Governor Davis may be on his way out of office, but he has left behind a legacy of legislation affecting employees' rights and employers' obligations which will become effective in the new year. The California Legislature passed a bill permitting employees (and so-called "bounty hunter" attorneys) to bring civil suits, including class action lawsuits, to recover penalties from employers for violations of the Labor Code. In addition, the penalties employers are subject to for Labor Code violations will increase effective January 1, 2004. This past year, the Legislature also addressed sexual harassment, domestic partner rights, health care for employees, and the workers' compensation system.

The Labor Code Private Attorneys General Act (SB 796)

Under existing law, only government agencies may assess and collect civil penalties for Labor Code violations. SB 796 extends this right to employees. Effective January 1, 2004, an employee may bring a civil action against his or her employer on behalf of "himself or herself and other current or former employees" to recover civil penalties for any alleged Labor Code violation that a government agency does not prosecute. The employee may recover up to 25% of any penalties imposed on the employer, and the remainder of the penalties will be distributed to the State's General Fund (50%) and to the California Training Fund (25%).

SB 796 will significantly impact California employers because it: (1) enables an employee to bring a representative class action against his or her employer; (2) encourages plaintiffs' attorneys to litigate these cases by providing for an award of attorney's fees and costs to any prevailing plaintiff; and (3) imposes new penalties of up to $200 per aggrieved employee per pay period for a violation of the Labor Code. Many commenters foresee an explosion of litigation based on this new law. 

Employer Liability for Sexual Harassment by Nonemployees (AB 76)

Just over a year ago, a California court of appeal held in Salazar v. Diversified Paratransit, Inc.,[fn1] that the California Fair Employment and Housing Act ("FEHA") did not hold employers liable for harassing conduct by third parties not employed by the employer (such as customers and clients). Although the California Supreme Court granted review of the case earlier this year, the California Legislature passed AB 76 expressly rejecting the Salazar decision. AB 76 amends section 12940(j) of the California Government Code to make an employer liable for the sexual harassment of any of its workers by clients, customers, and other third parties if the employer knows or should have known of the harassment, and failed to take immediate and appropriate corrective action.

Discrimination and Harassment Based on Gender (AB 196)

In AB 196, the Legislature expanded the definition of "sex" in the FEHA, Government Code section 12926, to include a person's "gender." The term "gender" is elsewhere defined as "the employee's or applicant's actual sex or the employer's perception of the employee's or applicant's sex, and includes the employer's perception of the employee's or applicant's identity, appearance, or behavior, whether or not that identity, appearance, or behavior is different from that traditionally associated with the employee's or applicant's sex at birth." Discrimination against transgender employees is therefore explicitly prohibited under the FEHA. Notwithstanding this prohibition, AB 196 also inserts a new section 12949 into the FEHA which makes clear that employers may require their employees to adhere to reasonable workplace appearance, grooming, and dress standards, provided that employees are allowed to appear or dress consistently with their gender identity.

Mandated Health Care Coverage (SB 2)

Starting in January 2004, SB 2 will phase in, over a period of three years, employer-financed health care for California workers. The bill creates a State Healthcare Purchasing Program, which will be administered by the Managed Risk Insurance Board. The bill sets up a "pay or play" system in which California employers must either provide minimum health care coverage to their employees who have worked for at least three months and work at least 100 hours per month or pay into a state fund which will provide such coverage. The bill imposes different timing and substantive requirements on California employers depending on the number of workers they employ. Small employers (those with fewer than 20 employees) are not required to contribute to the fund or provide health insurance to their employees. Beginning January 1, 2007, "medium" employers (those with 20-199 employees) must either provide individual health insurance to their qualifying employees, or contribute to the state fund. Beginning January 1, 2006, "large" employers (those with 200 or more employees) must either provide health insurance to their qualifying employees and their dependents, or contribute to the state fund. An employer's contribution to the state fund will be based upon the projected number of potentially eligible employees and, if applicable, dependents, within a time frame specified by the Employment Development Department. An employer's failure to timely submit its contribution will result in a fine of 200% of any contribution owed, plus accrued interest. Additionally, the bill makes it a separate unlawful act for an employer to attempt to evade the provisions of this law by: (1) making an employee an independent contractor or temporary employee; (2) reducing an employee's hours of work; or (3) terminating and then rehiring an employee. Business opposition to this bill is fierce and modifications or repeal will definitely be sought.

