Many people may view California as the Golden State…as a destination. But, for many employers it is quite the opposite because California is generally known to be a very employee-friendly state making it extremely challenging for employers and underwriters alike. There are many reasons for this, but this article will explore just a few: (1) one-way attorney fee statutes under the Fair Employment and Housing Act (“FEHA”) and Labor Code, (2) wage and hour claims, (3) how California trial judges handle dispositive motions, and (4) California runaway jury verdicts. We will also explore the impact on employment practices liability (“EPL”) insurance, and how to mitigate the risks of exposure to employment claims in California.
Under FEHA, California Government Code section 12965(c)(6) provides that an employee may recover attorney fees if the employee prevails on FEHA claims, which include, among other claims, discrimination, harassment, retaliation based on various protected classifications. The law was further clarified in 2019 to make it clear that defendants can only recover fees and costs if the case was “frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.” And even if the defendant proved that to be the case, the court still has discretion to award. See Senate Bill 1300, Scott v. City of San Diego, 38 Cal.App.5th 228 (2019). Whether something is frivolous, unreasonable or groundless requires a high showing of, among other things, bad faith on the part of the employee.
In wage and hour cases, attorney fees are covered by two sections of the Labor Code: sections 218.5 and 1194. Aleman v. AirTouch Cell., 209 Cal. App. 4th 556, 579 (2012). Section 218.5 covers, among other things, claims “for the nonpayment of wages,” (e.g. unpaid wages) except those claims subject to Section 1194. Section 1194, in turn, covers claims for failure to pay minimum wage or overtime. For an employer to recover fees under Section 218.5, the claim must have been made in “bad faith.” Cal. Lab. Code § 218.5(a).
These laws effectively make California a one-way attorney fee jurisdiction. Employment litigation is challenging for employers in California because employees have nothing to lose by filing lawsuits in the state, as long as they have some colorable claim to assert. Even if they lose, they know they will not have to pay attorney fees. This emboldens plaintiff attorneys as well because should they win on only one FEHA or Labor Code claim, they have the ability to obtain all of their attorney fees, notwithstanding that such fee requests are subject to judicial review.
There are many aspects of wage and hour claims that make California challenging, such as, nuanced meal and rest period laws which we previously discussed, stringent independent contractor classification requirements and the notorious Private Attorneys General Act (“PAGA”). This article will focus on the independent contractor classification and PAGA.
The seminal case in California regarding independent contractor classification is the Dynamex Operations West v. Superior Court case decided in 2018. 4 Cal.5th 903, 416 P.3d 1, 232 Cal.Rptr.3d 1. In that case, the California Supreme Court held that workers in the state are presumptively employees for purposes of California’s wage laws, where the burden is on the employer to establish that the worker is properly classified as an independent contractor under state law. In order to establish that a worker is an independent contractor, the employer must prove all three parts of what is known as the “ABC” test, in lieu of the multi-factor test under common law that most jurisdictions use -- where the employment relationship is determined by the degree of control over the details of the work being performed.
In September 2019, the California Legislature enacted Assembly Bill 5 (“AB 5”), which codified Dynamex. (Cal. Lab. Code § 2750.3). Under section 2750.3, a worker is presumed an employee unless the employer can establish (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
There has been quite a bit of pushback against AB 5, particularly with gig employers because they, like many other employers, wanted to treat their workers as independent contractors for various tax and benefits reasons. However, California deliberately designed AB 5 to make it difficult to do just that. Notwithstanding, there are a number of exemptions under the law that carve out certain workers from the auspices of AB 5, but still must meet the multi-factor common law test to be properly classified as an independent contractor.
