Mistakes Made With Hiring, Firing & Waivers—Tales from the Court: California Small Business Horror Stories

Blog By: Attorney Lisa Thorsson

Introduction

It’s officially spooky season! And we know this because pumpkin everything has hit shelves in every store across the land. 

As we compile and revisit our lists of favorite spooky season stories, movies, and shows–I cannot help but think of the real-life horror stories from past clients and current case law where well-intentioned and bright-eyed business owners unintentionally ran afoul of California employment law. 

As a native Californian, I am unequivocally proud of our state’s protections afforded workers. However, I am regularly aghast at the gap in educational resources for budding entrepreneurs and business folk on what the law says is required of them as employers and as business leaders. As part of our ongoing goal of client education and to help fill this gap, I’ve got some tricks and treats for you. Here is a cabinet of legal curiosities, each a real-life tableau (with details changed to protect anonymity) with a not-so-subtle lesson we will outline, for your edification. For what was all of the real-life suffering of these litigants worth if we learn nothing from it and do not prevent it from happening again? 

Here are three hard-learned lessons from business owners in California.

1. The Tale of the Misclassification Secret Trap Door [or, Why You Need a Consult Before Hiring Independent Contractors]

THE HORROR: Imagine you are taking your aging parents into long-term care, and you opt for keeping them in the home they love to get the help they need. You’ve done the research; seniors who stay at home fare better and live longer. You discover how difficult it can be to hire and vet caregivers directly, so you learn from your own experience and want to make it easier for others. You have a brilliant idea:start a referral agency where you connect certified and licensed caregivers directly with clients for a one-time fee. The caregivers are excited and they love the idea of picking their own clients, hours, fees, and freedom. They want to build something with you and alongside you. So, you draft up independent contractor agreements, form the business, grow the business, and start to feel like your journey has been a positive one for both clients and contractors.

Then one day, you get a demand letter in the mail. It states that one of your disgruntled contractors was misclassified for years, and that you’ve incurred hundreds of thousands of dollars in damages, fees, and the like–all composed of claims for unpaid overtime, incorrect withholdings, and a litany of statutory fees attached to these violations. Your clients are sued, too. They get pursued to the ends of the Earth by this former caregiver under a “joint employer” theory that allows this, it goes on and on for years, ultimately ending at the appellate court level. You end up paying out your share, in addition to years of attorney’s fees. The lawyers end up with more cash, and the disgruntled contractor walks away with most of the equity from the home where he spent years caring for someone, essentially becoming the unintended heir.

This case was Duffey v. Tender Heart Home Care Agency, LLC (31 Cal.App 5th 232).

In the State of California, caregivers in particular are protected by a relatively new law many business-minded folk are not aware of, and can be a secret trap door of liability for unknowing employers, agencies, clients, and caregiver workers: the Domestic Worker Bill of Rights. The law’s purpose is justified in its noble intentions; it addresses a desperate legislative need for protecting a particularly vulnerable cross-section of typically underrepresented and under-resourced workers: caregivers. 

Studies in the California Congress justifying the Bill’s existence cited data points about how such workers tend to be foreign-born women who are frequently catapulted into indentured servitude upon obtaining legal working status in the United States, working for wealthy families without the basic protections owed to her by the State of California as an employee. However, as the story demonstrates, the fundamental lack of knowledge on appropriate hiring practices (and the very existence of this law itself) can cause catastrophic results when lawyers are not on board for hiring classification decisions.

The agency (and the agency’s clients), had no idea that, for ten years, they weren’t classifying workers correctly. Everyone other than the lawyers in this case lost–the caregiver who didn’t get the pay structure and withholdings she was entitled to, the clients who lost everything, and the business that lost years of time and money.

THE LESSON: Before you classify ANYONE as an independent contractor, call your lawyer. Reach out to a lawyer if you haven’t already. Get a consult. Make sure your compliance and house is in order. Misclassification can be dangerous and costly litigation waters to swim in, and the best way to avoid the dangers is to make sure you’re equipped with what you need before you dive in. Every state defines employee vs contractor differently, so it is essential to get legal experts who know the rules.

2. The Tale of the Litigation Vampire [Why You Need to Document Employee Matters]

THE HORROR: Imagine you come to the USA as a first-generation immigrant family. You work hard to get here, get citizenship, and to start a business from absolutely nothing. Your story is quintessentially American and you want to bring joy to your community. You make the delicious tamales and people love them, so much so that your restaurant business thrives and you open a few more. You buy a home, send your kids to college, and start teeing up your well-deserved retirement plans. You treat your workers with fairness and compassion, hoping to elevate and build a team from within. You have a casual management style, and you don’t inundate your people with paperwork. When things go wrong, you discuss it as a team, and you sit down with folks one-on-one. You work things out with a handshake and a smile.

One of your employees, a manager who has worked for you for nearly a decade, starts not showing up. Starts to disengage. Starts to make numerous mistakes. You spend months (and months) giving second chances, talking to them about how to fix it, adjusting their pay upwards out of empathy rather than reward, allowing extra unpaid time off, and offering to pay for some of the out-of-pocket medical expenses they need for the litany of health concerns they are going through. You do everything you can think of to rectify the situation; you want to keep them. Still, one day, the employee yells at you in your office and storms off after not getting a pay raise that you can’t afford or justify. You call a few times over the next weeks, wondering when they will come in, not leaving any messages. After a month of no-contact and no-show, you send them their last check in the mail along with a simple, no-fuss cover letter stating you regret that the relationship ended without getting into the how or why it ended. 

