Can Coronavirus be a Force Majeure to Excuse Contract Performance?

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Businesses dealing with Coronavirus developments are suddenly faced with many pressing concerns, from whether they will be allowed to continue to operate, to employee relations and supply and delivery issues. One question that may become urgent is: What are the effects of Coronavirus and COVID-19 events on your business’ existing contracts? Can you cancel that big product order you placed, when government closure orders or other disruptions will make it difficult for you to sell it? Can you be forced to deliver products when you can no longer get the ingredients due to supply chain disruptions? Who bears those risks?

First, Does Your Contract Have a Force Majeure Clause?

All contracts are in some ways a method of allocating risks between the parties. Many (but not all) contracts contain what is commonly called a force majeure clause. These clauses explain what will happen when an unexpected and uncontrollable event disrupts performance of contractual obligations. Such a force majeure event is sometimes loosely referred to as an “Act of God,” but it is more accurately an unanticipated event that the parties could not have controlled. A key element is that the parties could not have reasonably anticipated the event at the time of contracting. As a result, the contract date becomes an important consideration: In a force majeure analysis, a contract entered into during March 2020 may well be treated differently than one entered into in March 2019.

Next, Read and Comply with the Requirements of the Force Majeure Clause

The primary purpose of a force majeure clause is to allocate the risk of such unanticipated events – effectively excusing one party’s failure to perform a contractual obligation due to such an event. It is regarded as a term that is negotiable between the parties, like price or delivery time. Whether the parties have any force majeure clause, and its specific terms, will vary from contract to contract. So it is essential to read your contracts carefully and be sure to comply with their terms.

If a contract has a force majeure clause, the first question that will arise is what kind of event can trigger it? Common events identified may be floods, earthquakes, wars and terrorism. Relatively few force majeure clauses refer to “pandemic,” “epidemic” or “state of emergency,” which seem most applicable here. But some may, and others may include events that result from such occurrences, such as “government action or order.” Others may refer to inability to obtain supplies, which could also be triggered by worldwide Coronavirus effects. And some may just generally refer to “force majeure” without identifying any specific event, or include a “catch all” term of some kind. Courts tend to apply such non-specific force majeure terms narrowly, so it is important to read and understand your specific contract and how its terms are likely to be applied.

Many force majeure terms include written notice requirements. Strict compliance with such notice requirements is often required, including giving written notice of inability to perform the contract within a specified time after the unanticipated event. Here, the Coronavirus pandemic and its effects, such as new government orders, may be viewed as a series of events that have varying effects – whether any one or more triggers the required notice will depend heavily on the contract terms and the specific circumstances.

The decision about whether and when to give the required notice can be daunting: Giving notice too early may itself be a breach of the contract – an anticipatory repudiation in legal terminology – but giving notice too late may waive the force majeure excuse. In many instances, it may be advisable to have communications with the other side about the issues, without formally giving notice.

Then, Give Consideration to the Controlling Law

Another important consideration is what jurisdiction’s laws control the contract. Many contracts include an agreement on which state or country’s law will control. But when the contract does not include such an agreement, it may become a fact question driven largely by where the parties were located, where the contract was made and where the performance was required.

The law of the controlling jurisdiction can be very important because states differ in what they require to apply a force majeure excuse for non-performance. California, for example, invokes a standard of “commercially impracticability,” which is more flexible than the standards of many other states. Some states require that actual impossibility be shown. All states require some showing of causation – meaning that the alleged disruption in fact was a cause of the inability to perform. But some states require that the force majeure be shown to be the sole cause of the inability to perform, and not just one among many causes.

Some states, including California, require substantial effort to mitigate the disruption (meaning, taking all reasonable alternative measures to eliminate or limit the effects of the force majeure), but other states are less demanding of mitigation efforts. For example, if the seller has unanticipated problems getting expected supplies of required ingredients, a court may require that the seller seek other more expensive supplies, or may even require that the seller take legal action against its suppliers. Courts may also require partial performance, if the unanticipated disruption does not preclude all performance.

Be Judicious in Your Use of the Force Majeure Clause

In all instances, the focus will be on the event that caused the disruption, not on the disruption itself. Just showing that performance has become more costly, difficult or inconvenient will not usually suffice to establish a force majeure. Courts may assume that the parties allocated ordinary risks of post-contract changes in costs and profitability, although contract terms can set different standards that could control this assessment.

Business managers should readily see that a contract’s force majeure clause can be a powerful tool in this Coronavirus emergency, but it can be double-edged if not wielded carefully. Managers may also have to face the difficult position of being on both sides of this issue – on the one hand, dealing with a business partner that is unable to perform a contractual obligation, and on the other hand, being unable to perform yourself. Conkle, Kremer & Engel attorneys routinely help clients with complex business matters, including contract terminations and force majeure disputes. In our next blog post on this subject, we will turn to what happens when your contract did not include any force majeure clause. In California, as in many states, the Uniform Commercial Code or other doctrines of Impossibility of Performance and Frustration of Purpose can come into play.

