JUNE 2003

I. LEGISLATIVE/REGULATORY UPDATE
Pending Legislation

Database Security Law Goes Into Effect July 1, 2003

Beginning July 1, 2003, a new law will affect all companies and state agencies that own or license a computer database that includes personal information. The law, SB 1386 (Peace), defines personal information as someone’s first name (or first initial) and last name combined with any of the following, when either the name or items are not encrypted:

• Social security number;
  
• Driver’s license number or California identification card number; or
  
• Account number, credit card number, or debit card number combined with any required security code, access code, or password that would permit access to the individual’s financial account.

If there is a security breach of any such unencrypted data, the company is required to notify all affected California residents of that breach. Notice may be effectuated in writing or electronically and must be made in the most expedient manner possible and without unreasonable delay.

The law also requires any person or business that becomes aware of a security breach to notify the owner or licensee of the breach immediately. Allowances are made for delay in giving notice at the direction of a law enforcement agency. The provisions of SB 1386 are codified in California Civil Code sections 1798.29 and 1798.82.

To be in compliance with this new law, California employers should consider implementing the following: identify employee, customer, or other computer database files that contain personal information as defined in SB 1386; determine whether security measures are in place to protect the integrity of the information in those files; establish procedures to comply with the notice provisions of SB 1386 if there is a breach in security; and advise appropriate employees that they must inform the responsible company official if there appears to be any unauthorized data access.

Cal/OSHA Shifts Toward Ergonomics Guidelines

California employers received positive news on the issue of ergonomics as a state board moved its focus to voluntary guidelines aimed at helping businesses comply with current law more easily.

The California Occupational Safety and Health (“Cal/OSHA”) Standards Board decided not to take action on Petition 448, which sought major alterations to the current ergonomics standard. Instead, the board called for the formation of an ergonomics advisory committee which will work to develop non-mandatory sample guidelines for employers to use in dealing with workplace-related repetitive motion injuries (“RMIs”).

Petition 448 would have required all employers to adopt RMI prevention programs, regardless of whether any of their employees had ever been identified as having a RMI. It also would have broadened the scope of cases triggering Cal/OSHA investigations, and would have removed provisions for verifying that injuries were predominately caused in the workplace, among other issues.

The Cal/OSHA Board decided against implementing these new regulations, in favor of developing new voluntary, industry-specific guidelines for business.

California’s current ergonomics standard went into effect in 1997, the first of its kind in the nation. After years of advisory committee deliberations, drafts, redrafts, numerous hearings, and thousands of comments on regulatory proposals, California has finally adopted a standard that provides reasonable protection for employees and flexibility to employers for compliance.

Pending California Legislation

AB 196 (Leno) would prohibit employment discrimination based upon perceived gender, which includes transgender individuals and those who do not fit gender stereotypes. The bill recently passed the Assembly and has been forwarded to the Senate Judiciary Committee.

Pending Federal Legislation

S 1053 (Snowe) would prohibit discrimination in employment and health insurance based upon genetic information. Proponents view the bill as a form of disability protection for employees with genetic predisposition to inherited health conditions, which may be revealed through genetic tests or information relating to family medical history. The legislation would prohibit employment actions and denial of health insurance based on such information. The measure is expected to pass the Senate before the Independence Day recess and then be taken up by the House. Notably, an amendment to the California Fair Employment and Housing Act that became effective on January 1, 1999 prohibits discrimination based on genetic characteristics.

Jobs for Veterans Act

Federal contractors and subcontractors will be facing changes that may impact employment practices with respect to veterans. In late 2002, President Bush signed into law the Jobs for Veterans Act (“JVA”), which made significant changes to the Vietnam Era Veterans’ Readjustment Assistance Act of 1974 (“VEVRAA”) and goes into effect in December, 2003. Both laws are aimed at easing veterans’ transition into civilian employment.

Under the new law, only employers with a federal contract or subcontract of $100,000 or more must create an affirmative action plan to hire and promote qualified veterans. The current contract threshold amount is $25,000. The categories of covered veterans have been altered to include: all disabled veterans (pursuant to the same test specified by the Americans with Disabilities Act); recently separated veterans (veterans who have left service within three years); and veterans who received an Armed Forces Service Medal under Executive Order 12985. Notably, the entire category of Vietnam-era veterans is eliminated from covered status, but Vietnam-era veterans may remain covered in the other categories.

