Copyright: Poofy / 123RF Stock Photo
Copyright: Poofy / 123RF Stock Photo

The California Supreme Court has once again deviated from what many view as clear precedent of the U.S. Supreme Court concerning the enforcement of arbitration agreements. Last week, the California court decided McGill v. Citibank, N.A., holding that state “public policy” precludes the enforcement of arbitration agreements where a class sues for “public injunctive relief” under Business and Professions Code § 17200, California’s much abused “unfair competition” statute. This decision comes on the heels of Iskanian v. CLS, in which the California court held that a class waiver in an arbitration agreement was unenforceable to prevent a representative action under the Private Attorneys General Act, again citing “public policy.” The McGill and Iskanian decisions are at odds with recent SCOTUS opinions such as ATT Mobility v. Concepcion, and American Express Co. v. Italian Colors. In the Italian Colors case, the high court specifically rejected state “public policy” as any kind of exception to the sweeping preemption of the Federal Arbitration Act (“FAA”).

California has been in a running dog fight with the FAA since 1987. In that year, SCOTUS decided Perry v. Thomas, in which Justice Thurgood Marshal upheld the FAA under the Commerce and Supremacy clauses, and slapped down California’s attempt to undermine arbitration agreements. Thirty years later, California courts remain determined to block arbitration under PAGA and Section 17200 in the face of otherwise enforceable arbitration agreements.

Also, with today’s swearing in of Neil Gorsuch, SCOTUS returned to its full complement of nine justices. Look for the high court to grant review of California and Ninth Circuit cases that follow McGill and Iskanian in the next couple of years with an eye toward overturning those decisions. In the meantime, companies should continue to include waivers of class and representative actions in their arbitration agreements with consumers and employees, noting that the waivers are enforceable to the extent permitted by applicable law.

Last Friday, the US Supreme Court agreed to hear cases from the 9th,  7th, and 5th Circuits in which the courts are split on the issue whether class action waivers in employee arbitration agreements violate Section 7 of the National Labor Relations Act by inhibiting employees’ rights to engage in “concerted activity”.  The NLRB has been promoting this novel theory for the past few years, under which the arbitration agreement can be invalidated notwithstanding the fact that it is otherwise enforceable under the preemptive effect of the Federal Arbitration Act.  Readers of this blog will recall that the California Supreme Court rejected that theory in Iskanian v. CLS. The defendant in that case argued that a class action does not necessarily involve “concerted” action at all.  A class action merely requires one employee with a complaint and a lawyer to file the case.  Only in the world of legal fiction can such a case automatically constitute “concerted activity”.  That legal fiction is a far cry from the scenario — several employees standing around the water cooler griping about wages and talking about unions and strikes —  envisioned by Congress in 1935 when the phrase “concerted activity” was coined.

Now, the US Supreme Court will settle the issue, and the lower  courts and particularly the NLRB will finally be bound by the result.  The cases will be briefed and argued later in the year.  By then, there will likely be a full complement of nine Justices on the Court.  The current Court may be split 4-4 on this issue.  The new Justice, assuming she or he is confirmed over what  is likely to be fierce opposition in the Senate,  will thus probably  be the deciding vote in these casesThe cases are Morris v. Ernst&Young (9th Cir.), Lewis v. Epic Systems (7th Cir.), and Murphy Oil v. NLRB (5th Cir.).  In these cases, and other employment cases likely to come before the Supreme Court in the near future, the stakes are high and the issues profound.  As we have said before, what a difference an empty chair makes.

With the same clarity as the Sacramento River delta at high tide, the California Supreme Court ruled yesterday that employers must provide suitable seating for all employees in California when it is “reasonable” to do so.

