MAY 2004

I. LEGISLATIVE/REGULATORY UPDATE
Pending Legislation

Department of Labor Announces New Federal Rules for Overtime

The United States Department of Labor announced the final regulations governing overtime eligibility for white-collar employees under the Fair Labor Standards Act (“FLSA”). The regulations, which have been dubbed the “FairPay” rules, had not been substantially updated in 50 years. One of the primary changes in the new regulations is that the minimum salary needed for exemption from federal overtime will now increase from the current level of $250 per week to a level of $23,660 per year ($455 per week). The FairPay rules are scheduled to take effect on August 18, 2004. The U.S. Senate, however, adopted an amendment which blocks the new regulations. The amendment is attached to an unrelated corporate tax bill that faces continuing obstacles in the Senate. President Bush has promised to veto any attempt to derail the regulations.

The FairPay rules add new sections that provide that “blue-collar” employees and “first responders,” such as police officers, fire fighters, paramedics, and emergency medical technicians are entitled to overtime. In addition, the FairPay rules provide new regulations for “highly-compensated” employees who are paid a total annual compensation of $100,000 or more.

For instance, the definition of overtime-exempt duties has been broadened under the FairPay rules. Exempt executives must continue to have as their primary duty the management of the business or a recognized subdivision of the business. Executives must also customarily and regularly direct the work of two or more full-time equivalent employees, and executives must be paid a salary. The new regulations also require exempt executives to maintain the authority to hire or fire other employees, or have their recommendations regarding the hiring and firing of employees given particular weight.

The primary duty of exempt administrative employees must still be the performance of non-manual work “related” to the management or general business operations of the employer or the employer’s customers, but the FairPay rules eliminate the requirement that exempt work be “directly” related to management or general business operations. The FairPay rules emphasize that the implementation of policies and the carrying out of major assignments may qualify as exempt work. Time alone, however, is not the sole test, and nothing in the new rules require exempt employees to spend more than 50% of their time performing exempt work.

The FairPay rules continue to require that an exempt employee’s primary duty include the exercise of discretion and independent judgment with respect to matters of significance. Exercising “discretion and independent judgment” generally involves an employee comparing and evaluating possible courses of conduct, and acting or making a decision after the various possibilities have been considered. The term “matters of significance” refers to the level of importance or consequence of the work performed. In determining whether or not an employee exercises discretion and independent judgment, all of the facts involved in the particular employment situation must be considered. However, employees may exercise discretion and independent judgment even if their decisions or recommendations are reviewed, and occasionally reversed, at a higher level.

To be an exempt learned professional under the FairPay rules, an employee who meets the new $455 per week salary requirement must also have the primary duty of performing non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. However, one significant change under the new rules is that in addition to receiving a bachelor’s degree, the “prolonged” study requirement can be met by alternative means, such as an equivalent combination of academic instruction and work experience. The relaxation of the requirement that employees earn a particular academic degree constitutes a significant change in this exemption.

The new rules expand the definition of outside sales work. An individual will be exempt as an outside sales employee if the employee is customarily and regularly making sales or obtaining orders or contracts for services or the use of facilities away from the employer’s place of business. The current 20% limit on nonexempt work has been deleted. The minimum ($455 per week) salary requirement does not apply to exempt outside sales employees.

Finally, under the FairPay rules there will also be a separate test for highly compensated employees. Under this test, any “white-collar” employee earning $100,000 a year or more must meet only one part of the standard test of any recognized exemption in order to be exempt from overtime. Thus, for example, an employee who earns $100,000 per year may qualify as an exempt executive if the employee regularly directs the work of two or more other employees, even though the employee does not meet any of the other requirements to be exempt. The $100,000 total compensation requirement may be satisfied by commissions, nondiscretionary bonuses, or other compensation earned during a 52-week period. There are also special rules for partial-year employees that permit a one-time make-up payment to meet the compensation test.

For many California employers, these changes may have little effect because California employers must still follow the more stringent California wage and hour rules. Moreover, California’s Wage Orders explicitly incorporate the old FLSA regulations. Thus, unless the Wage Orders are amended, the new rules will not affect California law.

However, the new federal rules will likely make the classification of employees more complex for those employers who have operations outside California. Employers must remember that, when a conflict between state law and the FLSA exists, the law establishing the higher standard applies. Thus, if an employer is subject to both the FLSA and the California wage and hour laws, it must comply with whichever is more stringent.

For further information about the new FairPay rules, visit the Department’s Wage and Hour Division web page at www.dol.gov. We will keep you fully updated on the status of the regulations in the future.

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Worker’s Compensation Reform

On April 16, 2004, SB 899 (Poochigian) was passed by the Assembly (77-3) and the Senate (33-3). The bill was signed into law by Governor Schwarzenegger. The bill fundamentally changes the workers’ compensation system for determining the level of injury, the amount of disability assigned to an injury, and creates a new medical network for employers to control.

