April Contra Costa Lawyer Online

Transcription

1 April 2013

2 The Contra Costa Lawyer is the official publication of the Contra Costa County Bar Association (CCCBA), published 12 times a year in six print and 12 online issues. 1

3 2

4 Contents Inside: Guest Editor's Column 4 Spring Fever 5 Employment Law Basics for Business Lawyers 7 To Withhold or Not to Withhold: The Employment Tax Consequences of... Should We Tell Employees Not to Talk to Co-workers About Ongoing In A Motivating Reason: Chipping Away at Pretext 20 What You Should Know About The Private Attorney General Act 23 The Discovery Facilitator Program - Nuts and Bolts 28 Disability Facts that Might Surprise You 31 Bar Soap - April The Ethics Corner: The New Efficiency Trend 35 Target Your Search with CCCBA's Job Board 38 3

5 Inside: Guest Editor's Column Monday, April 01, 2013 As the Employment Section President of the Contra Costa County Bar Association, I am honored to introduce you to the Employment Law edition of the online magazine. The April issue contains articles from employment law practitioners covering compelling and relevant employment law matters for everyday practitioners and for those who simply have a passing awareness of employment law. As we launch into the April magazine, we would like to highlight the MCLE events to date. The Employment Section has presented germane and thought-provoking employment law MCLE events over the past few months, as well as calendared the following upcoming MCLE events: Upcoming MCLE Events The Employment Tax Consequences of Settlements and Judgments to be held at 8 a.m. on Thursday, April 15, 2013, in Walnut Creek. Lead by speaker William Hays Weissman, Esq., of Littler Mendelson Workplace Violence Matters to be held at 8 a.m. on Friday, May 10, 2013, in Walnut Creek. Lead by speakers Jim Cawood, Threat Assessment Expert and Thomas Klein, Esq. of TKlein Associates Inc. For further information or to register for the events noted above, please see the Contra Costa County Bar Association calendar. Past MCLE Events Employment Law Update held on January 31, Lead by speakers Casey Christensen of Christensen Law Group and James Y. Wu of Law Office of James Y. Wu. Wage and Hour Update for Employment Law Practitioners held on February 19, Lead by speakers Beth W. Mora, Esq. of Cooper & Mora and Anne-Marie Waggoner, Esq. of Littler Mendelson. Employment Retirement Income Securities Act (ERISA) Basics for Employment Law Practitioners held on Tuesday, March 21, Lead by Speaker Ruth Silver Taube, Esq. of Law Office of Silver & Taube. I would like to thank each author in the April issue, those who present MCLE events and the Employment Section Board. Finally, a never-big-enough thank you to James Wu, our Employment Section Board Liaison and Co-Guest Editor of this magazine. Thank you to each and every one of you, your efforts are much appreciated. Should you have any comments or questions about the magazine, MCLE events or wish to get involved, please do not hesitate to contact Beth W. Mora, Esq., President of the Employment Section at bmora@cooperlawoffice.com or (925) We hope you enjoy the magazine. 4

6 Spring Fever Monday, April 01, 2013 Every year, from mid-march to mid-november, I play softball three times per week. There is nothing more cleansing for the soul, more liberating of the mind than spending an hour or two with other middle-aged men, acting like 10-year-old boys, trash-talking, engaged in simple physical play, carefree and thinking of nothing other than the moment I am living in. I get no greater thrill than running as fast as I can, leaping to the limits of my physical ability and snaring a ball that others thought had beaten me. We have a term around my house for the period from late November until early March. We call it the dark days. This signifies the time of long, dark winter. It is a time of complaints, irritability and hunkering down to survive to the next spring. Without the preset leisure time of organized athletic activity, the nights are long and somehow hollow, filled with debate about whether to open the briefcase I've dragged home with me and confront any of the endless lists of unfinished work that I am always creating. I have long held a theory that our conscious minds actually have some influence over events that seem unconscious and beyond our control. I think about the people who somehow, through will, survive moments of crisis that others would succumb to. I think about times when, for an individual, life hangs in the balance and whether to live a few more days or years depends upon the desire to do so. In a lesser way this extends to whether on a given day, a cold seems to come from nowhere and overwhelm us. We have all experienced gloom and deflation when an effortless summer finally gives way to a dark, cold, fall. So often, this is when we get sick. For me, ever vigilant, and having no time for colds, this is a time to be on guard, prepared in an instant to fight the microscopic invaders and to bridge that difficult transition from the hope and optimism of summer to the combative determination to survive winter. At the other end of this cycle, a reverse effect occurs. The clouds of winter lift. The sun shines. The air caresses our skin with warmth and fragrance rather than buffeting it with an empty chill. Our emotions soar. Are we entitled to a sigh of relief, a moment of wistful reflection when this occurs, just as much as we need the determination and will to survive 5

7 when the cycle is at its other end? I write as daylight saving time has just begun and we have experienced two days the likes of which we have not seen for months. I am afflicted by spring fever, which by instinct and circumstances I am as tempted to fight as I do the malaise of fall. It is all right. Just as we need to fight the gloom and depression that can come with winter, we are entitled to take a moment to embrace and celebrate the hope that comes with the return of lightness and warmth. It's the time for all of us to take a day off and celebrate: springtime. In addition to serving as CCCBA s President this year, Jay Chafetz has a solo practice in Walnut Creek and specializes in personal injury, medical malpractice, elder abuse, trust and estate litigation and general civil litigation. 6

