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Article | FINEX Observer

California nightmares — why EPL claims are so challenging for Golden State employers

Financial, Executive and Professional Risks (FINEX)
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By Adam Cantor | November 1, 2019

In 2019, employment practices liability (EPL) underwriters are struggling to keep pace with increased claims and expanding losses in the state of California.

In their 1965 hit song "California Dreamin'," The Mamas and the Papas harmonized about a Golden State which was viewed as a destination spot by many Americans attracted by beautiful beaches, mild weather and a dynamic economy. But for employment practices liability (EPL) underwriters in 2019, it's more like a dissonant "California Nightmare," where the struggle to keep pace with increased claims and expanding losses doesn't seem to end.

What makes California such a tough state for employers and, by extension, EPL insurers? There are multiple factors, including (1) the influence of the Dynamex decision in 2018, (2) the PAGA Act and (3) new California-specific laws enacted in 2019. We'll briefly address each in this article, then conclude with a few additional thoughts and takeaways.

Dynamex and its fallout

April 2018 saw the California Supreme Court issue a landmark decision in the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles. The decision jolted the business community by rejecting 30 years of precedent and making it much harder for companies to designate workers as independent contractors. We'll take an in-depth look at the Dynamex decision and whether it applies retroactively (per the Vazquez v. Jan-Pro Franchising Int'l Inc. case) later in this issue, in the article "Classifying workers in the gig economy – a view through the lens of Dynamex." Simply note for now that the Court embraced a presumptive standard that all workers are deemed to be employees (instead of independent contractors), while putting the burden on employers to overcome that presumption by proving each of the requirements in Dynamex's new ABC test, a rigid and formulaic test for determining whether a worker is properly classified as an independent contractor for California wage order claims.

The Dynamex and Jan-Pro decisions have major implications for California businesses that rely on independent contractors (e.g., gig economy companies) or franchises (e.g., the Ninth Circuit defendant Jan-Pro, an international commercial cleaning company). If Dynamex is ultimately held to apply retroactively, it could subject employers to potential liability for misclassifying workers as contractors as far back as 2014 and might even compel some businesses to simply reclassify contractors as employees and change pay and benefits (at much higher costs for those businesses).

By restricting when companies can classify workers as independent contractors, Dynamex raises labor costs for California businesses (e.g., in the form of increased overtime, sick leave and minimum wage benefits now owed to employees). In addition, misclassification of a worker as an independent contractor carries many risks and potential liabilities for businesses including wage and hour liability, Employment Development Department (EDD) fines and assessments, IRS fines and assessments, I-9 violations, penalties for violation of state workers compensation insurance laws and liability for unpaid premiums, entitlement of misclassified workers to coverage under the company's employee benefit plans, and penalties for willful misclassification.

For businesses, the only positive thing about Dynamex is that it currently applies only to wage order claims. For claims not brought under wage orders — such as claims based on labor statute violations, which would include most other types of EPL wrongful act claims, e.g., wrongful termination, discrimination, etc. — courts can continue to rely on the more flexible multi-standard Borello testi for classifying workers as employees versus contractors. (See Garcia v. Border Transportation Group, LLC, 28 Cal.App.5th 558, Oct. 22, 2018.) The Appellate Court in Garcia found no reason to apply the ABC test categorically to every working relationship, holding that the more flexible Borello test should apply when a claim is predicated solely on the Labor Code.

Garcia aside, not everything is settled. Assembly Bill 5 (AB 5) is currently pending before the California legislature and is being closely watched. It is the most consequential labor bill of the year. While AB 5, if passed, would exempt certain occupations from Dynamex's ABC test, it would also codify Dynamex and extend that decision to all provisions of the Labor Code unless another definition of "employee" is provided. The ABC test would then apply to a labor-code claim for wrongful termination in violation of public policy — a typical, garden variety EPL claim. That will certainly have a negative effect on EPL claims experience.

Whatever the outcome, it is clear that Dynamex and its fallout have had a massive impact on workers, businesses and entrepreneurs considering doing business in the Golden State.

PAGA

Fifteen years ago, California set up a powerful tool for enforcing its complex labor and wage laws. The Private Attorney General Act of 2004 (or PAGA) provides employees injured by their employer's Labor Code violations with an opportunity to file private actions for statutory penalties on behalf of him or herself and other aggrieved employees, as well as the State of California. PAGA thus allows an individual employee to stand in the shoes of the government agency that enforces the labor laws and sue the employer on behalf of a class of company employees, asserting the rights of all injured workers. While the intent of the law is to protect workers by "achieving maximum compliance with state labor laws," in reality, PAGA has allowed predatory trial lawyers to take advantage of it and has resulted in a flood of litigation against California businesses, often over minor or technical violations of the law where the employee(s) suffered no harm.

Because PAGA representative actions can carry substantial liability for employers, insurance companies often exclude coverage for wage and hour claims under their EPL policies. However, over the past few years, as certain insurers have expanded their policies to include some wage and hour coverage, the insurance market's exposure to PAGA wage actions has correspondingly increased.

Moreover, PAGA actions are not just limited to wage and hour claims — they can also involve typical covered EPL wrongful act claims. For example, in January 2019, a gender discrimination lawsuit was filed in San Diego Superior Court under PAGA against a law firm and five of its current and/or former male leaders by a female equity partner representing a class of similarly situated female employees at the firm. Whether the underlying PAGA liability is or is not covered by insurance, the defense costs in litigating the claim may well be — and those costs can be quite high. So PAGA is another component of California's unique legal environment that results in more claims and, consequently, more worries for EPL underwriters.