Copyright: gonewiththewind / 123RF Stock Photo
Copyright: gonewiththewind / 123RF Stock Photo

In Kilby v. CVS Pharmacy, Inc. (pdf),*  the Court was called upon to interpret language in the Industrial Welfare Commission wage orders saying that: “working employees shall be provided with suitable seats when the nature of the work reasonably permits the use of seats.” That language was largely ignored for decades until the Private Attorneys General Act created a vehicle for plaintiffs to bring representative actions for enforcement. The cases have worked their way up in the appeals process, and we now have what purports to be  the final word:

If the tasks being performed at a given location reasonably permit sitting, and provision of a seat would not interfere with performance of any other tasks that may require standing, a seat is called for.

The Court says that whether seating is “reasonably required” is always a question of fact involving a “totality of the circumstances approach.” The result in any given case will thus be entirely unpredictable, and summary judgment will be nearly impossible. To make things worse, “[a]n employer seeking to be excused from the requirement bears the burden of showing that compliance is infeasible….” This burden presumably also applies to “whether the physical layout [of the workplace] may reasonably be changed to accommodate a seat.” This amounts to “reasonable accommodation” to an entire class of employees (e.g., cashiers and bank tellers) who now have a “right” to sit.

The employer’s “business judgment as to whether a job requires standing” is but one factor to be considered, and it “does not allow employers unlimited ability to arbitrarily define certain tasks as ‘standing’ ones, undermining the protective purpose of the wage order.”

California employers must now brace for what may be an onslaught of class-like cases under PAGA, demanding “suitable seats” under the IWC wage orders, with potentially massive civil penalties, and, of course, attorneys’ fees awards. Few employers will be able to sit this one out.

*In the interests of full disclosure, Fox Rothschild LLP filed an amicus brief in this case on behalf of the California Retailers Association and the Retail Industry Leaders Association.

Public employee unions dodged a bulldozer yesterday when the U.S. Supreme Court announced that it had deadlocked 4 to 4 in Freidrichs v. California Teachers Ass’n, the case challenging the constitutionality of compulsory union dues for public employees. On January 12, we wrote that the Supreme Court was poised to end compulsory dues for California teachers, reversing the 9th Circuit decision in Freidrichs and overturning 40 years of the Court’s own precedent. That, of course, was before the death of Justice Antonin Scalia on February 13.

Copyright: moodboard / 123RF Stock Photo
Copyright: moodboard / 123RF Stock Photo

Oh, what a difference an empty chair makes. Scalia was certain to be the fifth vote in favor of ending compulsory dues on First Amendment grounds. Now, with a 4-4 tie, the 9th Circuit opinion stands, and in California (along with 20 other states) public employee unions can continue to force payment of dues under threat of firing.

The unions know that without government coercion, it will be impossible to maintain the cash flow and political influence they currently enjoy. In those states where compulsory dues have been abolished, union collections have dropped by as much as half when dues become voluntary. For now, however, the unions can breathe easy. It will take at least a few years for the issue to percolate back to the Supreme Court, and the result at that time will likely depend on which president fills the empty chair.

In 2012, the California legislature enacted SB 1234 that set the stage for the creation of Secure Choice Savings Plans, a state-sponsored retirement  program for private employers. The legislation created an Investment Board that has now issued its 500-page blueprint for the program (pdf). The stated goal is to create a portable IRA-like plan for the over 50% of employees in California whose employers currently do not offer any kind of retirement plan.

Any employer  with five or more employees would be required to enroll them in the in the new plan unless the employees affirmatively opt out. The automatic default contribution rate would be 5% of pay, with a maximum of $5,500 per year. The money comes directly out of the employee’s pay. There is no separate employer contribution, matching or otherwise.

Copyright: miluxian / 123RF Stock Photo
Copyright: miluxian / 123RF Stock Photo

The plans would operate like a Roth IRA – no tax deduction for contributions, but the money grows tax free and is not taxed when it is withdrawn upon retirement. There is also a provision for withdrawals because of “hardship”.  The mandatory investment vehicle would be a “diversified portfolio” in a fund created by the state. The U.S. Department of Labor has issued a proposed rule exempting such state-sponsored retirement plans from the requirements of the federal ERISA law.

