AGENCY DEVELOPMENTS

California

DFEH Proposes New CFRA Regulations

On February 21, 2014, the California Department of Fair Employment and Housing proposed amendments to the state regulations interpreting the California Family Rights Act (CFRA).  CFRA is the law that ensures work leave rights for the birth of a child, the placement of an adopted or foster child, for the serious health condition of an employee's child, parent, or spouse and for an employee's own serious health condition.  The proposed amendments are intended to clarify the existing regulations and adopt some of the recent amendments to the federal Family Medical Leave Act (FMLA) regulations to make the two acts more consistent.  The proposed amendments cover 11 sections of the CFRA regulations, addressing length of service/eligibility issues, the process of responding to CFRA leave requests, computation of amount of leave entitlements, clarification of reinstatement rights, the interplay between CFRA leave and California pregnancy disability leave and other aspects of the CFRA process.  For example, the proposed regulations make it clear that (1) same-sex spouses are covered under the CFRA and the FMLA regulations apply to CFRA leave “to the extent not inconsistent” with the CFRA regulations, and (2) a California employer is required to maintain the employee’s group health benefits for the entire time an employee is on pregnancy disability leave and FMLA/CFRA leave not just during the latter (12 weeks). 

The rulemaking process on the proposed amendments will be completed in June 2014.  The deadline to submit written comments is June 2, 2014.  For additional information and to submit comments go to: http://www.dfeh.ca.gov/res/docs/Council/CFRA%20Regulations/CFRA%20Rulemaking%20Notice%20final.pdf

Federal

President Obama Signs Executive Order and Presidential Memorandum Affecting Federal Contractors

On April 8, 2014, President Obama signed two measures aimed at applying provisions of the Paycheck Fairness Act to federal contractors. 

The President signed an Executive Order (Non-Retaliation for Disclosure of Compensation Information) preventing federal contractors from retaliating and discriminating against employees who have “inquired about, discussed, or disclosed” their compensation with co-workers.  The Secretary of Labor was directed to propose regulations to implement this Order within 160 days.  Although the Executive Order becomes effective immediately, it applies only to contracts entered into on or after the Department of Labor regulations become effective.

The second executive action was a Presidential Memorandum (Advancing Pay Equality Through Compensation Data Collection) directing the Secretary of Labor to propose regulations within 120 days that would require federal contractors and subcontractors to provide the U.S. Department of Labor with employee compensation data broken down by sex and race. 

IRS Issues Regulations on Affordable Care Act Employer Mandate Rule

These regulations implement the employer-shared responsibility (“pay-or-play employer mandate) provisions of the Affordable Care Act.  They affect employers that have 50 or more full-time employees during the prior year.  Generally, if an employer employs 50 or more full-time employees, they must either offer these employees and their dependents health coverage that meets affordability and “minimum value” requirements, or pay a penalty.

The final regulation offers a compliance phase-in for employers, which was not included within the initial proposal.  It will generally apply to larger employers (100 or more full-time employees) starting in 2015 and medium employers (50 or more full-time employees) starting in 2016.  To avoid payments for failing to offer health coverage, employers need to offer coverage to 70% of their full-time employees in 2015 and 95% in 2016.  The new regulation also includes an affordability safe harbor that allows employers to use the wages they pay, their employees’ hourly rates, or the federal poverty level to make the affordability assessment.

(29 C.F.R. 1, 54, 301.)

JUDICIAL DEVELOPMENTS

Federal Court Decisions

United States Supreme Court

Voters May Choose to Prohibit The Use Of Racial Preferences In Governmental Decisions, Including School Admissions

In 2006, a majority of Michigan voters supported a proposition to amend the state constitution to prohibit race-based preferences in the admissions process for state universities.  In consolidated challenges, the district court granted summary judgment to Michigan, thus upholding the proposition.  The Sixth Circuit Court of Appeals reversed summary judgment, holding the provision invalid under the Equal Protection Clause.  The United States Supreme Court granted certiorari.

In a 6-2 decision, the Supreme Court reversed the judgment of the sixth circuit.  The Court explained that this case was not about the constitutionality of race-conscious admissions policies, but rather was about whether, and in what manner, voters can choose to prohibit the use of racial preferences in governmental decisions, particularly with respect to school admissions.  Justice Kennedy, joined by the Chief Justice and Justice Alito, held that the attempt to define and protect interests based on race runs the risk of allowing the government to classify individuals on the basis of race and thus perpetuate the very racial divisions such policies sought to transcend.  The plurality noted that perhaps voters may in fact determine that certain race-based preferences should be adopted, but it is not the role of the courts to disempower voters from making those decisions.  If certain issues were decided to be too sensitive or complex to be within the grasp of the electorate, the Court would be denying voters their right to debate and to act through a lawful electoral process.

