SEPTEMBER 2004

I. LEGISLATIVE/REGULATORY UPDATE
Pending Legislation

Pending California Legislation

Governor Schwarzenegger has until September 30, 2004 to act on the following bills:

AB 1825 (Reyes) would require employers with 50 or more employees to provide two hours of sexual harassment training and education to all supervisory employees by January 1, 2006, unless such training had been provided after January 1, 2003. The bill would require each employer to provide sexual harassment training and education to each supervisory employee once every two years after January 1, 2006.

AB 1829 (Liu) would prohibit state and local agencies from permitting state services to be performed by employees outside of the United States.

AB 2317 (Oropeza) would increase damage awards and impose new penalties for gender pay equity violations.

AB 2545 (Koretz) would establish a new civil penalty scheme on employers who willfully violate rules regarding the maintenance of and access to exits.

AB 2832 (Lieber) would raise the minimum wage in California from $6.75 an hour to $7.25 on July 1, 2005, and to $7.75 on July 1, 2006.

AB 3021 (Labor Committee) would create a California-only reporting requirement for companies with more than 250 employees. The proposed law would mandate that such companies report the number of employees or contractors with employees outside of California and outside of the United States.

SB 888 (Dunn) would prohibit or restrict California businesses’ ability to conduct any work involving information that is essential to homeland security at a worksite located outside of the United States, unless the expertise necessary to perform the work is not available in the United States, or parts or materials necessary to perform the work are manufactured outside of the United States. The bill would require the Office of Homeland Security to adopt regulations necessary to implement these provisions.

SB 1841 (Bowen) would prohibit employers from engaging in electronic monitoring of employees without first providing notice to the employees, except in certain specified circumstances.

New Federal Overtime Regulations

On September 9, 2004, the U.S. House of Representatives voted to partially block the new overtime regulations for white-collar workers. The House voted (223 to 193) in favor of a budget amendment advanced by Congressman Dave Obey (D-Wisconsin) and strongly backed by the AFL-CIO. The budget amendment denies the necessary funding for the U.S. Department of Labor (“DOL”) to administer the new overtime regulations, except for the provisions raising the salary threshold from $8,060 to $23,660.

The new overtime regulations remain enforceable by both the DOL and through private litigation. In the event that the DOL ultimately is restricted from enforcing the new overtime regulations through a budget bill, the overtime regulations still may be enforced through private litigation.

Nongovernmental employers in California need not be concerned about the new federal overtime regulations, unless they have operations outside of the state. State overtime exemption regulations are more generous to employees, providing overtime to more of them than even the new federal guidelines. Where state overtime laws are more favorable to employees, the state laws will be applied.

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II. JUDICIAL UPDATE

California Supreme Court Approved Wage and Hour Class Action Lawsuit

In Sav-On Drug Stores, Inc. v. Superior Court, the California Supreme Court ruled unanimously that class certification was appropriate for employees who are misclassified as being exempt from overtime and various other wage laws.

In a long-awaited decision, the court held that Los Angeles County Superior Court Judge Irving Feffer did not abuse his discretion by certifying a class action for 600 to 1,400 Sav-On employees who claim they were deliberately mislabeled as “salaried managers” to exempt them from overtime pay.

“The record contains substantial, if disputed, evidence that deliberate misclassification was defendant’s policy and practice,” Justice Kathryn Mickle Werdegar wrote. “The record also contains substantial evidence that, owing in part to operational standardization and perhaps contrary to what defendant expected, classification based on job descriptions alone resulted in widespread de facto misclassification. Either theory is amenable to class treatment.”

Robert Rocher and Connie Dahlin filed the suit on behalf of themselves and others who had been designated as “operating managers” or “assistant managers.” As such, they were labeled as being exempt from state laws requiring overtime pay for anyone who works more than eight hours a day or 40 hours a week.

They claimed they had been “uniformly misclassified” because their jobs required them to perform nonmanagerial tasks – helping customers at checkouts, stocking shelves, and cleaning the stores – for more than 50% of their work hours. Sav-On opposed their attempt to certify the class by arguing that managerial duties varied significantly from person to person and store to store and that no meaningful generalizations could be made about the individual employment circumstances.

The trial court judge found, however, that the employees had established by a preponderance of the evidence that common issues predominated and declared a class action for the period of April 3, 1996 to June 22, 2001.
In reversing, the court of appeal in Los Angeles held, in 2002, that the employees’ job descriptions were so different, regardless of their titles, that there could be no class. It was the first time that a California appellate court had ruled that class certification was not appropriate in a wage-and-hour case.

The Supreme Court disagreed, saying that a “reasonable court” could conclude that the proper legal classification of the employees’ activities would be handled better in a class action than individually.

“Individual issues do not render class certification inappropriate so long as such issues may effectively be managed,” Werdegar wrote. “Nor is it a bar to certification that individual class members may ultimately need to itemize their damages. We have recognized that the need for individualized proof of damages is not per se an obstacle to class treatment,” she added, “and that each member of the class must prove his separate claim to a portion of any recovery by the class is only one factor to be considered in determining whether a class action is proper.”

This decision makes it more important than ever for employers to ensure that they have properly classified employees based on the actual work performed.

Can an Employer Covet Another’s Employee?

In Reeves v. Hanlon, the California Supreme Court decided how far an employer can go to entice a person to leave his or her present employer.

