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Notable California Legislative Changes and Case Law Updates - and Actions to Consider in Response

With the return to one-party rule in California, it is easy to catalog all the developments that are tangentially related to operating in that state with a workforce (use of that term instead of “employees” is intentional, as discussed below). Others provide what, we have heard, is not particularly helpful guidance to those charged with planning and management. Similarly, it is easy to conjure up potential horrors from any legislative or administrative pronouncement, but again, the chicken little approach is also not very helpful in running a business lawfully.

What those guiding businesses operating in California tell us they want/need is some helpful insight in sorting the developments by importance and configuring an approach to addressing the risks as the legal developments unfold. As we all eagerly await the California Supreme Court’s April ruling on the Rest and Meal Period cases, there are some things that can and should be done now. Our effort to identify those needs follows.

Non-California Resident Rights to California Overtime.

Regardless of where your business is based or, indeed, how long the employee’s temporary duty lasts, if you have employees providing service to your business while physically in California, you have a daily overtime exposure courtesy of the California Supreme Court’s decision in Sullivan v. Oracle.

  • What to do now. At the operational level, identify the members of your workforce who perform services in California — regardless of where they live or are based, or whether you presently think they are employees, subcontractors, independent contractors temps or leased employees.
  • Why do it? Given all the tumult of the last few years, business has learned the lesson that being flexible and nimble is essential to reacting to market conditions leading to consolidation and outsourcing. That often means servicing wider geographic areas than before and having tier one managers, sales reps, technicians and service personnel assigned from afar.
  • Why this is important. The Sullivan decision applies only to the overtime rule because that was the only question the court was asked to answer. What we do not yet know is which of the myriad other provisions of the Labor Code also apply based on the same rationale, including the new provisions described below.

Limitations on Use of Employment Credit Reports. In general and with some exceptions, California has banned use of an employee or applicant’s credit history in making employment decisions concerning non-exempt private sector employees who do not have access to $10,000 or more in cash.

  • What to do now. Stop performing the credit checks until you assess whether the position is truly exempt from the statute.
  • Why do it? The risk of class-wide exposure is highest, particularly given the flood of applications for each available position.
  • Why this is important. It marches California in a direction different than most other states. Moreover, this sort of background checking has been common practice for a very long period of time. Furthermore, to those who contract out the background searches, it will require some vendor supervision.

No Bright-Line Rule for Classifying a California Administrative Employee as “Exempt.”

In its decision in Harris v. Superior Court (Liberty Mutual), the court overturned a lower court ruling that held that the class of claims adjusters were all non-exempt “production” employees as a matter of law, and re-established the necessity of analyzing all aspects of the administrative exemption and emphasizes the relevance of federal law in interpreting the exemption.

  • What to do now. Because Harris was limited to one type of employee working for one employer under one set of circumstances, California employers cannot conclude that the administrative exemption applies to other employees working in different jobs with other sets of duties and responsibilities. Employers should thus review the particular circumstances of their employees classified as exempt under the administrative exemption to determine if they are properly classified. Employers should then commit employees’ job duties to job descriptions in order to demonstrate that those duties are sufficient important and involve the use of discretion and independent judgment.
  • Why do it? There is no predictable clear-cut rule applying exempt status. An employer must undertake a factual analysis before classifying anyone, let alone an entire class of employees, as “exempt.” Beyond titles, it matters what the employees actually do, particularly how much discretion they have to do their jobs.
  • Why this is important. This is a positive step in defending against misclassification lawsuits. However, employers should be mindful that a successful defense in this area takes planning well in advance of a lawsuit.

Wage Detail Notification Requirements.

One of those semi-innocuous, easy to overlook or misapprehend invitations to a California Wage and Hour Class Action is contained in new Labor Code section 2810.5. The statute has a specific list of required written disclosure items that must be provided at time of hire and within seven days of any change. The written notice requirement in the statute also has a catch-all for any other information the Labor Commissioner deems material or necessary. The Labor Commissioner has finally provided a model notice which does contain some additional items:

  • What to do now. At a minimum, review the Labor Commissioner’s notice, update your new hire package and begin creating a data structure/calendar so that when one of the various events occurs (like change in a workers compensation carrier or an employee wage rate), a reminder to generate a new notice is created.
  • Why do it? The risk of class-wide exposure is enhanced by the fact the notice is required to be in writing and the existence of multiple trigger points.
  • Why this is important. First, this statute adds another layer to the risk of exempt status misclassification. Second, the writing requirement will make it hard to argue against class treatment and may well be outside the notice posting exception to the Private Attorney General Act. Third, as anyone facing a “seating requirement” class claim can attest, PAGA has some Draconian penalty provisions.

