Exemptions and Limits: Recent Appellate Decisions Limit Exposure to Payroll Liability


The pendulum of enforcement of wage and hour claims appears to be swinging toward protecting employers against undue liability.  In the past few weeks, the U.S. Supreme Court has generously interpreted an exemption to the Fair Labor Standards Act overtime requirement, to include service advisors at automobile dealerships.  A few weeks after the National Labor Relations Board reinstated the Obama-era Browning-Ferris decision (for now) easing the test for finding joint employer liability, California appellate courts in two cases involving joint employers have protected, in one case, a staffing company, and in a second case, a client of a staffing company, against wage and hour liability.

The lessons of these cases are:

  1. Employers can expect the United States Supreme Court to give a less aggressively employee-oriented interpretation to wage and hour laws and regulations, but employers are still best served by carefully adhering to the applicable rules.
  2. Employers and staffing companies should carefully review their agreements with each other to be clear on which party is responsible for establishing and enforcing policies to comply with wage and hour laws. Employers and staffing companies should consider including in their agreements representations and warranties of compliance with wage and hour laws, as well as indemnification provisions.
  3. To minimize risk of liability for wage and hour violations, employers should assure that they are in compliance with those laws, even if the staffing companies they use are not vigilant in such matters. And staffing companies should assure that they are doing what is necessary, to the extent feasible, to comply with such laws with regard to employees they place.

Encino Motor Cars:  Service Advisors Employed by Auto Dealers Are Exempt Employees.

In its April 2, 2018 decision in Encino Motorcars, LLC v. Navarro, the U.S. Supreme Court held that service advisors employed by automobile dealerships are exempt from overtime pay requirements under the federal Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201 et seq.  Section 213(b)(10)(A) of the FLSA “exempts from its overtime-pay requirement ‘any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles . . . , if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles . . . to ultimate purchasers.”  In this case which involved statutory interpretation and construction of the FLSA exemption provisions, the Court reversed a decision by the U.S. Court of Appeals for the Ninth Circuit, which had narrowly interpreted the exemption to exclude service advisors.

This was the second time the case had come before the Court.  In a 2016 decision, the Court had held that it was error for the Ninth Circuit to defer to a 2011 U.S. Department of Labor regulation that had stated that the term “salesman” in section 213(b)(10)(A) of the FLSA excluded service advisors.  According to the Court, the regulation “undermined significant reliance interests in the automobile industry by changing the treatment of service advisors without a sufficiently reasoned explanation.”  In the prior case, the Court had left open the issue of whether, absent such deference, the term “salesman” included service advisors.

In the current case, after explaining that “[s]ervice advisors ‘interact with customers and sell them services for their vehicles,’” the Court held:  “Under the best reading of the text, service advisors are ‘salesm[e]n’ and they are ‘primarily engaged in . . . servicing automobiles.’”  In reaching this conclusion, the Court relied on the “ordinary meaning” of “salesman,” in part based on the definition of the term in the Oxford English Dictionary.  Relying on the definition of “servicing” in same source, the Court explained that service advisors “are integral to the servicing process.”

The Court rejected the Ninth Circuit’s invocation of the “distributive canon” of interpretation, by which the lower court had matched the statutory term “salesman” with “selling” and the terms “partsman” and “mechanic” with “servicing,” thereby concluding that the FLSA excluded service advisors (salesmen who were primarily engaged in servicing automobiles) from the overtime-pay exemption.  According to the Supreme Court, under the ordinary, disjunctive meaning of “or” in the statute, the term “salesman” could be matched with “servicing,” and, thereby, include service advisors in the exemption.  And the context of that provision “favors the ordinary disjunctive meaning of ‘or’”:  “narrow distributive phrasing” under the distributive canon was “unnatural,” because “the entire exemption bespeaks breadth.”  In sum, the “more natural reading is that the exemption covers any combination of [the statute’s] nouns, gerunds, and objects.”

Moreover, the Court rejected the principle applied by the Ninth Circuit “that exemptions to the FLSA should be construed narrowly.”  Because the text of the statute gives no indication “that its exemptions should be construed narrowly,” courts should give them “a fair (rather than a ‘narrow’) interpretation.”  (Citing A. Scalia, Reading Law.)  The lack of any reference in the statute’s legislative history to service advisors was not persuasive in excluding service advisors from exemptions, in light of a fair reading of the clear statutory text.  “If the text is clear, it needs no repetition in the legislative history; and if the text is ambiguous, silence in the legislative history cannot lend any clarity.”

SerranoStaffing Company that Provides for Meal Breaks Held Not Liable for Failure of Employees to Take Such Breaks at Company at which They Are Placed.

In Serrano v. Aerotek, Inc., __ Cal.App.5th __, 230 Cal.Rptr.3d 802 (March 21, 2018), a California Court of Appeal held that Aerotek, a staffing agency that had placed temporary employees with its client Bay Bread, LLC, was not liable for meal breaks missed by those employees.  The Court based its conclusion on two grounds:  (1) Aerotek had satisfied its obligations under Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1041, to provide meal periods, and (2) Aerotek could not be held vicariously liable as a joint employer, with Bay Bread, of the employees, because, under Brinker, Aerotek’s provision of compliant meal periods precludes liability even if it was aware that its employees were not taking the breaks.

The facts establishing that Aerotek had satisfied its Brinker obligations included that, in addition to having a compliant meal period policy, its contract with Bay Bread “required Bay Bread to comply with applicable laws, Aerotek provided its meal period policy to temporary employees and trained them on it during orientation, and the policy required them to notify Aerotek if they believed they were being prevented from taking meal breaks,” and prohibited retaliation resulting from such a notification.

Aerotek could not be held vicariously liable even if, as the Court assumed, it was a joint employer with Bay Bread, because the determination of whether a joint employer is liable under the California Labor Code for a violation by its co-joint employer depends not on principles of agency or joint and several liability, but rather on “the duties imposed under the particular statute at issue.”  Under section 226.7 of the Labor Code and Brinker, whether an employer is liable for a co-employer’s violations depends on the scope of the employer’s own duty under that provision.  The applicable wage order governing meal breaks contained no provision imposing liability on an employer “for a co-employer’s breach of the co-employer’s own duty to provide compliant meal periods.”

Castillo:  Settlement of Wage and Hour Class Action Against Staffing Company Bars Subsequent Claims Against Client Companies.

