California Employment Law Update Recent Changes in the Workplace

1. California Employment Law UpdateRecent Changes in the Workplace Presented To: Association of Corporate CounselSouthern California Chapter (ACCA-SoCal) Speakers: Thomas H. Petrides Christopher J. Kondon September 27, 2006 11:30 a.m. – 1:30 p.m. tpetrides@klng.com ckondon@klng.com 310.552.5000

2. Program Overview: New Developments, Practical Strategies and Tips on: • Wage and Hour Update • Independent Contractor / Employee Classifications • Exempt / Non-Exempt Classifications • Discrimination / Retaliation Issues • Disability Discrimination Issues • Release Agreements • Questions and Answers

3. Jury Trial in Orange County Superior Court • Mustafa v. Sprint – disability and national origin discrimination alleged after RIF • Employee “complained” to company about being selected for the RIF • Employee applied for other positions following the RIF but was not re-hired • Two week jury trial – Defense verdict!

4. Wage and Hour Update • Partial Day Deductions from Paid Leave Banks • Maximum Cap on Vacation Accrual • Meal and Rest Breaks • Minimum Wage Increase

5. Hypothetical Salaried exempt Supervisor has 32 hours of accrued vacation and 24 hours of accrued sick leave pursuant to Company policy. Supervisor leaves 3 hours early on Friday afternoon to watch son’s baseball game. • Can you deduct 3 hours from vacation leave bank? • What if for doctor’s appointment? • What if Supervisor left after 3 hours of work?

6. Salary Basis and Partial Day Deductions for Exempt Employees • FLSA permits partial day deductions from sick leave and vacation leave banks • But not from actual salary • Docking actual salary for partial days will lose exemption

7. Salary Basis (cont.) • Previously, DLSE allowed partial day deductions from sick leave, but not from vacation • Sick leave is a “benefit” • Vacation is an earned “wage” • In Conley v. PG&E, 131 Cal.App.4th 260 (2005), Appeal Court held California law does not prohibit partial day deductions from vacation leave banks • Employer has right to control “scheduling” of vacation and employee took time off

8. Salary Basis (cont.) • However, in July 2006, DLSE amended DLSE Enforcement Manual to permit partial day deductions from vacation leave, but only for absences of four or more hours (DLSE Manual Section 51.6.15.4) • This was what the particular vacation policy provided for in Conley, but this was not the rationale applied by the Court of Appeal

9. Salary Basis (cont.) Practical Tip: • Check current vacation leave policies to determine whether Company is providing for partial day deductions from vacation leave bank and, if so, what amount of time is Company allowing to be taken from leave bank for salaried exempt employees

10. Hypothetical Current company policy provides for maximum cap on accrual of vacation at two (2) times annual accrual. Company CFO is not happy with large amounts of vacation being paid out to terminated employees and wants to cut maximum cap to 1.25 times annual accrual (15 months). • Can he legally do this? • What about 1.5 times annual accrual?

11. Maximum Cap on Vacation Accrual • DLSE has recently withdrawn prior Opinion Letters and language of Enforcement Manual that established that maximum cap could not be set at less than 1 year and 9 months of accrual (1.75 times annual accrual) • Revised DLSE Policy as of March 2006 simply states that cap cannot be set at year in which it is earned “or in a very limited period following the accrual period.”--section 15.1.4.1 of DLSE Policy

12. Maximum Cap on Accrual (cont.) • Practical Tip: • Review current policy to determine whether current maximum cap is appropriate • Consider employee morale issues if do decide to reduce the cap • Risk increases the closer maximum cap is cut back towards the one year mark

13. Meal and Rest Break “Penalty” Update • Previous proposed Regulations have been withdrawn • Unclear as to status of any new proposed Regulations • “Penalty” vs. “Wage” issue of Labor Code § 226.7 to be decided by California Supreme Court • Murphy v. Kenneth Cole • Mills v. Superior Court • National Steel & Shipbuilding v. Superior Court (Godinez)

14. Meal and Rest Break (cont.) • Subject of many recent claims and class actions: • Wal-Mart; $172 million judgment! • Currently, employers must “provide” meal periods; but only need to give “opportunity” for employees to take rest breaks • Issues created by Labor Code §226.7 enacted in 2000 • Currently, employers must comply with law or be at risk if records for “time out” and “time in” for lunch are not kept

15. Minimum Wage Increase • On September 13, 2006, Governor signed Bill (AB 1835) raising state minimum wage from $6.75 to $7.50 effective 1/1/07 and to $8.00 effective 1/1/08. • Highest in the nation. • Raises minimum salary requirements for exempt employees under State law to $31,200 as of 1/1/07 and to $33,280 as of 1/1/08 (up from current $28,080).

16. Independent Contractor / Employee Classifications • Proper Classification • EDD Tests and Requirements

17. Hypothetical Company is experiencing rapid growth and expansion in California and needs to hire several hundred employees. To supplement current HR staff, company “contracts” with 15-20 “independent recruiters” who work “in-house” to identify, contact and screen potential candidates for the open positions. Company pays the recruiters based on a negotiated percentage of annual salary for each employee hired. Company anticipates it will take 6 to 9 months to fill the necessary positions. Company reports income of recruiters on Form 1099’s. • Any problems?

