California Employment Law: An Employer’s Guide, Revised and Updated: An Employer's Guide

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CHAPTER 1.

California Employment Law: How Did This Become So Difficult?

It is often said that it is impossible for an employer to fully comply with all of California’s employment laws. They are just too numerous and too complicated. They are frequently changing, and rarely for the better. There are so many traps for the unwary. Unfortunately, this is mostly true.

1.1 Why California Employment Laws Are So Difficult

Part of the problem is that California deems itself to be special. All the employment laws that serve the rest of the country just fine, such as Title VII of the Civil Rights Act, the Fair Labor Standards Act, and the Americans with Disabilities Act, are not considered adequate for California. Instead, California has its own versions of these laws—its own Labor Code, its own Fair Employment and Housing Act, and its own bureaucracies to enforce these laws. Sometimes these agencies interpret California law consistently with similar federal laws, sometimes not, and sometimes it is not really clear. California’s wage and hour laws are among the most difficult to follow. Many of them were written by a body called the Industrial Welfare Commission, which no longer exists. In some instances they are enforced by the Division of Labor Standards Enforcement (aka the Labor Commissioner, or what many call the Labor Board). That agency has written a lengthy Enforcement Policies and Interpretations Manual that contains some useful hints on what the laws mean, but courts routinely refuse to follow it because it was never subjected to public notice and comment. The same goes for the opinion letters the Labor Commissioner issues occasionally. The courts’ refusal is sometimes a good thing because the agency’s positions are often not employer-friendly, but it leaves many employers scratching their heads as they try to figure out which interpretation of often-ambiguous laws they should follow.

Another part of the problem is the Private Attorneys General Act (PAGA). Enacted in 2004 because the legislature felt the Labor Commissioner lacked the resources to fully enforce California’s wage and hour laws, the law deputized disgruntled employees and their lawyers as bounty hunters to extract penalties from unwary employers for violating obscure laws, some dating back to the 1800s. The penalties are supposed to be shared with the state, but no similar split is required for the attorneys’ fees recovered, so PAGA lawsuits have become lucrative ventures for the plaintiffs’ bar and an expensive headache for employers.

Unpredictable court decisions are part of the problem too. Clever lawyering by plaintiffs’ attorneys and sympathetic judges occasionally produce abrupt changes in the way California’s employment laws are interpreted. Court decisions finding that piece-rate workers must be paid at least minimum wage for the time they are not doing piece-rate work, and rejecting the long-applied (and common-sense) rule that employees need not be paid for the time they spend sleeping, are two examples. These decisions impose substantial retroactive liability on employers because they are premised on the notion that employers should have been complying with the new interpretation of the law all along.

Another part of the problem is that California has a full-time legislature. In states with part-time legislatures, legislators typically run businesses or work in jobs when the legislature is not in session, so they have some passing familiarity with the real world of work. California’s legislators are not burdened with such distractions, so they stay busy churning out new laws. Many of these laws affect the workplace and make managing employees within the law that much more difficult. Recent examples include a law protecting undocumented immigrants who present fake documents to become employed and then present real ones later, and a law awarding an extra hour of pay to workers who work outside and can claim they did not get to spend enough time resting in the shade. It is almost as if every time somebody in the legislature says, Hey, I have an idea! it becomes law because employers have so little leverage in Sacramento. The premise behind most of these laws is that employees are commonly abused by bad employers and need ever more protections. So the legislature passes yet another law, which may or may not overlap previously enacted laws addressing the same evil. It is true there are some unscrupulous employers, but few in state government seem to heed the effect that this ever-thickening web of laws has on the vast majority of employers that are doing their best to comply.

1.2 Which Law?

Both federal and California law applies to California employers, but which law applies is not a difficult question. Whichever law is most favorable to employees is the law that applies. Ordinarily that will be California law but not always. Regardless, this book will address the law that is usually applicable without specifically identifying it as state or federal unless the distinction is important.

1.3 The Cost of Getting It Wrong

The stakes are high for California employers. A simple mistake can lead to a seven-figure jury verdict or a class action lawsuit.

One reason for this is that under California law, unlike under federal law, there are no limits on the amount of emotional distress damages and punitive damages that may be recovered in most employment lawsuits. There is no rational explanation for this beyond the influence of the plaintiffs’ bar on the legislature. Is it really more traumatic to lose a job in California than in Indiana? The lack of damage limits often leads to outsized jury verdicts that courts are not likely to reduce except in extreme cases. When juries side with plaintiffs in employment cases, they often decide to make them millionaires—with the employer’s money, of course.