Hanlon and Green were attorneys associated with the law firm of Robert L. Reeves & Associates (“Reeves”). When they decided to establish their own practice, numerous Reeves employees accepted employment with the new Hanlon and Green firm. Reeves sued for interference with its contractual relationships with its employees. Hanlon and Green defended themselves, arguing that the employment relationship between Reeves and its employees was at-will. Employment offers were made only after the employees had quit their jobs.

In this case, Hanlon and Green had been responsible for important parts of Reeves’ business. They engaged in a campaign to disrupt that business by leaving without notice, soliciting clients, deleting computer files, and cultivating employee discontent. The Court found that they had engaged in unlawful acts that caused employees to terminate their at-will relationships.

In holding that an employer may sue a competitor for interference with the contractual relations of an at-will employee, if the competitor engaged in an independently wrongful act that induced the at-will employee to leave the employer, the Supreme Court was careful to acknowledge the public policy favoring competition and employee mobility. The Court also pointed out that, ordinarily, a competitor is not liable in tort for hiring the employees of another unless “unfair methods” are used in interfering with the relations of the former employer. In that regard, the Court reiterated that the mere extension of a job offer that induces an employee to terminate at-will employment does not create liability. Instead, the former employer must plead and prove that the competitor engaged in an “independently wrongful act” – i.e., an act “proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard” that induced the at-will employee to leave the plaintiff’s employment.

This decision may well give rise to a host of suits alleging that at-will employees were lured into new employment through unlawful means. Employers of new employees and of departing employees should be mindful that, despite the Court’s continued reference to the policy in favor of competition and at-will employee mobility, there are tort ramifications for recruiting any employee, even an at-will employee, if an employer does so in a manner that is deemed to be “wrongful.” To minimize exposure, prudent employers should develop specific policies for recruiting. These guidelines should contain a number of items including: a list of “dos and don’ts” for individuals involved in recruiting; a description of prohibited conduct; and a centralized process for recruitment efforts to improve oversight and efficiency.

Separate Release Required for Non-Workers’ Compensation Claims

Under a new rule announced by the California Supreme Court, the standard language of the Division of Workers’ Compensation’s (“DWC”) preprinted “Compromise and Release” form (“C&R”) releases only those claims that are within the scope of the workers’ compensation system, and does not affect claims made in separate civil actions. Also, courts will no longer hear evidence that the parties also intended to release claims in a related civil lawsuit.

Workers’ compensation generally provides the only compensation (known as the “exclusive remedy”) for employees with work-related injuries. In recent years, however, courts have found exceptions to this rule, particularly where the injured employee files a civil lawsuit alleging a violation of anti-discrimination law.

Because the C&R contains a broad general release of the employer’s and insurer’s liability, there has been much litigation concerning whether settling the workers’ compensation claim also settles the civil lawsuit.

In Claxton v. Waters, the injured employee filed two workers’ compensation claims, one for a knee injury and a second for sexual harassment by her supervisor. In addition, she filed a civil claim for sexual harassment under the California Fair Employment and Housing Act (“FEHA”). Several months later, the parties settled the workers’ compensation claims using the C&R, but made no mention of the civil claim. At the employer’s request, the trial court dismissed the civil suit based on the C&R’s general release.

The court of appeal reversed the trial court’s decision, however, denying the employer’s request to show that the C&R was intended to settle both the workers’ compensation and civil claims. The California Supreme Court agreed with the appeals court, and stated this new rule. In the future, therefore, should an injured worker and his or her employer desire to settle both the workers’ compensation and civil claim at the same time, the agreement to settle the civil claim must be set out in a separate document.

To ensure the maximum protection available, employers should consider the following: ask the attorney defending a workers’ compensation case to determine whether the injured worker has filed, or may file, a separate civil lawsuit; if an insurer’s attorney is defending the workers’ compensation case, have separate counsel attorney advise the employer regarding defending a real or anticipated civil lawsuit; and if a workers’ compensation settlement is also intended to release liability for a civil lawsuit, document that release separately from the workers’ compensation settlement.

Ignorance Is No Defense

Human resource managers and other senior company officials often make termination decisions based on facts and recommendations received from subordinates. Reeves v. Safeway Stores, Inc. is a reminder that a manager’s limited knowledge of underlying facts does not necessarily shield an employer from liability for an unlawful termination.

William Reeves (“the Employee”), an employee of Safeway Stores, Inc. (“the Employer”), complained several times to one of his managers, Fred Demarest, that female co-employees were being sexually harassed. Demarest paid little heed to the complaints, and one of the other managers was later overheard referring to the Employee as “Mr. Sexual Harassment.” Subsequently, Demarest instructed Safeway’s security department to investigate Reeves for incidents unrelated to the harassment complaints. Following a cursory investigation, another manager decided to terminate the Employee based upon the security department’s investigation report.

The Employer defended the Employee’s claim that his discharge was in retaliation for his sexual harassment complaints by arguing that the manager who made the termination decision had no knowledge of the sexual harassment complaints and therefore could not have terminated the Employee for making them. The court rejected what it called the “defense of ignorance,” observing that a multilayered organization cannot protect itself from liability by claiming the final decision maker’s action was innocent. Thus, where the terminated employee can show that the other parties who contributed to the termination engaged in retaliation for protected activity, an employer may be held liable. To protect against similar liabilities employers should: gather all of the facts justifying a disciplinary action; assign investigations of misconduct to competent and impartial investigators; whenever possible, obtain the facts supporting a disciplinary action directly from the people involved; and consider the credibility of the people relied upon for information, including their motivations and reliability.

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.