Ninth Circuit Strikes Down California’s Law Outlawing Mandatory Arbitration Agreements
On February 15, 2023, the United States Court of Appeals for the Ninth Circuit issued its decision in Chamber of Commerce of the United States of America, et al. v. Bonta, et al. In this decision, the Ninth Circuit found California Assembly Bill 51 (AB 51) to be preempted by the Federal Arbitration Act (FAA), and therefore, unenforceable against California employers. This decision reaffirms the right of employers to require a properly-drafted arbitration agreement as a condition of employment, and/or continue to use or update existing arbitration programs.
Background
In 2019, California Governor Gavin Newsom signed AB 51 into law. AB 51 represented the latest in a series of attempts by the California legislature to prevent employers from requiring employees to sign agreements to arbitrate employment claims.
California’s legislature was well aware that federal policy favored arbitration, and aware of legal precedent holding that attempts to curtail arbitration might be preempted by the FAA. In drafting AB 51, the legislature tried to avoid preemption by focusing the new law on the formation of mandatory arbitration agreements, and not on the enforceability of signed agreements. Specifically, AB 51 declared it an unlawful employment practice for an employer to require employees to waive their rights to litigate their claims in court – a fundamental requirement of any arbitration agreement. It provided for civil and criminal liability for employers who violated the law. However, AB 51 did not affect the enforceability of existing agreements to arbitrate.
AB 51 was immediately challenged by the business community based on FAA preemption. The United States and California Chambers of Commerce, along with other business organizations, sued California Attorney General Rob Bonta to prevent the enforcement of AB 51. On December 30, 2019, two days before AB 51 was to become effective, a California District Court agreed, and struck the law down. In September 2021, a three-judge panel of the Ninth Circuit, by a 2-1 vote, issued an unexpected ruling, concluding that most provisions of AB 51 did not conflict with the FAA, and could therefore be enforced.
The business community plaintiffs asked for a rehearing by the entire Ninth Circuit. In June, 2022, while this rehearing request was pending, the United States Supreme Court issued a decision in another case involving arbitration agreements in California, Viking River Cruises, Inc. v. Moriana. In Viking River, the Supreme Court held that employees could be required to arbitrate, on an individual basis, claims for wage and hour related civil penalties under California’s Private Attorneys General Act. The Supreme Court emphasized the strong federal policy supporting the use of arbitration agreements and the expansive nature of FAA preemption, which applies to any state law inhibiting the use of arbitration agreements.
After Viking River, the original Ninth Circuit panel vacated its decision and agreed to rehear the case. On February 15, 2023, the Ninth Circuit panel, again by a 2-1 vote, affirmed the District Court’s decision and found that AB 51 conflicts with the purposes and objectives of the FAA. The panel rejected the State of California’s contention that AB 51 avoided FAA preemption by focusing on contract formation rather than contract enforcement, concluding that the distinction makes no difference – the effect of the law is to disfavor the use of arbitration agreements, contrary to federal law and policy. Therefore, the Court upheld the District Court’s order preventing enforcement of AB 51.
Implications for Employers
This is a major victory for California employers who use or wish to adopt mandatory arbitration programs. Due to the uncertainty around AB 51, some employers with existing programs were reluctant to require new employees to sign agreements or to modify existing agreements with employees. With this ruling, it is clear – at least for the time being – that employers may require employees to agree to arbitration as a condition of employment. As before, any mandatory arbitration agreement must comply with existing requirements in California. These requirements include, among other things, that the employer pay for costs of the arbitration that exceed the filing fee for civil actions; the agreement must be mutual and not impose shorter statutes of limitations or restrictions on available damages; and it must allow for reasonable discovery and for the recovery of costs and attorney’s fees in accordance with applicable law.
It is also clear that employers are free to require current employees to agree to modifications in existing agreements. This may be important for employers who want to ensure that class and representative claims for wage and hour violations are limited to individual claims in arbitration in light of the Viking River decision, or employers who want to make changes to ensure the enforceability of their arbitration agreements.
What May Come Next
The Ninth Circuit’s decision may not be the final word on the issue. It is likely the State of California will request rehearing by the entire Ninth Circuit. It is also likely, whether or not rehearing is granted, that the losing party will ask the United States Supreme Court to review the case. Given past Supreme Court decisions, the prospects are good that the latest Ninth Circuit decision will be upheld.
In addition, there have been efforts in Congress to limit the scope of FAA preemption or to ban mandatory, pre-dispute arbitration agreements. One such effort resulted in the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” which took effect in March, 2022. This new federal law, while not prohibiting or invalidating arbitration agreements, provides claimants bringing claims of sexual harassment or sexual assault the right to proceed in court even if they previously agreed to arbitrate such claims. Despite these uncertainties and limitations, arbitration agreements remain a viable alternative for Golden State employers.
US Supreme Court Expands Protections for Public Employees’ Religious Expression
On Monday, the United States Supreme Court issued its decision in Kennedy v. Bremerton School District. In a 6-3 decision, the Supreme Court ruled that the Free Speech and Free Exercise clauses of the First Amendment to the United States Constitution protect a public school football coach’s right to lead a post-game, mid-field prayer. According to the Supreme Court, the prayers offered by the coach were a form of private religious observance, which the employer had no authority to censor.