California’s overlapping laws are another reason employment lawsuits are more expensive in California. For example, let’s say you terminate an employee who has been out on a medical leave for a long time and does not appear likely to return. You will probably be sued, not once but five times over, for: (a) disability discrimination, (b) failure to provide a reasonable accommodation, (c) failure to undertake the interactive process of accommodation, (d) failure to prevent discrimination, and (e) wrongful termination in violation of public policy. Each of these causes of action addresses the same termination decision, but they give a jury five separate grounds for awarding damages.

Numerous overlapping laws often apply in the wage and hour context as well. Suppose you pay your employees on a piece-rate basis, which is perfectly legal under federal law, and they earn well in excess of the minimum wage for all the hours they work. In California such a method of paying employees is illegal, however, if employees spend any part of their workdays not actually producing piece work. Virtually all piece-rate employees have downtime, such as training time, time spent waiting for a new assignment, and paid rest breaks. California courts have decided that these employees must be paid separately and at least minimum wage for these intervals in which they are not producing piece work. Dividing their total earnings by hours worked, as is done under federal law, will not suffice. Thus, almost every employer that has paid employees on a piece-rate basis has been (or is being) sued, but not just for unpaid minimum wage. Employees can also recover liquidated damages equaling the amount of unpaid minimum wage, plus interest and attorneys’ fees. Former employees may also recover 30 days of pay as a waiting time penalty for not being paid all wages due when their employment terminated. In most wage and hour lawsuits, moreover, additional penalties are recoverable under PAGA.

Because wage and hour violations typically affect many employees, lawsuits for these violations are usually brought as class actions with the exposure for a particular error multiplied by the number of employees in the class. Class actions are a thriving industry in California. They started in the employment context with alleging that retail and restaurant managers were misclassified as exempt from overtime. Eventually most employers, some having been sued multiple times, properly classified their employees, so the class action lawyers moved on to attack missed meal and rest breaks. Then inaccurate paystubs became the focus, then piece-rate employees, and so on. As soon as employers get their houses in order with respect to one law, the class action lawyers switch their focus to another.

Even absent a class action lawsuit, simple mistakes can be costly. Say you have an employee who earns $52,000 annually. She quits her job, and when you calculate her accrued vacation due at termination, you erroneously undercalculate the amount due by a half day. That half day of vacation is worth $100. Suppose the former employee files a claim with the Labor Commissioner for unpaid vacation. She will likely be awarded the $100 plus $6,000 in waiting time penalties—$200 per day for each of the days (to a maximum of 30) that she had to wait to receive her $100.

1.4 This Book’s Purpose and Approach

This book is written for those who must contend with employment law in California as part of their work. It is written primarily for business people and HR professionals, not lawyers, although in-house counsel and lawyers who practice outside of employment law will find it useful. The book’s approach is practical. There is no lengthy analysis of court decisions, and there are no footnotes. This book is grounded in the law as it is found in statutes, regulations, and case law, but its focus is on how the law works in the real world.

This book is written from the perspective of a lawyer who has spent a career advising employers, so it has a point of view. The purpose of this book is to help those who must deal with California employment law understand it better, but this book does not provide legal advice. Most of the time the right legal answer depends on the facts of a specific situation. Although this book will provide you with an overview of the law, it is not the substitute for competent advice from a lawyer who is knowledgeable about your business and is fully apprised of the facts of a particular situation.

CHAPTER 2.

Employment at Will: What It Really Means

California’s Labor Code contains a presumption that employees are employed at will. This means that either the employer or the employee may terminate employment at any time, with or without cause or prior notice. This is important for employers because cause is defined under California law as a fair and honest cause or reason, regulated by good faith on the part of the employer. Employers would be significantly burdened if they had to prove to a court or jury that they acted fairly and in good faith in every employee termination.

2.1 Exceptions to Employment at Will

Exceptions to employment at will include:

Public-sector employees, most of whom are protected by civil service laws and/or by a memorandum of understanding between their union and the agency that addresses discipline and termination.

Employees represented by unions and covered by a collective bargaining agreement that contains a just cause standard for termination.

Employees (usually executives) who have written employment contracts requiring good cause for termination.

Employees whose employers have said or done things that overcome the presumption of employment at will.