Hearings on the details of the state plan will be held in various locations next month. Additional legislation will be required for final implementation. If the plan becomes final, millions of California employees may be surprised to find that their after-tax income has been automatically reduced by 5%.  Also, employers are sure to be saddled with extra expense and paperwork.  Being a California employer just seems to become more and more complicated.

Almost 40 years ago, the U.S. Supreme Court in Abood v. Detroit Board of Education ruled that states could require public employees to pay union dues. The Court, however, now seems poised to sidestep, and perhaps even overrule, that decision. On January 11, the Court heard argument in a case brought by dissident teachers in California who claim that compulsory union dues violate their First Amendment rights. In Friedrichs v. California Teachers Association,  the plaintiffs argue that when government requires one to subsidize a particular political cause – i.e., to put one’s money where one’s mouth isn’t – the principle of free speech is violated. The plaintiffs further contend that almost everything about a public employee union is political, and therefore they cannot be compelled to pay dues or even the “agency fees” the teachers’ unions have been allowed to charge non-members. Based upon the comments at the oral argument, it appears that a majority of the Justices may agree.

Copyright: 72soul / 123RF Stock Photo
Copyright: 72soul / 123RF Stock Photo

Justice Kennedy, considered by many observers to be the swing vote on this issue, seemed to tip his hand in questioning the lawyers for the union who argued that the plaintiffs were merely seeking to become “free riders” in the collective bargaining process. He responded, “The union is basically making these teachers compelled riders on issues with which they strongly disagree.”  Justice Scalia drew a distinction between private employment and public employment “where every matter bargained for is a matter of public interest.” Justices Thomas, Roberts and Allito have indicated in other decisions that they may be willing to cast aside Abood.

If the plaintiffs prevail in this case, the cash collecting ability and political clout of the public sector unions in California could be significantly diminished.  A decision is expected in June.

Copyright: bbourdages / 123RF Stock Photo
Copyright: bbourdages / 123RF Stock Photo

Last June, the California Supreme Court in Iskanian v. CLS Transportation, 59 Cal. 4th 348, decided that the waiver of class action participation in an arbitration agreement was enforceable, but the waiver of a representative action under the Private Attorneys General Act (“PAGA”) was not. This later carve-out for PAGA, based on what the Court deemed “public policy,” was very troubling to employers who fear, with good reason, that PAGA will now become the plaintiffs’ lawyers’ preferred vehicle for wage and hour cases, despite a clear waiver of representative actions in an arbitration agreement.

CLS Transportation, the employer in the case, has filed a Petition for a Writ of Certiorari with the United States Supreme Court seeking review of that portion of the California decision dealing with PAGA. (Fox Rothschild LLP represents CLS Transportation).

The Petition argues that the California high court was simply wrong when it found that PAGA was somehow special, and thus exempt from the preemptive effect of the Federal Arbitration Act (“FAA”), which the U.S. Supreme Court has said, in several prior decisions, requires that an arbitration agreement be enforced “according to its terms”, and that state “public policy,” however noble, is irrelevant.

CLS Transportation is supported by friend-of-the-court briefs filed by the California Chamber of Commerce, the Civil Justice Association of California, the Employers Group, the Pacific Legal Foundation, the National Federation of Independent Businesses, and the California Employment Law Council. Briefing is now complete, and we understand the case will be “distributed” to the Supreme Court Justices in early January. Your California Employment Law blog will be the first to know whether the U.S. Supreme Court will agree to hear the appeal.

For decades, employers have relied on IRS policy that says when meals are provided for “the convenience of the employer,” the value of the meal is not taxable income. That policy is apparently about to change. The IRS announced on August 26, 2014 in its Priorities Guidance Plan that one of its new “priorities” will be new guidance “regarding employer – provided meals.” The Wall St. Journal reported on September 4, 2014 (subscription required) that IRS auditors are “flagging the issue and demanding back [payroll] taxes from companies amounting to 30% of the meals’ fair market value.” 

This development will affect the company cafeterias at high-profile tech companies in California as well as thousands of hotels and restaurants that provide free meals to employees. It is also a near certainty that where the IRS treads the state taxing authorities will be close behind.