PAGA was enacted in 2004 and revised in 2016. It allows employees to sue employers on behalf of the California Attorney General. The state, with a lack of resources, empowered private citizens to sue on behalf of the state for wage and hour violations against their employers. Employees allege various wage and hour claims (e.g. failure to pay overtime, provide meal/rest breaks, reimbursement, unpaid wages, etc.) as the basis to collect civil penalties afforded under PAGA, which generally involves a $100 civil penalty per violation per employee, and $200 per subsequent violation per employee. As a proxy of the state, a single employee may sue on behalf of all current and former non-exempt employees in the State of California within the statutory period, which some view as another way for employees to bring a multi-plaintiff or class/collective action against employers. However, an employee suing under PAGA does not have to establish any of the requirements for class certification. If an individual employee sues under PAGA, the civil penalties would be generally small, but by representing all non-exempt employees in California, these penalties swell into multiple millions of dollars of potential exposure.
PAGA claims have been a thorn on employers’ sides for years. For the longest time, employers were not able to avoid PAGA claims because employees were suing on behalf of the Attorney General, and there was a public interest in ensuring PAGA claims were prosecuted to punish employers for wage and hour violations, no matter how technical. However, things are changing with the recent U.S. Supreme Court decision of Viking River Cruises, Inc. v. Moriana, 596 U.S. ___ (2022).
In Viking River, the employee-Plaintiff executed an agreement to arbitrate any dispute arising out of her employment. The agreement contained a “Class Action Waiver” providing that in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action. The arbitration agreement also contained a “severability clause” specifying that if the class action waiver was found invalid, any class, collective, representative, or PAGA action presumptively would be litigated in court. But, under that severability clause, if any “portion” of the waiver remained valid, it would be “enforced in arbitration.” The Supreme Court held that PAGA claims can be dismissed and referred to arbitration if certain provisions exist in the arbitration agreement. While this is certainly a good decision for employers, it is a nuanced one. In addition, Assembly Bill 51 – where the CA legislature has attempted to ban mandatory arbitration agreements – is still pending which may preclude mandatory arbitration agreements in California, thus allowing employees to resurrect PAGA claims against employers that once were dismissed under Viking River.
From 2018 to present, out of 9,063 employment cases filed in California federal courts, only 310 cases were disposed in a motion for summary judgment (“MSJ”), or 3.4% of all cases (Lex Machina, June 15, 2022). Judges typically are not inclined to grant MSJs in employment cases in California because they are very fact-intensive and because California law tends to lean in favor of employees when faced with these motions. In other words, to the extent the judge is on the fence on whether to grant or deny a MSJ, they generally opt to deny, and allow a jury to decide, rather than face an appeal in the 9th Circuit or California Appellate Courts, both of which are known to further scrutinize triable issues of material fact in employment cases.
In effect, the employer essentially must have almost “perfect” facts in favor for the employer and be virtually “perfect” in executing its employment practices in order to prevail on MSJ in California. Otherwise, judges may deny dispositive motions to allow a jury to decide the outcome of the case. This ultimately results in increased cost of litigation to adjudicate the case through trial, which then necessarily increases the settlement value of the case. Plaintiff attorneys, knowing this, may be more aggressive in prosecuting the case.
Generally runaway jury verdicts are more likely to occur in more employee-friendly jurisdictions like Los Angeles, San Francisco, San Diego counties, compared to more conservative jurisdictions. From 2019 to present, in Los Angeles County, the average jury verdict on employment cases was $14.1 million, while in San Francisco County the average award was $7.2 million. By contrast, in conservative Orange County, the average award during the same time period was $325,000. (Lexis Verdict Analyzer, June 2, 2022).
Jurors are mostly employees. In liberal jurisdictions, they tend to sympathize more with employees than employers. In conservative jurisdictions, jurors tend to be more neutral in deciding how to rule in employment cases.
Just as employers find California to be problematic, so do the underwriters. For this reason and the reasons noted above, they will underwrite a California risk differently. Oftentimes there will be a separate (higher) retention for California claims. In addition, for California-only risks and for risks with a heavy California presence, premiums may be higher. Capacity is sometimes limited for those California-only and heavy California presence risks as well. While the EPL insurance market may be challenging, for the reasons noted above the coverage is important to ensure that your organization and employees are protected with insurance coverage.
There are some proactive steps that employers can take to mitigate the risk of California employment claims. Some of those are:
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