Background of Kennedy v. Bremerton School District
Joseph Kennedy was a high school football coach employed by the Bremerton School District (the “District”). After football games, Kennedy made it a practice to kneel and offer prayer at midfield with anyone who chose to participate. The District directed Kennedy to cease this practice, on the theory that students might feel obligated to participate, and the District wished to avoid a perception of religious endorsement. Kennedy continued the practice, and the District terminated his employment. Kennedy filed suit under the Free Speech and Free Exercise clauses of the First Amendment. Siding with the District, both the trial court and Ninth Circuit determined that the District maintained a compelling interest in prohibiting the prayers because allowing them to continue could violate the First Amendment’s Establishment Clause, which prohibits government endorsement or hostility towards any religion. The lower courts concluded that allowing Kennedy’s prayers to continue could be seen as preference towards his religion.
The Supreme Court disagreed. It concluded Kennedy’s post-game prayers were not “ordinarily within the scope of his duties as a coach,” and the “object” of the District’s decision was to prohibit a religious practice by a “private citizen.” Prior to Kennedy, courts applied the three-prong test established in 1971 in Lemon v. Kurtzman, to determine whether a government activity or law violated the Establishment Clause. The Supreme Court, however, shifted away from over fifty years of jurisprudence by abandoning the Lemon test and adopting a new framework requiring courts to generally consider “reference to historical practices and understandings.” The Supreme Court ultimately concluded that Kennedy satisfied his burden under the First Amendment by showing that the District “burdened his sincere religious practice pursuant to a policy that is not ‘neutral’ or ‘generally applicable.’” Therefore, the Supreme Court determined, the District violated Kennedy’s First Amendment rights by impermissibly regulating his speech and restricting his religious practice.
What This Means
The Supreme Court’s Kennedy decision could have a broad impact on public entities. It requires public employers to place a higher emphasis on employees’ right to religious expression when making employment decisions involving potentially protected religious activity and ultimately expands employees’ recognized First Amendment rights in the workplace.
It is too early to tell how lower courts will apply the Supreme Court’s new historical reference framework under the Establishment Clause. With greater protections now afforded employees under the First Amendment, employment decisions in the future, particularly for public employers, will be difficult and complicated. Employers are encouraged to consult with counsel before making employment decisions that involve religious practice implications.
AUTHORS
Anissa Elhaiesahar (USD School of Law, Class of 2023)
Matthew Mushamel
Fred Plevin
California Supreme Court: One Hour California Meal and Rest Period Penalty Must Include Commissions and Non-Discretionary Bonuses
by Corrie Klekowski and Fred Plevin
Paul, Plevin, Sullivan & Connaughton
On Thursday, the California Supreme Court issued its decision in Ferra v. Loews Hollywood Hotel, LLC, in which it ruled that the one hour of pay employers are required to provide employees for non-compliance with California’s meal and rest period requirements must be based on the same “regular rate of pay” (RROP) calculation used in calculating overtime pay. This means that employers must account for commissions and non-discretionary bonuses when calculating the amount of a meal or rest period penalty paid to employees.
The Court ruled that its decision applies retroactively, so employers may be liable for underpaying hourly employees who received a meal or rest period penalty in a workweek for which they received commissions or non-discretionary payments if the meal/rest period penalty was not based on the RROP calculation.
Details
Jessica Ferra was a bartender at the Loews Hollywood Hotel. She received quarterly incentive payments. On occasion, Loews paid her a penalty of one hour of pay for a missed, late or short meal or rest period. Loews calculated the one-hour meal/rest period penalty at Ferra’s base hourly rate. Ferra filed a class action against Loews in 2015, alleging that Loews failed to comply with California law by omitting the incentive payments from the one hour premium pay she received for noncompliant meal or rest breaks.
The governing statute, Labor Code 227.6(c), specifies that “the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.” Ferra argued that “regular rate of compensation” was the same as “regular rate of pay,” which is a well-known concept in wage and hour law used for calculating overtime pay.[1] Specifically, under the RROP concept, employers must include commissions and other non-discretionary payments when calculating overtime pay for employees.[2]
Both the trial court and the California Court of Appeal ruled in favor of Loews, holding that the because the Legislature did not use the term “regular rate of pay” in the statute, that concept did not apply to the meal/rest period pay. The Supreme Court, however, disagreed and held that “regular rate of compensation” (the term used in Section 226.7) and “regular rate of pay” were synonymous. In reaching this conclusion, the Court turned aside Loews’ reliance on accepted “canons” of statutory interpretation, characterizing them as “merely aids” and “guidelines subject to exceptions.” The Court also relied on the “remedial purpose” of California’s Labor Code and its guidance that California’s labor laws are to be “liberally construed in favor of worker protection.”
