California Employment Law Update

Work From Home Trend Reverses

A pair of recent studies reported here indicates that the pandemic-related remote workforce trend shows signs of reversal.  According to a recent survey conducted by the U.S. Department of Labor, 72.5% of business establishments reported that their employees teleworked rarely or not at all in 2022.  That number was 60.1% in 2021.  A second survey conducted by economists found that in February 2023, businesses reported that only 27.7% of total employee days worked were from home, verses 60% during peak pandemic periods in 2020.  Both of these surveys reflect that work from home is giving way to hybrid work, and for some, a full-time return to the work site.

Although the overall trend indicates a return to on-site work, certain industries appear to embrace remote work more than others.  Thirty-three percent of businesses surveyed in the information sector (which includes tech and media firms), and about half of businesses surveyed in the professional and business sector (which includes law and accounting firms), reported that their employees worked full-time from the office in 2022.  A recent surge in leisure, hospitality and retail jobs, which are more suited to in-person work, has made an outsized contribution to rising numbers of on-site employees.

Some employers believe that employees are more productive when working on site, and that it’s easier to train, mentor and build collaborative working relationships in person.  Still, remote work is far from over. The percentage of employees across all industries working on a fully remote basis actually rose from 10.3% in 2021 to 11.1% in 2022, and 13% of current job postings are for remote positions.  For employers and employees who long for a return to in-person work, however, the trend appears to be in their favor.

No Sexual Harassment Claim Between Friends

Under California’s Fair Employment and Housing Act (“FEHA”), employers generally are strictly liable for a supervisor’s harassment, even where the employer is unaware of the supervisor’s alleged bad actions.  While this left many employers without much recourse in the event supervisors misbehaved, a recently published Court of Appeal decision offers some hope.  In Atalla v. Rite Aid Corp., 2023 WL 2521909 (Cal. Ct. App. Feb. 24, 2023), the Court of Appeal established limits on the extent to which employers can be held responsible for conduct stemming from employees’ personal relationships and after-hours conduct.

Hanin Atalla (“Atalla”), a pharmacist, sued Rite Aid alleging that Erik Lund (“Lund”), a Rite Aid district manager, had sexually harassed her, among other claims.  Atalla’s harassment claim stemmed from a series of late-night text messages containing a video of Lund engaging in a sexual act and a photo of his genitals.  Rite Aid did not dispute that Lund had sent the sexually explicit communications, but maintained that it was not liable for harassment based on Lund’s conduct because he was not acting in his capacity as a supervisor at the time.  The trial court granted summary judgment to Rite Aid on Atalla’s sexual harassment claim, among others, and Atalla appealed.

The Court of Appeal affirmed summary judgment for Rite Aid because it agreed that the alleged harassment occurred when Lund was not acting in his capacity as a supervisor.  In reaching this conclusion, the Court relied on evidence demonstrating a long-standing personal relationship between Atalla and Lund that predated their working relationship.  Atalla had testified that her preexisting relationship with Lund “was wholly unconnected to her work” at Rite Aid, and there was evidence establishing that, both before and after Lund and Atalla worked together, they “texted about a range of topics, extensively and frequently, including … concerning family, vacations, food and dining, alcohol and drinking, people and pets, exercise, as well as chit chat about work,” and they “regularly met for coffee and lunch, got together for holiday and birthday dinners, and were acquainted with each other’s spouses.”

As for the text exchange in question, the Court concluded that it was not work-related and, thus, could not form the basis of a harassment claim against Rite Aid.  The Court noted that Lund sent the photo and video while intoxicated at a hotel late in the evening and Atalla received the texts at her home.  Although Atalla argued that Lund’s explicit photos followed a discussion of work, Lund’s text asking how Atalla’s work day had gone was a “common inquiry for a friend.”  Accordingly, the Court of Appeal explained that Rite Aid was not strictly liable because Rite Aid demonstrated that the harassment occurred outside of work and that Atalla a willing participant in the personal friendship that pre-existed Atalla’s employment.

Ultimately, while Atalla provides some protection for employers when employees engage in purely personal conduct, unconnected to work, employers still will face liability for work-related actions by supervisors.  Accordingly, employers should consult with experienced employment counsel regarding training and other means to ensure that their supervisors’ work-related conduct does not result in liability.

