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Dec 22, 2011

Five Key Labor And Employment Issues Hospitality Employers Need To Be Aware Of This Quarter

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Employee or Independent Contractor? Hospitality Employers Should Take Precaution in Light of Enhanced Penalties in Recent California Legislation

By: Camille Olson, David Kadue, Tim Haley, Fred Sanderson and Ferry Lopez

On October 9, 2011, Governor Jerry Brown signed California Senate Bill 459 ("SB 459"), which adds sections 226.8 and 2753 to the California Labor Code. SB 459, effective January 1, 2012, imposes steep penalties on employers who willfully misclassify employees. This legislation is but one example of a growing effort at both the federal and state level to identify, reclassify, and prevent misclassification of employees as independent contractors, deterring companies from doing so with significant penalties. Given the hospitality industry's widespread utilization of independent contractor services, hospitality employers should reevaluate their independent contractor agreements and take precautionary measures to ensure compliance with this new legislation. Below, we highlight the key provisions and set forth recommendations for compliance with SB 459 and avoidance of its significant civil penalties.

Key Provisions of SB 459

SB 459 makes it unlawful:

  • to willfully misclassify an individual as an independent contractor; or
  • to charge a willfully misclassified contractor a fee or make any deductions from compensation for any purpose including for goods, materials, space rental, services, government licenses, repairs, equipment maintenance or fines.

In addition, SB 459:

  • imposes a civil penalty of between $5,000 and $15,000 for each violation;
  • increases the civil penalties to between $10,000 and $25,000 if the employer has engaged, or is engaging, in a pattern or practice of such violations;
  • provides for the Contractor's State License Board to initiate disciplinary action against any licensed contractor that has been found to have violated the Act;
  • requires that any person or employer who has been found to have violated the Act to post a website notice (or to display prominently if there is no website) that, the person or employer has been found to have violated the Act and that the employer or person has changed its practices to prevent further violations;
  • provides that violations and disciplinary actions shall "remain in effect" against successors if it has one or more principals or officers and is engaged in the same or similar business; and
  • provides for joint and several liability for any person, other than an attorney or an employee providing advice to his or her employer, who knowingly advises an employer to treat an individual as an independent contractor to avoid employee status for that individual if the individual is found not to be an independent contractor.

Enforcement

SB 459 authorizes the Labor and Workforce Development Agency ("LWDA") or a court to determine if an employer has violated the provisions of SB 459, and to assess civil penalties. SB 459 also provides that the Labor Commissioner may enforce the statute and assess penalties through Labor Code section 98 proceedings. Despite the Legislative Counsel's statement that SB 459 authorizes an individual to file a complaint to request the Labor Commissioner to assess penalties, the language of the statute does not expressly authorize an employee to bring such an action, either in court or before the Labor Commissioner.

Employees likely will attempt to recover SB 459 penalties via the California Labor Code Private Attorneys General Act ("PAGA"). Under PAGA, aggrieved employees can bring a representative action on behalf of all other current and former employees to recover civil penalties in the Labor Code that may be assessed by the LWDA. This may include civil penalties under SB 459. Penalties recovered by an employee in a PAGA action are apportioned as follows: 75% to the LWDA, and 25% to the aggrieved employees. Also, although an employee would not be able to recover SB 459 penalties via California's Unfair Competition Law (Business and Professions Code section 17200 et seq.), the employee could use the UCL to seek injunctive relief.

SB 459 is considered "non-urgency" legislation, meaning it is effective January 1, 2012. The statute does not indicate whether the Legislature intended it to apply retroactively, so enforcement of SB 459 likely will be prospective only. The statute of limitations for the recovery of SB 459 penalties, whether pursued under the statute itself or via a PAGA action, should be limited to one year.

Willful Misclassification

Any violation of the statute requires a showing of "willful" misclassification, but SB 459 provides little guidance as to what is "willful." Rather, the Act simply defines willful misclassification as a misclassification that is voluntary and knowing, which is also vague.