In a case decided a few weeks after Aerotek, the California Court of Appeal, in Castillo v. Glenair, Inc., ___ Cal.App.5th __, 2018 WL1790683 (Apr. 16, 2018), held that a wage and hour class action lawsuit brought against a company by an employee placed at the company by a staffing company was barred by the settlement of a prior class action against the staffing company, which had included a broad release of the agents of the staffing company, as to the very same claims asserted in the pending case against the company where the employees had been placed.

In the prior case, a different plaintiff represented by different attorneys had filed a complaint asserting class claims against staffing company GCA Services Group of Texas, L.P., for unpaid minimum wages, overtime wages, meal and rest break violations, related Labor Code violations and unfair business practices under section 17200 of the Business and Professions Code.  The agreement settling that case was on behalf of all class members, generally listed ten wage and hour claims as “Released Claims,” and included “agents” of GCA among the “Released Parties”.  Castillo, the representative plaintiff in the pending Castillo v. Glenair case did not opt out of the settlement of the prior case, as had been permitted by the order approving the Settlement.

In Castillo, Glenair moved for summary judgment, based upon the settlement of the prior case.  The trial court granted the motion, and the Court of Appeal affirmed, concluding that the claims were barred by the doctrine of res judicata, based upon the settlement of the prior lawsuit, for two reasons.

First, the Court concluded that Glenair was “in privity” with GCA.  In other words, the subject matter of the pending case and the prior case was the same – “namely, both cases involve the same wage and hour causes of action arising from the same work performed by the same GCA employees (the Castillos) at GCA’s client company Glenair.”  And both companies were responsible for payment of their wages, with respect to which any errors were corrected by the settlement of the prior lawsuit.  “[W]ith respect to the Castillos’ wage and hour causes of action, the interests of Glenair and GCA are so intertwined as to put Glenair and GCA in the same relationship to the litigation here.”

Second, the Court concluded that, because Glenair was an agent of GCA “with respect to GCA’s payment of its employees” (including the Castillos), the release included in the settlement of the prior lawsuit explicitly reached agents of GCA.  “… GCA authorized Glenair [as its agent] to collect, review, and transmit GCA employee time records to GCA” for purposes of GCA making appropriate payments of compensation to its employees.[1]

[1]           It is unclear whether, under the arrangement between Aerotek and Bay Bread in Serrano v. Aerotek, Inc., Bay Bread would have been found to have been an agent of Aerotek, because Aerotek had an account manager on Bay Bread’s site, who reviewed time records of temporary Aerotek employees, and Bay Bread was not as involved in collecting information for payroll for Aerotek.

Struggles and Progress: Diverse Attorneys Add Valuable Personal Perspectives to their Counsel


While conversing over eggs and a croissant with a prospective client about our respective kids and spouses (his wife, my partner), in the back of my mind I note an anomaly.  Later that evening, I realize that the simple, natural, human interaction I had earlier that day still feels so foreign, unexpected, unreal.  I also note that, in the midst of talking with the prospect, I felt a mix of, on one hand, gratitude for his easy acceptance and, on the other hand, exasperation (at myself? society?) that my colleague’s acceptance should be something for which I feel gratitude.

When I first came out, many lesbians and gay men did not disclose personal details, because much of society rejected the ultimate detail, our sexual orientation.  Even if I disclosed that I was gay, I revealed little else about my life to most straight colleagues, to avoid an awkward or unpleasant reaction.

That reticence about being more open stifled my ability to engage fully with colleagues and clients or to develop business relationships.  I felt like the “other,” not belonging, and wondered whether revealing personal facts would incline a prospect not to build a relationship with me.  The energy I spent worrying about how much I dared disclose detracted from the focus I could have placed on thinking strategically about how I could meet the needs of the prospect or his business.

My reticence derived in part from a sense of self-preservation at a time when an employer could terminate an employee based on his sexual orientation.  While I was innately self-reserved, I doubt I would have exercised such caution had I not felt the need to hide so fundamental a part of myself.

With this history, identity and experience, how could a simple conversation during a breakfast about an everyday subject not feel both natural and foreign?  I understand why I would feel grateful for such a human interaction.  In light of the years it has taken to get (society and me) to the point where the interaction is natural, I understand my annoyance as well.

The ease of connection that many take for granted is an opening to friendship, business, or maybe just an occasional drink.  Many minority, including LGBT, employees have historically been excluded from such privilege.  Diversity and inclusion programs have sought to remedy this exclusion, with some success.

Celebration is appropriate for the progress reflected in the ease with which LGBT professionals can now, in many places and under many circumstances, engage fully without fear, due in large part to the non-discrimination laws and diversity and inclusion programs.  And exasperation directed at the missed opportunities resulting from a combination of societal rejection and prejudice, or at the notion that I feel gratitude for something that others take for granted, or at the efforts to roll back, protections amidst resurgent homophobia by leaders who want to rebuild barriers for LGBT workers and professionals, can, if appropriately channeled professionally and politically, be productive.

Particularly under the current administration, continued vigilance is essential to push back against policies that would permit religious beliefs to trump laws prohibiting discrimination against LGBT people or that would prevent the expansion of such laws.  Those policies threaten the interactions that we have begun to enjoy – the interactions in which we acknowledge and appreciate the humanity in each other, and which are the foundation of meaningful relationships – personal, professional or political.

My experiences as an LGBT professional have informed my perspective in advising companies on employee relations, setting boundaries and standards for employees with performance problems, encouraging employee productivity and defending against claims of harassment and discrimination based on sexual orientation or other characteristics.  For example, in a matter that appeared headed for litigation, I helped a client develop a performance plan that addressed the substandard performance by an employee, who was gay, and included opportunities for mentoring and development that had been missing.  I know from personal experience that the lack of such opportunities can have a significant impact on employee morale and success.  The plan not only made a positive outcome for the employee more likely, it also cast the employer in a justifiably better light for a defense if the employee later brought a claim.

When facing employee issues, employers, in my experience, have welcomed counsel that promotes the morale and productivity of their employees as much as minimizes their risk.  With an increasingly diverse workforce, retaining counsel with life experiences that reflect that diversity adds value to the legal advice provided.

