It’s no secret that California has extensive and stringent wage and hour laws. From overtime, sick pay and meal breaks to rest periods, wage statements, reimbursement of business expenses and more, it’s all covered—generally in excruciating detail.
You already know that if you violate these laws your company can be slapped with fines and lawsuits. But did you realize that you can be held personally liable as well?
It’s not just the company that’s on the hook
Under California Labor Code section 558.1, anyone who is an owner, director, officer or managing agent of an employer and who violates the Labor Code, or causes it to be violated, “may be held liable as the employer for such violation.” This is the case whether the violation was willful or not, whether or not the person was acting under someone else’s direction, etc.
For example, say a front-line supervisor is under pressure to get things done by a certain time each day. To make it happen he has workers delay their lunch hours. But because California law says that workers are entitled to a 30-minute meal break if they work five or more hours in a work day, the supervisor falsifies the timesheets to make it look like these breaks were taken at the legally-mandated time. Eventually, of course, one of those workers files a complaint with the appropriate government department. In a situation like this the business can be fined, and the supervisor (as well as, perhaps, upper management) can also be held personally liable for these violations.
Even bankruptcy won’t get you off the hook
A recent court case, Atempa v. Pedrazzini, is a great reminder of just how expensive these lawsuits can be. In this situation two people sued their former employer, a restaurant. They alleged that the restaurant’s owner, Mr. Pedrazzini, did not pay overtime, minimum and regular wages as per the California Labor Code, and also did not furnish accurate wage statements in a timely fashion.
After these two former employees won their case the employer filed for bankruptcy. The plaintiffs appealed, and Mr. Pedrazzini was held personally liable for the entire judgement: Over $30,000 in civil penalties, plus $300,000 in attorney’s fees.
You must comply with the law
The reality is, the laws are so extensive that even the most conscientious employers can find compliance difficult. That said, I’ve also seen many employers who like to operate in what they consider to be “grey areas.” This is a dangerous way to go, because sooner or later they’re bound to be caught.
Pop quiz: Companies that let their employees take time off to attend their children’s school field trips, parties, conferences and other activities are:
A. Wisely enacting family-friendly policies to attract and retain top talent
B. Being very generous
C. Setting unwise precedents
D. Complying with employment law
While arguments can be made for answering A, B or C, if a company has 25 or more employees working at the same California location, the correct answer is D. They are complying with California’s School Activities Leave law.
If this law applies to your business, here’s what you need to know:
• It covers a big range of school activities. If an eligible employee requests time off to attend any school-sponsored, school-supervised or school-approved activity, your answer needs to be yes. This includes parent/teacher conferences, assemblies, classroom parties, field trips, fundraisers, etc. In addition, finding, enrolling or re-enrolling a child in school or with a child care provider are also covered activities.
• It’s not just for parents. Others who stand in loco parentis (i.e. in the place of a parent) of a child who is in kindergarten through 12th grade, or who is in a licensed day care facility, are also eligible. This includes stepparents, grandparents, foster parents and guardians.
• You don’t have to grant leave to more than one parent of the same child. If two of your employees are parents of the same child (or if two are parents and one is a stepparent, etc.), you only have to grant leave to one of them to attend a particular activity.
• In general there’s a limit to how many hours of leave you must grant. The law stipulates up to eight hours per month of job-protected time off, up to a total of 40 hours per year, per eligible employee—regardless of how many children the employee has.
• The monthly maximum doesn’t apply to eligible emergencies. Job-protected school activities leave can also be used for “emergency” situations, such as unexpected school closures, behavioral or disciplinary problems, natural disasters, or requests that the child be picked up. Except in these non-planned situations, employees must provide reasonable notice of the absence.
• You don’t have to provide extra pay for these absences. Although you must allow employees to use any available paid time off to cover these absences, if none is available you can require employees to take the time off without pay.
• You can ask for proof. The law allows you to ask for documentation verifying that the employee actually participated in the activity as claimed.
Although staying current on labor law is a necessity that many small
businesses don’t have time for, remaining in compliance is vital. If
you’re struggling in this area, I can refer you to organizations that
provide annual labor law update via seminars or newsletters, as well as
outsourced HR providers that can help you put appropriate policies in
There’s nothing like being slapped with a lawsuit to make a business’ management team wish they had proper insurance in place. For smaller businesses, Directors and Officers Insurance (“D&O Insurance”) often falls into this category, as they mistakenly believe it’s not something they need.
However, D&O insurance is for companies of all sizes because it helps protect the company’s managers, directors and officers from lawsuits claiming that they have acted wrongfully. It provides liability coverage for claims based on the impact of the decisions and actions (or lack of action) these people have taken within the scope of their regular duties.