Leave for Crime Victims (SB 478)

SB 478 requires employers to permit an employee who is a victim of a violent felony, a serious felony, or a felony involving theft or embezzlement to be absent from work so that he or she may attend judicial proceedings related to the crime. The bill also requires an employer to permit an immediate family member, registered domestic partner, or child of a registered domestic partner of a victim to be absent from work so that he or she may attend judicial proceedings related to the crime. If possible, the employee must give the employer notice of his or her planned absence from work by providing the employer with reasonable notice of each scheduled proceeding. Where advance notice is not possible, the employer may not take any adverse action against the employee if the employee provides the employer with documentation evidencing the judicial proceeding within a reasonable period of time after his or her absence. An employee who is absent from work pursuant to SB 478 may choose to use his or her accrued paid vacation time, personal leave time, sick leave time, compensatory time off, or unpaid leave for the absence. SB 478 also prohibits an employer from discriminating against or retaliating against an employee who is absent from work pursuant to SB 478. Any employee who is discriminated or retaliated against because he or she has exercised rights under SB 478 may file a complaint with the Division of Labor Standards Enforcement within one year from the date on which the violation occurred.

Family Temporary Disability Insurance (Paid Leave) (SB 1661 and SB 727)

SB 1661 was signed into law on September 23, 2002. The bill, which entitles employees up to six weeks of partial wage replacement when absent from work for the injury or illness of a spouse, parent, domestic partner or child or for the purpose of bonding following a birth, an adoption or the placement of a foster child, becomes effective July 1, 2004. For a complete explanation of the Family Temporary Disability Act, see Employment Law Commentary, September 2003.

SB 727, which was signed into law on October 10, 2003, makes additional changes to California law related to the implementation of family temporary disability compensation. It requires the Employment Development Department to develop a certificate to be filed with the Department by any employee taking leave to care for a family member. SB 727 also applies certain existing unemployment insurance provisions to family disability insurance benefit provisions. In addition, the bill (1) defines the disability benefit period for purposes of the family temporary disability benefit program; (2) clarifies the amount of benefits an employee is eligible to receive under the program for each full day that he or she is on leave; and (3) authorizes the director of the Employee Development Department to require the care recipient to submit to reasonable examinations, as provided. Finally, SB 727 permits as a lien against any compensation to be paid to the employee, the amount of family temporary disability insurance benefits that have been paid to an injured employee.

Whistleblower Provisions Added to the California Labor Code (SB 777)

SB 777 extends the California Labor Code's protection of whistleblowers by amending Labor Code section 1102.5. Existing law provides that it is unlawful for an employer to make, adopt, or enforce a policy, rule, or regulation preventing an employee from disclosing a violation of a state or federal statute, or a violation of or noncompliance with a state or federal regulation to a government agency or to retaliate against an employee for doing so. SB 777 expands the existing law by making it unlawful for an employer to retaliate against an employee for refusing to participate in any activity that would result in a violation of a state or federal statute, rule, or regulation. Thus, an employer may be liable under section 1102.5 even if the employee has not reported any alleged violation of law or regulation to someone other than the employer. SB 777 also imposes on employers a new civil penalty of up to $10,000 per violation and establishes a whistleblower hotline which will receive calls from individuals who may have information regarding possible violations of state or federal statutes, rules, or regulations. Finally, the bill adds a section to the Labor Code requiring employers to prominently display a list of employees' rights and responsibilities under the whistleblower laws, as well as the telephone number of the whistleblower hotline.

