California Labor & Employment Law Blog

By Dan Forman

Continuing the recent trend in questioniong the propriety of classifying workers as independent contractors instead of employees, the Ninth Circuit reversed an employer's victory on this issue in Narayan v. EGL, Inc.  EGL, headquartered and incorporated in Texas, contracts with hundreds of persons and is the employer of hundreds of employees worldwide.  EGL enters into contracts with persons intended to be independent contractors (ICs).  The ICs lease vehicles and acknowledge that they will act as independent contractors to provide delivery services for EGL.  Each IC acknowledged that he or she was not an employee, and that he or she would “exercise independent discretion and judgment to determine the method, manner and means of performance of its contractual obligations.”  And, by contract, the ICs agreed that the contracts were to be enforced under Texas law. Nonetheless, a number of such California-based persons sued EGL claiming that they were employees and entitled to overtime pay, reimbursement of expenses, off-duty meal periods and other employment related claims.

The District Court for the Northern District of California found that the plaintiffs' claims did not have merit and granted summary judgment in favor of EGL.  The District Court not only held that Texas law applied and that under Texas law, the plaintiffs could not be considered to be employees, but also held that the same result would follow under California law.   Unfortunately for EGL, the District Court did not make any factual analysis to support the alternative finding and conclusion.

The Ninth Circuit reversed the District Court’s decision and held that the plaintiffs’ claims arose under California’s regulatory scheme and were governed by California law. Thus, the issue was whether under California’s labor laws (not Texas law), the plaintiffs were employees or independent contractors.  And, despite the trial court’s express finding that the plaintiffs would be considered to be independent contractors in California, the Ninth Circuit disagreed and found a triable issue of fact on this question.

In analyzing the independent contractor classification question, the Ninth Circuit created a shifting burden test not unlike discrimination cases finding that once a plaintiff established a prima facie case that he or she was an employee that the burden shifts to the employer to prove that the person was an independent contractor.  In this case, the Ninth Circuit concluded that the contract acknowledging independent contractor status was but one element in the employee/IC equation and that there were sufficient indicia of employment in this case to defeat summary judgment.  The Ninth Circuit further opined that summary judgment would rarely be appropriate in cases where employers claim that the plaintiffs were independent contactors, based on the numerous factors that must be considered in making the determination.

What should Companies do in light of Narayan and other recent court decisions and enforcement efforts focused on improper independent contractor classification?  Companies that have entered into Independent Contractor contracts (or verbal agreements) with persons located in California should consider having their counsel re-examine those relationships to assess whether the IC designation will hold up in California.  If it will not, consider engaging counsel to either change practices or convert existing ICs to employment before claims are filed against your Company.
 

By John Anthony

In class action wage-and-hour litigation oftentimes many million of dollars are at issue.  The legal and factual issues are often complex and the risk is high on both the plaintiffs' and defendants' sides.  Consequently, many of these class actions are disposed of by the parties by way of settlement rather than at a trial on the merits.

Unlike cases involving a single plaintiff and a single defendant, class action litigation requires court approval before a case is settled.  The reason for this is simple: the class action mechanism is in place to protect the interests of large classes of people who are not actually individually involved in the settlement negotiation process as they might be if the cases were brought on individual bases.  For this reason, courts want to make sure that any settlement that might bind class members be "fair, adequate, and reasonable" and that the defendants or the class counsel are not making a settlement that is more in their interests than that of the class.

Before a court approves a class action settlement, the court requires the parties fully investigate the case and negotiate in good faith at arms' length to derive a settlement without colluding against the interests of the class members.  Additionally, the court allows any class member to lodge an objection to the approval of the class settlement which will be heard by the trial court.  If the trial court overrules a class member's objection to a class settlement, the class member may appeal that decision in hopes of invalidating the proposed settlement.

One such appeal was recently heard by the California Court of Appeals in a case called the Nordstrom Commission Cases.  In the Nordstrom Commission Cases, the Appellate Court upheld a trial court's decision to overrule a class member's class settlement objection and approve a class action settlement.  In this case, two employees of the retailer, Nordstrom's, filed two separate class action lawsuits, alleging that Nordstrom's policy of paying net sales commissions to its commissioned sales employees violated the Labor Code.

The class member's objection centered on three main arguments:  (1) the trial court failed to fully consider the strength of the class' case and the settlement undervalued the waiting time penalties to which the class was allegedly entitled to; (2) the settlement was not fair, adequate, and reasonable because it allocated no portion of the damages to the class' claims under the Labor Code Private Attorneys General Act of 2004 (PAGA); and (3) the portion of the settlement providing for in-store merchandise vouchers in lieu of case was contrary to California law.

