DOL FINALIZES NEW SALARY RULE FOR EXEMPT EMPLOYEES UNDER FLSA

Both California and federal law establish minimum wage and overtime rules. Both laws also contain exemptions from those rules for “white collar employees” who meet the standards of the executive, administrative, and professional exemptions. The state and federal exemptions differ in numerous material respects, including the minimum salary level that employees must be paid in order to qualify as exempt. Currently, California law requires that exempt employees receive a salary of no less than $960 a week. In contrast, the minimum salary under the federal Fair Labor Standards Act (“FLSA”) has been set at $455 a week since 2004. (The rules are explained in Chapter 10 of the Wage and Hour Manual for California Employers, by Attorney Richard J. Simmons of Sheppard Mullin.)

1. Changes In The Federal Salary Level

Several years ago, the U.S. Department of Labor (“DOL”) proposed a substantial increase in the minimum salary required under the FLSA from $455 to $916 per week. The proposed hike, which was scheduled to take effect in December of 2016, was derailed after the regulations were challenged and blocked in federal court. Following changes in administrations resulting from the election of President Trump, a new proposal was issued earlier in 2019 that included an increase in the minimum salary level to an amount lower than the increase proposed by the Obama Administration.
On September 24, 2019, the DOL announced a final rule that will update the earnings threshold necessary to qualify as an exempt executive, administrative, or professional employee. The new rule also allows employers to count a portion of certain bonuses/commissions toward meeting the salary level. The DOL announced that the increase in the minimum salary level will result in 1.3 million workers losing their exempt status and becoming eligible for overtime pay.
Under the final rule that will become effective on January 1, 2020, the “standard salary level” will increase from $455 to $684 per week. This is equivalent to $35,568 per year for a full-year worker. In addition, unlike California law, the FLSA contains a special exemption for “highly compensated employees” (“HCE”). The total annual compensation level that must be paid to qualify under the HCE standard will increase from $100,000 to $107,432 per year. The final rule also will allow employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices.

2. The California Standard Will Remain Higher

California employers should take note of the fact that the minimum salary required for the state exemptions will remain higher than the new federal standard. Under Labor Code Section 515, the minimum salary is set at a level equivalent to two times the minimum wage for a full-time employee working 40 hours a week, or 80 times the minimum wage. Because the minimum wage in 2019 is $12 an hour, the minimum salary in 2019 is $960 per week. This amount will increase to $1,040 per week (i.e., 80 x $13 an hour) on January 1, 2020, when the state minimum wage increases from $12 to $13 an hour. California law does not have an HCE standard and does not permit employers to credit commissions or bonuses towards the minimum salary requirement.

3. Remember That Other Rules Also Apply

It should also be remembered that state and federal laws impose requirements beyond the minimum salary level. The additional requirements include a “salary basis test” and a duties test. Under federal law, an exempt employee’s “primary duty” must consist of exempt activities. California law requires that employees be “primarily engaged in” exempt activities to qualify as exempt. Even though the language in the state and federal rules is similar, they are defined to include significantly different standards. For a detailed review of the state and federal exemption standards, see Chapter 10 of the Wage and Hour Manual for California Employers, by Attorney Richard J. Simmons of Sheppard Mullin. The book is available from Castle Publications, Ltd. either in print or electronic form.

4. The Wage And Hour Seminar

The new rules will be discussed at Castle’s October 2, 2019 program on Wage and Hour Laws at LAX. Details regarding the program are discussed later in the ALERT.

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RICHARD SIMMONS FEATURED IN CEB’S CATALOG

Castle Publications is pleased to announce that Richard J. Simmons is featured on the cover of CEB’s In Practice Summer Catalog. CEB is the California legal professional’s trusted source for innovative and practice-oriented solutions. Partnering with some of California’s most experienced lawyers and judges, CEB is renowned for authoritative content, analysis and guidance.

Recently, Simmons teamed up with CEB to launch the new CEB and Simmons Employment Law Library on CEB’s OnLAW online platform. The Summer Catalog, which is distributed to approximately 100,000 California attorneys and firms, includes a detailed description of this new subscription offering, as well as an article authored by Simmons on defining compensable “hours worked” as related to travel time.