Chief Justice Roberts wrote a concurring opinion arguing it may do more harm than good to question the openness and candor of the debate on the use of racial preferences.  Justice Scalia, joined by Justice Thomas, wrote a separate concurring opinion in which he held that a state law which provides equal protection by prohibiting the use of racial preferences is facially neutral, and thus did not violate the Constitution.  Justice Breyer also wrote a separate concurring opinion in which he argued that, while the Constitution permits the use of narrowly tailored, race-conscious programs, it is the voters and not the courts who should resolve the debates about the merits of these programs.  Justice Sotomayor filed a dissenting opinion that was joined by Justice Ginsburg.  Justice Kagan took no part in consideration or decision of the case.

(Schuette v. Coalition to Defend Affirmative Action, 188 L. Ed. 2d 613 (U.S. 2014).)

Severance Payments to Employees Who Are Involuntarily Terminated Are Taxable Wages for Purposes Of The Federal Insurance Contributions Act

In a decision regarding taxing of severance payments, the United States Supreme Court held that severance payments made to individuals whose employment was involuntarily terminated are wages, taxable under the Federal Insurance Contributions Act (FICA).  The employer had gone bankrupt, and initially withheld taxes on severance packages it provided to former employees.  Believing the withholdings to be incorrect, the employer then sought a refund for itself, and approximately 1,850 employees from the IRS.  The employer eventually initiated proceedings in bankruptcy court against the IRS to recover the withheld taxes.  In reviewing the case, the Supreme Court determined that the term “wages” under the FICA should be read consistently with Internal Revenue Code regarding income tax withholdings – meaning the severance payments were “remuneration for employment” – and therefore wages and taxable.  The employer was not entitled to a refund.

(United States v. Quality Stores, Inc., 134 S. Ct. 1395 (U.S. 2014).)

Section 806 of the Sarbanes-Oxley Act Extends to Employees of Private Companies Who Are Contractors or Subcontractors for Covered Public Companies

The United States Supreme Court, in a 6-3 decision reversing the United States Court of Appeals for the First Circuit, held the whistleblower protection provision in section 806 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A (SOX), protects employees of publicly traded companies and employees of privately held companies that are contractors or subcontractors for a covered publicly traded company. 

Former employees of privately held companies that contracted to advise or manage publicly traded mutual funds brought separate actions alleging unlawful retaliation by their employers in violation of the whistleblower protections of section 806 of SOX.  Section 806 provides, in relevant part, that “[n]o company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 . . . or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee . . . .”

The privately held employers moved to dismiss the claims, arguing, in part, that petitioners were not “covered employees” within the meaning of section 806.  The district court denied the motions, finding the SOX whistleblower protections in section 806 extended to employees of private agents, contractors and subcontractors to public companies.  The first circuit reversed, holding the whistleblower protections of section 806(a) do not extend to an employee of a contractor or subcontractor.  The Supreme Court reversed, holding that SOX “shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”  The court rejected the dissent’s view that the court’s ruling was “all too inclusive” and could open the floodgates of SOX litigation.  The majority argued the dissent’s view was simply hypothetical as the “DOL’s regulations have interpreted [SOX] as protecting contractor employees for almost a decade.”

(Lawson v. FMR LLC, 134 S. Ct. 1158 (U.S. 2014).)

Ninth Circuit Court of Appeals

Reliance On Merits Issues Is Improper At The Class Certification Stage

Police officers filed the instant action alleging the examination the city used to consider promotions had a disparate impact based on age, in violation of the Age Discrimination in Employment Act (ADEA) and California's Fair Employment and Housing Act (FEHA).  The officers subsequently sought class certification on their FEHA disparate impact claim.  The district court denied the officers’ motion for class certification and they appealed.  The panel in an interlocutory appeal reversed the district court’s denial for want of commonality.  The panel held that the district court abused its discretion in denying class certification because it disregarded the existence of common questions of law and fact and impermissibly addressed the merits of the class claims.  Given the interlocutory nature of the appeal, and its consequent limitation to class certification factors only, the panel held that it could not consider the merits questions, even as an alternative ground for affirmance.  The panel remanded the case to the district court to consider whether the putative class satisfied the requirements of Rule 23(b)(3).