Increased Penalties for Labor Code Violations (AB 276)

AB 276 increases the penalties employers must pay for Labor Code violations. Existing law provides that an employer who fails to pay wages or unlawfully withholds wages will face a penalty of $50 for the first violation and $100 for subsequent or intentional violations. AB 276 increases these penalties to $100 and $200, respectively. In addition, where an employer pays any of its employees less than the minimum wage, AB 276 increases the employer's penalty from $50 per underpaid employee for each pay period to $100 per underpaid employee for each pay period.

Attorney's Fees for Any "Successful" Judgment in Wage Claims (AB 223)

AB 223 amends section 98.2 of the California Labor Code and expands the circumstances under which an employee may recover attorney's fees in connection with the appeal of a Labor Commissioner decision. Previously, an employee appealing from a Labor Commissioner decision could recover attorney's fees only if the judgment on appeal was more favorable to the employee than the Labor Commissioner's award. AB 223 now permits an employee to recover attorney's fees when the reviewing court awards judgment in the employee's favor for any amount greater than zero. Thus, an employee may now receive a lower award on appeal that he or she had previously received from the Labor Commissioner and still be entitled to attorney's fees.

Service of Complaints of Discrimination (AB 1536)

AB 1536 provides that in cases where an individual files a complaint with the Department of Fair Employment and Housing and the individual is represented by private counsel, the individual's private counsel must serve the complaint upon the person, employer, labor organization, or employment agency that committed the alleged unlawful employment practice. Service must be completed within 45 days after the complaint is filed with the Department of Fair Employment and Housing.

Employee Privacy: Social Security Numbers (AB 763)

AB 763 expands privacy protections for individuals by prohibiting the printing of an individual's social security number on a postcard, a mailer not requiring an envelope, an envelope, or in such a way that the social security number is visible without the envelope being opened. For further details regarding this and other legislation designed to prevent identity theft, see Employment Law Commentary, October 2003.

Prohibition of Corporate-Owned Life Insurance for Non-exempt Employees (AB 226)

AB 226 prohibits an insurer from issuing or delivering a "corporate-owned life insurance policy," which is a life insurance policy purchased by a California employer that designates the employer as the beneficiary of the policy and that insures the life of a California resident who is a current or former nonexempt employee of the employer. AB 226 states that any such policy purchased before January 1, 2004 will become void on the next premium payment date that falls on or after January 1, 2009, but no later than January 1, 2010. The bill expressly states that it is a violation of California public policy for an employer to purchase or hold a corporate-owned life insurance policy on non-exempt employees.

Workers' Compensation Reform Bills (SB 228 and AB 227)

AB 227 and SB 228 are complex bills that attempt to reform California's ailing workers' compensation system. Below is a brief summary of some (but not all) of the changes imposed by these two bills.

SB 228 requires the following:

• That the Commission on Health and Safety and Workers' Compensation, which is part of the Department of Industrial Relations, conduct a survey of nationally recognized standards of care no later than July 1, 2004;
• That the Commission issue a report of its findings and recommendations to the Administrative Director of the Division of Workers' Compensation on or before October 1, 2004;
• That the Division of Workers' Compensation use the Commission's report to formulate an appropriate medical fee schedule and medical treatment utilization schedule by December 1, 2004;
• That an increased penalty be imposed upon a person who makes or assists another person in making fraudulent workers' compensation claims;
• That every workers' compensation insurer conduct a review of its insured employers' injury and illness prevention programs within five months of the start of the initial insurance policy term; and
• That employers establish a "utilization review process."

AB 227 requires the following:

• That the Insurance Commissioner take into account the projected savings due to the changes enacted under SB 228 in his or her determination of the "advisory pure premium rates" for policies incepted on or after January 1, 2004;
• That insurers base the premium rates for their 2004 policies on the Commissioner's advisory pure premium rates;
• That a project for the financing of the costs of claims of insolvent workers' compensation insurers at the request of the California Insurance Guarantee Association be deemed in the "public interest" and eligible for financing by the California Infrastructure and Economic Development Bank, and that certain requirements and limitations relating to the financing of certain projects not apply to the financing of costs of these claims;
• That the California Infrastructure and Economic Development Bank issue bonds to finance the costs and specify how the bond proceeds may be used;
• That, with specified exceptions, where an injury causes permanent partial disability and the injured employee does not return to work for the employer within 60 days after the termination of temporary disability indemnity payments, the injured employee will receive a supplemental job displacement benefit;
• That the vocational rehabilitation services program for qualified injured workers be repealed.

