U.S. Department of Labor Publishes Proposed Rule on Independent Contractor Classification Under the Fair Labor Standards Act
On October 13, 2022, the U.S. Department of Labor (DOL) published a proposed rule updating the test for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The proposed rule would restore the multifactor economic reality test previously applied by the DOL. The DOL departed from this test when it published a new rule in January 2021, which clarified and simplified the multifactor test. Shortly after a change in administrations, the DOL delayed and withdrew the 2021 rule. The U.S. District Court for the Eastern District of Texas vacated the delay and withdrawal after it was challenged in March 2022. The court held that the rule became effective on March 8, 2021.
The DOL’s proposed new rule would replace the more business-friendly test announced by the DOL in January 2021. The proposed rule returns to the totality-of-the-circumstances analysis of the economic reality test historically applied by courts that focuses on whether each factor shows the worker is economically dependent upon the employer. The proposed new rule sets forth a six-factor test for determining independent contractor classification under the FLSA:
- Opportunity for profit or loss depending on managerial skill: This factor focuses on whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work.
- Investment by the worker and the employer:
This factor evaluates whether the worker’s investment is capital or entrepreneurial in nature to indicate independent contractor status. Costs borne by the worker to perform their job, such as tools, equipment and the worker’s labor, are not evidence of a capital or entrepreneurial investment.
- Degree of permanence of the work relationship: This factor analyzes whether the work relationship is definite or indefinite in duration. Relationships that are definite or sporadic indicate independent contractor status, while relationships that are indefinite or continuous indicate employee status.
- Nature and degree of control: This factor assesses whether the employer or the worker has substantial control over key aspects of the performance of the work, including scheduling, supervision over the performance of the work and the ability to work for others.
- Whether work performed is an integral part of the employer’s business: This factor considers whether the work performed is critical, necessary or central to the employer’s principal business.
- Skill and initiative: This factor examines whether a worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative that is consistent with the worker being in business for themself instead of being economically dependent on the business.
The proposed rule will be open for public comment until November 28, 2022. The DOL will then decide whether to move forward with a final rule after the comment period closes.
California Governor Extends COVID-19 Supplemental Paid Sick Leave
On September 29, 2022, Gov. Gavin Newsom signed AB 152, extending California employers’ obligations to provide COVID-19 supplemental paid sick leave (SPSL) with immediate effect through the end of 2022. Additionally, AB 152 expands an employer’s ability to request a subsequent diagnostic test for an employee’s continued use of SPSL and introduces the California Small Business and Nonprofit COVID-19 Supplemental Paid Sick Leave Relief Grant Program.
California employers with 26 or more employees—who were initially obligated to provide up to 80 hours of SPSL under the Labor Code (Sections 248.6 and 248.7) through September 30, 2022—must now do so through December 31, 2022. Notably, the extension does not provide any additional hours of SPSL under either section of the Labor Code, thus employees who have exhausted their 2022 SPSL banks are not entitled to an additional leave allotment.
Further, prior to AB 152’s amendment, Section 248.6 allowed employers to require employees who received SPSL related to their own positive COVID-19 diagnosis to submit a second diagnostic test on or after the fifth day of receiving the positive test that resulted in the grant of SPSL. Now, however, AB 152 permits employers, in cases where the second test is positive, to require a third test within 24 hours. Employers are also allowed to deny any additional SPSL to an employee who refuses to submit the requested tests. Employers remain responsible for providing the additional tests at no cost to the employee.
Additionally, under AB 152, certain private employers and registered nonprofits incorporated as a “C” corporation, “S” corporation, cooperative, limited liability company, partnerships or limited partnership, or registered as a 501(c)(3), 501(c)(6) or 501(c)(19) that: began operating before June 1, 2021; are currently operative with a physical presence in California; and have 26 to 49 employees may be eligible for a grant of up to $50,000 to cover their actual costs incurred to provide SPSL between January 1, 2022 and December 31, 2022. Moreover, any grants received will not count as gross income for state tax purposes.
Given the extension of SPSL through year-end, employers should consider what effect, if any, AB 152 has on their existing COVID paid sick leave policies and work with counsel to make necessary amendments.
California Governor Signs Law Protecting Employees’ Off-the-Clock Use of Cannabis
California Gov. Newsom on September 18, 2022 signed into law AB 2188, which, among other things, prohibits employers from penalizing workers for using cannabis during off-work hours.