(Stockwell v. City & Cnty of San Francisco, 2014 U.S. App. LEXIS 7694 (9th Cir. 2014).)

PAGA is Not Sufficiently Similar to Rule 23 to Establish the Original Jurisdiction of a Federal Court Under CAFA

Employee sued his employer under the Private Attorney General Act (PAGA) in superior court alleging the employer failed to pay him overtime, provide for meal breaks, allow rest periods, and failed to timely reimburse expenses.  The complaint sought statutory civil penalties for each alleged violation and asserted that plaintiff’s potential share of any penalties recovered and attorneys’ fees would be less than $75,000.  Employers removed the action to federal court on the basis of diversity and pursuant to the Class Action Fairness Act (CAFA). The district court denied employee’s motion to remand the action.

The Ninth Circuit reversed and ordered the matter remanded.  It held the district court could not exercise jurisdiction over the removed PAGA action under the CAFA because PAGA actions are not sufficiently similar to Rule 23 class actions to establish the original jurisdiction of a federal court under CAFA.  Specifically, the court held PAGA actions are not sufficiently similar to Rule 23 class actions to trigger CAFA jurisdiction because: (1) PAGA has no notice requirement for unnamed aggrieved employees; (2) PAGA contains no requirements of numerosity, commonality or typicality; (3) the finality of PAGA judgments differs from that of class action judgments; and (4) the nature of PAGA penalties is different from damages sought in Rule 23 class actions.  Overall, the court held a PAGA action is a civil enforcement action filed on behalf of and for the benefit of the state, not a claim for class relief.

The panel also noted that because employee’s portion of the recovery would be less than $75,000, and potential PAGA penalties against an employer cannot be aggregated to meet the minimum amount in controversy requirement, there was also no diversity jurisdiction.  As such, the panel reversed the district court’s order with instructions to grant employee’s remand motion.

(Baumann v. Chase Inv. Servs. Corp., 2014 U.S. App. LEXIS 4777 (9th Cir. 2014).)

An Employee Can Decline To Use FMLA Leave, Even If The Underlying Reason For Seeking Leave Would Have Invoked FMLA Protection

An employee was terminated for failing to comply with the company’s “three day no-show, no-call rule” after the end of a previously approved period of leave, which the employee took to care for her ailing father in Guatemala.  The employee subsequently filed suit, alleging violations of the Family and Medical Leave Act (FMLA), the California Family Rights Act (CFRA), and California public policy.  Before the employee’s claims were submitted to the jury, both parties moved for a judgment as a matter of law.  The district court denied the employer’s motion and took the employee’s motion under advisement, pending the jury’s determination.  After the jury returned a verdict in favor of the employer, the employee renewed her motion and requested a new trial.  The district court denied both motions, and both parties appealed.

On appeal, the employee argued that her employer was required to designate her leave as FMLA-protected and to provide her with a notice of her rights under the FMLA regardless of whether she expressly declined such a designation.  The Ninth Circuit disagreed, noting that when an employee alerts the employer of his or her desire to take leave for a reason that would qualify under the FMLA, the employer is only expected to inquire about whether FMLA leave is being sought by the employee, and to obtain additional information through informal means.  The court concluded that an employee can affirmatively decline to use FMLA leave, even if the underlying reason for seeking the leave would have invoked FMLA protection.  The Ninth Circuit held that the district court did not err in denying the employee’s motion for judgment as a matter of law because, viewing the evidence in the light most favorable to the jury’s verdict, there was substantial evidence that the employee elected not to take FMLA leave.  Furthermore, the Ninth Circuit held that the district court did not err in admitting evidence about the employee’s prior FMLA leave, and even if the district court did err in admitting this evidence, the error was harmless because the court issued a limiting instruction.

(Escriba v. Foster Poultry Farms, Inc., 743 F.3d 1236 (9th Cir. 2014).)

California State Court Decisions

Judgments in Favor of Employer and Supervisor Reversed Where Evidence Suggested Supervisor Engaged in a Pattern of Harassment Sufficient to Support a Same Gender Sexual Harassment Claim and Where Court Excluded Evidence of Plaintiff’s Harassment in Trial of Retaliation Claim

Employee sued his former employer and two supervisors under California’s Fair Employment and Housing Act (FEHA) for same gender harassment and retaliation.  The court granted summary judgment for the supervisors and judgment on the pleadings for employer as to sexual harassment claims, and a jury found for the employer as to retaliation.  The employee appealed.