Finally, the Court rejected Loews’ argument that its decision should apply only prospectively. Loews argued that it, like many other employers, had reasonably interpreted Section 227.6 as allowing for the premium pay to be based on an employee’s straight hourly rate and applying the decision retroactively would be unfair. The Court disagreed, concluding that this was a case of statutory interpretation, and therefore, its ruling should be retroactive. It also rejected Loews’ pleas that retroactive application of the Court’s decision would expose employers to “millions” in liability, observing it was “not clear why we should favor the interest of employers in avoiding ‘millions’ in liability over the interest of employees in obtaining the ‘millions’ owed to them under the law.”
What This Means
Like Loews, many California employers have paid meal/rest period penalties based on employees’ straight time hourly rate. The Loews decision means that such employers may have liability to employees who received a non-discretionary payment in the same workweek as they received meal/rest period premium pay. The period of exposure could be up to four years under California’s unfair business practice statute. Because the incremental difference in the penalties is likely to be small, the total wages owed, even to a large number of employees, may be relatively minor. However, the liability could expose employers to class action and PAGA claims for attorneys’ fees and other statutory and civil penalties based on an underlying violation of Section 226.7. We expect to see a proliferation of these claims being filed or added to pending class actions and PAGA lawsuits.
Employers should immediately implement changes to ensure that any meal/rest period penalties paid in the future are calculated based on the employee’s RROP.
In addition, employers may want to analyze options for paying employees to address recalculations of past meal/rest period penalties based on the RROP. Whether this is a viable option for employers will depend on a number of factors, including the availability of the information needed to identify eligible employees and to calculate the amount owed. If you have questions about this decision or would like guidance on analyzing your options, please feel free to contact one of the authors or any PPSC attorney.
[1] Calculating the RROP can be complicated. But, generally for hourly employees, the RROP for a workweek is calculated by determining the total regular pay—including regular wages and other forms of “remuneration”—divided by the total number of hours worked. For example, an employee with a pay rate of $15 per hour that worked 40 hours, and received a $20 production bonus, would have a $15.50 RROP:
| (40 hours x $15/hr) + $20 | $620 | |||
| ————————————– | = | ————- | = | $15.50/hr (correct regular rate) |
| 40 hours | 40 hours |
So, if this employee had a non-compliant meal period in this workweek, under the Loews decision, they should be paid a $15.50 penalty, not a $15.00 penalty. Where an employee works overtime in the same period that the meal premium is due, the formula would be even more complex.
[2] The term “non-discretionary” for purposes of the RROP rule is defined in state and federal regulations and administrative guidance. Simply stated, a payment is “discretionary” only if both the fact that the payment is to be made and the amount of the payment are determined at the sole discretion of the employer, and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.
New California Supplemental Paid Sick Leave Law Takes Effect March 29
On Friday, Governor Newsom signed SB 95, which requires California employers with 25 or more employees to provide employees with a brand new bank of supplemental paid sick leave for COVID-related reasons (SPSL), including to employees seeking vaccination appointments or recovering from vaccination side-effects. The law requires employers to provide the SPSL to employees retroactively back to January 1, 2021.
California’s new mandate is unfunded, placing all of the burden on employers. However, in a bit of good news, the recently enacted $1.9 trillion American Rescue Plan of 2021 (ARPA) extended the federal payroll tax credits originally put in place by the Families First Coronavirus Response Act (FFCRA) through September 30, 2021. This means that, in many cases, California-mandated SPSL provided by employers with fewer than 500 employees will qualify for federal payroll tax credits. However, the rules regarding tax credits are complex – employers should consult their tax professionals to see if the credits may apply.
The new SPSL law goes into March 29, 2021, so employers have little time to provide employees with notice of their rights under the law, ensure compliant policies and practices, and work with their payroll providers to ensure that their paystubs include the necessary new information.
What does SB 95 require?
SB 95, which adds section 248.2 and 248.3 to the California Labor Code, requires employers with 25 or more employees to provide SPSL for COVID-related reasons (listed below). This entitlement is over and above employees’ regular paid sick leave, PTO, or vacation leave banks. SPSL must be available for immediate use by the employee, upon oral or written request. An employee may determine how many hours of SPSL to use, up to the total number of hours to which the employee is entitled.
How much leave are employees entitled to?
Full-time employees are entitled to 80 hours of SPSL. Part-time employees who have a normal weekly schedule are entitled to SPSL based on the total number of hours the employee is normally scheduled to work over two weeks. Variable hour employees are entitled to SPSL based on an average hours calculation defined in the new law.
Employers cannot require the employee to use any other paid or unpaid leave, paid time off, or vacation time provided before the employee uses SPSL or in lieu of SPSL. The law clarifies that SPSL and leave provided under the Cal/OSHA emergency standards may run concurrently.
How will employees know about SPSL and how much leave they have available?
Each employee’s SPSL balance must be listed on the employee’s wage statement or a separate writing provided with the employee’s pay. The law provides only a very short grace period on implementing the pay stub requirement: employers have until the next full pay period after March 29, 2021, which is the effective date of the new law.
For variable hour employees, the employer may prepare an initial calculation of SPSL available and indicate “(variable)” next to that calculation. However, the employer must provide an updated calculation when a variable hour employee seeks to use SPSL or requests the calculation.