Misclassification of Independent Contractors.

Those who willfully misclassify employees as independent contractors are now liable for civil penalties of $5,000 to $15,000 for each violation. In addition, if it is found that the employer has a pattern and practice of misclassifying independent contractors, the penalties can increase to a minimum of $10,000 to $25,000 per violation. The new law, which adds Sections 226.8 and 2753 to the Labor Code, defines "willful misclassification" as avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor. In addition to the substantial civil penalties, employers that violate the law are required to post a notice about the violation on their website for one year. If they do not have a website, they must instead post the notice in an area available to employees and the general public.

  • What to do now? Assess whether employees previously classified as independent contractors truly qualify under California Law. It is preferable to use counsel to perform any audits so that audit results remain privileged.
  • Why do it? The penalties for willful misclassification not only harm an employer’s fiscal budget, but attack the employer’s reputation and public opinion as well.
  • Why this is important. This law provides no guidance to employers in determining whether an individual is an independent contractor, yet imposes joint and several liability on any person who advises an employer to treat an individual as an independent contractor, unless the advisor is an attorney who gave the advice in the capacity of legal counsel to the employer or misclassified individual.

Pay Stub/Wage Statements - Duty to Retain.

Labor Code section 1174 is amended to extend the time an employer is required to maintain payroll records from two years to three years. In addition, an employer may not prevent an employee from maintaining a personal record of his hours worked. Prior to January 1, 2012, Labor Code section 226(a) only required employers to keep on file both a copy of the [accurate itemized] wage statement or a record of wage deductions for at least three years at the place of employment or other central location within the state of California. After January 1, Section 226(a) was changed to require employers to keep on file both a copy of the [accurate itemized] wage statement and a record of the deductions.

  • What to do now? Employers must maintain payroll records for three years. Employers who were in compliance because their computerized records showed deductions must now arguably keep “on file” the “accurate itemized statement” for each employee. In all likelihood, if the employer can reproduce the past pay stubs/wage statements from its computerized records, this would be compliant. However, most employers do not have this electronic capability.
  • Why do it? There has been enormous class action litigation alleging deficient pay stubs/wage statements.
  • Why this is important. Employers that cannot keep or reproduce a copy of the pay stub/wage statements given to employees are likely to find themselves defendants in a class action and PAGA litigation alleging breach of the Labor Code section 226(a) requirement to retain a copy of the pay stub/wage statement.

Employee Pregnancy Leave and Maternity Insurance Coverage.

New laws (SB 299, AB 592, SB 222, and AB 210) assure health care coverage for pregnancy, childbirth and related conditions.

  • What to do now? The first step is to evaluate existing leave and benefit programs in the context of the new requirements. For employers not covered by FMLA/CFRA, this is a new set of requirements. For those who
    are FMLA/CFRA covered, the new law presents some significant leave integration and tracking issues because California pregnancy disability provisions apply consecutively not concurrently with the California Family Rights Act leave.
    • SB 299 (eff. 1.1.12) requires employers with five or more employees to continue health care coverage for employees taking pregnancy-related leaves. It also requires that maternity benefits must be at the same level of insurance benefits during pregnancy-related leave as they would have been prior to taking leave;
    • AB 592 (eff. 1.1.12) makes it an unlawful employment practice to refuse to allow a female employee to take pregnancy leave;
    • SB 222 (eff. 7.1.12) amends the California Insurance Code to require individual insurance policies to include maternity benefits. The California Health and Safety Code already requires health care services
      plans to include maternity benefits. SB 222 also defines coverage for maternity services to include prenatal care, ambulatory care, maternity services, involuntary complications of pregnancy, neonatal care, and in-hospital maternity care, including labor and delivery and post-partum care; and,
    • AB 210 (eff. 7.1.12) expands maternity coverage to all insureds under individual and group health policies.
  • Why do it? Pregnancy discrimination and related claims are the fastest-growing types of charges filed with the EEOC, rising by 47 percent over the last decade.
  • Why this is important. Although the FMLA and CFRA already require employers to provide leave and the availability of health care coverage for medical (including pregnancy) leaves, these laws only apply to employers who employ 50 or more employees (within a 75 mile radius). Employees must have been employed at least one year and have a minimum of 1,250 hours worked to qualify for FMLA leave. In sum, prior to the enactment of SB 299, employers not subject to FMLA/CFRA had no obligation to continue health care benefits during pregnancy leave.
    • Note that employers may recover the full premium paid on behalf of the individual if the employee fails to
      return to work once the four months has expired as long as the failure to return to work is not the result
      of additional leave being taken under FMLA, CFRA, or for circumstances not under the control of the
      employee (e.g. onset of another illness).
    • AB 592 explicitly permits individuals on pregnancy-related leave to remain entitled to participate in life, AD&D, LTD, pension and retirement plans during the full period of leave to the same extent as available to active employees. Employers, however, may require the full amount of premiums due during the period of the leave.