Although a lot of people will refuse to serve on a Board of Directors if the company doesn’t have D&O insurance in place, many managerial employees do not realize that they can be personally sued for their actions as well. But the reality is, a claimant might not just go after your company’s “deep pockets.” Individuals within your company (including the owner) can be sued, too.
What happens if you don’t have D&O insurance?
D&O insurance protects the personal assets of your company’s managers and corporate directors and officers, plus all of their spouses, if they should be personally sued by employees, vendors, competitors, customers, investors or other parties, for actual or alleged wrongful acts committed in the course of managing the company.
Like any insurance policy, if you never have a lawsuit or claim, nothing happens.
But if you do need it, you’re glad you have it! Chubb’s 2018 Private Company Risk Survey found that 26% of private companies reported experiencing a D&O loss in the last three years, with the average reported loss being a whopping $399,394.
If you can easily afford a $399K (or more) loss, go ahead and “self-insure.” Otherwise, not having this can be catastrophic.
What types of things are covered by D&O insurance?
D&O coverage applies to a wide variety of situations in which the directors, managers and officers of a company might be held personally liable for a negative outcome—basically a lot of things that are not particularly uncommon. This includes claims related to:
• Negligent management
• Breaches of fiduciary duty
• Breaches of contract
• Relationships with creditors
• Regulatory issues
• Inadequate disclosures on financial statements
• And more
Don’t let a lack of insurance bring your company down
Yes, like all insurance policies, D&O coverage is not free. But is it worth the money? Any company that has actually faced a D&O claim would say “yes.”
If you offer group health care benefits to your employees and their dependents, you must stay in compliance with COBRA, the law that says you have to give individuals who would otherwise lose their coverage the option to continue on your group plan for a specified length of time. Here are seven important things about COBRA that you need to know:
1. Who is entitled to COBRA coverage? COBRA applies to employees whose hours are reduced, or whose employment is terminated for reasons other than gross misconduct. For spouses the qualifying events also include divorce or legal separation, death of the covered employee, or the covered employee becoming entitled to Medicare. For dependent children qualifying events also include losing their dependent child status under the plan rules.
2. What type of coverage do I have to offer under COBRA? Basically, you must give COBRA participants the same insurance options that you are giving everyone else.
3. How long does COBRA coverage last? Federal COBRA generally lasts for 18 months. In some situations it can extend to 29 or 36 months.
4. Do I have to pay for or subsidize COBRA coverage? No. The COBRA recipient is responsible for making the premium payments, which can be 102% of the full cost of the plan.
5. What are my notification duties? You must provide written notification to covered employees and their covered spouses of their rights when they first join the group health care plan, in the summary plan description, and within a specified period of time when a qualifying event occurs (at which point you must also notify the plan administrator). You also have to maintain records showing that you’ve done all of this.
6. What if I don’t comply with the COBRA notice rules? In this case, get out your checkbook! The IRS can hit you with a $100 per day or $2,500 per affected beneficiary excise tax (or more). The Department of Labor will levy penalties of $110 per day, per violation. Plus, you can be required to pay for the affected individuals’ medical expenses and more.
7. What if I have less than 20 employees? In this case, Cal-COBRA, the California state law, applies. Cal-COBRA is rather similar to COBRA except it affects employers with two to 20 employees, and mandates that these employees be given the option to continue coverage for 36 months. Under Cal-COBRA, individuals who have used up their 18 months of federal COBRA can get an additional 18 months, for a combined period of 36 months.
Need help figuring this stuff out? Give me a call. As your part-time CFO, I’m here for you.
What happens when one of your non-exempt employees works unauthorized overtime—even if you had expressly forbid this person from putting in the extra time? You have to pay them for this forbidden overtime (at overtime rates) anyway! California law clearly states that you must pay hourly workers for all time worked.
Obviously this is not a desirable situation. Here are some ideas for how to stop your employees from working unauthorized overtime:
• Have a strong written overtime policy in place – Your Employee Manual should include a formal policy stating that employees may not punch in early or punch out late without prior written authorization from their supervisor. Back this policy up with strong progressive discipline consequences. Make it clear that continuing to work overtime after being instructed not to can be considered insubordination, and employees who work unauthorized overtime can be written up, suspended or even terminated.
• Keep everyone aware of the policy – Regularly remind your hourly employees and their supervisors that ALL overtime MUST be signed off by the supervisor on the day that it is worked.
• Educate your supervisors – Your supervisors must understand their role in enforcing your overtime policies, as well as the laws stating that non-exempt employees must be paid for all time worked. Once the time has been worked, the supervisor cannot tell the employee not to report it, and cannot refuse to authorize payment for those hours.
• Hold supervisors accountable – Your policy should include disciplinary consequences for supervisors who fail to take action to implement your overtime policies.
• Turn off their computers – If your non-exempt employees require the use of a computer to do their jobs, another option is to have your IT department automatically shut down these employees’ computers at a specific time each day.
