“Nothing so Exhilarating as Being Shot at Without Result”—California Pay Day Statements and Accrued Vacation

Posted in Compensation, Wage & Hour

What does Winston Churchill have to do with California wage and hour requirements? Well, the “shot” at employers in Soto v. Motel 6 Operating L.P. at the California Court of Appeal was whether, because California vacation pay cannot be forfeited and must be paid out at termination, it therefore follows that the value of the accrued vacation needed to be identified on the regularly issued pay day statement.

As employers with California employees know, Labor Code Section 226 contains a lengthy list of things that must be identified on the statement issued to employees with their paychecks each pay day. Some other statutes, most notably Labor Code Section 245(h), require other items to be reported on the pay day statement. California law also provides that vacation time and pay accrue and vest as wages when the work (on which the vacation accrual is based) is performed. Moreover, the accrued but unused vacation must be paid as part of final wages.

Ms. Soto’s counsel brought a California Private Attorney General Act (PAGA) claim asserting that the value of the accrued but unused time off was required to be itemized on the payday statement even though not specifically articulated in the statute. The theory was that, if wages must be listed on the statement, then deferred wages like vacation, Paid Time Off (PTO), and other forms of time off compensation were required to be itemized as well by the statute. Besides, the argument continued, without that itemization how would an employee know how much vacation remained in his or her account?

The practical problem of employers with California employees was that almost no one reports accrued vacation in that fashion. That, in turn, meant that if the court agreed with Plaintiff, the litigation tsunami unleashed would have been nearly unprecedented. As the title of this post implies, the court rejected the employee’s interpretation and found that Labor Code 226 does not require itemization of the value of accrued vacation. That is how the Winston Churchill quote enters and perhaps departs the conversation.

Although California employers may rightly enjoy the moment, they may do well to consider whether it may be worth revisiting the vacation reporting issue as a planning and management issue. First, this is but one court of appeal decision and may well be appealed to the California Supreme Court. Second, although probably safe for the remainder of the election year, the legislature may well re-visit the issue. The reason is that when California adopted mandatory paid sick leave, it included a requirement that those balances be listed on the pay day statement. Hence the reference to Labor Section Code 245(h) above. The rationale for doing so was very similar to the Plaintiff’s “employee knowledge” theory in the Motel 6 case.

A reason for perhaps giving consideration to this now is that if the law evolves in the direction of requiring reporting, implementation will be complicated. First, the quantity of vacation time may well accrue at a different pace for people in the same job, but with different levels of employment duration. Second, the actual value of the accrued vacation is not static because the value of the vacation time will fluctuate as the value of the employee’s compensation fluctuates.  Third, there will be other practical issues with how vacation is credited and charged in an environment where “getting it right” (on a pay period by pay period basis) carries with it some class action risk management importance. Again, nothing is likely to happen this year but, in terms of budgeting, employers with California employees may want to start thinking about it for 2017/2018.

Bill to Simplify State Tax Withholding on Mobile Workers Passes House

Posted in Labor, Tax

A bill that would simplify state income tax compliance for employers when they send employees on temporary assignment to another state passed the House on Sept. 21. Many state government interests oppose the bill, so its future in the Senate is uncertain.

Employers face a major state tax compliance headache when they send an employee on a short-term assignment to another state (the Taxing State). The Taxing State typically requires the employer to withhold state income taxes for the portion of the employee’s wages earned while performing services there, on a prorated basis. Most states do not provide a de minimus rule, so technically an employer is required to withhold for the amount paid to an employee even on a short-term business trip. This can create an enormous administrative burden for many companies.

The Mobile Workforce State Income Tax Simplification Act (H.R. 2315) would ease this burden by saying that the Taxing State may require an employer to withhold state income taxes only if the employee spends more than 30 days performing services for an employer in that state in any calendar year. This may seem like a rather short time frame, but currently many states demand withholding if an employee works only a handful of days there.

The bill has several rules to help calculate when an employee is considered to be employed in a state. For example, if the employee travels to several states in a day, it only counts as a day of service for the state where the employee performs most of his or her services. Time spent in transit is not counted as a part of a day in any state. The employer may rely on the employee’s determination of the amount of time spent in another state, unless the employer knows that the employee’s time estimates are not accurate, or the employer and employee are colluding to evade state income tax requirements.