The employer must also post a notice to employees of their SPSL rights. The California Labor Commissioner will provide a model notice sometime this week. Notices may be posted electronically for employees who do not frequent the workplace.
What can SPSL be used for?
Employees may use SPSL if they are unable to work or telework for any of the following reasons:
- the employee is under a COVID-19 quarantine or isolation period based on a governmental order or guidelines;
- the employee is under self-quarantine for COVID-19 concerns based on advice from a health care provider;
- the employee is receiving a COVID-19 vaccine;
- the employee is experiencing COVID-19 vaccine side-effects;
- the employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
- the employee is caring for a family member who is subject to an order or guidelines described in subparagraph (1) or who has been advised to self-quarantine, as described in subparagraph (2);
- the employee is caring for a child whose school or place of care is closed or otherwise unavailable for reasons related to COVID-19 on the premises.
How much are employees paid for SPSL?
As is the case with regular California paid sick leave, nonexempt employees must be paid SPSL at the employee’s “regular rate of pay” (a term of art that includes all forms of remuneration the employee receives such as shift differentials and non-discretionary bonuses) or via a calculation made by dividing the covered employee’s total wages, not including overtime premium pay, by the employee’s total hours worked in the full pay periods of the prior 90 days of employment.
Exempt employees’ SPSL should be paid in the same manner as the employer calculates wages for other forms of paid leave time.
However, employers are not required to pay more than $511 per day or $5,110 in the aggregate to an employee for SPSL unless federal legislation is enacted that increases the caps included in the FFCRA, in which case the new federal dollar amount caps would apply.
What is the practical effect of the law applying retroactively to January 1, 2021?
As noted above, SB 95 applies retroactively to January 1, 2021. This presents a significant practical challenge (and cost) for employers.
For any time an employee took off between January 1, 2021 and March 29, 2021 for a qualifying reason under the new law (see above):
- unless the employee has already received compensation in an amount equal to or greater than the amount of compensation required by the SPSL law, then upon the oral or written request of the employee, the employer must provide the employee with a retroactive payment that provides for such compensation;
- this retroactive payment must be paid on or before the payday for the next full pay period after the oral or written request of the employee; and
- the retroactive payment must be reflected on the employee’s wage statement as retroactive SPSL pay.
The law does not directly address what happens if the employee used “regular” paid sick leave, PTO, vacation leave, or unpaid leave after January 1, 2021, but we expect employees will request that their leave banks be credited and replenished for any such time previously debited. Employers should have internal processes/forms ready to process such requests.
When does the new SPSL leave expire?
This new law is in effect through September 30, 2021, except that an employee taking SPSL at the time of the expiration must be permitted to take the full amount of SPSL to which the employee otherwise would have been entitled to under the new law. For example, if an employee starts SPSL on September 30, 2021, she may continue it into October to complete her leave.
Anything else I should know about the new SPSL law?
The new SPSL incorporates many of the provisions of California’s regular paid sick leave laws. For example, the recordkeeping, wage statement, pay calculation, and anti-interference/discrimination/retaliation provisions all apply to SPSL.
In addition, because SPSL is codified in the Labor Code, violations of the SPSL law may be the basis for a Private Attorneys General Act of 2004 (PAGA) representative action.
How does the new federal American Rescue Plan affect implementation of the SPSL?
The federal mandate for employers with fewer than 500 employees (“small employers”) to provide FFCRA leave expired on December 31, 2020. However, shortly before its expiration, Congress extended the federal payroll tax credits for small employers who continued to provide leave based on FFCRA eligibility requirements and in accordance with FFCRA rules, through March 31, 2021. The ARPA has both extended the FFCRA payroll tax credits through September 30, 2021, and expanded the payroll tax credit eligibility to leaves taken for additional reasons covered by SB 95 (e.g., vaccination-related qualifying reasons). This means that small California employers may be entitled to claim federal payroll tax credits to cover most SPSL provided to their employees.
Navigating the tax credits issue is complicated because the federal ARPA and California’s SPSL are not exactly aligned, eligibility for federal payroll tax credits is limited by a number of factors including company size and leave plans offered, and the tax credits will not necessarily cover 100% of the cost of SPSL provided to employees.
California Governor Gavin Newsom Signs Series of Noteworthy Employment Bills
Sunday, October 13, 2019, was the last day for Governor Gavin Newsom to approve or veto bills passed by the state Legislature. This year’s approved employment-related bills generated quite a buzz, and for good reason. This e-Update surveys some of the most significant changes that will impact California employers. Paul, Plevin will review these and other new laws at the firm’s annual Employment Law Update on Friday, November 1st at the Hilton San Diego Resort & Spa on Mission Bay.
All new laws take effect January 1, 2020, except as indicated below.
