OCTOBER 2004

I. LEGISLATIVE/REGULATORY UPDATE
Pending Legislation

With the recall of Democratic Governor Gray Davis and the installation of Arnold Schwarzenegger as his successor late last year, employers expected a change in approach to Sacramento’s ever-increasing legislation of the workplace in the Golden State. The employers’ expectations have been met. Of the 1,270 bills which passed both houses of the Legislature in 2004, the Governor vetoed nearly a quarter of them. Governor Schwarzenegger’s veto rate was the second highest of any California governor since 1967. Several bills were signed, however, that will impact California employers, the most important being the new law that mandates anti-harassment prevention training.

Whistleblower Protection

An “urgency” measure affecting California employers, AB 1127 (Horton), codified at Labor Code section 1102.8, became effective September 27, 2004 and requires that the lettering of the list of employees’ rights and responsibilities under the whistleblower laws required to be posted under Labor Code section 1102.5 be larger than size 14 point type. Previously, the list employers were required to prominently display had to be larger than size “14 pica type.”

Other Enacted Legislation Impacting California Employers

SB 1618 (Battin), codified at Labor Code section 226, requires all California employers, by January 1, 2008, to furnish each employee with an accurate itemized statement, at the time of the payment of wages, showing no more than the last four digits of the employee’s social security number or an existing employee identification number other than a social security number.

AB 2900 (Laird) amends miscellaneous code provisions of existing law prohibiting discrimination in employment on different bases, including the race, color, sex, religion, and marital status of a person, to instead prohibit discrimination on the same bases as stated in the Fair Employment and Housing Act. Those bases are race, religious creed, color, national origin, ancestry, physical disability, mental disability, medical condition, marital status, sex, age, or sexual orientation.

AB 2870 (Mullin), codified at numerous sections of the Government Code, effective January 1, 2005, authorizes the FEHC to conduct mediations upon the request of the California Department of Fair Employment and Housing (“DFEH”); for the FEHC to either develop its own procedural regulations or to use the provisions of the Administrative Procedure Act as a default procedure; declaring the non-liability of the FEHC for the attorney’s fees of an administrative adjudication; and making other less substantive changes.

AB 1706 (Committee on Judiciary), codified at Family Code section 5920, effective January 1, 2005, clarifies Family Code section 5920 to prohibit an employer from using an assignment order as grounds for denying a promotion to an employee or for taking any other action adversely affecting the employee’s terms and conditions of employment.

AB 1950 (Wiggins), codified at Civil Code section 1798.81.5, effective January 1, 2005, requires a business, other than specified entities, that owns or licenses personal information about a California resident to implement and maintain reasonable security procedures and practices to protect personal information from unauthorized access, destruction, use, modification, or disclosure. The new law requires a business that discloses personal information to a nonaffiliated third party to require by contract that those entities maintain reasonable security procedures, as specified. The statute provides that a business that is subject to other laws providing greater protection to personal information in regard to subjects regulated by this statute shall be deemed in compliance with the statute’s requirements, as specified.

Other enacted legislation affects less than all California employers or employees, such as: SB 1388 (Ortiz), codified at Penal Code section 11105: applicants for employment by public utility and cable companies; AB 1706 (Committee on Judiciary), codified at Family Code section 5290: denying promotions or taking other adverse action against an employee on the basis of the existence of a support order; AB 2276 (Dymally), codified at Business and Professions Code section 19641.2: employers of horse racing backstretch workers; AB 2785 (Nakano), codified at Vehicle Code section 23125: the use of cell phones by school bus or transit vehicle drivers; AB 2861 (Negrete McLeod), codified at Government Code section 3522: the access of employees on work furlough to driver’s license and credit card information; AB 891 (Runner), codified at Education Code section 44010: the definition of sexual offenses of persons applying for work at a school.

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California Legislation Vetoed

A state’s chief executive makes policy, too, with the legislation he does not allow to become law. In perhaps his most prominent veto, the Governor rejected AB 2832 (Lieber), which would have raised California’s minimum wage for the first time in three years. In his veto message, Governor Schwarzenegger stated that the proposal exemplified “the high cost of doing business in California” which “has driven away jobs, businesses and opportunity. Now is not the time to create barriers to an economic recovery or to reverse the momentum we have generated.”

