LEGISLATIVE

California

Several Employment Bills Pass Legislature, But Face Potential Governor Veto

As mentioned in prior newsletters, most significant employment-related bills (e.g., paid sick leave, meal period reform, etc.) have stalled and will not be enacted this year. There are, however, several employment bills that recently passed the Legislature and have been sent to the Governor for signature or veto. These bills include the following:

AB 335 which creates a rebuttable presumption against enforcement of employment contract provisions requiring disputes to be heard in non-California forums or to be subject to non-California law.

AB 361 which precludes employers from refusing to pay for workers compensation medical treatment services if the employer approved those services before the time the treatment was provided.

AB 527 which allows the Labor Commissioner to presume relevant payroll records submitted by employer are false if it discovers a “pattern of intentional falsification” (e.g., two or more instances.)

AB 793 which is California’s version of the recently enacted federal Lilly Ledbetter Fair Pay Act regarding statute of limitations for compensation claims.

AB 943 which limits employer usage of consumer credit reports for employment-related decisions.

AB 1288 which prohibits the state or municipalities from requiring employers to use the federal E-Verify system except when required by federal law.

AB 1562 which prohibits employers from terminating an employee because the employee’s wages have been threatened or the wages have been subjected to garnishment for the payment of five or fewer judgments at any one time.

SB 242 which amends the Unruh Civil Rights act to prevent business establishments from adopting or enforcing policies requiring, limiting or prohibiting the use of any particular language in the business establishment unless the policy is justified by a “business necessity,” as defined.

The Governor has until October 11, 2009 to sign these bills or they will be deemed vetoed. The Governor has recently threatened that unless other reform bills (e.g., prisons, water rights) are addressed first, he will veto all bills sent to his desk. Whether the Governor actually carries out this threat remains to be seen. Stay tuned.

Federal

Bill to Extend Unemployment Insurance Benefits Passes House and Heads to Senate (H.R. 3548)

Known as the Unemployment Compensation Extension Act of 2009, this bill would extend unemployment insurance benefits for an additional thirteen weeks for unemployed workers in states with an average unemployment rate over 8.5 %, which includes California. This extension would be financed through an extension of the existing 0.2% Federal Unemployment Tax Act surtax through 2010, and expanded wage reporting requirements on existing databases for new hires. This bill now proceeds to the Senate where it is expected to pass fairly quickly.

AGENCY

Federal

USCIS Extends Deadline for Current I-9 Form

In August, the United States Citizenship and Immigration Services Department (USCIS) announced that it has extended its approval of the current I-9 form until August 12, 2012. To reflect this extension, USCIS has issued a new form identifying a new revision date of 08/07/09 which employers may use, or they may continue using the prior form with revision date of 02/02/09. Further information concerning this extended approval, as well as the updated I-9 form, may be found at www.uscis.gov/files/form/I-9.pdf.

Federal Contractor Requirements for E-Verify Now in Effect

The Department of Homeland Security’s long-delayed rule requiring federal contractors to use the federal E-Verify system finally took effect September 8, 2009. As discussed in greater detail in earlier newsletters, this rule will require that most federal contracts awarded or solicitations issued after the effective date include clauses requiring the contractor (and in some instances, subcontractors) to use the federal E-Verify system for purposes of determining employee eligibility to work if the contract contains the Federal Acquisition Regulation E-Verify Clause. These requirements to use E-Verify will generally apply to any contractor employee hired during the contract’s term, or to any current contractor employee assigned to perform work on the federal contract. In other words, covered contractors will need to use E-Verify for all new hires, regardless of whether working on the federal contract, and to employees hired before the contract was awarded if they will work on the contract.

Anticipating likely employer questions about these rules, the United States Citizenship and Immigration Services Department (USCIS) has issued guidance, in fairly easy to read question and answer format, providing an overview of this rule, including which federal contracts, employers and employees are subject to this rule, and how and when to register for E-Verify. This guidance document, entitled “Frequently Asked Questions: Federal Contractors and E-Verify” is available on the USCIS website as www.uscis.gov.

EEOC Issues Notice of Proposed Rulemaking Concerning ADA Amendments Act

When the ADA Amendments Act (ADAAA) became effective January 1, 2009, making numerous changes to the definition of “disability,” Congress directed the Equal Employment Opportunity Commission (EEOC) to amend its ADA Regulations to reflect these changes. Consistent with this congressional directive, on September 23, 2009, the EEOC issued a Notice of Proposed Rulemaking (NPRM) outlining potential changes to the ADA Regulations and to the EEOC’s Interpretive Guidance. The EEOC will accept public comments concerning the proposed regulations until November 23, 2009.