The law, which will go into effect on January 1, 2024, would add a new section to the California Fair Employment Housing Act and provide the following:
- An employer cannot discriminate against a person in hiring, termination or any term or condition of employment or otherwise penalize a person for:
- The person’s use of cannabis off the job and away from the workplace; or
- An employer-required drug screening test that has found the person to have nonpsychoactive cannabis metabolites in their hair, blood, urine or other bodily fluids. (The bill’s introductory notes provide that such tests “have no correlation to impairment on the job.”) Conversely, an employer may penalize a person based on scientifically valid preemployment drug screening conducted through methods that do not screen for nonpsychoactive cannabis metabolites.
- Employers may still discipline or terminate employees for possessing, being impaired by or using cannabis while on the job, and employers still enjoy the right to maintain a drug- and alcohol-free workplace.
- The law won’t apply to the following: employees in the building and construction trades; and applicants or employees hired for positions that require a federal government background investigation or security clearance in accordance with federal law.
- Further, the law won’t preempt state and/or federal laws requiring certain applicants or employees to be tested for controlled substances, or the manner in which they are tested, as a condition of employment.
In light of the above, California employers should revisit and update as applicable their drug testing policies and practices.
California Governor Expands Pay Transparency and Employee Data Reporting Laws
As covered in our alert here, on September 27, 2022, Gov. Newsom signed into law SB 1162, which expands California’s existing pay transparency and employee data reporting laws. The new law goes into effect January 1, 2023, and among other things, requires employers with 15 or more employees to include pay scale information in job postings. California joins New York and Colorado, which have similarly expanded, or are set to expand, their pay transparency laws.
New York City’s Automated Employment Decision Tools Law Goes into Effect on January 1, 2023
Effective January 1, 2023, employers that use automated employment decision tools (AEDTs) in connection with hiring and promotion of New York City employees will be subject to new rules and restrictions under Local Law Int. No. 1894-A. Specifically, employers that rely on AEDTs to evaluate candidates and employees located in New York City will now have to ensure that: the AEDT has been subject to an independent bias audit within one year prior to its use; a summary of the bias audit is made publicly available; they provide notice to the candidate or employee that an AEDT will be used; and they provide employees and candidates with the option to request an alternative selection process.
The new law defines AEDTs broadly to include “any computational process, derived from machine learning, statistical modeling, data analytics, or artificial intelligence, that issues simplified output, including a score, classification, or recommendation, that is used to substantially assist or replace discretionary decision making for making employment decisions that impact natural persons.” By its terms, the new law will apply to a wide array of tools, including resume sorting tools, personality assessments and skill tests. However, regulations proposed (but not yet adopted) by the New York City Department of Consumer & Worker Protection (DCWP), available here, further clarify that the law only applies to AEDT outputs (such as a score, tag, classification or ranking) when they are used to promote current employees or screen candidates for employment (defined as “a person who has applied for a specific employment position by submitting the necessary information and/or items in the format required by the employer”) within New York City, and the outputs are: the sole criteria relied upon, without considering other factors; given more weight than any other criteria; or used to overrule or modify conclusions derived from other factors, such as human decision-making.
The key provisions of the new law are as follows:
- Annual Bias Testing: The proposed regulations implementing the new law specify that the annual bias test of the covered AEDT must: calculate the selection rate for each race/ethnicity and sex category that is required to be reported to the EEOC pursuant to the EEO-1 Component report; and calculate the “impact ratio” for each such category. There will be a presumption of disparate impact if the AEDT yields an impact ratio of 80 percent or less (meaning that use of the tool results in members of a protected group being selected for employment at a rate that is 80% or less than the selection rate of the group with the highest selection rate) or the AEDT assigns a score or grade and the average score or grade for those in a protected category is 80% or less than the average score of those in the highest-ranked group.
This framework, known as the four-fifths rule and long used by the EEOC and courts in evaluating disparate impact claims, will be familiar to employers that have conducted adverse impact analyses in connection with hiring, promotion and termination decisions. The bias audit cannot be conducted by the employer using the AEDT, or the AEDT vendor, but rather must be conducted by an independent auditor (which is defined as “a person or group that is not involved in using or developing an AEDT”). It is expected that AEDT vendors will commission independent audits of their product offerings and provide such audits to employers using their tools, but it remains unclear whether that practice would be considered truly independent and compliant with the law.
- Notice Requirements: The new law includes two notice requirements. First, according to the proposed regulations, the employer must publicly post the date of the most recent AEDT bias audit and a summary of the audit’s result (including the selection rates and impact ratios for all categories) on the careers or jobs section of its website. Second, employers must provide at least 10 business days’ notice to candidates and employees who reside in New York City that an AEDT will be used in connection with an evaluation of their candidacy or consideration for promotion. The proposed rules specify that this notice can also be posted to the careers or jobs section of the employer’s website (including directly in the job posting) or sent to the candidate or employee via mail or email. Importantly, this notice must also include instructions “for how to request an alternative selection process or accommodation,” but the proposed rules do not provide any guidance as to what kind of alternative selection process or accommodation would look like in practice, nor do they even require employers to actually provide such an alternative selection process or accommodation if requested.