For more information on the new CEB and Simmons Employment Law Library, please visit CEB’s website.

RICHARD SIMMONS’ WAGE AND HOUR MANUAL ON CEB AND SIMMONS EMPLOYMENT LAW LIBRARY PLATFORM

Sheppard Mullin is pleased to announce that one of the firm’s leading Labor and Employment partners, Richard J. Simmons, is teaming up with CEB to launch the CEB and Simmons Employment Law Library. As part of the new partnership (a first for CEB), Simmons’ essential reference book, Wage and Hour Manual for California Employers, is now available through OnLAW’s powerful online platform.

“I’m honored – and excited – about this new partnership,” said Simmons. “CEB is an outstanding resource for lawyers all across California and its reputation is stellar. It is the California lawyer’s trusted source for fast, relevant and practical legal guidance. I’m hopeful that my publication on California labor and employment law will be beneficial to those who use CEB and will enhance CEB’s leadership in the area of practical legal research.”

“We are pleased to welcome Mr. Simmons to CEB’s community of highly respected and trusted authors,” said Kelly Lake, CEB’s Executive Director. “Richard Simmons is one of the foremost experts in California labor and employment law, his ability to distill extensive knowledge into practical advice is exceptional and will empower CEB customers to better support their clients and grow their practices.”

The CEB and Simmons Employment Law Library features authoritative tools and advice and includes:
• In-depth coverage of California substantive law, with links to cases and codes;
• Guidance on compliance;
• A detailed review and analysis of the unique California laws as well as the federal standards; and
• Practice tips and strategies for employers and attorneys.

About Richard J. Simmons

Simmons represents employers in various labor and employment matters involving state and federal wage and hour laws, wrongful discharge, employment discrimination, employee discipline and termination, employee benefits, affirmative action, and arbitrations. He received his B.A., summa cum laude, from the University of Massachusetts, where he was a Commonwealth Scholar and graduated in the Phi Kappa Phi Honor Society. He received his J.D. from Boalt Hall School of Law at the University of California, Berkeley where he served as Editor-in-Chief of the Industrial Relations Law Journal, now the Berkeley Journal of Employment and Labor Law.

About CEB

CEB is the California legal professional’s trusted source for innovative and practice-oriented solutions. Partnering with some of California’s most experienced lawyers and judges, CEB is renowned for authoritative content, analysis and guidance. As a non-profit program of the University of California, CEB is committed to strengthening the California legal community.

About Sheppard, Mullin, Richter & Hampton LLP

Sheppard Mullin is a full-service Global 100 firm with more than 850 attorneys in 15 offices located in the United States, Europe and Asia. Since 1927, industry-leading companies have turned to Sheppard Mullin to handle corporate and technology matters, high-stakes litigation and complex financial transactions. In the U.S., the firm’s clients include more than half of the Fortune 100. For more information, please visit www.sheppardmullin.com.

GOVERNOR SIGNS INDEPENDENT CONTRACTOR LEGISLATION INTO LAW

On September 18, 2019, Governor Newsom signed AB 5 into law, as expected. The bill was enacted in response to the 2018 decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018). The case created a presumption that a worker who performs services for a hirer is an employee for purposes of the Wage Orders of the California Industrial Welfare Commission (“IWC”). The case established a three-part test, commonly known as the “ABC” test, to overcome the presumption and establish that a worker is an independent contractor under the Wage Orders. Unless an employer satisfies all three elements of the test, the worker may be found to be an employee rather than an independent contractor.

1. The ABC Test

AB 5 codifies many aspects of the decision in Dynamex, clarifies its application, and expands principles to other areas. It provides that for purposes of the Labor Code, the Unemployment Insurance Code, and the Wage Orders, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates:

 

(A) that the person is free from the control and direction of the hiring entity in connection with the performance of the work,

 

(B) the person performs work that is outside the usual course of the hiring entity’s business, and

 

(C) the person is customarily engaged in an independently established trade, occupation, or business.

