2007-17

California Supreme Court Applies Three-Year Statute Of Limitations To Claims For Meal And Rest Break Violations

 In Murphy v. Kenneth Cole Productions, Inc., the California Supreme Court unanimously held that claims for one additional hour of pay for each work day in which a required meal or rest break is not provided (Cal. Labor Code § 226.7) must be treated as “wages,” and are subject to the longer three-year statute of limitations for wage claims under state law. The court rejected the employer’s argument that the one additional hour of pay is a “penalty” which is subject to a one-year statute of limitations. The court also held that on appeal of an administrative decision by the Labor Commissioner, an employee may raise new claims which were not raised in the administrative “Berman” hearing.

 The court stressed throughout its analysis that “statutes governing conditions of employment are to be construed broadly in favor of protecting employees.” The court focused on the fact that Labor Code section 226.7 provides for employees to be paid an additional hour of “pay” for each day they are required to work through a meal or rest period, and that the word “pay,” as defined in the dictionary, is analogous to the Labor Code definition of “wages.” Moreover, other types of recognized wages are referred to in the Labor Code as “pay,” such as “vacation pay” and “reporting time pay.” Nevertheless, the court acknowledged that the language of the statute is ambiguous, so extrinsic sources such as the legislative and administrative history of the provision must be consulted to determine legislative intent.

 Labor Code section 226.7 originated as part of Assembly Bill No. 2509 during the 1999 -2000 legislative session. In its original iteration, the bill included an explicit penalty provision, separate and apart from the provision requiring payment to employees who were forced to work through meal or rest periods. The Senate later amended the bill, deleting the penalty provision. The court held that the rejection of this separate penalty provision was “most persuasive that the act should not be interpreted to include what was left out.” It also noted that the Legislature certainly knows how to impose a penalty when it wants to and it has established many penalties in the Labor Code by specifically using the word “penalty.” Even AB 2509 itself contained other provisions which specifically used the word “penalty” when providing for a penalty.

 The Senate Rules Committee analysis of the bill explained that the provision which became Section 226.7 was intended to track a pre-existing provision in the Industrial Welfare Commission (IWC) wage orders. Thus, the court considered the rational of the IWC as expressed in administrative hearings, finding that statements made by IWC Commissioners “leave no doubt that the remedy was being adopted as a ‘penalty’ in the same way that overtime pay is a ‘penalty,’ although it is clear that overtime pay is considered a wage and governed by a three-year statute of limitations.” One Commissioner had stated: “So, it is in the same authority that we provide overtime pay that we provide this extra hour of pay.” Since the Legislature was fully aware of the IWC wage orders in enacting Section 226.7, “it follows the that the legislature’s occasional description of the meal and rest period remedy as a ‘penalty’ in the legislative history should be informed by the way in which the IWC was using the word; namely, that like overtime pay, the meal and rest period remedy had a corollary disincentive aspect in addition to its central compensatory purpose.” “However, neither the behavior-shaping aspect of overtime pay nor the fact that courts have referred to the remedy as a ‘penalty’ transforms overtime wages into a ‘penalty’ for the purpose of the statute of limitations.” “[W]hatever incidental behavior-shaping purpose section 226.7 serves, the Legislature intended section 226.7 first and foremost to compensate employees for their injuries.”

 The court went on to reject the “functional” analysis of the appellate court below, which had found that treating the remedy provided by Section 226.7 as a penalty is supported by the fact that the “additional hour of pay” is imposed without regard to the actual loss suffered. For instance, the amount paid by the employer is the same whether a meal period is skipped entirely or is just shortened. The court held that “section 226.7 pay is not transformed into a penalty merely because a one-to-one ratio does not exists between the economic injury caused by meal and rest period violations on the one hand, and the remedy selected by the Legislature on the other hand.... Where damages are obscure and difficult to prove, the Legislature may select a set amount of compensation without converting that remedy into a penalty.” For example, the Legislature set one and one-half times the regular rate of pay as the rate of compensation for hours worked beyond eight hours in a day, or 40 hours in a week, and twice the regular rate of pay as the appropriate rate after 12 hours. Similarly, it set four hours of pay as the amount owed as “reporting-time pay” if an employee arrives at the workplace as scheduled but there is no work available. The court held that the hour of pay required under Section 226.7 is similarly meant to compensate the employee for non-economic injuries suffered from being forced to work through rest and meal periods (such as greater work-related accidents and increased stress). Further evidence that the hour of additional pay is intended to be compensatory is found in the fact that the payment is linked to the employee’s rate of compensation rather than a prescribed fixed amount for all employees.

