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NLRB Division of Advice Says Misclassification Violates the National Labor Relations Act, Too

Issue: The National Labor Relations Board’s (NLRB) Division of Advice released a legal memorandum on August 26, 2016 announcing that employers who misclassify employees as independent contractors violate Section 8(a)(1) of the National Labor Relations Act (NLRA) by restraining the employees’ section 7 rights to engage in concerted, protected activity. The announcement came in the context of a request for advice from the Los Angeles Region as to whether the Region should issue a complaint against Pacific 9 Transportation, Inc., an employer that told its drivers, whom the Region had already determined were employees, in a written communication that they were independent contractors and had no right to unionize but treated the drivers as employees in “virtually every respect.” The Division of Advice determined that a complaint should be issued against the employer because “treating the drivers as employees on a daily basis while continuing to insist that they are independent contractors … is without any legitimate business purpose other than to deny the drivers the protections that inure to them as statutory employees, and operates to chill its drivers’ exercise of their Section 7 rights.”

Impact: The Division of Advice’s determination follows NLRB General Counsel Memorandum 16-01, issued in March 2016, which discussed misclassification of employment status as an issue “of particular interest” to the NLRB. Employers should be mindful that the risks associated with misclassification now include NLRB scrutiny and a potential unfair labor practice charge. Thus, in addition to the usual precautions to make sure that independent contractor agreements and treatment of independent contractors are consistent with their status, when a dispute or a pre-dispute situation arises with an independent contractor, employers should be aware that the possible consequences now include NLRB action, in addition to private claims and state and federal Department of Labor actions.

DOL Finalizes Rules and Guidance on Fair Pay and Safe Workplaces Executive Order

Law: On August 25, 2016, the Department of Labor and Federal Acquisition Regulatory Council issued final regulations and guidance implementing the Fair Pay and Safe Workplaces Executive Order signed by President Obama in July 2014. The detailed rules and guidance—which span well over 800 pages—will require certain prospective federal contractors and subcontractors to disclose “labor law violations” arising under 14 federal labor and employment laws and executive orders when applying for the award or extension of a federal contract. The contracting officer will, in turn, consider whether such labor violations are serious, repeated, willful or pervasive. If the contracting officer determines that a contractor or subcontractor is not “responsible” enough for a federal contract, he or she can require the contractor to enter into a labor compliance agreement to correct or remediate violations or simply decline to award the contract. In addition, the law also includes two other major provisions: first, a rule that requires covered contractors and subcontractors to include certain information regarding wages and hours in their workers’ paystubs or paychecks; and, second, a rule that allows employees of covered contractors and subcontractors to choose whether to bring Title VII claims or tort claims relating to sexual assault or harassment in arbitration or in court. The first phase of the new rules will take effect on October 25, 2016, with subsequent phases taking effect over the next year.

Impact: While contractors cannot be sure of the ultimate effect of the new rules on the award or extension of contracts, it is clear that the reporting requirements are a dramatic and onerous shift in oversight of this segment of employers. Government contractors and subcontractors must prepare for rigorous compliance with the new rules, including by collecting the substantial information required by the new rules, implementing a comprehensive program for maintaining such information in the future, performing an internal audit or engaging in a pre-assessment offered by the DOL to test compliance, and considering the effect of the new requirements on business or litigation strategies. In addition, employers will need to review their policies and practices to ensure compliance with the requirements relating to paycheck transparency and the arbitration of employee claims. Commentators suggest that the new rules suffer from a lack of clarity and that future interpretation will be key in employers’ implementation. We will be offering a webinar in the near future to discuss some practical steps that affected employers can take currently.

Second Circuit Expands Reach of “Cat’s Paw” Doctrine

Decision: In Vazquez v. Empress Ambulance Service, Inc., the Second Circuit expanded the reach of the “cat’s paw” doctrine, which is used to hold employers liable for the discriminatory or retaliatory intent of a supervisory employee who influenced, but did not make, the adverse employment decision. The plaintiff in Vazquez was terminated within hours of complaining to her supervisors that a male co-worker had sent her a text message containing a graphic, sexual photograph. The plaintiff alleged that when the co-worker learned of her complaint, he manipulated his text messages to make it appear that a conversation containing a sexual text with another person was a conversation between him and the plaintiff. The plaintiff alleged that the employer accepted the co-worker’s story as true and rejected her offer to inspect her cell phone to disprove his story. The plaintiff claimed that she was told by the employer that it “kn[e]w the truth,” that she had a sexual relationship with the co-worker and that she was being terminated because she had sexually harassed the co-worker. The plaintiff filed suit alleging retaliation in violation of Title VII and relying on the “cat’s paw” doctrine because the employer’s decision was influenced by the false information provided by the co-worker. The district court dismissed the complaint, concluding that the “cat’s paw” doctrine did not apply to the discriminatory or retaliatory intent of a non-supervisory co-worker.

On appeal, the Second Circuit reversed and held that although the plaintiff’s co-worker did not have any supervisory authority, the employer’s “own negligence provides an independent basis” to treat the co-worker as its agent and hold it accountable for his illegitimate intent. Referencing the allegations that the employer “blindly credited” the male co-worker’s assertions and “obstinately refus[ed] to inspect [the plaintiff]’s phone or to review any other evidence proffered by [the plaintiff] in refutation,” the Second Circuit concluded that “an employer may be held liable for an employee’s animus under a ‘cat’s paw’ theory, regardless of the employee’s role within the organization, if the employer’s own negligence gives effect to the employee’s animus and causes the victim to suffer an adverse employment action.”

Impact: While this decision purports to rely on the “cat’s paw” doctrine and effectively expands that doctrine, the decision actually focuses on a finding that the employer acted negligently in considering the facts. This decision retreats from the courts’ historical reluctance to second guess HR decisions. In particular, the decision emphasizes that employers can be held liable when there is an adverse action taken after a failure to conduct internal investigations thoroughly and in good faith and to consider all the evidence offered before making employment decisions.

California Court of Appeal Finds That Determination of Whether Employee Is “Aggrieved” Pursuant to PAGA Is Not Subject to Compulsory Arbitration

Decision: In Perez v. U-Haul Company of California, the plaintiffs filed a representative action under California’s Private Attorneys General Act (PAGA), alleging that U-Haul had violated several provisions of the California Labor Code. The plaintiffs had signed employment agreements containing an arbitration clause, in which each one had agreed to individually arbitrate any claims against the employer. U-Haul filed a motion to compel the plaintiffs to individually arbitrate “the predicate issue” of whether they were “aggrieved employees” under PAGA—i.e., whether they had personally been subjected to any Labor Code violation and therefore had standing to pursue a PAGA claim. U-Haul also requested a stay of all proceedings in the case pending the arbitration on the standing issue. The trial court denied U-Haul’s motion, concluding that California law prohibits an employer from compelling an employee to split the litigation of a PAGA claim between multiple forums. The California Court of Appeal agreed. Relying on the California Supreme Court’s decision in Iskanian, the Court of Appeal explained that forcing an employee to “split a PAGA claim into ‘individual’ and ‘representative’ components, with each being litigated in a different forum,” would enable the employer to “impose its preferred forum for different aspects of the PAGA claim.”

Impact: In making its findings, the court in Perez rejected the notion that the Federal Arbitration Act can apply to claims that belong to government entities or their designated proxies. In doing so, the court continued the trend in California positioning PAGA actions as a potential loophole for employees to bring California Labor Code claims on a class-wide basis through a representative action.