The appeals court disagreed with each of the objecting class member's arguments.  The appellate court found that the trial court's analysis of the settlement's terms correctly considered the merits of the class' claims and Nordstrom's defenses; rightfully did not allocate damages to the PAGA claim; and found that merchandise vouches are permissible to fund a class action settlement, therefore did not abuse its discretion in overruling the objection and approving the settlement.

This decision is good for employers and wage-and-hour class action defendants for several reasons.  First, the Appellate Court's decision discusses and stands to support the already-established public policy favoring settlement of these types of class cases.  Settlement is oftentimes an advantageous avenue for the defendant.  Second, the Court's decision supports the parties autonomy to use creative vehicles such as vouchers as a way to structure settlements. Lastly, the Court upheld parties' rights to allocate zero dollars to PAGA penalties in their settlement agreements, resulting in savings for defendants.

You can find the Nordstrom Commission Cases opinion here.
 

CDF's next Human Resources Roundtable is Tuesday, July 20, 2010 from 7:30 a.m. to 9:00 a.m.  Please join us in a discussion of "Litigation War Stories: How You & Your Company Can Avoid Costly Mistakes in Litigation."

All too often employers and their counsel are confronted with a lawsuit that had taken a surprising turn for the worse and are left to ponder what they "could have, should have, and would have" done differently.  For example, failure to fully and properly investigate the facts (including plaintiff's side of the story) may result in erroneous case assessments, under-valuing a case, and missed defense opportunities.  Not knowing when to use an outside investigator may result in the untenable position of having your attorney become a fact witness in the case, and potentially jeopardize attorney-client communications that would otherwise be protected by privilege.  Firing a key witness during  pending litigation should be carefully considered because that key witness may no longer be cooperative and foil an otherwise carefully-laid defense plan.

Please join our experienced litigators for an informative discussion on how you can avoid these and other costly litigation mistakes.
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PLEASE NOTE: The Los Angeles office will not be conducting a roundtable this month.

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By Brent M. Giddens

In Reeves v. MV Transportation, the California Court of Appeals considered whether an employer's hiring of a 40 year old attorney constituted age discrimination against an unsuccessful 56 year old applicant.  The court considered whether hiring someone with arguably inferior qualifications, combined with the Company's failure to retain and produce the candidate applications, was sufficient to defeat the employer's motion for summary judgment. 

Mr. Reeves, a 56 year old lawyer, applied along with approximately 60 other applicants for a position as a staff attorney with the defendant Company.  The Company chose to hire a 40 year old applicant who possessed what the Company found to be superior qualifications (and which Mr. Reeves believed to be inferior qualifications).  Mr. Reeves was not interviewed.  Unfortunately for the Company, the employment applications of the candidates could not be located, which Mr. Reeves argued presented a triable issue of fact regarding his rejection.  The court found that the Company had presented a legitimate business reason for his rejection (the other applicant was more qualified), so the burden shifted to Mr. Reeves to establish that the Company's reasons were a pretext for age discrimination.   Mr. Reeves argued, in part, that (1) he had superior qualifications, and (2) the Company's inability to produce the applications received constituted sufficient pretext to defeat summary judgment.

Courts generally defer to the legitimate business decisions of employers in determining which applicant is best qualified for the job.  Here, as in most instances, some candidates are stronger in some areas than others.  In this case, Mr. Reeves was found to have superior qualifications in some areas, but the court also found the successful applicant possessed other advantages.  In concluding Mr. Reeves had failed to establish that the Company's reasons were pretextual, it found that his "qualifications cannot be reasonably viewed as 'vastly superior'….[and] were not 'so superior to those of the person selected…as the make the selection of that person unreasonable…."  As for the Company's failure to produce the applications, the court found that this failure alone cannot create an issue of fact sufficient to defeat summary judgment where, as here, there is not substantial evidence of pretext on the merits.

On balance, this case provides yet another in a long line of favorable California decisions upholding the authority of California employers to select who they deem to be the most qualified applicant from the available pool for an open position.  That said, California employers are well advised to carefully weigh and evaluate the inevitably competing qualifications of the candidates and carefully document the reasons for the successful applicant's selection.  Further, California employers should ensure they are complying with record retention requirements (here, 2 years for employment applications under Cal. Gov't Code Section 12946).
 

By Robin E. Weideman

In Zamora v. Lehman, a California court held this week that a party to an arbitration agreement waives the right to compel arbitration by engaging in conduct inconsistent with the agreement to arbitrate.  In this case, one of the parties to a lawsuit waited until four months before trial to seek to compel arbitration of the dispute. Prior to requesting arbitration, the party conducted discovery in the court proceedings.  The court noted that the parties’ arbitration agreement did not allow for discovery in arbitration and that by conducting discovery in the court action, the party acted inconsistently with the agreement to arbitrate.  As such, the court found that the party had waived the right to compel arbitration of the dispute.  The party seeking arbitration argued that any waiver would have to be “knowing” and that there was no knowing waiver because the party forgot that there was an arbitration agreement and did not recall the existence of the agreement until four months before trial and after conducting discovery.  The party argued that upon “discovering” the agreement, she diligently pursued arbitration.  The court rejected this argument and held that any right to arbitrate had been waived.