Reminder: Employer Considerations When Contemplating Delaying Payroll

On March 10, 2023, financial markets were rocked by uncertainty over the future of certain significant financial institutions.  Among other concerns, bank failures raise the prospect of temporary or long-term cash flow problems for account holders, as deposits totaling more than $250,000 exceed the amount covered by the Federal Deposit Insurance Corporation.  Often, companies’ largest financial commitments are their payroll obligations to employees, including their tax withholding obligations to applicable government authorities.  Therefore, in these tumultuous times, some employers may find themselves contemplating whether to delay payroll payments.  In such case, they should proceed with extreme caution.

California law requires that employers pay employees their wages within designated time periods, both during employment and upon termination.  See Cal. Lab. Code §§ 201-202 (termination), 204 (during employment).  As to current employees, pursuant to Labor Code section 204 (“Section 204”), paydays must be designated in advance and occur within specific time parameters—both as to exempt and non-exempt employees.  See id. at § 204.  Failure to satisfy Section 204’s pay timing requirements can carry significant consequences:  Employees are able to recover penalties of $100 per employee for each initial violation of Section 204 and $200 plus 25% of the amount unpaid for each subsequent or willful violation per employee.  See id. at § 210(a).  As an alternative, employees can pursue claims for civil penalties on a representative basis and recover attorneys’ fees under the Labor Code Private Attorneys’ General Act (“PAGA”) for Section 204 violations.

Setting aside the potential for civil penalties and fees, employers contemplating payroll delays should consider potential criminal liability.  California Labor Code section 215 makes it a misdemeanor for “[a]ny person, or the agent, manager, superintendent or officer thereof” to fail to pay wages in accordance with Section 204.  And, on top of wage and hour liability, delays in payroll also may impact required contributions to company and union benefit plans.

Employers facing cash flow concerns stemming from a bank collapse and/or related market conditions should consult with seasoned counsel regarding how to navigate this situation.  Our Proskauer lawyers are ready to collaborate with our clients and help find solutions to assist through these tumultuous times and minimize risk.

Court of Appeal Rules Plaintiff May Recover PAGA Penalties For Violating Sick Pay Statute

In the first ruling of its kind, the California Court of Appeal (4th Dist.) recently ruled that a plaintiff may pursue penalties under the Private Attorneys General Act (PAGA) for alleged violations of California’s sick pay statute, the Healthy Workplaces, Healthy Families Act of 2014.  Wood v. Kaiser Found. Hosps., 2023 WL 2198664 (Cal. Ct. App. Feb. 24, 2023).

At issue was the meaning of Labor Code Section 248.5(e), which provides that “any person or entity enforcing this article on behalf of the public as provided for under applicable state law shall, upon prevailing, be entitled only to equitable, injunctive, or restitutionary relief[.]”  As the Court conceded, every federal district court to consider the issue had held that this provision precluded the recovery of PAGA penalties, because a PAGA plaintiff seeking to enforce the Act does so “on behalf of the public as provided for under applicable state law.”  Wood, 2023 WL 2198664, at *11.

However, Wood broke with this consensus primarily by parsing the legislative history of the Act.  Describing its role as “that of a detective,” seeking to “uncover what [the Legislature] had in mind,” it embarked on a thorough analysis comparing earlier versions of the bill to the version enacted.  Id. at *3-9.  Its conclusion was that the limitation on remedies was intended to apply only to claims under the Unfair Competition Law (UCL).

It is not hard to imagine this defendant or another employer challenging this reasoning in the California Supreme Court or another Court of Appeal, because there may be a persuasive argument that Wood’s legislative history analysis was unnecessary.  Notably, the statute does not mention the UCL at all.  Rather, it broadly refers to enforcement actions bought “on behalf of the public as provided for under applicable state law.”  Cal. Lab. Code § 248.5(e).  District courts have unanimously concluded that this language unambiguously encompasses PAGA actions.  E.g., Rudolph v. Herc Rentals, Inc., 2021 WL 5994514, at *5-6 (C.D. Cal. Aug. 27, 2021) (explaining that the “key language is clear in its context”).  If the meaning of the text is plain, then there is no opportunity for a court to assume the role of “detective” and dig through the legislative history for a contrary intent.

In the meantime, however, Wood’s holding is binding on California trial courts: a plaintiff may seek PAGA penalties for alleged violations of the sick pay statute.

Good News for Employers: Good Faith Belief of Compliance Precludes Both Final Wage and Wage Statement Penalties

Last summer, we reported here the California Supreme Court ruling that premium payments owed under Labor Code section 226.7 for meal and rest break violations constitute “wages.” The Naranjo et al. v. Spectrum Sec. Servs., Inc., 13 Cal. 5th 93, 102 (2022) decision had significant ramifications because it triggered related obligations for employers to report the premiums on employee wage statements, pay employees these wages within statutory deadlines at termination, and potentially pay statutory penalties if they fail to comply with these obligations.

