Category Archives: Legal Insights

Think you don’t have a written contract with your employer? Think again!

By michael

Advice for employees who are contemplating a move to a competitor.
Most California employees are at will and can be fired at any time. Many employees are nevertheless bound by agreements that benefit their employer, and which they are unaware of until they quit or are fired. The following are three agreements that may come back to bite the unsuspecting employee who leaves their job and moves to a competitor.

1.      Trade secrets agreements

If you are employed in certain fields, particularly in financial services (banks, insurance companies, brokerage firms, etc.), tech, biotech, or any similar industry, the chances are very good that you signed an agreement not to disclose the company’s trade secret agreements when you were hired. Trade secrets can be almost any information that is not available to people outside the company, and can include customer lists, non-public financial information, designs, formulas, processes and any other non-public information that provides the company with a competitive advantage.

In general, an employer will be given wide latitude in its designation of material that constitutes trade secrets as long as the information is not available outside the company and the company takes reasonable steps to keep the information secret. One “reasonable step” employers take to protect their trade secrets is to have employees sign a non-disclosure of trade secrets agreement when they are hired.

Most employees understand that they are not to disclose trade secret information to others while they are employed; many do not understand that these agreements survive their termination, and require them to refrain from disclosing such information to their new employer. A new employer who learns that an employee has breached a former employer’s trade secret agreement is likely to fire that employee, in part to avoid a conflict with their competitor, and in part because they fear the employee will do the same thing to them. A departing employee needs to be aware of what information they can and cannot disclose, and will need to be up front about this with any new prospective employer.

If you have access to truly sensitive information, you should contact an attorney who is knowledgeable in this area. An hour of counseling will be money well spent. If you are not privy to really sensitive information, the most likely source of problems will be your contacts list. Believe it or not, the list of contacts you developed while you were employed will usually be considered the company’s trade secret, not yours!

In some instances, your former employer will not have a policy of protecting such information. Some brokerage firms, for example, are parties to an agreement by which they have agreed that their employees can take customer lists as long as they take no other information about the customers. Many employers, however, jealously guard their customer lists, and will come after you if you take yours.

If you have signed a trade secret agreement, an employer may be able to get an injunction against you to prevent you from soliciting business from customers on the list (although you will usually be allowed to announce your move to a new job), and may be entitled to damages for any business lost as a result of improper solicitation. If you are unfamiliar with your employer’s policies in this regard, you may need to make some discrete inquiries to figure out where you stand before you quit.

This can be a complex area, so if you are in doubt, contact an attorney who knows this area of the law to help you figure out what you can and can’t take with you when you leave. Whatever you do, do not be the person who prints out or downloads customer lists and other data in their last few days at work and only inquires later whether this conduct is prohibited.

2.      Non-competition agreements

With a few exceptions, covenants not to compete (an agreement that you will not compete with your employer for a certain time period and/or in an certain geographic area) are not enforceable in California. While some California employers do still have all employees sign them, they are generally not enforceable unless you are a sole or part owner of the business.

On the other hand, if you worked in a state that does enforce non-competition agreements, and you take a new job in California, there are circumstances in which the non-competition agreement could be used against you and could cost you your new job in California. If you are in a state that does enforce non-competes and are planning to take new employment in California, you should seek legal advice before making the move!

3.      Covenants not to solicit

Unlike non-competition agreements, covenants not to solicit your former employer’s employees or customers are generally enforceable in California. Even though any employee is free to quit and join a competitor at any time, your employer can enforce an agreement that says that you will not encourage other employees to leave the company. Of course, those employees are free to quit and join your new company at any time without violating a non-solicitation agreement as long as you did not approach them about leaving first. As a practical matter, it can be difficult for an employer to enforce a non-solicitation agreement unless there is clear evidence that a current or former employee is actively encouraging others to leave and join a competitor. Nevertheless, employers do sometimes seek injunctions to prevent recruitment of their employees in violation of a non-solicitation agreement, and those agreements often provide for an award of attorney’s fees to the prevailing party. In short, you need to be careful with your communications with other employees if you are subject to a non-solicitation agreement.

4.      Get advice before you move!

Most employees will not even be aware that they signed a trade secret, non-competition or non-solicitation agreement when they were hired. If you’re unsure what you signed, you will need to make some discrete inquiries before you leave. If you don’t feel you can ask without creating too much suspicion that you have one foot out the door, you should at least take a look at the documentation your employer is using currently for new employees; that will give you a baseline as to what information the company is interested in protecting, and whether they are using non-competition or non-solicitation agreements currently.

Whatever you do, don’t download information in the hope that your employer won’t notice. Almost everything you do on a computer can be traced–the documents you’ve reviewed, what you sent to print, what you downloaded, what you attached to e-mails. Get some advice first before you find yourself in a lawsuit that could cost you current and/or your next job.

Pre-trial settlements by one defendant lead to issue for the non-settling parties

By Sweta Patel

A recent Second District Court of Appeals decision illustrates how the intersection of three laws can significantly reduce damages at trial.