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What California Employers Must Know About Coronavirus and COVID-19

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Federal, California and other state and local governments continue to grapple with responding to and reducing the spread of Coronavirus (severe acute respiratory syndrome coronavirus 2 
(SARS-CoV-2))
and the disease caused by it, COVID-19. In addition to grappling with the personal and family effects, employers must ensure that they have a response plan in place to address Coronavirus’ impact on their business. In doing so, employers must be conscious of responding appropriately in light of the legal and business implications. In some ways, employers are in uncharted territory, but there are guideposts in existing laws and regulations. Here are some of the important considerations for employers to keep in mind in responding to Coronavirus:

Stay Up to Date on Government Guidance

In order to make an educated decision regarding what course of action will best protect employee safety, employers need to stay informed about the latest developments regarding the spread of the virus and adhere to government guidance for responding to the virus.

The Center for Disease Control (“CDC”) has provided Interim Guidance for Business and Employers  meant to help prevent workplace exposures based on the information currently known about the virus. Given the rapidly evolving nature of this situation, employers should check the CDC’s website frequently for updates.

Employee Education to Prevent the Spread of COVID-19 in the Workplace

Some basic steps employers should take to help prevent the spread of Coronavirus and protect workers’ health and safety include:

  • > Educate employees on Coronavirus signs and symptoms and precautions to take to minimize the risk of contracting the virus
  • > Encourage employees to wash hands frequently with soap and water for at least 20 seconds, and avoid touching their mouth, nose, and eyes with unwashed hands
  • > Practice social distancing, including minimizing non-essential travel, meetings and visitors
  • > Provide employees who continue to work in the office with hand sanitizer, flu masks, disinfecting wipes and paper towels, instruct them on proper use, and direct them to diligently clean frequently touched surfaces and objects (such as doorknobs, telephones, keyboards and mice)
  • > Actively encourage employees who show any symptoms of the disease caused by Coronavirus (COVID-19) or are close to others who have, to stay home and not come to work

Formulate a Response Plan

Employers should move quickly to implement workplace policies to prevent the spread of the virus and protect employees. Some examples of potential elements of an employer’s response plan may include:

  • > Establish processes to communicate information to employees and business partners on your infectious disease outbreak response plan
  • > Review human resources policies to make sure that policies and practices are consistent with public health recommendations and existing state and federal workplace laws
  • > Increase the frequency and thoroughness of worksite cleaning efforts, particularly in common areas such as bathrooms, break rooms and kitchens
  • > Seriously consider new policies and practices to reduce congregations and increase the physical distance between employees, customers, vendors and others, to reduce the chances for exposure – for example, staggered break times, phone or video conferences instead of meetings
  • > To the extent feasible, ensure that employees have the requisite computer, phone and other technological capabilities to perform their work from home
  • > Formulate plans for suppliers and workers whose jobs cannot be performed remotely, such as staggered schedules and breaks, off-hours deliveries, or having some tasks performed by outside contractors
  • > Encourage employees who are feeling sick to stay home or work remotely, even if they are not showing Coronavirus symptoms
  • > Prepare to respond to employees who may be nervous or concerned about contracting COVID-19. Employers should be understanding of  employees’ concerns and evaluate each request or issue based on the individual employee’s specific circumstances.

Legal Implications of Workplace Strategy

Although there is currently no California law or regulations addressing an employer’s legal obligations relating specifically to Coronavirus, workplace safety and health regulations in California require employers to protect workers exposed to airborne infectious diseases. Therefore, it is important for employers to understand the legal issues implicated by Coronavirus and the guiding legal principles which will inform the employer’s response to the virus.

OSHA Standards for Maintaining a Safe Workplace

Employers have a legal obligation to provide a safe workplace for employees, and the best way to prevent infection is to avoid exposure. The General Duty Clause, Section 5(a)(1) of the OSH Act of 1970, 29 U.S.C. 654(a)(1) requires employers to provide workers with working conditions free from recognized hazards that are causing or are likely to cause death or serious physical harm, to receive information and training about workplace hazards; and to exercise their rights without retaliation, among others.

Cal/OSHA Requirements

The Aerosol Transmissible Diseases (ATD) standard (California Code of Regulations, title 8, section 5199) requires employers to take certain actions to protect employees from airborne diseases and pathogens such as Coronavirus. The regulations apply only to specific industries, such as health care facilities, law enforcement services and public health services, in which employees are reasonably expected to be exposed to suspected or confirmed cases of aerosol transmissible diseases.