Dissolved and De-Clawed: California Supreme Court Clarifies that a Dissolved Law Partnership Has No Right to Profits Generated from Hourly Billed Work by Other Firms


In the recent case of Heller Ehrman LLP v. David Wright Tremaine LLP (March 5, 2018) No. S236208, the California Supreme Court held that a dissolved law partnership has no right to claw back profits generated by hourly billed work performed by former partners of the dissolved firm (and their new firms), on matters that had started at the dissolved firm.  As explained below, in light of this case, law firms should review their partnership or shareholder agreements to determine the ongoing need or applicability of a “Jewel v. Boxer waiver” in the agreements.

The case arose from adversary proceedings filed in the bankruptcy proceeding of Heller Ehrman LLP against firms that departed partners had joined.  The U.S. Ninth Circuit Court of Appeals certified to the California Supreme Court the issue of “what property interest, if any, a dissolved law firm has in the legal matters, and therefore the profits, of cases that are in progress but not completed at the time of the dissolution.”

In a line of cases starting with Jewel v. Boxer (1984) 156 Cal.App.3d 171, the California appellate courts had developed case law that granted a firm some property rights in profits generated by work on some cases by partners who had departed the firm at which the case had originally been worked up.  In Jewel, the appellate court had held that, in accordance with the California partnership statute in effect at the time and absent an agreement providing for a different arrangement, fees generated from contingency matters pending when a law firm dissolved had “to be shared by the former partners according to their right to fees in the former partnership, regardless of which former partner provides legal services in the case after the dissolution.”  Later cases followed Jewel consistently, and one case, Rothman v. Dolin (1993) 20 Cal.App.4th 755, applied it to fees generated in hourly billed matters.

The California partnership statute was revised after these cases, and it changed some provisions, in part to remove the prohibitions against partners receiving compensation for services in winding up the affairs of a dissolved partnership.  In Heller, the California Supreme Court weighed the application of the revised statute against the scope of a dissolved partnership’s property rights to fees in hourly billed matters pending at the time of dissolution and the interests of clients in retaining some of the former attorneys of the dissolved firm.

The Court determined that a law partnership does not have a property right in fees generated from work on matters existing at the time it ceases to handle the matters.  “A property interest grounded in [an] expectation [of a law partnership to perform continuing hourly billed work on legal matters] requires a legitimate, objectively reasonable assurance rather than a mere unilaterally-held presumption.”  Because such an expectation by a dissolved firm “is unlikely to be shared by either reasonable clients or lawyers seeking to continue working on these legal matters at a client’s behest,” that expectation is “best understood as essentially unilateral.”

Ultimately, “hanging over all agreements involving legal representation – especially those involving work paid on an hourly basis – is the possibility that a client will change the nature of the work requested, the terms on which the work is to be performed, or the lawyer the client prefers.” [T]he client legitimately retains flexibility to change the terms of the bargain for legal services after a lawyer has been retained.”  While law partnership attorneys “feel some shared interest in each other’s work,” such an interest does not amount to a property right.  Hopes that Heller Ehrman would continue to work on unfinished hourly fee matters and be compensated for future work “were speculative, given the client’s right to terminate counsel at any time, with or without cause.”

To conclude otherwise, i.e., that a firm has a property interest in hourly matters, would impinge upon the statutorily and judicially recognized right of a client to discharge an attorney at will.  “The clients’ ability to retain their preferred counsel is a weighty interest, even if counterbalanced by an interest in partnership stability.”

In accordance with the provisions in the current California partnership statute that partners are entitled to compensation for work winding up the affairs of the dissolved partnership, the Court further held that a partner is entitled to compensation for (1) preserving legal matters for transfer to the client’s new counsel or the client itself, (2) effectuating such a transfer; and (3) collecting on work done pre-transfer.  Therefore, Heller Ehrman was entitled to recover fees for such work, including filing motions for continuances, noticing parties and courts that it was withdrawing as counsel, arranging for shipment of client files, and helping new attorneys get up to speed on pending matters.  Other substantive legal work was not compensable, because it went beyond winding up the partnership’s affairs.

The Court did not address whether its holding in Heller Ehrman would extend to contingency fee cases, such cases involve other issues, including but not limited to an assessment of the value of a former firm’s work as compared to the current firm’s efforts, in obtaining the amount recovered.

The partnership or shareholder agreements of law firms often contain a so-called “Jewel v. Boxer waiver,” a provision whereby the firm and its partners or shareholders waive their rights to any fees generated by work performed by a shareholder after he or she has left the firm or after the dissolution of the firm.  Firms should review the need, breadth and applicability of such provisions to address the impact of the Heller Ehrman decision.

Overdue Clarification: California Supreme Court Explains How Employers Must Calculate the Value of a Flat Bonus for Purposes of Overtime Compensation


In Alvarado v. Dart Container Corp., decided on March 5, 2018, the California Supreme Court settled the issue of how a company, in accordance with California Labor Code section 510, should calculate an employee’s overtime pay rate when the company has paid a flat sum bonus during a single pay period.  For reasons based on California policy protecting employees from overtime exploitation, the Court held that such a bonus should be assigned an hourly value by dividing the bonus amount by the number of non-overtime hours worked in the pay period, and that hourly value should then be multiplied by the number of overtime hours worked and by 1.5.  This amount would then be added to the non-bonus overtime pay.

In coming to its decision, the Court reviewed the fine points of what weight courts should give to an administrative agency’s “void underground regulation,” that is a policy interpreting a statute that functions as “a rule that must be followed prospectively, and that is not announced in the context of resolving a specific case,” and as to which the agency did not follow the Administrative Procedure Act rule-making process.  The Court’s guidance is that, while such a regulation is not entitled “any special weight or deference,” it is “something a court may consider, and assuming the court is persuaded that the agency’s interpretation is correct, the court may adopt it as its own.”

In her concurring opinion joined by three other Justices, Chief Justice Cantil-Sakauye was critical of California’s Division of Labor Standards Enforcement (DLSE), the agency tasked with adopting regulations to interpret wage and hour laws under the Labor Code.  She noted that the DLSE “could, and … should, have” dispelled some of uncertainty around the issue addressed by the Court, by promulgating an interpretive regulation sometime in the prior two decades.  Had the DLSE promulgated such regulations, employees and employers would have had “a more robust basis . . . to structure their affairs,” and employers could have avoided the prospect of substantial penalties for the miscalculation of overtime pay.

