In the wake of the shelter-in-place orders issued by many state and local governments, business is anything but normal for most organizations. Human resources professionals have been working feverishly in the past month to learn the ins and outs of the new Families First Coronavirus Response Act and adjust to the new realities of work from home for many employees. As the initial flurry of activity prompted by the new legislation begins to wane, however, many managers and HR professionals will find themselves with more idle time than usual, which creates the opportunity to tackle projects that often languish on “to do” lists without receiving the attention they deserve. Today’s Advisory is intended to assist you in identifying some of those projects, and understanding the reasons for which they are worthwhile.

Project No. 1: Review and update your Employee Handbook

The Employee Handbook is (or should be) one of the cornerstones of any company organization’s human resources infrastructure. All companies should review and update their Employee Handbooks periodically, preferably at least every 12 to 18 months. As a result of changes and developments that have occurred over the past two years, policies regarding discrimination, harassment, retaliation, lactation accommodation, parental leave, dress and grooming, rest breaks, organ donation, and sick leave are particularly likely to benefit from review and revision in 2020.

Reviews and updates should focus not only on compliance with new laws and regulations, but also on refining existing policies so that they remain state of the art. Even if a law has not changed, current thinking about the best means of utilizing or complying with the law may have evolved. By reviewing and updating their Employee Handbooks on a regular basis, companies can assure that they remain in compliance with applicable laws and minimize the risk of claims from employees.

Project No. 2: Audit the validity of your independent contractor classifications

California’s Assembly Bill 5, which sets forth the standards now used to determine whether a worker qualifies as an independent contractor, became effective on January 1, 2020. Under AB 5, workers are generally much less likely to qualify as independent contractors than they were under the rules previously in effect. Moreover, the rules set forth in AB 5 are effective retroactively, meaning that independent contractor agreements that may have been valid at the time they were created may be vulnerable to challenge now. The liability that can flow from a misclassification is substantial, and misclassification cases often lend themselves to class action litigation.

In order to reduce the risk of misclassification under the new rules, prudent employers should review the validity of their existing contractor classifications, and they should do so under the guidance of counsel to assure that the outcome of the assessment is protected by the attorney-client privilege and cannot be used against the company in the event of a later dispute. If an independent contractor classification is identified as potentially vulnerable to a challenge, employers should confer with counsel and consider the potential options strategically, remembering that that re-classification can serve as a double-edged sword – it can eliminate potential future liability, but can also increase the risk of liability for the period during which the contractor classification was in effect. In deciding how to address a misclassification, employers should consider factors such as the number of misclassified contractors involved, whether misclassified contractors are still providing service to the company, whether misclassified contractors should have been treated as exempt or non-exempt employees, and the extent to which misclassified contractors who should have been treated as non-exempt employees may have worked overtime.

Project No. 3: Review and revise sloppily drafted commission and bonus plans

Commissions and bonuses represent a significant component of the compensation packages of many employees. California Labor Code Section 2751 requires commission agreements to be set forth in writing, and requires employers to provide signed copies of the agreements to their employees. Disputes concerning commissions and bonuses are common because both employers and employees sometimes focus myopically upon the rate at which commissions or bonuses accrue, neglecting to give due consideration to other critical issues.

When creating or drafting a commission or bonus plan, employers should be sure to address the questions of when the commission or bonus accrues, and how it is to be calculated. Commissions and bonuses can accrue when an employee procures a customer or a purchase order, when an invoice is issued to the customer, when the company receives payment from the customer, or at other defined times. Designating the event that triggers accrual of the commission or bonus is perhaps the most important element of an incentive compensation plan. Employers and employees sometimes focus solely on the rate at which commissions or bonuses accrue, without defining the base on which the commission or bonus is calculated. Commissions and bonuses may be based on gross revenue, gross profit, or some other defined base. Plans should also clearly identify any revenue excluded from the base, such as taxes or shipping costs. Failure to clearly define the terms of an incentive compensation plan can easily lead to controversy and litigation.

Project No. 4: Verify your compliance with California’s paystub law

Employers are all too familiar with the ongoing wave of wage-and-hour litigation that has plagued companies of all sizes for many years. While claims regarding unpaid overtime and meal period violations remain common, employee attorneys have become particularly fond of claims alleging violations of pay stub rules.

The California Labor Code requires employers to provide employees with certain information together with their paychecks. The necessary information can be provided in a document separate from the paycheck, but is most often reflected on a detachable check stub. Regardless of the format chosen, employers must provide employees with an itemized listing of the following information:

  • gross wages earned
  • total hours worked by the employee, except for exempt employees paid on a salary basis
  • the number of piece-rate units earned and any applicable piece rate, if the employee is paid on a piece-rate basis,
  • all deductions
  • net wages earned
  • the inclusive dates of the pay period
  • the name of the employee and only the last four digits of his or her Social Security number or an employee identification number other than a Social Security number
  • the legal name and address of the employer
  • all applicable hourly rates in effect during the pay period and the number of hours worked at each hourly rate
  • the amount of paid sick leave available to the employee

Although the rule is relatively simple and straightforward, violations are all too common. Pay stubs may not contain the full, legal name of the employer entity, for example. Violations are particularly common for employers who process payroll checks internally, rather than through a vendor. Even some payroll vendors utilize pay stubs that do not comply with all of the requirements of California law, however, so employers should not assume that they are immune to risk merely because they utilize a vendor to process their payroll.

If we can be of assistance to you with any of the projects we have suggested, or with any other issue related to employment law, please contact one of our attorneys:

Shareholders Associates
Eric C. Bellafronto Ernest M. Malaspina Shirley Jackson
Karin M. Cogbill Richard M. Noack Sean Bothamley
Jennifer Coleman Daniel F. Pyne III Michael Manoukian