• Enforce your policy – Review time sheets daily, and implement your disciplinary procedures in every unauthorized overtime situation.
• Use rounding – A California state appeals court has ruled that a payroll system that automatically rounds workers’ hours either up or down to the nearest quarter-hour is permissible, as long as it “averages out sufficiently.”
Need help reigning in overtime costs? Give me a call. As your part-time CFO I can help you diagnose and address the problem.
Harassment. Discrimination. Wrongful termination. Failure to promote. Infliction of emotional distress. What do all of these things (and more) have in common? They are all situations for which everyone from customers to current, potential and former employees can sue your company.
If you have Employment Practices Liability insurance (EPL), these situations are all covered risks. But if you don’t have Employment Practices Liability insurance, you are essentially “self-insuring,” which can be an enormous mistake. Defending your company against employment practices claims can be so expensive that sometimes just a single EPL lawsuit causes a small business to go under completely.
To understand how expensive these claims can be, let’s look at some real-life examples, as provided by insurance companies:
• Age discrimination – A 62-year old sales rep filed an age discrimination suit after he was fired for not making his sales quotas. The settlement: $540,000.
• Sexual harassment and retaliation – An employee claimed that she faced retaliation after she complained about sexual harassment. Total defense and settlement costs: over $550,000.
• Emotional distress – An employee claimed that derogatory statements were posted by co-workers on an online company bulletin board. After the employer denied responsibility, the employee sued for defamation and emotional distress. Total defense and settlement costs: over $600,000.
• Sexual harassment and retaliation – After being fired for divulging confidential information, an employee filed a retaliation and sexual harassment suit, claiming the CFO’s behavior had been inappropriate for quite some time. Total defense costs: $150,000.
Think that because you’re dedicated to doing things right that this can never happen to you? Think again. One in ten businesses will face an employment practices charge. Which actually seems low given the results of a recent survey, in which 35% of respondents—including 41% of women respondents—stated that they had been harassed at work at some point in their career. 1 Plus, contrary to the #metoo stereotypes, not all harassers are bosses or men. This survey also found that 22% of alleged harassers were women, and 27% were peers.
Two more things to keep in mind: Many employment practices lawsuits are filed by former employees, when it’s too late to put an end to the offending behavior. And even handling unfounded allegations takes time and money.
Prevention, early detection, appropriate responses and proper insurance coverage are all key to dealing with Employment Practices Liability issues.
Need help getting the right insurance coverages in place? Give me a call. As your part-time CFO this is just one of the many services I can provide for you.
California has very stringent guidelines regarding which of your workers are “exempt” or “non-exempt” from overtime wage rules, and getting it wrong can be very costly. One misclassification can trigger multiple wage violations and their associated monetary penalties!
What I’ve seen is that the question of whether salespeople are exempt or non-exempt often trips employers up. Which is no surprise, since the answer is different for “outside salespeople” than it is “inside salespeople”—and the state has specific definitions for each of these categories. Here’s what you need to know…
Most (but not all) inside salespeople are non-exempt
In most situations inside salespeople are entitled to overtime pay. However, inside salespeople who meet all of the following criteria are exempt from overtime pay:
• Work in an industry governed by Wage Order Number 4 or Wage Order Number 7;
• Are primarily engaged in sales;
• Have earnings that exceed 1.5 times the minimum wage for each hour worked during the pay period; and
• Receive more than half of their earnings each pay period from commissions.
Most (but not all) outside salespeople are exempt
In determining if a worker meets the “outside salesperson” exemption, you must look at their actual job duties and not just their job title. This is because California law defines an “outside salesperson” as someone who:
• Is at least 18 years old;
• Spends at least 50% of their time in the field, working away from their employer’s place of business (which can be a home office, company worksite or other designated physical worksite); and
• Spends at least 50% of their time selling products or services, or obtaining orders or contracts for the sale of products or services.
An important thing to be aware of here is that while time spent traveling to and from sales appointments counts as “time spent selling,” time spent doing pretty much anything else, including delivering merchandise that was previously purchased, does not count as time spent selling.
In addition, the “50% in the field” criteria means that if your outside salesperson spends more time sitting at their desk making phone calls than they do going out and meeting with people face-to-face, the state says you must classify them as an inside salesperson. In this case, the “inside salesperson” criteria must be used to determine exempt vs. non-exempt status.
Need help getting these things sorted out? As your part-time CIO, I’m here for you.
Although few companies are aware of it, California has a program dedicated to reimbursing employers for the costs associated with providing job skills training to their employees. In fact, each year California’s Employment Training Panel (ETP) awards millions of dollars to qualifying companies!
The money comes from taxes you are already paying, including the $7 per employee that you, as a California employer, pay into the fund each year.
