LEGISLATIVE

California

Senate Committee Proves Inflexible to Proposed Alternative Workweek Amendments (SB 1335)

The Workplace Flexibility Act of 2009 failed to pass a key committee vote and likely will not be enacted this year. This bill would have relaxed the stringent requirements for alternative workweek schedules by permitting non-exempt employees to request an employee-selected flexible workweek schedule without requiring an entire work unit to vote on the proposed schedule. In other words, individual employees would have been permitted to request essentially individual alternative workweek schedules allowing them to work up to 10 hours per day within a 40-hour workweek without accruing daily overtime.

Federal

COBRA Premium Subsidy Extended Until May 31, 2010 (H.R. 4851)

As expected, on April 16, 2010, Congress passed and the President signed into law the Continuing Extension Act of 2010 (H.R. 4851) once again extending various government benefits, including the COBRA premium subsidy and unemployment insurance benefits. This bill is immediately effective and applies retroactively to March 31, 2010, when the prior extensions expired.

As discussed in prior updates, the American Reinvestment and Recovery Act (ARRA) contains a 65% percent COBRA premium subsidy for up to 15 months for “assistance eligible individuals” (defined as employees “involuntarily terminated” for other than gross misconduct since September 1, 2008). The eligibility period has been extended on multiple occasions, most recently through March 31, 2010. This latest extension extends the eligibility period for employees who lose their job through May 31, 2010. As mentioned, this bill is immediately effective and it also provides transition relief for employees who lost their jobs between the March 31, 2010 expiration and the April 16, 2010 enactment date.

In light of this extension, employers (or their group health plans) will still be required to provide notice of the premium subsidy to employees involuntarily terminated through May 31, 2010. The Department of Labor has previously published updated COBRA notices for employees to use reflecting this benefit and earlier extensions, and these notices are available at www.dol.gov/ebsa/cobramodelnotice.html. Please note, this extension extends the eligibility period for discharged employees, but it does not extend the length of subsidy coverage period (15 months), including for employees who may soon be nearing the end of the subsidy period on their coverage.

This bill also retroactively extends from April 5, 2010 to June 2, 2010 the period for employees to apply for federal emergency unemployment insurance compensation.

Now that this most recent stop-gap measure has been enacted, it is anticipated Congress will turn its attention to pending legislation (e.g., HR 4123) that would extend COBRA through the end of the year, and extend unemployment insurance eligibility up to 99 weeks. However, the improving economy and the increasing concern about government spending, coupled with the decreasing levels of support (relatively speaking) for these extensions (this most recent bill passed the Senate 52-38) suggest further extensions are likely but not guaranteed, so stay tuned.

Employee Misclassification Prevention Act Re-Introduced (H.R. 5107/S. 3254)

This recently-introduced bill is intended to prevent misclassification of employees as independent contractors. It would amend the Fair Labor Standards Act (FLSA) to require employers to keep certain records of non-employees who provide labor or services for remuneration. It would also impose penalties of $1,100 per employee misclassified as an independent contractor and up to $5,000 per employee against employers who repeatedly and willfully commit misclassification violations. It would also require employers to provide written notice to the non-employee of the classification and refer them to the DOL’s website for further information. Lastly, it would authorize DOL audits of certain industries with frequent incidence of misclassifications.

The House bill has been referred to the Committee on Education and Labor, and a similar bill is pending in the Senate. Prior versions of this bill have stalled.

Congress Considering Award to Encourage Work-Life Balancing Policies (H.R. 4855)

The recently introduced Work-Life Balance Award Act is intended to encourage employers to develop and implement work-life balance policies. Under this bill, the DOL would award an annual “Work-Life Balance Award” for employers that have developed and implemented work-life balance policies, defined as workplace practices “designed to enable employees to achieve a satisfactory work-life balance.” This bill, which is supported by the Society for Human Resources Management, is presently pending before the Workforce Protection Subcommittee.