Under the JVA, contractors and subcontractors must annually report to the U.S. Department of Labor the number of covered veterans employed by job category, the number hired within the previous year, the maximum and minimum number of non-temporary workers employed during the previous year, and the total number of employees in each of its designated job categories. Finally, under the new law, covered contractors must post all job openings with the local employment service office. Employers may also list openings with one-stop career centers under the Workforce Investment Act, with America’s Job Bank, or with other authorized job listing services. Employers need not post executive and senior management listings, positions that are to be filled with internal candidates, or jobs lasting three days or less.

II. JUDICIAL UPDATE

U.S. Supreme Court Limits Punitive Damages

In State Farm Mutual Automobile Ins. Co. v. Campbell, the U.S. Supreme Court limited a jury’s ability to grant unreasonable punitive damages awards. The Court ordered a Utah court to recalculate an award consistent with due process rights, pursuant to the Fourteenth Amendment.

In the case, Curtis Campbell (“Campbell”) allegedly caused a fatal auto accident. Campbell had a policy limit of $50,000 with State Farm Insurance Company (“State Farm”). State Farm refused to settle the case for the policy limits. In the trial against Campbell, the jury awarded a $185,849 verdict. State Farm refused to pay more than the $50,000 policy limit and instructed Campbell to pay the remaining $135,000.

Campbell sued State Farm for bad faith and fraud and was awarded $2.6 million in compensatory damages and $145 million in punitive damages. The trial judge reduced the compensatory damages to $1 million.

The Supreme Court held that when $1 million in compensatory damages are awarded, punitive damages of $145 million are excessive. The Fourteenth Amendment to the U.S. Constitution prohibits the imposition of grossly excessive or arbitrary punishments.

As applied to employment cases, Title VII of the Civil Rights Act of 1964 provides a $300,000 per plaintiff cap on compensatory and punitive damages. However, the California Fair Employment and Housing Act has no such cap, exposing California employers to unlimited punitive damages. Therefore, employers should take all possible steps to reduce the exposure to punitive damages in discrimination and harassment cases including the following: establish good faith efforts to prevent and remedy discrimination and harassment; publish and enforce anti-discrimination and anti-harassment policies; train all managers and employees on company policies against discrimination and harassment and require prompt reports of violations; and thoroughly and completely investigate all complaints of discrimination or harassment and promptly remedy proven discrimination or harassment.

FMLA Applies to the States

In Nevada Dept. of Human Resources v. Hibbs, the U.S. Supreme Court decided a case of significance to public employers. The Court ruled that state employees may file suit and recover money damages in federal court in the event of the state’s failure to comply with the Family and Medical Leave Act (“FMLA”).

The case arose when William Hibbs (“the Employee”), an employee of the Nevada Department of Human Resources (“the Employer”), sought to take FMLA leave to care for his ailing wife. At first, the Employer allowed him to take the leave, but then instructed him to return to work. When he refused, his employment was terminated. He then sued the Employer, but the trial court ruled that the state could not be sued in federal court due to the Eleventh Amendment, which grants states immunity from lawsuits in certain situations. The Ninth Circuit Court of Appeals disagreed and ruled that the state could be sued. The Supreme Court ruled that state employers may be sued in federal court for money damages if they violate FMLA. Congress had made its intention to abrogate the states’ Eleventh Amendment immunity from suit in federal court unmistakably clear. Thus, state employees can sue their employers for denying them FMLA leave.

Although the ruling covers the nearly 5 million people who work for state governments, it makes little difference in California. The California Family Rights Act already allows employees of the state to take up to 12 weeks of unpaid leave for family medical emergencies.

FMLA Opinion Withdrawn

The Ninth Circuit Court of Appeals recently withdrew its decision in Gradilla v. Ruskin Mfg. (see April 2003 update), which held that leave taken to accompany a spouse to a funeral was not protected family leave. Thus, employers can no longer rely on the decision as precedent. We will continue to advise of developments in the ever-changing area of family leave.