Whether an individual is an employee or an independent contractor under California or federal law varies depending upon the law being applied. In each case, however, the determination is fact-specific and requires the decision-maker to balance numerous factors. While no single factor is controlling, the most important factor is whether the putative employer has the right to control not merely a worker's results but the manner and means used to obtain those results. The test is vague and ambiguous. Accordingly, it would seem that a finding of willfulness should be limited to the most egregious cases, particularly in light of the draconian consequences of a violation.

Until further guidance is provided, hospitality employers will face numerous questions in attempting to comply with the willfulness standard. For example, if an administrator determines that an individual has been misclassified as an independent contractor under California's workers compensation laws, must the hospitality employer thereafter treat that individual and all others similarly situated as employees under all laws? What if the hospitality employer disagrees with the decision of the administrator? What if the hospitality employer has an opinion from an accountant or lawyer that the individual was properly classified as an independent contractor? The answers to these questions must await further development.

Charging or Deducting Fees

Providing equipment or supplies or reimbursing a worker for expenses incurred is evidence of employment status. Thus, most hospitality companies will avoid paying or reimbursing a contractor for expenses incurred to prevent a finding of employment status. Similarly, if the contractor uses supplies or space provided by the hospitality company, the hospitality company will charge the contractor appropriate fees so that it cannot be argued that the hospitality company is paying for the contractor's expenses. For instance, when a hospitality employer contracts with an outside catering agency to staff an event, the catering agency would be required to pay rental fees for use of kitchen equipment. But this practice would constitute a violation of SB 459 if the contractor was willfully misclassified. Hospitality employers should be able to avoid a violation of this fee provision even in the case of a willful misclassification, however, by requiring the contractor to obtain any necessary supplies, tools or equipment from unrelated third parties. The hospitality employer could still be liable under Labor Code section 2802, if that section – which requires employers to indemnify employees for expenditures or losses incurred in discharging employment duties – applies to ordinary expenses, as some courts have held.

SB 459 is silent concerning what constitutes a separate violation of the fee provision. Does it constitute a violation of SB 459 each time it charges a fee to a misclassified independent contractor (the Act does not expressly say so), or is it a violation for each misclassified contractor who is charged a fee or is subjected to a deduction? Again, further guidance is necessary to answer this question.

Other Ambiguities

As noted above, SB 459 provides for a range of civil penalties for each violation. The hospitality employer could expend tens of thousands of dollars for one misclassified individual, and hundreds of thousands of dollars if the hospitality employer is found to have a pattern or practice of willfully misclassifying workers. Further, if for example, a hospitality employer is found to have willfully misclassified outside catering agencies throughout a given year, those penalties would be multiplied by dozens or hundreds of misclassified workers, yielding exponential figures in potential employer liability. But no guidance is provided as to what merits a $5,000 penalty or $15,000 penalty. There is also no guidance as to what constitutes a "pattern or practice" that will result in larger civil penalties.

Recommendations

In light of federal initiatives and California's enactment of SB 459, hospitality employers should consider taking various steps to evaluate their existing independent contractor relationships:

  • Develop and publish a corporate policy on the engagement of independent contractors and the management of those relationships. As part of this policy, require that approval be obtained from a knowledgeable employee before any independent contractor relationship is established.
  • Train employees who manage independent contractor agreements as to how to work with independent contractor relationships.
  • Ensure that the company has a well-written independent contractor agreement for each contractor, that it is accurate, complete, and individually negotiated.
  • Audit the company's independent contractor relationships, including a review of any past decisions or determinations concerning independent contractor status.
  • Obtain a written legal opinion from counsel regarding the appropriateness of the classification of workers as independent contractors, based on counsel's understanding of the specific factual situations at issue.