Turning to the overtime calculation issue, the Court held that the bonus should be “treated as if it were fully earned by only the nonovertime hours in the pay period, and therefore only nonovertime hours should be considered when calculating the bonus’s per-hour value.”  Accordingly, in calculating overtime pay, the hourly value of an attendance bonus paid to an employee during a pay period should be calculated by dividing the amount of the bonus by the number of nonovertime hours actually worked during the pay period.  That hourly value would then be multiplied by 1.5, and added to the amount of non-bonus overtime pay.

Two “overarching interpretive principles” supported this decision: first, the state’s “policy favoring an eight-hour workday and a six-day 40-hour workweek, and discouraging employers from imposing work in excess of those limits,” as reflected in the requirement that employers pay a premium for overtime work; and second, the liberal construction in favor of employee protection that is to be accorded California’s labor laws.  Because the attendance bonus at issue in Alvarado was a flat sum, it did not “reward the employee ‘for each hour of work,’” i.e., it did not increase for each hour worked.  It is not like piecework compensation, which does increase in rough proportion to the hours worked and therefore, arguably, should, like a base pay, be divided by the number of overtime and regular hours worked.

Employers now have the clarity to assure that they include the proper hourly rate of a flat bonus in calculating overtime pay for a pay period.

Changes in California Law to Keep Employers on Their Toes — How the New Laws Impact Hiring and Employment Practices in 2018


During its 2017 session, the California Legislature adopted new measures to broaden employee protections and strengthen enforcement authority.  Following are the new restrictions and requirements with which, as of January 1, 2018, employers will need to comply, from the application and interview process through the course of the employment relationship:

  1. Employers are prohibited from asking for or relying on an applicant’s salary history in deciding whether to offer employment.
  2. Employers are subject to new and expanded restrictions on asking for criminal conviction history until they have made a conditional offer of employment and then are subject to a complicated process if they wish to rescind the employment offer because of a conviction.
  3. Employers are subject to restrictions on the access they may grant to immigration enforcement agents to nonpublic areas of their places of employment, and are required to provide notice to employees of certain employment records inspections by federal immigration agents.
  4. Employers that are required to give sexual harassment training to their supervisors must include specific training regarding transgender employees.
  5. The Fair Pay Act is extended to public employers.
  6. Parental leave rights are expanded for bonding with a new-born or newly adopted or fostered child.
  7. State and local minimum wages are increasing.
  8. The Labor Commissioner is granted broader authority to seek injunctive relief to require an employer it is investigating for Labor Code violations to hire, promote or restore an employee’s employment, where that the Commissioner makes a showing to a court that there is reasonable cause to believe the employer retaliated against the employee.

II.  The Application and Interview Process – Don’t Even Ask

Salary History.  AB168 adds section 423.3 to the California Labor Code to prohibit an employer from relying “on the salary history information of an applicant for employment as a factor in determining whether to offer employment to an applicant or what salary to offer an applicant.”  Accordingly, an employer may not “orally or in writing, personally or through an agent, seek salary history information, including compensation and benefits, about an applicant”.

The new provision does not apply to salary history information (1) that may be obtained through a public records act disclosure under state or federal law or (2) that an applicant, “voluntarily and without prompting discloses . . . a prospective employer”.  The latter information may be considered by the employer in setting the new employee’s salary.

Finally, new section 423.3 requires an employer to provide to an applicant, upon reasonable request, with “the pay scale for a position” that the applicant is seeking.

Criminal Background. AB1008 adds section 12952 to the Government Code to prohibit an employer of five or more employees from inquiring into the criminal conviction history of any applicant before it has made a conditional offer of employment to the applicant.  It also forbids an employer, while conducting a conviction history background check in connection with any application for employment, from considering, distributing, or disseminating information about:

  1. an “[a]rrest not followed by conviction, except in limited circumstances under a Labor Code provision that permits an employer to ask about “an arrest for which the employee or applicant is out on bail or on his or her own recognizance pending trial” or in the case of an employer at a health care facility, who is permitted to ask about certain arrests where access to patients or to medications is involved;
  2. referral to or participation in a pre- or post-trial diversion program; or
  3. a conviction that has been sealed, dismissed, expunged, or otherwise eradicated pursuant to statute.

An employer that intends to deny an applicant a job for the sole or partial reason of his or her conviction history must make an “individualized assessment” of whether the applicant’s conviction history has a “direct and adverse relationship with the specific duties of the job” to justify rejecting the applicant for the position.  That assessment must include: “(i) the nature and gravity of the offense or conduct, (ii) the time that has passed since the offense or conduct and completion of the sentence, and (iii) the nature of the job held or sought.”

Where an employer makes such an assessment, it must, before rejecting the applicant, notify the applicant of its preliminary decision to do so and include in the notification “(A) notice of the disqualifying conviction or convictions that are the basis for the preliminary decision to rescind the offer; (B) a copy of the conviction history report, if any, and (C) An explanation of the applicant’s right to respond to the notice of the employer’s preliminary decision before that decision becomes final and the deadline by which to respond.”  The explanation must inform the applicant that the response may include evidence challenging the accuracy of the conviction history on which the employer based its rescission of the offer, and/or evidence of rehabilitation or mitigating circumstances.

The employer then must give the applicant at least five business days to respond to the notification and, if the applicant timely “notifies the employer in writing that the applicant disputes the accuracy of the conviction history” on which the employer based its rescission of the offer and that the applicant is taking specific steps to obtain evidence supporting that assertion, then employer must give the applicant five additional business days to respond to the notice.

If the employer, after receiving the information from the applicant, makes a final decision to reject the applicant solely or in part because of the applicant’s conviction history, it must notify the applicant in writing of “(A) the final denial or disqualification, . . . (B) any existing procedure the employer has for the applicant to challenge the decision or request reconsideration, and (C) the right to file a complaint with” the Department of Fair Employment and Housing.

The new law does not apply to some governmental agencies and private employers that are required by law to conduct criminal background checks.

II.  Sanctuary State Protections for Employees

AB450 adds section 7285.1 and 7285.2 to the Government Code, to prohibit an employer from granting “voluntary consent to an immigration enforcement agent to enter any nonpublic areas of a place of labor,” except where “the immigration enforcement agent provides a judicial warrant.”  And an employer may not “provide voluntary consent to an immigration enforcement agent to access, review, or obtain the employer’s employee records without a subpoena or judicial warrant.”  This prohibition does not apply to “I-9 Employment Eligibility Verification forms and other documents for which a Notice of Inspection” has been provided.  Failure to comply with these provisions subjects an employer to “a civil penalty of $2,000 to $5,000 for a first violation and $5,000 to $10,000 for each subsequent violation.”