The ATD requires such employers to protect employees through a written ATD exposure control plan and procedure, training, and personal protective equipment, among other things. However, the requirements are less stringent in situations where the likelihood of exposure to airborne infectious diseases is reduced. For more information, Cal/OSHA has posted guidance to help employers comply with these safety requirements and to provide workers information on how to protect themselves.

Medical Leave, Paid Sick Leave Issues and Disability Discrimination

If an employee is forced to miss work due to the need to be quarantined or the need to care for a family member for similar reasons, employers must determine whether the Family and Medical Leave Act (FMLA) or other leave laws apply to an employee’s absence. If the employee has exhibited symptoms and is required to be away from work per the advice of a healthcare provider or is needed to care for a family member, leave laws may apply to the absence.

The FMLA regulations state that the flu ordinarily does not meet the Act’s definition of a “serious health condition,” it may qualify if it requires inpatient care or continuing treatment by a health care provider. In addition, eligible employees might be entitled to FMLA leave when taking time off for examinations to determine if a serious health condition exists, and evaluations of the condition, under the FMLA definition of “treatment.”

In contrast, if the employer itself implements health and safety precautions that require the employee to be away from work, an employer should proceed with caution before designating any time away from work as leave under a specific law. Doing so may require that the employee provide such leave when it otherwise would not be required to do so.

Review your sick leave, PTO (paid time off), or vacation policies. Consider reminding workers that the use of paid sick leave (PSL) is available to help workers who are sick to stay home. However, the employer cannot require that the worker use PSL – that is the employee’s choice. Employers may require employees use their vacation or PTO benefits before they are allowed to take unpaid leave, but cannot mandate that employees use PSL.

Employees in California at worksites with 25 or more employees may also be provided up to 40 hours of leave per year for specific school-related emergencies, such as the closure of a child’s school or day care by civil authorities (Labor Code section 230.8). Whether that leave is paid or unpaid depends on the employer’s paid leave, vacation or other PTO policies.

Paying Workers During a Pandemic

Depending on your organization’s business, some employees may be directed to work from home, temporarily furloughed, or work a reduced schedule.

Furloughs and Layoffs

Short-term layoffs or furloughs are generally permitted as long as the criteria for selection are not protected classes such as race, national origin, gender, etc. Exempt employees generally should continue to receive their full salary for each workweek in which they perform work. In contrast, hourly workers need not be paid for time not worked. A short-term layoff or furlough of less than six months should not implicate notice obligations under the Federal Worker Adjustment and Retraining Notification (“WARN”) Act, but may require advance notice under the California WARN Act, which was recently interpreted as having been triggered by certain short-term furloughs.

If non-exempt employees’ work schedules are reduced due to a temporary closure, they need not be paid according to their regular schedule under the Fair Labor Standards Act (FLSA). However, they may be eligible for state Disability Insurance (“DI”), and Paid Family Leave (“PFL”) benefits for caring for themselves or their family members. Employees receiving reduced hours because of the effects of COVID-19 may be eligible for unemployment insurance (“UI”). In California, the Governor’s Executive Order waives the one-week unpaid waiting period for DI and UI, so workers can collect those benefits for the first week out of work.

Resources for Additional Information about Coronavirus from the CDC

For more information about the Coronavirus and how businesses and individuals should best respond, refer to the below resources provided by the CDC and California’s Employment Development Department:

CDC: About Coronavirus and COVID-19

CDC: What You Need to Know About Coronavirus

CDC: Interim Guidance for Businesses and Employers

CDC: Frequently Asked Questions and Answers

EDD: Coronavirus 2019 and COVID-19

CK&E Can Help

During these uncertain and rapidly changing developments, employers need to be proactive and careful as to the steps they take to protect their businesses, employees, customers and vendors. Lawyers at Conkle, Kremer & Engel have decades of experience advising California employers and companies doing business in California about labor, regulatory, consumer and contract concerns. We remain available and ready to help our clients navigate these difficult times. Please contact John Conkle, Amanda Washton or any of our attorneys to discuss your concerns.

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AB 51 at a Crossroad: Can California Employers Still Compel Employees to Arbitrate Disputes?

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California Assembly Bill 51 (“AB 51”) has been in the news because it imposes a far-reaching ban on California employers requiring employees to arbitrate employment disputes. AB 51 was set to take effect on January 1, 2020, but its effect was temporarily stopped by a court injunction issued by U.S. District Judge Kimberly Mueller on December 30, 2019, in a lawsuit filed by the U.S. and California Chambers of Commerce. A fuller hearing on whether the court will extend the injunction is set for January 10, 2020. If the injunction is extended, AB 51 will remain in limbo as long as that case remains pending, and very possibly permanently.