This new legislation raises additional complex questions beyond the scope of this analysis. For example, even though the Act does not contain an express right of action, does it support an implied one? If you would like to discuss any of these issues further, please contact a Seyfarth Shaw attorney.

Occupy The Lobby: Hotel Employee Lobby Incident Largely Protected By The NLRA

By: Jack Toner

The Occupy Wall Street movement has gotten significant national attention as hundreds of activists, in order to publicize their demands (whatever they are) take over public space (city parks) and demonstrate against the government and Wall Street. The participants in Occupy Wall Street have the freedom to do so because, for the most part, their demonstrations have been on public property. Imagine for a moment, however, if your employees had the right to use your public space (e.g. lobby, reception area or bar) in order to publicize their complaints and to pressure you to give into whatever demands or grievances they may have. You probably think that there is no such right because your public areas are in fact on private property and, thus, you could prohibit employees by engaging in such conduct. The National Labor Relations Board ("NLRB"), however, in a recent decision, has opened the door to such demonstrations by declaring that pursuant to the National Labor Relations Act ("Act") employees cannot be disciplined for engaging in such conduct. LaGuardia Associates, LLP d/b/a Crowne Plaza LaGuardia, 357 NLRB No. 95 (September 30, 2011).

The NLRB in a number of decisions since last year has repeatedly expanded its definition of employee rights under Section 7 of the Act, which provides, in part, that employers may not discipline or discharge employees for engaging in union organizing or protected concerted activity. In LaGuardia, the Board majority (Chairman Mark Pearce and Member Craig Becker, over the dissent of Member Brian Hayes) reversed the findings of an Administrative Law Judge ("ALJ") and found that employees were engaged in activity protected by Section 7 and, therefore, could not be disciplined when they - while on paid working time and in violation of valid written policies - were part of a mob that physically and verbally assaulted a supervisor in front of guests in the hotel lobby.

During a union rally outside the hotel, a union official asked a hotel employee to lead a group of co-workers in presenting a petition to the hotel's chief operating officer ("manager") regarding a dispute over layoff procedures. Based on the union official's request, the employee organized a group of 13 to 15 co-workers. Each of the workers clocked in and, as a group, located the manager in the lobby area, where - in front of hotel guests and in loud voices - they demanded that the manager read the petition. The manager declined to do so and, instead, offered to meet with a representative of the group in his office to discuss the matter. The manager also requested that the employees report to their duty stations. The group, however, refused the offer and demanded that the manager remain in the lobby while the petition was read. When the manager tried to leave, the group surrounded him and three employees physically restrained him from leaving. A fourth employee struck a security guard on the arm as he attempted to escort the supervisor through the mob. After careful consideration, the hotel terminated the four employees who physically touched either the manager or the security officer, suspended five additional employees for three days for impeding the manager's ability to leave, and issued written warnings to the remaining participants in the confrontation. In the employees' disciplinary letters, the hotel noted that they were away from their workstations while on duty and "participated in a disturbance in a public area of the lobby using a loud and inappropriate voice." The union filed a charge alleging that the employees were actually engaged in protected concerted activity, thus making the disciplinary actions illegal.

After a hearing, the ALJ determined that each employee's behavior was so egregious as to lose any protections under the Act, noting in particular that the hotel's "approach to applying discipline … was careful, measured, and explicitly tailored to the conduct it believed the employees engaged in." The ALJ explicitly found that the manager "genuinely felt intimidated" by the confrontation and that the disciplinary actions were consistent with the hotel's valid written employee rules. Notwithstanding the ALJ's findings, however, the Board majority determined that only the three employees who physically touched the manager engaged in sufficiently egregious activity to lose the Act's protection. Consequently, the Board found that the discipline meted to the other employees was illegal.