Assembly Bill 5 – Employee versus Independent Contractor Status
Assembly Bill 5 codifies the “ABC” test adopted in Dynamex Operations v. Superior Court to determine whether a worker is an employee or independent contractor. The Dynamex decision was limited to only certain parts of the Labor Code, but Assembly Bill 5 extends the “ABC” test to virtually all California workers, excluding certain specifically enumerated industries and occupations (e.g. doctors, investment advisors, and hairdressers). In addition to various complete exceptions, this bill allows contracts of certain employers and industries to be governed by the more forgiving Borello multi-factor “economic realities” test, provided they meet a set of listed requirements.
Assembly Bill 9 – More Time To Bring Discrimination and Harassment Claims
The Stop Harassment and Reporting Extension Act extends the period for an aggrieved employee to file a complaint alleging harassment, discrimination, or other unlawful practices with the Department of Fair Employment and Housing (DFEH) from one year to three years. The new limitations period does not apply to claims that have already lapsed if a complaint was not filed with the DFEH.
Assembly Bill 51 – Prohibition on Mandatory Arbitration Agreements
This new law makes it a criminal misdemeanor for an employer to require an applicant or employee to enter into an agreement to arbitrate any claims under the Fair Employment and Housing Act or the California Labor Code. Arbitration agreements in place before January 1, 2020 will still be enforceable, as long as they are not extended or modified after that date. While the drafters of the bill attempted to avoid preemption by the Federal Arbitration Act, that question will likely be tested in the federal courts.
Assembly Bill 673 – Recovery of Civil Penalties
Employees will be able to obtain penalties as part of a Labor Commissioner hearing to recover unpaid wages. Under the current law, penalties must be paid to the State, but this new law allows workers to personally collect the penalty instead. An employee, however, still cannot “double dip”; he or she has to choose between recovering statutory penalties under these provisions or enforcing civil penalties under the Private Attorney General Act.
Assembly Bill 749 – “No Rehire” Provisions Prohibited in Settlement Agreements
This new law prohibits an agreement to settle an employment dispute from containing a provision that prohibits, prevents, or otherwise restricts the claimant from working for the employer against which the claimant filed a claim, or any affiliated entity. An employer and employee are permitted, however, to agree to end a current employment relationship or restrict the employee from obtaining future employment with the employer, if the employer made a good faith determination that the employee engaged in sexual harassment or sexual assault. Further, an employer is not required to continue to employ or rehire an employee if there is a legitimate, non-discriminatory or non-retaliatory reason for terminating or refusing to rehire the employee.
Assembly Bill 1554 – Flexible Spending Accounts
This new law requires employers to notify, in a prescribed manner, an employee who participates in a flexible spending account of any deadline to withdraw funds before the end of the plan year. “Flexible spending accounts” include but are not limited to: (1) dependent care flexible spending accounts; (2) health flexible spending accounts; and (3) adoption assistance flexible spending accounts. The required notice shall be provided by two different forms, one of which may be electronic.
Senate Bill 142 – Lactation Accommodations
This new law, largely based on the San Francisco ordinance for lactation accommodations passed in 2017, further expands protections for lactating workers by requiring employers to provide a lactation room, other than a bathroom, that shall be “in close proximity to the employee’s work area, shielded from view, and free from intrusion.” The lactation room must also (1) be safe, clean, and free from toxic or hazardous materials; (2) contain a surface to place a breast pump and personal items; (3) contain a place to sit; and (4) have electricity. Employers must also provide access to a sink with running water and a refrigerator in close proximity to the employee’s workspace. This law also requires employers to develop and implement a lactation accommodation policy, include it in employee handbooks, and provide it to new employees or when an employee raises parental leave. Employers with fewer than 50 employees may seek an exemption to these new requirements if they can demonstrate undue hardship.
Senate Bill 778 – Sexual Harassment Training Deadline Extension
This bill is emergency legislation, and therefore took effect immediately upon signing on August 30, 2019. This new law delays the deadline to complete supervisor and non-supervisor sexual harassment training under the FEHA from January 1, 2020 to January 1, 2021. However, new non-supervisory employees must still be provided at least one hour of sex harassment training within six months of hire, and new supervisory employees must be provided training within six months of the assumption of a supervisory position.
Senate Bill 83 – Expansion of Paid Family Leave
This new law extends the maximum duration of paid family leave (PFL) benefits from six weeks to eight weeks beginning July 1, 2020. Workers paying into the California State Disability Insurance (SDI) program may receive such PFL benefits to (1) care for a seriously ill child, spouse, parent, grandparent, grandchild, sibling, or domestic partner, or (2) to bond with a minor child within one year of the birth or placement of the child through foster care or adoption. Additionally, this new law allows state government employees that pay into the Nonindustrial Disability Insurance (NDI) program to receive six weeks of paid leave. Further, this law requires the governor to propose by November further benefit increases—in terms of duration and amount—and job protections for individuals receiving PFL benefits.
Senate Bill 188 – Hairstyle Discrimination
The Creating a Respectful and Open Workplace for Natural Hair (CROWN) Act, expands the definition of “race” under the FEHA and the Education Code to include both hair texture and protective hairstyles that are closely associated with race. The Act bans not only general employment discrimination, but also dress codes and grooming policies that prohibit “natural hair, including afros, braids, twists, and locks,” which would have a disparate impact on black applicants and black employees. FEHA exceptions for bona fide occupational qualifications and security regulations still may apply. California is the first state to codify this rule.