AB 51, if it is allowed to take effect, would have far-reaching implications for California employers who use arbitration agreements for resolution of disputes with employees. AB 51 was signed into law by Governor Gavin Newsom on October 10, 2019, and applies to “contracts for employment entered into, modified, or extended on or after January 1, 2020.” The law prohibits any person from requiring applicants and employees, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to waive any rights, forum, or procedure established by the California Fair Employment and Housing Act (“FEHA”) and the California Labor Code.

The Impact of AB 51
Although AB 51 was originally promoted to target the #MeToo movement and was characterized as a anti-sexual harassment law, because many sexual harassment claims against employers have been kept from public view by resolutions in private arbitrations rather than public court proceedings. But the new law covers much more than just sexual harassment claims. In practical effect, AB 51 would prohibit most employers from requiring employees to sign mandatory arbitration agreements for nearly all types of employment law claims, including any discrimination claims covered under FEHA and for any claims brought under the California Labor Code. AB 51 also precludes employers from threatening, retaliating or discriminating against, or terminating any job applicant or employee for refusing to consent to arbitration or any other type of waiver of a judicial “right, forum, or procedure” for violation of the FEHA or the Labor Code.

Nor can employers avoid AB 51 by having a standard arbitration agreement that requires applicants or employees to “opt out” to avoid. The law effectively prohibits employers from using voluntary opt-out clauses to avoid the reach of the bill. New California Labor Code Section 432.6(c) states that “an agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights is deemed a condition of employment.”

In addition, new Government Code Section 12953 states that any violation of the various provisions in AB 51 will be an unlawful employment practice, subjecting the employer to a private right of action under FEHA. Although this will presumably require an employee to exhaust the administrative remedy under FEHA, this provision would nevertheless lead to further exposure for California employers who utilize arbitration agreements with their employees. Importantly, however, AB 51 explicitly does not apply to post-dispute settlement agreements or negotiated severance agreements.

Federal Preemption of AB 51?
Generally, the Federal Arbitration Act, 9 U.S.C. § 1, et seq., (“FAA”) preempts state laws like AB 51 that attempt to regulate or restrict arbitration agreements. Under the FAA, a state may not pass or enforce laws that interfere with, limit, or discriminate against arbitration, and state laws attempting to interfere with arbitration have repeatedly been struck down by the U.S. Supreme Court as preempted by the FAA. AB 51, however, expressly states that it does not invalidate a written arbitration agreement that is otherwise enforceable under the FAA. Proponents of AB 51 argue that it is not preempted by the FAA because it only impacts “mandatory” arbitration agreements and does not affect “voluntary” agreements.

Impending Court Challenges
Many questions surrounding the validity and application of AB 51 remain unanswered. Therefore, legal challenges on the ground that AB 51 is preempted by the FAA were inevitable. On December 6, 2019, the U.S. and California Chambers of Commerce filed a complaint in the U.S. District Court for the Eastern District of California, alleging that AB 51 is preempted by the FAA. The complaint seeks a permanent injunction to halt enforcement of AB 51 until its legality is determined. The January 10, 2020 hearing of the preliminary injunction may give strong indication which way the Court will turn on the issue for the time being, but the ultimate determination will likely take years to wend its way through the Ninth Circuit Court of Appeal and perhaps the U.S. Supreme Court.

What Should Employers Do In Response to AB 51?
As this challenge to AB 51 makes its way through the courts, employers with ongoing arbitration agreements (or those interested in implementing arbitration programs) face a difficult choice starting in 2020: Play it safe and strike all mandatory arbitration agreements, or maintain the status quo until the litigation plays out. There is no one-size-fits-all approach that will work for every employer.

Employers currently using arbitration agreements should consider either staying the course based on the assumption that AB 51 will be held preempted by the FAA and therefore unenforceable, or suspending their arbitration programs until more clarity on AB 51 is provided. Employers implementing arbitration programs after January 1, 2020 should consider including in their arbitration agreements specific language to conform with Labor Code 432.6 and emphasizing the voluntary nature of the agreement.

The attorneys at Conkle, Kremer & Engel remain vigilant on employment law developments to advise businesses on all aspects of employee legal relations, including updates on the use of arbitration agreements as uncertainty looms.

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New California Law to Classify Employees and Independent Contractors

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On September 11, 2019, California lawmakers passed California Assembly Bill 5 (AB 5), codifying and clarifying the California Supreme Court’s landmark 2018 decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which fundamentally altered the test for determining the classification of workers as employees or independent contractors in California. We previously blogged about the Dynamex decision, under which workers are presumed to be employees for purposes of claims for wages and benefits arising under Industrial Welfare Commission wage orders, and companies must meet a three-pronged “ABC” test to overcome this presumption and establish that an individual is an independent contractor. AB 5 would codify the ABC test into law.