Likewise, Governor Schwarzenegger vetoed:

SB 1841 (Bowen): This bill would have required employers to provide notice to employees of employer monitoring of employees’ workplace electronic communications. This was the third consecutive year such a proposal had passed the Legislature and been vetoed by the Governor.

AB 606 (Nunez): AB 606 would have expanded the rights of hotel room attendants.

AB 2213 (Goldberg): This bill would have expanded the rights of janitorial service contractors.

SB 1521 (Alarcon): This bill would have expanded the rights of displaced janitors.

AB 2545 (Koretz): AB 2545 would have expanded the liability of employers for failing to provide safe workplaces for employees.

AB 2317 (Oropeza): This bill would have increased damages available to employees against employers in gender equity lawsuits.

AB 2715 (Reyes): AB 2715 would have required California employers contracting with a customer sales call center or a customer service telephone bank, to include a provision in the contract that would have required a customer service employee to disclose his or her location upon the request of a California resident.

SB 1538 (Alaracon): SB 1538 would have increased legal authority for an employer’s payment of employees’ rest period time.

Governor Schwarzenegger also vetoed a series of bills that would have affected employment policies relating to “offshoring” of California jobs. AB 3021 (Committee on Labor) would have required employers to report information on a California employer’s in-state, out-of-state, and outside the United States employees. SB 1492 (Dunn) would have required health care providers to disclose and obtain consent for allowing confidential medical information to be transmitted outside the United States. AB 1829 (Liu) would have prohibited a state agency or local government from allocating or expending state funds for employment training for employees located in foreign countries and prohibiting a state agency, or a local government in expending funds provided by a state agency, from contracting for services with a contractor or subcontractor unless that contractor or subcontractor certifies under penalty of perjury in his or her bid for the contract that the contract, and any subcontract performed under that contract, will be performed solely with workers within the United States. SB 888 (Dunn) would have prohibited employment of employees working on information essential to homeland security at a location outside the U.S.

In summary, California employers can breathe a sigh of relief that the onslaught of significant new statutes affecting the workplace in recent years substantially abated this year. Coming up for decision at the California general election on November 2, 2004 are several controversial ballot propositions. The propositions most directly affecting employers are Proposition 64, which would substantially cut back lawsuits under Business and Professions Code section 17200 (unfair business practices), and Proposition 72 which if passed would enact the comprehensive health insurance plan passed by the Legislature in 2003 as SB 2.

II. JUDICIAL UPDATE

Harasser Now, Supervisor Later -- Employer Responsible

The Ninth Circuit Court of Appeals, the federal appeals court with jurisdiction over California, ruled in Porter v. Department of Corrections that an employer is responsible for quid pro quo sexual harassment by a supervisor under Title VII of the 1964 Civil Rights Act even though the harasser was not a supervisor at the time the harassment took place. Quid pro quo sexual harassment occurs when a supervisor implicitly or explicitly conditions a job, job benefit, or the absence of a job detriment upon acceptance of sexual conduct.

Shortly after Lawana Porter (“the Employee”) began working as a correctional officer for the California Department of Corrections (“the Employer”), she contacted fellow officer DeSantis (“DeSantis”), her local union president, about an incident of sexual harassment. Following that contact, DeSantis himself made sexually suggestive comments to the Employee and invited her to travel and share a room with him at a union convention. The Employee rejected his invitation.

DeSantis later became a sergeant whose job included responsibility for making shift assignments and approving time off. The Employee alleged that each time she requested a change of assignments or time off, DeSantis would deny her the re-assignment or block the request. In her lawsuit, the Employee claimed that DeSantis denied her requests because she had rejected his sexual advances.

The Ninth Circuit held that Porter showed enough evidence of quid pro quo sexual harassment to warrant a trial despite the fact that DeSantis was not her supervisor at the time he allegedly harassed her. The court held that the goal of Title VII would not be achieved if an employer escaped liability for harassment because the harasser was not in a position to exact reprisals at the moment of the harassment but abused his supervisory authority at a later date.