AGENCY

California

DLSE Updates Criteria for Evaluating Internship Program

California’s Division of Labor Standards Enforcement (DLSE) recently issued an opinion letter to help determine whether “interns” or “trainees” are considered employees and therefore subject to California’s wage and hour laws, including minimum wage and overtime. Notably, the DLSE declined to apply its own 11-factor test, and instead adopted the 6-point formulation used by the federal Department of Labor (DOL) to determine whether the person qualifies as an intern and thus is not entitled to wages. The six criteria to be used by both the DLSE and DOL are:

1. The training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school;
2. The training is for the benefit of the trainees or students;
3. The trainees or students do not displace regular employees, but work under close supervision;
4. The employer derives no immediate advantage from the activities of trainees or students, and on occasion the employer’s operations may be actually impeded;
5. The trainees or students are not necessarily entitled to a job at the conclusion of the training period; and
6. The employer and the trainees or students understand that the trainees or students are not entitled to wages for the time spent in training.

The DLSE noted that all six criteria must be met, but that the application of these criteria depends upon all of the facts and circumstances of each internship/trainee program. In effect, by essentially adopting the DOL’s test, and by abandoning several of its prior criteria, including that the clinical training be part of an educational curriculum, the DLSE has provided consistency between state and federal law, and potentially made it easier for internship programs to meet this test. The full text of this opinion letter is available at: www.dir.ca.gove/dlse/opinions/2010-04-07.pdf..

FEHC Issues Initial Draft of Updated Pregnancy Regulations

The California Fair Employment and Housing Commission (FEHC) has issued a Notice of Proposed Rulemaking, stating that it intends to amend the FEHC’s existing regulations (set forth at CCR 7291.2-7291.16) concerning “Sex Discrimination, Pregnancy, Childbirth or Related Medical Conditions.” The FEHC states these proposed amendments are intended to update the Commission’s regulations to conform to statutory changes to the FEHA enacted in 1999 and 2004. These regulations are also intended to provide additional clarity and guidance to employers and employees on these issues, including but not limited to accommodating pregnant employees. Amongst other things, it appears the FEHC will specifically enumerate the types of reasonable accommodations available for pregnant employees.

The FEHC will hold two public hearings on these amendments on June 1 and 2, and will accept written comments on these proposed regulations until June 2, 2010. The text of these draft amended regulations is available at www.fehc.ca.gov/act/pregnancyregulations.asp.

Federal

HIRE Act Affidavit Now Available

The Internal Revenue Service (IRS) has published the employee affidavit (IRS Form W-11) required for employers to claim the tax benefits available under the recently-enacted Hiring Incentives to Restore Employment (HIRE) Act signed into law in March 2010. Under this Act, employers who hire “qualified employees” (employees hired after February 3, 2010 and who had not worked more than 40 hours during preceding 60-day period before being hired) are entitled to certain benefits, including an exemption from certain payroll tax requirements. Employers must also obtain an affidavit, either IRS Form W-11 or similar sworn documents, signed by the employee confirming they meet the HIRE Act’s definition of “qualified employee.” This affidavit is available at www.irs.gov/pub/irs-pdf/fw11.pdf.

DOL Also Issues Guidance on Internship Programs Under the FLSA

The DOL recently issued Fact Sheet No. 71 to help determine whether “interns” or “trainees” are employees subject to the Fair Labor Standards Act for services they provide to for-profit private sector employers. The DOL reiterated the FLSA’s broad definition of “employ” and that individuals who are “suffered or permitted” to work must be compensated for the services they perform unless they satisfy the 6-factor test (discussed above under California Agency Section) to qualify as a bona-fide internship or training program.

The DOL’s Fact Sheet articulated the six-factor test and then applied some additional guidance concerning several of these factors. For instance, the DOL noted that the more the internship program is structured around a classroom or academic experience as opposed to the employer’s actual operations, and provides skills applicable to multiple employment settings (as opposed to a single employer) the more likely the internship will be viewed as an extension of the individual’s education experience. The DOL observed that if the interns are regularly engaged in the operations of the employer or are performing productive work (ex. filing, assisting customers, performing other clerical work), then the benefits to the employer may outweigh the benefits the trainee is receiving.