New California laws for 2019

In 2018, the California Legislature passed some labor and employment bills signed by then Governor Brown. These laws became effective on January 1, 2019 and include:

  • SB 1300 — Significant New Protections and Prohibitions Under the California Fair Employment and Housing Act (FEHA)
    • This law makes a sweeping change to the landscape in which FEHA harassment claims are litigated by making it easier for employees to bring such claims, while simultaneously making it much harder for employers to obtain quick dismissals (noting that harassment cases "are rarely appropriate for disposition on summary judgment"). In SB 1300, the California legislature has rejected the higher "severe or pervasive" standard for unlawful harassment established by the U.S. Court of Appeals Ninth Circuit; instead, a single incident of harassing conduct is sufficient to create a triable issue regarding the existence of a hostile work environment if the harassing conduct unreasonably interfered with plaintiff's work performance or created an intimidating, hostile or offensive working environment.
  • SB 1343 — Harassment Prevention Training Requirements Extended to Smaller Employers and Nonsupervisory Employees
  • SB 820 — Settlement Agreements Cannot Prevent Disclosure of Factual Information Related to Sexual Harassment or Discrimination Claims
  • SB 224 — Makes it easier to bring sexual harassment claims under California Civil Code Section 51.9
    • One element for a sexual harassment claim in California requires that there is a "business, service or professional relationship between the plaintiff and defendant," and SB 224 adds elected officials, lobbyists, and "directors or producers" to the statute's non-exhaustive list of such relationships. Another element of the law required that there was an "inability by the plaintiff to easily terminate the relationship," but SB 224 has removed that element thereby making it easier for plaintiff to bring a claim. Finally, SB 224 makes it unlawful for a person to deny, or to aid, incite or conspire in the denial of rights created by section 51.9.

Ok, so California's tough…but is it really unique?

So far, we have examined why the Golden State's legal environment presents some real challenges for companies vis-à-vis exposure to EPL claims. But is California really an outlier, or are other states and jurisdictions moving closer to its model? Perhaps it is the latter. For example, New York has rolled out a slew of new, broad, pro-worker employment laws in 2019 which are leading some to question whether New York is the new California! Some of the NY highlights include:

  • NYS Assembly Bill A08421 — Similar to California's SB 1300, it removes the requirement that workplace harassment be "severe or pervasive" to constitute a hostile work environment in discriminatory or retaliatory harassment cases. The "severe or pervasive" test was the prior standard under the New York State Human Rights Law (NYSHRL). The sweeping bill also realizes a number of other pro-worker changes that likewise inflate employers EPL claim exposures, including:
    • Makes the NYSHRL applicable to all employers regardless of size, by removing the prior "four-employee threshold"
    • Expands 2018's non-disclosure and mandatory arbitrations restrictions related to sexual harassment claims to all discrimination claims
    • Requires (rather than permits) courts to award attorneys' fees to a prevailing party under the NYSHRL where the employer has committed an unlawful discriminatory practice; the previous standard applied to cases under the New York
    • Enlarges the statute of limitations for administrative charges before the NYS Division of Human Rights from one year to three years
  • NYS Senate Bill S6209 — Upon signing by the governor, the law will immediately take effect to clarify that race discrimination under the NYSHRL will now include "traits historically associated with race, including but not limited to, hair texture and protective hairstyles." For example, the law will bar as discriminatory a company grooming policy that prohibits twists, braids, cornrows, Afros or fades, or which requires employees to change the state of their hair to conform with company appearance standards.
  • GENDA: Gender Expression Non-Discrimination Act — Effective February 2019, GENDA makes it illegal under the NYSHRL to refuse to hire, fire or discriminate based on an employee's gender identity or expression. Gender identity or expression is defined as a person's actual or perceived gender-related identity, appearance, behavior, expression, or other gender-related characteristic regardless of the sex assigned to that person at birth, including, but not limited to, the status of being transgender.
  • New York City's Marijuana Testing Ban — Enacted May 10, 2019, it will become effective one year from now. This law makes it an unlawful discriminatory practice (under NYC's Human Rights Law) for employers to require prospective employees to submit to marijuana or THC testing as a condition of employment. There are exceptions to the law for some types of employment (e.g., certain types of law enforcement, medical and child supervisory positions) and employers can still forbid marijuana use at work and prohibit employees from working while impaired.

Another example is Illinois. In June 2019, and similar to recently passed CA and NY legislation, the Illinois legislature passed a 'MeToo-inspired bill (Public Act 101-0221) which expands and reforms sexual harassment and discrimination law by creating extensive employer obligations to prevent workplace discrimination and harassment and to increase employee protections. The bill was signed into law in August. The new law (1) prohibits unilateral agreements to arbitrate claims for discrimination, harassment and retaliation for complaining about discrimination or harassment; (2) changes sexual harassment reporting and training requirements; and (3) impacts how union representation is handled during sexual harassment claim proceedings. It undoubtedly raises the compliance bar for employers and subjects Illinois companies to increased EPL claims exposure.

Final takeaway

When pulling together a management and executive risk liability program, clients often focus on the trendy coverages which have either the board's or the media's frequent attention (e.g., D&O and cyber) and overlook EPL and its attendant exposures. They should not. As shown by California, New York and Illinois, legislative action and public sentiment continue toward increasing and expanded protections for employees. In this environment, a robust EPL policy with sufficient coverage — plus an experienced and knowledgeable insurance broker that knows what to look for — are an absolute must.


1 Under the more flexible Borello test, the primary factor for determining contractor status is whether "the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired."

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