AB450 also adds section 90.2 to the California Labor Code to require an employer to “provide a notice to each current employee, by posting in the language the employer normally uses to communicate employment-related information to the employee, of any inspections of I-9 Employment Eligibility Verification forms or other employment records conducted by an immigration agency within 72 hours of receiving notice of the inspection.”  And the new law requires the employer to provide each affected employee and his/her collective bargaining representative, “a copy of the written immigration agency notice that provides the results of the inspection of I-9 Employment Eligibility Verification forms or other employment records within 72 hours of its receipt of the notice.”  Failure to comply subjects the employer to the same penalties as noncompliance with sections 7285.1 and .2 of the Government Code.

Finally, AB450 prohibits an employer, except as required by federal law, from reverifying “the employment eligibility of a current employee at a time or in a manner not required by” the federal law governing documentation for employment of aliens.  Failure to comply subjects an employer to a civil penalty of up to $10,000.

III.  Expansion of Employee Protections

Transgender-specific Sexual Harassment Training.  SB396 requires employers to post in the workplace, in addition to a poster describing non-discrimination and sexual harassment protections, a poster regarding transgender rights.  In addition, employers with at least 50 employees must include in the sexual harassment training they are required to provide to supervisors every two years, training regarding harassment based upon gender identity, gender expression and sexual orientation.[1]

Fair Pay Act for Public Employees.  AB46 makes the California Fair Pay Act applicable to public employers, except for the provision making willful violation a misdemeanor.

Expanded Veterans Employment Protections.  AB1710 expands protections for members of the armed forces, making clear that employers may not discrimination against them with regard to the “terms, conditions or privileges” of employment.

Expanded Parental Leave.  SB63 expands the leave an employee who is a parent may take to bond with a new-born child.  The leave must be provided, upon an employee’s request, by an employer of at least 20 employees within 75 miles of a worksite.  To be eligible for the leave, an employee must have more than 12 months of service with the employer, with at least 1,250 hours of service with the employer during the previous 12-month period.  Such an employee is eligible to take up to 12 weeks of parental leave to bond with a new child within one year of the child’s birth, adoption, or foster care placement.  The employer must maintain in force the employee’s health insurance during the leave.

Wage and Hour.  On January 1, 2018, the state minimum wage increases to $11.00 per hour for employers with more than 25 employees, and to $10.50 per hour for employers with 25 or fewer employees.  City and county minimum wage ordinances should be consulted for even higher increases.

Expanded Labor Commissioner Authority.  AB306 broadens the authority of the California Labor Commissioner to investigate suspected discrimination by an employer against an employee in violation of laws under the jurisdiction of the Commissioner, even without a complaint having been filed by the employee, where suspected retaliation has occurred during the course of adjudicating a wage claim that is the subject of a field inspection by its field enforcement unit.  During the investigation, the Commissioner may seek injunctive relief in court requiring the employer to hire, promote or restore an employee, upon a showing of “reasonable cause” to believe that an employer has violated anti-retaliation laws.  This is a much lower standard of proof than the “likelihood of success on the merits” standard usually required to obtain injunctive relief.

An employer who willfully refuses to comply with “an order of such a court to hire, promote, or otherwise restore an employee or former employee who has been determined to be eligible for such relief, or who refuses to comply with an order to post a notice to employees or otherwise cease and desist from the violation shall, in addition to any other penalties available, be subject to a penalty” of $100 per day for each day the employer continues to be in noncompliance with the court order, up to a maximum of $20,000.

AB306 also authorizes the Labor Commissioner to issue and serve a citation on an employer to remedy violations of wage and hour laws, including payment of lost wages and penalties and reinstatement of an employee whom the Commission determines was unlawfully terminated.  The employer may seek review of the citation in court, but only upon posting of a bond for the amount of minimum wages, liquidated damages, and overtime compensation that the Commissioner determined are due.

[1]   AB1556 revises the California Fair Employment and Housing Act to replace gender-specific pronouns in its anti-discrimination, anti-harassment, family and medical leave and pregnancy disability provisions with terms such as “the director,” “the person” and “the employee.”  These changes are along the lines of the regulations issued earlier in 2017 that require employers to respect an employee’s request to self-identify by a particular gender, name, or pronoun (including gender-neutral).


Watch Your Step to Avoid Tripping up Your HR Strategies


In two recent cases, courts in California have ruled in support of protections for employers against claims by employees where the employers have followed the appropriate process for employee discipline, investigation of workplace misconduct and reductions in force.  But in a third case, the court prevented an employer from what it viewed as gaming the judicial process to seek an advantage against class claims for wage and hour violations, including contractor/employee misclassification and consequent denial of minimum wages, meal periods, and reimbursement of expenses.

Two of the cases show that employers can minimize or eliminate liability exposure if they comply with the not always clear process required by law when seeking to make appropriate human resources decisions.  Because these processes are often riddled with pitfalls, engaging experienced employment counsel to help navigate the process can save an employer the expense, time commitment and liability exposure that defending a later lawsuit will involve.  The third case is a cautionary tale for employers not to use strategies that may not pass the smell test.

I.   Okorie: Follow Appropriate Internal Investigation Procedures and
Limit Communications about Them to What Is Necessary

The California appellate case, Okorie v. Los Angeles Unified School District, 14 Cal.App.5th 574 (2017), shows that, where an employer follows the appropriate process to investigate employee misconduct and engages in appropriate communications in connection with that investigation, it can defeat claims by the employee related to that investigation conduct.  In Okorie, the Court of Appeal in Los Angeles affirmed a trial court order granting the defendant employer’s special motion to strike a former employee’s complaint as a Strategic Lawsuit Against Public Participation (“SLAPP”).

California’s anti-SLAPP statute allows a defendant to seek early dismissal of claims that “aris[e] from any act of [the defendant] in furtherance of the [defendant’s] right of petition or free speech” under either the U.S. or California Constitution, in connection with a public issue.  Under the statute, an “act in furtherance of a person’s right of petition or free speech” includes written or oral statements made before, or in connection with an issue under consideration or review by, “any . . . official proceeding authorized by law.”  An “official proceeding authorized by law” includes internal investigations into alleged employee misconduct.