Specifically, Naranjo suggested that, as a result of the ruling, employers who willfully withhold final wages from departing employees would owe a waiting time penalty (up to 30 days of daily wages) under Labor Code section 203.  Under Labor Code section 226, employees are also entitled to penalties if an employers’ failure to provide accurate and required information on wage statements is knowing and intentional.  Courts have been divided as to whether the defense to ‘willfulness,’ i.e., a good faith dispute as to wages owed under section 203, is also a sufficient defense to the “knowing and intentional” standard under section 226.

Upon its ruling, the Supreme Court remanded the case to the Court of Appeal and instructed it determine the following: (1) whether the trial court had erred in finding the employer had not acted “willfully” in failing to timely pay employees premium pay (which barred recovery for penalties under section 203); and (2) whether Spectrum’s failure to report missed break premium pay on wage statements was “knowing and intentional” under section 226.

This week, the Court of Appeal affirmed the trial court’s finding of Spectrum’s good faith basis for its failure to pay meal premiums for departing employees and therefore that its non-compliance was not willful under section 203.  At trial, Spectrum had presented evidence of its belief that the California Labor Code did not apply to its employees due to their work on federal enclaves and/or performance of federal functions.  Although Spectrum’s defenses did not prevail, the trial court did not find that the defenses were made unreasonably, unsupported by the evidence, or made in bad faith.  The Court extended this line of reasoning of “willfulness” in section 203 to the “knowing and intentional” standard of section 226.

Significantly, the Court also reversed class counsel’s attorneys’ fees award, finding that because Naranjo was not entitled to section 226 penalties, the attorneys’ fees award pursuant to that statute should also be reversed.  Class counsel had not asked for attorneys’ fees under any other statute.

The Court’s ruling in favor of Spectrum spared the Company from potentially significant penalties and attorneys’ fees.  That said, the Court’s ruling was highly specific to the evidence and arguments Spectrum submitted to the trial court.  As such, employers should continue to be vigilant in ensuring employee meal and rest period premiums are accounted for on their statements and are paid at the appropriate rate and time.

California’s War On The Fast-Food Industry Continues

In the California Legislature’s latest attack on the fast-food industry, Assemblymember Chris Holden (D-Pasadena) introduced the Fast Food Franchisor Responsibility Act (“AB 1228”). AB 1228 was introduced shortly after a Sacramento County Superior Court judge issued a preliminary injunction to stop the controversial Fast Food Accountability and Standards Recovery Act or “FAST Recovery Act” (AB 257) from taking effect, pending a vote by California voters, as we previously reported here.

Under AB 1228, a fast-food restaurant franchisor would be required to “share with its fast-food restaurant franchisee all civil legal responsibility and civil liability for the franchisee’s violations of prescribed laws and orders or their implementing rules or regulations.”

Examples of such laws include the California Fair Housing and Employment Act and the Labor Code.  As a result, a franchisor’s potential liability under these laws would be shared with a franchisee even though the latter actually may be the one responsible for the alleged violations.  A franchisor would have the opportunity to cure any violation following 30-days’ written notice before a civil action may be commenced.  The period to cure any violation will be extended to 60 days upon written request by the franchisor, for purposes of completing an investigation.  If the noticed violation is cured (i.e., if a franchisor abates each violation alleged, ensures the franchisee is in compliance and “makes whole” any affected employee) during this time, the franchisor shall not be liable in a civil action.

Perhaps we’re too skeptical, but it seems doubtful that most trial lawyers in California will be satisfied with any curative measures a franchisor may attempt to make.

Further, AB 1228 invalidates any agreement between the franchisor and franchisee attempting to waive this joint-liability or seek indemnity.  Lastly, AB 1228 authorizes a franchisee to sue a franchisor for monetary or injunctive relief if the terms of their franchise agreement prevent the franchisee from complying with the proposed law.  AB 1228 expands on this stating that “there shall be a rebuttable presumption that any changes in the terms of a franchise that increase the costs of the franchise to the fast-food restaurant franchisee create a substantial barrier to compliance.”

We will continue to monitor the AB 1228 and provide updates.

