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Year in review

The discussion that follows relates to four of the most significant employment law developments in 2018. First, the US Supreme Court resolved a split among federal appellate courts concerning the enforceability of class action waivers in arbitration agreements. Second, the California Supreme Court significantly changed the standard for determining whether a worker is an independent contractor or an employee for the purposes of California's Wage Orders. Third, the National Labor Relations Board (NLRB) and the US Court of Appeals for the District of Columbia Circuit have created considerable uncertainty around how joint employer status will be determined. Finally, the US Supreme Court resolved a split among federal appellate courts involving the scope of protection for internal whistle-blowers under the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank).

i Class action waivers in arbitration agreements

Throughout 2017 and 2018, employers had been closely watching a trio of consolidated cases at the Supreme Court involving the enforceability of class action waivers in arbitration agreements. The cases concerned whether an employer could require its employees, as a condition of their employment, to waive their right to pursue class actions by including class action waiver provisions in the employer's arbitration agreements.

The enforceability of class arbitration waivers had sharply divided federal appellate courts. Several circuits had held that arbitration agreements are presumptively valid under the Federal Arbitration Act (FAA). Those courts relied on the Supreme Court's repeated description of the FAA as 'a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary', such that 'questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration'. Those courts concluded that the FAA's presumption favouring arbitration superseded the National Labor Relations Act (NLRA), a law passed by Congress that, among other things, provides rights to employees to bargain collectively and to engage in concerted activity.

In contrast, other federal appellate courts had adopted the long-standing position of the NLRB and concluded that it was unlawful for an employer to require an employee to waive the right to proceed on behalf of a class of employees because such an agreement runs afoul of employees' rights to engage in protected, concerted activity under the NLRA.

In May 2018, the Supreme Court resolved the circuit split in Epic Systems Corp v. Lewis. In a sharply divided opinion, the Supreme Court held that class or collective actions do not constitute 'protected concerted activity' under the NLRA, so there was no conflict between the NLRA's provisions and the FAA's presumption in favour of arbitration. As a result, arbitration provisions with class waivers in employment agreements do not violate the NLRA and are generally enforceable under the FAA.

Epic Systems was a significant victory for employers, as many employers routinely use arbitration agreements that include class action waivers as a mechanism to try to protect against costly class and collective action litigation in a state or federal court and the concomitant risk of excessive jury verdicts.

ii Independent contractor determinations under California's Wage Orders

In April 2018, the California Supreme Court issued its decision in Dynamex Operations West, Inc v. Superior Court. The Court's decision adopted a new worker-friendly standard for determining whether a worker is properly classified as an independent contractor or an employee under California's various state Wage Orders.

Prior to Dynamex, California courts had employed a multi-factor test for determining independent contractor status set forth in SG Borello & Sons, Inc v. Department of Industrial Relations. In general, this required consideration of many different factors:

  1. the extent of the employer's right to control the work;
  2. whether the worker is engaged in a distinct occupation or business;
  3. whether the work is part of the regular business of the employer;
  4. whether the worker supplies the instruments or tools of the work, and whether the worker determines the place of the work;
  5. the worker's investment in the equipment or materials required, or whether the worker independently employs his or her own helpers;
  6. whether the services rendered require a special skill;
  7. whether the work at issue is typically done under the direction of the employer or by a specialist without supervision;
  8. the worker's opportunity for profit or loss depending on their managerial skill;
  9. the length of time for which the services are to be performed;
  10. the degree of permanence of the working relationship;
  11. the method of payment (e.g., whether by time or by job); and
  12. the parties' own subjective beliefs about the nature of their relationship.

However, this standard was rejected in Dynamex as inapplicable to Wage Orders issued by California's Industrial Welfare Commission (IWC). In the Wage Orders, the IWC defines an employer as including anyone who 'suffers or permits' another to work for them. The California Supreme Court added that California had adopted the 'suffer or permit to work' standard before enactment of the federal Fair Labor Standards Act. Accordingly, the court concluded that Borello was inapplicable and that the 'ABC' test used in several other jurisdictions applied instead. Under the ABC test, as articulated in Dynamex, a worker is properly classified as an independent contractor only if the hiring entity establishes all three of the following conditions: (1) the worker 'is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact'; (2) the worker 'performs work that is outside the usual course of the hiring entity's business'; and (3) the worker 'is customarily engaged in an independently established trade, occupation or business'.

