September 13, 2007

California employers should be aware of three decisions in the last week that will impact the way they do business here.   

Gentry v. Superior Court

On August 30, 2007, the California Supreme Court issued its long-awaited decision in the case of Gentry v. Superior Court, regarding the enforceability of class action waivers in employment arbitration agreements.

In a sharply divided opinion, four justices reversed the Court of Appeal's decision upholding the class action waiver. The majority opinion held that "at least in some cases, the prohibition of classwide relief would undermine the vindication of the employees' unwaivable statutory rights and would pose a serious obstacle to the enforcement of the state's overtime laws." Before enforcing such a waiver in a case where it is "alleged that the employer systematically has denied proper overtime pay," a trial judge now must apply the following factors: "(1) the modest size of the potential individual recovery; (2) the potential for retaliation against members of the class; (3) the fact that absent members of the class may be ill informed about their rights; and (4) other real world obstacles to the vindication of class members' right to overtime pay through individual arbitration." The opinion does not explain its reference to "other real world obstacles" and thus it is likely that this vague language will be exploited by plaintiffs and their counsel in arguing that every class action waiver should be invalidated.

After applying these factors, if the trial judge determines that "a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer's violations, it must invalidate the class arbitration waiver."

The majority opinion's analysis revolved around its concern that "class arbitration waivers cannot, consistent with the strong public policy behind [the overtime statute], be used to weaken or undermine the private enforcement of overtime pay legislation by placing formidable practical obstacles in the way of employees' prosecution of those claims."

The remainder of the majority opinion focused on whether the agreement's provision allowing 30 days for employees to opt out precluded a finding that the agreement was procedurally unconscionable. The majority once again reversed the Court of Appeal's decision, finding that the opt-out provision "did not represent an authentic informed choice." The majority based its ruling on the fact that the employer had not spelled out every disadvantage of the arbitration agreement (of which there were many, including a reduced statute of limitations, limits on compensatory and punitive damages, and the possibility that a successful plaintiff would not recover attorneys' fees despite an attorneys' fees statute). In short, the employer could not cure its overreaching by including an opt-out provision that failed to disclose all the disadvantages of the agreement.

A sliver of good news for employers can be found in the Court's refusal to declare all arbitration agreements with class action waivers as unconscionable per se. In fact, the Court went so far as to state expressly that, where the class action waiver is found invalid under the factors discussed above, it may be severed and the rest of the arbitration agreement enforced (so long as the rest of the agreement complies with the requirements of Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000)).

Another potential argument for employers is that the opinion is limited to the enforcement of class action waivers as applied only to overtime claims. The majority opinion repeatedly focuses its analysis on the public policies underlying overtime legislation in reaching its conclusions. Thus, employers faced with different types of claims where the public policies are less compelling (for example, alleged paystub violations, or alleged posting or record-keeping violations) may be successful in enforcing a class action waiver.

The practical effect of this decision for employers is that they now do not face per se invalidation of their arbitration agreements by including class action waivers. Thus, such class action waivers should be included because the facts in a particular case may allow for the enforcement of such a waiver.

Prachasaisoradej v. Ralphs Grocery Company, Inc.

On August 23, 2007, the California Supreme Court issued another divided decision, in this case one that is favorable to California employers. In another four to three split, the majority reversed the Court of Appeal's decision invalidating a bonus plan based in part on operating expenses. Instead, the majority held, an employer does not "violate California wage-protection laws by providing...supplementary compensation designed to reward employees, over and above their regular wages, if and when their collective efforts produced a positive financial result for the store where they worked."

Important to the majority's decision were the facts that: (1) all employees received their normal rate of pay without regard to the store's performance; (2) the plan allowed for incentive payments above and beyond regular wages (which were calculated by comparing actual plan-defined profit against target figures previously set by the company); and (3) after the incentive compensation was calculated, no deductions were taken.

In so holding, the Court affirmed the use of "normal concepts of profitability" to determine bonus payments. Thus, an employer may include "ordinary business expenses, such as storewide workers' compensation costs, and storewide cash and merchandise losses, along with such other store expenses as the electric bill and the cost of goods sold, to determine the store's profit" in calculating supplementary incentive compensation payments.

The majority rejected the argument that this bonus program shifted the costs of doing business to employees, noting that "after fully absorbing the expenses at issue, Ralphs simply determined what remained as profits to share with its eligible employees in addition to their normal wages."

The practical effect of this decision for California employers is that employee bonuses - above and beyond their regular wages - may be calculated based on the costs of doing business. Such plans should be in writing, should set forth the formula for calculating the bonus, and should make clear that no deductions are taken after the bonus amount is calculated.

Green v. State of California

On August 23, 2007, the California Supreme Court issued yet another split decision in Green v. State of California, which also is favorable to employers. The four justices in the majority overruled the Court of Appeal's decision, which had ruled that, in a disability discrimination case, the employer bears the burden of establishing that the plaintiff is not qualified to perform the job. The majority reversed, holding that it is the plaintiff's burden to establish that he or she is qualified as part of his or her prima facie case.

The majority began its analysis by noting that "the FEHA and the ADA both limit their protective scope to those employees with a disability who can perform the essential duties of the employment position with reasonable accommodation." In other words, the statute is not meant to apply to disabled individuals who cannot perform the essential functions of the job.

Thus, "a plaintiff must demonstrate that he or she was qualified for the position sought or held in the sense that he or she is able to perform the essential duties of the position with or without reasonable accommodation." Only after the plaintiff has made this showing does the burden shift to the employer to articulate a legitimate, non-discriminatory reason for its actions.

As part of its analysis, the majority expressly distinguished claims alleging that the employer failed to reasonably accommodate an employee's disability, noting that with regard to such claims, "the plaintiff [is] not required to prove whether she could perform the essential functions of her position in order to establish a prima facie case." The rationale for this distinction can be found in California's statutory scheme, which makes the failure to engage in the interactive process actionable as an unfair practice in and of itself.

The practical effect of this decision for employers is to restore the evidentiary burdens in existence prior to the Court of Appeal's decision in this case, so that only those plaintiffs who actually can perform the job with or without reasonable accommodation are able to state a claim for disability discrimination.

Additional Information

Should you have any questions about these decisions and their ramifications, please contact the Ogletree Deakins attorney with whom you normally work or the Client Services Department at 866-287-2576 or via e-mail at: [email protected]

"This article was drafted by the attorneys of Ogletree Deakins, a national labor and employment law firm that represents management. This information should not be relied upon as legal advice."