In Rashidi v. Moser, 219 Cal. App. 4th 1170 (2013), the defendant utilized the Medical Injury Compensation Reform Act (“MICRA”) (California Civil Code, Section 3333.2), the California Fair Responsibility Act of 1986 (“CFRA”) (Code of Civil Proc. Section 1431.2), and the good faith settlement statute (Code of Civil Proc. Section 877.6) to reduce his damages by almost 99%.  MICRA limits a plaintiff’s recovery for pain and suffering to $250,000 in medical malpractice cases.  Additionally, CFRA apportions pain and suffering damages based on the defendant’s percentage of fault in causing the plaintiff’s injury.  Lastly, a joint tortfeasor may seek court approval that the settlement is in good faith (reasonable) to protect himself from claims for indemnification or contribution by non-settling parties.

Generally, a defendant in a personal injury case (i.e. medical malpractice) is liable for his percentage of the fault in causing the plaintiff’s pain and suffering.  However, MICRA places a $250,000 cap on pain and suffering damages.  In turn, a defendant could end up paying less than his share of pain and suffering damages when there is a pretrial settlement.   MICRA does not cap damages for medical care or lost wages.  However, defendants are jointly liable for medical care and/or lost wages in a personal injury case.  In other words, one defendant could end up paying for all of the plaintiff’s medical care and/or lost wages (and, of course, such a defendant could seek reimbursement from his codefendant).

In Rashidi, the plaintiff became permanently blind in one eye from a surgery to prevent sever nose bleeds.  The plaintiff then sued the hospital and the surgeon for medical malpractice and the manufacturer of the product used during surgery for products liability.  Prior to trial, the plaintiff settled with the manufacturer and hospital, which the court approved to be in good faith.  The only remaining defendant, the surgeon, was found liable at trial and the plaintiff was awarded $1,450,000 ($125,000 for medical care and $1,325,000 for pain and suffering).

Although the trial court denied the surgeon’s efforts to reduce the verdict based on the pretrial settlements, he prevailed on appeal.  Since there was no allocation between medical care and pain and suffering damages in either of the pretrial settlements, the Appellate Court mirrored the jury’s apportionment to determine the appropriate offset.  Following offsets from the pretrial settlements, the plaintiff recovered nothing for medical care costs and only $16,655 for pain and suffering from the surgeon.

Thus, following a pretrial settlement, the remaining parties in a medical malpractice case should attempt to estimate the jury’s findings.  When MICRA applies to the settling and non-settling defendant, the parties can reasonably estimate the maximum pain and suffering damages at trial given the $250,000 cap.  If there is no allocation in the settlement the court will mirror the jury’s verdict after imposing the $250,000 cap.  For example, if the plaintiff is claiming $400,000 for medical care then it can be assumed that at trial the plaintiff would be awarded a maximum of $400,000 for medical care.  Since the maximum recovery for pain and suffering in a MICRA case is $250,000 it can further be assumed the maximum liability at trial would be $650,000 ($400,000 for medical care and $250,000 for pain and suffering).  The breakdown here is 61.5% in medical care and 38.5% in pain and suffering.  Therefore, if a codefendant settles for $1,000,000 a court would find that the plaintiff already recovered $385,000 (38.5% of the settlement) for pain and suffering and the plaintiff would not recover additional damages for pain and suffering at trial.  The lesson here is that pretrial settlement benefits all parties.  Both parties can avoid unnecessary litigation costs in light of the real possibility that plaintiff will not recover damages for pain and suffering at trial even with a verdict against the defendant.

If a settlement specifically allocates funds for medical care, then the parties can also reasonably calculate the maximum liability for medical care at trial.  However, if there is no allocation in the settlement, then the court would mirror the jury’s verdict (prior to imposing the MICRA cap).  Determining the likely allocation at trial can be difficult because the parties may not know how much a jury will award for pain and suffering.  Nevertheless, the parties should not be discouraged from attempting to calculate the potential maximum liability for medical care.

If you are involved in a medical malpractice case with multiple defendants you should consider the following guidelines when there is a pretrial settlement:

1)    It is crucial to analyze whether MICRA applies to the settling codefendant.  If MICRA does not apply to the settling codefendant, then you will not receive an offset from the settlement for pain and suffering damages at trial.

2)    Chances are you may not know the settlement terms between the codefendant and plaintiff prior to trial unless there is a motion for good faith settlement.  If you have an opportunity to review the settlement agreement, determine whether there is an allocation between medical care and pain and suffering damages.  An allocation in the settlement agreement would make it easier to calculate the potential damages at trial.

3)    If there is an allocation in the settlement agreement, you should make sure it is reasonable and fair.  You could challenge the motion for good faith settlement if the allocation is unfair or unreasonable; or you could challenge the allocation at trial since the trial court is not bound by the allocation in the settlement agreement even if the settlement is approved to be in good faith. (Gouvis Engineering v. Sup.Ct. (Cambridge Terrace) 37 CA4th 642, 651(1995).)

4)    Evaluate possible damages at trial and share your calculations with opposing counsel.  The strong possibility of negligible recovery at trial could aid in settling the case.