8 Employment Law Basics for Business Lawyers Monday, April 01, 2013 As advisors to business clients and in many instances employers themselves, attorneys face the daunting task of keeping current with numerous employment laws and regulations. The last session of the California legislature added to the mix. What follows is a summary of some newly enacted employment legislation that may affect attorneys and their clients. Accommodation of Religious Belief or Observance The California Fair Employment and Housing Act (FEHA) has required employers to provide reasonable accommodation for the religious beliefs and observance of an individual employee, unless doing so would constitute an undue burden on the employer. The new law clarifies that religious dress and grooming practices are subject to these requirements.[1] The new law also specifies that the accommodation cannot require the employee to be segregated from the public or other employees.[2] 7

9 Sex Discrimination/Breastfeeding The law has required all employers to provide reasonable accommodation and breaks for lactating women. The FEHA has prohibited discrimination on the basis of sex. The new law clarifies that under the FEHA, the word sex includes breastfeeding or medical conditions relating to breastfeeding.[3] Thus, lactating employees constitute a protected class that may not be discriminated or retaliated against or harassed. The discrimination and harassment notice posted by employers must be updated to include lactating mothers as a protected class on the basis of sex. Social Media The law now prohibits employers from requesting or requiring an applicant or employee to disclose his or her social media site user name and/or password. An employer may also not request that the applicant or employee access the social media site in the employer s presence. The law does not affect an employer s existing rights and obligations to request an employee to divulge personal social media reasonably believed to be relevant to an investigation of alleged employee misconduct.[4] This emphasis on employee social media privacy mirrors a national trend coming from the National Labor Relations Board. Personnel Records The California Labor Code sections relating to an employee s inspection of his or her personnel records are the subject of significant changes involving the right to inspect or make copies of personnel files, the timing of providing access to those records, where and how they must be made available, the employer s record retention obligations and penalties for failure to comply. The new law permits current and former employees to inspect and receive copies of their personnel records within 30 days of submitting a records request. Employers must maintain an employee s personnel records for three years from the date of separation from employment. The law also sets forth rules regarding how many requests per year may be made and requires employers to develop a written form to be used for an inspection request.[5] Temporary Service Employers A statute that becomes effective July 1, 2013, requires temporary service employers to include in the itemized wage statements of employees the rate of pay and total hours worked for each assignment. The employee must also be provided with a notice containing the name, physical address of the main office, mailing address if different and telephone number of the legal entity for which the employee will be performing the work.[6] Fixed Salary/Overtime In the past, controversy has arisen when a salaried employee whose duties entitled them to overtime pay became eligible for such premium pay based on the number of hours worked. In some situations, employers have resisted paying overtime, claiming that the agreement to pay a fixed salary to the employee included the expectation that the employee may work overtime hours. Newly enacted law now clarifies that the fixed salary paid to a nonexempt employee may not include overtime pay, notwithstanding an agreement between the employer and employee to the contrary.[7] Thus, if a salaried, nonexempt employee works overtime, the employee will be compensated for that 8

10 overtime worked using the hourly amount calculated from the total salary to establish the overtime rate. Commission Agreements Prior law enacted in 2011, but not effective until January 1, 2013, mandated that agreements for commission payments to employees must be in a writing setting forth the method by which the commissions would be computed and paid. That requirement remains in effect, and all agreements for payment of commissions must be in writing, subject to certain exceptions. Law enacted during 2012, also effective January 1, 2013, added as an exception temporary, variable incentive payments that increase, but do not decrease payment under the written contract. Already excepted from the written requirement were short-term productivity bonuses such as those paid to retail clerks and bonus and profit-sharing plans, unless the employer has offered to pay a fixed percentage of sales or profits as compensation for work to be performed.[8] The best practice is always for employers and employees to enter into clearly articulated commission agreements. Wage Statement Violations Under prior law an employer was required to provide to the employee an itemized wage statement that included specific categories of information. If an employee did not receive a legally compliant wage statement, the employee could recover penalties of up to $4,000 if the employee could demonstrate injury as a result of the employer s knowing and intentional failure to comply. This law has now been amended to state that the employee is deemed to suffer injury if the employer fails to issue compliant wage statements, thus making it easier for the employee to collect penalties from the employer.[9] Wage Garnishment It is not uncommon for an employer to be served with a court order requiring the employer to withhold and pay a third party disposable earnings that would have otherwise been paid to the employee. Newly enacted legislation increases the amount of wages that are exempt from garnishment. This law does not go into effect until July 1, 2013, which will give the court system time to develop new forms instructing employers how much should be deducted from the employee s disposable income.[10] Commencing July 1, 2013, employers should be careful not to rely on the previous computation made to determine the amount of deduction from the employee s wages (such as in the case where the amount is the same each paycheck because the pay is the same). Instead, the new amount should be calculated based on the updated legal requirements. Human Trafficking Newly enacted law requires off-sale sellers of alcoholic beverages, adult or sexually oriented businesses, airports, intercity passenger rail or light rail stations, bus stations, highway truck stops, acute care hospital emergency rooms, urgent care centers, farm labor contractors and privately operated job recruitment centers to post notices in a specified form advising about resources available to victims of human trafficking.[11] The above does not constitute a complete list of the new California employment laws, but it does represent some of the major changes. As can be seen, these changes are not limited to the California Labor Code and are often difficult to track. Among the most 9

