Supreme Court Unanimously Rules That Security Screening Time Is Not Compensable

Today the U.S. Supreme Court issued its decision in Busk v. Integrity Staffing Solutions, Inc., unanimously holding that time warehouse employees spent waiting to go through security checks and undergoing those checks at the end of their shift was not compensable time.  The decision overrules a contrary conclusion that the Ninth Circuit Court of Appeals reached earlier in the case.

The employees at issue in Busk were hourly warehouse employees whose job was to retrieve products off shelves and package them for Amazon customers.  Their employer required them to undergo an anti-theft security check at the end of their shifts before allowing them to leave for the day.  During this process, employees had to remove items such as belts, keys, and phones from their persons and go through a metal detector.  The employees were not compensated for the time they spent waiting in line for the security checks and undergoing the checks, which they alleged took up to 25 minutes each day.  The employees filed a class action lawsuit seeking to recover unpaid wages for this time.  The trial court dismissed the employees’ claim, holding that the security check time was not compensable time under the Fair Labor Standards Act.  The employees appealed to the Ninth Circuit, which reversed the district court’s ruling and held that the employees could proceed with their claim because the security checks were required by the employer and if they actually took as much as 25 minutes per day, that time would not be de minimis but instead would be compensable under the FLSA.  The U.S. Supreme Court granted Integrity Staffing Solutions’ petition for review.

In reversing the Ninth Circuit’s decision and holding that the security check time was not compensable, the U.S. Supreme Court held that the claim was governed by the standards set forth in the Portal to Portal Act and the reasons that the Act was initially enacted.  The Portal to Portal Act was enacted after several court decisions came out interpreting the FLSA to broadly require payment for preliminary and postliminary activities (including a plaintiffs’ counsel fave – Anderson v. Mt. Clemens Pottery), which in turn resulted in a flood of litigation by employees seeking pay for such activities.  In response to these decisions expansively interpreting the FLSA, Congress enacted the Portal to Portal Act to define “work” that is compensable and activities that are not compensable under the FLSA.  The Portal to Portal Act thus expressly excludes the following activities from compensable time:

  1. Time spent walking, riding or traveling to and from the actual place of performance of the principal activity or activities which such employee is employed to perform; and
  2. Activities which are preliminary to or postliminary to said principal activity or activities which occur either prior to the time on any particular workday at which such employee commences, or subsequent to the time on any particular workday at which he ceases, such principal activity or activities.

The term “principal activity or activities” means activities that are an “integral and indispensable” part of the principal activities the employee is hired to perform.  Based on these definitions, the Court held that time Integrity Staffing’s employees spent undergoing security checks was non-compensable postliminary work.  The Court reasoned that end of shift security checks were not the employees’ principal activity because the employees were not employed to undergo security checks; rather, they were employed to retrieve products in the warehouse and package them for customers.  Furthermore, the security checks were not an “integral” or “indispensable” part of the employees’ packaging activities.  The security checks were not necessary in order for the employees to perform their packaging duties, and the mere fact that the employer required the screenings does not change the nature of the screenings as being separate from the employees’ principal activities.  Indeed, the employer hypothetically could eliminate the security check requirement and this would have no impact on the employees' ability to perform their principal activities, thus demonstrating that the security checks were not an integral or indispensable part of the employees' duties.  The Court contrasted this type of activity from different types of preliminary or postliminary activity that would be compensable under the FLSA, such as time an employee spent donning required protective gear needed to perform job duties or removing contaminated clothing at the end of a shift in order to safely leave the worksite. Finally, the Court held that the Ninth Circuit erred in focusing on whether the time was de minimis or not in assessing whether it was compensable under the FLSA.  The Court held that the Portal to Portal Act definitions focus on the nature of the activity and its relation to the employees’ principal activities – not on how much time the activity takes the employee to complete. 

The Busk v. Integrity Staffing Solutions decision is a great one for employers fighting wage and hour lawsuits based on unpaid preliminary and postliminary activities brought under the FLSA.  California employers are cautioned, however, that the Busk decision is based solely on the FLSA/Portal to Portal Act and is not an interpretation of California law.  California courts interpreting California’s Labor Code and Wage Orders have applied a much broader definition of compensable work time to include all time that an employee is subject to the control of the employer.  Thus, even though an employer may be able to defeat a claim for compensation for preliminary/postliminary work under the FLSA, the result may not be the same under California law.  Employers seeking guidance on whether preliminary or postliminary activities performed by California employees are compensable should consult California employment law counsel.

The Busk decision is available in full here.