However, the California Supreme Court left open the question of how far the ABC test should be applied because the employer had only petitioned the court for review of the standard as applicable to Wage Order claims. By its terms, the decision applies only to the determination of whether a worker is an employee for the purposes of California Wage Orders. It is unclear whether the Borello standard continues to apply to employment law claims that do not arise under the Wage Orders, such as claims for unreimbursed business expenses. In the wake of Dynamex, at least one California appellate court has held that the ABC test for independent contractor status only applies to a plaintiff's Wage Order claims and not to other employment claims. The US Court of Appeals for the Ninth Circuit has emphasised the same point.

Dynamex is a significant decision for any employer in California. On the one hand, the ABC test should be considerably easier than the multi-factor Borello test for employers to analyse and apply to their classification decisions. On the other hand, the ABC test is considerably more worker-friendly. Dynamex should make employers more cautious in classifying workers as independent contractors because the ABC test squarely places the burden of proof on employers to satisfy all three conditions of the test in order to establish that a worker is properly classified as an independent contractor. Furthermore, because Borello still appears to apply to non-Wage Order claims, employers must still contend with it in the context of other California employment laws. As the California Supreme Court acknowledged in Dynamex, 'it is possible under Borello that a worker may properly be considered an employee with reference to one statute but not another'.

iii Test for joint employer status in flux

Since 2015, employers have been grappling with the implications of the NLRB's decision in Browning-Ferris. That decision altered the standards for determining when two or more entities could be deemed 'joint employers' under the NLRA. Under Browning Ferris, an entity could be deemed a joint employer if it had the 'authority' to exercise control over the terms and conditions of a person's employment, even if it never actually exercised that authority. Further, the exercise of any such authority would be sufficient to establish a joint employer arrangement even if the control was 'indirect' or 'limited and routine'. Browning-Ferris enunciated a considerably more worker-friendly rule and subjected businesses to significantly increased risk that they would be deemed joint employers. The most significant outcomes were felt in the context of businesses that obtain workers through independent staffing agencies and independent franchise arrangements.

Browning-Ferris was the subject of much discussion in 2018. For example, at the end of December 2017, the NLRB overruled Browning-Ferris in Hy-Brand Industrial Contractors, Ltd, holding that the actual exercise of 'direct and immediate' control over the terms and conditions of employment is required to show a joint employer arrangement, and that such control must be more than merely 'limited and routine'.

Hy-Brand itself, however, was vacated only two months later, in February 2018, following a ruling by the NLRB's Designated Agency Ethics Official that one of the board members who decided the case had a conflict of interest and so was disqualified from participating in the proceedings. As a result, Browning-Ferris was reinstated as establishing the prevailing test.

In response, in September 2018, the NLRB issued a proposed rule that would effectively reinstate the holding in Hy-Brand. The comment period for the proposed rule ended on 13 December 2018 and is now awaiting a final decision by the NLRB.

Further, on 28 December 2018, the US Court of Appeals for the District of Columbia Circuit weighed in on Browning-Ferris directly, issuing a 2:1 decision in Browning-Ferris v. NLRB. The court affirmed 'the [NLRB's] articulation of the joint-employer test as including consideration of both an employer's reserved right to control and its indirect control over employees' terms and conditions of employment'. The court held that indirect control, or the mere authority to exercise control (even if not exercised) are 'relevant' factors in determining joint employer status under the NLRA. But the court provided no guidance on how those factors should be weighed, nor whether they might suffice to support a finding of joint employer status. Instead of resolving these issues, the court remanded the case back to the NLRB 'to explain and apply its test in a manner that hews to the common law of agency'.

