California Labor & Employment Law Blog

By Sarah Drechsler

Oral argument before the California Supreme Court is scheduled for May 27 in the Edwards v. Arthur Andersen case, which addresses the permissible scope of non-compete agreements in California.  In Edwards, Plaintiff Edwards, a tax manager at Arthur Andersen ("Andersen") in Los Angeles, provided income and estate planning services to wealthy individuals.  Edwards was required to sign Arthur Andersen's standard non-compete agreement when he was hired.  The agreement prohibited Edwards, for an eighteen month period after his departure from Arthur Andersen, from performing professional services of the type he provided at Arthur Andersen for any client on whose account he had worked during eighteen months prior to his departure.  It also prohibited Edwards, for a year after his departure, from providing professional services to any client of Arthur Andersen's Los Angeles office.  In 2002, Arthur Andersen sold its Los Angeles office to HSBC, and as a condition of being hired by HSBC, Edwards was required to sign a release of claims in favor of Arthur Andersen in exchange for Arthur Andersen’s agreement to relieve Edwards of his non-compete restrictions.  Edwards refused to sign the release agreement and was not hired by HSBC as a result.  Edwards then brought an action against Arthur Andersen, claiming in part that the non-compete agreement was invalid under California law and therefore it was unlawful to condition his employment with HSBC on his execution of the release agreement.  The trial court disagreed with Edwards and held that the non-compete agreement was valid because it fit within the "narrow restraint" exception, which permits covenants not to compete where the covenant is narrowly crafted so that an employee who leaves a company still can work in his or her profession.  The trial court noted that given the large number of wealthy individuals in Los Angeles, preventing Edwards from performing services for a period of time for individuals who were clients of Arthur Andersen, was not a significant restriction on Edwards’ ability to work.

Edwards successfully appealed the trial court's decision.  The California Court of Appeal held that there is no "narrow restraint" exception under California law, and that Edwards’ non-compete agreement was, therefore, invalid.  According to the court, California prohibits non-compete agreements, no matter how narrow the restraints on competition are, except in a few limited circumstances outlined by statute involving the sale of a business, or where necessary to protect an employer's trade secrets.  The Court of Appeal reasoned in part that allowing narrowly restrained non-compete agreements would give employers an incentive to draft agreements that "push the envelope of the narrowness requirement" and employees would not be able to determine on their own whether the restraint was enforceable.

Arthur Andersen petitioned for review by the California Supreme Court, and the Court granted review in November 2006.  The matter is now fully briefed and is scheduled for oral argument later this month.  A decision is expected shortly thereafter on this important issue for California employers.

By Marianne C. Koepf

Employers are soon to be prohibited from discriminating against individuals on the basis of their genetic information. 

Last week, the U.S. House of Representatives passed a bill on a vote of 414-1, called the Genetic Information Nondiscrimination Act (GINA), which prohibits employers from using genetic data in hiring, firing, and other workplace decisions affecting employment.  GINA also requires employers to maintain genetic information strictly confidential in compliance with the ADA and HIPAA.  The bill also forbids insurance companies from using an individual's genetic information to deny or limit coverage, or establish different rates.  The same bill unanimously passed the Senate on April 24.  

Genetic tests are now regularly used to determine an individual's predisposition for diseases such as cystic fibrosis, breast and prostate cancer, diabetes and Lou Gehrig's disease.  As genetic testing has become more prevalent in society, the U.S. Congress has enacted GINA to address widespread concern that such information would be misused, especially in the health care and employment arenas.   

President George W. Bush is expected to sign the bill.  The employer provisions of the bill will take effect in November 2009, after the U.S. Department of Labor has had an opportunity to enact implementing regulations.

Carlton DiSante & Freudenberger's next monthly HR Roundtable, entitled "Discrimination Issues: How Employers Can Prevent Claims and Limit Exposure," will take place on May 20, 2008 from 8:00 a.m. to 9:00 a.m. (continental breakfast and networking from 7:30 a.m. to 8:00 a.m.). 

California employers face a myriad of state and federal laws prohibiting discrimination on a number of different grounds.  Simply keeping track of the groups protected by the anti-discrimination laws can present a daunting task for any company.

Please join our employment attorneys for a discussion of some of the vital issues of which all California employers should be aware in order to limit their exposure to potential claims of discrimination.  The presentation will address the common grounds for discrimination claims, highlight some of the less obvious situations that can lead to complaints of discrimination, and provide practical tips on how to prevent discrimination in your organization and how to deal with complaints of discrimination in their early stages in order to reduce the likelihood of costly litigation later.  

