Court of Appeal: Administrative Exemption After Harris

Harris v. Superior Court (discussed here and article here) is the California Supreme Court's recent interpretation of the administrative exemption.  The Supreme Court reversed the lower court's decision, saying the court of appeal mis-applied the law.  Of note, the court insisted that the court of appeal apply the relevant standards in the wage order, which includes reliance on certain federal Department of Labor Regulations.  The court sent the case back down for the court of appeal's re-consideration.

The court of appeal has issued its new decision . Again, it decided that the claims adjusters at issue in the case are non-exempt under the administrative test.  In fact, the court again granted the plaintiffs' motion for summary adjudication, which means that the court believes the claims adjusters are non-exempt as a matter of law.  Therefore, there will be no trial over whether the class of claims adjusters are exempt or not. The only dispute is over damages and penalties. If allowed to stand or remain published, it appears the court of appeal's decision limits the administrative exemption.

The Supreme Court's decision rejected the court of appeal's analysis of the exemption because the court relied on the "administrative / production dichotomy" to the apparent exclusion of the Wage Order's tests for the exemption. This time the court of appeal mostly avoided the dichotomy and focused on a different method of analyzing the exemption:

Federal Regulations former part 541.205 (2000) is one of the regulations incorporated in Wage Order 4-2001, subdivision 1(A)(2)(f). That regulation defined the italicized phrase above. It is this directly related‘ phrase that distinguishes between 'administrative operations‘ and production‘ or sales‘ work. (Fed. Regs. § 541.205(a) (2000).) 

Parsing the language of the regulation reveals that work qualifies as 'administrative‘ when it is directly related‘ to management policies or general business operations. Work qualifies as directly related‘ if it satisfies two components. First, it must be qualitatively administrative. Second, quantitatively, it must be of substantial importance to the management or operations of the business. Both components must be satisfied before work can be considered directly related‘ to management policies or general business operations in order to meet the test of the exemption. (Fed. Regs. § 541.205(a) (2000).)  

The regulation goes on to further explicate both components. Federal Regulations former part 541.205(b) (2000) discusses the qualitative requirement that the work must be administrative in nature. It explains that administrative operations include work done by ‗white collar‘ employees engaged in servicing a business. Such servicing may include, as potentially relevant here, advising management, planning, negotiating, and representing the company. Federal Regulations former part 541.205(c) (2000) relates to the quantitative component that tests whether work is of ‗substantial importance‘ to management policy or general business operations. (Harris, supra, 53 Cal.4th at pp. 177–182 & fns. 3, 5, fns. 2, 4 & 6 omitted.)  

Only the qualitative component of the ―directly related‖ requirement is at issue in this case. (Harris, supra, 53 Cal.4th at p. 182.)

So, the Court set about analyzing what it means to be "directly related to management policies or general business operations."  In doing so, the court appeared to conflate the qualitative and quantitative standard.  The court reasoned that every job is in some way "directly related to management policies," which cannot mean that everyone is exempt.  The court explained that even the lowest level employees may "advise" management (about mundane things), and may "represent the company" when calling a cab.  The court reasoned that the exemption would include everyone if that were the case, seeming to ignore the "quantitative" test of "importance."

So, the court sought to draw a line and readily concluded:

The undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the "directly related" requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like.

 * * *

The claims adjusters were responsible for determining coverage, setting and updating reserves, determining liability, evaluating a claim for settlement, and negotiating settlement of claims,‖ as well as recognizing potential subrogation on claims and forwarding such claims to the Subrogation Unit‖ and recognizing indicators of potential fraud on claims and forwarding such claims to the Special Investigations Unit.‖ The settlement authority of the adjusters under the declarant‘s supervision ranged from $6,000 to $40,000, and their expense authority ranged from $5,000 to $20,000. The declarant estimated that 85 percent of the adjusters‘ claims were settled within their settlement authority; for claims exceeding their authority, he ―generally expect[ed] them to provide [him] with a recommendation of settlement as well as a thorough analysis of their reasoning.‖ Other declarations described other adjusters who had lower or higher settlement authority (some as high as $100,000), but all of them performed similar duties.

None of that work, or the similar work of the other class members, is carried on at the level of management policy or general operations. Rather, it is all part of the day-to-day operation of Employers‘ business.