Rashidi may prove to be an incentive for all parties to settle when one defendant in the case enters into a pretrial settlement.  The remaining parties should have an honest discussion about how much the plaintiff could recover at trial (if, the plaintiff prevails). The combination of MICRA, CFRA and the good faith settlement statute could aid the parties in reaching a fair settlement.

The “New” Evidence. . .Email And Other Electronic Communications Can Define A Company’s Defense In An Employment Discrimination Lawsuit

By Rachel Hulst

Email has been a primary source of communication in the business space for nearly 15 years.  Today, most of us receive and respond to dozens of emails a day.  We use it constantly, to chat with coworkers, to spell out work assignments, to receive information from colleagues across the country and to document key events.  So, why is it when an employee sues its company for employment discrimination, the documentary evidence gathered rarely includes all emails of all the key witnesses in the case?

There are many reasons for this:

  • Despite our many years of using emails as a form of communication on employee matters, emails are not viewed as “employee files” and thus, companies don’t always think about their relevance when an employee sues.  In fact, it is those emails about nothing that often contain the most helpful information in these types of suits.
  • We assume that all “important” emails regarding an employee would’ve been sent to his/her personnel file;
  • Even when searching for emails, it is easy to miss some; logistically, email threads are often intertwined—individuals are added and removed and new threads are spawned off.  Information that may be included in one thread could often be missing from another.
  • Often such emails don’t exist: employees get so many emails a day, many feel the need to delete and get rid of them.

But this needs to change.  Emails (along with the more recent culprits—mobile texts, instant messages and communications through social networks) are crucial to an employer’s defense in these types of cases. They can set the timeline of events, provide key information needed to understand what actually happened or they reveal very troublesome communications.  Providing counsel with all potentially relevant emails at the beginning of a lawsuit can ensure the best defense.  More often than not however, emails trickle in months or even years into litigation.  Finding out newer facts or damaging information that late in the game can be extremely detrimental to a company’s defense—even if, those facts are good for the company. Words read in an email can often be the ones that make or break a case.  While we are casually and quickly pressing “send”, it is very easy to forget that our words could later be blown up on a screen to be read before a jury at trial.

Tips for employers to ensure effective use of electronic communication:

  1. Instruct all managers to save emails related to employee personnel matters by putting the emails in the employee’s personnel file, or even better, creating their own separate file on the employee;
  2. Implement company policy on texting and messaging with coworkers and employees on work related matters to attempt to gain some visibility into those communications;
  3. Since #1 may not be possible in all circumstances, archive and back up emails, instant messages; save those backups even after employees leave for a safe period of time;
  4. When managers depart from the company, question them about any emails or files they may have related to personnel matters;
  5. Watch your words: employees may communicate casually on email regularly but they need to remember that this is work—emails can be misconstrued and ultimately lead to harassment suits.  Or even worse, an email with helpful information that also insults a plaintiff could render the good stuff unusable.

Ultimately, when sued, survey all the culprits—anyone who knew the plaintiff employee must search emails for any communications with that plaintiff.  You never know what you’ll find.

SUPREME COURT ADOPTS RESTRICTIVE DEFINITION OF “SUPERVISOR” FOR EMPLOYER’S TITLE VII VICARIOUS LIABILITY

By Michael Earlymichael

On June 24, 2013, the US Supreme Court issued its long-awaited decision in Vance v. Ball State University, upholding a Seventh Circuit decision that an employee is a “supervisor” for purposes of an employer’s vicarious liability under Title VII only if he or she is empowered by the employer to effect a “significant change in employment status.” Vance v. Ball State University, No. 11-556 (June 24, 2013).  The majority decision by a strongly divided court rejected the EEOC’s Enforcement Guidance definition of supervisor, which tied such status to the ability to “exercise significant direction over another’s daily work,” in favor of the more definite rule limiting the role of “supervisors” to those harassers who have the power to “hire, fire, demote, promote, transfer, or discipline” the plaintiff.

Facts and Proceedings in the Lower Courts

Plaintiff Maetta Vance began working at a Ball State University (BSU) cafeteria in 1989 as a substitute server. She was the only African-American working in the department. Vance submitted a complaint to BSU when a white coworker, Saundra Davis, allegedly used a racial epithet directed at her and African-American students at BSU. Davis did not have the authority to hire, fire, demote, promote, transfer, or discipline Vance.

BSU issued Davis a written warning. Following a series of incidents that resulted in Vance reporting that she felt unsafe in her workplace, BSU investigated but found no basis for any remedial action. On October 3, 2006, Vance sued BSU in federal district court for lessening her work duties and her ability to work overtime, forcing her to work through breaks, and unjustly disciplining her. She also alleged that BSU had created a racially hostile work environment in violation of Title VII. After filing the suit, Vance claimed her work environment continued to worsen after she filed suit.  BSU alleged that its investigation into these matters was inconclusive, and that there was insufficient evidence to discipline anyone.

BSU moved for summary judgment. The district court granted the motion, holding that there was not enough evidence to prove a hostile work environment and that BSU was not liable for Davis’ actions because Davis could not “hire, fire, demote, promote, transfer, or discipline” Vance.  As a result, Davis was not Vance’s “supervisor” for purposes of Title VII.  The court further held that BSU was not negligent because it responded reasonably to the incidents of which it was aware. Vance appealed, and the Seventh Circuit affirmed the district court’s judgment.

