SEPTEMBER 2002

I. LEGISLATIVE/REGULATORY UPDATE
Pending Legislation

California's Legislature Passes Nation's First Mandatory Paid Leave

On August 30, 2002, California's legislature gave final approval to SB 1661 (Kuehl), positioning the state to enact the nation's first mandatory paid leave law. SB 1661 establishes a family temporary disability insurance program, within the state disability insurance program, which will provide up to six weeks of paid leave for employees who take time off work to care for a seriously ill child, spouse, parent, or domestic partner, or to bond with a new child. Implementation of the proposal creates new taxes, additional administrative burdens, and complex governmental mandates affecting all of California's residents.

SB 1661 not only creates a new payroll tax which applies to all employees, but also adds to the maze of complexities and costs for California employers juggling federal and state leave programs (FMLA and CFRA respectively). Finally, SB 1661 raises a host of privacy issues.

Governor Davis has until September 30, 2002 to either sign SB 1661 into law or veto the bill.

Mandatory Severance Pay Legislation Passes California's Legislature

If AB 2989 (Koretz) is signed into law by Governor Davis, it would mandate employers to pay as severance one week's pay per year of service. Further, notwithstanding any other provision of law, the severance pay owed to each eligible employee shall be in addition to any final wage payment to the employee and shall be paid within one regular pay period after the employee's last full day of work.

Governor Davis has until September 30, 2002 to either sign AB 2989 into law or veto the bill.

Anti-Arbitration Bill on Governor Davis's Desk SB 1538 (Burton) also passed both houses of the California legislature, and if signed, will prohibit binding arbitration for claims associated with the California Fair Employment and Housing Act ("FEHA").

This bill would amend existing law to invalidate predispute arbitration agreements between employers and employees as they relate to employment claims pursuant to FEHA. This bill will also establish that on or after January 1, 2003, it will be an unlawful employment practice to require an employee to waive rights and procedures established by FEHA, or to take any adverse employment action against any person in retaliation for refusing to waive rights and procedures established by FEHA. This bill will also require that a waiver of rights or procedures provided under FEHA be knowing, voluntary, and not made a condition of employment or continued employment; that a required waiver of rights or procedures provided under FEHA as a condition of employment or continued employment is invalid; and that a required waiver of rights or procedures provided under FEHA as a condition of employment or continued employment entered into prior to January 1, 2003, may be deemed involuntary as to any FEHA claim that arises on or after January 1, 2003. The bill will also provide that the employer has the burden of proving that an agreement to arbitrate was knowing, voluntary, and was not a condition of employment or continued employment.

Governor Davis has until September 30, 2002 to act upon the bill.

State Issues Guidance to Assist with New Social Security Law

The California Department of Consumer Affairs' Office of Privacy Protection recently released a written guide to assist businesses in complying with the new law aimed at protecting the confidentiality of social security numbers ("SSNs"). Governor Gray Davis approved the SSN confidentiality legislation last year, and the law went into effect for most businesses on July 1, 2002. Under the new statute, companies (with the exception of those in the health care and insurance industries) are prohibited from using an individual's SSN for a variety of purposes.

The Office of Privacy Protection has outlined six key areas to assist employers in aligning their business practices with the requirements of the new statute. The areas include the following:

1. Reduce the collection of SSNs (i.e., develop a unique personal identifier as a substitute):

2. Inform employees when their SSNs are requested (i.e., notify individuals of the purpose of the collection, the intended use, whether the law requires the number to be provided, and the consequences of not providing the number);

3. Eliminate public display of SSNs (i.e., avoid placing SSNs on identification cards, badges, timecards, and employee rosters);

4. Control access to SSNs (i.e., use logs to monitor employees' access to records with SSNs);

5. Protect SSNs with security safeguards (i.e., develop a written security plan for record systems that contain SSNs); and

6. Make the company accountable for protecting SSNs (i.e., provide training and written materials for employees on their responsibilities when handling SSNs).

Civil Rights Tax Relief Act

Pending in the U.S. Congress is the "Civil Rights Tax Relief Act of 2001," H.R. 840 (Pryce) /S. 917 (Collins). This Act seeks to alter the tax treatment of employment discrimination awards resulting from provisions included in the Small Business Job Protection Act of 1996.

The Civil Rights Tax Relief Act of 2001 is intended to restore the pre-1996 tax treatment of compensatory damages in employment discrimination cases by providing that gross income does not include amounts received by a claimant ˆ whether by suit or settlement agreement ˆ on account of a claim of unlawful discrimination, other than back or front pay or punitive damages. This language also means that attorney's fees and expenses are not taxable to the plaintiff when paid in settlement or through a court judgment. This bill also attempts to mitigate the tax effect of receiving back pay and front pay in one year by providing income averaging for those recoveries.