Fred Plevin
Paul, Plevin, Sullivan & Connaughton LLP
California Governor Jerry Brown Signs #MeToo Bill Package Affecting Employers
Governor Brown Signs #MeToo Bill Package Favoring Employees in Harassment Litigation and Settlements, Expanding Anti-Harassment Training Requirements, and Protecting Employers From Defamation Claims
Summary
On September 30, 2018, Governor Brown acted on the last of over 1,200 bills that the Legislature passed this year, including a slate of #MeToo inspired laws. This e-Update surveys the most significant changes.
Discussion
Although the Governor’s reaction to the #MeToo legislation was mixed, the laws taking effect on January 1, 2019 will significantly affect California employers.
Senate Bill 1300 is most impactful. It establishes that a single incident of harassment may satisfy the requirement that harassment be “severe or pervasive.” The law also directs trial courts that sex harassment cases should generally be resolved by a jury trial. Further, the law makes it harder for an employer that prevails in a discrimination or harassment suit to recover its attorneys’ fees. Finally, the law limits an employer’s use of confidentiality and non-disparagement agreements in harassment and discrimination settlements.
Governor Brown also signed Assembly Bill 2770, which aims to protect employees and employers from certain defamation claims. A.B. 2770 deems three specific communications privileged: (1) an employee’s credible report of sexual harassment to an employer; (2) communications between an employer and “interested persons” (like witnesses or victims) about sexual harassment claims; and (3) an employer’s statements to prospective employers that a decision to not rehire an individual is based on the employer’s finding that the individual engaged in sexual harassment. All communications must be made without malice to be privileged.
The Governor also signed Senate Bill 820, which prohibits any provision in a settlement agreement that would prevent the disclosure of facts related to sexual assault, harassment, or discrimination. The law excepts only provisions that shield the claimant’s identity or the settlement amount.
Another new bill is Senate Bill 1343, which expands employer training obligations. Currently, employers with 50 or more employees must provide anti-harassment training to supervisory employees within six months of hire and every two years. The new law extends the training requirement to employers with five or more employees. The law also requires that non-supervisory employees receive one hour of training, starting in January 2020.
Paul, Plevin will review these new laws at the firm’s annual Employment Law Update on November 2, 2018.
What This Means
These laws are certain to alter harassment litigation in California. The new ban on non-disclosure provisions in harassment cases is certain to make early settlement more precarious as it will no longer ensure a publicity-free resolution. The new laws will also impede the dismissal of sex harassment claims. Finally, employers must now expand their harassment prevention efforts by training both supervisory and nonsupervisory employees every two years.
Employers have until January 1, 2020 to provide the first mandated training, which must be repeated every two years thereafter. PPSC regularly offers customizable compliance trainings both on-site and at our offices. For more information, see our website.
We note that some of the bills vetoed by Governor Brown this year, such as the bill prohibiting mandatory arbitration of harassment claims, are likely to be presented again in 2019 before a new Governor and Legislature. Paul, Plevin will continue to track these legislative proposals and provide updates on developments that affect California employers.
This E-Update was co-authored by Desi Kalcheva and Mary Allain. For more information, please contact Ms. Kalcheva, Ms. Allain or any Paul, Plevin attorney by calling (619) 237-5200.
California’s Equal Pay Act is Amended . . . Again
Last week, Governor Brown signed into law Assembly Bill 2282, which was introduced in February 2018. The bill is another amendment to California’s Equal Pay Act, which has now been amended three times since January 1, 2016, when the Fair Pay Act expanded the law to apply to employees performing “substantially similar work” and limit the factors employers can rely on to justify pay disparities. The changes to the law take effect on January 1, 2019.
Details
The new amendments are primarily intended to clarify the obligations imposed on employers by Assembly Bill 168, which took effect on January 1, 2018. AB 168 prohibited employers from asking job applicants for salary history information, and it also required employers to provide “applicants” with the “pay scale” for a position based on a “reasonable request.” Since AB 168 took effect, employers have struggled to interpret these requirements, including whether “applicants” included current employees, what information had to be included when providing the “pay scale,” and what constituted a “reasonable request.” AB 2282 addresses these questions by providing more details about employers’ obligations. Specifically, the new amendment provides:
- An “applicant” is an individual seeking employment, not a current employee.
- “Pay scale” is a salary or hourly wage range, and does not include bonuses or equity compensation.
- A “reasonable request” is a request made after an applicant has completed an initial interview with the employer.
The amendment also states what was previously understood: The ban on inquiring about an applicant’s pay history does not prohibit inquiries about an applicant’s “salary expectations.”