Courts in some cases have found that employer policies or statements of managers have overcome the presumption of employment at will, such that an implied contract to be terminated only for good cause arose. One such policy is a rigid progressive discipline policy under which employees cannot be fired until a series of prior warnings and lesser sanctions have been imposed. Managers’ assurances of secure or long-term employment might also be found to overcome the presumption of employment at will in some circumstances.

2.2 Reinforcing Employment at Will

California courts will not find employer policies and manager statements to overcome the presumption of employment at will when an employee has signed an express employment-at-will acknowledgment. To retain the freedom to terminate employment without cause that employment at will affords you, therefore, you should do everything you can do to preserve employment at will. This means:

Include an employment-at-will statement on the employment application and in offer letters so that a prospective employee understands, before leaving another job or moving from out of state, that the new job will be employment at will.

Have new hires sign an employment-at-will acknowledgment on their first day.

Include an employment-at-will statement in the employee handbook.

Avoid rigid progressive discipline policies, and instead say that conduct violations may lead to disciplinary action up to and including termination of employment.

Train managers and supervisors not to make careless assurances of job security during job interviews or in response to questions from employees or applicants.

When presented with an employment verification form in connection with a mortgage application, do not respond to questions asking about the employee’s prospects for future employment.

Model Employment-at-Will Statement

I acknowledge that my employment is at will and for no specific duration. Either I or the company may terminate my employment at any time, with or without cause or prior notice. My employment-at-will status cannot be changed except in a writing signed by the president of the company.

2.3 The NLRB and Employment at Will

The National Labor Relations Board (NLRB) is vigilant regarding employer policies that may tend to interfere with employees’ exercise of their right to engage in concerted activity for mutual aid and protection under Section 7 of the National Labor Relations Act (see Section 19.2 in this book). In one case, an NLRB judge found unlawful an employment-at-will statement that said that it could never be changed. The judge found fault with this statement because employees have the right to decide to be represented by a union, and most union labor agreements contain a clause requiring just cause for termination. In another case, however, the NLRB approved of an employment-at-will provision stating that it could be changed only in writing by the president of the company, noting that this language did not foreclose employees choosing to be represented by a union and having a collective bargaining agreement with a just cause termination standard that would be signed by the president of the company.

It is not clear how far the NLRB will go in scrutinizing employment-at-will provisions. For now, employers should heed the agency’s concerns by including language stating that employment at will cannot be changed except in a writing signed by the company president (or similar official).

2.4 Employment at Will versus Right to Work

Sometimes employment at will is confused with the right to work. They are different concepts, however. In states with right to work laws, union-represented employees cannot be forced to pay union dues or fees as a condition of employment. California is not a right to work state, so the term has no significance in California employment law.

2.5 The Limits of Employment at Will

Employment at will simply means that an employer cannot be sued for breach of an implied contract requiring a showing of good cause for termination. It does not mean that an employer may not be sued for other employment wrongs, such as discrimination, retaliation, violations of specific statutes (including those protecting whistle-blowers or employees who take family or medical leave) or for terminations that violate public policies set forth in statutes or regulations.

Employers should do everything they can to preserve employment at will. It is not a good idea, though, to tell an employee only that we are exercising our employment-at-will rights and terminating you. Because there are so many other grounds for employee lawsuits, you should still be sure to document the reasons for terminating an employee. This includes providing prior warnings, when appropriate, for poor job performance and less serious types of misconduct such as attendance policy violations. These warnings should not be given pursuant to a formal progressive discipline policy but rather simply to establish that misconduct or performance issues occurred and that the employee was put on notice of them, to rebut a later claim that the termination was motivated by an unlawful reason such as discrimination or retaliation.

CHAPTER 3.

Arbitration of Employment Disputes

The U.S. Supreme Court and California state courts favor arbitration of employment disputes. Numerous court decisions over the last few years have strongly endorsed arbitration of employment cases, including class actions. All California private-sector, nonunion employers, therefore, should consider implementing mandatory arbitration of employment disputes.

3.1 Why Arbitration Is a Good Idea

There are several reasons to consider implementing arbitration agreements, including the following.