Similarly, on the “displacement” factor, the DOL cautioned that interns will more likely be viewed as employees if they are substitutes for regular workers or to augment the employer’s existing workforce during specific time periods. Similarly, if the employer would have hired additional employees or required existing staff to work additional hours had the interns not performed the work, then the interns will be viewed as employees and subject to the FLSA’s provisions.

The DOL also suggested the internships should be of a fixed duration, established prior to the outset of the internship, and the unpaid internship should not be used as a trial period for individuals seeking employment at the conclusion of the internship period. In this regard, if the intern is placed with the employer for a trial period with the expectation that he or she will then be hired on a permanent basis, that individual generally would be considered an employee under the FLSA. The full text of Fact Sheet No. 71 is available at: www.dol.gov/whd/regs/compliance/whdfs71.htm.

OSHA Unveils Severe Violator Enhancement Program

The Occupational Safety and Health Administration (OSHA) has announced it intends to implement a new Severe Violator Enforcement Program (SVEP) to replace its Enhanced Enforcement Program implemented in January 2008. The SVEP is intended to develop enforcement policies and procedures allowing OSHA to concentrate resources on inspecting employers who have repeatedly and willfully violated OSHA’s requirements. Enforcement actions for severe violator cases will include increased penalties, mandatory follow-up inspections, increased company/corporate awareness of OSHA enforcement, company-wide agreements, enhanced settlement provisions, and further federal court enforcement. An overview of the SVEP program is available at www.osha.gov/dep/svep-directive.pdf.

JUDICIAL

California

California Supreme Court Permits Judicial Review of Erroneous Arbitrator Decisions Involving Unwaivable Statutory Rights

In a 4-3 decision, the California Supreme Court concluded that the courts may review an arbitrator’s erroneous legal conclusions involving unwaivable statutory rights (e.g., those arising under the FEHA), notwithstanding the Court’s prior decisions and the California Arbitration Act’s provisions precluding judicial review of erroneous legal conclusions by arbitrators. The Court also held that arbitration provisions limiting administrative agencies (e.g., the DFEH) from adjudicating claims may be valid, but it declined to address whether arbitration provisions shortening the applicable statute of limitations were permissible.

In this employment case, the arbitrator failed to apply the applicable statutory tolling provision and as a result, he erroneously concluded the plaintiff’s FEHA age discrimination claims were time-barred because he did not file for arbitration within the one-year period identified in the arbitration provision. The trial court vacated the arbitration award because the arbitrator had clearly misapplied the tolling statute, but the appellate court reversed finding that arbitrator error was not one of the narrow bases for judicial review identified in the applicable statute (Code of Civil Procedure section 1286.2(a)). The California Supreme Court granted review to determine the standard of judicial review of an arbitrator’s legal error involving statutory employment claims.

Citing its prior decision in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, in which the Court had outlined various “minimum requirements” for mandatory arbitration of statutory employment claims, the Court held judicial review is appropriate for arbitrator errors that effectively bar an employee from a hearing on the merits of his or her claim. In other words, while the courts generally cannot review an arbitrator decision for legal error in the non-employment context, such review is permitted in the employment context to ensure the arbitrator’s legal error does not deprive an employee of a substantive hearing on certain statutory claims, such as under FEHA.

The Court also rejected the employee’s argument that the arbitration provision precluding an administrative agency from adjudicating the claims rendered the agreement unconscionable. The Court noted that while the parties cannot preclude an administrative agency from prosecuting an administrative charge on the employee’s behalf, the parties may limit the administrative agency’s ability to adjudicate the charge on the employee’s behalf. In other words, the parties may agree that as between the employer and the employee (as opposed to the employer and an administrative agency), they will bypass both the agency and judicial forums and proceed directly to arbitration for final determination. (Pearson Dental Supplies, Inc. v. Superior Court (2010) __ Cal.4th __, 2010 Cal.LEXIS 3685.)