Amongst other things, the NPRM clarifies that the ADAAA does not apply retroactively, and adds some additional major life activities (e.g., sitting, reaching and interacting with others) and major bodily functions (hemic, lymphatic, musculoskeletal, special sense organs and skin, genitourinary, and cardiovascular) to the ADAAA’s non-exhaustive list of “major life activities” for disability purposes. The NPRM further states that mitigating measures other than “ordinary eyeglasses or contact lenses” should not be considered in assessing whether an employee has a disability. The NPRM also clarifies that temporary non-chronic impairments of short duration with little or no residual effects usually will not be considered disabilities, and provides specific examples of such non-qualifying impairments, including the common cold, season or common influenza, a sprained joint, minor and non-chronic gastrointestinal disorders, or a broken bone that is expected to heal completely.

The EEOC has also issued a question and answer guide concerning the proposed regulation. The full-text of this easy-to-ready question and answer guide, which contains citations to specific sections of the proposed regulations, can be found on the EEOC website at: www.eeoc.gov/policy/docs/qanda_adaaa_nprm.html.

IRS Issues Guidance Concerning Taxation of Employment-Related Judgments and Settlements

A frequently recurring issue in employment law, whether involving severance pay during a reduction in force or a settlement payment following civil litigation, is the income and employment tax consequences (as well as the appropriate reporting requirements) of employment-related judgments or settlement payments. The Office of Chief Counsel of the Internal Revenue Service has recently released an internal memorandum providing detailed advice and charts concerning the IRS’ position on the taxability and reporting requirements for a wide-range of employment-related payments or judgments. (See Office of Chief Counsel Internal Revenue Service Memorandum dated October 22, 2008 re: Income and Employment Tax Consequences and Proper Reporting of Employment-Related Judgments and Settlements (PMTA 2009-035).)

This memorandum outlines a four-step process for determining the correct tax and reporting treatment of employment-related settlement payments. First, the employer and taxpayer should determine the character of the payment and the nature of the claim giving rise to the payment. Second, the employer and taxpayer should determine whether the payment constitutes an item of gross income. Third, the employer and taxpayer should determine whether the payment is wages for employment tax purposes. Fourth, the taxpayer should determine the appropriate reporting for the payment and any attorneys’ fees (e.g., Form 1099 or Form W-2). This memorandum then addresses each inquiry in this four-step process outlining the IRS’ position concerning the taxability and reporting obligations on a number of employment-related payments (ex. severance pay, compensatory damages, etc.)

This guidance memorandum cannot be cited as precedent, and it undoubtedly does not address every conceivable situation that might arise. However, it should provide some guidance and a readily-available reference for employers, employees, and their attorneys.

This IRS Guidance Memorandum (PMTA 2009-035) is available on the IRS’ website at www.irs.gov/pub/lanoa/pmta2009-035.pdf.

HHS Issues HIPAA Breach Notification Rules, Which Took Effect September 23, 2009

The Department of Health and Human Services (HHS) has recently issued new regulations requiring that health care providers, health plans and other entities covered by the Health Insurance Portability and Accountability Act (HIPAA) notify individuals when their health information is breached. These “breach notification” regulations require health care providers and other HIPAA covered entities to promptly notify affected individuals of a breach, as well as the HHS Secretary and media where a breach affects more than 500 individuals. Breaches affecting fewer than 500 individuals must be reported to the HHS Secretary on an annual basis. These regulations also require business associates of covered entities to notify the covered entity of breaches at or by the business associate.

These interim final regulations took effect September 23, 2009, but the HHS will accept public comments for 60 days after that date. Additional information concerning these regulations is available on the HHS website: www.hhs.gov/ocr/privacy.

IRS to Launch Employment Tax Audits

The Internal Revenue Service (IRS) has recently announced it intends to step up employment tax audits to ensure employers are paying taxes owed by them and used by the Government to fund certain programs (e.g., Social Security, etc.). The IRS intends to audit up to 6000 randomly selected companies, and will focus on issues such as employee classifications (e.g., independent contractor vs. employee), taxes owed on fringe benefits, and company executive compensation.

JUDICIAL

California

Employer Responsible For Actions of Employee Returning Home From Business Trip

Several non-employees injured in a car accident involving an employee returning from a business trip sued the employer. The employer argued that it could not be held liable due to the "going and coming rule" which holds employers are not vicariously liable for accidents occurring during an employee's commute to and from work. The employer argued that since the employee's route home from the airport took him past his office, and at the time of the accident he was on his regular commute route at approximately his normal commute time, the "going and coming rule" should apply.