 

For many organizations part B of the test may be the most difficult to meet. Because the new standard applies to the Labor Code as well as the Wage Orders, it is expected to extend the minimum wage, overtime, paid sick leave, meal period, rest period and numerous other provisions to the Labor Code to persons previously thought to fall outside the purview of these rules.

 

2. Statutory Exceptions To The Test

AB 5 also establishes statutory exceptions for some types of workers for whom the three-part test will be inapplicable. In many of these cases, the determination of employee or independent contractor status will be governed by the test adopted by the California Supreme Court in its 1989 decision of S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989). Occupations specified as exempt from the application of Dynamex would be governed by Borello.

Exempt occupations include, among others, licensed insurance agents, certain licensed health care professionals, registered securities broker-dealers or investment advisers, direct sales salespersons, real estate licensees, commercial fisherman, workers providing licensed barber or cosmetology services, and others performing work under a contract for professional services, with another business entity, or pursuant to a subcontract in the construction industry. The bill requires the Employment Development Department (“EDD”) to issue an annual report to the Legislature on the use of unemployment insurance in the commercial fishing industry.

3. No Reclassification Allowed

The bill states that it does not permit any employer to reclassify an individual who was an employee on January 1, 2019, to an independent contractor due to the bill’s enactment. It also indicates that it is declaratory of existing law with regard to violations of the Labor Code relating to the Wage Orders, and that certain provisions of the Labor Code will apply retroactively to existing claims and actions.

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NINTH CIRCUIT FINDS DYNAMEX RETROACTIVE

On April 30, 2018, the California Supreme Court decided Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018), a landmark ruling that replaced California’s longstanding independent contractor classification test with a new “ABC” test. The new test is described in the May 2018 issue of the ALERT. In reconstituting the test, the Supreme Court left two critical questions unaddressed. First, it did not determine whether the ABC test applied retroactively. Second, it did not expressly indicate whether the principles of the decision will apply broadly to the entire Labor Code or just issues raised under the IWC Wage Orders.

On May 2, 2019, the Ninth Circuit held in Vasquez v. Jan-Pro Franchising International, Inc. 2019 U.S. Dist. LEXIS 54608 (9th Cir. 2019), that Dynamex applies retroactively under California law. Although the Ninth Circuit may not authoritatively interpret California law, this development indicates that Dynamex’s scope—which may govern hundreds of thousands of independent contractor relationships throughout the state—continues to expand.

1. Application Of Dynamex By The Ninth Circuit In Vasquez

a. Background

Vasquez’s lengthy procedural history began in 2008 with a potential class action filed in the U.S. District Court, District of Massachusetts by janitors against JAN-PRO, an international commercial cleaning franchisor. The janitors’ minimum wage and overtime claims stemmed from allegations that they were misclassified as independent contractors as part of JAN-PRO’s franchising model. Because several of the janitors resided in California, the Massachusetts District Court severed the California janitors from the case and transferred their claims to the Northern District of California.
In the Northern District, JAN-PRO prevailed on a summary judgment motion as to the janitors’ minimum wage and overtime claims. The janitors appealed. While on appeal, the California Supreme Court decided Dynamex. The Ninth Circuit then ordered the parties to brief the effect of Dynamex on their case.

b. The Ninth Circuit’s Decision

In its opinion, the Ninth Circuit examined California precedent and found that applying Dynamex retroactively was consistent with the state’s “legal tradition” to apply judicial decisions retroactively. While the court acknowledged that there was an exception to that general rule, it declined to apply it here. Rather, the court reasoned that there was a strong presumption in favor of retroactivity, Dynamex only clarified existing law, and that California state courts provided no indication of an intention to limit Dynamex to new cases. As part of its opinion, the Ninth Circuit acknowledged that the California Supreme Court’s denial of a petition asking it to state that Dynamex should be applied prospectively was only “a data point for us to consider.”

Although the Ninth Circuit remanded the case to the Northern District to decide the case’s merits, it nonetheless offered “guidance” on the analysis. It urged the district court to focus on Prong B of the ABC test, raising the serious question of whether the janitors performed work outside the “usual course” of JAN-PRO’s business. Although JAN-PRO markets itself as a “commercial cleaning company,” it argued that it was a franchising business and not a cleaning business—a fact that may prove dispositive on remand.