AB 5 has been sent to Governor Gavin Newsom, who recently endorsed it in an op-ed for the Sacramento Bee, and he is expected to sign it into law.

Under AB 5, a new Section 2750.3 would be added to the California Labor Code. Section 2750.3, subsection (a)(1), will state that, for purposes of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
(B) The person performs work that is outside the usual course of the hiring entity’s business; and
(C) The person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

Under the new law, California workers can generally only be considered independent contractors if the work they perform is outside the usual course of a company’s business. Conversely, a company must classify workers as employees if the company exerts control over how the workers perform their duties, or if their work is part of a company’s regular business.

AB 5 has far-reaching implications for California businesses who classify their workers as independent contractors because it extends the scope of the Dynamex ruling from only Industrial Wage Commission Orders to include claims for wages and benefits under the Labor Code and Unemployment Insurance Code. The Dynamex decision applied only to rules governing minimum wages, overtime and meal and rest breaks, but under AB 5, individuals classified as employees must also be afforded workers’ compensation in the event of an industrial injury, unemployment and disability insurance, paid sick days and family leave.

However, AB 5 is also narrower than the Dynamex decision in that it exempts certain occupations from the new test. The new Labor Code section would provide limited exemptions for certain occupations, including direct sales salespersons, licensed estheticians, licensed electrologists, licensed manicurists (until January 1, 2022), licensed barbers and licensed cosmetologists from the application Labor Code Section 2750.3 and the holding in Dynamex, provided that the individual:
• Sets their own rates, processes their own payments, and is paid directly by clients;
• Sets their own hours or work and has sole discretion to decide the number of clients and which clients for whom they will provide services;
• Has their own book of business and schedules their own appointments;
• Maintains their own business license for the services offered to clients; and
• If the individual is performing services at the location of the hiring entity, then the individual issues a Form 1099 to the salon or business owner from which they rent their business space.

If a company can meet its burden of showing that the individual meets the above criteria, then the determination of proper classification for that individual would be governed by S.G. Borello & Sons, Inc. v. Department of Industrial Relations, the 1989 decision that has been the prevailing law for wage order cases in California prior to Dynamex. Borello established an 11-factor inquiry into the degree of control a company exerts over the worker’s performance of his or her duties: whether the hiring entity has the right to control the manner and means of accomplishing the result desired; the right to discharge at will, without cause; whether the worker is engaged in a distinct occupation or business; the kind of occupation and the skill required in the particular occupation; who supplies the instrumentalities, tools and the place of work for the person doing the work; the length of time for which services are to be performed; the method of payment; whether or not the work is part of the hiring entity’s regular business; and whether or not the parties believe they are creating an employer-employee relationship.

Another aspect of AB 5 worth noting is that it would not allow an employer to reclassify an individual who was an employee on Janaury 1, 2019 to an independent contractor due to the measure’s enactment.

With the law set to become effective on January 1, 2020, companies, particularly in the salon and beauty industry, would be wise to reassess the classification of their workers to ensure compliance with the new law. The attorneys at Conkle, Kremer & Engel have extensive experience advising businesses on best practices regarding proper worker classification, and will be continually monitoring developments related to AB 5 as they occur.

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California Expands Sexual Harassment Training Requirements to Most Employers

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As usual, a new year means new laws, especially in California.  For 2019, one law that all employers need to be aware of is SB1343, which amended Government Code Sections 12950 and 12950.1 to impose new sexual harassment training requirements on most employers.  Previously, only employers of at least 50 employees were required to train their supervisory employees.  Starting now, if you have 5 workers, including both employees and contract workers, you have to comply with several training requirements:

  • – Within the next year, all supervisory employees must complete two hours of sexual harassment training.

– The definition of “supervisor” is fairly broad and covers more than just your managers. Under California Government  Code 12926(t), “Supervisor” means “any individual having the authority, in the interest of the employer, to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees, or the responsibility to direct them, or to adjust their grievances, or effectively to recommend that action, if, in connection with the foregoing, the exercise of that authority is not of a merely routine or clerical nature, but requires the use of independent judgment.”

  • – Within the next year, all nonsupervisory employees must complete one hour of sexual harassment training.
  • – For all employees, the training must be provided within six months of the employee’s assumption of a position with the company.
  • – After January 1, 2020, each employee must receive sexual harassment training once every two years.
  • – Beginning January 1, 2020, seasonal and temporary employees, and any employees hired to work for less than six months, must receive sexual harassment training within 30 calendar days after the hire date or within 100 hours worked, whichever occurs first. If the temporary employee is employed by a temporary services employer (i.e., a temporary staffing agency), the temporary services employer is required to provide this training, not the client.