11 helpful employment law resources for attorneys and their business clients are those published by the California Chamber of Commerce, including its yearly California Labor Law Digest. Each year, attorneys and their employer clients should review and update their employee handbooks to comply with our evolving law. The article was co-written by Michelle Ferber and Stuart Goldware, partners at Frankel Goldware Ferber. Michelle specializes in employment and business litigation and Stuart in all aspects of transactional and estate planning work. [1] California Government Code section 12926(p). [2] California Government Code section 12940(l)(2). [3] California Government Code section 12926(q)(1)(C). [4] California Labor Code section 980. [5] California Labor Code section [6] California Labor Code section 226(a). [7] California Labor Code section 515(d)(2). [8] California Labor Code section [9] California Labor Code section 226(e)(2)(B). [10] California Code of Civil Procedure section [11] California Civil Code section

12 To Withhold or Not to Withhold: The Employment Tax Consequences of... Monday, April 01, 2013 Litigation arising out of employment is a fact of life. When those cases conclude with payment, there are tax consequences that have to be addressed. This article provides a short primer on common tax issues associated with these cases. Law Governing Tax Treatment of Settlement Agreements As the IRS and state tax agencies are not parties to settlements, they are not required to respect the tax consequences inherent in such settlements. As such, a settlement agreement s characterization or division of settlement amounts is not binding on the government.[1] Rather, the IRS will look at these factors to determine whether to respect the agreement s characterizations: The nature of the claim that was the basis for actual settlement, but not its validity.[2] That determination is primarily a factual question that is generally made by reference to the settlement agreement.[3] The payor s intent or dominant reason for making payment.[4] However, intent of the parties is not controlling.[5] Rather, the courts will ask in lieu of what were the damages awarded? [6] In addition, in order for the allocation in a settlement agreement to be respected, it must be entered into: In an adversarial relationship. At arm s length. In good faith. It is not enough for the parties to reach a settlement figure in an adversarial relationship; rather, the allocation must also be based on adversarial positions. For example, in Robinsonv. Commissioner, following a verdict for about $60 million, including $6 million for lost profits, $1.5 million for mental anguish and $50 for punitive damages, the parties settled for about $10 million. Plaintiff wanted to allocate 95 percent of settlement to mental anguish (which was not taxable at the time). The IRS rejected the settlement allocation because it was not based on a reasonable allocation consistent with the claims alleged in the lawsuit, and the court agreed.[7] Tax Treatment of Typical Claims Made by Employees Wage Related Claims Back pay. Payments of wages are subject to employment taxes unless specifically exempted, and no statute or regulation exempts back pay from the definition of wages for tax purposes.[8] This is true even if the worker receiving the payment is no longer employed by the payor at the time of payment.[9] Front pay. Front pay is also generally treated as wages because wages apply to the entire employee-employer relationship and not merely to work actually performed. The Fifth Circuit, however, has held that front pay is not wages because it represents a loss in earning capacity, not for services already performed.... [10] 11

13 Family and Medical Leave Act. Amounts paid under the Family and Medical Leave Act are generally treated as wages. Courts in the Eastern District of Pennsylvania have held that such amounts are not for services in employment but rather damages that are equivalent to the amount of wages, and as such are not themselves wages. The IRS, however, does not agree, and in general it will consider amounts paid under the FMLA wages for tax purposes. Refusal to hire cases. The IRS takes the position that claims based on failure or refusal to hire are back pay and thus wages.[11] However, the 8th Circuit has taken a contra view.[12] The court held that FICA tax and income tax withholding do not apply unless an actual employment relationship existed, and no such relationship existed if the person was never hired. Emotional Distress and Personal Physical Injuries Under Internal Revenue Code section 104(a)(2), amounts received on account of personal physical injury or illness are not income subject to tax. Prior to 1996, emotional distress was generally treated as exempt under section 104(a)(2). However, for payments made after August 21, 1996, emotional distress was carved out of section 104(a)(2). The IRS has defined personal physical injury or sickness requires an observable bodily harm such as bruising, cuts, swelling and bleeding.[13] In contrast, emotional distress generally includes physical or psychological distress. It also includes physical symptoms of the emotional distress, such as stomach aches, ulcers and headaches triggered by the distress.[14] Payments on account of personal physical injuries are not reported, while emotional distress damages are reported on IRS Form 1099-MISC, box 3 (other income) if over $600. Emotional distress payments are not taxable, however, up to the amount of any unreimbursed medical expenses actually paid by the plaintiff. Accordingly, when fashioning a settlement, it is useful to know if such offsets exist. An emotional distress payment, while taxable income, is not wages, as it is not intended to be in lieu of wages paid in employment.[15] Attorney s Fees Most settlements involve some payment of attorney s fees. In two consolidated cases in 2005, the United States Supreme Court ruled that attorney s fees are taxable income to the plaintiffs.[16] Therefore, attorney s fees should be reported on a Form 1099-MISC, box 3, to the plaintiffs. In addition, to the extent income is reported to an attorney, such income is reported on Form 1099-MISC, box 14, to counsel.[17] Congress alleviated the problem of plaintiffs being taxed on attorney s fees in most employment litigation in the JOBs Act of A plaintiff may deduct attorney s fees paid for discrimination cases that is above-the-line, making it potentially tax neutral, but only up to the amount of the settlement award.[18] This provision applies to payments made after October 22, 2004.[19] In Revenue Ruling ,[20] the IRS explained the income and employment tax consequences of interest and attorney's fees being awarded by a court in connection with 12