II. JUDICIAL UPDATE

Court Finds Employees Cannot Be Fired For Discussing Pay

A California court of appeal recently ruled that it is against public policy to terminate an employee's employment for discussing his or her compensation with co-workers. In Grant-Burton v. Covenant Care, Inc., Sharron Grant-Burton ("the Employee"), a marketing director at a nursing home owned by Covenant Care ("the Employer"), attended a corporate marketing directors meeting. At the meeting, one director brought up the subject of bonuses. The directors discussed whether it was fair that some received bonuses while others did not. The Employee indicated she did not receive a bonus, but was not bothered by it because the Employer was paying for her continuing education.

The day after the meeting an executive director of the Employer indicated he was offended by the discussion of pay and bonuses. Six days later, the Employee's supervisor fired her. Without being specific, he stated that her termination was based on what the Employee had said at the meeting. The termination papers indicated the discharge was for violating company rules. A company investigation concluded that the bonus discussion was one reason for the Employee's discharge.

The Employee sued for wrongful termination in violation of public policy. Her case was dismissed without trial. The court of appeal reinstated the case, saying that the Employee had the right to a trial on her claim. An at-will employee may not be terminated for an unlawful reason or one that is against fundamental public policy. The Employee's claim was based directly on California Labor Code section 232, which expressly prohibits an employer from discharging, formally disciplining, or discriminating against an employee who discloses the amount of his or her wages.

The court further relied on California Labor Code section 923, which states that California public policy allows an employee's "full freedom of association . . . to negotiate the terms and conditions of his employment." The court also held that the Employee's claim was supported by the public policy expressed in the National Labor Relations Act ("NLRA"). The NLRA protects concerted employee activity, including participation in a group discussion about the fairness of compensation. The NLRA's protection applies to both union and non-union employees.

To prevent similar issues, employers should review employee handbooks and policies, and train all managers to know that employees cannot be disciplined for discussing compensation. On a related note, employers should ensure that they are in compliance with equal pay laws.

Court Examines "Administrative" Exemption

In the recent case of Bothell v. Phase Metrics, the Ninth Circuit discussed the "administrative" employee exemption under the Fair Labor Standards Act ("FLSA") and California law, and how it applies to a job commonly called "field service engineer" or "customer service engineer."

Rex Bothell ("the Employee") worked as a field service engineer for Phase Metrics ("the Employer"), an equipment manufacturer for the data storage industry. The Employer considered the Employee an exempt administrative employee, excluding him from overtime.

The Employee worked mainly at the location of a large customer, but went to the Employer's offices several times a week to do paperwork, receive training, and meet with supervisors. The Employer contended that the Employee served as an account manager working independently at the client's location to supervise installation, repair and maintenance of equipment, solve problems, and make recommendations to serve the customer better.

The Employee claimed that his job was to install, troubleshoot, and maintain the Employer's products at the customer's location and that he did not exercise independent discretion or judgment. His primary duties were to keep the Employer's equipment in good working order and provide communication between the customer and the Employer.

The court summarized the requirements for administrative exemption under the FLSA, all of which must be met to qualify:

a. Minimum weekly compensation on a salary basis of $250 per week ($2340 per month under California law),

b. Primary duties consist of office or non-manual work directly related to the management policies or general business operations of the employer or employer's customers, and

c. Duties require the exercise of discretion and independent judgment.

In Bothell, the Employer needed to prove all three elements to justify the Employee's exemption. The court concluded that, although the salary test was satisfied, there were outstanding factual issues to be determined regarding the Employee's primary duties.

To qualify for administrative exemption, the Employee must have been involved in more than the daily affairs of the Employer or customer. He must have been engaged in running the business or determining the overall course of its policies. The court distinguished administrative duties from those related to production, service, or sales activities. If the Employee was essentially a highly skilled repair man responsible for installing equipment, diagnosing problems, formulating a work or repair plan and advising the Employer of proposed repair procedures and improvements, such work could not be considered of substantial importance to the general management policies or business operations of the Employer or customer.

The court also questioned whether the Employee's job required the exercise of independent discretion or judgment, stating there must be more than the use of substantial skill or reasoning in applying techniques, procedures, or specific standards to a situation. The court ordered a trial to resolve these issues.

Exemptions from overtime are often the subject of lawsuits. Employers, therefore, should not assume an employee is exempt just because he or she is paid a flat salary. Moreover, employers should periodically check the compensation of exempt employees to ensure they are paid on a "salary basis" and meet the higher earnings level required by California law. Finally, it is recommended that employers audit the actual job duties performed by exempt employees to be sure they meet the tests established by federal and state law.