To register to attend this complimentary Roundtable at one of our five California offices, please e-mail your name, your company name, and the location you will be attending, to the following address:  register@cdflaborlaw.com.

Office Locations:

Sacramento:

8950 Cal Center Drive, Suite 160
Sacramento, CA  95826

San Francisco:

601 Montgomery Street, Suite 350
San Francisco, CA 94111

Los Angeles:

707 Wilshire Blvd., Suite 5150
Los Angeles, CA 90017

Orange County:

2600 Michelson Drive, Suite 800
Irvine, CA 92612

San Diego:

4510 Executive Drive, Suite 300
San Diego, CA 92121

By Mark S. Spring

As previously posted on this blog, in March a San Diego judge awarded over $85 million dollars to a California class of Starbucks employees who successfully argued that Starbucks had improperly allowed shift supervisors to share in the employee tip pool and thereby denied other non-supervisory employees their fair share of the tips.  Starbucks' position is that the shift supervisors did not have the necessary supervisory responsibilities to be considered "supervisors," as the law defines that term, and that because of their customer service responsibilities, they were properly allowed to share in the tip pool.  Starbucks is expected to appeal the verdict and it has recently made public statements and statements to its employees supporting its position and its confidence in the appeal.  Even if Starbucks does succeed on appeal, the superior court decision is already producing ramifications for employers with tipped employees. 

Within weeks of the decision, separate similar lawsuits were filed against Starbucks in Massachusetts, New York and Minnesota by two different law firms.  Other industries are also being adversely affected.  Baggage handlers have brought tip pooling lawsuits against the struggling airline companies.  Casinos, restaurants, and other hospitality and service industry employers are also seeing more and more of these claims.  As news of the Starbucks decision and wave of tip pooling lawsuits continues to circulate and be discussed by the plaintiffs' bar, a snowball effect is likely to ensue.  Employers who have mandatory tip pools in their workplaces should not sit back waiting to be the next victim.  In California, damages for an improper tip pool can be awarded to all current and former employees who were improperly denied a fair share of the tip pool over the last four years. 

At-risk employers should consider auditing their tip pooling practices to make sure that they are in compliance with both state and federal law.  To review a very basic discussion of the general guidelines on tip pooling regulations applicable to California employers, click here  http://www.cdflaborlaw.com/view_article.php?id=108&s=0.  Employers who seek more information on this topic can also contact Kendra Miller at kmiller@cdflaborlaw.com in Southern California or Jeremy Naftel at jnaftel@cdflaborlaw.com in Northern California.   

By Connor Moyle

A recent decision by California's Fourth District Court of Appeal analyzed the administrative exemption from overtime compensation and found that an employer was entitled to summary judgment because its network operations director qualified for the administrative exemption.  Significantly, in reaching its conclusion in Combs v. Skyriver Communications, Inc., 159 Cal.App.4th 1242 (2008), the court held that it was not necessary to apply the administrative/production worker dichotomy and that the employee qualified for the exemption without regard to that test. 

Background

Plaintiff Mark Combs sued his former employer Skyriver Communications seeking recovery of unpaid overtime.  Skyriver is a high-speed wireless broadband internet service provider.  Combs worked for Skyriver starting in 2001, first as manager of capacity planning, and then as director of network operations.  Combs’ duties were largely undisputed.  A resume Combs prepared after leaving Skyriver indicated that he was responsible for project management, budgeting, vendor management, purchasing, forecasting, employee management, management of overseas deployment of wireless data network, management of the integration and standardization of three networks into the Skyriver architecture, and the overseeing of day to day network operations.  At trial, Combs testified that he spent 60-70% of his time on his “core” responsibility of maintaining the well-being of Skyriver’s network.  This responsibility included high-level problem solving and “troubleshooting,” as well as planning to integrate acquired networks into Skyriver’s network.  Combs also prepared reports for Skyriver’s board of directors and conducted lease negotiations and equipment sourcing and purchasing.  The trial court granted Skyriver’s motion for judgment on the ground that Combs was exempt from overtime under the administrative exemption. 

On appeal, Combs claimed that the court should have applied the “administrative/production worker dichotomy” as set forth in Bell v. Farmers Insurance Exchange, 87 Cal.App.4th 805 (2001) (“Bell”), and that application of the dichotomy would have led to a determination that he was a nonexempt production worker.  Combs also claimed that, apart from the administrative/production worker dichotomy, application of the proper test for the administrative exemption under IWC Wage Order No. 4-2001 would have resulted in summary judgment in his favor because his job duties did not meet the requirements of the exemption.