Employees Lose on PAGA Claims in Court Following Loss in Arbitration

Earlier this month, the California Court of Appeal (2d Dist.) ruled that issue preclusion bars a derivative Private Attorneys General Act (PAGA) claim where the plaintiff litigates individual Labor Code claims in arbitration and loses.  Rocha v. U-Haul Co. of Cal., 2023 WL 1462594 (Cal. Ct. App. Feb. 2, 2023) (certified for publication).  Rocha, while at odds with a prior decision from the 4th Dist., has important implications for the closely watched Adolph v. Uber Technologies, Inc. case, in which the California Supreme Court is poised to rule on a critical question following last summer’s blockbuster U.S. Supreme Court decision in Viking River Cruises.

The plaintiffs in Rocha filed a lawsuit against their direct employer and multiple co-defendants, including their alleged joint employer, U-Haul.  The complaint alleged whistleblower retaliation under Labor Code Section 1102.5 and other non-wage/hour claims.  When the defendants moved to compel arbitration, the plaintiffs moved to amend their complaint to add a PAGA claim against U-Haul for the alleged Section 1102.5 violation.  The trial court denied leave to amend on the grounds that the plaintiffs lacked standing and compelled arbitration.  The arbitrator ruled against the plaintiffs on all claims, and the trial court confirmed the award.

On appeal, the court rejected the plaintiffs’ argument that the trial court abused its discretion by denying leave to amend to add the PAGA claim against U-Haul, finding that issue preclusion destroyed their standing.  Because the arbitrator ruled against the plaintiffs on all of their claims—including the Section 1102.5 claim—the “arbitrator’s finding addressed the same issue the [plaintiffs] want to relitigate in connection with PAGA standing: whether U-Haul . . . retaliated against the [plaintiffs] in violation of section 1102.5.”  Rocha, 2023 WL 1462594, at *11.  The arbitrator’s conclusion that they experienced no violation therefore bound them in court and meant they were not “aggrieved employees.”

In applying issue preclusion, Rocha expressly disagreed with Gavriiloglou v. Prime Healthcare Mgmt., Inc., 83 Cal. App. 5th 595 (2022).  In Gavriiloglou, after the plaintiff lost on several individual Labor Code claims in arbitration, the Court of Appeal (4th Dist.) concluded that issue preclusion did not apply to a subsequent PAGA action alleging the same Labor Code violations.  Citing Code of Civil Procedure Section § 1909(a)(2) and three earlier cases, Gavriiloglou concluded that the plaintiff must act in the “same capacity” in the two proceedings for issue preclusion to apply, and the plaintiff “was acting in different capacities in the arbitration and in the litigation of the PAGA claim.”  Id. at 601.  Rocha criticized this holding, explaining that the authorities Gavriiloglou relied on apply only to claim preclusion and found no “basis in the case law or log for creating an identical capacity requirement for issue preclusion[.]”  Rocha, 2023 WL 1462594, at *13.

The Rocha decision may provide some respite for employers if the California Supreme Court rules for the employee in Adolph, where the employee argues that a PAGA plaintiff should be able to pursue a non-individual PAGA claim in court even if the individual component of that PAGA claim is severed and sent to arbitration.  If the California Supreme Court adopts this rule, the employer could still defeat the entire PAGA claim under Rocha by proving in arbitration that the plaintiff suffered no Labor Code violation.  The arbitrator’s finding would then bind plaintiffs in court, precluding them from proving that they are “aggrieved employees.”  Gavriiloglou would not seem to suggest a different result, because both in arbitration and in court, the plaintiff acts in the “same capacity” of a private attorney general representing the State of California.  Therefore, Rocha may provide some valuable insurance to employers in the event of a bad outcome in Adolph.

Court Obliterates California’s Anti-Arbitration Law

Yesterday, a three-judge Ninth Circuit panel revisited its own 2021 order and finally struck down California’s anti-mandatory employment arbitration law, Assembly Bill 51 (“AB 51”).  In an opinion drafted by the former dissenting judge, Judge Sandra Ikuta, the new majority declared AB 51 was preempted by the Federal Arbitration Act (“FAA”).

The statute in question, signed into law by Governor Newsom in 2019, was California legislators’ third attempt to side-step the FAA.  Two prior legislative enactments had been vetoed by former Governor Brown.  Among other things, AB 51 made it unlawful for employers to require employees to agree to arbitration of claims pursuant to California’s Fair Employment and Housing Act or Labor Code—whether as a condition of employment or receipt of any other employment benefit, even with an opt-out provision.  The law also purported to impose both civil and criminal penalties for violations.  As Judge Ikuta noted in yesterday’s opinion, the legislators had made it obvious they were trying to evade the U.S. Supreme Court’s arbitration jurisprudence by carefully carving out from AB 51’s reach any agreements subject to the FAA.