As the NLRB readies to issue regulations that will encourage unions to ramp up their organizational efforts and file petitions for election with the NLRB, hospitality employers should expect to see greater use of demonstrations as an organizational tactic. Although LaGuardia involved a unionized employer, it applies equally to non-union employers who may face ever more disruptive employee conduct - either during union organizing campaigns or to oppose decisions or policies by their employer. The hospitality industry is obviously particularly susceptible to such tactics and hospitality employers should prepare in advance as to ways to respond if necessary.

California Courts Hear Arguments on Two Wage/Hour Class Actions Important to the Hospitality Industry

By: Andrew McNaught

On November 8, 2011 and November 10, 2011, California Courts heard oral arguments in two high profile wage and hour class actions, the outcomes of which will likely have significant impact on hospitality industry employers in California.

On November 8, the California Supreme Court heard argument in the long-awaited "meal and rest" case: Brinker Restaurant Corp., et al v. Superior Court. The main issue in this case is whether an employer is required only to make meal periods available to employees or whether an employer has an affirmative obligation to ensure that meal periods are taken.

On the merits, several justices appeared to be favorably disposed to the employer's interpretation of California Labor Code section 512, the meal period statute, which says that an employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes, except that if the total work period per day of the employee is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee. The statute also mandates a second meal break after 10 hours of work.

This debate is more than academic. It is extremely important to California hospitality industry employers with significant numbers of non-exempt employees, such as restaurants and hotels. If they must "ensure" that meals are taken by their non-exempt employees, then they must strictly police meal breaks to make certain that they are being taken. However, if employers need only "make available" meal breaks, then the employer's meal period obligation should be satisfied so long as employees are permitted to take a timely, 30-minute meal period, regardless of whether the employee decides to take a shorter meal period or no meal period at all.

Aside from the debate about the interpretation of the word "provide," there was also a good deal of argument on when non-exempt employees must take their meal breaks. Apparent support was found among the Court for the idea that employers must enforce a "rolling five hour" rule. This is the theory that a California employer must provide an uninterrupted meal for every five consecutive hours of work. If this "rolling five hour" rule is adopted, then employers will be forced to structure meal breaks very close to the middle of each shift regardless of the needs of the business or the desires of the employees. This is because a second meal break (or a penalty for a missed meal break) would be required if employees work five hours after taking their first meal break.

If that is how the opinion is written, then the practical result may be to force employers to "ensure" that non-exempt employees are permitted to take meal breaks at a certain time (i.e., the middle of the shift). This is true even though section 512 seems likely to be interpreted as requiring only that the employer "make available" a meal break. The Court's decision is due on April 12, 2012.

Just two days later, on November 10, 2011 the California Court of Appeal, First District, heard oral argument in Duran, et al. v. U.S. Bank. The Duran case presents extremely important issues relating to how class action trials are conducted in California. In a matter of first impression, the Court of Appeal is considering whether class action plaintiffs may use statistical sampling and representative evidence to establish liability on a class-wide basis.

After class certification, the misclassification case went to a bench trial on the Bank's defense under the outside sales exemption. The trial court conducted the liability phase of the trial based on a purportedly random sample of 20 class members out of 260 total. It determined that the Bank had misclassified 19 of the 20 class members in the sample, and then extrapolated from that result that all 260 class members had been misclassified. The trial court also refused to allow U.S. Bank to put on evidence at trial that at least 70 of the 260 class members, who had signed declarations for the company, were not misclassified. After the damages phase, the trial court entered judgment against the Bank in the amount of approximately $15 million.

The panel appeared receptive to the Bank's arguments. The Court had "significant questions" about the trial court's trial management plan which appeared to implicate the Bank's due process rights, and also regarding the trial court's exclusion of defendant's evidence supporting individualized defenses. The panel also demonstrated considerable concern regarding the trial court's approval of extrapolating class-wide liability to 260 class members based on a trial sample of only 19, which resulted in a 43.3% margin of error.