These rules would not apply to professional athletes, entertainers, or certain public figures who are paid appearance fees, who will have to comply with state income tax requirements that would require tax payments even for a single work day in a Taxing State.

It is important to note that if this bill becomes law, it would protect companies only from withholding tax obligations on wages paid to employees – it would not protect a company from becoming subject to another state’s taxing jurisdiction for the company’s state income tax or sales tax obligations. Other pending bills in Congress address this issue.

The bill now goes on the Senate, where its prospects in a lame duck session are uncertain. Some senators have been critical of the bill, saying that it impinges on state sovereignty, and would reduce revenues for many states.

Not Everything the California Legislature Enacts is Bad for All Employers All the Time

Posted in Contracts, Employment Agreement, Labor

The title should not be read to suggest some tectonic shift in the moods and values of the California Legislature or the Governor; far from it.  However, every once in a while something a bit useful does emerge. This time it is some certainty in executive level employment contracts. 

AB 1241 adds yet another section to the California Labor Code. New Section 925 provides that: 

An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: 

(1) Require the employee to adjudicate outside of California a claim arising in California.

(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

Labor Code Section 925 goes on to provide that any contract violating these two requirements is voidable and any employee who pursues an action for violation of the new rule can obtain an injunction and his or her reasonable attorney’s fees. This all becomes effective Jan. 1, 2017. 

By now you may be feeling a bit misled by the title, but keep the faith a line or two longer. Tucked away in Labor Code Section 925(e) is the following provision: 

This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

Not quite feeling better? Envision a sale or other merger and acquisitions event with an executive team that will be subject to employment agreements where everyone is represented by counsel. You might be able to have those agreements governed by Delaware law or the law of the parent company headquarters, provided it was negotiated with advice of counsel to the employee. Consider the need or desirability to transfer a key executive from out of state with a noncompete agreement into California. You may be able to hang on to that existing provision. Even if you could not come to terms, a fair amount of uncertainty can be eliminated and hence priced into the deal. 

Having built this up a bit, we close with a word of caution. Employers inclined to move forward with this opportunity should consider treading lightly and in a measured way. Section 925(e) has a number of disjunctive “or” provisions that creative counsel could use to address perceived over reach. It is possible a court or arbitrator may one day find that the contractual provision has limits imposed by California public policy. Thus, when drafting an executive agreement, an employer should consult with counsel in order to keep an eye on California law as it evolves.

Not-for-profit Hospitals and Health Care Providers Facing Retirement Plan Class Actions

Posted in ERISA, Retirement

There has been much media coverage of the recent class action lawsuits filed against some of the most prestigious universities in the United States by university employees. These class action lawsuits allege that the universities breached their fiduciary obligations in running their defined contribution 403(b) retirement plans by allowing the plans to pay excessive investment, record-keeping and administrative fees, thereby resulting in reduced retirement savings for their employees. The roster of current defendants includes Yale, MIT, Vanderbilt, Duke, Cornell, Johns Hopkins, and the University of Pennsylvania, among others, and more class actions of this type against other universities are expected.  These suits are similar to the fiduciary-duty breach hidden fee litigation that has bedeviled corporate 401(k) plan sponsors for years.  The suits also claim that some university retirement plans offer too many investment options (Duke University allegedly offered more than 400; John Hopkins, 440; and Vanderbilt, 340), have multiple recordkeepers (John Hopkins allegedly has five recordkeepers; Duke and Vanderbilt, four) and the universities failed to put record-keeping and other services for their retirement plans out for competitive bidding on a periodic basis.

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Ninth Circuit Court of Appeals Widens Circuit Split as to Class Action Waivers in Employee Arbitration Agreements

Posted in Arbitration, NLRB

In a decision likely to have significant ramifications for employers, a divided panel of the Ninth Circuit Court of Appeals ruled last week that employers cannot require employees to individually arbitrate their claims by way of “separate proceedings.” In Morris v. Ernst & Young, LLP, No. 13-16599, D.C. No. 5:12-cv-04964 (9th Cir. August 22, 2016), the Ninth Circuit joined the Seventh Circuit Court of Appeals and the National Labor Relations Board (NLRB or Board) in holding that requiring employees to sign an agreement precluding them from bringing concerted legal claims violates § 7 and § 8 of the National Labor Relations Act (NLRA).