2. Practical Pointers

As a result of Vasquez, companies defending misclassification claims in the Ninth Circuit may now confront potential exposure for claims that accrued several years before the April 2018 Dynamex decision, increasing the already-heightened pressure on companies who use independent contractors.

Some action items that companies may take to mitigate the risk of future misclassification claims include:

• Conduct a risk analysis with legal counsel to confirm all independent contractors are properly classified.

• Confirm in the risk analysis that the independent contractors do not provide services that are part of the company’s core business offerings.

• If necessary, reclassify independent contractors.

• Establish a checklist and process for onboarding independent contractors that contemplates the ABC test and prevents misclassifications.

• In light of the U.S. Supreme Court’s recent decisions affirming the validity of arbitration agreements, including those that contain class action waivers, consider including private arbitration agreements to resolve any disputes that arise from the working relationship.

• Note that different criteria are applied under the Wage Orders and federal laws, including the Fair Labor Standards Act.

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RICHARD SIMMONS WINS EMPLOYMENT VICTORY BEFORE CALIFORNIA SUPREME COURT

On December 10, 2018, the California Supreme Court handed down its unanimous decision in Gerard et al. v. Orange Coast Memorial Medical Center, affirming the Court of Appeal ruling that hospital employees who work 12-hour shifts will be able to enjoy scheduling flexibility and confine their work schedules to a span of 12 ½ rather than 13 hours. The voluntary meal period waivers were found permissible even on shifts when employees happen to work more than 12 hours. Likewise, hospitals will no longer face the threat of tens of millions of dollars in liability for meal period violations for simply relying on the state regulations, called Wage Orders, that allow health care employees to voluntarily waive one of their two meal periods when they work long shifts. Hospitals with collective bargaining agreements (CBAs) are also relieved of the concerns that would have occurred whenever negotiated CBA provisions tracked the provisions in the Wage Order to allow meal period waivers.  The Sheppard Mullin team has represented Orange Coast Memorial Medical Center in this case since 2008.

“Sheppard Mullin is the only law firm to win an employment case before the California Supreme Court in 2018,” said lead partner Richard J. Simmons.  “Over the past year, the Supreme Court has ruled unanimously against employers and businesses in three high-profile cases: Alvarado v. Dart ContainerDynamex Operations v. Superior Court, and Troester v. Starbucks. Needless to say, we are extremely gratified that the Court has ruled unanimously in our client’s favor and we are also very appreciative of the California Hospital Association’s unending support for our position over the past few years.”

The Sheppard Mullin team was successful in obtaining summary judgment in the trial court on the meal period, rest period, pay stub, final pay, expense reimbursement, unfair competition and PAGA claims. The trial court also granted the Medical Center’s motion to deny class certification on all claims. After succeeding in the trial court, teams persuaded the Court of Appeal that first ruled against the Medical Center in 2015 to reverse its decision in 2017 and admit that it had erred.  Simmons and his team also assisted the California Hospital Association in drafting and enacting legislation (SB 327) that was unanimously approved by the California Assembly and the Senate and was signed into law in October 2015 to confirm the validity of our position. Notably, the Supreme Court independently concluded that the Medical Center’s legal arguments were correct, even without SB 327, which simply reinforced the same conclusion.

The Sheppard Mullin team comprised of expert attorneys was led by partner Richard J. Simmons and included Daniel McQueen, both of whom will be speaking at Castle’s upcoming Wage and Hour Seminars.

 

For more information about this significant employment victory, please click here.

NEW LAW REQUIRES BOARDS OF DIRECTORS TO INCLUDE WOMEN

General corporation law provides for the formation of domestic general corporations by the execution and filing of articles of incorporation with the Secretary of State. Under that law, the business and affairs of these corporations are generally managed by the direction of their boards of directors, and each director is elected by shareholder vote, with certain exceptions.