It appears that the Court of Appeal may be poised to overturn the judgment against U.S. Bank and at the very least reject the trial plan and use of sampling for liability authorized by the trial court. The Court may follow the U.S. Supreme Court's guidance in Wal-Mart Stores v. Dukes, disapproving "trial by formula" because "a class cannot be certified on the premise that [a defendant] will not be entitled to litigate its statutory defenses against individual claims." A decision in the Duran case is expected before the end of February 2012.

Be Careful What You Say At The Bargaining Table

By: Isabel Lazar

Hospitality employers are well aware that claims of "inability to pay" can open themselves up to having to provide the Union financial information demonstrating that inability to pay. NLRB v. Truitt Mfg. Co., 351 U.S. 149 (1956). In National Extrusion & Mfg. Co., 357 NLRB No. 8 (2011) the Board majority has taken this obligation to new level: Where an employer premised its demand for substantial wage concessions on a need to remain "competitive" in the marketplace, as opposed to claiming an inability to pay, the union was entitled to information concerning the employer's current and former customers, job quotes, outsourcing, pricing structure, market studies and competitors. The Board majority went on to find that, because the employer unlawfully withheld the requested information, the employer's lockout of employees, temporary replacement of them, and cancellation of their health insurance coverage violated Sections 8(a)(3) and (5) of the Act.

Specifically, the employer in National Extrusion stated at the bargaining table that a 12 percent reduction in wages over three years was necessary to make its facility more competitive. More specifically, it stated that it faced competition from Asia and that its production costs had increased while its production had diminished. In response, the Union issued an information request asking for: a list of all current customers so that the union could contact them to see if they contemplated purchasing products from other sources; a copy of any and all quotes that the company had provided and how many had been awarded in the past five years; a list of all outsourced work in the past five years; a list of all customers who stopped buying from the facility during the last five years; a list of prices for products; marketing studies and marketing plans; and a complete calculation of the projected company savings over the next three years as a result of the concessions. The employer refused to provide virtually all of the information in reliance on prior Board law. Nonetheless, the Board found a violation of the National Labor Relations Act Section 8(a)(5). In holding there was an 8(a)(5) violation, the majority -- which consisted of then Chairman Liebman and Member Becker -- carefully and explicitly stated that the case was NOT an inability to pay case. Nonetheless, they noted they wanted the employer to share information because "information sharing helps to foster honest and constructive collective bargaining."

This decision turns years of Board precedent on its head. Whereas before, it was firmly established that a general claim about non-competitivness, particularly related to future ability to compete, was insufficient to require the employer to open its books, now such general assertions are adequate. The key takeaway for all hospitality employers from this decision is to think twice before making any statement explaining the rationale behind their proposals, counteroffers, or rejections in negotiating. Otherwise, the company risks making information public or, at least, available to the union, even under a confidentiality agreement.

American Hotel and Lodging Association Files Amicus Brief Urging Supreme Court to Resolve Court Split Over When Employers Can Use the Tip Credit to Satisfy Minimum Wage Obligations

By: Alex Passantino

How often can a bartender polish the bar rails before he becomes a janitorial worker? How much time can a server roll silver before she becomes a hostess? And how in the world is an employer supposed to keep track?

These questions have been arising with increasing frequency, most notably in cases addressing the issue of which employees are "tipped employees" for the purposes of an employer using the tip credit to satisfy its minimum wage obligation. Under the Fair Labor Standards Act, the "wage" for a "tipped employee" includes (among other items) a cash wage of $2.13 per hour and an "additional amount on account of the tips received by [the tipped] employee which amount is equal to the difference between" $2.13 per hour and the minimum wage in effect at the time. This latter amount is commonly referred to as the "tip credit."

In the case of Fast vs. Applebee's International, Inc., the Eighth Circuit Court of Appeals determined that the ability of an employer to use the tip credit to satisfy its minimum wage obligations was subject to a 20% limitation on an employee's performance of "non-tip-producing" work. Under the Fast decision, if the "non-tip-producing" work exceeds the 20% limit, the employer must make an additional wage payment to compensate the employee at the full minimum wage for the time spent performing "non-tipproducing" duties, even though the employee was already paid at least the minimum wage (in wages and tips combined) for all hours worked.

