Discouraging Employee Departures

Because employers invest money in hiring, training and developing their employees, they would like their employees to remain in their employ. You know how it goes. You spend time and money on recruiting the best candidates. Then, you teach the ones you hire how to do their jobs. Just as the best one of the bunch gets to the point where she is ready to contribute to the enterprise, she up and leaves to join the competition. What does the law allow employers to do to retain employees?

The best way to retain employees is to offer competitive pay and benefits, an enjoyable working environment, and a job that matches the employees skills. So as long as you do not discriminate on the basis of a prohibited characteristic, the law allows you to offer whatever incentives you like to encourage employees to stay. This how-to guide from The Wall Street Journal has some ideas about how to hang on to your employees.

Disincentives are another story. For example, California law is quite clear that you may not require an employee to sign a non-compete clause that bars her from quitting to join the competition. Business and Professions Code section 16600 provides that, with few exceptions, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

Although you might be tempted to charge departing employees for the investment you made, there are restrictions on that, too. Labor Code section 2802 requires employers to absorb all the regular costs of doing business, including recruiting and training employees to do their jobs. If the employer pays for voluntary training or education that is not required for the job, the employer may charge that back to the employees. For discussions of the distinction, see USS-Posco Industries v. Case (2016) 244 Cal.App.4th 197 and In re Acknowledgment Cases (2015) 239 Cal.App.4th 1498. To implement such a program, you will need a written agreement that the employee signs before receiving the training.

There is also room within the law for tying some aspects of compensation to a commitment to sticking with the employer. In Schachter v. Citigroup, Inc. (2009) 47 Cal.4th 610, the Supreme Court upheld an incentive plan that allowed employees to receive part of their compensation in the form of discounted restricted stock, which had a two-year vesting period. If an employee voluntarily terminated employment or was terminated for cause before the end of the two-year period, the restricted stock would be forfeited. That same concept can be applied to payment of relocation expenses, and signing bonuses. The idea is that the employee has not earned the payment, until she has worked the specified amount of time for the employer. Keep in mind that the Schachter case involved only a two-year delay in receiving the compensation. Imposing a requirement that the employee remain employed for an extended length of time might render the plan unlawful.

California Employers Must Pay Employees for Required Use of Personal Cell Phones

According to a recent Court of Appeal decision, Labor Code section 2802 requires employers to reimburse employees who must use their personal cell phones for work-related calls. Cochran v. Schwan's Home Service, Inc., Case No. B247160 (Aug. 12, 2014).

Section 2802 provides: "An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful." Labor Code section 2804 makes any agreement by which an employee purports to give up the right to indemnification null and void.

Prachasaisoradej v. Ralph's Grocery Co., 42 Cal.4th 217 (2007) illustrates the outer boundaries of the requirement. The plaintiff in that case challenged a profit sharing plan that provided employees with additional compensation based on a store's profits after deducting operating expenses. The Supreme Court upheld the plan against the argument that employee pay was being reduced by expenditures that were the employer's responsibility. "The Plan was not illegal, we conclude, simply because, pursuant to normal concepts of profitability, ordinary business expenses, such as storewide workers' compensation costs, and storewide cash and merchandise losses, were figured in, along with such other store expenses as the electric bill and the cost of goods sold, to determine the store's profit, upon which the supplementary incentive compensation payments were calculated. By doing so, Ralphs did not illegally shift those costs to employees. After fully absorbing the expenses at issue, Ralphs simply determined what remained as profits to share with its eligible employees in addition to their normal wages."

In the Cochran case, the Court of Appeal explained that the test for determining whether the employer must reimburse is not whether the employee incurred an added expense, but whether the employer, in the absence of reimbursement, "would receive a windfall because it would be passing its operating expenses onto the employee." Even though employees might have cell phone plans that did not require them to pay for the minutes of usage devoted to the employer's purpose, the employer was not entitled to the "windfall" of not paying for those minutes on its own.

Insurance Agent Is An Independent Contractor, Not An Employee

The enactment by the California legislature of new penalties for willful misclassification of independent contractors should have employers paying close attention to the applicable standards. (See Labor Code section 226.8.) A recent decision from the First District Court of Appeal in San Francisco is instructive. Arnold v. Mutual of Omaha Ins. Co., Case No. A131440 (Dec. 30, 2011).

Kimbly Arnold was licensed by the Department of Insurance as an independent agent or broker. When she was appointed by Mutual of Omaha as a nonexclusive agent, she was under appointment with another insurance company to offer its products. Her contract with Mutual of Omaha stated that she was an independent contractor, and made her responsible for maintaining any required license. The evidence submitted in support of Mutual's summary judgment motion showed that she had no supervision, did not receive a performance evaluation. Training was available, but attendance was not required. Mutual's insurance agents were responsible for their own expenses, including business cards, vehicles and office equipment. If they elected to use Mutual's office, they had to pay monthly fees to cover the expenses.

Arnold brought a class action on behalf of all Mutual's licensed agent's, claiming that they were employees and should have been reimbursed for expenses under Labor Code section 2802, and were not paid the wages they were owed timely upon termination of employment, as required by Labor Code section 201 and 202. The Court of Appeal affirmed the grant of summary judgment for Mutual, because Arnold was not an employee entitled to the protections of those sections.

The Court of Appeal rejected Arnold's argument that she met the "definition" of employee in Labor Code section 2750, which provides "The contract of employment is a contract by which one, who is called the employer, engages another, who is called the employee, to do something for the benefit of the employer or a third person." Section 2750 is not a definition of "employee," but a definition of "contract of employment."

Because it found no statutory definition, the court turned to the common law principles articulated by the California Supreme Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989). That decision identified the "principal" factor of the test to be whether the person receiving the services has the right to control the manner and means of accomplishing the result. It identified the following additional factors: whether the principal has the right to discharge at will, without cause; whether the one
performing services is engaged in a distinct occupation or business; the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; the skill required in the particular occupation; whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; the length of time for which
the services are to be performed; the method of payment, whether by the time or by the job; whether or not the work is a part of the regular business of the principal; and, whether or not the parties believe they are creating the relationship of employer-employee.

In this case, all the factors pointed to an independent contractor arrangement.

For a post about another case in which the employer did not fare so well, see $14.4 Million To FedEx Drivers Misclassified As Independent Contractors.