Finally, the new amendment drives home that employers cannot rely on prior salary – ever – to justify a pay disparity between employees performing substantially similar work. Existing law said employers could not rely on salary history information of an applicant as a factor to determine what salary to offer the applicant. Existing law also said employers could not use prior salary “by itself” to justify any disparity in compensation. The amendment removes the “by itself” limitation, and also adds a new sentence that says: “Prior salary shall not justify any disparity in compensation.” However, the amendment provides a slight exception for current employees, by providing: “Nothing in this section shall be interpreted to mean that an employer may not make a compensation decision based on a current employee’s existing salary, so long as any wage differential resulting from that compensation decision is justified” by the statutory factors of a seniority or merit system, a system that measures earnings by quantity or quality of production, or a “bona fide factor” other than gender, race or ethnicity, such as education, training or experience.
What This Means
This amendment provides employers with some additional clarity by better defining their obligations to provide pay scale information to applicants. The amendment also makes it clear that employers cannot rely on prior pay in initial salary setting, and cannot include prior pay even as one consideration in justifying a pay disparity between employees performing substantially similar work. Even though employers may make compensation decisions based on an existing employee’s current salary, employers still must be able justify any resulting wage differential based on factors enumerated in the statute. This means that employers must rely solely on these statutory factors, and never on prior pay, when explaining starting salaries or any pay differential between employees performing substantially similar work. Considerable uncertainty remains, however, over how narrowly courts will construe the statutory factors, especially a “bona fide factor other than gender, race or ethnicity,” which requires employers to prove an “overriding legitimate business purpose” and that the factor has been “applied reasonably.” It will take time for these questions to be answered by the courts.
Fred Plevin
The Ninth Circuit Rules That Employers Cannot Rely On Prior Pay To Justify A Pay Differential Between Men And Women
On Monday, the Ninth Circuit issued an en banc opinion in Rizo v. Yovino, holding that an employer may not rely on prior pay as a defense to a gender pay equity claim under the federal Equal Pay Act (“EPA”). This is a significant decision as it reverses Ninth Circuit law established over 35 years ago and creates a split between federal circuits on this issue, which opens the door to review by the United States Supreme Court. The practical impact of the decision is immediate: Employers defending gender pay equity claims cannot rely on prior pay as even part of the justification for a pay differential between men and women.
Case Details
Aileen Rizo was hired by the Fresno County Office of Education in 2009. The County set Rizo’s starting salary based on its policy of placing new employees within the County’s salary schedule at a step corresponding to their prior salary plus 5%. Rizo filed an equal pay claim in 2012 after learning she was earning less than male colleagues performing the same work. The County sought summary judgment on the ground that prior salary fell under the EPA’s “any factor other than sex” defense and as such, was a permissible basis for setting compensation under the EPA. The County’s summary judgment motion was denied, and the County obtained permission to file an immediate appeal. On appeal, a three-judge panel of the Ninth Circuit reversed the trial court’s denial of summary judgment, concluding that under a 1982 Ninth Circuit decision, Kouba v. Allstate Insurance Co., prior salary constitutes a “factor other than sex” under the EPA, as long as the employer’s consideration of prior salary was reasonable and effectuated some business policy.
The Ninth Circuit then granted Rizo’s petition to rehear the appeal en banc. On rehearing, an 11 judge en banc panel of the Ninth Circuit reversed course, overturned Kouba v. Allstate, and held that prior salary is not a “factor other than sex,” and therefore cannot be used to justify a pay differential between the sexes, independently or as one of several factors.
The Court’s en banc opinion was authored by Stephen Reinhardt, known as “the liberal lion of the Ninth Circuit,” who passed away on March 29, 2018 at the age of 87. In the majority opinion, Judge Reinhardt concluded “unhesitatingly, that ‘any other factor other than sex’ is limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.” He observed that since the 1963 EPA was intended to eliminate long-existing, endemic sex-based pay disparities, it was “inconceivable” that Congress would create an exception for basing new hires’ salaries on those very disparities. Accordingly, the Court held: “Prior salary, whether considered alone or with other factors, is not job related and thus does not fall within an exception to the [Equal Pay] Act that allows employers to pay disparate wages.”
In response to an argument made in a concurring opinion, the Court noted that its decision expressed a general rule, and did not resolve its application under all circumstances. The Court specifically stated that it was not deciding whether or under what circumstances past salary might play a role in the course of an individualized salary negotiation, and expressly reserved questions relating to individualized negotiations to future cases.
What This Means
This is a significant development for all California employers. First, the case was decided under the EPA, which applies to employers nationwide. However, California’s Fair Pay Act, which took effect on January 1, 2016, was designed to be substantially tougher than the EPA. To accomplish this, the California legislature expanded coverage to employees performing “substantially similar work” instead of “equal work,” and also narrowed the “catch-all defense.” In contrast to the “any factor other than sex” language under the EPA, the defense under California law is limited to “a bona fide factor other than sex.” Under California’s formulation of this defense, an employer must prove the “factor other than sex” is job-related, consistent with business necessity, and not based on or derived from a sex-based factor. Given these more stringent requirements, it is not hard to see how a California court would adopt the Ninth Circuit’s reasoning and conclude that prior pay cannot constitute a “bona fide factor other than sex.”
