Recent Developments in California Employment Law

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1 Recent Developments in California Employment Law By: D. Gregory Valenza and Jennifer Brown Shaw Recent developments in labor and employment law will keep employers and their lawyers busy. According to a survey by international law firm Fulbright & Jaworski, companies today face more employment lawsuits than any other type of suit. Wage and hour class actions are still on the rise, and the Equal Employment Opportunity Commission (EEOC) reported an increase in 2009 in discrimination suits based on national origin, religion, retaliation, pregnancy and disability. At the same time, important changes in California trade secrets law mean more litigation in that field is likely. A recent study by the UCLA-Rand Center for Law and Public Policy evaluated how the California Fair Employment and Housing Act (FEHA) is enforced. Among other things, the study revealed a system that is overburdened and often inaccessible to certain segments of the population. As a result, many experts predict that the Department of Fair Employment and Housing (DFEH) will step up enforcement efforts and will likely hire more investigators. The study also examined defense costs in California employment law discrimination cases. Researchers surveyed 14 employer attorneys on the cost of defending employers in proceedings before the Department of Fair Employment and Housing (DFEH) and the Fair Employment and Housing Commission (FEHC). The DFEH is the state agency that enforces California s employment non-discrimination laws, and the FEHC is the administrative agency that conducts hearings on employment discrimination matters. Employers spend approximately $150,000 defending themselves through the course of a trial; and spend $50,000 if they just take the case to the motion of summary judgment stage. Estimated Costs of Defense, Online Survey of 14 Employer-side Attorneys Stage of Proceeding Median Costs of Defense Prepare response to DFEH complaint $5,000 Prepare response and negotiate settlement with DFEH $6,750 Represent employer before FEHC $15,000 Defend litigation by private counsel until summary $50,000 judgment motion Defend litigation by private counsel through summary $75,000 judgment motion Defend litigation by private counsel through trial $150,000 The study also examined jury awards in employment law cases. Researchers compared jury verdicts in and in , and examined financial awards awarded by juries in 360 cases brought by 417 plaintiffs. In the 207 cases where the plaintiff won, the financial awards from juries ranged anywhere from mid-five to low seven figures, according to the study. It s clear that employers who fail to meet their legal obligations in the workplace can face stiff legal penalties, increased turnover and reduced productivity. Litigation in this area is expensive. It can easily cost employers more than $100,000 in attorneys fees and costs even if they win. Of course, when they don t, jury verdicts and settlements can run into the millions of dollars, as many large retailers have discovered in wage-hour class-actions. In short, 2010 promises to bring new legal challenges for California employers. Page 1 of 7

2 Disability Discrimination, Accommodation and the Interactive Process The Americans with Disabilities Act Amendments Act, passed in 2008, significantly expands the coverage of the federal Americans with Disabilities Act (ADA). However, don t expect significant changes in California. The newly broadened ADA is similar to California s Fair Employment and Housing Act (FEHA) in some ways. But California employees won t likely file lawsuits under the expanded federal law. Instead, they ll continue to file lawsuits alleging violations of the FEHA. In part, it s because California s courts are more employee-friendly than federal court. State court judges are less likely to hold plaintiffs to procedural rules, and California law contains no cap on damages that could be awarded in state court. The sky s the limit for plaintiffs in discrimination lawsuits in state court. Federal court judges, though, are far more likely to require strict compliance with procedural rules from plaintiffs, and federal law puts a cap on damages awarded in discrimination suits. Nonetheless, disability discrimination law is changing a bit in California because courts recently issued several important decisions in this field. The courts rulings emphasize the employer s duty under the FEHA to accommodate an employee s disability and engage in a timely, good faith interactive process to determine an effective and reasonable accommodation. An interactive process is one in which the employer receives input from the employee, exchanges ideas and works jointly to come up with a solution. The trend is that the employer bears an ongoing obligation to communicate with an employee, assess potential accommodations, and ensure the accommodations are effective once implemented. The First Appellate District in A.M. v. Albertsons, LLC, 178 Cal. App. 4th 455, 457 (2009), ruled that an employer might be liable for a failure to accommodate relating to a single incident, even if the employer otherwise successfully accommodated the employee s needs. In A.M., the employee needed to use the restroom frequently due to a medical condition. Albertsons accommodated her need without incident for about one year. But on one occasion, she was not permitted to leave her work area on time due to short staffing. Unfortunately, she suffered an accident at the check stand. The court rejected Albertsons argument that the company s overall accommodation was adequate, and upheld a jury verdict in favor of A.M. for $200,000 because the single incident constituted a failure to accommodate. Case Two A.M. follows Nadaf-Rahrov v. Neiman Marcus Group, Inc., 166 Cal. App. 4th 952 (2008), where the company initially engaged in an effective interactive process and granted accommodations. Eventually, the employee was terminated because her doctor claimed she was unable to work at all and there was nothing to show the potential for improvement. Nonetheless, the court ruled it was up to a jury to decide whether the company took appropriate steps to accommodate her in another position. Of course, juries are unpredictable, and many employers would rather not roll the dice on whether a jury will rule against an employee. Two years after filing, Nadaf-Rahrov is still being litigated, and the employer is still racking up attorneys fees. Case Three On the other hand, when Orange County implemented an ongoing series of accommodations for an employee, the Fourth Appellate District upheld a jury verdict in favor of the county Wilson v. County of Orange, 169 Cal. App. 4th 1185 (2009). The employee ended up with nothing. Case Four In Scotch v. Art Institute of California, 173 Cal. App. 4th 986, 1019 (2009), the Fourth Appellate District clarified what an employee must prove when claiming that the interactive process failed. Page 2 of 7