Governor Brown signed SB 826 into law on September 30, 2018. The bill imposes a new requirement on a domestic general corporation or foreign corporation that is a publicly held corporation whose principal executive offices are located in California. Under the new rules set forth in Section 301.3 of the California Corporations Code, a corporation must have a minimum of one female on its board of directors no later than the 2019 calendar year. The bill increases the minimum number required to two female directors by the close of the 2021 calendar year if the corporation has five directors or to three female directors if the corporation has six or more directors.

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CALIFORNIA’S SALARY HISTORY AND EQUAL PAY RULES CLARIFIED

California law prohibits employers from relying on a job applicant’s salary history information as a factor in determining whether to offer the applicant employment or what salary to offer.  It also requires employers to provide applicants the pay scale for a position if it is requested.

On July 18, 2018, Governor Brown signed legislation into law, AB 2282, that adopts clarifying changes to the existing rules regarding the use of an applicant’s prior salary information and the state’s equal pay rules.  The bill amends Labor Code Sections 432.3 and 1197.5, effective January 1, 2019.

1. Overview Of Changes

The clarifications to the salary history rules add definitions of the terms “pay scale,” “reasonable request” for the pay scale, and job “applicant.”  AB 2282 also states that the rules do not prohibit an employer from asking about an applicant’s salary expectations for the position sought.

The equal pay requirements in Labor Code Section 1197.5 prohibit employers from paying employees wage rates less than the rates paid to employees of the opposite sex or of another race or ethnicity for substantially similar work.  AB 2282 authorizes employers to make compensation decisions based on a current employee’s existing salary, so long as any wage differential resulting from that compensation decision is justified by one or more specified factors under Section 1197.5, including a seniority or merit system.

2. The Historical Context In Which AB 2282 Was Enacted

California’s equal pay provisions have been embodied in Labor Code Section 1197.5 for decades.  Over the last several years, the rules have been revised and augmented by several bills enacted between 2015 and 2017.  The key bills are reviewed below.

In 2015, SB 358 amended Section 1197.5, effective January 1, 2016, to prohibit employers from paying wage rates less than those paid to employees of the opposite sex for substantially similar work.  Significantly, the legislation revised the defenses available to employers paying such differentials.

The following year, the legislature passed two bills in 2016 that further amended Section 1197.5.  AB 1676 established a new rule providing that prior salary cannot, by itself, justify a sex-based pay differential for employees performing substantially similar work.  SB 1063 independently expanded the prohibitions in Section 1197.5 that previously were confined to gender discrimination to include discrimination based on race or ethnicity.  These new rules took effect in 2017.

Then, in 2017, the legislature passed two additional bills, AB 46 and AB 168, to further alter the landscape of legislation in the area.  AB 46 specified that the Equal Pay Act provisions prohibiting employers from paying lower wages to employees on the basis of gender, race, or ethnicity apply to both public and private employers.  AB 168 added a new Labor Code provision, Section 432.3, to prohibit employers from relying on salary history information as a factor in deciding whether to offer employment to a job applicant or what salary to offer.  It also directed employers to provide the pay scale for the position upon reasonable request.

3. The Salary History Provisions

AB 2282 was signed into law on July 18, 2018 in the context of these existing rules.  The clarifications and changes made are described below.

Labor Code Section 432.3 prohibits employers from relying on an applicant’s salary history in making a job offer to that applicant or in deciding what salary to offer.  It also prohibits employers from seeking salary history information, including compensation and benefits, about an applicant.  Section 432.3(c) requires employers to provide the pay scale for a position to an applicant upon reasonable request.

AB 2282 clarifies these rules by defining several important terms.  First, “pay scale” is clarified to mean “a salary or hourly wage range.”  And, the term “reasonable request” is defined to mean a request “made after an applicant has completed an initial interview with the employer.”  Section 432.3(k) defines the term “applicant” to mean “an individual who is seeking employment with the employer and is not currently employed with the employer in any capacity or position.”  This is described in the legislative history as a limited carve-out for using prior salary in a compensation decision in the case of a current employee, e.g., for purposes of giving raises or bonuses, so long as any wage differential from that compensation decision is justified by one or more specified factors under Labor Code Section 1197.5, including a seniority or merit system.