California’s Department of Fair Employment and Housing (DFEH) is required to develop online sexual harassment training courses.  DFEH has stated that it expects to have such training programs available on its website by late 2019.  If they are available on time, employers can direct their workers to those online courses, but otherwise employers must develop or provide their own training.

Employers should also take this as a reminder to check your work site and make sure you have prominently displayed the required posters.  For example, California law requires employers to display the DFEH poster regarding workplace discrimination and harassment in a prominent and accessible location in the workplace, and to distribute a sexual harassment prevention brochure to their employees.

Constant vigilance is required for employers to comply with rapidly changing requirements.  Employers should consult with experienced counsel particularly in regard to interpretation of new requirements such as these.  Conkle, Kremer & Engel attorneys are experienced with counseling employers in the face of the changing legal landscape in employment law.  CK&E attorneys help companies identify and reduce areas of exposure to liability for employment claims, including wage and hour, discrimination, harassment, and retaliation claims.

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GDPR is Coming: If Your Business is Online, Beware the New EU Privacy Regulation

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If you sell or offer goods to EU residents, even from the U.S., it is now necessary to re-examine your data processing and privacy procedures. There is a new EU privacy law that will go into effect on May 25, 2018, with significant penalties for violations. The EU General Data Protection Regulation, or “GDPR,” covers any website, including a U.S.-based website, selling to EU residents and processing personal data of those EU residents.  Here are some basic questions and issues to address concerning your online presence:

Do you collect, store, or use Personal Data? You are subject to this regulation if your website collects, organizes, stores, disseminates, uses or otherwise processes personal data of EU residents, regardless of where your website keeps or uses such information.

“Personal Data” will likely be broadly interpreted. The GDPR defines “Personal Data” very broadly to include any information that can be used to identify an individual. This can include all sorts of data, like names, e-mail addresses, office addresses, and even IP addresses.

Can your users easily revoke consent? The GDPR takes consent seriously. The GDPR requires you to demonstrate consent was “freely given, specific, informed and unambiguous” by a “clear affirmative action” on the part of the user for the processing of personal data. When you ask for the user’s consent, you must articulate “specified, explicit, and legitimate purposes” for processing the data. Limit the data you collect to what is necessary to achieve these articulated purposes. Be extra careful if you are collecting sensitive personal data – the GDPR raises the bar for obtaining consent to process “special categories of personal data.” And make sure it is as easy for the user to withdraw consent as it is to give consent.

Can you respond quickly and effectively when the user exercises rights under the GDPR? The GDPR grants users, or “data subjects,” quite a few rights, including but not limited to knowing where and why you are taking the data and anything that happens to it, objecting to its collection or use, obtaining a copy of it, correcting or erasing it, or restricting its use. Make sure you have procedures in place to respond appropriately in the event a user exercises rights under the GDPR.

Penalties for failure to comply can be steep. Failure to comply with the GDPR can expose companies to administrative fines of up to 20 million Euros or 4% of the total worldwide annual turnover of an “undertaking” of the preceding financial year, whichever is greater. Even if you use vendors to process your data, you are still responsible for monitoring compliance. You are required to “implement appropriate technical and organizational measures to ensure and to be able to demonstrate that processing is performed in accordance with this Regulation.”

The EU GDPR is a minefield of regulatory requirements that require a close examination of your data processing and privacy procedures. Some companies, such as Microsoft, are implementing a single system worldwide to comply with the EU’s requirements, effectively granting greater-than-required  rights to non-EU residents.  There will likely be considerable uncertainty and confusion as the GDPR requirements are implemented and enforcement begins.  Contact Conkle, Kremer & Engel to help bring your data processing and privacy procedures into compliance.

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California’s New, Stricter Test for Independent Contractors and Employees

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Does Your Business Pass California’s New, Stricter Test for Independent Contractors Rather Than Employees?

On April 30, 2018, the California Supreme Court issued a decision in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County that will make it more difficult for employers to classify their workers as independent contractors.  Under the new Supreme Court test, workers are presumed to be employees, not independent contractors.  Incorrect classification can have serious consequences.

Previously, many California employers thought an agreement stating a worker was an independent contractor was enough.  No more.  The Supreme Court has adopted a strict “ABC” test to determine whether a worker is properly classified as an “employee” or as an “independent contractor.”  Under this test, the Court presumes a worker is an “employee” unless the hiring business can establish that the worker meets all three conditions of an independent contractor:

(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 such work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) apart from the independent contractor relationship, the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The presumption means that when in doubt employers should err on the side of classifying their workers as employees.  An employer that misclassifies a worker as an independent contractor can be liable for back wages and wage and hour penalties, including willful misclassification penalties that can range from $5,000 to $25,000 per violation.  These issues may be raised by the worker after the “independent contractor” relationship has ended.