- Enforcement and Penalties: The new law will be enforced by the DCWP, but it does not create an individual or collective private right of action. The DCWP has issued a penalty schedule for violations of the AEDT law, ranging from $375 to $1,500 for each violation. Employers should note that each time an AEDT is used in violation of the law, it would be considered a separate violation and the failure to provide the required notices to each candidate or employee would also be considered a separate violation.
- Next Steps: Employers that have employees in New York City, or that recruit employees located in New York City, should begin evaluating their hiring tools to determine whether they are covered by the new law and consult with their vendors, counsel and outside audit experts to develop a plan to conduct the required bias audits and comply with the law’s notice requirements. It is also important to note that the DCWP’s proposed rules have not been finalized and will be subject to public hearing on October 24, 2022. Accordingly, there may be modifications as to how the new law will be implemented prior to the January 1, 2023, effective date. We will continue to monitor future developments.
New York City’s Wage Transparency Law Set to Go into Effect on November 1, 2022
On November 1, 2022, New York City employers—defined as having four or more employees, including independent contractors—will be required to include the salary range (or hourly wage) on all job advertisements or postings. The law compels covered employers, when advertising a job, promotion or transfer opportunity, to state the position’s salary range (or hourly wage) in the advertisement. Failure to do so constitutes an unlawful discriminatory practice.
For each job, promotion or transfer position that can be or will be performed, at least in part, in New York City, the employer must include the minimum and maximum salary (or hourly wage) that it in “good faith believes at the time of the posting it would pay.” In addition, the law provides that:
- Employers are not required to post benefits or other forms of compensation (such as health, life or other employer-provided insurance; paid or unpaid time off work; availability of or contributions toward retirement or savings funds; or commissions, tips, bonuses, stock);
- Only current employees—and not applicants—may pursue a private right of action against employers for alleged violations of the law; and
- Employers will have thirty (30) days from receipt of an initial complaint of noncompliance to amend its advertisement or posting before facing a fine from the New York City Division of Human Rights. If an employer fails to cure the violation, or engages in future violations, it may have to pay monetary damages to individuals and civil penalties, as determined by the New York City Division of Human Rights.
Employers should ensure that they document their discussions related to salary ranges or hourly wages for each position and/or job classification. If you have any questions regarding compliance with New York City’s wage transparency law, please contact a Fenwick lawyer.
New York State’s Wage Transparency Law May Not Be Far behind New York City’s Law
This summer, New York state lawmakers passed a bill similar to New York City’s wage transparency law which, if signed by New York Gov. Kathy Hochul, would require New York employers with four or more employees to post the salary range (or hourly wage) on all postings or advertisements for a job, promotion or transfer opportunity that can or will be performed, at least in part, in New York state. Therefore, a posting for a fully remote position that could potentially be filled by an applicant who resides in New York state (who would thus work remotely in the state) would be covered.
However, the New York wage transparency bill differs from New York City’s law in a few key areas. Under New York state’s law,
- If the job is paid solely on commissions, employers may comply with the law with a general statement that “compensation will be based on commission”;
- Employers do not have an opportunity to “cure” any violation; an employer deemed noncompliant with the law will be subject to civil penalties—up to $1,000 for the first violation, up to $2,000 for the second violation and up to $3,000 for a third or subsequent violation; and
- In addition to the salary range, employers must provide the job description of a position, if one exists.
The New York law will take effect 270 days after signed by Gov. Hochul, assuming she signs it. Fenwick will continue to monitor developments related to this law.
U.S. Supreme Court Declares Right to Compel Arbitration of Individual PAGA Claims in Viking River Cruises v. Moriana
In a seminal 8-1 decision, the U.S. Supreme Court ruled in Viking River Cruises v. Moriana that the Federal Arbitration Act (FAA) permits an employer to compel arbitration of an employee’s individual claims for California Labor Code violations under the California Private Attorneys General Act of 2004 (PAGA). As such, an employee whose individual PAGA claims are subject to arbitration lacks standing to bring a representative PAGA action in court absent future intervention from the California legislature.