The Supreme Court’s Decision

Vance filed a writ of certiorari to the Supreme Court, posing the following question: Whether the “supervisor” liability rule established by Faragher v. City of Boca Raton and Burlington Industries, Inc. v. Ellerth (i) applies to harassment by those whom the employer vests with authority to direct and oversee their victim’s daily work, or (ii) is limited to those harassers who have the power to “hire, fire, demote, promote, transfer, or discipline” their victim.

The Supreme Court, in a 5-4 decision written by Justice Alito, held that an employer may be vicariously liable for an employee’s unlawful harassment only when the employer has empowered that employee to take tangible employment actions against the victim, i.e., to effect a “significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits.”

In so holding, the Court rejected the EEOC’s Enforcement Guidance definition of supervisor, which ties such status to the ability to “exercise significant direction over another’s daily work.” The Court opined that the EEOC approach advocated by Vance was too vague and failed to further the purpose of imposing liability on an employer for the actions of a supervisor.

The majority rejected the dissents’ contention that the ruling will preclude employer liability in all cases in which a harasser is not a “supervisor” under the majority’s definition of the term.  Assuming that a harasser is not a supervisor, a plaintiff can still prevail by showing that the employer was negligent in failing to prevent harassment from taking place.  Evidence that an employer did not monitor the workplace, failed to respond to complaints, failed to provide a system for registering complaints, or effectively discouraged complaints from being filed would all support such a claim.

The Dissent

The dissent, written by Justice Ginsburg and joined by Breyer, Sotomayor and Kagan, took issue with the Court’s definition of supervisor because it “strikes from the supervisory category employees who control the day-to-day schedules and as­signments of others, confining the category to those for­mally empowered to take tangible employment actions.”  The dissent would have adopted the EEOC’s Guidance definition of supervisor, which counts as a supervisor anyone with authority to take tangible employ­ment actions or to direct an employee’s daily work activities.

Analysis

The Supreme Court’s narrow definition of supervisor in this context is certainly a win for employers.  However, as the majority specifically noted, employers may still be held liable in negligence for the actions of non-supervisory employees.  Employers still need to insure that they have policies and procedures in place to identify and address harassment by non-supervisory personnel in order to benefit fully from the Court’s limitation of supervisory vicarious liability.

This entry was posted in Legal Insights, Uncategorized on by ja.

Court of Appeals Strikes Down NLRB Employer Posting Requirement

By Michael Early

On May 7, 2013, the United States Court of Appeals for the D.C. Circuit struck down the NLRB’s August 30, 2011 Final Rule requiring employers to post notice of employee rights under the NLRA. National Association of Manufacturers, et al. v. NLRB, Case No. 12-5068 (DC Cir. May 7, 2013).

The Final Rule, entitled “Notification of Employee Rights under the National Labor Relations Act,” required in Subpart A that all employers subject to the National Labor Relations Act (NLRA) “post notices to employees, in conspicuous places, informing them of their NLRA rights, together with Board contact information and information concerning basic enforcement procedures.” The notice requirements included an 11×17-inch poster which described the NLRA in detail and informed employees of, among other things, their right to organize a union and to strike.

Subpart B of the Final Rule described how the Board would enforce Subpart A’s notice posting provisions. Once an unfair labor practice charge was filed alleging that the employer failed to post the notice, the Board would investigate and attempt to obtain the employer’s compliance. Thereafter, a formal complaint could be issued, followed by a hearing before an administrative law judge governed by the Board’s customary procedures. If the Board found that the employer failed to post the notice, the employer would be ordered to cease and desist from the unlawful conduct and to post the required notice.

Subpart B also established two ways in which future NLRB proceedings might be affected by an employer’s prior failure to post the required notice. First, the Board could toll the six-month statute of limitations for the filing of an employee’s unfair labor practice charge. Second, the Board could consider an employer’s “knowing and willful refusal” to comply with the notice posting requirement evidence of an unlawful motive “in a[ny] case in which motive is an issue.”

The Plaintiffs, the National Association of Manufacturers and the National Right to Work Legal Defense Foundation, alleged that the Final Rule exceeded the NLRB’s authority and that the Notice provision violated the Plaintiffs’ First Amendment Rights. The District Court for the District of Columbia held that the Board had authority to issue Subpart A requiring employer posting of employee rights, but exceeded its authority under the NLRA in Subpart B. National Association of Manufacturers. v. NLRB, 846 F. Supp. 2d 34 (D.D.C. 2012).

All parties appealed the District Court’s decision. Plaintiffs argued that the District Court erred in concluding the Board had the authority to promulgate Subpart A.  The NLRB argued that the District Court erred in concluding that it did not have the authority to promulgate the enforcement mechanism and penalties under Subpart B.