 The court then turned to the question of whether, on de novo appeal of a Labor Commissioner decision, an employee may raise claims which were not raised in the original administrative proceedings. Noting that this is a question of first impression, the court held that “permitting trial courts to exercise jurisdiction over the entire wage dispute, including related wage claims not raised in front of the Labor Commissioner, is consistent with the trial court’s broad discretion in adjudicating claims at trial.” Murphy could have filed a separate civil complaint raising his additional claims based on meal and rest break violations, at which point the trial court could have consolidated that civil action with the de novo proceeding regarding overtime violation and considered all of the claims together. However, “forcing Murphy to file an original civil action to raise the additional claims would appear inconsistent with the legislative purpose under Labor Code section 98 of providing an expeditious resolution of wage claims.”

 The court’s decision in Murphy does not discuss whether claims for one additional hour of pay may be brought under Business and Professions Code section 17200, which has an even longer four-year statute of limitations. But the Supreme Court previously held in Cortez v. Purolator Air Filtration Products Co., 23 Cal. 4th 163 (2000), that wage claims may be brought under Section 17200 with its four-year statute of limitations. The decision in Murphy that the one additional hour of pay constitutes “wages” also opens up the door to claims for waiting time penalties under Labor Code section 203 (30 days of wages) and attorney’s fees if the penalties for missed meal or rest breaks are not paid at the time of termination. Such an extension of the Murphy decision potentially could have a devastating financial impact on employers, including those who unknowingly violate the laws on meal and rest breaks.

 Please call your BRG&S contact for more information about this development, and steps you should take to ensure compliance with the meal and rest break rules.

Labor Code Provision Preempted by Federal Arbitration Act, and Armendariz Held Inapplicable, in Former Executive’s Action to Recover Multi-Million Dollar Profit-Sharing Bonus and Severance Payment

 In Giuliano v. Inland Empire Personnel, Inc., the California Court of Appeal overturned a trial court decision denying the defendant’s motion to compel arbitration. The plaintiff, James R. Giuliano, III, had been an executive vice-president and the chief financial officer of Inland Empire Personnel, Inc. and several other affiliated companies. After leaving Inland Empire, he sued in Los Angeles Superior Court for unpaid wages and breach of contract, and for declaratory relief to invalidate the arbitration clause in his employment contract. The contract included a separately-initialed arbitration clause. However, Giuliano claimed that the arbitration clause was invalid under Labor Code section 229, which provides in pertinent part: “Actions to enforce the provisions of this article for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate.”

 Inland Empire argued that this state-law provision was preempted by the Federal Arbitration Act (“FAA”). Giuliano argued that the FAA did not apply because his employment contract did not involve interstate commerce, citing the fact that Inland Empire had its principal offices in California, the employment agreement was signed in California, Giuliano worked and paid taxes in California, and Giuliano was terminated in California. The trial court denied Inland Empire’s motion to compel arbitration on grounds that: (1) the arbitration clause was “vague and unintelligible” as to which parties (as among Inland Empire and its affiliated companies) were bound by the agreement; (2) the FAA did not preempt Giuliano’s statutory wage claim because his employment contract did not involve interstate commerce; and (3) the arbitration clause was unconscionable and invalid under Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000).

 The Court of Appeal reversed. It first noted the Supreme Court’s holding in Cronus Investments, Inc. v. Concierge Services, 35 Cal. 4th 376 (2004), that “to ensure that arbitration agreements are enforced according to their terms, the FAA preempts all state laws that apply of their own force to limit those agreements against the parties’ will or to withdraw the power to enforce them.” The court also cited U.S. Supreme Court cases which had held that California statutes rendering certain arbitration provisions unenforceable by requiring judicial resolution of claims were preempted by the FAA.

 As to whether the employment agreement involved interstate commerce, the court held that whether or not the contracting parties subjectively contemplated a substantial interstate commerce connection when they entered into the agreement, the test is whether the agreement does in fact involve interstate commerce. Here, Giuliano acknowledged in his complaint that Inland Empire was engaged in “business throughout Arizona and California,” and stated in a declaration that he had “attended meetings, site visits and grand opening ribbon cuttings” in other states, and he had failed to dispute Inland Empire’s assertion that he had negotiated “multi-million dollar loan agreements” with a bank headquartered in another state. The court held these facts sufficient to establish that Giuliano’s employment contract involved interstate commerce, as a matter of law.