Appellate Court Analysis

1.  Administrative/Production Worker Dichotomy Did Not Apply

The court first addressed the issue of whether the trial court should have applied the administrative/production worker dichotomy to determine whether Combs was an exempt or nonexempt worker.  The court explained that in some cases, such as Bell, a distinction was drawn between 1) administrative employees, who are usually described as employees performing work directly related to management polices or general business operations and 2) production employees, whose primary duty is producing the commodity or commodities that the enterprise exists to produce.  Employees falling into the first category are more likely exempt from overtime compensation requirements while employees in the second category are more likely nonexempt.  Combs claimed that he fell into the second category because Skyriver’s product for purposes of the administrative/production worker dichotomy was its network because the network provided the internet connectivity that Skyriver marketed.  Combs accordingly claimed he was a production worker who provided the network that provided the connectivity.

By Alison L. Tsao

The Sixth Circuit of the U.S. Court of Appeals recently ruled that an employer who hired an employee through a staffing agency may be liable for violations of the federal Family Medical Leave Act (FMLA).  In Grace v. USCAR and Bartech Technical Services, LLC, --F.3d--, 2008 WL 782470 (6^th Cir. 2008), Plaintiff Rosalyn Grace was a long-term “contractor” who provided information technology (IT) services to Defendant USCAR through a couple of different placement agencies for a period of eight years.  In the fall of 2004, Grace developed a respiratory disability (asthma) that eventually resulted in her hospitalization, whereupon she took a leave of absence through her staffing agency, Bartech.  In late December 2004, just days before Grace’s original anticipated date of return to work, Bartech informed Grace that USCAR had decided to outsource its IT duties and that, as a result, her position was terminated.

USCAR contended that its management decided in the fall of 2004 to restructure its IT division to switch from using full-time contractors to contracting directly with individual providers on an as-needed basis.  Grace’s position was allegedly targeted for restructuring.  While Grace was on FMLA leave in December 2004, USCAR decided to use the services of another Bartech contractor, Spolarich, to handle regular IT maintenance issues due to Grace’s absence.  In May 2005, USCAR contracted directly with Spolarich for a 20-hour per week job to permanently fill the new IT position at USCAR.

Grace filed suit against Bartech and USCAR in federal district court, alleging among other things, violations of the FMLA for failing to return her to her pre-leave (or comparable) position and retaliation, and for gender discrimination under Title VII and Michigan’s civil rights law.  The district court granted both employers’ motions for summary judgment.  The Sixth Circuit Court of Appeals reversed the district court’s ruling with respect to the FMLA claims but affirmed the grant of summary judgment as to Grace’s Title VII claim.

The Court recognized that the FMLA is silent about the issue of joint employment.  However, the Department of Labor (DOL) has promulgated regulations such that liability could attach to Bartech and USCAR under either an “integrated employer test” or “joint employment” test under 29 C.F.R. § 825.104(c)(1).  The Court found that the integrated employer test did not apply because there was not sufficient interrelation between the operations of the staffing agency and client employer.  However, the Court found sufficient evidence under a joint employment test because each employer exercised a sufficient level of control over Grace’s work or working conditions.  Specifically, 29 C.F.R. § 825.106(a) describes three employment relationships where joint employment will “generally . . . be considered to exist:” (1) “where there is an arrangement between employers to share an employee’s services or to interchange employees;” (2) “where one employer acts directly or indirectly in the interest of the other employer in relation to the employee;” or, (3) “where the employers are not completely disassociated with respect to the employee’s employment and may be deemed to share control of the employee, directly or indirectly, because one employer controls, is controlled by, or is under the common control with the other employer.”  Under specific regulations pertaining to cases involving staffing agencies and client employers, Bartech was determined to be Grace’s primary employer because it had the ultimate decision to hire and fire, the sole ability to assign Grace, and was the entity in charge of her payroll and benefits.  USCAR was determined to be a secondary employer because it supervised Grace’s day-to-day work and determined her salary and hours.  Although only the primary employer is responsible for giving required notices, providing FMLA leave, and maintaining health benefits, both primary and secondary employers must honor the FMLA leave and not engage in “retributory action.”  Significantly, the Court notes that the anti-retaliation provisions applicable to secondary employers apply even if the secondary employer may not be covered by FMLA.  Under 29 C.F.R. § 825.106(e), the secondary employer is responsible for “accepting the employee returning from FMLA leave in place of the replacement employee if the secondary employer continues to utilize an employee from the temporary or leasing agency.”