The plaintiff in Okorie sued the school district and two of his supervisors for discrimination, harassment and retaliation, based upon the following communications:  comments they made to him about disciplinary practices in Africa (where he was from), comments to his co-workers about complaints expressed by parents about him, write-ups, a directive that he be reassigned to his home pending an investigation of an allegation against him, and notification of parents that he had been escorted off campus for misconduct and reassigned to an office where teachers under investigation were often placed, where he remained until the school district charged him with misconduct.

The appellate court held that the comments of which the employee complained were protected by the anti-SLAPP statute because they were part of an internal investigation, which “constitute[s] an ‘official proceeding authorized by law,’” one of the categories of activities protected by the anti-SLAPP statute; that the comments were integral (not incidental) to plaintiff’s claims; and that plaintiff failed to show the probable success of his claims, because he had presented no evidence, other than a self-serving declaration, to show any discriminatory animus on the part of the defendants.

II.   Merrick: Follow Your RIF Procedures and Common Sense

A recent Ninth Circuit case, Merrick v. Hilton Worldwide, Inc., 867 F.3d 1139 (9th Cir. 2017), shows the importance, when planning and executing a reduction in force (RIF), of (1) following the guidelines established by the company for RIFs, (2) meticulously documenting the steps taken in executing the RIF, and (3) making reasoned decisions for particular layoffs that can be justified by common-sense business rationales.  In Merrick, the Ninth Circuit U.S. Court of Appeals affirmed the dismissal of a lawsuit brought by an employee who claimed that his termination as part of a RIF constituted age discrimination.  The employee alleged that his termination was motivated by age discrimination.

The Court held that Merrick had shown a prima facie case of age discrimination, even though he had not shown that he was replaced by a younger employee.  Courts have consistently recognized that employers often do not replace employees terminated in a RIF; therefore, instead of showing they were replaced, employees may show, through statistical, direct or circumstantial evidence, circumstances from which an inference of age discrimination arises.  The inference may be established by demonstrating that the employer continued to need an employee’s skills or services.  Hilton did not contend that it no longer needed Merrick’s skills, and acknowledged that his duties were outsourced or assumed by other employees.

Nevertheless, the Court ruled in Hilton’s favor, because it had non-discriminatory reasons for choosing him for the RIF, including that his high salary permitted it to comply with the RIF criteria by laying off only one employee, his duties in property operations were not considered a high guest contact or revenue generating function, and other departments that were considered high guest contact and had greater revenue generating capabilities were already understaffed because of prior terminations and unfilled positions.

Merrick could not then show that Hilton’s grounds for terminating him were pretextual.  He failed to show that Hilton neglected to follow policy by not transferring him, because there was no policy requiring that Hilton transfer him; the managers who decided on his termination in the RIF used reasonable judgment in determining that another employee could assume some of Merrick’s functions and in assessing his performance; and any showing by Merrick that Hilton failed to follow its RIF policy was insufficient to raise a triable issue of fact, because it did not support a rational inference that intentional discrimination on the basis of age motivated Hilton’s decision.

In the context of this RIF, a context that included Hilton’s lost profits during the recession, prior layoffs over the years, which Merrick had survived while also a member of a protected class (because of his age), and the business reasons for selecting his position for elimination, the evidence he offered did not support a rational inference of age discrimination.

III.   Sprunk: Do Not Overplay Your Hand

By contrast to Okorie and Merrick, the ruling in Sprunk v. Prisma LLC, 14 Cal.App.5th 785 (2017), shows that an employer that games the applicable process to resolve employment claims and asserts unconvincing justifications for its litigation strategies can lose the right to assert applicable defenses.  In Sprunk, the California Court of Appeal affirmed the trial court’s order denying the defendant employer’s motion to compel arbitration in a class-action wage and hour lawsuit, where the employer had filed and then withdrawn a prior motion against the named plaintiff and then renewed its motion against class members only after a class had been certified.

The employer argued that, although unreasonable delay in moving to compel arbitration can result in waiver, it had not delayed because it could not have moved for arbitration against unnamed class members until the trial court had certified a class.  The Court held that the trial court could properly consider whether the employer had unreasonably delayed moving to compel arbitration against the putative class representative in determining whether the employer had waived the right to compel arbitration against the class members.  Even though unnamed class members would not have been bound by the trial court’s ruling before class certification, the employer could have settled the question whether the claims were subject to arbitration with regard to the form of agreement plaintiff had signed.

While the employer also argued it needed to wait to file its motion because the law regarding class arbitration was too uncertain and risky until settled by the California Supreme Court, the employer delayed for a year after the California Supreme Court had settled any uncertainty over whether an employer might be compelled to engage in class arbitration.  Although the Court in Iskanian v. CLS Transportation, 59 Cal.4th 348, had decided on June 23, 2014, that class arbitration waivers were not categorically unenforceable, the employer did not file its motions to compel for more than 15 months thereafter.

Moreover, even before Iskanian, the state of the law held little risk to the employer that class arbitration would be imposed, or that class action waivers would be held unenforceable.  “[W]ell prior to our Supreme Court’s decision in Iskanian, the state of the law on class arbitration in California was that (1) the continued viability of [California case law restricting consumer class action waivers in arbitration agreements] was in serious question following [AT&T Mobility LLC v.] Concepcion, [563 U.S. ___], (2) even under [California case law], a class plaintiff resisting individual arbitration had to make a specific factual showing that only a class action could adequately protect unwaivable statutory rights (a showing that Sprunk did not make), (3) the Fifth Circuit had reversed Horton I, [an NLRB ruling prohibiting class action waivers as a violation of the NLRA], and (4) several California Courts of Appeal had rejected Horton I. While the outcome was not free from doubt, given this authority one could not reasonably describe [employer’s] prospects of compelling individual arbitration prior to Iskanian as ‘futile.’”

In light of the state of the law pre-Iskanian, “a prudent litigant who was intent on avoiding an implication of waiver would not have taken [the] risk” by delaying filing a motion to compel arbitration.  The Court concluded that the delay was part of a strategy to gain an advantage in the litigation, and noted:  “An attempt to gain a strategic advantage through litigation in court before seeking to compel arbitration is a paradigm of conduct that is inconsistent with the right to arbitration.”