14 claims for back pay. Specifically, it stated that interest and attorney's fees are generally not wages to the employee unless there is no specific allocation. The same principles should apply to settlements. Liquidated Damages and Interest Liquidated damages and interest are treated as taxable income but not wages.[21] Incentive Payments to Named Class Representatives There is little authority regarding whether incentive payments to named plaintiffs are treated for tax purposes. In Trotter v. Rankin[22] a federal district court held that $5,000 incentive payments made to class representatives were wages, and therefore subject to employment taxes. Trotter involved a typical employment related class action, in which the plaintiffs sought back pay and certain benefits. The settlement agreement allocated money based on hours worked and years of service. In addition, the named plaintiffs were each to receive a $5,000 incentive payment for the risk of stepping forward and being involved in the litigation process. While in Trotter the court held that incentive payments were wages, the court s decision was based in part upon: the fact that the only underlying claim was for wages; the Allocation Plan did not specifically allocate these payments separately; no claim had been made in the complaint for a separate payment; and the fact that the allocation was based on factors that could have included work on the lawsuit. Whether the same result would occur under different facts is unknown, but the IRS is likely to conclude, as the court did, that if the underlying claims were wage based, the incentive payments should also be treated as wages. Penalties California employment cases frequently involve penalty claims. For example, employees may claim Private Attorney General Act penalties[23] or waiting time penalties.[24] Generally the use of the word penalty is not conclusive of its characterization for tax purposes.[25] Further, for tax purposes the label placed upon payments is not determinative of its character.[26] While penalties are generally not wages, there are some limited exceptions. For example, in Office of Chief Counsel Information Release , March 17, 2005, the IRS stated that the payment required to be made under California Labor Code section was a payment subject to FICA, FUTA and income tax withholding. In Murphy v. Kenneth Cole Productions, Inc.,[27] the California Supreme Court distinguished between California Labor Code sections 203 and The court held California Labor Code section to be a wage rather than a penalty, while contrasting it with California Labor Code section 203, which it described as clearly being a penalty.[28] While there have been a number of cases on the subject of whether the payment of an additional hour of pay per California Labor Code section when a meal or rest period is not provided should be characterized as a wage or a penalty, the taxing agencies expect these payments to be processed as wages. In most cases, however, 13

15 penalties, if paid directly to employees, should be treated as income but not wages. Analysis of the Tax Consequences of Allocations Made in a Settlement From a taxing agency perspective, the primary concern with respect to an employer and a settlement agreement is whether a reasonable amount was allocated to wages, and thereafter the correct amount of taxes was withheld and remitted. To the extent that there may be multiple allocations for non-wage (but taxable) payments, there is little incentive for the taxing agency to address the matter with the employer, so long as it was reported on a Form 1099-MISC if more than $600 in total. The natural starting place for determining whether the allocation made in a settlement agreement is appropriate is the complaint. Certain causes of action are only entitled to certain damages. For example, claims under the ADEA do not allow tort damages, and therefore no amount could be allocated to a claim under the ADEA for personal physical injuries.[29] Once the claims and potential damages are determined, the relative strength of any claims should be reviewed. For example, a claim for back pay must be determined in light of whether the employee continued to be employed during the period at issue. Also, plaintiffs are obligated to mitigate their damages. Thus, it should be determined whether the employee obtained other employment, how quickly and at what rate of pay. In some cases, despite claims for back pay, the facts will demonstrate that the employee lost little in wages, either because he or she remained employed or obtained other employment quickly for the same or more pay. In such situations the amount of a settlement reasonably allocated to wages may well be small relative to other payments made. Further, the reasons for payment - based on whatever investigation has been performed - should be documented. Doing so will help in any audits of the settlement agreement. So, if investigation shows that a plaintiff claiming harassment had psychological treatment expenses, this may support a decision to allocate some payment for emotional distress and/or other damages for that claim. Nonetheless, there is no bright line test for determining the reasonableness of an allocation. Often the amount of a settlement is less than the potential damages that could be awarded under one cause of action, let alone the entire complaint. This is particularly true when dealing with claims of various employment law violations on a class action basis. Thus, it becomes most critical to make sure that the negotiations process is well documented and conducted in an adversarial arm s length manner. This, more than any other factor, is likely to establish that the allocations were reasonable. William Hays Weissman is a shareholder in the Walnut Creek office of Littler Mendelson, P.C. who specializes in employment tax issues. He can be reached at wweissman@littler.com or (925) [1] Hemelt v. Comm r (4th Cir. 1997) 122 F.3d 204, 208; Vincent v. Comm r, T.C. Memo ; see also Treas. Reg (a)-1(c). [2] Bagley v. Comm r (1995) 105 T.C. 396, 406; Allum v. Comm r, T.C. Memo [3] Robinson v. Comm r (1994) 102 T.C. 116,