The Court ruled that Grace produced sufficient evidence to raise triable issues of fact as to whether USCAR’s decision to restructure its IT functions was unlawful discrimination or retaliation for Grace’s exercise of her FMLA rights.  Grace contended that the replacement employee, Spolarich, performed functions similar to those performed by her before her FMLA leave.  While Spolarich was contracted for fewer hours, he was paid at a higher rate such that the cost savings to USCAR was not significant.  Most damning was evidence of meetings notes where USCAR’s Director of Operations inquired as to Grace’s termination, and when apprised of a need for a “legitimate business reason” to avoid the risk of being sued, asked “can lawyers construct a way to make it [Grace’s termination] doable?”  The Court held these facts warranted a trier of fact to determine the true motive behind USCAR’s decision not to reinstate Grace after the expiration of her FMLA leave.

Employers who rely on staffing and placement agencies for its personnel needs are advised to review their policies with respect to FMLA compliance in relation to its “contracted” personnel.  If you have any questions about FMLA compliance with respect to an employee employed through a staffing agency, please contact us.

By Kent J. Sprinkle

Echoing the California Supreme Court's recent decision in Jones v. The Lodge at Torrey Pines Partnership et al., a California Court of Appeal has provided additional clarification on the holding that individual supervisors cannot be personally liable for retaliation under the FEHA.  Specifically, the Court of Appeal in Hammond v. County of Los Angeles et al., 73 Cal.Rptr.3d 690 (2008), held that individual supervisors cannot be personally liable for retaliation under the FEHA even when the claim of alleged retaliation by a supervisor is in response to an employee's complaint for harassment by the same supervisor (as opposed to a complaint for discrimination).  

Plaintiff Hammond, a nursing instructor employed by the Los Angeles County Sheriff's Department, sued her employer, the County, as well as her supervisor, alleging violations of the FEHA, including race and age discrimination, harassment and retaliation.  The County and her supervisor successfully moved for summary judgment and Plaintiff appealed.  On appeal, the summary judgment order was reversed.  However, the Court of Appeal held that the individual supervisor defendant was entitled to summary adjudication in her favor as to Plaintiff's claim for retaliation because such claims cannot be asserted against non-employer individuals.  Plaintiff argued that the Supreme Court's holding in Jones does not extend to claims alleging retaliation by a supervisor in response to an employee's report of harassment by that supervisor, and that Jones involved claims of retaliation by a supervisor in response to an employee's report of discrimination, not harassment.  Plaintiff argued that a supervisor who is allegedly liable for harassment should also be liable for retaliation against an employee who opposes or reports that harassment.  The Hammond court rejected this argument and instead concluded that "there is no sound basis for a distinction between retaliation for a complaint about discrimination on the one hand and retaliation for a complaint about harassment on the other." 

The Hammond court explained its reasoning in the following manner:  "The Supreme Court in Jones interpreted the FEHA as not imposing individual liability for retaliation.  The court said, 'In this case, we must decide whether the FEHA makes individuals personally liable for retaliation.  We conclude that the same rule applies to actions for retaliation that applies to actions for discrimination: The employer, but not non-employer individuals, may be held liable.'  The court's reliance on the discussion in Reno v. Baird, 18 Cal.4th 640, 643 (1998), pointing to the adverse consequences of subjecting supervisors to personal liability for personnel decisions, seems equally applicable to claims of retaliation based on reports of harassment.  It is true that under the FEHA a supervisor may be subject to personal liability for harassment, but not for discrimination.  But that distinction is of little significance in determining the question of whether a supervisor should personally be liable for retaliation under the FEHA.  The policy of protecting supervisors from 'the ever-present threat of a lawsuit each time they make a personnel decision' would seem to apply generally to retaliation claims, regardless of whether the alleged retaliation was in response to an employee's report of discrimination or harassment.  The idea that a supervisor has more incentive to retaliate for reports of harassment than for reports of discrimination is highly theoretical.  Accordingly, we hold that Brennan [the supervisor] cannot personally be liable for retaliation under the FEHA."