Waiting to compel arbitration “until after a ruling on class certification was a strategic decision to attempt to win the case by defeating the class before seeking to arbitrate.  Such strategic use of the judicial forum is inconsistent with an arbitration right and supports a waiver finding.”

During the four-year delay in seeking to compel arbitration, plaintiff had conducted class-related discovery and filed an “extensive” class certification motion, which would have been unnecessary had the employer earlier sought arbitration and the court had granted it.  Therefore, the trial court properly found that the delay had caused plaintiff prejudice.

Employers need to think through their defense strategies carefully.  In addition to considering what may be considered an effective strategy under the applicable law, employment counsel need to assess the impact of the strategy on the Court, both in terms of burden and optics.

Mid-Year Employment Law Update for California Employers


Summary of Developments

California employers should heed and assure their policies and practices comply with new or revised regulations and administrative guidance that recently took effect or take effect on July 1, 2017, and recent cases.  Here’s a summary (with a more detailed explanation following):

  1. New Protections for Transgender Employees: Employers should make sure that they respect the gender identity and expression of transgender employees, that they are not limiting access to employment positions based on transgender status, and that they permit use of restroom facilities accordingly and protect transitioning employees from discrimination based upon their transitioning process.
  2. New Restrictions on Use of Criminal Background in Employment Decisions: Employers are prohibited from using any forms of criminal history that have an adverse impact on a protected class, absent a showing that the information is job-related and consistent with business necessity.  The regulations also impose other limitations and procedural requirements that are described in detail below.  Bottom line: Employers must make sure that any criminal background information used for decisions on an employee or applicant for a position bears a strong relationship to the duties of the position.
  3. Guidelines Clarifying Leave Restrictions under PTO Policies in Effect When Paid Sick Leave Law Passed: Guidelines issued in March 2017 by the California Labor Commissioner clarify that paid time-off policies in effect when the paid sick leave law was enacted need not grant additional paid sick leave days if the PTO policy otherwise complies with the law.  And an employer may discipline an employee for unscheduled absences that are not for a purpose for which paid sick leave is available and used.
  4. New DFEH Guide on Workplace Harassment: On May 2, 2017, the California Department of Fair Employment and Housing issued a guide for California employers to assist them in complying with the obligations California law imposes on them to prevent and correct workplace harassment and to notify employees of their rights with regard to such harassment.
  5. U.S. DOL Withdrawal of Informal Guidance on Joint Employer Duties and Independent Contractor Status: The U.S. Secretary of Labor has withdrawn informal, non-binding, guidance issued by the Department of Labor in the Obama Administration, which had suggested expanded criteria for establishing (a) a joint-employer relationship and (b) employee, rather than, independent contractor, classification.  Because the guidance was non-binding, its withdrawal is not likely to impact employers.  Even if, after more judges and National Labor Relations Board members are appointed by the current President, the tightened standards that are likely to be adopted will not impact employers who are subject to California’s broader standards for establishing a joint-employer relationship as well as employee rather than independent contractor status.
  6. California Supreme Court Clarifies Applicability of Law Requiring Seventh Day of Rest:  The Labor Code provisions requiring employers to grant a day of rest after six days of work apply by work week, not on a rolling seven-day basis.  The exemption from the day of rest requirement applies only for employees who have not worked more than six hours on any day in a work week and not more than 30 hours over the initial six days of the work week.  While an employer may not require or induce an employee to work a seventh day in a work week, the employer may permit the employee to choose to do so, provided the employee is apprised of his or her rights to rest.

New Regulations Strengthen Protections for Transgender Employees

The California Fair Employment and Housing Council has issued revised regulations strengthening protections of transgender employees in California.  The definitions of “gender expression” and “gender identity” are expanded to include the “perception of” a person’s gender-related appearance or behavior, and a person’s “internal understanding of their gender,” which “may include . . . combination of male and female” or “neither male nor female”.  The regulations also contain a new definition, of “transitioning”.

Employers may not use an employee’s “transgender or gender non-conforming” status as a bona fide occupational qualification defense, and they must “permit employees to perform jobs or duties that correspond to the employee’s gender identity or gender expression ….”

The revised regulations bolster requirements that employers (1) permit employees to use facilities corresponding to an employee’s gender identity or gender expression, (2) use gender-neutral signage for single-occupancy facilities and (3) provide feasible alternatives to protect the privacy of all employees, such as locked toilet stalls and staggered shower schedules.  Employers may not require an employee to undergo a medical treatment or procedure or provide identification, to use facilities designated for a particular gender.  But an employer may make a “reasonable and confidential inquiry of an employee for the sole purposes of ensuring access to comparable, safe and adequate multi-user facilities.”

Employers are prohibited from making inquiries that “directly or indirectly identify an individual on the basis of sex, including gender, gender identity or gender expression,” unless the employer establishes a permissible defense, such as that gender is a BFOQ, business necessity or job-related.  An employer must use the preferred gender, name or pronoun requested by an employee.  An employer may not require an employee to submit documentation or proof of an employee’s gender, gender identity or gender expression, absent a permissible defense.

If an employee initiates communication about the employee’s sex, gender identity or gender expression, with regard to the employee’s working conditions, the employer and employee may discuss that topic.  Employers are prohibited from discriminating against an employee who is transitioning or perceived to be doing so.

New Regulations Restricting Criminal History Checks

The California Fair Employment and Housing Council has also issued new regulations, effective July 1, 2017, further restricting employers’ ability to impose criminal background checks in making hiring decisions.  The Council adopts as binding regulations non-binding guidelines that had been published by the Equal Employment Opportunity Commission.

Under the regulations, employers are prohibited from using “forms of criminal history in employment decisions” that “would have an adverse impact on” a protected class, unless the employer can prove that such use “is job-related and consistent with business necessity,” and even then, the use is prohibited if the affected employee or applicant demonstrates “a less discriminatory alternative means of achieving the specific business necessity as effectively.”  In showing that use of criminal history is job related and consistent with business necessity, the employer must show that it is “bear[s] a demonstrable relationship to successful performance on the job and in the work place and measure[s] the person‘s fitness for the specific position(s) .  .  . .”  The employer may not justify the policy merely by showing it is needed “to evaluate the person in the abstract.”  The employer must also show that the policy “is appropriately tailored, taking into account, among other factors, the following: (1) the nature and gravity of the offense or conduct, (2) the time that has passed since the offense or conduct and/ or the completion of the sentence served, and (3) the nature of the job held or sought.