16 [4] Knuckles v. Comm r (10th Cir. 1965) 349 F.2d 610, 613; Metzger v. Comm r (1987) 88 T.C. 834, 847. [5] Dotson v. United States (5th Cir. 1996) 87 F.3d 682, 687. [6] Alexander v. Internal Revenue Serv. (1st Cir. 1995) 72 F.3d 938, 942 (internal quotations and citations omitted). [7] See also Vincent v. Comm r, T.C. Memo [8] IRC 3401; United States v. Cleveland Indians Baseball Co. (2001) 532 U.S [9] Treas. Reg (a)-1(a)(5); Social Security Bd. v. Nierotko (1946) 327 U.S. 348, ; Mayberry v. United States (8th Cir. 1998) 151 F.3d 855; Hemelt v. United States (4th Cir. 1997) 122 F.3d 204. [10] Dotson, 87 F.3d at 690. [11] Rev. Rul Rev. Rul was cited with approval in Melani v. Board of Higher Ed. (S.D.N.Y. 1986) 652 F. Supp. 43, aff'd, 814 F.2d 653 (2d Cir. 1987). [12] Newhouse v. McCormack (8th Cir. 1998) 157 F.3d 582. [13] See IRS Private Letter Ruling [14] Conference Committee Report to the 1996 Act. [15] 2011 Form 1099-MISC Instructions, p. 4. [16] See Banks v. Commissioner (2005) 543 U.S. 426 (2005). Whether attorney s fees are income to a plaintiff under a fee shifting statute is unsettled (the Supreme Court in Banks declined to address the issue) and may depend upon state law. For example, under California law, when there is no contract providing for the disposition of such fees, they belong to the attorney that earned them. See Flannery v. Prentice (2001) 26 Cal.4th 572. Nonetheless, there is no definitive law yet on this issue from a tax reporting perspective. The IRS takes the position that even attorney s fees paid under a fee shifting statute are still income to the plaintiff. PMTA (October 22, 2008). [17] See also Treas. Reg [18] IRC 62(a)(20). [19] There is also currently an administrative exception to the rule that attorney s fees are income to the plaintiffs in claims made class action settlements. This exception is based on an IRS memorandum. While the legal justification for IRS position is somewhat suspect, because it benefits taxpayers, it has not been challenged. See Office of Chief Counsel Memorandum, PRENO , May 18, Thus, to the extent that a settlement is a claims-made settlement, it should be possible to exclude the attorney s fees from inclusion in income for the plaintiffs. However, this is subject to change at the IRS s discretion. [20] Rev. Rul , C.B. 294, I.R.B

17 [21] See, e.g., 2013 Form 1099-MISC Instructions (liquidated damages under ADEA not wages); Rev. Rul (liquidated damages are not wages subject to employment taxes); Kern v. Mid Continent Petroleum Corp. (N.D. Iowa 1945) 63 F. Supp. 120, aff d 157 F.2d 310 (8th Cir. 1946) (liquidated damages under the FLSA are not wages for employment or income tax withholding purposes); 2013 Form 1099-INT (interest income); Rev. Rul (interest is not wages subject to employment taxes). [22] Trotter v. Rankin (D. Del. 2003) 253 F. Supp. 2d 812. [23] Cal. Labor Code 2698 et seq. [24] Cal. Labor Code 203. [25] Smith v. Commissioner (1960) 34 T.C. 1100, [26] Treas. Reg (a) 1(c); (b) (1)(c); 3401(a) 1(a)(2). [27] Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal. 4th [28] Id., at [29] Commissioner v. Schleier (1995) 515 U.S

18 Should We Tell Employees Not to Talk to Coworkers About Ongoing In... Monday, April 01, 2013 Most employment lawyers have been trained to advise employees to refrain from talking to their co-workers about a workplace investigation during the pendency of the investigation. The best witness testimony is that which is raw, uncensored and unrehearsed. A conscientious investigator not only wants to guard against collusion among witnesses but also the tendency to have one s own recollection of events be influenced by listening to others. The well-publicized July 30, 2012, decision by the National Labor Relations Board (NLRB) in Banner Health System d/b/a Banner Estrella Medical Center and James A. Navarro Case 28-CA made what had become perfunctory admonitions regarding confidentiality a thing of the past. In Banner, the NLRB held that covered employers were prohibited from maintaining blanket confidentiality policies in connection with workplace investigations. Specifically, the NLRB found that the employer s human resources consultant, who routinely asked employees making a complaint not to discuss the matter with their co-workers while the employer s investigation was ongoing, violated Section 8 (a)(1) of the National Labor Relations Act. The NLRB explained that to justify a prohibition on employee discussion of ongoing investigations, an employer must show that it has a legitimate business justification that outweighs employees Section 7 rights. The term Section 7 rights references concerted activity (employees joining together to go to the employer or just talking about doing something). With the decline of unionized work forces in the private sector, there has been a shift in focus by the NLRB to Section 7 rights. Consequently, there have been more work rule cases from the NLRB that focus on what employers can and cannot do. In determining whether a work rule violates Section 8(a)(1), the inquiry is whether the rule would reasonably tend to pacify employees in the exercise of Section 7 rights. Banner is one such case. The NLRB in Banner identified the following factors as those that need to be considered when determining whether an employer has a substantial business justification to prohibit discussion among co-workers regarding an ongoing investigation: 1. Do witnesses need protection? 2. Is evidence in danger of being destroyed? 3. Is testimony in danger of being fabricated? 4. Is there a need to protect a cover up? Then, on January 25, 2013, the buzz about Banner resurfaced when a three-judge panel of the Federal Appeals Court in Washington, D.C. (in Noel Canning v. NLRB), ruled that President Obama s recess appointments to the NLRB were unconstitutional. If the decision is appealed to the Supreme Court and then upheld, some speculate that all of the decisions reached by the NLRB since January 2012 (including Banner) could be invalid. The NLRB, on the other hand, respectfully disagrees with the decision and takes the position that this order applies to only one case, Noel Canning, and that similar questions have been raised in more than a dozen cases pending in other courts of 17