California Court Complicates Determination of Independent Contractor Misclassification Claims

A decision earlier this month by a California Court of Appeal in Dynamex v. Superior Court greatly (and unnecessarily) complicates the determination of whether an employee is an independent contractor or an employee, and in some instances makes it extremely difficult for an employer to defeat class certification of an independent contractor misclassification claim. 

The plaintiff in the case was a delivery driver for Dynamex, a nationwide courier and delivery service.  Dynamex used to classify its drivers as employees, but in 2004 Dynamex converted its drivers to independent contractor status.  One driver thanked Dynamex with a lawsuit alleging that the reclassification to independent contractor status violated California law.  The plaintiff, who sought to represent a class of about 1,800 Dynamex drivers, alleged that due to their improper independent contractor classification, they were unlawfully denied overtime compensation and expense reimbursement.  The trial court ultimately certified a class.  Dynamex later sought to have the class decertified, arguing that the trial court applied the wrong legal standard for determining whether common issues predominated on liability.  The trial court applied the definitions of “employ” and “employer” found in the applicable IWC wage order (Wage Order No. 9, applicable to the transportation industry).  That wage order defines “employ” as “to engage, suffer, or permit to work,” and defines “employer” as any person “who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person.”  Applying these definitions, the trial court concluded that determining whether the drivers were “employees” (as opposed to independent contractors) within the meaning of the wage order could be determined based on common proof and would not require numerous individualized inquiries.  As such, the trial court concluded that class certification was proper. 

Dynamex sought to have the court of appeal decertify the class, arguing that the trial court applied the wrong test for determining whether a worker is an employee or an independent contractor.  Dynamex argued that the multi-factor test set forth by the California Supreme Court in S.G. Borello & Sons v. Dep’t of Indus. Relations, 48 Cal.3d 341 (1989), applied and that under this test, liability could not be established based on common proof, but instead would require individualized inquiries concerning the degree of control Dynamex exercised over any individual driver, along with other individualized inquiries relevant to the Borello factors. 

The court of appeal agreed with Dynamex – well, sort of.  With highly questionable reasoning, the court essentially held that the test for independent contractor vs. employee status varies, depending on what wage and hour violation is being alleged.  Thus, if a worker is alleging that the employer violated a provision of an applicable wage order, then the wage order definitions of “employer” and “employ” apply to determine whether the worker is an employee.  However, if the worker is alleging wage and hour violations that are not based on violation of a wage order but rather on some other provision of law (e.g. a Labor Code requirement that is not also set forth in the wage order), then Borello’s multi-factor common law test for employee/independent contractor status applies.  Thus, the court looked at the claims alleged by the drivers against Dynamex and held that to the extent the claims were based on violations of the wage order (e.g. the overtime claim), the trial court had properly applied the definitions of “employ” and “employer” set forth in the wage order to grant class certification.  However, the court held that to the extent the drivers’ other claims did not fall under the wage order, the trial court would need to reconsider whether class certification was appropriate based on application of the Borello test.  More specifically, the court explained that the wage order expressly covers expense reimbursement of certain types of expenses (e.g. tools, uniforms), but may not cover all of the types of expenses for which the driver class was seeking reimbursement (e.g. rental or purchase of personal vehicles).  On remand, the trial court will have to consider which of the expense claims are for expenses covered by the wage order and which are not, and for claims that fall outside the wage order the trial court will have to re-assess the propriety of class certification using the multi-factor Borello test.

The Dynamex decision is a bad one for employers defending class claims for independent contractor misclassification for two important reasons.  First, as a practical matter, application of the wage order definitions of “employ” and “employer” makes it virtually impossible for an employer to prevail in establishing that a worker is an independent contractor because all workers are "engaged" and "permitted to work" which makes the hiring entity an "employer" under the wage order, as interpreted by the Dynamex court.  Second, the Dynamex decision makes it much easier for a class to be certified in an independent contractor misclassification case because the wage order definitions of "employ" and "employer" are much more susceptible to common proof than the Borello factors.  For these reasons, the decision magnifies the risk of classifying workers as independent contractors in California.  In this author’s opinion, the Dynamex decision is questionable because it relies predominantly on caselaw applying the wage order definitions to determine whether an third party could be held liable for wage and hour violations as a “joint employer.”  Joint employer analysis has nothing to do with independent contractor classification analysis.  It seems likely that this issue will end up before the California Supreme Court.  In the meantime, however, California employers should tread cautiously and carefully in classifying workers as independent contractors because the court decision trend in this area has been largely unfavorable for employers -- with several recently publicized cases finding employers liable for misclassification of workers as independent contractors and now the Dynamex court holding that an "employee" includes any worker "engaged" or "suffered or permitted" to work.