The DC Circuit did not expressly hold that the NLRB's Browning-Ferris decision set forth the correct standard under the NLRA. The court's opinion nevertheless raises significant doubts about the validity of the NLRB's proposed rule. Because the proposed rule requires the actual exercise of direct and immediate control over the terms and conditions of employment, it appears to be inconsistent with the DC Circuit's conclusion that the existence of unexercised authority or the exercise of indirect control are relevant factors to be considered.

iv Scope of whistle-blower coverage under Dodd–Frank

Another case of keen interest to employers involved a sharp divide among federal courts regarding the scope of whistle-blower protection under Dodd–Frank. Congress passed Dodd–Frank in the wake of the financial crisis that began in 2008. In the ensuing decade, federal courts reached different opinions on whether the anti-retaliation protections set out in Section 922 of Dodd–Frank extend beyond employees who report alleged violations of law to the Securities and Exchange Commission (SEC). As one court summarised the debate: 'In operational terms, the issue is whether an employee who suffers retaliation because he reports wrongdoing internally, but not to the SEC, can obtain the retaliation remedies provided by Dodd–Frank.'

The issue is important to employers because Dodd–Frank is more favourable for employees in some respects than other federal whistle-blower statutes, such as the Sarbanes–Oxley Act of 2002. Unlike Sarbanes–Oxley, Dodd–Frank has a long statute of limitations, has no administrative exhaustion requirements and provides that a prevailing plaintiff may recover two times the amount of back pay otherwise owed to the individual. Sarbanes–Oxley, on the other hand, permits employees to recover 'special damages', which has been interpreted to include damages for pain and suffering and emotional distress. Thus, employees bringing claims as whistle-blowers often seek to proceed concurrently under Dodd–Frank and Sarbanes–Oxley.

The interplay between Subsections (a) and (h) of Section 922 of Dodd–Frank was the focus of the courts' divergence. Subsection (a), entitled 'Definitions', provides that '[t]he term “whistleblower” means any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC]'. Subsection (a) also specifically states that the definitions of terms contained therein 'shall apply' throughout Section 922. Subsection (h) of Dodd–Frank, entitled 'Protection of whistleblowers', includes provisions prohibiting retaliation, including retaliation for 'making disclosures that are required or protected under the Sarbanes–Oxley Act of 2002'. Sarbanes–Oxley, unlike Dodd–Frank, does not contain a provision requiring an employee to report to the SEC to establish an actionable whistle-blower retaliation claim.

The US Court of Appeals for the Fifth Circuit was the first federal appellate court to address the interplay between Subsections (a) and (h) of Dodd–Frank. The Fifth Circuit held that a purely internal whistle-blower could not state an actionable claim under Dodd–Frank. Because the definition of 'whistleblower' as stated in Subsection (a) of Dodd–Frank requires that the complainant make a report 'to the [SEC]', the Fifth Circuit held that 'the plain language of the Dodd–Frank whistleblower-protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC'. The Fifth Circuit explained that '[u]nder Dodd–Frank's plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC'.

A divided panel of the US Court of Appeals for the Second Circuit reached the opposite conclusion, holding 2 : 1 that internal whistle-blowers are entitled to protection under Subsection (h) of Dodd–Frank. The Second Circuit reasoned that the retaliation provisions in Dodd–Frank were ambiguous because Subsection (a) requires an employee to report to the SEC while Subsection (h), by explicitly incorporating complaints made pursuant to Sarbanes–Oxley, does not. Accordingly, the Second Circuit concluded that it was appropriate to give substantial deference to the interpretation of the SEC, which, for its part, has interpreted Dodd–Frank's retaliation provision to protect internal whistle-blowers.

In 2017, the US Court of Appeals for the Ninth Circuit deepened the divide among federal appellate courts. In another 2 : 1 decision, the Ninth Circuit held that the anti-retaliation provisions in Subsection (h) of Dodd–Frank 'should be read to provide protections to those who report internally as well as to those who report to the SEC'. The Ninth Circuit also concluded that the SEC's interpretive rule that Dodd–Frank protects internal whistle-blowers 'accurately reflects Congress's intent to provide broad whistleblower protections under [Dodd–Frank]. The [r]ule says that anyone who does any of the things described in subdivisions (i), (ii), and (iii) of the anti-retaliation provision is entitled to protection, including those who make internal disclosures under Sarbanes–Oxley. They are all whistleblowers'.