The Supreme Court’s ruling in Viking River Cruises
upends nearly a decade of precedent set forth in the California Supreme Court’s opinion in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014). In Iskanian, California’s high court held that arbitration agreements seeking to waive representative PAGA claims were unenforceable and against public policy. In reaching its decision, the California Supreme Court dismissed the notion that individual PAGA claims could be severed and therefore subject to arbitration, reasoning that such division of individual and representative claims would frustrate the purpose of PAGA to punish and deter employers from engaging in unlawful wage and hour practices. In so doing, the California Supreme Court posited a secondary ruling precluding the division of individual and representative PAGA claims such that an agreement that attempts to waive any PAGA claims is unenforceable under California law.
SCOTUS agreed with the central premise of Iskanian
that representative claims under PAGA cannot be waived, but it rejected the secondary ruling barring the severability of individual PAGA claims suffered personally by an employee. The Supreme Court held that the secondary ruling in Iskanian was “incompatible with the FAA” as it would relinquish the rights of the parties to control what claims could be brought in arbitration, thereby coercing them to select a judicial forum and forgo their right to arbitrate individual claims afforded under the FAA. Based upon this reasoning, SCOTUS found that although the wholesale waiver of PAGA claims in the agreement at issue was unenforceable, Moriana’s individual PAGA claims could nevertheless be severed and compelled to arbitration under the agreement’s severability provision. Because Moriana had to arbitrate individual PAGA claims, she had no standing to bring nonindividual PAGA claims in court and therefore such claims were dismissed.
The Viking River Cruises decision is a victory for California employers, though this may not be the end of this saga. As suggested by Justice Sonia Sotomayor, the California legislature could choose to amend the standing requirements under PAGA to allow for a representative action to proceed, even if individual claims are subject to a separate forum. For now, employers should review their arbitration agreements to ensure that they include clear severability provisions, particularly if representative claims are broadly waived. Employers may also consider consulting with counsel to update their arbitration agreements in anticipation of future changes to PAGA’s standing requirements.
Arbitration Update: Ninth Circuit Withdraws Opinion on AB 51 and Opts for Rehearing
In a surprising turn of events, the U.S. Court of Appeal for the Ninth Circuit withdrew its previous opinion upholding, in part, AB 51, California’s long-contested law prohibiting mandatory arbitration of claims under the California Labor Code and the Fair Employment and Housing Act (FEHA). The case against AB 51 will be heard anew by the same three-judge panel following a request for an en banc review and the much-anticipated U.S. Supreme Court decision in Viking River Cruises v. Moriana.
Since its passage in 2019, AB 51 has been widely contested by employers and legal analysts alike as preempted by the Federal Arbitration Act, which strongly favors arbitration. Opponents of AB 51 challenged the law on this basis and initially succeeded with a federal district court issuing a preliminary injunction on February 7, 2020, prohibiting the state’s enforcement of AB 51.
This victory was short-lived as the state of California appealed the district court’s ruling to the Ninth Circuit, which reversed course as we previously reported. In its September 15, 2021, opinion, the divided three-judge panel held that AB 51 did not conflict with, nor was otherwise preempted by, the FAA because AB 51 concerns an employer’s “pre-agreement” conduct and does not actually prohibit or invalidate enforceable arbitration agreements. Under such interpretation, the majority upheld AB 51’s prohibition on mandatory arbitration of Labor Code and FEHA claims. Judge Sandra Ikuta vehemently dissented from the majority’s opinion, describing AB 51 as “a blanket attack on arbitration agreements, contrary to both the FAA and longstanding Supreme Court precedent.”
As expected, the U.S. Chamber of Commerce petitioned the Ninth Circuit for an en banc review. However, in February 2022, the Ninth Circuit announced that it would wait to review the en banc request until the U.S. Supreme Court ruled on another California arbitration case, Viking River Cruises v. Moriana. In Viking River Cruises, the Court considered whether the FAA preempted the California Supreme Court’s 2014 ruling in Iskanian v. CLS Transportation Los Angeles, LLC, prohibiting arbitration of claims under the California Private Attorneys General Act. On June 15, 2022, the Supreme Court issued its 8-1 decision holding that the FAA partially preempts the ruling in Iskanian and thus allows individual PAGA claims to be severed and subject to mandatory arbitration.
On August 22, 2022, the Ninth Circuit issued an order withdrawing its September 15, 2021, opinion and granting a rehearing. The panel was once again divided with Judge Ikuta and Judge William Fletcher voting for the withdrawal and rehearing, while Judge Carlos Lucero voted against rehearing.
The Ninth Circuit panel has yet to set a date for rehearing. In the meantime, the district court’s preliminary injunction remains in place, though as we previously
cautioned, that decision concerns the state’s ability to enforce AB 51 and does not give private employers the green light to disregard the law in its entirety. Employers are encouraged to continue to consult with counsel regarding the use of mandatory arbitration agreements in California and may also wish to have counsel review current arbitration agreements in light of Viking River Cruises.