Sacramento Trial Court Holds That Sacramento Bee Newspaper Carriers Were Misclassified as Independent Contractors

On September 22, after a court trial before the Honorable Gerrit W. Wood of the Superior Court of Sacramento County, the court, in an unpublished opinion, found that a class of newspaper carriers working for the Sacramento Bee from 2005 through 2009 were improperly classified as independent contractors.  Utilizing the standards articulated by the California Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Ind. Relations, 48 Cal. 3d 341 (1989,) and more recently in Ayala v. Antelope Valley Newspapers, Inc., 59 Cal. 4th 522 (2014), Judge Wood held that the Bee’s parent company, McClatchy, maintained such control over the means in which the newspapers were delivered that it could not properly classify the carriers as independent contractors.  The individual class action plaintiffs are now demanding that McClatchy reimburse them all of their mileage expenses in accordance with section 2802 of the California Labor Code, which requires that employees be reimbursed all reasonable expenses incurred in the course of their employment.  It remains to be seen if McClatchy will appeal the decision. 

Although this decision is not a precedential one, it is important nonetheless as it illustrates the increased focus and scrutiny by plaintiffs’ attorneys and certain government agencies on individuals who are working as independent contractors.  California businesses who utilize independent contractors are cautioned to carefully review the circumstances of these workers to make sure that they can make a strong legal argument, under both federal and California law, that the classification is an accurate one.  The consequences for misclassification can be broad and include such items as tax liability, liability for unpaid workers’ compensation premiums, liability for stock options and benefits and other entitlements that similarly situated employees receive but independent contractors do not, and liability for unreimbursed expenses.  

Federal District Court in California Rules That Iskanian Is Wrong and That PAGA Representative Action Waivers Are Enforceable

Earlier this summer, the California Supreme Court ruled in Iskanian v. CLS that while class action waivers in employment arbitration agreements are enforceable, similar waivers of the right to bring a representative action under PAGA are not enforceable.  The Court reasoned that preventing a representative action under PAGA is contrary to California public policy because it undermines the state’s interest in fully penalizing employers who violate labor laws.  The Iskanian Court ruled that California’s public policy was not preempted by the Federal Arbitration Act (“FAA”) because the FAA only applies to arbitration of private disputes and a PAGA plaintiff represents the interests of the state, not himself, such that the claim isn’t really a private dispute between an employee and his employer but rather a dispute between the state of California and a private employer.  The Court held that the FAA does not apply to disputes between a state agency and a private employer.  This reasoning is a stretch in this author’s opinion.  At least one (so far) federal district court in California apparently agrees, having chosen not to follow Iskanian.  In Fardig v. Hobby Lobby, a wage and hour putative class action, a Central District judge granted the employer’s motion to compel arbitration, rejecting the plaintiffs’ argument that a PAGA representative action waiver in the arbitration agreement was unenforceable.  The court held that FAA preemption is an issue of federal law and that federal courts are not bound by the California Supreme Court’s opinion that the FAA does not preempt California public policy with respect to PAGA representative action waivers.  The court went on to hold that it disagreed with Iskanian and that a PAGA claim filed by an employee is a dispute between the employee and his employer, not between the state of California and the employer.  As such, the district court held that the FAA applied and preempted any California public policy weighing against enforceability of a PAGA representative action waiver.  This means that the individual plaintiffs will now have to litigate their individual wage claims in private arbitration and do not have the right to pursue any class or representative PAGA claims in any forum.

The Fardig v. Hobby Lobby decision (August 11, 2014, Central District Case No. SACV 14-00561 JVS) is a favorable development for California employers as it demonstrates that there is some continued viability of PAGA representative action waivers in employment arbitration agreements, notwithstanding Iskanian.  Employers should also note that the parties is Iskanian have until late September to petition for review of the decision by the United States Supreme Court.  If that happens, it is quite possible that the Supreme Court will reverse the PAGA portion of the Iskanian opinion.  Even if review is not sought (or is sought but denied), employers facing the issue of enforceability of a PAGA representative action waiver should remove California state court cases to federal court wherever possible.