In order to prevent similar potential liability, employers should: distribute and enforce a policy establishing zero tolerance for sexual harassment; include in the anti-harassment policy a process for employees to use if they believe they have been subjected to harassing conduct by a fellow employee, supervisor, customer, vendor or visitor to the employer’s premises; train all employees in regard to the employer’s policy against harassment and what to do if experiencing harassing conduct; and provide extensive training to managers and supervisors (especially in light of AB 1825), informing them of the potential for personal liability and their responsibility to the company.

Supreme Court Preview

In the upcoming months, the California Supreme Court will decide a variety issues of importance to California employers. The following is a summary of the most significant pending cases and the issues involved:

Lyle v. Warner Brothers Television Productions: The Court will determine two issues: (1) whether the use of sexually coarse and vulgar language in the workplace constitutes sexual harassment under the California Fair Employment and Housing Act (“FEHA”); and (2) if the potential imposition of liability under FEHA for sexual harassment based on such speech infringes on a individual’s right of free speech.

McClung v. Employment Development Department: The Court will decide whether the provision of FEHA enacted in 2000 to impose personal liability on nonsupervisory coworkers who engage in harassment applies retroactively. The court of appeal in McClung held the provision is retroactive.

Mackey v. Department of Corrections: The Court will consider whether, under FEHA, a male supervisor’s preferential treatment in promotions and other employment decisions of female employees with whom
the supervisor had consensual sexual relationships constitutes sexual harassment or discrimination against employees who were never asked to provide such favors. The court of appeal ruled a supervisor who grants favors to his “paramours” has not engaged in sexual harassment or sex discrimination under
California law.

Reynolds v. Bement: The Court will determine whether corporate managers and officers may be held personally liable for unpaid wages owed by the corporation. The court of appeal held that under California law, only “employers” are liable for unpaid wages, and individual corporate officers are not “employers.”

Yanowitz v. L’Oreal USA, Inc.: The Court will consider whether a manager’s termination for refusing to carry out her supervisor’s discriminatory order to terminate another employee because the employee was not attractive enough may constitute retaliation under FEHA. The court of appeal ruled in favor of the manager, and determined that
the termination of her employment was retaliatory.

Discover Bank v. Superior Court: The Court will decide whether the Federal Arbitration Act (“FAA”) preempts state courts from applying state substantive law to strike
arbitration agreement provisions prohibiting class actions. The court of appeal held the FAA preempted California contract law.

Dore v. Arnold Worldwide, Inc.: The Court will determine whether an offer letter that states “your employment with [the employer] is at-will” and “[t]his simply means that [the employer] has the right to terminate your employment at any time” permits an employer to terminate the employee at any time without cause. The court of appeal found the employer did not have the right to fire the plaintiff without cause because his offer letter defined at-will employment only as the employer having the right to terminate the plaintiff at any time – there was no mention of the employer’s right to terminate the plaintiff without cause.

Similarly, the United States Supreme Court has granted certiorari in several important employment cases and will review the following issues in its current term which begins in October 2004 and ends in June 2005.

Smith v. City of Jackson: The Court will determine whether an age discrimination claim can be based on a disparate impact theory. The plaintiffs, police officers and dispatchers employed by a city, claimed a performance compensation plan discriminated against older employees because it resulted in larger pay increases to younger employees with less tenure. The trial court and Fifth Circuit Court of Appeals held the plaintiffs could not pursue a claim under the Age Discrimination in Employment Act on a disparate impact theory.

Banks v. Commissioner of Internal Revenue, Commissioner v. Banks and Commissioner v. Banaitis: The Court will consider whether the portion of a settlement paid to a plaintiff’s attorney must be included in the plaintiff’s gross income. The federal court of appeals in both of these cases rejected the Internal Revenue Service’s (“IRS”) contention that all amounts paid in settlement must be included in a plaintiff’s gross income, including amounts paid to attorneys as part of contingency fee agreements. This issue is significant for employers because the IRS’s position has caused plaintiffs and their attorneys to make higher settlement demands based on concerns the entire settlement amount is taxable.

The decisions of the California and United States Supreme Courts often have far-reaching consequences for employers. We will provide analyses of the most significant employment-related cases as they are decided.

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.