2018 saw a number of new and important cases and other developments that affect California employers. Here are several that are worth noting:

U.S. Supreme Court Upholds Class Action Waivers

The U.S. Supreme Court finally and conclusively established that class waivers in arbitration agreements between employers and employees are enforceable under the Federal Arbitration Act (FAA). The Court’s decision offers employers a tool to limit costly and protracted class action litigation. However, employers should carefully consider the pros and cons of such waivers and, if electing to use these waivers, ensure that their arbitration agreements are bi-lateral and well-written, and satisfy any applicable requirements of state law. See our detailed analysis here.

California Supreme Court Adopts New Test for Evaluating Independent Contractor Status

In its landmark decision in Dynamex, the California Supreme Court adopted the so-called “ABC test” for determining whether an individual was an “employee” for purposes of the California Wage Orders. Link to decision Under the ABC test, a worker will be deemed to be an “employee” unless the hiring company can prove all of the following: (1) that the worker is free from the control and direction of the company; (2) that the worker performs work that is outside the usual course of the company’s business; and (3) that the worker is customarily engaged in an independently established trade, occupation or business. See our detailed analysis here.

Prior Salary Cannot Justify Pay Disparities under Federal Equal Pay Act

In 2018, the 9th Circuit overturned its long-standing precedent to rule that prior salary, whether alone or in combination with other factors, is no longer a defense to a claim of pay discrimination under the federal Equal Pay Act (EPA). See our detailed analysis here. California has also adopted its own restrictions on the use of prior salary in setting compensation. See our detailed analyses here and here.

Use of Employee Non-Solicitation Agreements Limited

In a precedent-setting decision, a California Court of Appeal in AMN Healthcare held that a recruiting company’s attempt to ban its former recruiters from recruiting away its current employees was a violation of California’s long-standing public policy, embodied in Section 16600 of the Business & Professions Code, favoring competition and employee mobility. While contract terms prohibiting employee solicitation were often thought to be permissible, this decision suggests that all employers in California (not just recruiters) need to be extremely careful when including these types of provisions going forward. See our detailed analysis here.

Calculating Bonus Payments into the Overtime Rate

The California Supreme Court clarified that when a nonexempt employee receives a non-discretionary flat-sum bonus during a single pay period, the overtime rate should be based on the employee’s straight time hours worked during the pay period in which the bonus is earned, and not the employee’s total hours worked during the pay period. See Alvarado v. Dart Container Corp. of California decision here. California employers who continue to use total hours worked in their calculations (which is permitted under federal law) run the risk of being found to have underpaid their employees. To avoid possible class-wide claims, employers should review their calculation methods for every bonus and other extra compensation they provide to nonexempt employees. See our detailed analysis here.

New State Regulations on National Origin Discrimination

New regulations dealing with national origin discrimination were issued by the Fair Employment and Housing Council effective July 1, 2018. Link to regulations. The new regulations provide an expansive definitions of “national origin” and “national origin group,” clarify permissible and prohibited types of employer policies governing English language proficiency and permissible and prohibited inquiries regarding immigration status, and detail prohibited forms of harassment based on national origin. See out detailed analysis here.

"Rounding" Employees' Hours Worked Remains Risky in California

While a California Court of Appeal upheld an employer practice of automatically rounding employee time up or down to the nearest quarter-hour Link to decision, the practice remains risky in an era of sophisticated software that is capable of capturing all time actually worked. See our detailed analysis here. Employers who elect to round employee time must prove that their rounding policies are neutral on their face and that those policies do not result in any loss of pay to their employees. Because the second factor can only be determined by post-payment analysis, any violation will have already occurred before the employer can identify the problem. And, even a lawful rounding policy can invite costly and time-consuming legal challenges. For these reasons, a policy that provides payment for time actually worked, coupled with clear rules for the recording of time, may be a more prudent option.

Federal Restrictions on Back-of-House Participation in Tip Pools Lifted

U.S. Department of Labor (DOL) regulations adopted in 2011 under the Fair Labor Standards Act (FLSA) provided that a tip pool is only valid if it includes employees who “customarily and regularly” receive tips, such as servers, bartenders, and bellhops; according to the regulation, a tip pool “may not include employees who do not customarily and regularly receive[] tips, such as dishwashers, cooks, chefs and janitors.” Although mandatory tip pooling has been lawful in California since at least 1990, participation in such tip pools by back-of-house employees was proscribed by the 2011 DOL regulation until this year.

Amendments to the FLSA enacted in 2018 affected tip pooling arrangements in two key respects: first, the amendment explicitly prohibits owners, managers or supervisors from participation in any type of tip-pooling arrangement; second, the amendment effectively eliminated the proscription against participation by back-of-house employees. See our detailed analysis here. As a result, California employers can now have mandatory tip pooling arrangements that include back-of-house employees.