New Case Highlights Duty to Reimburse Employees for Using Personal Cell Phones for Work Purposes

Last week a California Court of Appeal held that class certification was appropriate in a case alleging that the employer failed to reimburse employees for expenses associated with using their personal cell phones for work calls.  At the trial court level, the employer successfully opposed class certification, arguing that liability could not be established on a class wide basis because it required individualized inquiry regarding whether an employee purchased a plan over and above what he normally would have had for purely personal use, and/or whether the employee incurred charges over and above his personal plan.  The employer also argued that if someone other than the employee paid the employee’s cell phone bill, the employee would not have standing to pursue a claim for relief and this also created individualized issues.  In addition to the individualized issues bearing on liability under Labor Code section 2802, the employer also successfully argued that damages would be highly individualized.  The trial court denied class certification based on the predominance of individualized issues.

The Court of Appeal reversed, holding that the trial court abused its discretion in denying class certification.  The Court of Appeal held that the trial court relied on the wrong standard for liability for a reimbursement claim under Labor Code section 2802.  According to the Court of Appeal, all that is required to prove liability under Labor Code section 2802 is that the employee necessarily incurred expenses in the course of his job duties.  The employee does not need to prove that he incurred expenses over and above what he would have incurred absent the job, nor does he have to prove that he actually paid his cell phone bill.  The court held that if the rule were otherwise, the employer would receive a windfall by being able to pass on some of its operating expenses to employees.  Thus, the court held that to be in compliance with Labor Code section 2802, “the employer must pay some reasonable percentage of the employee’s cell phone bill” if the employee uses a personal cell phone for work purposes.  In other words, "reimbursement is always required."  The court did not define what a “reasonable percentage” is, but instead held that “the calculation of reimbursement must be left to the parties and the court in each particular case.”

Based on its interpretation of the standard for liability under Labor Code section 2802, the Court of Appeal held that a class should have been certified because liability could be determined on a class wide basis and did not depend on adjudication of numerous individualized issues.  The court acknowledged that damages issues were “more complicated” (i.e. individualized) but held that individualized damage issues do not defeat class certification and that the trial court could employ statistical sampling to calculate damages under the standards set forth by the California Supreme Court in Duran v. U.S. Bank.

The case is Cochran v. Schwan Home Service, Inc. and is available here.  Employers that have employees using personal cell phones for business calls should review their expense reimbursement policies to ensure that these employees are reasonably compensated for the expense of making business calls on their personal devices.

California Supreme Court Narrows Commissioned Salesperson Exemption

Last week the California Supreme Court continued its trend of issuing employee-friendly decisions, this time in a case involving the commissioned salesperson exemption.  In Peabody v. Time Warner Cable, the plaintiff was a commissioned salesperson who sold advertising spots for Time Warner Cable.  She was classified as exempt from overtime under California's commissioned salesperson exemption, which applies to a sales employee whose earnings exceed at least one and one-half times the minimum wage if more than half of those earnings represent commissions.  Time Warner paid plaintiff her regular wages on a biweekly basis, but only paid her commission wages once per month.  Thus, at least one paycheck per month was comprised only of base hourly pay and did not reflect earnings exceeding more than one and one-half times the minimum wage.  However, the monthly commission check, which represented commissions earned for a monthly period (not just for a bi-weekly period), brought the employee's wages for the month to more than one and one-half times the minimum wage.

Plaintiff sued, arguing that she was not properly paid overtime wages for hours worked in excess of eight per day or forty per week.  The trial court granted summary judgment for Time Warner, agreeing with Time Warner that it properly paid plaintiff under the commissioned salesperson exemption and that plaintiff was not entitled to additional overtime compensation.  Plaintiff appealed to the Ninth Circuit, which certified a question to the California Supreme Court concerning whether an employer could properly allocate commission wages over the pay periods in which they were "earned," or whether the commission wages could only be attributed to the pay period in which they were actually paid.  The California Supreme Court said the latter.

In so holding, the California Supreme Court reasoned that California overtime exemptions are narrowly construed and must be interpreted in favor of the employee and against the employer.  The Court's holding certainly accomplishes that.  The Court acknowledged that California law permits commission wages to be paid less frequently than regular wages and that monthly, or even less frequent, payment of commission wages is permissible (given that commission wages often are not "earned" until certain conditions are satisifed and are not calculable with the same frequency as the regular payroll schedule).  However, the Court reasoned that just because California law allows less frequent payment of commission wages that aren't "earned" every pay period does not mean that an employer can use a monthly or less frequent schedule to pay commission wages that are earned.  The Court reasoned that California law requires that all wages earned for work performed generally be paid no less frequently than twice per month.  Time Warner was arguing that it could allocate commission wages to the pay periods in which they were "earned," but the Court said that permitting this would be tantamount to authorizing monthly pay periods for wages earned.  Because monthly pay periods are not authorized by the California Labor Code, the Court held that Time Warner had not properly paid the plaintiff and she did not qualify for the commissioned salesperson exemption.