California Supreme Court to Determine if “Mixed Motive” Affirmative Defense Applicable Under California Law

The California Supreme Court has granted review in Harris v. City of Santa Monica (2010) 2010 Cal.App.LEXIS 135, to determine whether the so-called “mixed motive” affirmative defense available under Title VII is available under FEHA. Under this defense, if a plaintiff demonstrates both discriminatory and non-discriminatory reasons motivated a challenged decision, the employer can still prevail by demonstrating it would have made the same decision solely on the basis of its legitimate reasons. A final decision is not expected until 2011.

Class Certification Denied in Another Wage and Hour Class Action

In a wage and hour class action filed by restaurant managers claiming they were improperly classified as exempt, the California court of appeal denied class certification. The appellate court found that issues of common proof did not predominate because the managers’ duties and time spent on various tasks varied widely from one restaurant to the next. The court concluded class treat is inappropriate if a series of mini-trials will be necessary to establish liability as to the various individuals. This case is another in a series in which the courts have scrutinized class allegations more closely, and have denied class certification unless the plaintiffs can show that class treatment will truly be the most efficient way of litigating the claims. (Arenas v. El Torito Restaurants, Inc. (2010) 183 Cal.App.4th 723.)

Federal

United States Supreme Court Authorizes, But Sharply Limits, Attorneys’ Fees “Enhancements” in Federal Civil Rights Cases

Many federal civil rights statutes authorize the prevailing party to recover “reasonable” attorney’s fees, and a frequently litigated issue is whether the trial court may award a fee enhancement (i.e., a multiplier) after it determines the so-called “lodestar” amount (the number of hours worked multiplied by the prevailing hour rates). In this case, the trial court applied a 75% multiplier to a $6 million “lodestar” amount resulting in a $10.5 million fee award. A unanimous United States Supreme Court concluded the trial court may award such fee enhancements under 42 U.S.C. § 1988 in appropriate circumstances. However, in the 5-4 portion of its decision, the Court also held such fee enhancements are justified only in “extraordinary “ or “rare” circumstances and that there is a strong presumption that the lodestar amount yields a sufficient fee. (Perdue v. Kenny A. (2010) ___ U.S. ___, 2010 U.S.LEXIS 3481.)

NOTE: This particular decision is immediately applicable to several federal employment civil rights statutes (42 U.S.C. 1981 and 1983) and may also provide a basis for employers to argue so-called fee enhancements should be similarly limited under other statutes authorizing reasonable attorney’s fees, including Title VII, the ADEA, and FEHA.

United States Supreme Court Reaffirms That ERISA Plan Administrators Remain Entitled To Deference Even After an Earlier Mistaken Interpretation

A group of former employees who received lump-sum payments of their retirement funds and who were later rehired sued the company for ERISA violations based on the plan administrator’s method of calculating current benefits to take into account the earlier distributions. The plan administrator’s method was ultimately found to be unreasonable, and the case was remanded. The plan administrator then came up with a different method of calculating the current benefits to take into account the time-value of money. On review, the district court refused to apply a deferential standard to the plan administrator’s interpretation, finding that deference is no longer required after a plan administrator’s earlier interpretation has been found unreasonable. The Supreme Court reversed, noting that the broad standard of deference to a plan administrator’s interpretations of a plan is not subject to a “one-strike-and-you’re-out” approach. (Conkright v. Frommert (2010) ____ US ____; 2010 U.S. LEXIS 3479.)

United States Supreme Court Holds Class Actions Permissible in Arbitration Only When Arbitration Agreement Expressly Authorizes Class Action Arbitrations

In an arbitration dispute between two sophisticated maritime entities, the United States Supreme Court held that that class action arbitrations are not permitted under the Federal Arbitration Act (FAA) unless the parties' arbitration agreement expressly authorizes such class actions. The Court noted these parties' written arbitration agreement did not expressly authorize either party to proceed on a class action basis and, thus, there was no evidence the parties intended such class actions to be brought in the arbitral forum. Citing the numerous significant procedural differences between "bilateral" arbitration and "class action" arbitration, the Court concluded the parties' agreement should ordinarily be interpreted as written and arbitrators cannot decide the parties' dispute on a class-wide basis absent an express agreement permitting such class arbitration. (Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp. (2010) ___ U.S. ___, 2010 U.S.LEXIS 3672.)