The Court of Appeals affirmed the District Court’s conclusion that the enforcement mechanisms of Subpart B were contrary to the NLRA. The Court primarily relied upon section 8(c) of the NLRA, which gives both employers and unions the right to express their views about unions, and about the benefits and drawbacks of union membership. Since section 8(c) clearly prohibits the Board from making an employer’s non-coercive speech regarding unionization an unfair labor practice, the Court of Appeal held that the Board could not make an employer’s failure to speak (by failing to post the notice) an unfair labor practice.  The Court held the Final Rule violates section 8(c) because it makes an employer’s failure to post the notice an unfair labor practice, and because it allows the NLRB to treat the failure as evidence of anti-union animus in unrelated proceedings.

The Court of Appeal reversed the District Court’s ruling upholding the validity of Subpart A.  Since the Board had expressly rejected the idea of asking for voluntary employer compliance with the notice requirement, the Court of Appeal concluded that Subpart A could not be severed from Subpart B.  It therefore vacated the Final Rule in its entirety.

The D.C. Circuit Court of Appeals decision follows on a similar ruling by the district court for the District of South Carolina last year. See Chamber of Commerce of the U.S. v. NLRB, 856 F. Supp. 2d 778 (D.S.C. 2012). The appeal in that case is now pending before the Fourth Circuit.

Comment

This case is a significant victory for employers, as the employer posting requirements are essentially no longer in effect.  Application of the Final Rule had previously been stayed by the Court of Appeals, and the NLRB’s website states that the posting requirement will not go into effect “until the legal issues are resolved.”  However, the Court of Appeals did not rule that the NLRB had no authority to promulgate Subpart A alone (relying on voluntary employer compliance).  Whether the Board will try this approach now is an open question.

This entry was posted in Legal Insights, Uncategorized on by ja.

Vacation Time Waivers in Union Contracts

By Michael Early

Under California Labor Code Section 227.3, a California employer must immediately pay a terminated union employee for all “vested vacation time” unless the union representing that employee has negotiated a collective bargaining agreement (“CBA”) that “otherwise provide[s].”  In Choate v. Celite Corp,(2nd Dist. May 2, 2013), the Court of Appeal for the Second District held that a CBA abrogates an employee’s right under section 227.3 to immediate payment for vested vacation time only if the waiver of those rights is “clear and unmistakable.”

In the Choate case, each January, Celite Corporation calculated a yearly “vacation allotment” based on each employee’s length of employment and the number of hours they worked the year before. Under the applicable CBA’s, employees terminated from Celite were entitled to “receive whatever vacation allotment is due them upon separation.”

For 25 years, both Celite and the Union understood this provision in the CBA’s to refer to the “vacation allotment,” and not to include pro rata vacation time vested in the year of termination. Plaintiffs, former Celite employees, filed a class action lawsuit on behalf of all employees who were terminated and not provided their pro rata vacation time for the year of their termination. They also sought waiting time penalties under Labor Code Section 203.

Although both the union and the employer interpreted the CBA’s to waive the employees’ rights to vested vacation time, the Court of Appeal held that this understanding was irrelevant, because the waiver in the CBA’s was not “clear and unmistakable.” Because the CBA’s lacked this clarity, Celite was required to pay terminated employees for all their vested vacation time.

The Court of Appeal also rejected Celite’s contention that plaintiffs’ claims were preempted by Section 301 of the LMRA. Having established a “clear and unmistakable” standard for a waiver of Labor Code Section 227.3, the Court of Appeal concluded that no interpretation of the CBA’s was necessary.

The Court of Appeal nevertheless reversed the trial court’s grant of summary adjudication as to waiting time penalties, finding that Celite’s refusal to pay vested vacation time, although intentional, was not “willful” within the meaning of Labor Code Section 203 because it acted “reasonably” in the “good faith belief” that the CBA’s provisions were enforceable.

Recommendations

Employers should review their CBA’s to determine whether any waiver of vested vacation rights is “clear and unmistakable.” While the Choate decision does not require a CBA to make an express reference to Labor Code Section 227.3, it would be good practice to include such a reference in future agreements.

PIECE RATE AND COMMISSION BASED PAY PLANS MAY NOT SATISFY CA MINIMUM WAGE REQUIREMENTS

California Court of Appeal requires employers to pay separate hourly wage for non-piece rate work and waiting time; Federal District Court reaches similar conclusion for commission-based pay

By Michael Early

Piece Rate Pay Plan Held to Violate California Law

In  Gonzalez v. Downtown LA Motors, 2013 WL 820723 (March 6, 2013)*, the Court of Appeal for the Second District held that an auto dealership that paid employees for repair work on a piece rate basis must also separately pay those employees at the minimum hourly rate for waiting time and for time spent doing other work.  The court held that the employer did not meet its minimum wage obligations even though it insured that its piece rate employees’ average hourly rate exceeded the minimum wage.  The Court of Appeal therefore affirmed an award of $1.5 million to a class of 108 employees based on their average uncompensated waiting time.

In Gonzalez, the defendant paid its repair technicians a flat rate (ranging from $17 to $32 per hour) for each “flag hour” a technician accrued.  The number of “flag hours” assigned to repairs was based on a fixed amount of time expected to complete each repair.  Employees were paid based on the number of flag hours assigned to each repair task, regardless of how long the task actually took to complete.