The Court acknowledged that Time Warner's pay system was proper under the federal commissioned salesperson exemption, but declined to find it proper under California law because California law, unlike federal law, requires at least semi-monthly pay periods.

The California Supreme Court's decision makes it much more difficult for employers to satisfy the commissioned salesperson exemption under California law.  Employers that look back and allocate commission wages over the pay periods in which they were "earned" as a means of ensuring that the employee's pay is at least one and one-half times the minimum wage, should revise their practices in light of this decision.

California Supreme Court Eases Path to Class Certification in Independent Contractor Misclassification Cases

Yesterday the California Supreme Court issued its decision in Ayala v. Antelope Valley Newspapers, holding that the trial court erred in denying class certification to a group of newspaper carriers who worked as independent contractors for Antelope Valley Newspapers and later sued the newspaper for wage and hour violations on the basis that they should have been classified as employees.  The Court held that the trial court focused on the wrong legal criteria in denying class certification and that the matter had to be remanded for the trial court to re-assess class certification using proper criteria.  In denying class certification, the trial court held that the issue of whether the carriers were employees or independent contractors could not be decided in one stroke as to the entire class because the evidence showed substantial variation in the degree of control the newspaper exercised over its carriers’ work, and the issue of degree of control is the primary factor in assessing whether a worker is an independent contractor or an employee.

The California Supreme Court held that the trial court erroneously focused on variation in the level of control actually exercised by the newspaper, rather than on whether the newspaper uniformly retained the right to control the carriers’ work.  The Court emphasized that the key issue is whether the hirer has the right to control the work, not whether the hirer actually exercises that right.  The Court explained that evidence of whether the hirer retains the right of control typically is found in the contract between the hirer and the worker.  In this case, the newspaper used largely the same form independent contractor agreement for all of its carriers.  The Court stated that the trial court “afforded only cursory attention” to the parties’ agreement, when it should have focused on the agreement as the starting point for its analysis.  Rather than outright saying that if a hirer uniformly uses the same agreement for all of its workers, the issue of right to control can always be decided on a class wide basis, the Court reserved some room for trial courts to look to the parties’ “course of conduct” (and beyond just the agreement).

“While any written contract is a necessary starting point, [ ] the rights spelled out in a contract may not be conclusive if other evidence demonstrates a practical allocation of rights at odds with the written terms.  In deciding whether claims that hinge on common law employee status are certifiable, then, a court appropriately may consider what control is ‘necessary’ given the nature of the work, whether evidence of the parties’ course of conduct will be required to evaluate whether such control was retained, and whether that course of conduct is susceptible to common proof – i.e. whether evidence of the parties’ conduct indicates similar retained rights vis-à-vis each hiree, or suggests variable rights, such that individual proof would need to be managed.”

The Court directed that on remand, the trial court would need to assess whether the newspaper, notwithstanding the form contract it entered with all carriers, actually had different rights with respect to each that would necessitate mini-trials.  The Court briefly addressed the fact that the test for determining whether a worker is an independent contractor or an employee depends not only on the right of control, but also on numerous secondary factors (method of payment, who supplies the tools and equipment, place of work, etc.).  The Court minimized the significance of the secondary factors and of evidence of individualized variation bearing on those factors, reasoning that variation in one or more secondary factors may not impact class certification if the factor is not a heavy one in the analysis compared to the other factors.

The Court’s decision and reasoning makes class certification more likely in independent contractor misclassification cases is likely to fuel more of this litigation.  This is because many companies use form independent contractor agreements and these agreements often spell out the “right to control” retained by the company.  The full decision is available here.

Supreme Court Rules That Obama’s 2012 Recess Appointments to the NLRB Are Invalid

Today the United States Supreme Court issued its decision in NLRB v. Noel Canning, voiding President Obama’s 2012 recess appointments to the NLRB on the ground that the appointments exceeded the President’s constitutional authority.  In so holding, the Court affirmed the D.C. Circuit Court of Appeal’s decision last year in the case.  However, the Court did not agree with the D.C. Circuit Court’s reasoning.  The D.C. Circuit Court had held that the recess appointments were invalid because the Senate was not actually in “recess” at the time and that the recess appointment power only applies to inter-session recesses, and then, only to vacancies that arise during such a recess (as opposed to vacancies existing at the time the recess commences).  By contrast, the Supreme Court held that the recess appointment power applies both to inter-session and intra-session recesses and is not limited to vacancies that arise during a recess.  However, the Court held that the recess must be of a sufficient length to trigger the recess appointment power.  The Court held that the break in the legislative session must be at least 10 or more days in order for recess appointments to be authorized.  In the case of the 2012 NLRB recess appointments, the appointments were made during a period when the Senate was convening every three days for pro forma sessions when no business was actually conducted.  The Court held:  “Three days is too short a time to bring a recess within the scope of the clause.  Thus we conclude that the president lacked the power to make the recess appointments here at issue.”