Gender Identification.

AB 887 redefines the term “gender” throughout current statutory law, including the FEHA, clarifying that California law not only prohibits discrimination on the basis of “gender identity,” but also “gender expression.” Gender expression is defined as a person’s gender-related appearance and behavior, whether or not usually associated with the person’s assigned sex at birth.

  • What to do now? Employers must allow employees to appear or dress consistently with their “gender identity” and “gender expression” in the workplace. Issues regarding sex segregated rest room facilities should also be reviewed.
  • Why do it? Employees who successfully litigate claims of “gender identity” and “gender expression” discrimination are entitled to the same remedies as other protected categories under the Fair Employment and Housing Act, including emotional distress and punitive damages.
  • Why this is important. Besides having the right to dress in conformity with how they “identify” their gender (as a male or a female), employees will also have the right to dress as they wish to "express" their gender. In other words, an individual need not “identify” as a woman to dress as a woman, but need merely wish to express the feminine.

Organ/Bone Marrow Donation Leaves.

SB 272 provides up to 30 days of paid leave for an organ donation and up to five days of paid leave for bone marrow donation. SB 1304 specifies that such leaves are to be counted in business day increments.

  • What to do now? Provide leaves for organ donation of not more than 30 business days in one year, or no more than five business days for a bone marrow donation in one year. The one-year period consists of 12 consecutive months measured from the date the employee’s leave begins.
  • Why this is important. Time off on an organ or bone marrow donation leave does not constitute a break in service for employment and benefit calculation purposes, and health insurance coverage must be continued in the same manner as if the employee had been actively at work.

Commission Agreements.

AB 1396 requires both California and out-of-state employers to provide written information about commission compensation to California employees, and to have written commission agreements in place as of January 1, 2013. The contracts must state how commissions will be computed and paid. AB 1396 also provides that if the parties continue working under an expired contract, the terms of that agreement are presumed to remain in full force and effect until the contract is expressly superseded by a new agreement or the employment relationship is terminated.

  • What to do now? At a minimum, the customary annual commission plans published for such employees will need to be incorporated into a contract format and written receipts obtained.
  • Why do it? No penalties are specified in the law for violations. However, Labor Code violations can result in penalties under PAGA, and/or constitute unfair business practices.
  • Why this is important. For most cautious employers, compliance with this law should be relatively easy. However, given the complexity of many commission plans, it is important not wait until the end of 2012 to finalize agreements.

NLRB Notice Posting.

This requirement has been through the preliminary legal challenges and is effective as of April 30, 2012.

NLRB Protects Employee Social Media Activity.

According to the NLRB, an overbroad social media policy opens an employer to an unfair labor practices claim even if no disciplinary action is taken against an employee. In September 2010, the NLRB decided that a company violated federal law when it fired five employees when they engaged in a public group discussion on Facebook regarding a co-worker’s criticism of their work performance. The company saw this as bullying and harassment, and a valid reason for termination. The NLRB, however, found that the posts were protected “concerted activities” under Section 7 of the NLRA and required reinstatement with back-pay, as well as a public posting that “we violated Federal labor law” and that the company will not discharge or discriminate based on Section 7 protected activities. The NLRA also considered it irrelevant that the employees were not trying to change their working conditions or report their concerns to management.