As with most piece rate pay systems, defendant’s employees only accrued flag hours for the repair work they were given.  Time spent waiting for repair orders or performing other duties was “unpaid.”  To insure that employees were compensated at or above the minimum wage rate for all hours worked, defendant calculated what each employee’s pay for all hours worked would have been at the minimum wage and, if necessary, supplemented the employee’s pay to meet that amount.  Defendant argued that its pay system satisfied California’s minimum wage laws because every employee earned at least the minimum wage for all hours worked.

The Court of Appeal disagreed.  The court held that Wage Order No. 4, subdivision 4(B), which requires payment of the minimum wage “for all hours worked,” requires that employees be compensated at the minimum wage for “each and every separate hour worked.”  Since defendant’s employees were only paid based on the piece rate or “flag rate” for repair work they performed, they did not earn any direct compensation for time spent waiting for repair work or performing other tasks.  The failure to pay the minimum wage for time spent waiting for repair work or performing other tasks could not be rectified by averaging the employees’ piece rate compensation over all hours worked.

The court further held that defendant’s compensation scheme violated California Labor Code sections 221 and 223, which require an employer to pay all employee hours at the statutory or agreed rate, and prohibit an employer from improperly collecting wages paid to an employee.  The court held that averaging piece rate wages over total hours worked “results in underpayment of employee wages under Labor Code section 223, as well as an improper collection of wages paid…under Labor Code section 221.”  Since the average hourly rate actually paid to defendant’s employees was lower than the flat rate they were promised for repair work under their employment contracts, the court held that the defendant was effectively crediting wages accrued during “flag” hours to pay non-piece rate hours in violation of these Labor Code provisions.

Commission-Based Pay Plan Held to Violate California Law

The Gonzalez case falls fast on the heels of a federal court decision on commission-based pay from the Southern District of California, Balasanyan v. Nordstrom, Inc. , — F.Supp.2d–, 2012 WL 6675169 (S.D. Cal. Dec. 20, 2012).  In Balasanyan, a federal judge reached a similar conclusion respecting Nordstrom’s sales associate commission plan.

Nordstrom pays its sales associates a commission based on net sales.  Like the defendant in the Gonzalez case, Nordstrom sought to insure compliance with minimum wage laws by calculating each employee’s minimum hourly rate for all “selling time” and supplementing any employee’s pay, if necessary, to insure that it was at least equal to the minimum wage rate for all “selling time” hours.  Nordstrom’s “selling time” includes 1.5 hours of non-commission producing work (such as stocking) per shift.  While Nordstrom separately paid employees an hourly rate for “non-selling time,” the non-commission producing work included in “selling time” hours was only compensated based on commissions earned (or by Nordstrom’s supplementation of an employee’s pay).

Plaintiffs brought claims under both the federal FLSA and California law asserting that their commission pay could not be used to compensate them for time spent on non-commission producing activities.  Nordstrom moved for summary judgment on both claims.  The District Court held that Nordstrom’s compensation plan was lawful under the FLSA, because employers are permitted under the FLSA to average employee wages over total time worked in a week to determine if FLSA minimum wage requirements are satisfied.  Since Nordstrom guaranteed pay at or equal to the federal minimum wage through commissions (or by supplementing) based on “selling time” hours, FLSA minimum wage requirements were met.

As in Gonzalez, however, the District Court held that Nordstrom’s commission plan violated California law because it averaged employee wages over total hours worked, and failed to compensate them at the minimum wage for “each and every separate hour worked.”  The District Court rejected Nordstrom’s argument that stocking and other duties were compensated through sales commissions because such duties were related to (and increased) sales and sales commissions.  The District Court held that “compensation must be directly tied to the activity being done,” and that “activities that are only indirectly related to sales or services must also be [separately] compensated.”  Since Nordstrom’s employees were not compensated directly for stocking or other work, those hours were in essence uncompensated by Nordstrom’s commission plan under California law.

The trial court therefore denied Nordstrom’s motion for summary judgment on plaintiff’s California minimum wage claims.  Nordstrom’s request for permission to file an interlocutory appeal of the summary judgment order was denied last month.

Analysis

There are several objections to the decisions in these two cases.  Both cases relied heavily on the decision in Armenta v. Osmose, Inc., (2005) 135 Cal.App.4th 314.  In Armenta, the plaintiffs were employed by a company that maintained utility poles in remote areas.  Although paid (per a collective bargaining agreement) well above minimum wage, plaintiffs were not paid for hours spent traveling to and from job sites, loading vehicles, or attending safety meetings.

In Armenta, the employer contended that the minimum wage laws were satisfied because total employee compensation exceeded the minimum wage for the all hours worked.  This contention was, of course, rejected.

Armenta is distinguishable on several grounds.  First, both pay structures are distinguishable from Armenta because defendants guaranteed their employees the minimum wage for every hour worked, leaving no work time uncompensated.  Second, the guarantees of the employers in Gonzalez and Balasanyan insure minimum employee compensation, while the piece rate and commission based components of the pay plans incentivize employees to increase their compensation based on productivity and sales.  Third, there is a logical disconnect between the right to pay an employee based on a piece rate system that includes a guarantee that their hourly wage will not fall below the minimum, and the court’s insistence that an employee must be paid separately for every hour of work, regardless of whether the employees were “making pieces.”