The Court’s voiding of the NLRB appointments invalidates many NLRB decisions and actions in which the 2012 recess appointees participated.  It is unclear how the NLRB with proceed as to the many affected matters.  However, NLRB Chairman Mark Gaston Pearce issued the following statement today:

“The Supreme Court has today decided the Noel Canning case.  We are analyzing the impact that the Court’s decision has on Board cases in which the January 2012 recess appointees participated.  Today, the National Labor Relations Board has a full contingent of five Senate-confirmed members who are prepared to fulfill our responsibility to enforce the National Labor Relations Act.  The Agency is committed to resolving any cases affected by today’s decision as expeditiously as possible.”

The Court’s full opinion in Noel Canning is available here.

California Supreme Court Holds, Contrary to Federal Law, That Unauthorized Workers Can Recover Back Pay Even for the Post-Termination Time Period When They Did Not Perform Work and Could Not Legally Earn Wages

Today the California Supreme Court issued its decision in Salas v. Sierra Chemical Co., holding that an employee who fraudulently obtained employment through use of someone else’s social security number, may still pursue employment discrimination claims stemming from termination and recover damages against the employer, including post-termination back pay for the period when the employee was not authorized to work and did not actually perform work.  The Court held that federal immigration law does not preempt this result.

Salas applied for employment with Sierra Chemical in 2003 and was hired.  In compliance with its legal obligations, Sierra Chemical required Salas to complete an I-9 form as well as a W-4.  Salas completed these forms by providing a resident alien card and a social security card.  From 2003 to 2005, Salas was subject to seasonal layoffs on a few occasions, but was later recalled to work.  Each time he was recalled to work, Salas provided the same social security number he had provided upon hire.  In 2006, Salas injured his back in the course of his work.  He sought medical treatment and returned to work with temporary modified work restrictions, with Sierra Chemical accommodated.  A few months later, Salas was released to full duty.

Later the same year, Salas injured his back again and filed a workers’ compensation claim.  He performed modified duties, which Sierra Chemical accommodated, until the winter of 2006, when he was subject to another seasonal layoff along with Sierra Chemical’s other production workers.  In May 2007, Sierra Chemical notified Salas and other production workers that it was recalling them for work and directing them to make arrangements to return to work.  Salas’ supervisor told Salas to also bring a doctor’s note indicating he was released to return to work.  Salas contacted his supervisor and told him that he had not been released to return to full duty but that he had an appointment in June to obtain the release.  Salas’ supervisor agreed to hold his job open for him until that time.  Salas’ supervisor never heard from him again.

In August 2007, Salas sued Sierra Chemical, alleging claims for failure to accommodate a disability in violation of FEHA, and for unlawful refusal to rehire him in retaliation for filing a workers’ compensation claim.  Salas sought lost wages, emotional distress damages, punitive damages, and attorneys’ fees.  Two years into the litigation, Sierra Chemical learned that Salas had falsified his employment eligibility documentation and that he was not authorized to work in the United States.  Sierra Chemical filed a motion for summary judgment, arguing that it was entitled to judgment as a matter of law on Salas’ claims based on the doctrines of after-acquired evidence and unclean hands.  The trial court denied Sierra Chemical’s motion, but was then directed by the court of appeal (by writ of mandate) to grant the motion.  After judgment was entered for Sierra Chemical, Salas appealed.  The court of appeal again held that Salas’ claims were barred by the doctrines of after-acquired evidence and unclean hands and affirmed the judgment in favor of Sierra Chemical.  The California Supreme Court granted review and reversed the judgment in favor of Sierra Chemical, holding that the doctrines of after-acquired evidence and unclean hands did not operate to completely bar Salas’ claims.

