Employment and Labor Law in California – 2011 Updates

While federal legislation on small employers remains complex and burdensome across the country, overbearing employment and labor laws in California are helping it maintain its reputation as the one of the most litigious states in the Union. Below are two recent court cases which highlight the complexity and exposure of labor laws in California, and the lengths to which employers must go to be informed and protected.

Wage and Hour: Payroll Companies are Not Liable as the Employer

Outsourcing payroll processing is a common business practice. A recent case that reached the California Supreme Court addressed the issue whether or not a payroll processing service could be held responsible, as an employer, for wage and hour violations. The California Supreme Court had determined in a previous case, Martinez v. Combs, what defines a legal “employer”. The Court applied this definition to the recent case of Futrell v. Payday California, Inc. It found that in order to be liable as an employer, an entity must exercise control over an employee’s wages (the authority to negotiate and set the employees’ rate of pay). In Futrell v. Payday California, the court found Payday merely calculated pay, tax withholding and issued paychecks but did not manage the employees’ wages. They determined that payroll preparation alone does not meet that standard.

This case shows that employers who utilize outside processing firms for payroll administration will be liable for wage and hour violations, such as meal and rest period and overtime violations. Conversely, the case is good news for organizations who simply provide administrative payroll services to employers but are not involved in managing employees wages.

Compensation Agreements

In McCaskey v. California State Auto Association, the California Court of Appeals ruled that an employer may unilaterally terminate its duty to honor a compensation policy only if the following conditions are met:

A� The policy must be of indefinite duration

A� The employer must effect the change after a reasonable time and with reasonable notice

A� The employer may not interfere with the employee’s vested benefits.

In McCaskey v. California State Auto Association, the court ruled that the plan was not for an indefinite duration under California law. Rather, it said that the plans terms suggested an implied-in-fact durational term by which CSAA’s duty to honor the policy, either at age 65; after 10 years; or, upon the employee’s retirement. The court affirmed that a contract of indefinite duration is terminable after a reasonable time on reasonable notice, which was not met in this case.

Employment and Labor Laws in California

The cautionary note to California employers is to review your compensation agreements carefully to determine if they were properly drafted by an attorney. Prior to changing agreements, particularly those related to compensation (including sales/commissions agreements), you should consult with legal counsel.

Alternatively, if you are a California-based employer, it is imperative that you contact a California human resources services provider who can advise you in all areas of labor law and employment administration.