The legislation also provides another clarification in Section 432.3(i).  It states that nothing in Section 432.3 prohibits an employer from asking an applicant about his or her salary expectation for the position being applied for.

4. Amendments To Equal Pay Statute

Labor Code Section 1197.5(b)(4) states that “prior salary shall not justify any disparity in compensation” based on sex, race or ethnicity.  AB 2282 amends the statute to add:  “Nothing in this section shall be interpreted to mean that an employer may not make a compensation decision based on a current employee’s existing salary, so long as any wage differential resulting from that compensation decision is justified by one or more of the factors listed in this subdivision.”  This allows compensation decisions justified by a provision in 1197.5(b)(1), such as a seniority or merit system.

5. Practical Significance

The clarifications and carve-outs included in AB 2282 are significant.  The new definitions of pay scale and reasonable requests for pay scales make employer obligations more clear, as does the provision stating that employers are not precluded from asking applicants about their salary expectations for the position sought.  This clarification can be read in tandem with the rule in Sections 432.3(g)-(h) stating that (a) applicants are not prohibited from voluntarily disclosing salary history information without prompting to a prospective employer and (b) employers are not prohibited from considering such voluntarily disclosed information in determining the salary for that applicant.  It is also helpful that the legislation defines “applicants” to exclude individuals currently employed with the employer in any capacity or position.

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LEGISLATION EXPANDS SEXUAL HARASSMENT TRAINING REQUIREMENT TO COVER ALL EMPLOYEES

The California Fair Employment and Housing Act (“FEHA”) prohibits discrimination and harassment, including the harassment of an employee based on sex or any other protected characteristic.  It also requires employers with 50 or more employees to provide at least two hours of prescribed training and education regarding sexual harassment, abusive conduct, and harassment based upon gender.  The training must be provided to all supervisory employees within six months of their assumption of a supervisory position and once every two years.

1. SB 1343

SB 1343 expands this requirement.  First, it lowers the threshold for coverage to employers who employ five or more employees, including temporary or seasonal employeesSecond, it requires at least two hours of sexual harassment training for supervisory employees and one hour for nonsupervisory employees.  This must occur by January 1, 2020, and once every two years after that.

The bill requires the California Department of Fair Employment and Housing (“DFEH”) to develop or obtain two online training courses on the prevention of sexual harassment in the workplace.  The DFEH must make the courses available for streaming or downloading on its Internet Website.  Further, the DFEH must provide existing informational posters and fact sheets, as well as the online training course regarding sexual harassment prevention so that they are available to employers and members of the public.

2. Summary By The Senate

Some of the features of the bill were summarized by the Senate Rules Committee as follows:

1. It reduces the employment threshold for harassment training from 50 to five employees.

2. It expands the number of employees who are required to attend the training from supervisorial employees to all employees. The training must be provided within six months of the employee being hired and once every two years.

3. It requires that all employers provide the sexual harassment training by January 1, 2020, but does not need to be provided again if the training is provided to an employee after January 2019.

4. It provides that the training may be done with other employees, as a group or an individual, and broken up into shorter time segments as long as the two-hour requirement is reached.

5. It requires that the DFEH provide a method to employees who have completed the training to print out a certificate of completion, but neither they nor their employer is required to retain the certificate.

6. It requires the DFEH to develop and make available on its Website a two-hour online training course on the prevention of sexual harassment in the workplace. The course must contain an interactive feature which requires the worker to respond to questions periodically in order for the course to continue.

7. It permits an employer to develop a two-hour training module instead of the online training course developed by the DFEH.

8. It requires that an employer provide sexual harassment training for temporary or seasonal employees within two weeks of their date of hire if they will work for less than six months.

9. It requires that the sexual harassment information sheet developed by the DFEH or the employer on sexual harassment include a link to the online training course developed by the DFEH.

10. It requires that the DFEH make the sexual harassment information sheet and online course available in English, Spanish, Simplified Chinese, Tagalog, Vietnamese, Korean, and in any other language that is spoken by a “substantial number of non-English-speaking people,” as defined under existing law. The DFEH must provide the translated materials on its Website.  The bill requires that the online course be both dubbed and subtitled in the languages described above, with the exception of dubbing in English.