Here's how you know the court of appeal seems to have conflated the qualitative and quantitative components of the exemption:

For example, if a Golden Eagle underwriter consults with a Golden Eagle claims examiner regarding whether the company should issue certain types of policies to a particular customer, the claims examiner is not giving advice about management policies or general operations. But if Golden Eagle‘s underwriters consult with Golden Eagle‘s claims examiners regarding whether the company should offer certain types of policies in general (namely, whether such policies should be included in Golden Eagle‘s line of products), the claims examiners are giving advice about management policies or general operations.

So, that means if you are not formulating or implementing policies on a company wide basis, you're non-exempt?  The exemption does not say you have to formulate the policies. Whether you issue a certain policy to a particular customer is the application of a business policy. That is "administrative" work.  Similarly, if an employee relations manager evaluates the employee handbook policies and decides whether a management decision to discharge is wise, that is exempt work - advising management.  If you take the court of appeal's analysis to the next step, only the HR manager responsible for drafting the handbook is exempt; everyone else just applies it to the individual worker and is non-exempt?  Everyone in the accounting department is non-exempt except the CFO or those who manage 2 or more people? That will be news to thousands of employers, (and plaintiff lawyers.)

There's more here, but you get the picture.

Dear court of appeal, with respect, I think you got this one wrong. I hope the California Supreme Court decides to re-review this one or depublish it.

The case is Harris v. Superior Court and the opinion is here.

Court of Appeal Upholds Arbitration Agreement

Nelsen v. Legacy Partners (opinion here) is the latest decision from the court of appeal to address the validity of arbitration agreements in California, after recent federal developments (Concepcion, DR Horton, etc.). 

The issues, as usual, are whether the arbitration agreement is "unconscionable," or violates public policy, and therefore is unenforceable as a contract.

The arbitration agreement was located at the end of a long handbook. Not surprisingly, the court first found that the agreement was "procedurally unconscionable,"  because

It was part of a preprinted form agreement drafted by LPI that all of LPI‘s California property managers were required to sign on a take-it-or-leave-it basis. The arbitration clause was located on the last two pages of a 43-page handbook. While the top of page 42 contains a highlighted prominent title ―TEAM MEMBER ACKNOWLEDGMENT AND AGREEMENT,‖ the title makes no reference to arbitration and the arbitration language itself appears in a small font not set off in any way to stand out from the rest of the agreement or handbook. Moreover, unless Nelsen happened to be conversant with the rules of pleading in the Code of Civil Procedure, the law and procedure applicable to appellate review, and the rules for the disqualification of superior court judges, the terms and rules of the arbitration referenced in the clause would have been beyond her comprehension.

So, now the courts say that failing to attach the Code of Civil Procedure makes an agreement procedurally unconscionable.  What happened to "everyone is bound to know the law?" or "ignorance is no excuse?"  Also, by saying that the agreement is not in a different font, the court is imposing a requirement that does not apply to other contracts.  That's not supposed to be allowed, demonstrating once again that the unconscionability doctrine is just an end run around Federal Arbitration Act preemption.

However, the court then turned to "substantive" unconscionability, which must also exist for an arbitration agreement to be invalidated.  In this case, though, the arbitration agreement was pretty much lifted verbatim from a California Supreme Court decision. (Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064.)  So, the Court did not find substantive unconscionability.

But Nelsen then argued that, regardless of unconcsionability, the arbitration agreement violated "public policy" under the California Supreme Court's decision in  Gentry v. Superior Court (2007) 42 Cal.4th 443.  In particular, Nelsen argued that the arbitration agreement barred her from bringing a class claim in arbitration because the agreement was silent as to class claims.

The court of appeal held that, indeed, the silent agreement did not encompass class-based claims.
However, the court then decided that Gentry did not invalidate the arbitration agreement because Nelsen did not adequately support the argument to the trial court.  That is, Gentry does not invalidate "all" class action waivers, so you have to establish the Gentry "factors," which Nelsen did not do.  In ruling this way, the court sidestepped whether Gentry remains good law.

Finally, the court decided that the National Labor Relations Board's decision in DR Horton was not binding and that the court would not follow it. The court noted that the decision was issued by just 2 Board members and that the issue of whether class action waivers are enforceable are beyond the Board's normal expertise.

So, another arbitration agreement survives. 

Court of Appeal: Employee's Attempt to Buy Shoes for Friend with Employer's Money Not Misconduct

Here's another Court of Appeal decision regarding an unemployment insurance benefits determination by the Employment Development Department.  A few weeks ago, the Court decided that refusing to sign a document was insubordination, disqualifying an employee from benefits.  See here.  Not this time.