The court rejected the employer's argument, and held that the entire time the employee was engaged in business for the employer, including the time the employee was driving back to his home after his business trip, the employer could be held vicariously liable for the acts of the employee. The Court's decision turned on its analysis of the special errand doctrine which holds that when an employee is engaged in a special errand on behalf of the employer, the employee is acting within the course and scope of his employment for the entire time the employee is engaged in the errand including travel from the place of employment to the errand and back. Because the employee was driving straight home from the airport, and did not make any personal stops, the employee was engaged in a special errand for the employer until the time he reached his home. (Jeewarat v. Warner Bros. Entertainment, Inc. (2009) 177 Cal.App.4th 427.)

Class Certification Denial Upheld In Independent Contractor Case Involving Cab Drivers

Former independent contractors brought a class action claiming that USA Cab’s leases wrongfully classified them as independent contractors rather than employees. The trial court denied class certification noting that defendant submitted driver declarations showing that drivers’ duties and days varied widely. The California court of appeal affirmed finding that common questions did not predominate for class action purposes. Although a somewhat factually specific result, it signals that courts are willing to deny class certification where employers can demonstrate the factual differences amongst the claimants. (Ali v. U.S.A. Cab Ltd. (2009) ___ Cal.App.4th ___, 2009 Cal.App.LEXIS 1368.)

Federal

Ninth Circuit Upholds Title VII Retaliation Verdict against Employer

The Equal Employment Opportunity Commission (“EEOC”) filed a Title VII discrimination and retaliation suit on behalf of a terminated Muslim employee, and the jury awarded nearly $400,000 on the retaliation clam, but found in the employer’s favor on the underlying discrimination claim. On appeal, the employer argued the employee had not engaged in a protected legal activity since the employee had only complained on one or two occasions concerning isolated comments. The employer argued since isolated comments generally cannot constitute a hostile work environment, the employee could not have reasonably believed he was reporting a Title VII violation.

The ninth circuit rejected this argument noting that an employee need not complain specifically about every comment to which he has been subjected to believe he is reporting a Title VII violation. The court observed that unreported comments are relevant to the inquiry of whether the employee has a reasonable belief a violation has occurred. This case is a good reminder that employers can be liable for retaliation claims even if there is no underlying discrimination, and to be careful in deciding for itself in advance whether an employee complaint passes the legal standard of a “legally protected activity.” (Equal Employment Opportunity Comm’n v. Go Daddy Software, Inc. (9th Cir. 2009) __ F.3d ___, 2009 U.S.App.LEXIS 20159.)

Employee Did Not Violate Computer Fraud and Abuse Act by E-mailing Financial Documents to Home While Employed

An employer sued a former employee alleging the employee violated the Computer Fraud and Abuse Act (CFAA) (18 U.S.C. § 1030) by emailing financial and marketing documents to his home while employed. The employer acknowledged granting the employee access to its computer files during his employment, and that it had no policy prohibiting emailing documents to home computers, but contended the employee exceeded the authorization provided once the employee began using the computer for his interests rather than the employer. The district court and the Ninth Circuit Court of Appeals rejected this argument and entered summary judgment for the former employee.

The CFAA provides a private right of action against individuals who intentionally access a computer either without authorization or in excess of the authorization granted where such access causes statutorily-enumerated damages. In this case, the employer had granted the employee access so his usage could not be considered “without authorization.” The court also concluded the employee’s access did not exceed the authorization provided since the employer had not placed any limits on the type of information the employee could access or on his emailing of these documents. The circuit court refused to follow a recent Seventh Circuit decision (Int’l Airport Centers LLC v. Cintrin (7th Cir. 2006) 440 F.3d 418) which had held an employee’s authorization was also limited by the duty of loyalty owed to the employer.

Ultimately, the court suggested the employer could have protected itself by better delineating the limits of the employee’s authorized access. The court also observed the employee would have violated the CFAA by accessing the computer system after his employment ended. Notably, the court did not address in this opinion whether the employer might also have other remedies, even if not a statutory remedy under the CFAA. (LVRC Holdings LLC v. Brekka (9th Cir. 2009) ___ F.3d ___, 2009 U.S.App.LEXIS 20439.)

Only Objective Criteria Relevant When Determining if Employee “Qualified” at Prima Facie Stage

A discharged female pilot sued for Title VII gender discrimination claiming her former employer terminated her to remove “an object of sexual competition” from its otherwise all male pilot regional team. The employer argued it acted properly due to plaintiff’s demonstrated failures in “crew resource management” (i.e., interpersonal skills with her co-pilots), which presented safety issues. The federal district court granted summary judgment for the employer, but the ninth circuit court of appeals reversed, making a couple procedural determinations that may further limit employers’ general ability to obtain summary judgment in this federal circuit.