  • What to do now? Employers should ensure their social media policies, at a minimum, explicitly state (1) that they exclude Section 7 activity and (2) that employees are permitted to engage in concerted activity regarding matters related to the terms and conditions of their employment.
  • Why do it? Employee postings are protected if they (1) relate to the terms & conditions of employment, and (2) can reasonably be interpreted as acting with or on behalf of employees.
  • Why this is important. Nonunion employers often assume that the NLRA does not apply to them, and also often assume that, so long as they comply with antidiscrimination and retaliation laws, they are free to take action in response to employee social media activity. Both assumptions are wrong.

NLRB Invalidates Class Action Waivers in Arbitration Agreements.

In a Decision and Order dated January 3, 2012, the NLRB ruled that it is a violation of federal labor law to require employees to sign arbitration agreements that prevent them from joining together to pursue employment-related legal claims in any forum, whether in arbitration or in court. The Decision examined an arbitration agreement used by nationwide homebuilder D.R. Horton, under which employees waived their right to a judicial forum and agreed to bring all claims to an arbitrator on an individual basis. The agreement prohibited the arbitrator from consolidating claims, fashioning a class or collective action, or awarding relief to a group or class of employees. The NLRB ruled that these agreements conflict with the NLRA, and that the NLRA precludes these arbitration agreements in all private sector workplaces, both union and nonunion.

  • What to do now? Employers should review and revise Arbitration Agreements to assure that they are not too limiting.
  • Why do it? While the decision is arguably in conflict with United States Supreme Court precedent and will likely be appealed, no one wants to be the test case and if the decision stands, many employers will need to revise their arbitration agreements to withstand legal challenge under the NLRA.
  • Why this is important. The Board’s decision is limited to statutorily-defined “employees” under the NLRA, meaning it does not apply to managerial employees or supervisors. Further, the decision does not affect collectively-bargained waivers of employees’ rights to bring class or collective actions.

Other New Laws of General Application to Private California Employers

  • Amendments to the FEHA and the Unruh Civil Rights Act ban discrimination based on genetic information. The new law prohibits the consideration of genetic information in a wide variety of associated statutes.
  • Under S.B. 757, any policy or certificate of health insurance that is “marketed, issued, or delivered” to a California resident shall not discriminate in coverage between spouses or domestic partners of a different sex, or of the same sex. This includes a policy issued outside of California to an employer whose principal place of business and majority of employees are located outside of California.
  • Labor Code section 98 is amended to allow an employee to recover liquidated damages in an action before the Labor Commissioner.
  • Labor Code section 200.5 extends the DLSE’s time to file a request for entry of judgment on a civil penalty or fee against an employer from one year to three years from the date the penalty or fee became final. Once the DLSE commences such an action, the clerk of the superior court must enter judgment immediately.
  • Labor Code section 240 extends the time required for an employer who commits a violation of this section, or who fails to satisfy a judgment, to maintain a bond from six months to two years. In addition, if the employer fails to post a bond, the Labor Commissioner may require the employer to provide an accounting of assets.
  • Labor Code section 1194.3 allows an employee to recover attorney’s fees and costs that are incurred in enforcing a court judgment for unpaid wages under the Labor Code.
  • Workers’ compensation notices posted by employers must now include the website address and contact information that employees may use to obtain further information about the workers' compensation claims
    process and an injured employee's rights and obligations, including the location and telephone number of the nearest information and assistance officer.
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About this Author

James Nelson, Greenberg Traurig Law Firm, Los Angeles, Sacramento, Phoenix, Labor and Employment Attorney

James M. Nelson is Co-Chair of the firm’s National Labor & Employment Practice’s ERISA Litigation team, as well as, Chair of the Sacramento office’s Labor & Employment Practice. He represents employers and ERISA plan fiduciaries in matters concerning ERISA compliance, fiduciary responsibility, collective bargaining, wage and hour, employee benefits, safety, discrimination, wrongful termination, and other labor and employment issues.

His experience includes complex litigation, class action defense, administrative proceedings and appeals,...