Direct Sales and MLM

Thoughts A Brewin' Newsletter 7: The California Risk

By
Clay Brewer

The distinction between employees and independent contractors has always been and will continue to be a hot topic. Whenever something is narrowed down to a fact-specific case, it will always be difficult to provide a definitive answer.

This risk is heightened for companies, notably direct sales companies, that utilize the services of independent contractors in California. California provides a variety of unfriendly business regulations, but the Private Attorneys General Act of 2004 (PAGA) is gaining steam and is the topic of discussion here.

For starters, PAGA is a joke and is nothing but a money grab for both the government, specifically the Labor and Workforce Development Agency of California (LWDA), and whatever law firm that is seeking to turn PAGA litigation into the next personal injury niche.

What Is PAGA?

PAGA is a statute that permits an individual to bring suit on behalf of the state against a company for California labor code violations. The individual is not simply limited to their own damages as “an aggrieved party,” known as individual claims, but may also bring claims on behalf of others. Additionally, a recent California Supreme Court case, Adolph v. Uber Technologies, Inc. ruled that arbitration clauses cannot override or seek to circumvent the public policy decisions of the state of California. This means that if there is an arbitration clause, the individual claims may be required to go to arbitration, but the non-individual PAGA claims on behalf of others may still proceed in state court. This decision is a watershed moment as the Court clarified state law to address the previous Supreme Court of the United States ruling in Viking River v. Moriana, that previously ruled independent claims being arbitrated would not permit an individual to bring PAGA claims in court.

Before any individual may bring a PAGA case, the company being accused of the violations and the state attorney general must be notified with an official notice of the allegations. The state then has 65 days to determine whether or not they will pursue the case on their own or whether the individual may proceed. All notices are made public during this time frame and can be viewed on the state of California’s website. You may be surprised at the companies who have received something.

While PAGA claims originate from violations of labor codes that grant certain rights to employees, the major risk for those companies that utilize independent contractors is misclassification. Not only are the PAGA law firms searching for aggrieved plaintiffs who have suffered potential labor code violations, but they are on the prowl for the low hanging fruit that is likely to stem from misclassification of independent contractors. Any misclassification would then open the floodgates to labor code violations if they are, in fact, employees.

Impact On Direct Sales Industry

For those companies that use independent contractors in California, such as direct sales companies, it’s critical to understand the differences between employees and independent contractors and to take a look in the mirror at how you are operating your business.

I’m not saying stop doing business in California, it’s the largest economy in the United States and one of the top economies in the world, but I am saying to proceed with caution and understand the risks that are accompanied with doing so. The time of direct sales companies, in particular, to re-empower the salesforce and loosen the reigns of control is now. Otherwise, California may make you pay because the incentives for the PAGA chasers is here.

Clay Brewer
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