18. Independent Contractor / Employee Classification • EDD and other State Agencies continue to closely scrutinize Independent Contractor/Employee Classification Issues • Surprisingly, few reported decisions under California law on this issue • Maybe the next targeted area for class action Plaintiffs’ attorneys • Significant issue following reported Microsoft decisions in late 90’s, but few “high profile” cases after that

19. Independent Contractor / Employee Classification (cont.) Primary factor looked at by the State (EDD) is: • Does the Company have the right to direct and control the manner and means in which the worker carries out the job? The right of direction and control, whether or not exercised, is the most important factor in determining an employment relationship. (The right to discharge a worker at will and without cause is evidence that the Company has the right to control the worker.)

20. Independent Contractor / Employee Classification (cont.) Secondary factors: • Is the worker engaged in a distinct trade or occupation? Does the worker make his or her services available to the general public? Does the worker perform work for more than one firm/company at a time? Does the worker hire, supervise, or pay assistants? Does the worker have a substantial investment in equipment and facilities? • Is the work done without supervision? In the geographic area and in the occupation, is the type of work usually done under the direction of a principal without supervision? • Is the work highly skilled and specialized? Is the worker trained by the principal? Does the worker personally perform the services? • Does the principal furnish/provide the tools, equipment, materials, supplies, and place of work? Does the worker perform the services on the principal's business premises? • Are the services provided on a long-term or repetitive basis?

21. Independent Contractor / Employee Classification (cont.) Secondary factors (cont): • Method of payment - Is the worker paid based on time worked or on completion of the project? • Are the services an integral part of the principal's business? • What type of relationship do the parties believe they are creating? • What is the extent of actual control by the principal? Does the worker have the right to terminate the relationship without liability? Does the principal provide instructions on how to do the work? Does the principal establish the work hours or the number of hours to be worked? Does the principal require the work to be done in a particular order or sequence? Does the principal require oral or written reports from the worker? • Is the work performed for the benefit of the principal's business?

22. Exempt / Non-Exempt Classifications • Dunbar v. Albertson’s (July 20, 2006)

23. Dunbar v. Albertson’s (July 20, 2006) • Grocery Manager sought class certification re non-exempt status • 500 stores; 900 managers in the class • Plaintiff filed 61 near identical declarations from managers to support class cert.; Company filed 79 to oppose; Plaintiff then filed 31 more • Deposition testimony differed from the declarations; trial court placed more weight on the depo.’s • Court denied class cert., finding “Plaintiff has not demonstrated that common issues predominate.”

24. Discrimination / Retaliation Issues • Standard for Establishing Retaliation • Adverse Employment Action • Burlington Northern v. White (U.S. Supreme Court; 6/22/06) • Yanowitz v. L’Oreal, 36 Cal.4th 1038 (2005) • McRae v. Dept. of Corrections, Court of Appeal, 1st Dist. (August 29, 2006)

25. Hypothetical Employee (Assistant Manager) “complains” about harassment of Manager. Company investigates but finds no unlawful conduct. Later, Employee’s lap-top is exchanged for a PC. Employee is excluded from some Manager meetings. Customer is assigned away from Employee to different Asst. Mngr. Employee is given less favorable review than in the past, but still receives small pay raise. Employee then files retaliation complaint. • Does Employee have a claim for retaliation • What if Employee had not previously complained? Does Employee have basis to claim discrimination?

26. Burlington Northern v. White • Employee suspended without pay for 37 days but then reinstated with back pay. Employee re-assigned to less favorable duties but kept same pay and benefits • Discrimination under Title VII requires “adverse employment action,” defined as a “materially adverse change in the terms and conditions” of employment. • However, to prove retaliation, employee need only show “materially adverse” employment action that “might have dissuaded a reasonable worker” from complaining about discrimination

27. Yanowitz v. L’Oreal • Employee refused to obey unlawful order of manager (told to terminate other employee) • Employee never complained to anyone at company; never told supervisor that she believed his order was discriminatory • Thereafter written up, onerous performance standards imposed - Previously: consistently favorable reviews • Employee was not fired, went out on stress leave, filed a retaliation claim

28. Two Key Determinations by Yanowitz Court: • Under State law, standard for discrimination and retaliation is the same; must show adverse employment action that materially affects the terms and conditions of employment. • Not sufficient if action would merely “reasonably deter” employee from complaining • However, Employee need not be fired or severely disciplined to sue for retaliation • “Campaign of retaliation” is sufficient

29. McRae v. Dept. of Corrections • Followed holding of Yanowitz • Required Plaintiff to show that the employer’s retaliatory actions “had a detrimental and substantial effect on the plaintiff’s employment” • Court reversed jury verdict as not being supported by substantial evidence