If an employer uses a “bright line” policy disqualifying an employee or applicant based upon certain convictions, the employer must demonstrate (1) that the policy “can properly distinguish between applicants or employees that do and do not pose an unacceptable level of risk and (2) that the conviction being used to disqualify, or otherwise adversely impact the status of, the employee or applicant, has a direct and specific negative bearing on the person’s ability to perform the duties or responsibilities necessarily related to the employment position.”  A bright-line policy that is based upon “conviction-related information that is seven or more years old” is subject to a rebuttable presumption that “it is not sufficiently tailored to meet the job-related and consistent with business necessity affirmative defense”, unless the position is subject to federal or state law or regulation that requires criminal history screening.

If an employer is not using a “bright-line” policy, then it must conduct “an individualized assessment of the circumstances and qualification of the applicants or employees excluded by a conviction screen.”  That assessment must involve (1) notice to any adversely impacted employee or applicant, before adverse action is taken, that he or she has been screened out because of a criminal conviction, (2) a reasonable opportunity to demonstrate that the exclusion should not be applied because of his or her circumstances, and (3) the employer’s consideration regarding whether the additional information the person provides or otherwise obtained by the employer warrants an exception to the exclusion because the policy as applied to the employee or applicant is not job-related and consistent with business necessity.

Whether an employer uses a bright-line policy or individualized assessment, the employer, before taking adverse employment action based upon criminal history, must give the affected applicant or employee an opportunity “to present evidence that the information is factually inaccurate.”

The regulations prohibit the use of certain types of criminal history as a basis of making employment decisions, regardless of adverse impact, including (1) an arrest that did not result in a conviction, (2) referral to a diversion program, (3) expunged or sealed convictions, (4) juvenile arrests or dispositions, (5) non-felony convictions for marijuana possession more than two years in the past.  Employers also need to abide by more restrictive local ordinances that limit use of criminal records.

New Guidelines on California Paid Sick Leave

On March 29, 2017, the California Labor Commissioner issued new guidance on California’s paid sick leave law.  The guidance focuses on how the law impacts paid time off (“PTO”) policies of employers that predate the law and how it impacts employer disciplinary policies related to unexplained absences.

Initially, the guidance clarifies that, where a PTO policy that was in effect when the paid sick leave law went into effect provides at least as many paid sick days as under the paid sick leave law and is no less restrictive in terms of use of the leave than under the law, the employer need not provide additional paid sick days.  And while the paid sick leave law requires that such leave be paid at the regular rate of pay of the employee taking the leave, the law does not impact the rate of pay that an employer pays its employees for days taken under an existing PTO policy for reasons other than those covered by the paid sick leave law.

The guidance also explains that, while the law prohibits an employer from taking disciplinary action against an employee for being absent from work for purposes covered by the paid sick leave law and for which accrued paid sick leave is available and used by the employee, the law does not restrict the discipline that an employer may impose on an employee for an unscheduled absence unrelated to the purposes stated in the law or where the employee does not have or does not use accrued paid sick leave.

New DFEH Workplace Harassment Guide for California Employers

On May 2, 2017, the California Department of Fair Employment and Housing released a guide for California employers on fulfilling their obligation to take reasonable steps to prevent and correct workplace harassment.  The guide is available in brochure form and as a poster.  An employer may use either publication to fulfill its obligation to provide employees an information sheet regarding sexual harassment in accordance with the Fair Employment and Housing Act.  The DFEH-issued information describes how sexual harassment is illegal, the different kinds of sexual harassment (quid pro quo and hostile work environment. It also explains the potential liability of employers for sexual harassment and their duty to take action to prevent and promptly correct any harassing conduct.  Employers should carefully review their duties as described in the brochure and consult with employment counsel with any questions regarding their duties under the FEHA.

U.S. DOL Withdraws Guidance Issued by the Obama DOL on Joint Employer Duties and Independent Contractor Status

On June 8, 2017, the DOL issued a brief press release that the Secretary of Labor has withdrawn informal guidance memoranda that the Secretary under the Obama Administration had issued in 2015 and 2016 on circumstances that establish joint employer liability and on independent contractor or employee classification.  The guidance had used expanded criteria to determine whether a company that used employees of another company for particular functions could be found to be a joint employer of the employees and also whether a worker was an employee rather than an independent contractor.  Because informal guidance is not enforceable, the withdrawal of the guidance does not change the state of the law on these issues, which continue to be governed by rulings of the National Labor Relations Board and court decisions.  If and when President Trump nominates appointees to fill vacancies on those bodies, it is likely that these standards will be tightened.  In addition, the withdrawal of the guidance has little impact on employers in California, which has its own broad laws and regulations governing these relationships.

California Supreme Court Clarifies Exemption from Rule Requiring the Seventh Day Off after an Employee Works Six Days

In a decision filed May 8, 2017, in Mendoza v. Nordstrom, Inc., the California Supreme Court clarified when the rule prohibiting a seventh workday and when the exemption from that prohibition apply.

Sections 551 and 552 of the Labor Code prohibit California employers from requiring an employee to work a seventh day in a week in which the employee has worked the previous six days.  The California Supreme Court clarified that the seven-day week is not a rolling week, but an established work week for an employee.  If an employee’s work week is from Monday to Sunday, and the employee has worked every day from Monday through Saturday, the employer may not require the employee to work on Sunday.  If that same employee is off on Monday and works every day Tuesday through Sunday, the employer need not give the employee the following Monday off, because Monday starts a new work week.

Section 556 of the Labor Code exempts an employer from the requirement to give an employee who has worked six consecutive days the seventh day off, where the employee did not work more than 30 hours in the work week and no more than six hours in any day.  The California Supreme Court clarified (1) that this exemption applies only if the employee has not worked more than six hours in any day of the work week, and (2) that the employee worked no more than 30 hours in that week.  Therefore, if an employee works more than six hours on even one day of the work week, he or she must be given the seventh day off after working six consecutive days.  And, even if the employee works no more than six hours each day of the work week but works more than 30 hours that week, the employee must be given the seventh day off after working six consecutive days.

The Supreme Court also clarified that section 552 of the Labor Code, which provides that an employer may not “cause his employee to work more than six days in seven,” means that an employer may not “induce” an employee to forgo the day of rest.  But, provided the employee is “apprised of the entitlement to rest, the employer may permit the employee to choose to work the seventh day.