In this case, Robles was employed by Liquid Environmental Solutions. He received an annual allowance for safety shoes.  He took a friend to the Red Wing store to buy the friend a pair of boots with his shoe allowance.  The store clerk would not permit the purchase.  Robles did not complete the transaction.  He was later suspended and then fired.

Robles applied for unemployment benefits.  The company did not appear or contest.  Robles admitted he attempted to use the Company's shoe allowance to buy shoes for a non-employee friend.  EDD denied the claim for unemployment on the basis of misconduct, as did the superior court.  Here is what the EDD's ALJ said, which pretty much sums it up:

Robles started to explain his objection to the characterization in the investigator・s report to the effect that claimant stated he was aware ―that the purchase had to be for employees only.‖The ALJ said he would have a chance later to ―tell me more about it.

The ALJ found that Robles was discharged for misconduct connected with work. In particular, Robles understood that the employer intended that its employees use the
annual shoe allowance to purchase shoes. Robles breached ―a duty of good faith and fair dealing when he attempted to obtain shoes for a friend who was not an employee rather than using the allowance for himself. [¶] The claimant may have had good intentions toward his friend, but in his actions he breached a serious obligation he had to the employer.

But the court of appeal disagreed with the EDD and superior court.  The court of appeal apparently did not accept that an employee who knowingly attempts to use company money to buy something for a third party is stealing, or at least attempting to do so:

In the case at hand, Robles knew that the employer intended its employees to use the shoe allowance to purchase safety shoes for work, but the element of culpable intent has not been established. First, Robles did not try to hide anything when he went to the shoe store. Next, it is undisputed that he wanted to help his friend who had a recent home accident. Further, Robles had decent safety shoes and did not feel he would jeopardize the safety purpose of the allowance or otherwise injure his employer‘s interests. When his supervisor indicated the employer did not approve of the intended use, Robles registered his regret and assured the supervisor he would comply. And finally, Robles did not use the shoe allowance for his friend. At most Robles was guilty of a good faith error in judgment. At the least Robles misunderstood the limits of what he could do with the safety shoe allowance, which he was entitled to as a benefit of employment.

Well, you be the judge.  Is the court of appeal indulging bad behavior.  Do you need a written policy saying don't use company money to buy friends shoes intended for employee safety?  Is this misconduct or just a "good faith error in judgment?"  These are rhetorical questions; don't write :)

The case is Robles v. EDD and the decision is here.

Court of Appeal: Advanced Commissions May Be Recovered

Verizon paid certain employees on commission. The commissions were paid on wireless subscriptions.  However, if customers canceled their service, Verizon would charge back the commissions that were advanced to employees under the assumption that the customer would pay for the entire subscription. Here is the court of appeal's description of the commission plan:

The compensation plans explain that commissions on the sale of cell phone service plans are paid in advance, but not earned until the expiration of a chargeback period during which the customer may cancel the service. The 2004 compensation plan stated: "Customer retention is an important element of earning any commission; therefore your commission for sales of service is not earned until after the expiration of the applicable chargeback period. However, as a benefit to employees so that they will have use of the money before it is actually earned, Verizon Wireless has a policy of advancing commission dollars, if certain requirements are met, for the sale of commission-eligible services." The 2005 compensation plan stated: "Your commission . . . is not earned and the sale does not „vest‟ until . . . your customer satisfies his [or her] contract during the applicable chargeback period."

The compensation plans include a section entitled, "Chargeback of Commission Advance." The 2004 compensation plan stated: "In the event a customer disconnects service during the commission chargeback period, your commission is subject to adjustment by the original amount advanced for the sale. Your commission advance will be adjusted to account for disconnects within the chargeback period . . . ." The 2005 compensation plan stated if a customer disconnects service during the chargeback period, "the sale is not considered vested[.]"

Deleon, a Verizon employee, brought a class action agianst Verizon, challening Verizon's right to recover advanced commissions. Deleon's point apparently is that he sold the plan to the customer. If the customer makes a return or cancels, Verizon must pay him the commission anyway and absorb the loss.  That's why there's little chance there will be a company called "Deleon Wireless" any time soon.

There is no allegation that Verizon failed to honor its plan, or that Deleon was underpaid. The entire focus was that he should be paid more, on sales that did not bear fruit.

Nice try. The trial court granted summary judgment, and the court of appeal affirmed. The courts decided that Verizon's plan was clear, Deleon had notice of it, and Verizon followed the plan correctly. The plan defined when commissions were "earned" and paid money in advance, but reconciled the advances against future earned commissions. Therefore, the courts held, Verizon's plan was lawful.