The court of appeal reversed the grant of summary judgment as to the first supervisor.  The court held that the course of alleged conduct, which included numerous gifts, frequent lunch purchases, sexual jokes, and displays of pornographic computer images, over a period of several months, supported an inference that the supervisor engaged in a pervasive pattern of same-gender harassment.  However, the court affirmed the grant of summary judgment in favor of the second supervisor.  Although the supervisor showed pornographic computer images to a group of employees, there was no evidence that he pursued a romantic or sexual relationship with the employee, made any explicit or implicit proposals of sexual activity, or acted from genuine sexual interest in the employee.

The court of appeal also reversed the judgments in favor of the employer on the causes of action for sexual harassment, failure to prevent sexual harassment, and retaliation, but affirmed the judgment on the pleadings for employer on the claim for intentional infliction of emotional distress.  Specifically as to the retaliation claim against the employer, the court held that the trial court abused its discretion by excluding evidence of sexual harassment and expert psychological testimony about employee’s emotional distress.  The evidence of sexual harassment was relevant to whether employee engaged in protected activity and whether the employer’s subsequent alleged adverse employment actions were motivated by employee’s complaints.  The expert testimony was relevant to whether employee was harmed by the alleged adverse employment actions.

(Lewis v. City of Benicia (2014) 224 Cal. App. 4th 1519.)

Employer’s Medical Reevaluation of Employee upon Return to Work Did Not Violate FMLA

When an employee takes leave under the Family Medical Leave Act (FMLA), the employee is entitled to be restored to employment upon certification from the employee’s health care provider that the employee is able to resume work.  The employer is not permitted to seek a second opinion regarding the employee’s fitness for work prior to returning the employee to work.  Here, the court addressed whether, if the employer is not satisfied with the employee’s health care provider’s certification, the employer may restore the employee to work, but then seek its own evaluation of the employee’s fitness for duty at its own expense.  The court held that it may.

The employee, a peace officer who carried a weapon, took FMLA leave for her depression.  After her return to work, the employer ordered a medical reevaluation of the employee because of the employee’s conduct prior to her leave.  The employee argued the reevaluation violated her FMLA rights.   The trial court concluded that the employer would be legally permitted to order a medical reevaluation of the employee based on any conduct occurring after her return to work, but that her doctor’s certification that she was fit for work following leave must be accepted as sufficient.  The appellate court reversed the judgment in favor of the employee and remanded with directions to enter judgment in favor of the employer.

According to the appellate court, a certification that an employee may return to work from FMLA leave simply requires that the employee be restored to work; it does not erase all of the events which occurred before the employee went on FMLA leave.  Similarly, a return to work certification does not preclude a finding of unfitness for duty.  Thus, the employer may require a fitness for duty examination if it has a basis to question the employee’s health care provider’s opinion.  The court pointed out that the FMLA implementing regulations state:  “After an employee returns from FMLA leave, the ADA requires any medical examination at an employer’s expense by the employer’s health care provider be job-related and consistent with business necessity.”  Thus, once an employee returns to work and is no longer on FMLA leave, an employer may require a medical exam under the guidelines and restrictions imposed by the ADA.

(White v. County of Los Angeles, 2014 Cal. App. LEXIS 336 (2014).)

Agreement Not to Aid Labor Relations Board Void as Against Public Policy

The United Farmworkers of America (UFW)—representing the employees of D’Arrigo Brothers (D’Arrigo)—filed two charges against D’Arrigo with the state Agricultural Labor Relations Board (ALRB) alleging unfair labor practices.  The UFW and D’Arrigo settled one of the charges, and allegedly agreed not to cooperate with the ALRB on the matter.  Believing the UFW breached this agreement by aiding the ALRB, D’Ariggo sued the UFW for breach of contract.

The UFW filed a special motion to strike under California’s Anti-SLAPP statute, and won dismissal of the case.  The court of appeal ruled that the UFW’s alleged agreement not to cooperate with the ALRB was void as against the public policy of the Agricultural Labor Relations Act, and therefore unenforceable.

It is important to note when drafting settlement agreements that preventing participation with government agency investigations will likely not survive scrutiny, and suffer a similar fate.