If your workers do not meet this new 3-part test for independent contractors, make sure you re-classify them as employees and pay them all the wages and benefits given to your employees under the wage and hour laws, deduct payroll taxes, cover them under your worker’s compensation insurance, and generally treat them like your other employees.

If you have questions about how the new decision applies, or whether your workers meet the new strict ABC test for independent contractors, you should promptly consult with experienced employment counsel.  Conkle, Kremer & Engel attorneys have years of experience in employment matters, advising businesses and litigating and arbitrating disputes, including class actions.

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Do You Have to Pay Your Summer Interns?

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Do I Have to Pay My Interns?

Spring will soon draw to a close.  As you prepare for the arrival of your summer interns, make sure you have asked yourself this question: Do I need to pay my interns?

The easiest answer is generally, YES!  But the easiest answer is not the whole story, because you do not have to pay your interns in accordance with wage and hour laws if the company-intern relationship meets the federal (and state, as applicable) test.

The U.S. Department of Labor’s New Test

Earlier this year, the U.S. Department of Labor helped private businesses out.  It announced that it would be using a new (more employer-friendly) test to determine whether an intern is an “employee” that must be paid in compliance with wage and hour laws.  Whether an intern must be paid in compliance with federal wage and hour laws now depends on seven factors:

  • The extent to which the intern and the company clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa;
  • The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions;
  • The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;
  • The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;
  • The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;
  • The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern; and
  • The extent to which the intern and the company understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

According to the DOL, “no single factor is determinative.”  Thus, companies need to conduct a case-by-case analysis of each internship position to determine whether that intern should be paid.

I’m Located in California.  Do I Need to Be Concerned About State Laws Controlling Wage and Hour Requirements?

Here, the clear answer is YES!  For many years, the California Department of Labor Industrial Relations, Division of Labor Standards Enforcement (“DLSE”) has relied on the DOL’s old six-factor test.  For now, California businesses should also look to the DOL’s old six-factor test to determine whether they need to pay their interns.

The DOL’s adoption of this new seven-factor test this year followed a decision in the Ninth Circuit (which covers California).  In 2017, the federal Ninth Circuit Court of Appeals made a predictive statement, that the California Supreme Court would no longer use the old DOL test, and would instead apply a test more similar to the one set forth above.  Benjamin v. B & H Educ., Inc., 877 F.3d 1139 (9th Cir. 2017).  However, this statement is only predictive of what the federal court thinks the California courts would do, so it is not actually controlling law in California.

Thus, until the California state agencies and courts take a position on whether they will follow the Ninth Circuit and the DOL, companies should also check that they have considered the DLSE’s interns test to make their decision to pay (or not pay) interns.  That requires an analysis under the DOL’s old six-factor test:

  • The internship, even though it includes actual operation of the facilities of the company, is similar to training which would be given in an educational environment;
  • The internship experience is for the benefit of the intern;
  • The intern does not displace regular employees, but works under close supervision of existing staff;
  • The company that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  • The intern is not necessarily entitled to a job at the conclusion of the internship; and
  • The company and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If you have not examined your internship programs with these federal and state legal considerations in mind, you should do so immediately, before your summer interns arrive.  Review your internship materials, including your recruitment postings, company policies, and any other documents you anticipate having the intern sign before starting the summer program.

Conkle, Kremer & Engel attorneys are experienced with counseling employers in the face of a constantly changing legal landscape in employment law, and with helping companies identify and reduce areas of exposure to liability for employment claims, including wage and hour, discrimination, harassment, and retaliation claims.

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California Employers’ Risks of PAGA Exposure

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If you’re a California employer, you may have heard people refer to “PAGA” and wondered what it’s all about.  PAGA is a legal device that employees can use to address Labor Code violations in a novel way, in which employee representatives are allowed to act as if they are government enforcement agents.

The California Labor and Workforce Development Agency (CLWDA) has authority to collect civil penalties against employers for Labor Code violations.  Seems simple enough.  But in an effort to relieve an agency with limited resources of the nearly impossible task of pursuing every possible Labor Code violation committed by employers, the California legislature passed the Private Attorney General Act of 2004 (“PAGA”).  PAGA grants aggrieved employees the right to bring a civil action and pursue civil penalties against their employers for Labor Code violations, acting on behalf of the State of California as if they were the CLWDA.  If the aggrieved employees prevail against the employer, the employees can collect 25% of the fines that the state of California would have collected if it had brought the action.