Other Bills Related to Workers' Compensation (AB 1099; AB 1262; AB 1557)

AB 1099 authorizes the Employment Development Department to request and receive information regarding workers' compensation fraud from an insurer or other specified person. In addition, AB 1099 permits licensed rating organizations to release information regarding workers' compensation fraud.

AB 1262 requires the Insurance Commissioner to adopt regulations specifying the minimum standards of training, experience, and skill that workers' compensation claims adjusters must possess. In addition, each workers' compensation insurer must certify to the Commissioner that the personnel employed by the insurer or by a medical billing entity to adjust workers' compensation claims meet those minimum standards.

AB 1557 provides that an employee is not entitled to any increase in compensation for an unreasonable delay in the provision of medical treatment for the period of time necessary for an employer to complete its required utilization review process under SB 228.

Other Developments

California Domestic Partner Rights and Responsibilities Act of 2003 (AB 205) AB 205, the California Domestic Partner Rights and Responsibilities Act, amends various sections of the California Family Code, the California Government Code, and chapter 447 of the Statutes of 2002. AB 205 expands the rights of domestic partners in California so that registered domestic partners have the same rights, protections, obligations, and benefits under the laws of California as other spouses.

Domestic Partner Benefits for State Contractors (AB 17)

AB 17 requires companies that have contracts with the state of $100,000 or more to certify that they do not discriminate in the provisions of benefits between employees with spouses and employees with domestic partners.

Protection from Unsolicited E-mail (SB 186)

SB 186 provides customers with greater protection from unsolicited e-mails. It prohibits a person or entity located in California from initiating or advertising in unsolicited commercial e-mail advertisements. It also prohibits a person from collecting e-mail addresses or registering multiple e-mail addresses for the purpose of initiating or advertising in an unsolicited commercial e-mail advertisement. SB186 authorizes a recipient of a commercial e-mail advertisement, the Attorney General, or an electronic mail service provider to bring an action to recover damages and liquidated damages of $1,000 per transmitted message up to $1 million per incident. In addition, a prevailing plaintiff may recover an award of attorney's fees and costs.

Employment of Minors in the Entertainment Industry (SB 210)

Existing law regulates contracts for employment between an unemancipated minor and third parties, including employment of the minor as an actor, dancer, musician, comedian, singer, stuntperson, voice-over artist, or other performer or entertainer, or sports participant, and requires that a trust account be established for the purpose of preserving for the benefit of the minor at least 15% of the minor's gross earnings. SB 210 defines a minor's "gross earnings" and an "employer" for the purposes of establishing this trust account, which SB 210 terms a "Coogan Trust Account." SB 210 also limits the trust amounts to 15% of the minor's gross earnings; specifies the time period within which a minor's employer must receive a copy of the trustee's statement; instructs the employer as to what to do if it does not receive this copy; and conditions the issuance of certain work permits for a minor in the entertainment industry on the establishment of a Coogan Trust Account. Moreover, SB 210 limits the period during which the Labor Commissioner's written consent for the employment of a minor in the entertainment industry remains valid.

California Civil Code § 1798.82

Section 1798.82 of the California Civil Code became effective July 1, 2003. It requires California companies to disclose publicly any computer security breaches that involve the personal information of a California resident. For more information about section 1798.82, see the Employment Law Commentary, May 2003.

Vetoed Bills

Prohibition Against Mandatory Arbitration Agreements (AB 1715)

AB 1715 would have prohibited an employer from requiring, as a condition of employment, that an employee agree to arbitrate any claims related to employment practices covered by the Fair Employment and Housing Act.

Rebuttable Presumption of Retaliation (AB 274)

AB 274 would have created a rebuttable presumption that an adverse employment action taken within 60 days from the date on which an employee exercises his or her employment rights is retaliatory. If AB 274 had passed, it would have been the employer's burden to show by clear and convincing evidence that the employee had fabricated his or her claim of retaliation.

