5 Common Reasons California Employers Get Sued

California has long provided fertile ground for employment lawsuits, because the state has strict workplace rules that businesses must follow. And in recent months, several rulings by the California Supreme Court have made it even more likely that employers will get sued. Here's what employers should know to help reduce the risk of litigation.

1. Independent Contractor Misclassification

How does an employer determine if a worker should be classified as an employee or independent contractor under California wage orders? In Dynamex Operations v. Superior Court, the state Supreme Court adopted an "ABC" test, allowing a worker to be deemed an independent contractor only if the business shows all of the following:

• The worker is free from employer control.
  
• The worker performs tasks that are outside the usual course of the company's business.
  
• The worker is usually engaged in an independently established trade, occupation or business.
  

"The presumption is that the worker is an employee, unless you can prove otherwise," said Veronica Gray, an attorney with Nossaman in Irvine.

The ruling will lead to more lawsuits in an area that was already heavily litigated, according to Gary McLaughlin, an attorney with Akin Gump in Los Angeles. Therefore, employers should review their business practices to ensure workers are properly classified.

2. Off-the-Clock Work

In Troester v. Starbucks Corp., the plaintiff claimed that the coffee chain failed to pay him for off-the-clock work performed at closing time, such as setting the alarm and locking the door.

The district court found that the "de minimis" doctrine—a federal rule that allows small amounts of time that are difficult to track to be unpaid—applied in this case. However, the California Supreme Court ultimately rejected the federal de minimis rule, holding that businesses must pay employees for regularly occurring off-the-clock activities, such as opening or closing a retail store.

Gray noted that the court left open a key issue: whether there are circumstances in which compensable time is so minute or irregular that it is unreasonable to expect the time to be recorded.

3. Calculating Overtime on Bonuses

When employers provide extra payments such as bonuses to nonexempt workers, they often fail to properly calculate overtime pay, said Maria Stearns, an attorney with Rutan & Tucker in Costa Mesa. Nondiscretionary bonuses need to be included in the regular rate of pay for calculating overtime, she noted.

[SHRM members-only how-to guide: How to Calculate Daily and Weekly Overtime in California]

Under federal law, employers can calculate the regular rate of pay by taking the employee's hourly rate times the total hours worked (including overtime hours), adding in the nondiscretionary bonus and dividing that by the total hours worked in the week. For example, if an employee earns $15 an hour, worked 55 hours and received a $100 bonus, the regular rate would be $16.82 (15 x 55 = 825 + 100 = 925 / 55 = 16.82).

In Alvarado v. Dart Container Corp. of California, however, the California Supreme Court clarified state rules. When dealing with a flat-sum bonus, the employer must divide only by the total regular (nonovertime) hours worked during the earning period. So when using the same earnings as in the example above, the regular rate would be $17.50 (15 x 40 = 600 + 100 = 700 / 40 = 17.50).

"It's a very easy type of case for plaintiffs' attorneys to litigate," Stearns observed. "The facts are all captured on the pay stub. You either did it right, or you didn't."

Businesses should conduct payroll audits to determine if their practices comply with the law, she said.

4. Meal and Rest Breaks

California has stringent requirements for meal and rest periods. For example, nonexempt employees generally aren't allowed to work for more than five hours without an unpaid meal break of at least 30 minutes. Also, employers must provide a paid rest break of at least 10 minutes for every four hours worked (or major fraction thereof).

"The requirements are so specific that it's a challenge for any employer," McLaughlin said. Under the California Supreme Court decision in Brinker Restaurant Corp. v. Superior Court, employers have several obligations, he added. Employers must provide meal breaks, relieve employees of their duties during those periods and be sure not to interfere with workers' ability to take breaks.

Employers aren't required to police employees to ensure they're taking meal periods, McLaughlin said. Nevertheless, it's smart to be proactive. For example, he said, it's a good idea to have a timekeeping system that detects whether meal periods are taken. If a worker isn't taking breaks, the employer might want to discuss the situation with the employee. The goal is to ensure the law is being followed.

5. Wage Statements

The California Labor Code requires employers to include very detailed information on pay stubs. Failure to do so could cost the company a lot of money.

Under Labor Code Section 226(e), for instance, an employer who knowingly and intentionally fails to comply with the rules must pay penalties to the injured employee. The penalties are $50 for the first violation and $100 for each subsequent violation (not to exceed $4,000). The employee also is entitled to costs and attorney fees.

Employees can recover civil penalties for labor code violations under the state's Private Attorneys General Act (PAGA). Under PAGA, employees can sue on behalf of themselves and other workers—with 75 percent of recovered penalties going to the state and 25 percent going to employees.

When seeking civil penalties in PAGA cases, employees don't need to show that a violation was "knowing and intentional" or that the employee suffered an actual injury. For example, in Lopez v. Friant & Associates, a California court held that an employee could sue under PAGA for an employer's failure to include the last four digits of his Social Security number or an employee identification number on wage statements.

It can add up quickly, so internal audits are crucial to stay out of trouble, Gray noted.

Toni Vranjes is a freelance business writer in San Pedro, Calif.