The Court (in an opinion authored by Justice Kennard and joined by Justices Cantil-Sakauye, Werdegar, Corrigan, and Liu) held that the doctrines of after-acquired evidence and unclean hands may operate to reduce an employee’s damages and/or preclude reinstatement, but that they are not a complete defense to an employee’s claims.  The court held that where lost wage damages are at issue, these doctrines generally preclude recovery of lost wage damages from the point of the employer’s discovery of the employee’s misconduct forward, but that the doctrines do not bar recovery of damages for the period of time prior to the employer’s discovery of the information.  In the case of an employee who is fired and later sues, and during the litigation the employer discovers that the employee fraudulently obtained employment through use of someone else’s social security number, the employee would still be entitled to recover lost wages for the time period from termination until the employer discovered the fraud (typically years later during the litigation process).  In other words, the employee who wasn’t even authorized to hold employment in the first instance and did not perform any work for the employer during the post-termination time period could still recover lost wages for being denied employment during that time period.  Really?

Employers shaking their heads have good reason to do so.  The United States Supreme Court does not seem to agree with the result reached today by the California Supreme Court.  Indeed, in 2002, in Hoffman Plastic Compounds, Inc. v. NLRB, 535 U.S. 137, the United States Supreme Court held that a worker who fraudulently obtained employment in violation of immigration laws was not entitled to backpay from the period of time from termination through the employer’s discovery of the fraud.  Reversing an award of backpay to an employee for a four and one-half period of time from his termination through his employer’s discovery of his undocumented status, the Court held that “awarding backpay to illegal aliens runs counter to policies underlying” the Immigration Reform and Control Act of 1986, and that it was improper to “award backpay to an illegal alien for years of work not performed, for wages that could not lawfully have been earned, and for a job obtained in the first instance by criminal fraud.”  Makes sense, right?  The California Supreme Court apparently does not think so.  In an effort to get around Hoffman Plastics, the California Supreme Court held that Hoffman Plastics did not apply because it dealt with NLRB proceedings and that somehow made it materially different.  The Court held that because this case involves California law and, more specifically, discrimination claims brought under FEHA, there are different public policy considerations at issue.  The Court also emphasized the fact that in 2002, the California legislature, which also did not like the Hoffman Plastics decision, enacted a state law specifically designed to render Hoffman Plastics inapplicable to state law employment claims.  That 2002 California state law specifically provided that all state-provided worker protections, rights, and remedies (except reinstatement prohibited by federal law) were equally available and applicable to all individuals regardless of immigration status.

Hmmm.  Doesn’t federal immigration law preempt state laws to the contrary?  Not so, according to today’s California Supreme Court ruling.  The Court held that there was no direct conflict between federal immigration law and California law permitting unauthorized workers to recover lost wages for a period of time when the employer did not know of the employee’s fraud and unauthorized status.  The Court also held that California law was not in conflict with the policy and purpose of federal immigration law.  According to the Court:

“Even if permitting [unauthorized aliens who have used false documents to secure employment] to obtain state remedies for violations of the state labor and employment laws provides an incentive for such federal law violations, the practical effect of such incentive is minimal because the typical unauthorized alien wage earner is not familiar with the state law remedies available for unlawful termination and because job seekers rarely contemplate being terminated in violation of the law.  Thus, it is highly unlikely that an unauthorized alien’s decision to seek employment in this country would be based in any significant part on the availability of lost wages as a remedy for unlawful discharge. . . . Furthermore, not allowing unauthorized workers to obtain state remedies for unlawful discharge, including prediscovery period lost wages, would effectively immunize employers that, in violation of fundamental state policy, discriminate against their workers on grounds such as disability or race, retaliate against workers who seek compensation for disabling workplace injuries, or fail to pay the wages that state law requires.”

Based on this and other reasoning, the California Supreme Court held that California’s 2002 law and its holding were not preempted by federal immigration law.

In sum, the California Supreme Court held that a worker who fraudulently obtains employment through false immigration documents and is later terminated for reasons unrelated to the employee’s fraud may pursue claims for employment discrimination and that those claims are not completely barred by the employee’s fraudulent conduct.  The employee loses the right to reinstatement as a remedy if the employee was not actually authorized to work in the United States in the first place and also loses the right to recover lost wages for any time AFTER the employer discovers the employee’s fraud.  However, the employee can still recover lost wages from the time of termination until the time the employer discovers the fraud, even though the employee was not authorized to work and did not actually perform any work for the employer during that time period.  Of course, the employee can also still seek emotional distress damages, punitive damages, and attorneys’ fees as well.

