California Employment Pitfalls For Small Businesses

Life is not easy as an employer in California. Businesses are tough enough to run without all the traps and pitfalls you can all too easily fall into when it comes to your employees and state laws and regulations. This article dives into several of these risks and challenges, including: 

• Navigating Non-Compete Agreements And Trade Secrets
• Legally Mandated Benefits
• Avoiding Misclassification of Employees as Independent Contractors
• Guidelines for fair employee evaluations to keep you out of trouble later.
• Dealing with disabilities, employment classification, and benefits. 

Each of these pitfalls might at first seem innocent enough or even lure you into leaping straight in, like the first one: non-compete agreements. 

What Are Non-Compete Agreements, And Why Are They A Trap For California Employers?

A “non-compete” agreement is a provision in a contract signed with another party, often an employee, contracted company, etc. The non-compete clause forbids that person or business from directly, and sometimes indirectly, competing against you for a specific period of time within a designated geographical area. Many states enforce reasonable non-compete agreements.

Not so under California law. 

Under California Business and Professions Code 16600-16600.5, non-competition agreements in employment contracts are strictly prohibited.

“[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” 

As a result, any contract that contains a non-compete clause is subject to complete invalidation. Thus it is generally not a good idea to include a non-compete agreement in any California contract.

What Is The Alternative? How Can I Protect My Company’s Techniques Or Technology?

Fortunately, non-compete agreements are not your only option for protecting your proprietary technology or innovative techniques. This is because “trade secrets” are protected forever under California law. 

A trade secret is any piece of information not generally known to the public from which you derive independent economic value and which you have taken reasonable precautions to keep hidden.

As a business owner, you can prohibit others, including former employees, from using a trade secret to compete unfairly with you. This includes using a trade secret to solicit clients, vendors, and employees. 

If they do, you can file a claim against the employee or company in question for injunctive relief to stop them and request damages in court. 

That said, these protections come at a cost; there are requirements in both your contracts and the law that you will have to meet as well. 

What Benefits, Such As Health Insurance And Retirement Plans, Must You Provide California Employees?

The requirements for what you must provide your employees, in terms of benefits, depends in part on the size of your company. 

Everyone has to provide:

• Unemployment insurance,
• State disability insurance, 
• Workers’ compensation insurance. 

California employers with five or more employees have an obligation under the Cal Savers law to enroll employees in the state-sponsored retirement plan unless you offer your own private retirement plan, such as a 401k or simple IRA for example.

Certain employers may also be subject to the Affordable Care Act (ACA) with respect to health insurance.

These benefits are one of the reasons why the status of someone who works for you is so important as mislabeling an employee as an independent contractor can have serious ramifications. 

What Are The Legal Implications Of Misclassifying Employees As Independent Contractors In California?

Of all the traps you can fall into, misclassification issues can be some of the most devastating, especially if there are a large number of employees involved. Misclassification of independent contractor status is often the basis for class action or Private Attorneys General Act (PAGA) lawsuits. In those cases, one representative can sue on behalf of others whether the others like it or not.

Setting aside the larger companies, even a single IC misclassification case can be life-threatening to a small business. When you erroneously classify what should be an employee as an independent contractor, the result is a violation of a host of employment and wage and hour laws.

For example, you will not have deducted employment taxes from the payments made to the worker, sometimes drawing audits before the California Employment Development Department (EDD) or the Internal Revenue Service (IRS). The employee likely would not have time records to track hours worked, thereby exposing you to wage and hour claims such as: 

• Failure to pay for all hours worked,
• Failure to pay minimum wage, including liquidated damages
• Failure to pay overtime, 
• Failure to provide rest and meal periods, 
• Failure to provide itemized wage statements (i.e. paystubs),
• All the resulting derivative penalties for late payroll, waiting time penalties for failure to pay final pay on time, etc.

A single misclassification can unleash a tidal wave of legal vulnerabilities and punishing fines and damages.

There are examples where claims by individuals before the California Labor Commissioner based on misclassification of IC status exceeded six figures. Certainly, this is life-threatening to any small business.

What Are The Guidelines For Conducting Compliant Employee Performance Evaluations In California?

Another trap that is all too easy to fall into is poorly managing your performance evaluations, while they might seem like tedious work, they can be invaluable evidence later. 

First, performance evaluations should always be based on facts. As such, they should be objective and include both the good and the bad. You may be tempted to sugarcoat the performance evaluation to avoid hurting the feelings of an employee. Especially in a small firm where everyone has to interact regularly with each other. 

Over time, however, the employee receives raises, and five years later, unfortunately, you may want to terminate the employee because they are not living up to your standards or their costs. At this point, those performance evaluations that highlighted the good and minimized the bad, or a lack of negative performance evaluations at all, put you in a tough position to push for termination or defend your decision to do so when they sue.

What Must California Employers Do To Accommodate Employees With Disabilities Under The ADA?

Under both California and federal law (the Americans with Disabilities Act), you must “engage in the interactive process” with a disabled employee to determine reasonable accommodations that will enable them to perform the essential functions of their job. 

Engaging in the interactive process requires good faith communication where each side has an obligation to explore the options that would let the employee continue to perform their essential job functions. If either fails to engage in or causes the failure of the interactive process, they are likely to lose the inevitable disability discrimination and failure to accommodate a lawsuit. 

Thus, it is critical that you handle the interactive process in good faith, which often means trusting the employee that the restrictions they need are genuine. It is just as critical, however, that the process be carefully documented, in detail, at every step along the way. This will allow you to defend a failure to reasonably accommodate a disability claim.

Each of these pitfalls, and more, can be avoided with the help of an experienced employment attorney. But if you do not take small steps with the help of a lawyer to avoid them in the first place, you will soon find yourself paying a lot more money to a lawyer to defend you against claim after claim in court. For more information on Wrongful Termination Claims In California, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (855) 534-1490 today.