California Supreme Court Limits Payroll Servicers’ Liability for Failing to Comply with Wage & Hour Laws
Decision: In Goonewardene v. ADP, LLC, the California Supreme Court recently concluded that employees generally may not bring contract or negligence-based claims against their employers’ payroll servicer for failing to comply with California’s wage and hour laws. In Goonewardene, the plaintiff alleged that her employer’s payroll servicing company had breached its contract with her employer by failing to provide legally compliant wage statements, failing to pay overtime amounts, and otherwise failing to comply with the Labor Code and Industrial Wage Commission wage orders. The plaintiff argued that she could bring a breach of contract claim against the payroll servicer because she was a third-party beneficiary of that contract. The plaintiff also alleged that the payroll servicer was negligent by failing to comply with the Labor Code’s requirements and that the servicer’s inaccurate wage statements amounted to negligent misrepresentations.
The California Supreme Court held that the plaintiff’s claims should be dismissed. The court held that the employer’s contract with the payroll servicer—like most payroll services agreements—was intended only to benefit the employer, not its employees. Accordingly, the plaintiff could not bring a claim as a third-party beneficiary. The court explained that a contrary conclusion would bring payroll servicers into “the numerous wage and hour disputes that regularly arise between employees and employers,” resulting in increased costs that the payroll servicer would pass on to the employer. The court also held that the plaintiff’s negligence-based claims must be dismissed because payroll servicers did not owe a duty of care to employees and that imposing a duty of care on a payroll company would be contrary to public policy because, among other reasons, employees can already sue their employers to vindicate their rights under the Labor Code.
Impact: The Goonewardene decision will prevent plaintiffs from dragging payroll servicers into their wage and hour litigations—and thereby avoid (in the court’s words) a “potentially burdensome complication to California’s increasing volume of wage and hour litigation.” The decision, however, does not impact the employer’s liability to employees for wage and hour violations, and payroll servicers who fail to comply with wage and hour laws may still be liable to employers under breach of contract and indemnification theories.
Illinois Supreme Court Eases Standing Requirements for BIPA Claims
Decision: The Illinois Supreme Court recently issued a decision in Rosenbach v. Six Flags Entertainment Corp. establishing that private plaintiffs have standing to sue for breaches of the Illinois Biometric Information Privacy Act (BIPA) regardless of whether they have suffered an actual injury. BIPA imposes certain requirements on private entities that possess individuals’ biometric identifiers and information—such as employers that use employees’ fingerprint data for timekeeping or security purposes. For example, BIPA imposes disclosure and consent requirements on employers before collecting employee biometric information and requires entities to destroy certain biometric information within a set period of time. BIPA also grants a private right of action to “any person aggrieved by a violation of” BIPA and authorizes statutory penalties of up to $5,000 per violation.
In Rosenbach, the plaintiff, a teenager, alleged that the defendant had required him to provide his thumbprint before gaining admission to its amusement park but did not comply with BIPA’s disclosure, consent or data retention procedures. The plaintiff, however, did not allege any harm resulting from these violations. The Illinois appellate court, upon an interlocutory appeal, dismissed the plaintiff’s case, finding that he lacked standing to pursue his claims because he had only alleged “technical violation[s] of [BIPA],” not an actual injury. The Illinois Supreme Court disagreed and reversed the decision, concluding that “an individual need not allege some actual injury or adverse effect, beyond violation of his or her rights under [BIPA]” to “be entitled to seek liquidated damages and injunctive relief” under BIPA.
Impact: Rosenbach already has emboldened plaintiffs to file numerous BIPA lawsuits against private entities that use biometric data—including employers that use fingerprints and other data for employee timekeeping and security purposes. Illinois employers that use biometric data should update their policies and provide training to employees to ensure compliance with BIPA’s requirements, including its disclosure, consent and confidentiality retention requirements.
D.C. Circuit Wades In on Joint Employer Test
Development: Since 2015, employers have been grappling with the implications of the National Labor Relations Board’s (“NLRB” or “Board”) decision in Browning-Ferris (362 NLRB No. 186 (2015), which radically expanded the scope of “joint employer” liability. Under Browning-Ferris, an entity is a joint employer if a common law employment relationship exists and the purported joint employer “possesses sufficient control over employees’ essential terms and conditions of employment to permit meaningful bargaining.” In applying this test, the Board jettisoned its prior position that the purported joint employer must actually exercise “direct and immediate” control over the employees; instead, the Board concluded that it was enough that the putative joint employer has the ability to directly or indirectly control the terms and conditions of employment, regardless of whether the employer exercises actual control. The Board suggested that contract provisions reserving the right to control might be sufficient to impose joint-employer liability.
