The Perils of California Employment Law

By Frank E. Melton, Olivia Goodkin and Wendy Lane, Rutter Hobbs & Davidoff Incorporated (www.rutterhobbs.com)

It is difficult to keep track of the various laws affecting employers in all 50 states, but California employers that do not focus on the substantial differences between California law and federal law may incur serious liabilities. Prudent companies with California operations simply cannot have uniform national policies or practices without considering the impact of differences in California law in areas such as wage and hour laws, anti-discrimination laws, and rights to terminate or discipline employees.

This article briefly highlights a few of the more significant differences between California and federal employment law, including recent developments.

More Potent Monetary Remedies under FEHA

Companies with California employees should be aware that the remedies under the California Fair Employment & Housing Act (“FEHA”) are much more potent than under federal laws such as Title VII, the ADA (Americans with Disabilities Act) and the ADEA (Age Discrimination in Employment Act). Unlike federal law, compensatory damages under FEHA (including back pay, front pay and lost benefits) are not subject to caps limiting recovery. There are also no specific limits on emotional distress damages, punitive damages and attorneys’ fees that may be recovered under FEHA. Moreover, under FEHA, individuals may be held personally liable for harassment, including sexual harassment. Under a recent California Supreme Court decision, individual managers or supervisors may no longer be held personally liable for retaliation under FEHA, but retaliation claims remain one of the most dangerous areas of exposure for California employers.

Disability Discrimination

Cases decided under the ADA have significantly limited employer obligations. However, California employers cannot rely on federal law under the ADA in determining what reasonable accommodations, if any, to provide to employees with some type of arguable “disability.” The disability discrimination provisions of California’s FEHA create greater rights for employees than the ADA by more broadly defining what is a protected mental or physical ”disability.” In addition, California employers have a statutory duty under FEHA to engage in an “interactive process” to determine, in a timely and good faith manner, whether effective reasonable accommodations may be made whenever requested by an employee or job applicant with a known disability. Unlike federal law, the duty to engage in the interactive process is separate and independent from the duty to provide reasonable accommodation for a protected disability. Hence, California employers may be held liable for failure to engage promptly in the interactive process, even if there ultimately is no need to provide a reasonable accommodation.

More Rigorous Tests for Exemptions from Overtime Requirements

There are many differences between California wage and hour laws (governed by the California Labor Code and the state’s 17 industry or occupational wage orders) and the

Fair Labor Standards Enforcement Act (“FLSA”), the primary federal law regulating wage and hour issues. Where there is an inconsistency, the law most protective of the employee must be followed.

One area where there is a particularly significant difference between California and federal law is in the exemptions from overtime requirements. For example, the minimum salary generally required under California law to be an exempt employee is considerably higher than that mandated by federal law (at least two times the California minimum wage, which in 2008 requires a salary of $33,280 based on the minimum wage of $8.00 per hour). California law generally requires a rigorous analysis of the employee’s actual duties to determine whether more than 50 percent of the duties fall within the executive, administrative, or professional exemptions, in addition to the $33,280 minimum salary requirement. Federal law, by contrast, frequently leaves more room for employers to find exempt status in permitting non-exempt duties to be performed, so long as they are not “primary” and are “incidental” to the employee’s “primary duties.” In addition, California employers are required to pay daily overtime whenever a non-exempt employee works more than eight hours in a day (and double time after 12 hours in a day), in contrast with the FLSA, which requires overtime only when non-exempt employees work more than 40 hours in a workweek.

There has been a substantial increase in class action wage and hour litigation nationwide under the FLSA and many state laws during this decade. The proliferation of class action wage and hour lawsuits has been even greater under California law due to the especially rigorous rules regarding determination of exempt status and other unusual requirements upon which many employers have not previously focused, such as meal and rest periods. The wave of class action lawsuits has spread during the past year or so from multi-million dollar settlements and verdicts against large national employers to many medium-sized and small California employers, including non-profits.

Rest and Meal Periods

While the FLSA does not require rest periods, California law requires employers to provide compensated rest periods for non-exempt employees who work at least three and one-half hours per day. Rest periods should be in the middle of each work period and must be at least 10 consecutive minutes for each four hour period worked.

In addition, California law prohibits non-exempt employees from working more than five hours without a meal period of 30 minutes or longer, except in certain limited circumstances. Generally speaking, non-exempt employees must be required to take at least the minimum 30-minute meal period, completely uninterrupted, even if employees voluntarily prefer to do otherwise.

The penalties for violating California meal and rest period requirements are severe. Employers owe one additional hour of pay for each meal or rest period violation. Under recent California court decisions, employers are liable for wage penalties relating to violations for a four year period before the lawsuit was filed (the same statute of limitations as applicable to many other wage and hour violations), which has significantly increased exposure for meal and rest period violations.

Penalties for Non-Payment of Wages upon Termination

All wages and vacation accrued through the last day of employment are due immediately upon termination. Thus, employers must have ready the final paycheck, including all accrued wages and vacation — including any unused paid time off (“PTO”) or floating holidays, which are also generally treated like vacation, but not unused sick time — so that it can be received by the employee on the day of termination. For each calendar day that the final paycheck is delayed, even if it is paid at the normal payroll date, the terminated employee may recover a “waiting time” penalty equal to daily wages, for up to a total of 30 calendar days. The same penalty applies where the employer “willfully” (interpreted broadly) fails to pay the full wages due, including overtime or vacation pay, or takes an unlawful setoff against the final paycheck for monies owed by the employee (most such setoffs being unlawful in California).