 As to the applicability of Armendariz, the court noted that the Armendariz requirements have been applied to unwaivable claims that arise under the Fair Employment and Housing Act or are tied to fundamental public policy. As to those claims, arbitration agreements are only enforceable if they, at a minimum, provide for neutral arbitrators, more than minimal discovery, a written order, and all the types of relief that would otherwise be available in court, and do not require employees to pay either unreasonable costs or any arbitrator’s fees or expenses as a condition of access to the arbitration forum. Giuliano argued that his statutory wage claim was similarly unwaivable, citing to federal and state cases in which overtime and minimum wage claims were held unwaivable, and therefore the Armendariz requirements should apply. However, the court held that Giuliano’s contract claim for a five to eight million dollar bonus and a $500,000 severance payment is distinguishable from the overtime and minimum wage claims in the cases cited and does not implicate any fundamental public policy. Accordingly, the arbitration provision does not have to meet the standards set out in Armendariz to be enforceable.

 The court also found that the arbitration clause was not so vague and ambiguous as to the parties bound by the agreement on the employer’s side to render the agreement unenforceable, pointing to contract language in which the employer is identified as “Our Company’s affiliated Empire entities (collectively, the “Companies”).” Moreover, Giuliano obviously believed that all of the affiliated companies were parties to the employment contract because he named them as defendants in his breach of contract claim.

Claims Against School Superintendents for Publicly Blaming Principal for School Violence Were Properly Stricken Under Anti-SLAPP Statute

 In Morrow v. Los Angeles Unified School District, the Court of Appeal held that a defamation and invasion of privacy action brought by former Jefferson High School Principal Norman Morrow was properly dismissed under the anti-SLAPP statute (Cal. Code Civ. Proc. § 425.16). After three campus melees at the school which involved hundreds of students and resulted in some students being injured and other arrested, Los Angeles Unified School District Superintendents Roy Romer and Rowena LaGrosa told a Los Angeles Times reporter that: (1) stronger leadership was needed at the school; (2) Principal Morrow’s retirement plans “did not fit with the District’s needs”; and (3) Morrow’s handling of the campus disturbances had “accelerated” a decision to replace him. Morrow sued the District, Romer and LaGrosa, alleging invasion of privacy and defamation, among other causes of action. He argued that the statements falsely implied that the school violence was his fault when, in fact, he had made repeated requests to the District for more security personnel. The trial court granted the defendants’ motion to strike the invasion of privacy and defamation causes of action under the anti-SLAPP statute.

 The Court of Appeal affirmed. To prevail on an anti-SLAPP motion, defendants must show that: (1) the challenged cause of action arises from acts committed by defendants in furtherance of their constitutional right of petition or free speech; and (2) the plaintiff cannot demonstrate a probability of prevailing on his claim. The defendants can meet the first requirement by showing that the statements were made in a public forum in connection with an issue of public interest. The burden then shifts to the plaintiff, who “must demonstrate that the complaint is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by the plaintiff is credited.”

 Morrow contended that the superintendents’ statements about him were not in connection with an issue of public interest because they did not concern the student violence at Jefferson High School, but rather “merely revealed matters of private interest -- his retirement plans and the reasons for a personnel action.” The court rejected this argument, finding that the superintendents only mentioned Morrow’s retirement plans to the extent they directly concerned the school district’s solution to the student violence, and there was no evidence that any gratuitous details were offered to the press. Morrow further argued that the statements were not protected speech because they violated the Brown Act, which provides for a closed session when a local legislative body considers a personnel matter (Cal. Gov’t Code § 54957). He noted that one of the express purposes of this “personnel exception” to the public hearing requirements is “to protect employees from public embarrassment.” The court rejected this argument, finding that it “turns the Brown Act on its head, because the general purpose of the Brown Act is to increase public awareness of issues,” and thus the personnel exception has been narrowly construed. This forecloses an interpretation that would equate the kind that generalized criticism Superintendent Romer made to the press with a formal performance evaluation.

