Courts Halt State Enforcement of AB 51 (Arbitration Agreements), Deny Request to Block AB 5 (Independent Contractors) and Mandate Payment to Employees for Pre- and Post-Shift Activities
Arbitration Agreements: Potential for a Reprieve from AB 51
As we reported last year, the California Legislature passed AB 51 in an effort to prohibit employers from requiring employees to arbitrate claims under the California Labor Code or Fair Employment and Housing Act. Many, including former Governor Jerry Brown who vetoed previous similar bills, questioned the constitutionality of AB 51 given the Federal Arbitration Act's (FAA) strong preference for arbitration. In fact, when the California Senate was considering AB 51, the Senate Judiciary Analysis stated, "There is little doubt that, if enacted, [AB 51] would be challenged in court and there is some chance . . . that it would be found preempted."
Consistent with this prediction, a coalition of business groups immediately challenged AB 51 by filing a lawsuit in federal court arguing that AB 51 was preempted by federal law. As we shared in a prior alert, on December 30, 2019, U.S. District Judge Kimberly Mueller temporarily found in favor of the business coalition and blocked the State of California from enforcing AB 51 through January 31, 2020.
In a detailed order on February 7, 2020, the court granted a preliminary injunction—extending its prohibition against state enforcement of AB 51 until further notice. In doing so, the court explained that the business group coalition is likely to succeed on its claims that AB 51 interferes with the purpose of, and is preempted by, the FAA.
While this ruling is a positive development for employers, the AB 51 saga is not over. Other courts may rule differently. Further, while the preliminary injunction prohibits state enforcement of AB 51, it does not speak to AB 51's effect on private parties. Therefore, we strongly recommend consulting with counsel before imposing mandatory arbitration on employees.
Independent Contractor Classification: Court Rejects Businesses' Effort to Block AB 5
As we noted last year, California's busy 2019 legislative session also included codification of a very restrictive "ABC" test that businesses must meet in order to classify workers as independent contractors. Many businesses, particularly those in the "gig economy," see the passage of AB 5 as a significant impairment to their business model. Accordingly, several businesses filed a lawsuit seeking court intervention to block AB 5 (similar to the above injunction blocking AB 51). However, on February 10, 2020, the business-plaintiffs' plea to the court was rejected. The court acknowledged that individual workers filed declarations describing how AB 5 will be "financially devastating." Nonetheless, the court held that it could not "second guess the Legislature's choice to enact" AB 5. Accordingly, while other challenges to AB 5 remain, and the plaintiffs in this case have the right to appeal, this initial effort to block widespread enforcement of AB 5 failed.
California Supreme Court Clarifies Employer Obligations Regarding Compensable Pre- and Post-Shift Activities
On February 13, 2020, the California Supreme Court in Frlekin v. Apple provided clarification regarding whether employees must be compensated for certain on-site activities that occur before or after work. In a class action, the named plaintiffs sought compensation on behalf of Apple retail store employees for time spent having their bags searched when they left the workplace for lunch or at the end of the workday. The plaintiffs argued that this time, along with the time they spent waiting for a manager or security guard to be available to search their bag, is compensable.
In 2000, the California Supreme Court held that an employer must pay employees for time spent commuting to the worksite in an employer-provided shuttle because the employees were required to take the shuttle. Morillion v. Royal Packing Co., 22 Cal. 4th 575 (2000). In Frlekin, Apple relied on the Morillion decision, arguing that employees are not required to undergo bag searches because they could choose not to bring a bag to work. However, the California Supreme Court clarified that the mandatory or voluntary nature of the activity is only one factor in determining whether an activity is compensable. In addition, the Court held that employees must be compensated if the employer exercises significant control over the employee during the given activity, if the activity is for the employer's benefit rather than the employee's, and if participation in the activity is enforced through discipline. The Court held that employees were "clearly under [the employer's] control while awaiting, and during, the exit searches." In addition, the bag search solely benefited the employer and employees were subject to discipline if they did not comply. Therefore, based on these factors, the Court determined that the employees must be paid for all time spent waiting for and participating in security checks.
This decision is a wake-up call for California employers to assess their pre- and post-shift policies and practices applicable to hourly workers. Employers must ensure that activities—even those that are unrelated to the employee's job duties—that fall within the above test constitute compensable time.
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