Termination of California Employee and US Market Expansion 101
Termination of an employee in California is a sensitive process for a foreign company expanding into the US Market. Without the correct information and assistance, it is comparable to walking on a tight rope, between two skyscrapers, blindfold, with your hands tied behand your back, on a windy day. In this article would discuss several important issues that may arise during employee termination, particularly in California. These issues are of special concern to companies expanding from Europe to California.
Introduction
As an employer, not only do you have to comply with applicable California and federal laws, you are also required to comply with the initial offer letter or employment contract, and any applicable company policies, both written and unwritten (i.e., if such unwritten policy has become a settled practice of your company).
Vacation pay
In California, employers are not required by law to offer vacation to their employees. However, if offered by the employer, because California law regards a vacation as a form of wages, certain rules must be followed. Since vacation days are considered compensation for the labor a worker performs, failure to allow an employee take such vacation or pay the employee for any accrued but unused vacation days upon termination may lead to a wage violation. Generally, in California, the right to a paid vacation vests or accrues when the employee performs the work that entitles the employee to a paid vacation, i.e., if the employee is terminated before performing the services, the employee is not entitled to such vacation. However, depending on how the offer letter/employment contract is drafted, and whether or not the company has a vacation policy conditioning the vacation on an accrual basis, a vacation could be deemed to have been granted fully upon commencement, i.e., there is no accrual basis and the employee is entitled to such vacation days upon employment even the employee has not performed work for the company. In such a case, if such employee is being terminated, the payment in lien of the whole vacation period would be considered wages due at the time of separation of employment, and if not paid when final wages are due, can also trigger penalties of additional pay for up to 30 days wages under the “waiting time penalty.”
Benefits — medical and dental insurance
In California, employers with less than 50 full time equivalents (i.e., the aggregate total number of hours worked by all of company’s employees is not up to 50 full time workers) are not mandated by law to obtain health insurance for their employees. However, some offer letter/employment contract expressly provide this benefit to their employees. In the event that the company is unable to provide this to the employee, upon termination of such employment, the employee may have a claim against the employer for breach of contract, whether or not the employee ever incurred any out of pocket costs to secure medical insurance and/or experienced any medical costs. Although this claim may likely fail if no medical cost was incurred during employment, it is still a valid claim and, in the event, that the employee has other claims against the employer, may be used as evidence to prove such other claims or proof company’s negligence on employment matters.
The importance of the offer letter/employment contract and maintaining a functioning payroll system really becomes evident when terminating an employee’s services, therefore, it is important to be forward looking when drafting any such agreement or creating any such payroll system. In truth, complications that arise when terminating an employee’s services, are usually as a result of oversights made during the hiring and during the term of the employment rather than at termination. These complications are mostly caused by improper planning of the US market expansion. Finally, these complications usually just become magnified during terminations.
Misclassification of employment
Sometimes, employers may mistakenly or even intentionally classify certain workers as independent contractors rather than employees, even where such workers qualify as employees under California law. A typical situation occurs when a European startup decides to hire a California resident initially as independent contractor and then decides to move to an employment contract.
Unfortunately, such “misclassification” has far reaching consequence and usually results in such workers being denied some benefits of employment, including overtime pay, meal breaks, and reimbursement of business expenses. Also, if found to be guilty of this, the employer has opened itself up to possibly large penalties from the government. This is because employee employer misclassification also leads to millions of dollars in lost tax revenue for both the federal and state governments. As such, federal agencies including the IRS and state agencies such as the California Employment Development Department (EDD), and the California Labor Commissioner aggressively pursue independent contractor misclassification. These agencies may do this by unilaterally auditing companies or commencing an audit upon a complaint from a wrongfully classified worker. Most times, a complaint from a wrongfully classified worker is usually made during a contentious termination of such worker. In California, in addition to civil penalties which could be up to $25,000 per “employee” along with back pay, overtime, compensation for non-provided benefits, the state and federal agencies could separately seek for all unpaid payroll related taxes, unemployment and workers compensation. All of which could run into over six figures per employee and may, in many cases, represent the end of the company.
To guide you in classifying your employee, the U.S. Department of Labor has published a worksheet that describes the factors that courts generally consider under the Fair Labor Standards Act when determining whether an employment relationship exists. Even more, under California law, a worker is deemed to be an employee rather than an independent contractor of the hirer if any one of the following is true: (1) the worker is not free from the control and direction of the hirer; (2) the worker performs work within the usual course of the hiring entity’s business; or (3) the worker is not customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. Therefore, it is imperative that you properly classify your worker from the start of the employment to prevent any complaint from a disgruntled worker whose services are being terminated.
Underpayment, Late Payment and Reduced Pay
All employers have a legal obligation to pay the wages that their employees earn and to pay it on time. Under California law, wages are defined as payment for labor performed by an employee and this could include all form of compensation such as hourly pay, fixed salary, commissions, payment that varies by project or task, and employee benefits such as insurance, vacation pay and sick pay. Normally, the offer letter or employment contracts set the terms of employment, including when wages will be paid, but some state laws, including California imposes some requirements on employers, regardless of their agreement with their employees. In California, one of which is that most employees must be paid at least twice a month and that an employer must establish an employee’s regular paydays before wages are first paid.
Unfortunately, wage violations are more common than one would expect. It is likely as a result of the employer not having a functioning organizational structure in the US, i.e., no company’s accountant and, therefore, no payroll structure set up before hiring an employee. Sometimes, wage violations may be a result of a misclassification of an employee, i.e., not paying all applicable benefits because the worker is classified as an independent contractor and not an employee. How ever it is caused, wage violations are a serious violation of law and could lead to massive penalties for the company.
Wage Violations
Again, the risks of wage violations are generally magnified when an employee’s services is being terminated. In California, generally, an employee who is fired must be paid all unpaid wages that have been earned up to and including the date of termination, and that payment must be made on the same day that the employee is terminated. For a resigning employee, this must be paid on the last day of work if a notice of at least 72 hours was given, and within 72 hours after their last day of work if no notice was given.
Where employers willfully fail to pay final wages, in full and on time, after employment ends, California law provides for a “waiting time penalty.” This penalty consists of a full day of wages for each day that payment is delayed and continues to accrue for as much as 30 days after discharge, depending on when payment is fully satisfied, i.e. company would be required to first pay the owed wages and also the accrued penalty. The waiting time penalty is calculated by first determining the employee’s daily wage rate (calculated by adding base wages, commissions, bonuses, and vacation pay that the employee earns in a year, dividing that sum by 52 weeks, and dividing that result by 40 hours) and then multiplying it by the number of days that payment is delayed (up to a maximum of 30 days). More importantly, this penalty accrues on a daily basis, not just on days the employee would normally have worked., i.e., even if the employee works only two days per week, they would be entitled to receive a full 30 days of wages if their final wages are paid 30 days late.
Additional Penalties
Lastly, wage violations in California may trigger additional penalties, such as penalties for inaccurate wage statements, and penalties under the Private Attorneys’ General Act (PAGA) and if an employee succeeds in recovering any unpaid wages, California law entitles such employee to also get reimbursed for their legal fees. Therefore, it is always advisable to create and maintain a functioning payroll system to ensure that there are no hiccups when terminating an employee’s services.