Second, the Ninth Circuit did not just prohibit the use of prior pay as the sole justification for a challenged pay disparity. (California law already prohibits an employer’s reliance solely on prior pay.) The Court went one step further and held that prior pay, “whether considered alone or with other factors” could not be used to justify a pay differential. This could mean that an employer who uses prior salary along with valid job-related factors such as education, past performance, experience and training, could lose an equal pay claim because it failed to justify the entire pay disparity based on legitimate factors. In this regard, the Ninth Circuit’s interpretation of the EPA is more restrictive than other circuit courts that have addressed this issue.
Use of prior pay as a factor in setting compensation is already under attack. California is one of several states that prohibit an employer from even inquiring about an applicant’s prior pay. With the Ninth Circuit’s decision in Rizo and California’s nascent Fair Pay Act, employers are well-advised to avoid using prior pay in setting compensation, and to review the pay of existing employees whose starting pay was set based on prior pay, preferably as part of a broader, privileged audit of pay practices.
Employers That Prevail in Discrimination Cases Are No Longer Automatically Entitled to Recover Costs
It has long been the rule in California that the prevailing party in a discrimination or harassment claim under the Fair Employment and Housing Act is entitled to recover costs. A prevailing plaintiff is also entitled to automatically receive an attorneys’ fee award, while a prevailing defendant needed to prove that the plaintiff’s claim was frivolous or otherwise unreasonably brought or pursued. Although fee awards are difficult to obtain for prevailing employers, the ability to recover costs has served as a useful deterrent against marginal claims.
However, in a disappointing ruling for California employers, on May 4, 2015, the California Supreme Court ruled in Williams v. Chino Valley Independent Fire District that an employer’s ability to recover its costs after prevailing in a discrimination or harassment case is subject to the same “objectively without foundation” standard that applies to attorneys’ fee awards. The Court concluded the legislature intended for the Fair Employment and Housing Act to provide an exception to the general rule that a prevailing defendant is automatically entitled to recover costs, and imposing the higher standard of proof on a prevailing defendant’s cost application was consistent with California’s policy not to chill the vindication of employees’ rights under the FEHA.
What This Means
An employer will no longer be able to automatically recover costs in a FEHA case, even if it proves a plaintiff’s case has no merit. This further reduces the downside risk for employees and their attorneys who file baseless claims, and removes an important tool for employers to resolve unmeritorious claims.
California Supreme Court on Arbitration Agreements: Class-Action Waivers OK, but PAGA Claims Unwaivable
This week, the California Supreme Court issued its highly anticipated opinion in Iskanian v. CLS Transportation Los Angeles, LLC. The decision was a partial victory for employers: the Court clarified that class-action waivers in arbitration agreements may be enforced, but it also held that employers cannot obtain the waiver of an employee’s right to bring a “representative” claim under California’s Private Attorney General Act of 2004 (PAGA).
Iskanian resolved a split amongst California courts as to whether the U.S. Supreme Court’s 2011 ruling in Concepcion v. AT&T Mobility overruled an earlier California case – Gentry v. Superior Court – that said courts could evaluate class-action waivers on a case-by-case basis. The Iskanian Court addressed whether the Federal Arbitration Act (FAA) allowed state courts to refuse to enforce arbitration agreements in order to promote important state interests, such as California’s wage-and-hour laws. The plaintiff in Iskanian argued wage claims were cost-prohibitive for an individual to bring, so class actions were needed to enforce California’s unwaivable labor rights.
The California Supreme Court concluded that the FAA trumps these state-law interests. Because the FAA mandates the enforcement of legal arbitration agreements, California labor laws cannot require procedures that are “incompatible with arbitration.” Therefore, California courts are not free to rely on public policy to reject class action waivers. The Court also rejected the argument that class action waivers violated employees’ rights to engage in “concerted activity” under National Labor Relations Act.
The case was not a total win for employers, however, as the Court determined that employees cannot waive the right to bring claims under the PAGA. Iskanian held that the FAA’s purpose is to preserve arbitration’s “efficient forum for the resolution of private suits.” PAGA “deputizes” employees so they can assert claims for civil penalties on behalf of the state of California. Since PAGA claims are not “private suits” but state enforcement claims, the Court reasoned, the FAA does not apply and an employee’s waiver of rights to pursue PAGA claims on behalf of other employees is not enforceable.
What This Means
Iskanian allows employers to include class action waivers in arbitration agreements. To be enforceable, these agreements still must comply with existing legal standards including mutuality, allocation of costs, and preservation of statutory rights to attorneys’ fees.
However, it is now established that such class action waivers cannot include a waiver of an employees’ right to bring PAGA claims. Therefore, employees with valid arbitration agreements can still seek civil penalties for Labor Code violations, and they can do so on behalf of themselves and all other allegedly aggrieved employees. As a result, employers with valid class action waivers in arbitration agreements could find themselves litigating wage claims in two separate forums.
The potential of parallel wage claims is a new wrinkle in this area. Employers should consider this along with all the other pros and cons of arbitration agreements, and ensure that their agreements do not otherwise violate California law against unconscionable contracts.
by Matthew R. Jedreski and Fred M. Plevin.
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