(The new training obligations and other legislative developments regarding sexual harassment are addressed in the new (17th) edition of the Sexual Harassment Training And Prevention Manual.  The new edition can be ordered from Castle Publications and will be available soon.)

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U.S. SUPREME COURT BLESSES ARBITRATION AGREEMENTS WITH CLASS ACTION WAIVERS

In Epic Systems Corp. v. Lewis, the U.S. Supreme Court held 5-to-4 on May 21, 2018 that class action waivers set out in arbitration agreements are alive and well despite claims that they interfere with employee rights under Section 7 of the National Labor Relations Act (“NLRA”). Putting policy considerations aside, Justice Gorsuch wrote in the blockbuster decision that the matter was clear “as a matter of law.” In the Federal Arbitration Act (“FAA”), Congress has directed federal courts “to enforce arbitration agreements according to their terms – including terms providing for individualized proceedings.” In reaching this decision, the Supreme Court opened the door, once again, to the use of properly drafted arbitration agreements that preclude employees from bringing or participating in class or collective action proceedings.

1. Overview Of The Three Court Of Appeal Decisions

The three cases reviewed by the Supreme Court each involved contracts between an employer and employee that provided for individualized arbitration proceedings to resolve employment disputes. Despite these agreements, each employee sought to litigate Fair Labor Standards Act (“FLSA”) and related state law claims through class or collective actions in federal court. They sought to extricate themselves from the obligation to arbitrate their claims on an individual basis by contending that, by requiring individualized proceedings, the agreements violated the NLRA.

The employers disagreed. They countered that the FAA protects agreements requiring arbitration from judicial interference. Furthermore, neither the saving clause in the FAA nor the NLRA demands a different conclusion. The Supreme Court held that Congress has instructed courts to enforce arbitration agreements providing for individualized proceedings. Neither the saving clause nor the NLRA suggests otherwise.

In declining to read a new right to bring class actions into the NLRA, the Supreme Court resolved a conflict among the Fifth, Seventh and Ninth Circuit Court of Appeals. It reversed the decisions of the Ninth Circuit in Ernst & Young LLP v. Morris and the Seventh Circuit in Epic Systems Corp. v. Lewis, while affirming the judgment of the Fifth Circuit in NLRB v. Murphy Oil USA, Inc.

The Supreme Court stated:

“The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written.”

a. The FAA Saving Clause

In its analysis, the Supreme Court examined the FAA saving clause, which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” This recognizes only “generally applicable contract defenses, such as fraud, duress or unconscionability. It does not permit defenses targeting arbitration either by name or by more subtle methods, such as by interfering with “fundamental attributes of arbitration.” The court determined that by challenging the agreements because they require individualized arbitration instead of class or collective proceedings, “the employees seek to interfere with one of these fundamental attributes.”

b. The NLRA Does Not Bar Class Action Waivers

Likewise, the Supreme Court rejected the employees’ NLRA claims. They asked the court to infer that class and collective actions are “concerted activities” protected by Section 7 of the NLRA, which guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively …, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Finding that Section 7 focuses on the right to organize unions and bargain collectively, the court observed that it does not mention class or collective action procedures or even hint at a clear and manifest wish to displace the FAA.

Here, the Supreme Court found it possible to give effect to both federal laws in issue, the FAA and the NLRA. It concluded that the NLRA does not prevent the use of class action waivers that restrict employees to arbitrating disputes in their individual capacity rather than in a class or collective proceeding.

2. The Ninth Circuit’s Decision In Morris

The Court gave close attention to the Ninth Circuit decision in Ernst & Young LLP v. Morris, 834 F.3d 975 (2016), where a junior accountant, Stephen Morris, entered into an agreement providing that the employer and Morris would arbitrate any disputes that might arise between them. The agreement specified individualized arbitration, with claims “pertaining to different employees to be heard in separate proceedings.” After his employment ended, and despite having agreed to arbitrate claims against the firm, Morris sued Ernst & Young in federal court. He alleged that the firm had misclassified its junior accountants as professional employees and violated the FLSA and California law by paying them salaries without overtime pay. Although the arbitration agreement provided for individualized proceedings, Morris sought to litigate the federal claims on behalf of a nationwide class under the FLSA’s collective action provision, 29 U.S.C. § 216(b). He also sought to pursue the state law claim as a class action under Federal Rule of Civil Procedure 23.