Recommendations

The deadline for appellate review has not passed for either of these decision, and it is possible that a higher court may reach a different conclusion.  Nevertheless, California employers should review their piece rate and commission-based pay plans to determine whether employees are directly paid at least minimum wage for each hour worked.  If employees under these plans have uncompensated waiting time hours or perform duties that are not directly compensated through piece rate or commission wages, employers should consider modifying their pay plans to avoid potential liability for failure to comply with California’s minimum wage laws.

*A publication order for this previously unpublished opinion was entered by the court on April 2, 2013.

EEOC Narrows the “Reasonable Factors Other than Age” Defense under the ADEA

By Jessica Madrigal

The Equal Employment Opportunity Commission (EEOC) has recently amended its Age Discrimination in Employment Act (ADEA) regulations. These amendments are aimed at regulations pertaining to disparate impact claims and the reasonable factors other than age (RFOA) defense. The revised regulations appear to define the RFOA much more narrowly than under existing law, potentially making it more difficult for employers to mount a defense to age discrimination claims.

The ADEA prohibits both intentional discrimination (disparate treatment) against employees over the age of 40, and the application of neutral policies that adversely affect older workers (disparate impact). In Smith v. City of Jackson, 544 U.S. 228 (2005), the Supreme Court recognized that an employee could bring a disparate impact claim under both Title VII and the ADEA, but it clarified that the scope of disparate impact liability under the ADEA was more narrow. To defend against such claims under Title VII, an employer must show a “business necessity.” However, the Supreme Court held that under the ADEA, an employer need only show that it relied upon a “non-age factor that was ‘reasonable.’” The employer is not required to consider alternative polices that would have a lesser impact on older workers, as with the “business necessity” defense.

The new EEOC regulations appear to undercut the Supreme Court’s rulings by imposing a more rigorous standard on employers asserting an RFOA defense. The regulations now require that the employer show that its practice was “objectively reasonable when viewed from the position of the prudent employer mindful of its responsibilities under the ADEA under like circumstances” (emphasis added). The “prudent employer” standard is rooted in tort law, which imposes a duty to avoid harm. Thus, under the new regulations, a reasonable factor other than age is “one that an employer exercising reasonable care would use to avoid limiting the opportunities of older workers, in light of all surrounding facts and circumstances.”

In creating a “prudent employer” standard, the EEOC brings the RFOA defense much closer to the required “business necessity” showing under Title VII by requiring employers to consider the potential impact that policies and practices may have on older workers prior to implementing them.

Practical Considerations for Employers

These new regulations are bound to spur an onslaught of new litigation and investigations by the EEOC. The EEOC and/or private counsel will be focused on the following issues:

  • The business purpose for the practice and how closely related the practice is to the stated business goal
  • Whether alternatives to the practice were available and the rationale behind choosing the practice in question
  • Steps taken by the employer to mitigate the impact of the decision on older workers
  • Whether the employer considered the fact that the criteria used for hiring, firing and/or promoting may involve age-based stereotypes

To avoid potential litigation, employers should discuss and document the rationale behind each decision and ensure that managers and supervisors are cognizant of the potential adverse impact certain practices may have on older workers. Further, all management personnel should undergo anti-discrimination training that focuses specifically on age discrimination. Finally, employers should carefully examine all business decisions with an eye toward avoiding adverse impact on older workers, and, if necessary, consider alternatives that will avoid potential discrimination.

California’s New Wage Theft Protection Act — Are you Ready?

By Jessica Madrigal

New Requirements for New Hires

California has passed new legislation (the Wage Theft Protection Act), effective January 1, 2012, that imposes new requirements on employers with respect to new hires. Specifically, California Labor Code Section 2810.5 will require that employers disclose certain information to employees “at the time of hiring” in the form of a written notification. The specific requirements are outlined below:

What Information Must be Disclosed to New Hires?

Labor Code Section 2810.5 requires employers to provide written notice to employees “at the time of hiring” of the following information:

1. the employee’s pay rate and basis for pay rate (e.g. salary, commission, hourly, etc.);

2. allowances, if any, claimed as part of the minimum wage, including meal or lodging allowances;

3. the regular payday designated by the employer;

4. the name of the employer, including any “doing business as” names used by the employer;

5. the physical address of the employer’s main office or principal place of business, and a mailing address, if different;

6. the telephone number of the employer;

7. the name, address, and telephone number of the employer’s workers’ compensation insurance carrier;

8. and other information the Labor Commissioner “deems material and necessary” (nothing further has been designated by the Labor Commissioner to be included in the new hire notices at this time)

What if There Are Changes or Modifications to the Information Contained in the Notice?