3 Relying on earlier cases, the court decided that an employee can t successfully sue an employer for failing to engage in the interactive process unless the employee identifies a specific and available accommodation the employer should have considered. The employee in Scotch wanted the employer to either relax a minimum education standard or guarantee him priority in assignments, neither of which the court found to be reasonable. Because he didn t identify a specific, available reasonable accommodation, the court ruled that he couldn t proceed with his lawsuit alleging that the Institute failed to engage in the interactive process. The employer avoided a potentially very costly trial. The courts message is that ongoing communication and flexibility are required to prevent disability discrimination claims. To avoid problems in this area, employers should: Involve the right people. In A.M., the supervisor didn t know about the employee s restroom accommodation. The employee may have avoided the accident that led to her claim if management had ensured the right people were informed. Maintain an open dialogue. Employers must treat the interactive process as an ongoing obligation, not a one-time solution. In Nadaf-Rahrov, the employee s needs changed over time. The employer s unwillingness to adapt to those changing needs and to maintain an ongoing interactive process resulted in costly litigation. Keep good records. In Scotch, the employer was successful in part because it had a good record of the steps it had taken to try and accommodate the employee. The employee s proposed accommodations were not reasonable in light of the job s requirements, which were well documented. Harassment California courts recently issued some key rulings in harassment cases. The California Supreme Court in Roby v. McKesson Corp., 47 Cal. 4th 686 (2009), attempted to explain the distinction between harassment claims, for which a supervisor may be personally liable, and discrimination claims, for which there is no personal liability. Supervisors who face personal liability must pay for verdicts against them out of their own pockets and potentially retain their own attorneys. FEHA s discrimination provision addresses only explicit changes in the terms, conditions, or privileges of employment, such as hiring, firing, failing to promote, adverse job assignment, significant change in compensation or benefits, or official disciplinary action, the Court said in its ruling. In other words, discrimination claims typically involve recognizable adverse personnel actions. On the other hand, the court explained that harassment focuses on situations in which the social environment of the workplace becomes intolerable because the harassment (whether verbal, physical or visual) communicates an offensive message to the harassed employee. Unfortunately, the court then blurred the distinction between these types of claims by ruling that personnel actions may be harassment if connected to offensive conduct. Additionally, the court noted that proof of discriminatory actions may contribute to a hostile work environment harassment claim. The Supreme Court s decision may open the door to more harassment claims against employers and individual managers based on personnel actions and other conduct previously thought to be discrimination, not harassment. Harassment verdicts against individuals can go well into the six figures, depending on the facts of the case so this is important distinction. For example, the jury decided that a supervisor in a recent racial harassment case owed over $1,000,000 to the plaintiff-employee. Even after Roby, however, employees can t claim that a workplace decision is unlawful harassment without showing some wrongful conduct by the employer. In recent cases, courts ruled that significant offensive conduct is required to prove a harassment claim. Page 3 of 7