Ernst & Young replied with a motion to compel arbitration. The district court granted the request, but the Ninth Circuit reversed this judgment. The Ninth Circuit recognized that the FAA generally requires courts to enforce arbitration agreements as written, but reasoned that the statute’s “saving clause,” 9 U.S.C. § 2, removes this obligation, if an arbitration agreement violates some other federal law. It then concluded that an agreement requiring individualized arbitration proceedings violates the NLRA (29 U.S.C. § 157) by barring employees from engaging in the “concerted activity” of pursuing claims as a class or collective action.

3. The Supreme Court Disagreed With The Ninth Circuit

In expressing disagreement with the Ninth Circuit, the Supreme Court determined that the saving clause in the FAA did not support the claim that the agreement for individualized arbitration violated the NLRA. In the course of announcing its conclusion the Supreme Court issued several important reminders to lower courts regarding the value of arbitration, which it viewed as a means of resolving employment disputes in a convenient, efficient and fair way. For example, the Supreme Court reiterated:

(a) The NLRA does not guarantee class or collective action procedures in disputes before judges or arbitrators.

(b) Arbitrations offer “the promise of quicker, more informal, and often cheaper resolutions for everyone involved.”

(c) Congress directed courts to abandon their hostility and instead treat arbitration agreements as “valid, irrevocable, and enforceable.”

(d) There is an unmistakably “clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts.”

(e) Congress directed the courts “to respect and enforce the parties’ chosen arbitration procedures,” e.g., § 3 provides for a stay of litigation pending arbitration “in accordance with the terms of the agreement.”

(f) The FAA’s “saving clause recognizes only defenses that apply to “any” contract and establishes a sort of “equal-treatment” rule for arbitration contracts, permitting agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability, but offering no refuge for “defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” It does not save defenses that target arbitration either by name or by more subtle methods, such as by interfering with “fundamental attributes” of arbitration. The Supreme Court noted that the employees’ argument stumbled because they did not suggest their arbitration agreements were extracted by an act of fraud or duress or in some unconscionable way that would render any contract unenforceable. Instead, they objected to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes.

(g) Allowing any party in arbitration to demand class-wide proceedings despite the traditionally individualized and informal nature of arbitration would sacrifice the principal advantage of arbitration – it’s informality – and make the process slower, more costly, and more likely to generate procedural morass than fiscal judgment. Based on the Supreme Court’s earlier decisions and Epic Systems, courts may not allow a contract defense to reshape traditional individualized arbitration by mandating class-wide arbitration procedures without the parties’ consent.

4. Does Arbitration Make Sense?

In evaluating the Epic Systems decision, it is important that employers consider the pros and cons of arbitration agreements generally and then separately analyze the issues associated with class action waivers. For example, some of the potential cons often associated with arbitration agreements include the inability to appeal unfavorable decisions, the need for the employer to incur the costs of the arbitrator, the inability to effectively prevent PAGA claims from being pursued despite a class and collective action waiver, and the strategy of some plaintiff lawyers to seek to leverage the costs of multiple arbitrations against the employer. And, while it can be argued that arbitration is faster and less expensive than litigation in court, that is not always true.

It appears that the interest in utilizing arbitration agreements will increase as a result of the clear path created by Epic Systems. Yet, if history suggests anything, it can be predicted that while the proponents of arbitration will tout the advantages of the arbitration forum, opponents of arbitration will decry that it undercuts the right to a jury trial. These opponents will continue to mount attacks against arbitration agreements in court and in the legislatures. Each side has its own messaging, but it is now clear that the U.S. Supreme Court and many other courts have recognized that arbitration can benefit employees and employers by providing a fair, efficient, relatively quick and less expensive means of resolving many workplace disputes.

 

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