Employer Can Insist on Arbitration Agreement

In EEOC v. Luce, Forward, Hamilton & Scripps, the Ninth Circuit Court of Appeals overturned one of its more controversial employment law decisions in recent years when it recently ruled that employers can require employees to sign arbitration agreements as a condition of employment. The court held that Luce, Forward, Hamilton & Scripps ("the Employer") did not violate the law when it rescinded an employment offer to a legal secretary, Donald Lagatree ("the Employee"), because he refused to give up his right to sue for workplace discrimination.

"[The Employee] did not engage in a protected activity when he refused to sign [the Employer's] arbitration agreement, and consequently, [the Employer] did not retaliate when it refused to hire him," the court opined. The suit was brought on behalf of the Employee by the Equal Employment Opportunity Commission, which argued that the Employer unlawfully retaliated against the Employee for refusing to sign the agreement.

In reaching its conclusion, the Ninth Circuit overturned Duffield v. Robertson Stephens, which held that employees cannot lose their jobs for refusing to agree to have their Title VII workplace discrimination claims settled by an arbitrator.

Court Sets New Standard for "Mixed Motive" Discrimination Cases

In a recent opinion, the Ninth Circuit Court of Appeals established a rule that will make it easier for employees to win "mixed motive" cases. A mixed motive case is one in which the evidence shows that an adverse employment action has occurred for both lawful and unlawful reasons.

In Costa v. Desert Palace, Inc., Catharina Costa ("the Employee"), the only female employee at a warehouse for Caesars Palace Hotel ("the Employer"), was involved in an altercation with a male employee. The Employer suspended the male employee for five days and terminated the Employee's employment, although an investigation as to who was at fault was inconclusive.

The Employee sued under Title VII alleging sex discrimination and sexual harassment. Her sex discrimination claim would be upheld if she proved that her sex was a motivating factor - as opposed to the motivating factor - in her termination. Although she could not present direct evidence substantiating her claim, the Employee produced indirect evidence of the Employer's motivation by showing the differential treatment she experienced during her years of employment because she was female. The Employee argued that the evidence she provided demonstrated that her termination was motivated by both her sex and the altercation.

The Employer responded that, regardless of her sex, the Employee would have been terminated for the altercation and other behavior issues. In support of this defense, the Employer cited court decisions ruling that employees can prove discrimination only by direct evidence in mixed motive cases. Absent such direct evidence of a discriminatory motive, the Employee's claim must fail.

The court concluded, contrary to decisions in other courts, that an employee may prove discrimination in mixed motive cases by either direct or indirect evidence. The court stated that the evidence need only indirectly establish that it was "more likely than not" an unlawful motive prompted the action.

According to the decision, an employer may limit its liability in such a case by proving "more likely than not" that it would have taken the same action absent the discriminatory factor. An employer's liability would then be limited to attorney's fees and costs, but no damages or other remedies, such as reinstatement, would be ordered.

Using this standard, the Costa court found the jury's conclusion that the Employee was terminated because of her sex to be reasonable.

To prevent similar liability, employers should maintain a clearly communicated policy against all kinds of unlawful employment discrimination and harassment and set forth what steps to take should occur harassment or discrimination. Moreover, employers should review all proposed employment terminations to avoid any appearance of unequal or unlawful discriminatory treatment.

Employer Liable for Attorney's Fees Regardless of Settlement Offer

In Greene v. Dillingham Construction N.A., Inc., a California court of appeal recently ruled that an employer is liable for the attorney's fees paid by an employee in the course of a discrimination suit under the California Fair Employment and Housing Act ("FEHA"), even if the employee's award in the suit is less than he or she would have received in a settlement offer made by the employer during an effort to mediate the claim.

Willie Greene ("the Employee") sued his employer, Dillingham Construction ("the Employer"), for racial discrimination and harassment in violation of FEHA. Prior to the trial, the Employee made an informal offer in a mediation session to settle the claim. The Employee rejected the offer and the case proceeded to trial. The Employee was awarded less than one-half of what he would have received had he settled. His award also included attorney's fees.

The Employer challenged the award of fees for work performed after the rejection of the settlement offer. FEHA provides for the award of attorney's fees to employees who prevail in a lawsuit. However, section 998 of the California Code of Civil Procedure limits an award of attorney's fees where a pre-trial settlement offer under that statute has been rejected and the ultimate recovery is smaller than the settlement offer. The Employer argued that public policy encouraging settlement requires application of the same rule to settlement offers made in mediating FEHA claims.

The court of appeal disagreed. The court opined that informal settlement offers made in the course of confidential mediation sessions do not have the same effect as formal pre-trial settlement offers. The court's reasoning was that disclosing such settlement offers made during mediation violates the confidentiality of the mediation session and would discourage resolution through the FEHA mediation process. Moreover, informal settlement proposals lack the safeguards included in the procedures for formal settlement offers. Thus, the court upheld an order granting over $1 million in attorney's fees.

If you would like to discuss these or any other employment law matters, please do not hesitate to contact any member of Klinedinst's Employment Law Department.

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