This ruling put the Eighth Circuit squarely at odds with the Eleventh Circuit Court of Appeals's decision in Pellon v. Bus. Representation Int'l, Inc., which determined that, because the non-tipped duties were related to the occupation, the duties "need not by themselves be directed toward producing tips." The Eleventh Circuit rejected the 20% rule, holding that "a determination whether 20% (or any amount) of . . . time is spent on non-tipped duties is infeasible" and that it would be "impractical or impossible" to divide the workday among the various tasks performed.

Given the "impractical" and "infeasible" standard in Fast, the employer has -- not surprisingly -- sought review of the Eighth Circuit's decision by the United States Supreme Court. On behalf of the American Hotel & Lodging Association AH&LA), Seyfarth Shaw LLP submitted an amicus curiae brief to the Supreme Court, urging it to take the Fast case for review and provide the employer community with much-needed guidance on the "tipped employee" issue.

In the amicus brief, AH&LA notes the difficulties inherent in implementing a rule that differs based on which side of the Mississippi River a facility is based and alerts the Court to employer concerns related to the monumental task of monitoring and tracking every task performed by every tipped employee to determine whether each employee spent at least 80% of his or her time on tip-producing tasks. Noting that such monitoring would require either (1) constant surveillance of tipped employees by their managers or a person hired specifically to conduct monitoring or (2) detailed timekeeping by employees themselves, we explained that the realities of the workplace make neither option workable.

Finally, in the amicus brief, AH&LA stresses the compliance challenges related to the Eighth Circuit's decision, in that it creates a rule that employers must follow, but no guidance on how to comply with that rule. The line between "tipproducing" and "non-tip-producing" is less than clear. The majority of duties performed by a waiter, for example, contribute to a customers' dining experience and are thus arguably tip-producing. Some of those duties are, however, more obvious to the tip-providing customer than others. For example, placement by a server of food on the table in front of customers is most certainly tip-producing, direct customer service, but what about the behind-the-scenes placement of the same food on a tray or cart by the same server before bringing to the table? Both duties undeniably contribute to the customer experience. Does the fact that the customer directly observes one and not the other matter? An employer's miscategorization of even a single duty could have significant consequences by tipping the 80/20 balance, thus causing the employer to lose the ability to use the tip credit.

These significant issues impact all employers of tipped employees, regardless of the industry. Accordingly, AH&LA requested that the Supreme Court take the Fast case on appeal. Until such time as the Supreme Court rules, however, employers in the Eighth Circuit must comply with the decision of the Fast court.

Hospitality Team Updates

Jim Curtis and Meagan Newman of our Chicago office presented a webinar on hot Occupational Safety and Health Administration (OSHA) issues faced by the hospitality industry on November 3. The presentation discussed enforcement trends as well as policies and practices that may expose businesses to risks that may be avoided.

Minh Vu of our Washington, D.C. office, on November 30, gave an in-depth look at the ADA's new requirements recreational facilities and service animals. The webinar covered how the requirements impact employers' lodging facilities and operations.

Jack Toner of our Washington, D.C. office and Ronald Kramer, Molly Eastman and Isabel Lazar of our Chicago office will be presenting a webinar titled "The Year That Was And Will Be: National Labor Relations Board Update For Hospitality Employers" on January 18, 2012 at 1:00 PM ET. The webinar will cover the National Labor Relations Board's big year, both in terms of its rulemaking initiatives and key decisions impacting hospitality employers. Please email events@seyfarth.com if you would like to attend.

We want to hear from you! Do you want to know more about these or any other topics? Want to see something reported on? Have an idea for an article or webinar? Looking for a speaker for your group? Please feel free to contact your Seyfarth attorney.