In February 2018, the Supreme Court issued its decision unanimously rejecting the Ninth Circuit's analysis. The Supreme Court held that Subsection (a) of Dodd–Frank 'supplies an unequivocal answer' to the question of Dodd–Frank's scope of coverage. 'Courts are not at liberty to dispense with the condition – tell the SEC – Congress imposed.' The Supreme Court concluded that both the text and the purpose of Dodd–Frank left no doubt that the term 'whistleblower' in Subsection (h) of the statute 'carries the meaning set forth in the section's definitional section.' Accordingly, an employee is ineligible to seek relief under Subsection (h) of Dodd–Frank as a whistle-blower unless the employee provided information to the SEC before the employee's termination.

Outlook and conclusions

During the past year or so, perhaps the most significant development for employers in the United States has not been any change in legal rules or doctrine, but rather the growth of the #MeToo movement and the increased willingness of employees to come forward with and litigate complaints of sexual harassment and misconduct. There is no reason to expect this trend to abate any time soon.

Courts and state and local legislatures have taken notice of the movement. For example, in April 2018, the US Court of Appeals for the Third Circuit issued a decision in Minarsky v. Susquehanna County, which involved a sexual harassment claim brought by a former secretary at the county's Department of Veterans' Affairs. The district court had granted summary judgment in favour of the county on the basis of the Faragher–Ellerth defence, which arose from a pair of US Supreme Court opinions and allows employers to avoid liability for sexual harassment in certain circumstances if (1) the employer 'exercised reasonable care to prevent and correct promptly any sexually harassing behavior' and (2) the plaintiff employee 'failed to take advantage of any preventive or corrective opportunities provided by the employer or to avoid harm otherwise'. The district court in Minarsky explained that the plaintiff's failure to report the alleged harassment, which had continued for years, was unreasonable in light of the employer's anti-harassment policy.

However, the Third Circuit vacated and remanded the decision to the district court, holding that whether the county had taken reasonable precautions to detect and prevent harassment and whether the plaintiff had acted reasonably in not reporting the harassment were each questions that a jury should decide.

In its decision, the Third Circuit noted the recent 'veritable firestorm of allegations of rampant sexual misconduct that has been closeted for years, not reported by victims'. The court recognised the significant social pressures and fears of 'serious adverse consequences' that victims of harassment confront, which leads many victims to stay silent for fear of reprisal. In light of these pressures and fears, the court noted that 'a jury could conclude that [an] employee's non-reporting was understandable, perhaps even reasonable'. On the basis of these considerations, and the plaintiff's own testimony about why she did not report the harassment, the Third Circuit held that a reasonable jury could find that she acted reasonably in not reporting the harassment. Although only a single case, the Third Circuit's decision reflects a potentially significant narrowing of the Faragher–Ellerth defence, and a possible corresponding expansion of employers' potential liability in harassment cases.

State and local legislatures have also taken aggressive steps to address sexual harassment in the workplace in response to the #MeToo movement. For example, the State of New York and New York City each recently passed new sexual harassment laws. The State of New York's revised sexual harassment laws expand the prohibition on harassment to cover non-employee workers such as independent contractors, consultants and vendors; restrict the ability of employers to use non-disclosure provisions concerning sexual harassment claims; prohibit employers from requiring confidential arbitration to resolve sexual harassment claims (and invalidate all such existing contractual provisions); and impose significant new requirements concerning employers' sexual harassment policies and training practices. New York City's new law (which takes effect on 1 April 2019) expands the prohibition on sexual harassment to cover all employers in New York City, regardless of size; increases the statute of limitations for filing sexual harassment claims from one year to three years; and imposes significant requirements for training employees.

California also has enacted new legislation, which took effect on 1 January 2019, concerning both workplace sexual harassment and gender disparity. The new laws:

  1. impose liability on employers who fail to prevent all forms of unlawful harassment, even by non-employees;
  2. expand the scope of hostile work environment claims to make it easier for plaintiffs to pursue such claims;
  3. limit the circumstances in which a successful defendant can recover attorneys' fees;
  4. prohibit releases of claims in exchange for a pay raise or a bonus, or as a condition of employment or continued employment;
  5. sharply limit the ability of employers to use non-disclosure provisions concerning sexual harassment claims; and
  6. impose new sexual harassment training requirements.

Employers should be aware of these significant trends and developments, which will likely continue in 2019 and in the coming years.