The Employer Is Likely to Get a Better Result in Arbitration

Multimillion dollar jury verdicts in employment lawsuits in California are hardly news any longer. An employer goes into a jury trial with the deck stacked against it. This is because jury trials of employment cases usually take several weeks, and the jurors who can afford to sit on jury duty for such a long time tend not to be owners or managers of businesses. More frequently they are public-sector employees who get paid for jury service, students, and retired persons. Most public-sector employees come from an environment where strict due process applies, and no one gets fired without multiple warnings and thorough documentation. Recently naturalized citizens are appearing with greater frequency on juries too, and some of them face language difficulties or come from countries with different legal systems than ours. Whatever their background, jurors tend to identify with the employee, and they may not view misconduct at work harshly. Some jurors may themselves have been mistreated by a boss. Many of them may view the company as a big corporation regardless of its actual size. Jurors tend to focus less on the evidence and more on what is fair. By contrast, an arbitrator (who typically will be a retired judge) will be less likely to be swayed by bias or emotion and more likely to rule on the evidence.

It’s not a jury of your peers. It’s a jury of theirs.

The Exposure for a Case in Arbitration Is Generally Less Than in a Jury Trial

Unlike in federal employment discrimination cases, there are no caps on noneconomic (that is, emotional distress and punitive) damages in discrimination cases brought under California state law. Moreover, California jury instructions are often vague and generally favorable to plaintiffs, and the standards for mitigation of damages and for recovery of future lost wages are extremely indulgent to plaintiffs. Also, California laws give plaintiffs multiple shots at winning—and at winning multiple times. Separate causes of action for discrimination or harassment, as well as for failure to prevent discrimination or harassment, are permissible, as are separate causes of action for disability discrimination, failure to accommodate a disability, and failure to engage in the interactive process of accommodation. As a result, California juries typically award large sums when they rule for plaintiffs, and except in extreme cases, courts are not usually inclined to reduce damage awards. In arbitration, damage awards tend to be substantially more modest and reflect a plaintiff’s actual losses. Whereas juries often want to punish an employer found guilty of some workplace wrong, arbitrators are more likely to focus on making the plaintiff whole.

Arbitrated Cases Are Generally Less Expensive to Try

In the typical California jury trial, the case may trail for several days until a free courtroom is located; then two or three days are spent on arguing pre-trial motions and picking a jury. Because judges must deal with other matters, rarely will you have more than four or five hours of trial time per day, and many judges hold trial only four days per week. The typical employment case, therefore, takes at least three or four weeks to try. In arbitration, the case starts on the scheduled date, and you have eight hours of the arbitrator’s time every day. No time is spent on jury selection or jury deliberations, and opening statements and closing arguments are streamlined. Most employment cases can be tried in between two and five days, substantially reducing the amount of attorney time needed. Even though under current law employers are required to pay the arbitrator’s fees in full, given that arbitration hearings are usually shorter than jury trials and that no time is spent waiting for a courtroom to become available, arbitration is usually less expensive overall.

Arbitration Occurs in Private, So There Is Little or No Media Coverage

Although nothing prevents a plaintiff’s attorney from attempting to gain publicity for an arbitration win, in practice the media pays little attention to arbitration cases not involving celebrities or other famous people. Lack of media coverage reduces the likelihood of negative exposure and copycat lawsuits.

The Settlement Value of Arbitrated Cases Is Less Than That of Cases Tried Before Juries

For all the above reasons, arbitrated cases are usually valued less for settlement purposes than jury cases. Plaintiffs’ lawyers know that a jury trial will be expensive and that a sympathetic jury may award a substantial verdict, and they use these points as leverage to negotiate high settlements. They also know that an arbitrated case will cost the employer less to try, that the case will be decided on the evidence, and that they will not be able to appeal to a jury’s emotions. This creates a discount of the settlement value of most arbitrated cases.

3.2 Potential Negatives Regarding Arbitration

Arbitration has some potential negatives. One is that the employer must pay the entire arbitrator’s fee, win or lose. Most arbitrations are conducted by retired judges, whose fees can be substantial. Also, a bad arbitration result is not generally appealable in the courts, although a provision may be included in the arbitration agreement for appellate review by a second arbitrator. Finally, some arbitrators—but not all—are less inclined to award summary judgment (that is, dismiss the case without a full hearing), but summary judgment is often difficult to obtain in California state courts in employment cases in any event. On balance, the advantages of arbitration generally substantially outweigh the disadvantages.

3.3 Enforceability of Arbitration Agreements

California courts will enforce arbitration agreements so long as they are not unconscionable and they satisfy the requirements set forth by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc. (2000).