This development may also impact the calculation of the “regular rate” for purposes of overtime compensation. If the value of the free meal is taxable compensation, Plaintiffs’ class action lawyers (who are already circling in the waters on this issue) will argue that the value of the meals must also be blended into the hourly rate on which overtime is calculated. For example, if the stated hourly rate is $10 (overtime = $15/hr) and the meal is worth $4, arguably, the new “regular rate” for an eight-hour shift would be $10.25 (overtime = $15.125/hr). California law on this “regular rate” and overtime point is not crystal clear, and we can expect litigation over the issue in the future. Some employers may want to proactively adjust their payroll practices in order to head off the potential problem.

We all knew there’s no such thing as a free lunch. We’re just learning now that the free lunches may be way more expensive than previously thought.

Free Lunch

On July 30, we blogged about the recent efforts of the National Labor Relations Board to hold corporate  franchisors, such as McDonald’s, liable for the acts of individual franchisees toward employees under the theory that  the “parent” company is a “ joint employer.”  We opined that this effort was a “stretch” to deviate from traditional principles on the part of the federal agency, and which threatened the viability of franchising as a business model.

On August 28, 2014, the California Supreme Court provided a dose of fresh air, clarity, and common sense to this issue by holding that Domino’s Pizza could not be the joint employer of a worker who accused a franchisee operator of harassment. The opinion upheld the granting of summary judgment in favor of Domino’s. It also reaffirmed the decades-old analysis which focuses on the degree of real control the corporate franchisor may exercise over the employment practices of the franchisee in  light of the “totality of the circumstances.”

The Supreme Court reversed the opinion of the Court of Appeals (which we lamented in this June 2012 post), and sent a clear message to trial courts that it’s permissible to summarily dismiss claims of “joint employment” where the plaintiff lacks sufficient facts to demonstrate “control” on the part of the franchisor parent. As the court stated:

A franchisor [may] impose comprehensive and meticulous standards for marketing its trademarked brand and operating its franchises in a uniform way. To this extent, the franchisor ‘controls’ the enterprise. However, the franchisee retains autonomy as a manager and employer.  It is the franchisee who implements the operational standards on a day-to-day basis, hires and fires store employees, and regulates workplace behavior.

This sensible opinion from the high court of California will likely influence other state and federal courts, including those federal circuit courts that may hear appeals from the NLRB on the issue of “joint employment.” You can read the opinion here (pdf).    

           In the quest to expand liability for real and imagined violations of employment laws, and to find more and deeper pockets, the latest target for plaintiffs’ lawyers and unions is the “joint employer.” The joint employment concept is a decades-old doctrine that applies where two companies are so intertwined and jointly involved with the employment policies and the supervision of employees that both companies can be liable violating employment laws such as wage and hour, wrongful discharge, or discrimination. The application of “joint employment” can also vastly increase the pool of employees in class actions and for union organizing.

            The newly constituted and highly politicized NLRB is currently reviewing its standards for finding “joint employers” in a case involving Browing Ferris Industries of California and a staffing agency. Employers fear that the Board will take a radical turn toward making joint employment much easier to establish.

            On July 29, 2014, the NLRB’s general counsel ominously ruled that unfair labor practice charges can proceed against McDonald’s franchisees and the franchisor, McDonald’s Corp. as a joint employer. The Board is thus backing the SEIU, and the employee advocacy group Fast Food Forward, in an attempt to organize and raise wages for fast food restaurants around the country. The union hopes to get neutrality agreements from parent companies that will make it easier to organize one franchise store after another.

           A spokesman for the International Franchise Association said, “Ruling that franchises are joint employers will be a devastating blow to…the franchise model.” This development could affect fast food restaurants, hotels, and convenience stores and other retailers in California. The NLRB’s aggressive stance is sure to be litigated in the courts, but look for other agencies and plaintiffs’ lawyers to be pressing the issue of “joint employment.”