The court of appeal also made a refreshing observation.  If the plaintiff's argument prevailed, Verizon most likely would have dispensed with making advances. Employees would then have to wait up to a year to "earn" commissions when the subscriptions were fully paid. 

The case is Deleon v. Verizon Wireless, LLC, and the opinion is here.

Court of Appeal Imposes Franchisor Liability for Franchisee Harassment Claim

A Domino's franchisee's employee claimed sexual harassment against her supervisor and her employer, the franchisee (Sui Juris).  However, she also sued franchisor Domino's Pizza.  Normally, only the "employer" can be held liable for FEHA violations.  But the victim, Patterson, claimed that Domino's was also her employer because of its control over franchisee Sui Juris. The trial court disagreed, but the Court of Appeal reversed.

The appellate court decided there at least was a triable issue of fact regarding whether the franchisor exercised sufficient control over Sui Juris' employment practices to make it an "employer."  The court did not apply "single employer" or "joint" employer standards that normally apply to these analyses.  Nor did the Court analyze franchisor liability under FEHA's text.  Rather, the Court of Appeal applied an independent contractor-type analysis applying to torts generally:

Whether a franchisor is vicariously liable for injuries to a franchisee's employee depends on the nature of the franchise relationship.  . . . ."The general rule is where a franchise agreement gives the franchisor the right to complete or substantial control over the franchisee, an agency relationship exists." . . . "'[I]t is the right to control the means and manner in which the result is achieved that is significant in determining whether a principal-agency relationship exists.'" (Ibid.) Consequently, a franchisee may be found to be an agent of the franchisor even where the franchise agreement states it is an independent contractor.  .... If the franchisor has substantial control over the local operations of the franchisee, it may potentially face liability for the actions of the franchisee's employees. 

"[T]he franchisor's interest in the reputation of its entire system allows it to exercise certain controls over the enterprise without running the risk of transforming its independent contractor franchisee into an agent."  ... Consequently, it may control its trademarks, products and the quality of its services. But the franchisor may be subject to vicarious liability where it assumes substantial control over the franchisee's local operation, its management-employee relations or employee discipline. 

Applying this rule, the Court decided there should be a trial on whether Domino's was sufficiently controlling of Sui Juris to the considered an "employer" and liable for the harassment.

Significantly, Domino's then argued it could not be liable because it had no advance knowledge there was sexual harassment at that franchise.  But the Court of Appeal ruled that the franchisor could be held strictly liable for the harassment of the franchisee's supervisor. 

Anyway, this decision opens up a significant avenue for franchisor liability when it exercises tight control over a franchisee's operations. 

It will be interesting to see if the California Supreme Court takes this one up or if Domino's seeks rehearing. The standard for liability under FEHA is usually analyzed under whether the corporate entity is an "employer."  At the same time, FEHA does impose liability on "agents" of the employer.   

The case is Patterson v. Domino's Pizza, LLC and the opinion is here.

California Supreme Court: Certain Cities Don't Have to Pay Prevailing Wage

Many employers who do business with the government have heard of the "prevailing wage."  If you haven't, here's what it is, as explained by the California Supreme Court:

contractors on "public works" projects [have] to pay "the general prevailing rate of per diem wages for work of a similar character in the locality in which the work is performed." . . . The term "public works" was defined as work done for public agencies and work paid for with public funds. ... Simply put, "[p]revailing wage laws are based on the . . . premise that government contractors should not be allowed to circumvent locally prevailing labor market conditions by importing cheap labor from other areas."

Basically, the law requires public employers to pay "prevailing" wages.  But "prevailing" usually means "pretty darn high" if you have ever seen them. They are calculated by the Bureau of Labor Statistics and state counterparts (such as the Department of Industrial Relations).

Anyway, so California's constitution authorizes "charter cities," which have broad authority to govern themselves.  State laws preempt charter cities' rules in certain circumstances.

Vista, CA, is a charter city.  Vista was implementing some public works projects, constructing buildings and such.  The project did not call for paying the "prevailing" wage and some unions sued.

Cutting to the chase, here is the 5-2 holding:

Here, we reaffirm our view — first expressed 80 years ago (see City of Pasadena v. Charleville (1932) 215 Cal. 384, 389 (Charleville)) — that the wage levels of contract workers constructing locally funded public works are a municipal affair (that is, exempt from state regulation), and that these wage levels are not a statewide concern (that is, subject to state legislative control).

How fast will someone try to pass an initiative to overturn this one?

The case is State Building and Const. Trades Council, etc. v. City of Vista and the opinion is here.