4 Case Two In Haberman v. Cengage Learning, Inc., 180 Cal. App. 4th 365 (2009), for instance, the plaintiff claimed that a long list of primarily verbal conduct over a period of years created a hostile work environment. The plaintiff sought compensation for back pay and emotional distress, and punitive damages. Relying on a recent Supreme Court decision, Hughes v. Pair, 46 Cal. 4th 1035, 1044 (2009), the Fourth Appellate District ruled against Haberman, and the employer prevailed without the need for further legal proceedings. Hughes, too, involved a series of sexist and vulgar sexual comments and come-ons. But the Supreme Court held that Hughes was not entitled to continue with her claim against the trustee because the conduct was not sufficiently severe or pervasive to alter the parties relationship. Of course, no definitive rule exists for how much offensive conduct is too much. To reduce liability in this area, employers should: Provide training. Employers should ensure managers and supervisors understand what conduct may meet the definition of discrimination and harassment and their potential for personal liability. Take all complaints seriously. Many employees base their claims on a series of smaller, less offensive incidents over a long period of time. Employers should take all these incidents seriously. They may help establish a pattern of behavior the employer can then act to control. Set up a process for reviewing negative employment actions. Employers should not allow managers to take adverse actions without consultation. Even when acting for good reason, many managers will not understand the potential legal pitfalls that can accompany these decisions. Employers should have a process to make sure someone in HR, or higher up the chain of command, reviews the decision before it is finalized. Lily Ledbetter Fair Pay Act President Obama signed The Lily Ledbetter Fair Pay Act during his first week in office. Congress passed the Act in reaction to a United States Supreme Court decision that limited the statute of limitations in compensation-related discrimination cases. In Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 (2007), the plaintiff worked for Goodyear Tire for several years before discovering that, based on previous merit increases she alleged were discriminatory, she was earning less than her male counterparts. She argued that even though she was supposed to bring her claim within 180 days of the original discriminatory act the decision to pay her less she met the requirement because each time she received a pay check, Goodyear continued to violate the applicable law. Ledbetter sought back pay, attorneys fees and other damages against the company. The Supreme Court disagreed with this continuing violation theory, and would not let her case proceed further. But the new federal Fair Pay Act essentially reverses the Supreme Court decision, and allows employees to file compensation-based discrimination lawsuits under federal law outside of the 180-day limitations period. This is likely to lead to more claims against employers (and necessarily more fees and costs, even if an employer prevails). To protect themselves, employers should: Assess pay practices. Employers must ensure they understand their pay practices and why employees earn what they earn. This will help assess risk, and allow employers to make adjustments if unjustified discrepancies exist. Justify pay differences. Employers do not have to pay employees the same amount for the same work but they must be able to explain differences that justify different pay, such as greater experience or education. Keep accurate records. Employers will only be able to defend themselves in these suits if they maintain accurate records. That means keeping an employee s payroll and performance records available the duration of employment and beyond. Page 4 of 7

5 Wage and Hour Claims Wage and hour litigation continues to be a hot topic in California. Over the next several months, the California Supreme Court is set to decide significant legal issues involving meal periods, the administrative exemption and tip pooling. California employers have paid out tens of millions of dollars over the past few years in these kinds of cases, whether as part of settlements or as a result of jury verdicts. There is also interesting activity in the courts concerning settlements in wage and hour class action cases. As class action cases continue to grow, courts are concerned about making sure settlements are fair to all employees who may be affected by them. In two recent decisions, California courts refused to approve class action settlements because the courts did not believe the settlements were adequate. In Clark v. American Residential Services LLC, 175 Cal. App. 4th 785 (2009), the parties reached a $2 million settlement after a full-day mediation and significant discovery. Only 20 of more than 2,000 class members objected to the settlement, raising questions about whether the attorneys adequately calculated the potential value of the case. The Second Appellate District overturned a trial court s approval of the settlement, ruling that the trial court did not adequately consider whether the settlement was within the ballpark of reasonableness. The appellate court also rejected the added incentive payments of $25,000 to the named plaintiffs because there insufficient information existed to show the plaintiffs did anything extra to deserve the incentive payments. CaseTwo The court in Clark followed Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116, 133 (2008). There, objectors to a confidential class action settlement for a meal period claim asserted that the court erred in finding the terms of settlement to be fair, reasonable and adequate without citing any evidence of each class member s recovery. The First Appellate District found that the trial court failed to allow objectors sufficient opportunity to gather information through discovery. As a result, the court vacated a settlement reached at mediation. These cases suggest that courts will carefully and independently review class action settlements, and that two sides reaching mutual agreement is no guarantee of success. But the news is not all bad. Case Three In Watkins v. Wachovia Corp., 172 Cal. App. 4th 1576 (2009), the Second Appellate District refused to permit the plaintiff to proceed as a class representative after she voluntarily settled her own personal wage claims. That left the other members of the class to pursue their own claims, which likely will result in lower total payout by the company. Case Four In Chindarah v. Pick Up Stix, Inc., 171 Cal. App. 4th 796 (2009), the Fourth Appellate District held that individuals who had already settled their disputed claims for wages could not proceed as part of a class action, which essentially ended the case. So courts will limit potential plaintiffs ability to participate in a lawsuit if they have already found alternate means of resolving their own disputes. The trend in this area is not to take settlement agreements for granted. Employers must: Follow wage and hour requirements. The easiest way for an employer to avoid the headache of a class action lawsuit is to prevent it. Employers must ensure their practices comply with state and federal law. Because California law is stringent in this area and penalties can be serious, it pays to spend extra time and resources upfront to prevent problems down the road. Do not rely on boilerplate settlement agreements. One step to effectively preventing class actions is to obtain signed releases for disputed wages. In Chindarah, employees who had signed such releases could not proceed as part of the class. However, it is important these agreements are carefully written so they will be enforceable. Page 5 of 7