 Having found that the superintendents’ statements were protected free speech, the court held that Morrow could not demonstrate a probability of prevailing on his claims, because to the extent the challenged disclosures included any private fact, the disclosure was logically relevant to the newsworthy subject of the violence at Jefferson and the school district’s response to it. Further, the court held that the statements were protected by the executive officer privilege provided under Civil Code section 47(a), which provides that “a privileged publication or broadcast is one made: (a) In the proper discharge of an official duty.” Moreover, the reported statements were all protected opinions rather than false statements of fact.

Lower Percentage of Minority Employees in Higher-Paid Classifications Does Not Raise An Inference of Unlawful Racial Discrimination Where All Employees Are Free to Apply For Higher-Paid Positions

 In Frank v. County of Los Angeles, minority officers of the Los Angeles County Police brought a class action lawsuit alleging racial discrimination, based on the fact that Deputy Sheriffs, who are about 70 percent Caucasian, are paid better than other County police officers, who are about 70 percent non-Caucasian. A jury found that race was a motivating factor for the lower salaries and benefits of County police officers outside of the Los Angeles Sheriff’s Department (“LASD”), and the trial court awarded back pay and benefits to class members. The County moved for judgment notwithstanding the verdict, which the trial court denied. The total class-wide judgment was over $38 million.

 The Court of Appeal reversed the judgment in its entirety, and held that the mere fact that the predominantly non-Caucasian County police officers were paid less and received fewer benefits than the predominantly-Caucasian Sheriff’s Deputies did not establish a basis for either a disparate impact claim or a disparate treatment claim. Citing Carter v. CB Richard Ellis, Inc., 122 Cal. App. 4th 1313 (2004), the court held that disparate impact is not proven merely because all members of a disadvantaged subgroup -- in this case, County police officers outside the LASD -- are also members of a protected group. In Carter, the plaintiff alleged that a reorganization that demoted administrative managers had a disparate impact based on gender and age because all but one of the administrative managers were women and about half were over the age of 40. Rejecting this argument, the court in Carter explained:

 The Frank court also cited to the U.S. Supreme Court’s decision in Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989), in which non-white cannery workers sued for racial discrimination based on the fact that unskilled cannery jobs were filled predominately by non-whites and higher-paid skilled positions were filled predominately by white workers. The Supreme Court held that these facts do not establish disparate impact because the absence of minorities holding skilled positions could be due to a dearth of qualified non-white applicants for reasons that are not the employer’s fault. The Court in Wards Cove stated: “As long as there are no barriers or practices deterring qualified non-whites from applying for [the higher-paid] positions, ... if the percentage of selected applicants who are non-white is not significantly less than the percentage of qualified applicants who are non-white, the employer’s selection mechanism probably does not operate with a disparate impact on minorities.”

 Similarly, the Frank court found that “the County’s policies were to pay the class members, Caucasian and minority alike, less because they were members of the County police rather than the LASD. Plaintiffs presented no evidence that the County established policies which worked as a barrier or deterrent to minority application in hiring by the LASD.”

 The court also rejected the plaintiffs’ theory of intentional discrimination based on disparate treatment. In support of this theory, plaintiffs presented expert testimony that positions within the County police were paid less than “functionally equivalent” positions in the LASD. The expert compared patrol officers in both organizations and determined that they engaged in similar activities such as responding to crimes and pursuing suspects, but he “failed to take into account the critical factor of the frequency with which the officers dealt with these situations.” The court concluded that, because of this and other defects in the expert’s methods, the jury could not reasonably rely on his conclusion that County police officers and Sheriff’s Deputies were “functionally equivalent or comparable.”

 Plaintiffs also pointed to an internal management document which discussed integrating the Safety Police (who were mostly non-Caucasian) and Park Rangers (who are mostly Caucasian) into the LASD. The document noted that Park Rangers were a “different breed” from Safety Police Officers, and would be easier to integrate, which Plaintiffs argued was a disparagement of County police officers on the basis of race. However, the court found that, when read in context, the “different breed” comment did not have any racial implications and referred to the fact that Rangers were more likely to be college-educated and to be environmentalists, and also that they would be easier to integrate because they were very few in number. The court also rejected Plaintiffs’ broad assertion that racially discriminatory intent was established by expert testimony showing that the County did not follow its own procedures in determining classification and salary. The court held that “it may be that County police officers should be better compensated as a class. That abstract issue is not before us. The question is whether the pay disparity was the product of intent to discriminate based on race. We conclude that the jury could not reasonably infer such intent from the record.” Accordingly, the court reversed the judgment with directions to enter judgment in favor of the County.

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