In analyzing this decision, as with Jones, employers should remain mindful that, although individual employees are not personally liable, employers are still liable for any unlawful retaliation, whether it relates to complaints of discrimination or harassment or something else.  Please contact us directly if you have any questions regarding the Hammond decision.

By Anthony B. Lewis

The California First District Court of Appeal has decided that individual owners of defunct corporations were not the employers of, and did not owe restitution for unpaid wages to, the employees of the defunct corporations.  The decision, Bradstreet v. Wong (April 16, 2008) affirmed a trial court’s decision that the individual owners of the garment manufacturers known as the Wins corporations were not liable for wages the corporations owed to their employees.  The Wins corporations employed garment workers for more than a decade.  They experienced financial difficulty and closed without sufficient funds to pay all wages owed to their employees.  In this case, the California Labor Commissioner, on behalf of the employees, attempted to recover the wages from the individual owners of the Wins corporations.  The Labor Commissioner lost at the trial court level and appealed, along with an intervening party.  The appeal asserted several arguments that the individual owners should be held liable for the unpaid wages, but the appellate decision rejected those arguments.

First, the decision explained that a limited, common law definition of “employer” (instead of a broader Industrial Welfare Commission definition found in its Wage Order for the garment industry) applies to actions brought pursuant to California Labor Code section 1193.6, which is the law authorizing the Labor Commissioner to file lawsuits against employers to recover unpaid wages on behalf of employees.  Under the common law definition of employer, owners of corporate employers are not ordinarily considered employers in their individual capacity, and thus are not generally liable for wages owed by the corporate employer.

Second, the decision addressed California Labor Code section 2677, a statute that is specific to the garment manufacturing industry.  This statute provides that parties other than the corporate employer can be held liable for unpaid wages as “deemed employers” in some circumstances, mostly relating to problems that arise from doing business with unregistered garment manufacturers.  The appellate court held the plaintiffs did not establish the necessary facts to prove the individuals in this case should be deemed employers under this statute.

Third, the decision held that the individual owners were not liable for restitution of the employees’ unpaid wages under California’s Unfair Competition Law, Business and Professions Code section 17203.  In this case, the individual owners did not require any employee to work for them personally and did not misappropriate to themselves any of the wages owed to the employees.  If the plaintiffs had proven otherwise, the individual owners may have been liable for restitution.

This case is important for all individual owners of corporations that are employers.  The decision respects the legal significance of incorporating a business and the protection that the corporate entity provides its owners and agents when corporate formalities are followed (this protection is know as the “corporate veil”).  Still, if you are an individual owner of a corporation that may be unable to pay wages owed to its employees, you should consult with a qualified attorney to help insure that you do not become liable in your individual capacity.

By Alison L. Tsao

On April 15, 2008, the California Senate Labor and Industrial Relations Committee unanimously approved SB 1539 as amended to “declare the intent of the Legislature to enact legislation to address issues related to meal periods in employment.”   SB 1539, authored by Senator Ron Calderon (D-Montebello), sponsored and supported by the California Chamber of Commerce, California Restaurant Association, and approximately 40 trade and professional organizations, was introduced to provide a comprehensive solution to compliance with and enforcement of California’s meal period laws.

SB 1539 has generated bipartisan support from Committee members who have expressed concern over the inflexibility and ambiguity of meal period laws in California that have spawned a tidal wave of expensive litigation and liability for California employers.  As a result, Committee members have recognized the need for clarity and greater flexibility to meet the needs of both employers and employees.  SB 1539, as originally drafted, would have provided for the following changes to existing meal period law (among others):  (1) allowing the employee to waive either the first or second meal period if the employee is otherwise entitled to two meal periods in a day; (2) expanding conditions for employees to take on-duty meal periods; (3) allowing collective bargaining agreements to override provisions of the meal period rules; and (4) defining “providing an employee with” a meal period to mean “giving the employee an opportunity to take” a meal period.  The Committee amended SB 1539 to delete all of the substantive changes to the meal period laws, and amended the bill to simply declare the intent of the Legislature to enact legislation to address issues related to meal periods in employment.  While the meal period laws have not been changed, the Legislature’s declaration of intent is a good sign that lawmakers recognize the need for change and will continue to have further discussions to try to find consensus on a solution that contains adequate protections for employers and employees.  SB 1539 has been referred to the Senate Appropriations Committee.  Employers and employees are encouraged to contact the Senate Appropriations Committee to voice their opinions regarding SB 1539 to continue to build the momentum for change in meal period laws.  We will continue to monitor this legislation and apprise you of any developments.