19 appeals. [1] While Banner got a lot of attention, the core holding was not precedential. Although the NLRB precisely delineated the four-factor analysis for the first time in Banner, it was not the first time the NLRB had prohibited a blanket confidentiality policy as violative of Section 7 rights. It was also not the first time the NLRB recognized that there were times when confidentiality rules were justified. In 2001, in the case of Desert Palace, Inc. d/b/a Caesar s Palace and Richard Zollo, Case 28-CA-14240, the NLRB declared it lawful for the employer to demand confidentiality during its investigation regarding drugs at the workplace. The NLRB agreed that in an investigation involving allegations of a management cover-up, possible management retaliation and threats of violence, a confidentiality rule was necessary to ensure witnesses were not put in danger, evidence was not destroyed and testimony was not fabricated. On the flip side, in the 2002 case of Phoenix Transit System and Amalgamated Transit Union, Local Union No. 1433, AFL-CIO, Case 28-CA-15177, the NLRB held the employer failed to establish a legitimate and substantial justification for its confidentiality rule prohibiting employees from discussing their sexual harassment complaints among themselves. Similarly, on August 26, 2011, in the case of Hyundai America Shipping Agency, Inc. and Sandra L. McCullough Case 28 CA 22892, the NLRB held that the employer was prohibited from maintaining or enforcing an oral rule prohibiting employees from discussing with other people any matters under investigation by its human resources department because it had not met its burden to establish a legitimate and substantial justification for doing so. The Hyundai case is currently pending review in the D.C. Circuit. Interestingly, Hyundai s attorney argued that it should be able to raise the Noel Canning ruling in its case even though it concerns a different board member appointed during a recess in It remains to be seen as to whether the Noel Canning ruling will impact the ruling in Hyundai. Regardless of the ultimate outcome of Noel Canning, Banner and Hyundai, the fundamental rule prohibiting blanket confidentiality policies in the absence of a legitimate and substantial business as set forth in Caesar s Place and Phoenix Transit System should not be affected. What Does This Mean for Employers? An employer within the jurisdiction of the NLRB may not maintain a blanket policy prohibiting discussion among employees regarding the investigation. Instead, the first step in determining the appropriate instruction regarding confidentiality in a particular investigation should be to determine if the NLRB has jurisdiction over the employer in general and the employees who are being interviewed in particular. If so, then the employer, with the advice of their counsel, should analyze the four Banner factors to determine if any facts justify an individualized instruction regarding confidentiality. Documentation of this analysis is advisable. There has not yet been a case before the NLRB where an employer has formulated an admonition regarding confidentiality as a result of analysis specifically set forth by Banner. Since the four factors are stated in the alternative, it would arguably be enough 18

20 to satisfy just one in order to meet the burden of proof required to justify a confidentiality rule in an ongoing investigation. However, it is not known if the NLRB gives equal weight to all factors or what types of facts would be a valid level of concern for each factor. Naturally, employment attorneys must balance this approach against the EEOC s guidance regarding keeping allegations of harassment as confidential as possible.[2] However, there are signs that the EEOC may share concerns similar to the NLRB with regard to how a broad confidentiality policy could act as a deterrent to an employee filing harassment claims with the EEOC. The reality is that the four Banner factors identify the most common concerns an employer has regarding employee communications around an investigation. It likely won t be difficult for employers to satisfy at least one of the factors. Consequently, the net effect of Banner is not a prohibition against confidentiality, but rather, a prohibition against blanket confidentiality policies that could also be viewed as problematic by the EEOC. This certainly is not the last word from the NLRB or the EEOC on confidentiality in investigations, so stay tuned! Michelle Regalia McGrath is an attorney who devotes her practice to conducting workplace investigations ( [1] See [2] See Enforcement Guidance: Vicarious Employer Liability for Unlawful Harassment by Supervisors June 1999 at 19

21 A Motivating Reason: Chipping Away at Pretext Monday, April 01, 2013 The Judicial Council of California Civil Jury Instructions (CACI) offers only a few instructions in employment law. More often than not, to address the different nuances common in employment claims, practitioners must request special jury instructions which most judges are hesitant to apply. Two instructions that are found in CACI, however, are No (that a plaintiff s protected characteristic was a motivating reason for the adverse employment action) and 2507 (defining a motivating reason as a reason that contributed to the decision to take certain action, even though other reasons also may have contributed to the decision ). Neither instruction requires a jury to find that unlawful discrimination was the motivating or only reason for an adverse employment action. Nonetheless, these instructions are often requested by practitioners and given by judges in pretext cases where liability hinges on the protected characteristic being the sole reason for the employer s decision. Several considerations suggest, however, that despite their common use in pretext trials, CACI 2500 and 2507 are not pretext instructions, but rather, instructions to be used in mixed-motive cases under a very different liability analysis. Fair Employment and Housing Act (FEHA) discrimination claims are typically based on one of two theories: pretext or mixed-motives. The Supreme Court made clear that mixed-motives cases are different from pretext cases such as McDonnell Douglas. In pretext cases, the issue is whether either illegal or legal motives, but not both, were the true motives behind the decision. In mixed-motives cases, however, there is no one true motive behind the decision. Instead, the decision is a result of multiple factors, at least one of which is legitimate. [1] A plaintiff alleging mixed-motives must establish that the employer in fact acted, at least in part, because of a discriminatory reason. The employer, in turn, can present evidence that it also had legitimate reasons for the termination and that it would have taken the same action even absent the unlawful motive.[2] On the other hand, in a pretext case applying the McDonnell Douglas burden-shifting analysis, the question becomes whether the plaintiff has shown that the challenged action resulted in fact from discriminatory animus rather than other causes, i.e., not from mixed motives.[3] Pretext alleges that the non-discriminatory reasons offered by the employer are false and that the protected characteristic is the only and true reason for the adverse employment action. Thus, it makes sense that under a mixed-motives theory, the employee can show that the protected characteristic was a motivating reason for the employer s decision, although other, legitimate reasons also may have existed. At least two cases applying California law have deemed the motivating reason test to be the socalled mixed-motive test under Price Waterhouse v. Hopkins, 490 U.S. 228 (1989), not a pretext test.[4] Aside from the language of CACI 2500 and 2507 suggesting that they are mixed-motives instructions, so too does their legislative history. Despite the published versions of CACI 2500 and 2507 referencing a few pretext cases (one reason practitioners request these instructions in pretext actions), the Sources and Authority section of the 2007 first draft of CACI 2507 cited Desert Palace, Inc. v. Costa (2003) 539 U.S. 90, the seminal mixedmotives case which expressly decided the standard of proof in a mixed-motives 20