While Browning-Ferris was on appeal, at the end of December 2017, the NLRB overruled the standard articulated in Browning-Ferris in Hy-Brand Industrial Contractors, Ltd. The Board went back to the test it had employed for three decades, holding that joint employer status requires the actual exercise of “direct and immediate” control over the terms and conditions of employment, and that such control must be more than merely “limited and routine.” 365 NLRB No. 156 (2017). However, Hy-Brand was vacated in February 2018 following a ruling by the NLRB’s Designated Agency Ethics Official that one of the board members who decided the case was disqualified from participating in the proceedings due to a conflict of interest. Browning-Ferris was therefore reinstated. In response, the NLRB issued a proposed rule in September 2018 that would restore the Hy-Brand test. The comment period ended in mid-December 2018 and is awaiting final decision.
On December 28, 2018, the D.C. Circuit finally issued its decision in Browning-Ferris Indus. of Cal., Inc. v. NLRB. The court approved the NLRB’s 2015 articulation of the joint employer test, including its determination that indirect control and a company’s reserved right to control were factors to be considered, as consistent with the common law. At the same time, the court reversed the Board’s application of its new test to the case before it because the Board failed to “differentiate between those aspects of indirect control relevant to status as an employer [that is, related to the essential terms and conditions of employment] and those quotidian aspects of common-law third-party contract relationships.” The court remanded for the Board to identify specific facts supporting its joint-employer finding and to create a “legal scaffolding” for applying the indirect control factor that will “keep the inquiry within traditional common-law bounds and recognize that ‘some such supervision is inherent in any joint undertaking, and does not make contributing contractors employees.’” The court also remanded for the Board to identify what constitutes the “essential terms and conditions of employment” and to clarify what “meaningful collective bargaining” might require. And it left up in the air the question of whether indirect control or reserved-but-unexercised authority could, on their own, establish a joint employer relationship.
Impact: The NLRB’s revision of the joint-employer standard will have to take the D.C. Circuit’s decision into account insofar as it was based on an interpretation of the common law of agency. What that means for the final rule is unclear. What is clear is that litigation is likely to continue. As a result, employers should take a close look at their staffing relationships with third parties and consider whether and to what extent they have reserved authority or exercise “indirect” control over work terms and conditions. While these may be necessary for business reasons, employers should reevaluate, and possibly restructure, those relationships in light of the expanded legal risks brought on by the D.C. Circuit’s decision.
Ninth Circuit Invalidates Background Check Disclosure Form over Grammatical Errors and Reference to State Law Disclosure Requirements
Decision: On January 29, 2019, a unanimous panel of the Ninth Circuit held in Gilberg v. California Check Cashing Stores LLC that an employer’s background check disclosure form violated the Fair Credit Reporting Act (FCRA) because it contained grammatical errors and also included a section referencing state law disclosure requirements. Reversing the district court, the panel held that the disclosure form violated both the FCRA’s “clear and conspicuous disclosure” requirement and its standalone document requirement. The panel first concluded that the disclosure form was not clear and conspicuous because a reasonable person would have difficulty understanding the disclosure’s scope due to grammatical errors in the following sentence:
The scope of this notice and authorization is all-encompassing; however, allowing CheckSmart Financial, LLC to obtain from any outside organization all manner of consumer reports and investigative consumer reports now and, if you are hired, throughout the course of your employment to the extent permitted by law.
The panel also concluded that the disclosure form violated the FCRA’s standalone document requirement because it was not limited to the FCRA and instead included a separate section referencing state law disclosure requirements. The panel explained that, in accordance with the court’s prior decision in Syed v. M-I LLC, 853 F.3d 492 (9th Cir. 2017), “a prospective employer violates FCRA’s standalone document requirement by including extraneous information relating to various state disclosure requirements in that disclosure. . . . Because CheckSmart’s disclosure form does not consist solely of the FCRA disclosure, it does not satisfy FCRA’s standalone document requirement.”
Impact: For employers that conduct background checks, Gilberg is another reminder that courts often strictly construe the FCRA’s disclosure requirements and will potentially invalidate a background check disclosure form simply because it includes extraneous information. In an effort to standardize their onboarding procedures, many national employers have attempted to develop uniform background check disclosure forms that include both the FCRA’s mandated disclosure requirements as well as applicable state law requirements. Although such practices are often well-intentioned, Gilberg is a stark reminder that the use of such nationwide disclosure forms, even if written in a clear and conspicuous manner, may violate the FCRA. Gilberg is also a reminder that employers should periodically review their disclosure forms to ensure that they are “reasonably understandable.” In the Ninth Circuit, even if a disclosure form is grammatically correct, it may still run afoul of the FCRA if a prospective employee would have difficulty understanding it.