Waiver of Waiting Period for Unemployment Benefits (AB 331)

Under existing law, an employee must be unemployed for one week before he or she is eligible for unemployment benefits. AB 331 would have provided an exception to this one-week waiting period for employees who are unemployed because of a lockout related to a labor dispute.

Penalty for Failure to Pay Judgment for Unpaid Wages (AB 1133)

AB 1133 would have made an employer subject to additional penalties if it had failed to satisfy, for six months or longer, a judgment against it for unpaid wages or penalties.

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Profit-Based Bonuses And Illegal Deductions: Ralph's Grocery Company v. Superior Court

By Lloyd W. Aubry, Jr.

As the fourth quarter of the calendar year approaches, many employers are no doubt contemplating providing Christmas bonuses or year-end bonuses to their employees based on net profits of the company overall or, in a chain-store retail environment, on the net profits of the individual outlet. A recent appellate court decision from the Second Appellate District, Ralph's Grocery Co. v. Superior Court of Los Angeles (David Swanson, Real Party in Interest), 3 CDOS 9311, calls into question the manner in which these types of bonuses may be calculated. If, in fact, employers take into account the costs of workers' compensation costs(for all employees) or cash shortages (for non exempt employees) in determining the net profit of a particular facility and the subsequent profit based bonus, they should reconsider how to calculate the bonus based on the Ralph's Grocery case.

David Swanson, a former store manager at a Ralph's Grocery Store, filed a class action lawsuit alleging that Ralph's bonus plan violated the Labor Code and Industrial Welfare Commission (IWC) Orders because the bonus plan was based on the net income of a store taking into account workers' compensation costs and cash shortages as expenses to offset against revenues. The trial court and appellate court agreed with the plaintiffs.

The appellate court specifically affirmed holding that it was illegal for an employer to include these two types of expenses in determining net profits as a basis for payment of a profit based bonus. Labor Code section 3751 prohibits employers from making or taking any deduction from the earnings of any employee, either directly or indirectly, to cover a part of the costs of workers' compensation. This code section applies to both exempt and non exempt employees. Under subsection 8 of the IWC Orders (which subsection is applicable only to non exempt employees), it is illegal to deduct for cash shortages unless the shortage was due to the employee's dishonest or willful act or culpable negligence. Accordingly, the court held that it was illegal for an employer to use cash shortages and workers' compensation costs in the calculation of a profit bonus for non exempt employees. On the other hand, with regard to exempt employees to whom subsection 8 of the IWC Orders does not apply, only workers' compensation costs cannot be included in the calculation of a profit-based bonus.

The appellate court noted that Ralph's presented persuasive arguments that profit-based compensation plans benefit both employers and employees. Ralph's argued that, as a matter of economics, calculation of an incentive-based bonus on profitability by taking into account not only revenues but also store expenses in accordance with standard accounting principles differed markedly from reducing or recapturing wages through prohibited deductions. The court stated: "Nonetheless to the extent the Legislature or, as applied to nonexempt employees, the Commission in its authorized wage orders has prohibited the use of certain expenses in determining wages due an employee, economic reality must yield to regulatory imperative."

While the court held that only deductions that had been made illegal by specific provisions in the Labor Code and in the Industrial Welfare Commission Orders are prohibited from inclusion in the calculation of a bonus, it is uncertain whether other courts will accept this formulation or will take the argument a step further that any expenses that are outside the control of the employee may not be used in the calculation of a bonus. In any case, the Ralph's court limited the illegal deductions to only those that had been specifically enumerated in the Labor Code or in the Orders of the Industrial Welfare Commission.

This is a troubling decision for employers, calling into question many profit-based bonus plans. When employers consider their year-end bonuses, they should consider the impact of this case and determine if it is necessary to revise the methods used for bonus calculations.

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Footnotes

1: 103 Cal. App. 4th 131 (2002), review granted, 130 Cal. Rptr. 2d. 656 (Jan. 22, 2003).