30. Retaliation Concerns and Issues • Practical Tip: • Unlike discrimination, retaliation claims will usually have a proximate nexus between the “complaint” and the subsequent “adverse action” • Immediately places employer on the defensive to show that subsequent actions were for legitimate business reasons and not pretext for retaliation • Upper management needs to be properly trained to inquire and question reasons for discipline or other action directed at previously good employee • Situations need to be monitored for reasonable period of time following employee complaints

31. Disability Discrimination Issues • Gelfo v. Lockheed Martin Corp.(6/2/06; CA Court of Appeal) • Rochelle Y. Williams v. Genentech, Inc. (5/9/06; CA Court of Appeal)

32. Hypothetical Employee goes out on disability leave just prior to receiving discipline / poor performance review from supervisor. • Can you issue discipline anyway? Employee stays out on leave past protected FMLA/CFRA 12 week period. Supervisor calls you next day to ask “can we fire him yet?” After six months, employee still not released to return to work, so you send letter terminating employment. • Was this okay to do?

33. Gelfo v. Lockheed Martin Corp.(6/2/06; CA Court of Appeal) • 9/00, employee metal fitter injured lower back, filed workers compensation claim. By 11/00, doctor determined injury was permanent & stationary, restricted employee from heavy lifting, bending, stooping. Employee then participated in vocational rehabilitation to be retrained • By 2/02, employee was feeling fine; participated in strenuous activities (bicycling, walks, yard work); felt there was nothing he could not do

34. Gelfo v. Lockheed Martin Corp.(cont.) • 2/02, offered job as plastic parts fabricator, but revoked 2 days later because of medical file review. Lockheed stood by revocation, concluding that company could not accommodate stooping and bending based on doctor report • After jury trial, court granted directed verdict in favor of Lockheed; Appellate Court reversed

35. Significant Determinations in Gelfo • Rejecting analogies to ADA, CA court confirmed FEHA is broader than ADA • FEHA obligates employers who regard or perceive employees as disabled, even if they are not disabled, to • Engage in interactive process for accommodation • Provide reasonable accommodations, even if employee is not actually disabled!

36. Rochelle Y. Williams v. Genentech, Inc. (5/9/06; CA Court of Appeal) • Receptionist disciplined by supervisor for failing to follow policies; suffered asthma attack, taken by ambulance • Extended leave of absence for asthma and then depression/anxiety; certified as completely disabled and unable to work • After 12 weeks, and while Employee completely incapacitated, she was replaced per company policy • At end of six month leave, Employee certified to come back to work without restrictions, no longer “disabled”

37. Rochelle Y. Williams v. Genentech, Inc. (cont.) • Position had been filled, given 60 days to find new position within company • Not qualified for any open position for which she applied • Employment terminated and brought claims for, among other things, disability discrimination (failure to accommodate, failure to engage in interactive process)

38. Rochelle Y. Williams v. Genentech, Inc. (cont.) • At time her position was replaced, receptionist was unable to perform with or without reasonable accommodation because she was still certified as totally disabled; no accommodation would work • Claim of failure to engage in interactive process belied by detailed communications and assistance provided in helping her look for another position in company; she was also not disabled when looking for the new position

39. Importance of Williams Decision • Reaffirms employers’ rights to replace workers who cannot perform duties with reasonable accommodation and highlights certain common demands that are NOT reasonable accommodations (demand not to be supervised by particular person, e.g.) • Underscores importance of engaging in the interactive process • Confirms right of employer to refuse to place a disabled person in a position for which he/she is not actually qualified • Documentation is key

40. Williams Decision (Cont.) • Practical Tip: • Review current leave policies to determine maximum permitted leave • If only partial disability, send out notices of open positions to employee while on leave • Establish procedures to contact employee to discuss ability to return • Do not just send out letter of termination

41. Release Agreements • Syverson v. IBM (9th Circuit 8/31/06) • EEOC v. Ventura Foods (Consent Decree 9/1/06)

42. Hypothetical Company conducts mass lay-off and offers releases in exchange for severance packages. Release contains provision that employee promises not to file any “charge, action or complaint against company in any state or federal court or in any administrative forum.” Release contains “carve out” with respect to right to file EEOC Charge to challenge enforceability of ADEA waiver. • Does this language create any issues with respect to the release? • Would this affect the entire release or just that provision?

43. Release Agreements • In Syverson v. IBM, the 9th Circuit refused to enforce the release because it found this type of language created ambiguity and “was confusing.” The Court followed an earlier 8th Circuit decision that had reviewed the same release and had also refused to enforce it. • In EEOC v. Ventura Foods, the EEOC entered into a consent decree with the company based on similar language from a release. The EEOC took the position that the covenant not to file a Charge not only violated the ADEA, but also violated Title VII and the Equal Pay Act. The EEOC took the position that the release was both invalid and also a form of retaliation under those statutes.

44. Release Agreements • Practical Tip: • Review all current form releases being used by the Company • Determine if any contain covenants not to sue or file charges. Analyze whether such language needs to be revised or removed in light of these recent decisions

45. Questions & Answers