22 discrimination claim and reiterated that a motivating factor is a mixed-motives instruction.[5] Also appearing in the 2007 draft was a reference to Grant-Burton v. Covenant Care, Inc. (2002) 99 Cal. App. 4th 1361, 1379, another mixed-motives case, which held that, In a mixed motive case, both legitimate and illegitimate factors contribute to the employment decision. Once the employee establishes that an illegitimate factor played a motivating or substantial role in an employment decision, the burden falls to the employer to prove by a preponderance of the evidence that it would have made the same decision even if it had not taken the illegitimate factor into account. For no known reason, the references to Desert Palace and Grant-Burton were deleted from the final version of CACI 2507, although the instruction continued to reference the motivating reason language appearing in those non-pretext cases. The recent holding by the California Supreme Court in Harris v. City of Santa Monica (2013) P.3d, 2013 WL , a mixed-motives case, further suggests that CACI 2500 and 2507 are not pretext instructions. In Harris, a probationary at-will employee had a history of performance problems, including two preventable accidents caused by her negligent driving and poor attendance. Fearing that she may be terminated, the plaintiff disclosed something she had known for a while but not yet divulged that she was pregnant. Her employment was terminated, with the stated reasons being that she caused two accidents and missed work twice without giving the required notification. The California Supreme Court outlined a new mixed-motive defense for employers facing FEHA discrimination claims and also required employees to first prove that the employer s adverse-employment action was substantially motivated by the employee s protected status.[6] In analyzing the suitability of a motivating reason instruction, the Harris court differentiated between mixed-motive and pretext cases: In FEHA employment discrimination cases that do not involve mixed motives, we have adopted the three-stage burden-shifting test established by McDonnell Douglas Corp. v. Green (1973) 411 U.S. 792, 93 S.Ct. 1817, 36 L.Ed.2d 668 ( McDonnell Douglas ). As explained in Guz v. Bechtel National Inc. (2000) 24 Cal.4th 317 a plaintiff has the initial burden to make a prima facie case of discrimination by showing that it is more likely than not that the employer has taken an adverse employment action based on a prohibited criterion. A prima facie case establishes a presumption of discrimination. The employer may rebut the presumption by producing evidence that its action was taken for a legitimate, nondiscriminatory reason. If the employer discharges this burden, the presumption of discrimination disappears. The plaintiff must then show that the employer's proffered nondiscriminatory reason was actually a pretext for discrimination, and the plaintiff may offer any other evidence of discriminatory motive. The ultimate burden of persuasion on the issue of discrimination remains with the plaintiff. The framework above presupposes that the employer has a single reason for taking an adverse action against the employee and that the reason is either discriminatory or legitimate. By hinging liability on whether the employer's proffered reason for taking the action is genuine or pretextual, the McDonnell Douglas inquiry aims to ferret out the true reason for the employer's action. In a mixed-motives case, however, there is no single true reason for the employer's action. What is the trier of fact to do when it finds that a mix of discriminatory and legitimate reasons motivated the employer's decision? That is the question we face in this case.[7] The Supreme Court held that under a mixed-motive theory, the CACI 2500 (and therefore 2507) a motivating reason language is insufficient and that the jury should instead 21

23 determine whether discrimination was a substantial motivating factor/reason. [8] This is a significant shift in the burden of proof in mixed-motives cases, although it remains to be seen how this new standard will be applied. Harris did not directly address or resolve the applicability, or lack thereof, of CACI 2500 and 2507 when the plaintiff has pled discrimination based on pretext. However, Harris mixed-motives analysis of CACI 2500 and 2507 suggests that they are not proper instructions when the employee alleges that the employer s decision was a pretext for discrimination. Delia Isvoranu is a Partner with Sedgwick LLP. [1] Price Waterhouse v. Hopkins (1989) 490 U.S. 228, 260 [2] Huffman v. Interstate Brands Companies (2004) 121 Cal.App.4th 679, [3] Reeves v. Safeway Stores, Inc. (2004) 121 Cal.App.4th 95, 112. [ Plaintiff has not invoked the competing model of mixed motive analysis, under which a case goes to the jury if there is evidence that an impermissible criterion was a motivating factor for any employment practice. ] [4] Crommie v. State of Cal., Public Utilities Com n (N.D.Cal.1994) 840 F.Supp. 719, 722. [see also, Reeves, supra, 121 Cal.App.4th at p. 112 [The motivating factor analysis is used under a mixed motive analysis.] [5] Id. at pp. 91, 98, 102 [6] Id. at p.26 [7] Id. at *4 [8] Id. at p.26 22