Justice Baxter, joined by Justice Chin, dissented from the majority’s holding, stating that in their view, Hoffman Plastics and federal immigration law preempt and preclude a state law award of back pay during the time period from an employee’s termination through the employer’s discovery of the fraudulent conduct.  Perhaps Sierra Chemical will seek review by the United States Supreme Court.  Stay tuned.  Today’s decision is available in full here.

Ninth Circuit Further Weighs In on Class Waivers in Employment Arbitration Agreements

The California Supreme Court wasn’t the only court focused on arbitration agreements today.  The Ninth Circuit also issued a pair of decisions relating to the enforceability of class waiver provisions in employment arbitration agreements.  In both instances, the Ninth Circuit upheld the enforceability of the agreements.

In the first case, Johnmohammadi v. Bloomingdale’s, the Ninth Circuit considered whether a class waiver provision was enforceable to bar court litigation of wage and hour claims brought on behalf of a putative class of employees.  The narrow issue before the court was whether the class waiver violated the Norris-LaGuardia Act and/or the National Labor Relations Act, both of which protect employees’ rights to engage in concerted activities for mutual aid and protection and prohibit employers from restraining or interfering with these rights.  The court held that the class waiver provision did not violate either Act because the arbitration agreement allowed employees 30 days to elect to opt-out of the agreement.  Had the plaintiff opted out, she would have been free to pursue her class claims in court.  By not opting out, she elected to proceed with any claims individually in arbitration.  The court held that this opt-out right effectively precluded a finding that the plaintiff was coerced into waiving class claims or otherwise restrained from pursuing them.  The plaintiff admitted she was aware of the arbitration agreement and the right to opt-out and that she did not elect to do so.  There was no evidence that the plaintiff was coerced into not opting out.  On these facts, the Ninth Circuit held that the class waiver provision in the agreement was enforceable and not in violation of the NLRA or Norris-LaGuardia Act.

In the second case decided by the Ninth Circuit today, Davis v. Nordstrom, the court considered whether a class action waiver provision that the employer added to its arbitration policy (set forth in an employee handbook, not a free-standing agreement) was enforceable to preclude an employee from litigating wage and hour claims on behalf of a putative class in court.  The court held that the handbook provision was an enforceable agreement and that the class waiver provision was enforceable.

Nordstrom had a long-standing arbitration policy in its employee handbook, but the policy did not include class waiver language.  The handbook did include language indicating that Nordstrom would provide employees with 30 days written notice of any substantive changes to the arbitration provision in the handbook to allow employees to consider the changes and decide whether or not to continue employment subject to those changes.  In July and August 2011, Nordstrom revised its arbitration policy to require that employees arbitrate any employment claims individually and to preclude the filing of class claims.  Nordstrom sent letters to its employees in June 2011 advising them that the arbitration policy had been modified and provided a copy of the new policy.  In August 2011, the plaintiff filed a putative class action alleging wage and hour violations against Nordstrom.

Nordstrom moved to compel arbitration of the plaintiff’s individual claims, but the district court denied the motion.  The district court held that no “agreement” was ever reached because Nordstrom did not provide clear notice to employees of the change, that it would go into effect in 30 days, and that by continuing employment employees would be bound by the change.  The Ninth Circuit reversed the district court’s ruling and held that the plaintiff had entered into an enforceable agreement by continuing her employment after notice of the change to the arbitration policy, thereby agreeing to the change.  “While the communications with its employees were not the model of clarity, we find that Nordstrom satisfied the minimal requirements under California law for providing employees with reasonable notice of a change to its employee handbook by sending a letter to [the employees] informing them of the modification, and not seeking to enforce the arbitration provision during the 30 day notice period.”

As for Nordstrom’s failure to expressly alert employees that by continuing employment for 30 days they would be agreeing to the change to the arbitration policy, the Ninth Circuit held that California law does not require employers to expressly inform employees that continued employment constitutes acceptance of policy modifications.  As such, this was not a basis for invalidating the class waiver or for finding that no agreement was reached.

The Ninth Circuit’s decisions in these two cases are here and here.  While today's Ninth Circuit opinions are favorable for California employers, employers are cautioned that best practice is still to have any arbitration agreement be a separate agreement rather than simply a part of an employee handbook.  Additionally, it is a good idea to specifically advise employees not only that their employment is at-will, but also that this means the employer has the right to modify the terms and conditions of employment at any time and that continued employment constitutes the employee's acceptance of any such modifications.    

Editor
Cal Labor Law

Robin E. Largent is a Partner in CDF’s Sacramento office and may be reached at 916.361.0991 or rlargent@cdflaborlaw.com BIO »

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