NOTE: This is not an employment decision, but it could potentially have significant employment ramifications, particularly at the federal level, given the FAA’s scope. The Court's suggestion arbitration agreements should be enforced as written, and that class actions are permitted only when expressly authorized, may enable employers to argue their class action waivers in pre-dispute mandatory arbitration agreements should also be enforced. However, since California courts have repeatedly held that class action waivers in employment arbitration agreements are generally unconscionble and unenforceable (See e.g., Gentry v. Superior Ct. (2007) 42 Cal.4th 443), California law arguably conflicts with federal law on this point, although employers may ultimately be able to argue that Stolt-Nielsen and the FAA preempt these California state decisions. In the interim, since California courts have held such class action waivers may invalidate an entire arbitration agreement, thus authorizing a class action in state court, employers should continue to consult with their legal counsel about such provisions in employment arbitration agreements.

Ninth Circuit Upholds Class Certification Ruling in Title VII Gender Discrimination Case

The Ninth Circuit Court of Appeals recently upheld a district court decision certifying a nationwide class of female employees alleging Wal-Mart violated Title VII by discriminating against them based on their gender in regards to pay and promotions. The employer opposed certification of a class of potentially up to 1.5 million members, citing the size of the class and claiming individual issues of fact and law predominated and precluded commonality. The district court granted certification and the ninth circuit affirmed noting, in part, that the “mere size does not render a case unmanageable.”

Notably, the circuit court appeared to adopt a more stringent standard for reviewing class certification motions, essentially requiring the plaintiffs to prove the class action requirements were met and precluding courts from mechanically relying upon the plaintiffs’ complaint allegations. In this case, however, the court also concluded the plaintiffs had met Rule 23(a)’s commonality and other requirements through use of statistical, expert and anecdotal evidence, and that their request for back pay (which would often involve different amounts) did not preclude class certification. However, the ninth circuit remanded the case to the district court to reevaluate whether certification of the punitive damages claim would cause “monetary relief to predominate,” causing plaintiffs’ certification argument to fail under Rule 23(b)(2). In addition, the court struck former employees from the class, since they were not eligible to seek injunctive relief. (Dukes v. Wal-Mart Stores, Inc. (2010) ___ F.3d ___, 2010 U.S.App. LEXIS 8576.)

Start-Up Company Deemed the Owner of the Source Code Created by its Employee

A small technology start up company sued a computer programmer for trade secret misappropriation after he deleted the source code he developed from the company’s computers to obtain leverage in negotiating a better contract. The start up company claimed that under the “work for hire” doctrine under Federal Copyright Law, under which the employer owns the copyright of materials prepared by its employee/authors, it owned the source code created by the programmer. In a role-reversal of sorts, the programmer argued he was an independent contractor, not an employee, and therefore owned the computer program he created.

The Ninth Circuit Court of Appeals applied the traditional agency factors for examining employee versus independent contractor status, albeit with a recognition of the technology start up industry’s business norms, and concluded the programmer was an employee. The court noted a number of factors suggested an employment relationship, including the fact the parties contemplated an indefinite relationship, the programmer’s duties were not limited to the source code, his work was integral to the company’s regular business and the company paid the programmer a monthly salary even though most of the salary was in the form of stock. The court noted that some factors which facially weighed in the programmer’s “independent contractor” claim (i.e., the lack of day-to-day supervision over the programmer’s work, the programmer working from home, etc.) were less important given the informal nature of start up company businesses. Significantly also, the court noted the company’s failure to pay taxes on the programmer’s salary or to complete various employment-related forms (e.g., W-2, etc.) were not decisive, in part because the company had not previously claimed the programmer was a contractor rather than its employee. (JustMed,Inc. v. Byce (9^th Cir. 2010) ___ F.3d ___, 2010 U.S.App.LEXIS 6976.)