This case serves as a good reminder that parties to arbitration agreements must act diligently to pursue the right to arbitrate.  Conduct inconsistent with arbitration may result in a finding of waiver.
 

By Robin E. Weideman

The United States Supreme Court has denied review of the Ninth Circuit decision upholding San Francisco’s employer mandated healthcare ordinance.  In Golden Gate Restaurant Association v. City and County of San Francisco, the Ninth Circuit rejected the GGRA’s legal challenge to the ordinance and held that the ordinance was not preempted by ERISA.  Our prior post on the case is here.  With the Supreme Court’s denial of review of the Ninth Circuit decision, the GGRA is without further legal avenues to challenge the enforceability of the ordinance.

By Sarah Drechsler

The U.S. Department of Labor ("DOL") has published an Administrator's Interpretation (available here) to address the question of whether an employee is entitled to leave under the Family Medical Leave Act ("FMLA") to care for the child of a same sex partner.  The FMLA entitles an eligible employee to take up to 12 weeks of unpaid leave for, among other things, the birth and care of the employee's newborn child, for placement of a son or daughter with the employee for adoption or foster care, and to care for a son or daughter with a serious health condition.  Under the FMLA, employees who have no biological or legal relationship with a child may still be considered to stand in "loco parentis" to the child and be entitled to leave to care for the child.  An in loco parentis relationship can be demonstrated either by provision of day-to-day care for the child, or provision of financial support to the child. In the Interpretation, the DOL makes it clear that same sex partners can establish the requisite in loco parentis relationship.  The Interpretation states, "[f]or example, where an employee provides day-to-day care for his or her unmarried partner’s child (with whom there is no legal or biological relationship) but does not financially support the child, the employee could be considered to stand in loco parentis to the child and therefore be entitled to FMLA leave to care for the child if the child had a serious health condition."  The Interpretation further states that the same applies for "an employee who will share equally in the raising of a child with the child’s biological parent" and "an employee who will share equally in the raising of an adopted child with a same sex partner, [but] does not have a legal relationship with the child."  The DOL also notes in the Interpretation that "the fact that a child has a biological parent in the home, or has both a mother and a father, does not prevent a finding that the child is the 'son or daughter' of an employee who lacks a biological or legal relationship with the child for purposes of taking FMLA leave." 

It is important for employers to be aware that the FMLA and California child care leave laws are not limited to traditional definitions of family and parentage.  When faced with a request for child care leave, employers need to make an individualized fact-based determination regarding the relationship between the employee and the child.

By Robin E. Weideman

AB 482, which would restrict the use of credit reports for employment purposes, is pending before the California Legislature this session.  If enacted in its current form, AB 482 would prohibit employers, with the exception of certain financial institutions, from obtaining a consumer credit report for employment purposes unless the information is (1) substantially
job-related, meaning that the position of the person for whom the report is sought has access to money, other assets, or confidential information; and (2) the position of the person for whom the report is sought is a position in the state Department of Justice, a managerial position, that
of a sworn peace officer or other law enforcement position, or a position for which the information contained in the report is required to be disclosed by law or to be obtained by the employer.  This legislation would significantly curtail the ability of employers to obtain or use credit reports in the hiring and background check process.  A hearing on the proposed legislation is scheduled for June 29 in the Senate Judiciary Committee.  We will continue to monitor this legislation and post developments here.
 

By Leigh A. White

On June 17, 2010, the Department of Labor issued an administrator interpretation opinion letter reconsidering the DOL’s 2002 and 2007 opinion letters about what constitutes compensable time related to changing clothes.

The FLSA, as modified by the Portal-to-Portal Act, provides that “changing clothes or washing at the beginning or end of each workday” is not compensable work time if the time is excluded from compensable time by “the express terms or by custom or practice” under a collective bargaining agreement.  As a result of this language in 29 U.S.C. section 203(o), there has been much debate and litigation as to whether “donning and doffing” protective clothing for work constitutes “changing clothes” that is not compensable under this provision of the FLSA.

In 1997, the DOL issued an opinion letter providing that the time that meat packing employees spent putting on protective clothing such as mesh aprons, arm guards, shin guards, mesh gloves, rubber boots, and weight belts was compensable time because these types of protective clothing did not constitute “clothes” under section 203(o).  This opinion was confirmed again in opinion letters in 1998 and 2001.