(D'Arrigo Bros. of California v. United Farmworkers of America (2014) 224 Cal. App. 4th 790.)

Appellate Court Upholds Employer’s Arbitration Agreements as Not Unconscionable

In two separate cases involving an arbitration agreement used by CarMax Auto Superstores, the California court of appeal ruled that wrongful termination suits brought against CarMax should be arbitrated, overruling trial court rulings finding the applicable arbitration agreements to be unconscionable.

In the first case, Sanchez v. CarMax, the employee signed an arbitration agreement as a part of his application for employment.  The trial court found several provisions unconscionable including a limitation on discovery, a requirement that the employee (but not employer) fill out an arbitration request form, precluding the arbitrator from imposing a “just cause” standard for employee discipline/discharge, confidentiality, and a prohibition on consolidation of employees' claims.  The appellate court reversed holding the agreement was not unconscionable because the provisions applied equally to both parties and the employee had not shown that he would be unable to vindicate his rights.  As a result, the appellate court reversed the trial court's judgment denying CarMax's motion to compel arbitration in the Sanchez wrongful termination suit.

In the second case, Casas v. CarMax (another wrongful termination case in which Carmax moved to compel arbitration) plaintiff’s opposition focused on a provision that permitted CarMax to unilaterally change the arbitration agreement as long as it gave the employee 30-day notice of the change.  The trial court agreed with the employee that this provision made the arbitration agreement “illusory” because CarMax had the ability to unilaterally modify or terminate the agreement.  The appellate court reversed the lower court’s decision noting the arbitration clause also included the clear provision that when an employee asserts a claim that arose before modification of the agreement, the employer could not apply modifications to that claim.  Further, the appellate court held that the implied covenant of good faith and fair dealing must be presumed in reviewing the arbitration provision, which would also limit the employer’s authority to unilaterally modify the arbitration agreement.  The implied covenant of good faith and fair dealing also saved the agreement from being illusory and, thus, is not unconscionable.  Accordingly, the trial court's order denying the employer's motion to compel arbitration was reversed.

(Sanchez v. CarMax (2014) 224 Cal. App. 4th 398; Casas v. CarMax (2014) 224 Cal. App. 4th 1233.)

Appellate Court Compels Arbitration of Wage and Hour Claims Where Agreement References AAA Rules and Expressly Provides Arbitration for Wage and Hour Disputes

Reversing the trial court’s denial of arbitration, the California court of appeals held an arbitration agreement that references but does not attach a copy of the AAA rules is not per se unconscionable.  The court noted the agreement was two pages, contained no hidden terms, and its express language specifically referenced “wage, hour, and benefit claims.”  The court held that simply failing to attach the AAA rules is not sufficient to justify denying a motion to compel arbitration, especially where the rules could be easily found on the Internet.  The court also rejected the employee’s argument that the agreement was unconscionable because it did not contain an express provision for discovery.  The court noted that the agreement referenced the AAA rules, which permits the arbitrator to order discovery. 

The court also rejected the employee’s contention that not all of his wage and hour claims were subject to arbitration under Labor Code section 229.  Section 229 provides, “[a]ctions to enforce the provisions of this article for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate.”  The trial court held that based on this provision, the employee’s claims for wage and hour violations, including failure to pay final wages, failure to pay overtime, and failure to provide meal and rest breaks could not be arbitrated.  The court of appeals reversed, holding that section 229 by its terms only applies to claims for “due and unpaid wages.”  Based on this language, the court compelled arbitration of each of the employee’s claims except for his claim for unpaid wages. 

(Lane v. Francis Capital Management LLC (2014) 224 Cal. App. 4th 676.)

Employer Cannot Enforce Agreement that “Unreasonably” Shortens the Statute of Limitations of Employee’s Discrimination Claims

Under the Fair Employment and Housing Act (FEHA), an employee has one year to file an administrative charge with the Department of Fair Employment and Housing (DFEH) and then a year from the date of the Right-To-Sue letter he or she receives from the DFEH to file a civil complaint.  In Ellis v. U.S. Security Associates, the employee (after timely filing a DFEH administrative charge) filed a civil complaint alleging three claims under the FEHA and two non-statutory claims.  All claims were timely under the applicable statutes of limitations.  However, the employer moved for judgment on the pleadings, based on the employee’s signed application for employment where she agreed that “any claim or lawsuit . . . must be filed no more than six (6) months after the date of the employment action,&rd