The decision means that, at least for now, employers within the Ninth Circuit cannot prevent class and/or collective actions by mandating individual arbitration.

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Massachusetts Enacts Comprehensive Pay Equity Law

Posted in Compensation, Discrimination, Wage & Hour

On Aug. 1, 2016, Massachusetts Governor Baker signed into law the “Act to Establish Pay Equity.” The new law is intended to address the gender wage gap by strengthening the pay disparity prohibitions under existing law. The Pay Equity Act also provides employers the opportunity to assert an affirmative defense to wage claims based on the employer’s good faith self-evaluation of its pay practices. The new law does not go into effect until July 1, 2018, but particularly in light of the affirmative defense, employers should consider a self-evaluation study in advance of 2018.

Definition of Equal Pay for Comparable Work

The Pay Equity Act amends Massachusetts General Laws Chapter 149, Section 105A to provide a definition of “comparable work” as “work that is substantially similar in that it requires substantially similar skill, effort and responsibility and is performed under similar working conditions.” The new law also specifies that “a job title or job description alone shall not determine comparability.”

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SEC Scrutinizes Severance Agreements for Compliance With Dodd-Frank

Posted in EEOC, Whistleblower

Recent SEC Fines

On Aug. 16, 2016, the U.S. Securities and Exchange Commission (SEC) announced that it had issued its second fine in as many weeks concerning a company’s use of severance agreements that contain confidentiality and/or covenant-not-to-sue or release provisions that allegedly violate SEC whistleblower Rules.

These recent SEC charges arise from SEC Rules, passed in August 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which enable whistleblowers to collect 10 percent to 30 percent of the total award when giving information that leads to an action recovering at least $1 million. Rule 21F-17 provides that “[n]o person may take any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

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Split California Supreme Court Holds that without Express Agreement, Classwide Arbitrability is not a ‘Gateway Issue’ that must be Decided by the Court

Posted in Arbitration, Litigation

In a 4-3 decision, the California Supreme Court recently determined that the question of “who decides whether [an arbitration] agreement permits or prohibits classwide arbitration” is not subject to a “universal rule [that] allocates this decision in all cases to either arbitrators or the courts.” See Sandquist v. Lebo Automotive, Inc., Case No. S220812, 2016 WL 4045008 (Cal. July 28, 2016). Instead, the question depends on contract interpretation under California law, unless it conflicts with federal law. The arbitration agreement in Sandquist was silent concerning classwide arbitration, so the broad language confirming the parties’ agreement to have an arbitrator decide “any claim, dispute, or controversy” was sufficient to demonstrate that the parties expected the arbitrator to resolve the issue.

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National Labor Relations Board Extends Reach of Browning-Ferris Joint Employment

Posted in Labor, NLRB

On July 11, 2016, the National Labor Relations Board extended the reach of its ground-breaking 2015 Browning-Ferris decision, which announced an expansive view of “joint employment,” and ruled that “employer consent is not necessary” to require multiple employers to jointly bargain with “units that combine jointly employed and solely employed employees of a single user employer.”  Miller & Anderson, Inc.  (NLRB July 11, 2016).  In other words, if, for example, an employer has ten workers performing a similar job function, five of whom it employs directly and the other five of whom are provided through a “supplier” agency, the employer can be required to collectively bargain, together with the “supplier” employer, as to all ten employees.

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EEOC Publishes Revised Proposal to Collect Data on Employees’ Compensation and Hours Worked

Posted in EEOC

On July 14, 2016, the Equal Employment Opportunity Commission (EEOC) published a revised proposal to collect data on employees’ compensation and hours worked through the EEO-1 reports that larger employers are required to submit annually. Notwithstanding numerous public comments stressing the burdens that this reporting requirement would impose on employers and the limited statistical utility that the information may offer, the EEOC is pressing forward with only modest revisions to its original proposal.

The revised rule will apply to employers subject to Title VII of the Civil Rights Act with 100 or more employees.  The EEOC rejected comments urging a higher workforce threshold, stating, “exempting employers with fewer than 500 employees, or even fewer than 250…would result in losing data for a large number of employers who employ millions of workers, and thus would significantly reduce the utility of the pay data collection.”

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