In 2002, however, the DOL departed from the prior opinion letters by issuing an opinion letter finding that the protective equipment typically worn by meat packing employees were “clothes” under section 203(o), and as a result, the time spent changing into those protective clothes was not compensable time.  In 2003, the Ninth Circuit rejected the 2002 opinion letter and instead held that “ordinary, contemporary, common meaning” of the term “clothes” used in section 203(o) did not apply to protective clothing and equipment.  See Alvarez v. IBP, Inc., 339 F.3d 894, 905 n.9 (9th Cir. 2003).  Nonetheless, the 2002 opinion was confirmed again in a 2007 DOL opinion letter.
Last week’s opinion letter, however, rejects the 2002 and 2007 opinion letters and reverts back to the DOL’s pre-2002 position.  The opinion latter states:

"Based on its statutory language and legislative history, it is the Administrator’s interpretation that the § 203(o) exemption does not extend to the protective equipment worn by employees that is required by law, by the employer, or due to the nature of the job.  This interpretation reaffirms the interpretations set out in the 1997, 1998 and 2001 opinion letters and is consistent with the “plain meaning” analysis of the Ninth Circuit in Alvarez. Those portions of the 2002 opinion letter that address the phrase “changing clothes” and the 2007 opinion letter in its entirety, which are inconsistent with this interpretation, should no longer be relied upon."

The DOL opinion letter also addressed the issue of whether an employee’s changing clothes, even if that act itself is not compensable work time, could be a “principal activity” that starts the work day.  The opinion letter states:  "Consistent with the weight of authority, it is the Administrator’s interpretation that clothes changing covered by § 203(o) may be a principal activity.  Where that is the case, subsequent activities, including walking and waiting, are compensable."  Thus, if changing clothes is integral and indispensable to the work, changing clothes is a principal activity that starts the workday, such that everything that follows (such as walking from the locker area to the work area) is compensable time, even when the changing time itself is not compensable.

While the opinion letter is not law, it is a strong indication of how the DOL will enforce the laws and may be persuasive authority to courts.  As a result, if you have employees who wear protective clothing and do not compensate them for the time they spend changing into and out of that clothing or if you have employees who change at your place of work and do not compensate them for the time spent walking from the changing area to the work station, you should consult with employment law counsel about the impact of this opinion letter on your employees.

By Candice Boyd

In City of Ontario v. Quon, the Supreme Court overturned a Ninth Circuit Court of Appeals decision and ruled in favor of the employer, the City of Ontario, ruling that the employer's search of an employee's text messages was reasonable and not in violation of the Fourth Amendment.

Quon worked for the City of Ontario as a police sergeant and was a member of the Ontario Police Department's SWAT Team.  The City issued two-way pagers to Quon and other officers in the department.  Prior to acquiring the pagers, the City instituted a policy that informed employees that they should have no expectation of privacy or confidentiality when using these resources.  Quon signed a statement acknowledging his receipt and understanding of the policy.  In addition, the City informed employees, including Quon, that it would treat text messages the same way as it treated e-mails.

When Quon and other officers exceeded their monthly character limits for several months in a row, the department Chief sought to determine whether the character limit was too low.  The wireless provider gave the City transcripts of Quon's and another employee's text messages for a two month period.  After reviewing the transcripts, it was discovered that many of Quon's messages were not work-related, and some were sexually explicit.  An internal investigator redacted Quon's messages that were communicated during non-work hours, however, the majority of his messages transpired while he was on duty.  Quon was disciplined for violating department rules.

Quon sued the department and the City alleging violation of his Fourth Amendment rights.  The district court granted summary judgment in favor of the City, finding no Fourth Amendment violation.  The Ninth Circuit reversed.

The Supreme Court reversed the Ninth Circuit decision and held that Quon's Fourth Amendment rights were not violated.  More specifically, the Court held that the City's review of Quon's text messages was reasonable because it was motivated by a legitimate work-related purpose and because it was not excessive in scope.  Thus, assuming Quon had some privacy expectation in his messages, that privacy was not unreasonably violated.

The Court did not resolve the parties' disagreement over Quon's privacy expectation or whether the individuals who sent messages to Quon had a reasonable expectation of privacy in their messages.  The Court refused to draw any bright lines regarding privacy expectations in electronic communications, noting that communication technology is constantly changing and it's unknown how workplace norms or the law's treatment of them will evolve.  However, the Court held that on the facts before it, the search was reasonable and there was no Fourth Amendment violation.

In light of this narrowly tailored decision, employers should seek legal counsel before investigating employee communications in order to ensure that the investigation is legally sound. Employers should also review their communication policies to ensure that employees are sufficiently informed that they do not have an expectation of privacy in communications sent or received on employer provided systems.