6 Do not assume a private agreement will be approved by the court. As the Clark case shows, settling a class action is not just a matter of the parties reaching an agreement. It also means the court must review and approve the settlement. Unlike a single-plaintiff case, in a class action, an employer must look at the effect of the settlement on the larger potential plaintiff population, or risk court rejection of the agreement. Restrictive Covenants Recent decisions from California courts make it much more difficult for employers to protect their investments in employee development and confidential information. In two recent cases, the courts refused to enforce non-solicitation agreements, which prohibit or limit former employees from soliciting former clients. These cases permit an employer to restrict the use of trade secrets, but make it clear the law allows for little else. In The Retirement Group v. Galante, 176 Cal. App. 4th 1226 (2009), the Fourth Appellate District ruled that a contractual agreement not to solicit customers was unenforceable. However, the court stated that employers can protect their trade secrets through an injunction under the Uniform Trade Secrets Act. Case Two Similarly, in Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564 (2009), the Second Appellate District refused to enforce a non-solicitation clause contained in a confidentiality agreement. Even though the employer tried to argue the agreement only protected trade secrets and confidential information, in the court s opinion, the employer was trying to protect more. The court refused to enforce the agreement, and ruled that the employer s only real remedy was to obtain injunction to stop the employee from improperly using trade secrets. So, the employer s confidentiality agreement alone was insufficient to protect the employer s trade secrets. The message here is that employers must find alternative ways to engender loyalty and protect their assets from departed employees. It remains lawful and advisable to create strong confidentiality agreements, specifying what company property must be protected from disclosure. But the courts will not permit employers to restrict future competition via these agreements. Employers must beef up security systems, procedures for accessing confidential information and employee-exit processes to protect proprietary information. In addition, employers may wish to consider incentives rather than deterrents to retain valuable employees who are considering leaving to work for competitors. Regulatory Enforcement Federal agencies that enforce employment laws and regulations are gearing up for increased enforcement. The U.S. Department of Labor and Occupational Safety and Health Administration, for example, announced increases in audits and complaint processing. Obviously, increased enforcement efforts likely will lead to more findings against employers. The Equal Employment Opportunity Commission is implementing procedures to reduce its backlog of cases. As a result, employers must become more aware of how to effectively respond to agency requests for information, charges, and on-site investigations. The National Labor Relations Board (NLRB) remains under-staffed, with just three of five members appointed. President Obama nominated three members, both union-side Democrats, but they have not yet been confirmed by the Senate. The NLRB s decisions likely will become significantly more pro-union should these candidates be confirmed, or should the president make recess appointments. The NLRB s decisions may affect union and non-union employers on matters such as employer confidentiality policies, solicitation and distribution rules, and union organizing activity. In addition, Congress has not forgotten about pending legislation making it much easier for unions to organize workers. Once Congress turns away from health care reform and carbon trading legislation, federal lawmakers may again take up the Employee Free Choice Act. Page 6 of 7

7 Conclusion Employment law continues to shift significantly as state and federal legislators pass new laws and courts interpret existing ones. With significant changes in political leadership and economic conditions, this area of the law will continue to be dynamic in the coming months. California employers can be best prepared for these changes by staying informed and focusing on compliance. About the Authors D. Gregory Valenza is the managing partner of Shaw Valenza LLP. Greg is resident in the Firm s San Francisco office. Mr. Valenza practices in all areas of labor and employment law and devotes most of his practice to counseling employers, employment litigation and appeals. Jennifer Brown Shaw is a founding partner of Shaw Valenza LLP, a Sacramento/San Francisco employment law boutique. The Firm s practice exclusively focuses on representing management in employment law advice, training, investigations, litigation and appeals. Ms. Shaw may be reached at or jshaw@shawvalenza.com. CalChamber Is Here to Help We hope that you found this white paper helpful. If you re Interested in learning more about litigation trends and how CalChamber can help, contact us at (800) Page 7 of 7