In late 2019, a coalition of business groups led by the U.S. Chamber of Commerce (“Chamber”) first challenged the law and were successful in getting a district court to enjoin its enforcement (as we reported here).  Thereafter, in 2021, the same three judge panel issued an order holding that AB 51 was partially preempted by the FAA to the extent it purported to impose civil or criminal penalties on employers who obtained signed arbitration agreements; the panel left intact AB 51’s penalties for any employer who was unsuccessful in getting an employee to sign.  In a sharply worded dissent, Judge Ikuta wrote that “the majority[’s opinion] abet[ed] California’s attempt to evade the FAA and the Supreme Court’s caselaw by upholding this anti-arbitration law on the pretext that it bars only nonconsensual agreements.”  Chamber of Com. v. Bonta, 13 F.4th 766, 782 (9th Cir. 2021) (Ikuta, J., dissenting).  As she further explained, the former majority’s “holding mean[t] that an employer’s attempt to enter into an arbitration agreement with employees is unlawful, but a completed attempt is lawful.  This tortuous ruling is analogous to holding that a statute can make it unlawful for a dealer to attempt to sell illegal drugs, but if the dealer succeeds in completing the drug transaction, the dealer cannot be prosecuted.”  Id. at 791.  Well, Judge Ikuta got the last word.

Following the U.S. Supreme Court’s June 2022 ruling in Viking River Cruises, Inc. v. Moriana, 142 S. Ct. 1906 (2022), the same three judge Ninth Circuit panel voted sua sponte to rehear the challenge to AB 51.  The new majority opinion, written by Judge Ikuta, who was joined by Judge William Fletcher, held that AB 51 was preempted by the FAA in its entirety because it discriminated against the formation of arbitration agreements.  The majority noted that AB 51 singled out arbitration provisions for different treatment than other contracts because “California law generally allows an employer to enter into a contract with an employee that includes non-negotiable terms as a condition of employment.”  The majority also rejected California’s and the dissent’s argument that AB 51 merely targeted involuntary agreements, noting that non-negotiable agreements are not the same as involuntary agreements, and that the former are a routine part of daily life.

At this point, California may seek full en banc review, though it is unclear that AB 51 would fare better before the broader Ninth Circuit.  As Judge Ikuta noted in her new majority opinion, at least two other Circuits have rejected similar laws that seek to prevent parties from entering into arbitration agreements.  Furthermore, even if California could obtain its preferred outcome before the full Ninth Circuit, most commentators believe that AB 51 would meet its match before the U.S. Supreme Court.

Accordingly, in light of this new decision, employers are now free to resume requiring employees to execute arbitration agreements as a condition of employment—with or without opt-out provisions—without the specter of AB 51’s civil and criminal penalties.  However, as Judge Ikuta noted, any such agreements remain subject to normal contract defenses—including unconscionability.  Thus, employers may wish to consult counsel when designing mandatory arbitration programs and/or agreements.

January 2023 California Employment Law Notes

We invite you to review our newly-posted January 2023 California Employment Law Notes, a comprehensive review of the latest and most significant developments in California employment law. The highlights include:

View PDF

Outside Salesperson Exemption Does Not Apply To Workers Whose Employer Controls Their Hours And Working Conditions

Espinoza v. Warehouse Demo Servs., Inc., 86 Cal. App. 5th 1184 (2022)

Georgina Espinoza, an employee of Warehouse Demo Services (“Warehouse”), worked in a Costco and performed demonstrations of products. Warehouse did not lease the space, but instead collects floor space on behalf of the companies whose products are demonstrated and then remits payment on their behalf to Costco. Espinoza brought a class action complaint alleging numerous Labor Code violations. Warehouse, however, argued that Espinoza fell within the outside salesperson exemption, which exempts workers from statutory overtime, minimum wage, and meal and rest break requirements, because she was engaged in selling outside of Warehouse’s place of business. The trial court held that the Espinoza was covered by the exemption because Warehouse did not own or lease the site at which Espinoza worked. However, the Court of Appeal reversed, holding that the correct inquiry is the extent to which the employer maintains control or supervision of the employee’s hours and working conditions. The Court of Appeal held that the exemption reflected the fact that such outside salespersons generally control their hours and are paid by commission. In “stark contrast,” Espinoza was assigned to work in a small, designated area at a fixed site; she was required to clock in and out for each shift; and she could not leave the area during her shift unless another employee relieved her, which does not comport with the purpose of the exemption.

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