Penalties available for Labor Code violations can be steep – for some violations, the state of California can recover fines of $100 for an initial violation to $200 for subsequent violations, per aggrieved employee, per pay period.  These penalties can add up to serious money, especially if the aggrieved employee was with the company for some time.  But what makes PAGA particularly dangerous for employers is the ability of employees to bring a representative action (similar to a class action), in which they can pursue these penalties for violations of the Labor Code on behalf of not only themselves, but also all others similarly situated.  Under this scheme, an aggrieved employee can bring an action to pursue penalties on behalf of an entire class of current and former employees, thereby multiplying the penalties for which an employer can be on the hook and ballooning the risk of exposure.  That risk is further amplified because PAGA also permits plaintiff employment attorneys to recover their fees if their claim is successful.

There is an upward trend in use of PAGA against California employers.  A July 2017 California Supreme Court decision, Williams v. Superior Court, exacerbated the problem for employers:  The California Supreme Court decided that plaintiff employment attorneys can obtain from employer defendants the names and contact information of potentially affected current and former employees throughout the entire state of California.  This means the PAGA plaintiffs can initiate an action and then pursue discovery of all possible affected employees and former employees throughout California, which can greatly expand the pool of potential claimants and ratchet up the exposure risk for employers.

Employers in California need to be attuned to Labor Code requirements and careful in their manner of dealing with employees, so that they avoid exposure to PAGA liability to the extent possible.  Conkle, Kremer & Engel attorneys are familiar with the latest developments in employment liability and able to assist employers avoid trouble before it starts, or respond and defend themselves if problems have arisen.

 

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Making a Federal Case of Trade Secret Misappropriation

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On April 27, 2016, the Defend Trade Secrets Act (DTSA) passed the House of Representatives and went to President Obama’s desk, where it is expected to be signed.  With that, trade secret misappropriation claims will exist under federal law and can be pursued in federal courts.

The DTSA will provide businesses with more effective new tools to protect their sensitive information from misappropriation.  In the context of trade secrets, misappropriation is generally considered the acquisition of hidden information through some improper means .  The broadly structured language of the DTSA extends its protection to “all forms and types of financial, business, scientific, technical, economic, or engineering information” so long as (1) the owner has taken reasonable steps to keep the information secret and (2) the information derives its value from that secrecy.  The DTSA largely tracks the concepts of trade secrets that have long existed in most states.  But under the DTSA, plaintiffs will be able to bring claims for misappropriation of trade secrets in federal court.

Previously, trade secrets have been an outlier in the world of intellectual property.  Unlike copyright, patent and trademark claims, which receive the wider benefit and protection of federal court jurisdiction, trade secret claims have mostly been litigated in state court.  The problem with this has been that, given the diffuse and global nature of business and commerce, state courts are often not the best venue for intellectual property claims.   If a misappropriation occurs across state or national borders, a federal court is better suited to address such jurisdictional conflicts.

To gain access to the DTSA, and federal court jurisdiction, all that is required is that the “trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”  This is generally a very low threshold, as most products and services these days are used or intended for use in at least interstate commerce – only the most localized of businesses would not be able to meet this minimal requirement.

The DTSA will confer on trade secret holders a greater ability to pursue misappropriation beyond the borders of the United States, and can even pursue remedies before the International Trade Commission.  In addition, a secondary benefit gained from access to the federal court system is a potential for more uniform decisions and precedent than the more disparate and varied state courts decisions.

Another interesting development that the DTSA will usher in relates to injunction and damages.  Injunctions are often sought in trade secret cases to prevent the information at issue from being disclosed.  Previously,  under the Uniform Trade Secrets Act (UTSA), which almost all states have adopted in some form or another, the injunction would end when the trade secret ceased to exist or after an amount of time necessary to stop any potential commercial advantage being gained from a misappropriation.  The DTSA however contains no such limitation, which presumably will give courts more discretion in applying an extended injunction.  Also, where the UTSA allows for double damages in cases of “willful and malicious misappropriation”, the language of the DTSA has upped this to treble damages.

Perhaps the biggest tool in the DTSA tool belt is the ability to seek ex parte civil seizures.  What this means is that a plaintiff can, without giving a defendant notice, seek the seizure of property if the plaintiff can demonstrate that the defendant, or someone working in concert with the defendant, is likely to “destroy, move, hide, or otherwise make such matter inaccessible to the court”.  This type of ex parte seizure is a powerful new tool that will likely allow trade secret holders to better combat harm associated with a misappropriation.  And being a powerful tool, it may be subject to misuse among competitors.

Conkle, Kremer & Engel attorneys stay current on developments that may be important to their clients concerned about commercial and intellectual property issues.  If you have questions about the DTSA or other aspects of trade secret or intellectual property protection, we would be glad to hear from you.

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