Ninth Circuit Rules on Arbitration Agreement

The Ninth Circuit Court of Appeals refused to enforce an employer’s arbitration agreement. In Ingle v. Circuit City Stores, Inc., the Ninth Circuit once again considered the requirements for employers to have binding arbitration agreements with their employees. The Ninth Circuit ruled that a pre-dispute arbitration agreement is “unconscionable,” and therefore unenforceable, if it is offered as a “take it or leave it” proposition and the terms of the arbitration agreement are, in the court’s view, “one-sided.”

Importantly, the Ninth Circuit ruled that this particular arbitration agreement was “one-sided” because the nature of the employment relationship is such that employees are much more likely to bring claims than are employers. Thus, employers may now have the burden to demonstrate that the effect of their agreement will be to create truly mutual obligations between the employer and that particular employee. California courts, however, do not articulate the same rule as the Ninth Circuit set forth in Ingle. According to the California decisions, only a “modicum of bilaterality” is required in employment arbitration agreements.

Age Discrimination Claim Rejected

In Pottenger v. Potlatch Corp., the Ninth Circuit Court of Appeals dismissed a lawsuit filed by an executive level employee who claimed he was unlawfully forced to retire at age 60. Charles Pottenger (“the Employee”) was hired by Potlatch Corp. (“the Employer”) in 1968. He held various positions, and was ultimately promoted to vice president. The Employer began to experience significant economic losses. During meetings to stem the tide, the COO characterized the Employee and his team as an “old management team” using an “old business model.” Thereafter, the Employee received his annual performance review, which indicated some cause for concern. The Employer’s management committee, including the Employee, met on two occasions to discuss strategies to cut costs. Some time later, the CEO and COO determined that the Employee was not capable of bringing about significant changes in the operation and decided to terminate his employment.

The Employee sued under the Age Discrimination in Employment Act. The Ninth Circuit affirmed the lower court’s dismissal of the Employee’s case, highlighting that the Employer’s lack of confidence in him was not a pretext for illegal age bias. Moreover, the court reiterated that employers have leeway to make subjective business decisions.

Employee’s Behavior Change May Prompt FMLA Coverage

A change in an employee’s behavior may be enough to notify the employer of the need for a leave of absence under the Family and Medical Leave Act (“FMLA”), according to a recent ruling by the federal Seventh Circuit Court of Appeals. The Seventh Circuit covers part of the Midwest. Nonetheless, its decision may be used by courts with jurisdiction over California to interpret family and medical leave laws.

In Byrne v. Avon Products, John Byrne (“the Employee”) worked as a night shift employee of Avon Products (“the Employer”). In November 1998, his work behavior began to change. The Employee was found sleeping on the job, leaving work early, and missing work. On one occasion his sister answered a call from the Employer and said that the Employee was ill. Finally, the Employee was told to attend a meeting to discuss his performance. When he did not appear, his employment was terminated for that failure, as well as for sleeping on the job.

After two months of hospitalization for depression, the Employee asked the Employer to rehire him. When the Employer refused, the Employee sued, alleging he was a qualified disabled employee terminated in violation of the Americans with Disabilities Act (“ADA”) and that the Employer had denied him leave rights under FMLA.

The court denied the ADA claim, stating the Employee was not a “qualified” employee at the time because his absence from work prevented him from performing essential functions. The court opined that time off from work may be an appropriate accommodation for an employee who needs intermittent leave, but the ADA does not require an employer to accommodate an employee by granting time off for an extended time.

The court held that FMLA, on the other hand, is designed to provide an eligible employee up to 12 weeks of leave in a 12-month period to address a serious health condition. An employee need not specifically request FMLA leave to be eligible for its protection. Rather, the employer must recognize when an absence qualifies as FMLA leave, based upon the notice from the employee. In this case, the court concluded that the Employee’s unusual behavior was sufficient notice to the Employer that something was medically wrong.

The court analogized the situation to one in which an employee collapses at work, perhaps due to a stroke, heart attack, or insulin deficiency. Such an employee need not give verbal or written notice of the need for FMLA leave. Here, the Employee was similarly unable to give notice because of his condition. His behavioral change was sufficient to put the Employer on notice that he suffered from a serious health condition that qualified for FMLA leave.

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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