First, the circuit court held that when making the initial determination whether an individual is “qualified” for Title VII purposes, courts may not consider subjective criteria such as interpersonal skills. Rather, the court may only consider easily measurable objective criteria (e.g., level of education, years of relevant experience, etc.). Second, the court held employees need only introduce “minimal” evidence of pretext to rebut an employer’s proffered legitimate business reason, and that some employees may meet this non-onerous burden without introducing any evidence beyond that constituting their prima facie case (i.e., their initial required pleading elements). (Nicholson v. Hyannis Air, Service, Inc. (9th Cir. 2009) ___ F.3d ___, 2009 U.S.App.LEXIS 20020.)

Courts, Not Arbitrator, to Determine Enforceability of Arbitration Agreement

In a Title VII race discrimination and retaliation suit, the employer moved to compel arbitration pursuant to the parties’ arbitration agreement signed by the employee as a condition of employment. The federal district court ordered arbitration, but the employee appealed arguing the court first needed to address his unconscionability objections notwithstanding the agreement’s provision an arbitrator would resolve all such objections. The ninth circuit reversed the arbitration order, holding that where an employee challenges arbitration provisions as unconscionable and thus invalid, the court (and not the arbitrator) must resolve these challenges even where the agreement delegates that determination to the arbitrator. (Jackson v. Rent-A-Car West, Inc. (9th Cir. 2009) ___ F.3d ___, 2009 U.S.App.LEXIS 20133.)

Employer's Physical Capacity Evaluation Test for Returning Employee Deemed an Impermissible Medical Examination

Many employers require returning employees to pass a physical fitness test (aka physical agility test) to determine whether the employee can perform the essential functions of the former position. While the Americans with Disabilities Act (ADA) does not prohibit such physical agility-type tests, it does prohibit employer from requiring a current employee to undergo a “medical examination” unless the examination is "shown to be job related and consistent with business necessity." (FEHA contains the same limitations on medical examinations for current employees (See Gov. Code § 12940(f) (1) and (2).) In a 2-1 decision, the Ninth Circuit Court of Appeals recently determined that an employer’s “physical capacity evaluation” (PCE) actually constituted an impermissible “medical examination” under the ADA.

In this case, the employer required an employee returning from a lengthy leave due to surgery on both knees to undergo a PCE to assess her ability to perform the job duties of two positions (both of which involved fairly heavy lifting [e.g., up to 75 pounds]). A licensed occupational therapist performed the two-day test which included several fitness tests (i.e., a treadmill walk, and lifting exercises), measurement of the employee’s blood pressure and heart rate before and after the tests, and inquiries into the employee’s medical history and current reports of subjective pain levels and use of medication. As a result of these tests, the occupational therapist and plaintiff’s treating physician concluded the employee could not perform the physical requirements of her job, and her employer terminated her position.

The employee sued the employer under the ADA alleging the test was an improper medical exam and that the employer had discriminated against her based on her disability. The lower court granted summary judgment for the employer, concluding that the PCE was not a medical examination. The court of appeals reversed, concluding the test was a medical examination. The court applied the seven factors provided for in the EEOC Enforcement Guidance on Disability Related Inquiries and Medical Examinations for determining whether a test is a medical examination: 1) whether the test is administered by a health care professional; 2) whether the test is interpreted by a health care professional; 3) whether the test is designed to reveal an impairment of physical or mental health; 4) whether the test is invasive; 5) whether the test measures an employee's performance of a task or measures his/her physiological responses to performing the task; 6) whether the test is normally given in a medical setting; and 7) whether medical equipment is used. The court concluded that at least four of these factors (e.g., an occupational therapist performed and interpreted the test, the test inquiries might reveal mental or physical impairments, and the test measured heart rate and breathing patterns) suggested the employer's physical capacity evaluation test was actually an impermissible medical exam under the ADA. (Kris Indergard v. Georgia-Pacific Corporation (Sept. 28, 2009) ___ F.3d. ___, 2009 US.App.LEXIS 21312.)

(NOTE: Although a federal ADA case, this decision is potentially relevant to California employers since FEHA contains the same statutory limitations on medical examinations for current employees (i.e., they are impermissible unless job-related and consistent with business necessity), and since California courts often look to federal authorities in interpreting FEHA. The EEOC Enforcement Guidance on Disability Related Inquiries and Medical Examinations is available at www.eeoc.gov/policy/docs/guidanceinquiries.html.