Key points of the reform include:

• Requiring that disability reports be based on the standards from the American Medical Association’s 5th Edition of Impairment and that the disability schedule be objective and consistent;
  
• Ensuring that employers are only responsible for the portion of the injured worker’s disability that is the result of their existing job;
  
• Closing a loophole that allowed multiple disability awards in excess of 100% of disability;
  
• Creating a new medical network for employers to control unnecessary medical utilization in the workers’ compensation system providing that injured workers be treated by a network chosen by the employer. However, there are extensive provisions to allow injured workers who are dissatisfied with their care to change doctors within the network, and ultimately to ask for an independent medical review;
  
• Ensuring that medical treatment follows nationally recognized guidelines; and
  
• Establishing clear parameters for what is acceptable treatment for injured workers.

II. JUDICIAL UPDATE

Inability to Perform Single Job Sufficient to Sue Under FEHA

In Bryan v. United Parcel Service, Inc., a federal court in Northern California held that a group of individuals with monocular vision who sought full-time driving positions are limited in the major life activity of working, and thus, are “disabled” under California’s Fair Employment and Housing Act (“FEHA”). According to the court, the employees’ exclusion from a single position + despite their ability to perform other jobs, both within and outside the company + constitutes a limitation on the major life activity of working. Tim Hancock, Jeffrey Morales, Greg Quiros, and Mark Jensen (“the Employees”) were all long-term employees of United Parcel Service (“the Employer”). The Employees, who have monocular vision, sued the Employer, claiming they were discriminated against and not allowed to work as full-time package-car delivery drivers, based on their vision impairment.

California law prohibits discrimination against an individual with a “disability.” Pursuant to FEHA, “physical disability” is defined as an impairment that limits an individual’s ability to participate in a major life activity. Unlike its federal counterpart, the Americans with Disabilities Act, FEHA does not require that an impairment substantially limit a major life activity. Moreover, “working” has been recognized as a major life activity under state law without regard to “whether the actual perceived working limitation implicates a particular employment or class or broad range of employment.”

The Employees argued that they were limited in their particular employment. Due to their impaired vision in one eye, they contended, the Employer denied them full-time driving positions. The Employer, on the other hand, argued that the Employees’ ineligibility for a single job is insufficient to show that working is more difficult for them as compared to the general public.

Relying on FEHA’s plain language, the judge agreed with the Employees. However, the court found that this holding does not end the inquiry. The Employees still must prove that they are as qualified to drive the trucks in question as the drivers the Employer currently employs. According to the court, if they are unable to meet that requirement, they need not be hired.

Employer Liability for Sexual Harassment by a Customer

In the first case applying a legislative clarification of FEHA, a California court of appeal found an employer liable for sexual harassment by a customer. In Salazar v. Diversified Paratransit, Inc., Raquel Salazar (“the Employee”) drove a bus for Diversified Transit (“the Employer”). A passenger on the Employee’s route repeatedly accosted the Employee and exposed his genitals to her. Although she reported the incident to the Employer, no acts were taken to stop the behavior. After a similar incident occurred, the Employee filed another report, but decided to terminate her employment.

When the Employee sued the Employer for sexual harassment in violation of FEHA, the trial court interpreted FEHA as not holding employers liable for their clients’ acts. The Employee appealed, but the court of appeal agreed with the trial court. The California Supreme Court agreed to review the case. While the case was pending, the California Legislature passed a law clarifying FEHA so that the statute does apply to customers’ acts. The appellate court then reversed the case again, applying the new legislative language.

The appellate court ruled that employers can be held liable for sexual harassment under FEHA by their clients or customers. Thus, because of the legislative clarifications, an employer is now responsible for the sexual harassment of employees by nonemployees, applicants, or subcontractors, if the employer knew or should have known about the issue and did not address it. The appellate court also ruled that the new legislation was merely a clarification of existing law rather than a change in the law. Therefore, the statute applies to pending cases as well as future ones.

"Friends” Meetings Lead to Sexual Harassment Claim

In Lyle v. Warner Brothers Television Productions, a California court of appeal held that a jury must determine whether the writers of the TV sitcom “Friends” were justified in regularly talking in a sexual nature about female cast members and making sexually explicit drawings. The writers, along with the television studios responsible for “Friends,” were sued by a former writers’ assistant who alleges that she was subjected to sexual and racial harassment while working for the show. The court held that “[t]o the extent defendants can establish the recounting of sexual exploits, real and imagined, the making of lewd gestures and the displaying of crude pictures denigrating women was within the ‘scope of necessary job performance’ and not engaged in for purely personal gratification or out of meanness or bigotry or other personal motives, defendants may be able to show their conduct should not be viewed as harassment.” The court did note, however, that the creative necessity argument has its limits. An employee cannot be fondled or kissed in the interest of developing a love scene, for example. Moreover, offensive or demeaning remarks personally directed at another writer are also be out of bounds.

Lyle reminds employers that in evaluating a potentially harassing or discriminatory work environment, California courts continue to use a “totality of circumstances” test, which generally requires a jury to weigh the facts. Thus, to limit liability, an employer should be prepared to demonstrate: (1) its efforts to prevent harassing jokes and comments, (2) a well publicized policy urging people to come forward with harassment complaints without the fear of retaliation, (3) effective responses to harassment complaints, and (4) an environment that openly encourages employees to use the complaint process.

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.