can earn three to seven days of paid sick leave each year. Rhode Island allows four weeks of paid leave to care for a family member with a serious health condition.