Then, one day, you get a demand letter in the mail. It claims that you unlawfully terminated this now-absent manager who unceremoniously quit. It also says that you retaliated against them for their health conditions, that you failed to reasonably accommodate their requests for a disability, and a host of other completely fabricated charges. The thing is though, you don’t really have much proof and evidence to disclaim what they are saying. It boils down to a “he said, she said” situation, your lawyer explains. 

What does that mean? You’ll have a hard time proving what actually happened, and so will the manager suing you. You end up burning through lawyer’s fees over the course of three years of litigation, showing up to depositions, spending hours gathering and turning over documents, and going through a nail-biting trial. You testify, and the jury believes you. You spend two weeks not sleeping well, showing up to court each day, and wondering when you can get off of this nausea-inducing ride. To your greatest relief, you win.

But you’re drained. Traumatized. There is a tarnish on your working relationship with employees–you don’t trust so easily anymore. Your employees were interrogated at a deposition and poked and prodded, and they’re scared to talk to you as openly as they used to. And your plans to open more restaurants got put off for three years because of the uncertainty and funding the litigation. You’ve won, but the collateral damage was more than you could have ever imagined for simply arriving at the truth. 

This story represents an amalgamation and hypothetical of several cases brought under California’s Fair Employment and Housing Act (FEHA), including Joaquin v. City of Los Angeles (202 Cal.Ap. 4th 1207), Krylova v. Genentech Inc. (37 F.Supp.3d 1156), and Andrade v. Arby’s Restaurant Group, Inc. (225 F.Supp.3d 1155).

THE LESSON: Document, document, and then document everything again when it comes to employee (or contractor) performance issues. Confirm performance issue discussions in writing–text, email, performance reviews, anything is better than nothing. In-person discussions and phone calls are a hallmark of the employer-employee relationship and the inherent trust required of that arrangement. However, when it comes to CYA (cover your ASS-ETS), you need to be documenting when things go astray with a worker to avoid disputes about the facts in the future. Good documentation can shut down claims before they ever see the inside of a courtroom, and can enable a fruitful settlement out of early mediation or informal resolution. Moreover, if any employee ghosts you or you haven’t had to ever fire someone before, call your lawyer! They can help you ensure you’re documenting everything enough to prove you’re not in the wrong, and advise you on the best preventative course.

Another suggestion? If you are unsure of HR best practices, get a consultant in this area. 

3. The Tale of the Injured Child and the Tort Damages Ghost [Why You Need Customers to Sign Waivers]

THE HORROR: It’s a beautiful spring day at a nature reserve in the Northern California hills, the several-week season when the wildflowers bloom and the arid landscape explodes in dots of vibrant oranges, pinks, yellows, and reds. You own a horse ranch that you’ve spent years building from scratch. You’ve put in the painstaking efforts to turn the facilities into a stunning local feature that families love and a point of pride in the neighborhood. In fact, you’ve even begun hosting things like goat yoga and other fun ideas, with plans to offer plenty of holistic and healing activities. You’ve done this all yourself, even the paperwork. You’ve been downloading what forms you need from the internet and getting contract forms from friends or colleagues who run similar types of businesses, even from mentors. You’ve never really had an issue with the paperwork, and you feel like you’ve done everything you can to protect your business.

You instruct riders on how to maintain a safe pace so as not to gallop forward suddenly and injure other riders. You genuinely care about your guests and want to do anything and everything to keep them safe, but sometimes, life has other plans. One day, a rider gallops forward without warning other riders, causing other horses to gallop, and a guest falls off and gets injured.

Then, one day, you get a demand letter in the mail. It states that there are not appropriate waivers in your contract for “inherently dangerous activities”, and that the waiver was “too ambiguous”. It also states that the injured guest intends to sue for all kinds of tort damages–the medical bills are unimaginable. Your lawyer tells you that they’re right because the waiver form was the wrong kind of waiver. You’re not covered for this, and you’ve got to pay up.

This story is based on Cohen v. Five Brooks Stable (159 Cal.App.4th 1476).

THE LESSON: Whether you think of the activity you offer to clients as dangerous or not, you need the correct waiver language in your client contracts before ever allowing them to participate in any kind of activity, especially if you are inviting them onto your own property. You have a host of duties of care to guests on your property, including elevated duties of care related to being the owner of the property. Don’t just download a random, generic waiver. They need to be correct, current and matched to the activity that guests are engaged in. Have a lawyer take a look at your waiver before you put it into practice.

KEY TAKE-AWAYS

1. Consult a lawyer before you decide to make someone an independent contractor.The stakes are too high to be wrong.

2. Always document performance issues and terminations in writing in a way that tells what happened in as much detail as possible. Litigation without it can be agonizing. Your lawyer can help you through the termination process if you are unsure or have never done it before.

3. Always, ALWAYS have guests sign a waiver before engaging in a class or activity you are offering, no matter how safe the activity or the property seems. Make sure it’s the correct kind of waiver for what you’re offering, and don’t blindly trust something entitled “waiver” that you’ve found on the internet. Consult an attorney to determine if there are legal issues to address in your documents.

Want to know more?

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