Here’s what you need to know about ETP funding:
• What types of companies qualify? While a broad spectrum of California employers can qualify, the ETP gives top priority to those in the following industries:
• Biotechnology and Life Sciences|
• Green Technology
• Information Technology Services
• Multimedia and Entertainment
• Nursing and Healthcare
• Transportation Logistics
• Is this available for small businesses? Technically yes, but from a practical standpoint this is best for businesses that have at least 40 employees.
• How much can you get? The answer depends on a variety of factors, but we’re talking real money here! Plus, these awards are actual checks in the mail—not tax credits. For example, June 2018 awards included $1,040 per trainee for a manufacturing company, $1,476 per trainee for a construction company, $1,058 per trainee for an accounting firm and $1,885 per trainee for an engineering services provider.
• What sort of training qualifies? Pretty much anything other than legally-mandated courses. So while it won’t reimburse you for your sexual harassment prevention training class, everything from computer skills and business skills to machinery operation, estimating, scheduling and a whole lot more is eligible.
• Who delivers the training? You’re responsible for the actual training. Either you design and deliver it, or you hire a third party to do so. Basically, this is “free money” to help pay for the training you’re doing anyway.
The bottom line is, ETP funding can be a significant competitive advantage for your firm. The only catch is that, being a government program, there are a lot of hoops to jump through to get the money. Rather than deal with the steep learning curve, though, most companies simply hire specialists to take care of the paperwork for them. As your part-time CFO, I can help you find the right ETP funding specialist for your company’s needs.
Laws and regulations that affect Human Resources are constantly changing, and it’s vitally important that your HR Department keeps up. For example, here in California a number of laws went into effect in 2018. Did you know…
• You cannot ask job applicants about their criminal history – If you have five or more employees it is now against the law to ask job applicants about their criminal records, or seek this information, until after a conditional job offer has been made. After that, if you want to rescind the offer because of the applicant’s conviction history, a specific procedure must be followed.
• You cannot ask job applicants about their salary history – This question is always forbidden, even after you make a conditional job offer. However, if, without any prompting, the applicant volunteers this information, you can use it when setting their starting salary.
• The anti-discrimination laws have been expanded – Effective July 1, California’s rules prohibiting harassment and discrimination based on protected classes, including national origin, have been expanded. Specifically, “national origin” is now very broadly defined to include various actual or perceived characteristics. Click here to learn more. As part of this, “English-only” policies are now forbidden unless narrowly tailored and justified by business necessity—and are never permitted during non-work time, such as breaks.
• You must answer job applicants’ questions about pay scale – Upon “reasonable request” you must provide an applicant for a specific position the pay scale for that position.
• Family Leave Law now affects small businesses – If you have 20 or more employees, you must now allow eligible employees to take up to 12 weeks of unpaid, job-protected parental leave to bond with a new child. On the positive side, if you offer at least two weeks of annual paid family and medical leave to all qualifying employees, you may be eligible for a new tax credit. Click here to learn more.
• The new tax bill affects employee benefits – The deductions for employee entertainment and transportation benefits were eliminated, and the deduction for employee meals was reduced. Also, any money you provide employees to reimburse them for the costs of commuting to work by bicycle is now considered taxable income to the employee. Are you noting this on their payroll stub?
If you have not yet modified your policies, job application forms and Employee Handbooks to account for these changes, now’s the time to do so!
Determining whether a worker is an independent contractor or an employee
has significant consequences. If a worker is classified as an employee
you must pay payroll taxes, provide workers compensation insurance, and
be in compliance with a wide variety of laws governing pay, time off and
other employment-related issues. If the worker is an independent
contractor they’re responsible for these things themselves. And if you
misclassify an “employee” as an “independent contractor” the fines can
In the past the “independent contractor vs employee” issue was based on the amount of control that your business had over the worker, and was determined by answering a long series of questions.
Recently the California Supreme Court established a new three-part test that applies specifically to California’s Wage Orders (i.e. regulations regarding wages, breaks and more). The Court’s stated goal was to narrow independent contractor status to far fewer people. As such, under this new test many workers who are currently classified as independent contractors must be reclassified as employees.
The new “ABC” test
The new test states that a worker is considered an employee under the Wage Orders unless the employer proves that all three of the following are true:
A. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
B. The worker performs work that is outside the usual course of the hiring entity’s business; and
C.The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Applying the new test
How might this apply to your business? Say you run a manufacturing plant, and you sign a service contract with an HVAC (Heating, Ventilation and Air Conditioning) contractor. That contractor qualifies as an “independent contractor” because they meet all three conditions. You will not be directly supervising their work; you’re not in the HVAC business yourself, and they have their own HVAC business that also services other clients.
However, say you’re the HVAC contractor and you bring on an HVAC technician to help you during the busy summer months. That technician must be classified as an employee. Since you are in the business of providing HVAC services, the work they perform will be within the usual course of your business. Even if they work independently and have their own HVAC business, too, they will not pass criteria B.