24 What You Should Know About The Private Attorney General Act Monday, April 01, 2013 Although most California employment attorneys are no doubt familiar with the Private Attorney General Act of 2004 (PAGA), they may not fully understand what the PAGA is or grasp how it works. This article summarizes what every California employment attorney should know about PAGA, regardless of whether they are actively litigating such claims. About PAGA PAGA provides employees with a private right of action against an employer in order to collect penalties on behalf of the state s Labor and Workforce Development Agency (LWDA). PAGA requires that 75 percent of any penalties collected be paid to the LWDA, with the remaining 25 percent distributed to the aggrieved employees.[1] It provides for attorney s fees to the employee who successfully brings the suit.[2] It is subject to a oneyear statute of limitations.[3] PAGA groups violations into three categories and provides for slightly different procedures for each category. Category 1: Violations of Labor Code Provisions Specifically Listed in Labor Code section Most PAGA claims fall within this first category. It encompasses violations of those Labor Code sections identified in section There are over a hundred different Labor Code sections listed. They include section 203 on waiting time penalties, section on meal and rest break premiums, as well as section 1198, which makes it illegal to employ an employee under conditions prohibited by the wage order. The inclusion of section 1198 greatly expands the scope of the PAGA since it allows claims to be predicated on sections of the wage order which may not otherwise provide for a private right of action. These new wage and hour claims have been in the news recently. They include failure to provide employees with suitable seating (Section 14 of most wage orders) or to maintain comfortable temperatures at work (section 15 of most wage orders).[4] Before commencing a category 1 PAGA claim, an employee must satisfy certain notice requirements.[5] He or she is required to give written notice, by certified mail, to both the LWDA and the employer describing the specific provisions alleged to have been violated, including the facts and theories to support the alleged violation. [6] An employee can only proceed with the PAGA claim if LWDA either declines to investigate or neglects to respond to the notice within 33 days.[7] PAGA was enacted because the LWDA did not have adequate resources to police employers compliance with the Labor Code. It is, therefore, not surprising that the LWDA rarely initiates an investigation as a result of a PAGA notice. However, this does not mean that the PAGA notice requirements should be taken lightly. Since the notice is a jurisdictional prerequisite, a PAGA claim can be dismissed outright if the notice is deficient.[8] One court recently dismissed PAGA claims due to an insufficient notice even 23

25 though the employer raised the sufficiency of the notice for the first time at the final pretrial conference.[9] For these reasons, it is very important to determine whether notice was served properly and contained sufficiently specific facts about the alleged violations.[10] Category 2: Health and Safety Violations (Labor Code 6300 et seq.) The second category of PAGA claims is for health and safety violations predicated on any section of Labor Code sections 6300 et seq. (other than sections 6310, 6311, and which are specifically listed in Labor Code section and, therefore, fall under category 1).[11] In addition to sending notice to LWDA, a plaintiff bringing a health and safety-based PAGA claim must also send notice to the Division of Occupational Safety and Health, which is then required to investigate the claim.[12] If the Division issues a citation, the employee is precluded from commencing an action under the PAGA. In the alternative, if the Division does not do so, the aggrieved employee may proceed to Superior Court. Category 3: All Other Labor Code Violations The third PAGA category applies to violations of the Labor Code other than those covered by the first two categories.[13] The notice requirement is the same as category 1 claims. However, unlike category 1 claims, an employer is provided with a safe harbor and can avoid a category 3 PAGA claim if it cures the violation within 33 days of the notice.[14] An employer who wishes to take advantage of this cure provision sends notice to LWDA and the employee describing the actions taken to cure the violation.[15] The employee can then submit arguments to LWDA as to why those actions did not actually cure the violation.[16] An employee may appeal the agency s determination that a violation has been cured by filing an action with the Superior Court.[17] Class Certification For the first five years under PAGA, it was an open question as to whether a plaintiff had to have a class certified in order to pursue PAGA claims on behalf of other aggrieved employees. However, in 2009, the California Supreme Court held that a plaintiff is not required to have a class certified in order to pursue PAGA claims on behalf of aggrieved third parties. The court in Arias v. Superior Court in 2009 decided that class certification requirements need not be met when an employee's representative action against an employer is seeking civil penalties under the Labor Code Private Attorneys General Act of [18] While this clarified the issue in state court, there remains a split in California s federal District Courts. Some district courts have adopted Arias and allow PAGA claims to be pursued without requiring Rule 23 class certification.[19] Other district courts view the PAGA as a state procedural statute. Since district courts must follow federal civil procedure, some district courts have held that a plaintiff must first obtain Rule 23 class certification before having standing to pursue PAGA claims on behalf of absentee third parties.[20] Regardless of whether a particular court requires Rule 23 certification, a PAGA plaintiff needs to be cognizant of additional difficulties they may face establishing liability and proving damages at trial. The California Supreme Court is currently considering whether using representative testimony and sampling for 24