Liability Based on Unenforceable Covenants Not to Compete

Covenants not to compete are unenforceable in California except in certain circumstances involving the sale of a business. Companies may be liable for tort damages for wrongful termination in violation of public policy if they fire employees who refuse to sign a non-competition covenant that violates California law. There are also serious questions regarding the extent to which out-of-state employers can succeed in enforcing such covenants against former employees located in (or who relocate to) California based upon choice of law provisions in the covenants purporting to make them enforceable under the law of the employer’s home state. Several California decisions have ruled such choice of law provisions to be unenforceable as to California-based employees because they are contrary to the fundamental public policy of the state permitting employees to pursue a livelihood in the field of their choice. However, employers can enforce in California narrowly-tailored non-solicitation covenants and other provisions necessary to protect trade secret information as defined under California ’s version of the Uniform Trade Secrets Act.

Mandatory Arbitration of Employment Claims

Agreements to arbitrate California state law claims such as wrongful termination in violation of public policy or state discrimination claims under FEHA: (1) may not limit the employee’s right to seek the full range of remedies provided by statute, such as punitive damages or attorneys’ fees; (2) must permit the employee to conduct discovery sufficient to vindicate statutory rights, including access to essential documents and witnesses; (3) must require the employer to pay all types of costs unique to arbitration, such as arbitrator’s fees; and (4) must ordinarily require both the employee and employer to arbitrate their claims against each other. In addition, the arbitrator must be neutral and issue a decision at least briefly stating the essential findings and conclusions on which the arbitration award is based. Conditioning continued employment on the execution of an invalid arbitration agreement may support a tort claim for wrongful termination in violation of public policy.

Enhanced Privacy Rights

Private sector employees in California have a right to privacy under the California Constitution, which has been interpreted to impose restrictions on private sector employers somewhat comparable to those imposed on public sector employers by the Fourth Amendment of the United States Constitution. As a result, California courts have significantly limited the rights of employers to engage in random, post-accident and reasonable suspicion drug and alcohol testing. There are also privacy issues raised by company searches or inspections of computers, emails, offices, personal effects and employee vehicles, which make it important for California employers to address these issues in published employee handbooks or policy statements.

Unusual Leave of Absence Requirements

California has a special preg nancy disability law, applicable to businesses with five or more employees (the minimum under FEHA), that requires unpaid leaves for the period of disability certified by a physician up to four months. Larger employers (with 50 or more employees) covered by federal and California family and medical leave laws are required to provide up to 12 workweeks of unpaid “baby-bonding” leave in addition to the up to four months of preg nancy disability leave. California has a unique paid family leave law that technically does not require employers to grant family leave, but leads many California employers to create policies authorizing such leave, even when employees would be ineligible under state/federal family and medical leave laws, because the State pays a portion of the salary for up to six weeks of paid family leave, funded by payroll tax deductions from employee wages.

There is a long list of other special leave of absence and time off requirements under California statutes, including one of the nation’s strictest laws prohibiting retaliation or discrimination against employees who have filed, or made known their intention to file, workers’ compensation claims. This law has been interpreted to require employers to provide leaves of absences and job protection to injured workers, even in cases where the leaves of absence go beyond 12 workweeks of family and medical leave, company policy or the terms of collective bargaining agreements.

Terminating Employees for Use of Medicinal Marijuana

In 1996, Californians passed an initiative, the Compassionate Use Act, which allows patients with a valid doctor’s prescription to possess and cultivate marijuana for personal medical use. In a victory for employers, the California Supreme Court recently determined that California employers are not required to accommodate medicinal marijuana use by their employees under this law. The Court held that the Act was only intended to protect medicinal users of marijuana from criminal prosecution and was not meant to affect an employer’s right to terminate individuals who use drugs that continue to be illegal under federal law.

Protections for Domestic Partners

Although there is no corresponding right under federal law, as of January 1, 2005, registered domestic partners have the same rights and obligations under California law as spouses. A domestic partnership is established by filing a Declaration of Domestic Partnership form with the California Secretary of State that meets criteria set forth in the California Family Code.

Establishing a domestic partnership affects several different employment-related obligations of businesses. For instance, while California employers (except those in San Francisco ) are not required to provide sick leave at all, if they do, they must allow employees to use sick leave to care for “kin care.” The “kin care” provisions of California law permit employees to use up to one-half of their annual allotment of sick leave to care for sick children, parents, spouse, domestic partner or the partner’s children. Also, insurers of companies that provide health insurance benefits to spouses are required to provide equal benefits to registered domestic partners in California .

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There are many other differences between California employment law, and federal employment law and the employment laws of most states. The above provides only a sampling of the surprises out-of-state employers and their counsel may discover regarding their California operations. Employers in California need to be familiar with the state’s unique, employee-friendly employment laws in order to run their businesses effectively, with an appropriately limited level of risk of employment law claims.

Frank Melton, Olivia Goodkin and Wendy Lane litigate and provide preventive day-to-day advice in connection with a wide range of issues that confront employers, such as those discussed in this article. They can be reached at (310) 286-1700, or visit www.rutterhobbs.com for more information.

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