3 Items For Your Winter Corporate Check-Up

One of BKCG's main goals is to help our clients avoid legal problems from occurring in the first place and, with that in mind, based on our clients' experiences and recent legal developments, we suggest you consider doing the following 3 things to help your company stay out of legal peril.

1. Conduct a Cybersecurity Audit. The time to do this is now, before your company experiences a data breach, whether it be an outside hack, a ransomware demand or the loss of valuable proprietary company information to a competitor. Not only can any one of these events cause massive disruption to your business, but the costs can be devasting. For example, since 2015, California has required businesses to provide 12 months of free credit monitoring services to persons whose personal information has been subject to a data breach. Disclosure of a person's name and social security number or driver's license number can trigger this monitoring requirement. Assuming a modest monitoring cost of $100/year, if your business has a database of 1,000 such consumer records that is breached, the monitoring cost alone would be $100,000. Among the most common causes of company data breaches are: (1) not regularly installing security patches issued by Microsoft, Google, etc.; (2) giving employees administrator rights, for example, so they can install their own software updates; and (3) failing to properly train employees so as to avoid computer viruses and malware.

While a consultation with an IT professional is the best way to determine any additional steps you need to take to protect your company, here are a few simple things you can do immediately:

· Consider hiring an outside specialist IT consulting company to conduct a thorough audit of your company's current cybersecurity measures. Many such companies will do so at a low or nominal cost, and there are obvious advantages to having someone other than your regular IT services provider or in-house IT person undertake the audit.

· Conduct an inventory of employees who remotely access your company's servers and ensure that the devices they use to do so employ appropriate security protocols and have regularly updated security software. Your data is only as safe as your weakest link.

· With your IT professional's help, develop an internal company security plan which includes employee training on security training and limiting access to legally sensitive information to higher level employees on a "need to know" basis.

· Ask your commercial insurance broker precisely what types of cybersecurity insurance coverage you have under your business' existing commercial general liability policy, and what the limits of coverage are. Do not just assume that your existing coverage is adequate for your business' needs, you may need to purchase supplemental coverage.

· Determine exactly what employee and customer information your company gathers and how and where it is stored. Avoid complacency, as the law is evolving rapidly in this area. For example the California Consumer Privacy Act of 2018 will go into effect in January 2020 and will impose significant new obligations on companies' use and retention of consumers' personal information. As is always the case, ignorance of the law will not shield you from liability.

2. Immediately Review Your Company's Use of Independent Contractors. As has been widely reported in the press and online, the decision issued a few months ago by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903, makes it even harder than it previously was for companies in California to legally justify characterizing a service provider as an independent contractor, rather than as an employee.

The Dynamex court adopted a three-part test used in other jurisdictions for determining whether a worker is properly considered an independent contractor under the "suffer or permit to work" standard in the California wage order in question. Commonly referred to as the "ABC test," this test "presumptively considers all workers to be employees", and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions:

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 that involved in the work performed.

For most BKCG clients, the biggest obstacle to legally utilizing independent contractors will be to satisfy the "B" prong of the test, which the Court stated was meant to cover "all individuals who are reasonably viewed as providing services to the business in a role comparable to that of an employee, rather than in a role comparable to that of a traditional independent contractor."

As examples of how the "B" part of the test would apply, the Court said that a retail store could justify hiring an outside plumber to repair a bathroom leak, or an electrician to perform electrical work. In contrast, a clothing manufacturer company could not hire a work-at-home seamstress to make dresses from cloth and patterns supplied and to be later sold by the company; and a bakery could not legitimately hire a cake decorator to decorate the bakery's custom cakes.

In a nutshell, if a business engages independent contractor to provide services that are part of the business' usual business operations, it risks an expensive employee misclassification claim. Bear in mind also that, if the "B" part of the test is not satisfied, even the fact the parties signed an independent contractor agreement, or that the service provider asked, or even insisted, on being treated as an independent contractor will not change the legal result. Practically speaking, it also does not matter if the independent contractor provides services for just a few hours a week, or for a limited period of time.

The Dynamex case involved only how to determine a worker's employment status under a wage order, and the California Court of Appeal recently confirmed, in Jesus Cuitlahuac Garcia v. Border Transportation Group, LLC, et al, that the ABC test set forth in Dynamex applies only to causes of action brought under wage orders. However, it is to be anticipated that creative plaintiffs' employment and personal injury lawyers, workers' compensation insurance companies and others will still seize on the Dynamex case and attempt to expand its applicability to further their own agendas. For example, if your independent contractor salesperson is involved in a vehicle accident, a plaintiffs' personal injury lawyer may name your company as a co-defendant in the resulting lawsuit, as the salesperson's alleged employer, and your company could find itself defending an auto liability claim with no insurance if your company does not have "non-owned" automobile liability coverage.

With these factors in mind, it is imperative that you immediately review your company's use of independent contractors and consider either hiring as employees any independent contactors who will not satisfy the "ABC test" described above, or consider hiring them through a staffing company or a professional employer's organization.

3. Implement or Review Your Company's Arbitration Policy for the Resolution of Employee Disputes. A recurring theme in this newsletter is our firm's strong suggestion that California employers seriously consider requiring all employees to sign an arbitration agreement agreeing to settle all employment-related disputes that can be legally resolved through arbitration. It is a harsh reality of doing business in California that, however careful an employer is with its employment practices, procedures and documentation, sooner or later some kind of employment claim will arise and the employer will be faced with a potentially expensive litigation claim.

In many instances, however, litigation can be avoided through the use of a well-drafted employment arbitration agreement. Although employers are required to pay the costs of the arbitration service and the arbitrator, in our experience, the significant advantages to an employer that result from having the case decided by an impartial arbitrator, rather than by a Southern California jury that is highly likely to contain at least one disgruntled ex-employee, greatly outweigh the added cost.

The U.S. Supreme Court recently concluded in three cases decided simultaneously that arbitration agreements providing for individualized proceedings (in other words, prohibiting the use of a class action) are enforceable, thus providing yet another reason for employers to make use of an arbitration agreement and, specifically, one containing a class action waiver. If your company either does not have an employee dispute arbitration agreement in place with your employees, or uses an agreement that has not been recently reviewed for legal compliance purposes, please contact us.

We would also be remiss if we failed to remind you of the importance of obtaining Employment Practices Liability Insurance (often referred to as "EPLI") for your business, since commercial general liability policies do not cover employment-related claims brought by employees. Finally, if you do suspect that an unhappy employee may be considering making some sort of employment-related claim against your company, do not overlook the possibility of offering to pay a departing employee severance pay, in exchange for the employee signing a separation agreement containing a general release of claims. If you are successful, you may never need to even resort to your arbitration agreement.

Please contact partner Greg Clement at (949) 975-7586 or at [email protected] if you have questions about any of the foregoing issues, or any other legal issue confronting your business.


For example, workers' compensation claims wage and hour claims brought against an employer under the California Private Attorneys General Act (PAGA) are not subject to mandatory arbitration.

Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP et al. v. Morris et al., No. 16-300; National Labor Relations Board v. Murphy Oil USA, Inc., et al., No. 16-307 (May 21, 2018).

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