  • If any changes are made to the above information, employers must provide notification to the employee within seven days either by including the updated information on the employee’s next pay statements or in a separate written form. Thus, for information that typically appears on an employee’s wage statement (i.e. pay rate), an amended notification form does not need to be issued as long as those changes appear on the employee’s next wage statement. For changes in other information, such as the name and address of the employer’s workers’ compensation carrier, which is generally not included on wage statements, an amended notification form would have to be provided to the employees.
  • The Labor Commissioner has indicated that it will be creating a sample notification form as well as a FAQ sheet to assist employers in complying with the law, which will be available on the Division of Labor Standards and Enforcement website in mid-December.

Which Employees do the Notification Requirements Apply To?

  • The new law applies to all non-exempt employees hired on or after January 1, 2012 so these notifications do not need to be provided to current employees.
  • Section 2810.5 does not apply to employees who are exempt from overtime laws or employees covered by a valid collective bargaining agreement if their regular rate of pay exceeds California’s minimum wage by at least 30%, and if their overtime compensation is paid at the proper premium wage rate. Despite this exception, it is good practice to provide this notice to all new hires for two reasons: 1) To avoid disputes over whether the notice was due in the event employees classified as exempt later claim they were misclassified; and 2) as for union employees, not all employees are eligible to become union members immediately upon hire and would thus not fall under this exception. The fact that they may eventually become union members is immaterial, because Labor Code 2810.5 requires that the notice be provided “at the time of hiring.”
  • Although not required by the law, a copy of this new hire notice should be kept in each employee’s personnel file in case there is ever a dispute regarding compliance with this requirement.
  • Finally, although some information addressed in the written notice is already contained in the workplace posters mandated by other laws, Section 2810.5 does not change any of those posting requirements.

What Are the Disclosure Requirements Each Pay Period?

California Labor Code Section 226 requires that employers provide accurate itemized wage statements to each employee semimonthly or at the time of each payment of wages. This is not a new requirement, but ensuring that accurate wage statements are provided to employees will also help employers meet the notification requirements set forth under the new legislation described above. Section 226 requires that the following information be included on employee wage statements:

1. gross wages earned;

2. total hours worked by the employee (this requirement does not apply to employees who are salaried and exempt from payment of overtime);

3. the number of piece-rate units earned and any applicable piece rate if the employee is paid on a piece-rate basis;

4. all deductions (i.e. taxes, medical insurance, etc.), provided that all deductions may be aggregated and shown as one item;

5. net wages earned;

6. the inclusive dates of the period for which the employee is paid;

7. the name of the employee and the last four-digits of his or her social security number or an employee identification number other than a social security number;

8. the name and address of the legal entity that is the employer; and

9) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee

  • A copy of the wage statement and record of the deductions must be kept by the employer for three years at the place of employment or at a central location within the State of California

What Should Employers do to Ensure Compliance with the New Notification Requirements?

Employers should be working diligently to prepare notification forms so that they are ready to be distributed to any new hires as of January 1, 2012. It is also a good idea to take this opportunity to review itemized wage statements to ensure they are in compliance with California law.

San Francisco’s Health Care Security Ordinance: 2012 Updates

By Kathryn M. Weeks

Within San Francisco city limits, employers of 20 or more employees are subject to the Health Care Security Ordinance. The following is a plain-English summary of these provisions, which can be somewhat perplexing for employers and employees alike, and the changes to the law effective in 2012.

San Francisco’s Health Care Security Ordinance (HCSO) requires mid to large-size employers in the City (for-profits with 20 or more employees and non-profits with 50 or more employees) to spend a minimum amount on their employees’ health care. Employers can choose how to make these health care expenditures, including purchasing health insurance, setting up health spending accounts, or enrolling employees in the City’s Healthy San Francisco Program. Employers with 1-19 employees are exempt from the HCSO provisions.

Employees covered by the HCSO, “covered employees,” are those employed for at least 90 calendar days and perform at least eight hours of work per week in San Francisco.

The new HCSO regulations, effective January 1, 2012, change the minimum health care expenditure rates and the annual salary figure exempting certain employees from the HCSO.

2012 Health Care Expenditure Rates

Large Employers (100+ employees) – minimum health care expenditure rate increased to $2.20/hour (previously $2.06/hour).

Medium-Sized Employers (20-99 employees) – the minimum health care expenditure rate increased to $1.46/hour (previously $1.37/hour).

The minimum expenditure rates require employers to pay a certain amount for each employee’s health care services, or reimbursing the costs of those services, in addition to wages and compensation.

The expenditure rate is to be paid for each hour worked by a covered employee for that quarter. Required health care expenditures are calculated by multiplying the total number of “hours paid” to each covered employee by the applicable expenditure rate. “Hours paid” include both work hours and any paid time off, including vacation and sick leave.

2012 Annual Salary Exemption Figure

Managers, supervisors, or confidential employees who earn an annual salary at or above $84.051 (or $40.41/hour) in 2012 are exempt from coverage under the HCSO (previously $81,450, or $39.16/hour). In other words, these employees are not “covered employees” and the employer need not pay health care expenditure rates.

San Francisco employers are must comply with several city-wide ordinances regulating labor and employment, such as the HCSO, in addition to state and federal labor laws.

Source: http://sfgsa.org/index.aspx?page=418

 

- Katie Weeks