With respect to unconscionability, the courts look for both procedural and substantive unconscionability. Procedural unconscionability involves oppression or unfair surprise in one party’s entering into an arbitration agreement. A court will not find an arbitration agreement unconscionable simply because the employee was required to sign it as a condition of employment, however. Though courts often cite the take it or leave it nature of mandatory employment arbitration agreements as evidence of procedural unconscionability, they ordinarily do not refuse to enforce the agreement unless it is also substantively unconscionable. Nor will a court find unconscionability in an employee’s assertion that he or she did not read or understand the agreement before signing it. In situations in which the arbitration agreement appears to be deliberately misleading, or is not provided in a language the employee can read and understand, the likelihood of a court refusing to enforce it is greater.

Substantive unconscionability involves contract terms that are one-sided. The most common situation in which a court will refuse to enforce an arbitration agreement as unconscionable is when the employee is bound to arbitrate disputes with the employer over discrimination, harassment, or wrongful termination, yet the employer is free to litigate in court claims it has against the employee, such as theft or misappropriation of trade secrets. In addition, the Armendariz requirements also address issues of substantive unconscionability. Those requirements are:

The agreement to arbitrate must be mutual. The agreement cannot require that only the employee arbitrate claims. The employer must similarly be bound to arbitrate all claims it may have against the employee. However, California law provides that either party may seek a temporary restraining order or a preliminary injunction in court without waiving arbitration.

The employee’s rights and remedies may not be limited. Statutes of limitations cannot be shortened, recoverable damages cannot be limited, and there cannot be a provision that the loser pays the winner’s attorneys’ fees. The employee must have all rights and remedies that would be available in court.

The arbitrator must be neutral. The arbitrator may not be aligned with either party.

Adequate discovery must be available. The agreement may not severely limit discovery. The parties must be able to take at least a few depositions, obtain documents from one another, and subpoena documents from third parties.

There must be a written arbitration award. It must provide the arbitrator’s reasoning in sufficient detail to allow for judicial review.

The employee must not be required to pay for the cost of the arbitration. The employer must pay the arbitrator’s fee in its entirety, but the employee must bear the same costs for court reporters, expert witnesses, and other expenses that would have been incurred had the case been heard in court.

Electronic Signature

Arbitration agreements may be signed electronically. Under California law, an electronic signature has the same effect as a handwritten signature. On occasion, however, a plaintiff may attempt to avoid arbitration by claiming never to have electronically signed an arbitration agreement. In such an event you will need to prove that the plaintiff did in fact electronically sign the document. This requires more than just stating that all new employees are required to sign onboarding documents electronically. Courts require proof that only the plaintiff could have signed the document. This typically requires that a unique user name and initial password be given to each new hire who will sign onboarding documents electronically. Then the employee must change the password to a personally selected password and enter a personal password before being permitted to sign documents electronically.

3.4 Requiring Arbitration as a Condition of Employment

There is no requirement in California that employees be given any additional consideration in exchange for signing an arbitration agreement; employment or continued employment is sufficient. In fact, a job offer may be withdrawn or an employee may be terminated for refusing to sign an arbitration agreement. Before you take such adverse action against an applicant or employee, however, you should have an employment attorney review your arbitration agreement. The law in this area changes frequently, and you should ensure that your arbitration agreement does not contain any unlawful provisions before taking adverse action against an employee or applicant for refusing to sign it.

3.5 Use of Arbitration Agreement to Block Class Actions

In AT&T Mobility LLC v. Concepcion (2011), the U.S. Supreme Court held that class-action waivers in arbitration agreements are valid and enforceable. The California Supreme Court reached the same conclusion in Iskanian v. CLS Transportation (2014), specifically with respect to a class-action waiver in the employment context. As a result, many employers have included class-action waivers in their arbitration agreements.

However, the National Labor Relations Board (NLRB) decided in D.R. Horton, Inc. (2012) that requiring employees to sign class-action waivers is an unfair labor practice because class actions are a form of concerted activity that is protected under Section 7 of the National Labor Relations Act. Although many courts that have considered D.R. Horton have rejected it, the U.S. Court of Appeals for the 9th Circuit, which covers California and other western states, has approved of it. As a result, the NLRB continues to issue complaints of unfair labor practice against employers that require their employees to sign class-action waivers. The 9th Circuit case that approved of D.R. Horton emphasized that the class-action waiver was mandatory in that case. This leaves open the possibility that where an employee voluntarily agrees to a class-action waiver or is given the chance to opt out of a class-action waiver, such a waiver might be lawful, but no court has expressly held as much, and the NLRB has not approved of opt out mechanisms. Especially if you face union activity among your employees, you must balance the benefits of a class-action waiver with the risk of incurring an unfair labor practice complaint before deciding whether to include a class-action