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Every year new case law, statutes, opinion letters and regulations bombard California employers, along with labor and employment law practitioners. This article highlights some of the more significant developments from the past year. California employers and employment law practitioners are anxiously awaiting California Supreme Court review of several important issues, including: • Propriety of wage-hour class actions — Sav-On Drug Stores Inc. v. Superior Court , 125 Cal.Rptr.2d 439 (July 17, 2002, S106718). • Whether the Faragher/ Ellerthaffirmative defense to sexual harassment claims applies under the California Fair Employment and Housing Act (FEHA) — Department of Health Services v. Sacramento County Superior Court , 117 Cal.Rptr.2d 166 (Feb. 13, 2002, S103487). • Whether favoritism toward an alleged “paramour” is actionable sexual harassment or discrimination — Mackey v. Department of Corrections , 133 Cal.Rptr.2d 323 (April 23, 2003, S114097). • Whether an order to hire someone “hot” constitutes sexual harassment or discrimination — Yanowitz v. L’Oreal USA Inc., 135 Cal.Rptr.2d 62 (June 11, 2003, S115154). • Individual liability for wage-hour violations — Reynolds v. Bement , 2 Cal.Rptr.3d 553 (July 23, 2003, S115823). UNLAWFUL HARASSMENT One interesting Ninth Circuit U.S. Court of Appeals opinion, Holly D. v. California Institute of Technology , 339 F.3d 1158 (2003), highlights several unsettled areas of federal and state sexual harassment law. First, the Ninth Circuit joined the Second and Third Circuits in holding that a subordinate’s submission to her supervisor’s quid pro quo demand for sexual favors constitutes a “tangible employment action” for purposes of the Faragher/ Ellerthaffirmative defense. Second, the court discussed the type of evidence necessary for an employer to establish the “reasonable care to prevent and correct promptly” prong of the Faragher affirmative defense. Third, the court rejected the plaintiff’s so-called sexual harassment expert’s hindsight conclusion that the employer did not do enough. Finally, the court remanded the plaintiff’s state law claims to state court, observing that the California Supreme Court is reviewing whether the Faragher affirmative defense applies under the FEHA, Cal. Gov’t Code ��12940 et seq. (see Department of Health Services v. Sacramento County Superior Court (S103487)). Another hot issue continues to be how much harassment is sufficient to cross the “severe or pervasive” legal threshold for a hostile environment claim. Sheffield v. Department of Social Services, County of Los Angeles , 109 Cal.App.4th 153 (2003) (canvassing state and federal “single incident” case law; threat of violence may be sufficient to cross legal threshold of severe or pervasive); compare Manatt v. Bank of America, NA , 339 F.3d 792 (9th Cir. 2003) (alleged discriminatory comments, including “China woman” on several occasions, were insufficiently severe or pervasive) with Dee v. Vintage Petroleum, Inc., 106 Cal.App.4th 30 (2003) (supervisor’s alleged remark “it is your Filipino understanding versus mine” was ethnic slur, both abusive and hostile). Last year the California Supreme Court granted review of two court of appeal decisions, Salazar v. Diversified Paratransit (Jan. 22, 2003, S111876), and Carter v. California Department of Veterans Affairs (Aug 13, 2003, S117253), to resolve whether employers are liable under FEHA for third-party (e.g., customer, patient) sexual harassment. However, the recent passage of AB 76 makes Supreme Court review moot. Employers are now liable under FEHA for third-party harassment if they knew or should have known of the harassing conduct and did not act to prevent and/or address it. DISCRIMINATION AND RETALIATION: AN INCREASE IN PROTECTIONS AND CLAIMS, AND SOME NEW DEFENSES Predictably, in the wake of the Enron/Tyco/Arthur Andersen corporate fraud scandals, whistle-blowing claims have increased. Outgoing Gov. Gray Davis recently signed SB 777, which provides significant added protection for employee whistle-blowers and creates new posting requirements for California employers concerning a state hotline to report possible violations of state or federal laws. In one potentially far-reaching decision, Herr v. Nestle , 109 Cal.App.4th 779 (2003), the court of appeal held that an employer that engages in age discrimination may gain an unfair advantage over its competitors, supporting a separate claim under California’s broad unfair competition law, Business & Professions Code �17200. Yet another new law, AB 196, which goes into effect Jan. 1, expands the prohibition on sex discrimination and harassment by including gender in the code’s definition of sex for discrimination purposes, prohibiting discrimination based on gender identity. But some new defenses to discrimination and retaliation claims also emerged in 2003. One Ninth Circuit decision, Pottenger v. Potlach Corporation , 329 F.3d 740 (2003), supports the exercise of managerial discretion defense. In deference to managerial discretion, the court explained, “[i]t may have been unfair (and perhaps unwise) for Potlatch to blame Pottenger for IPPD’s losses, but it is not surprising that Pottenger’s bosses would try to make a change in leadership in a division that was having such consistent trouble.” See also Gibbs v. Consolidated Services , __ Cal.App.4th __, (2003) (corporate restructuring may constitute legitimate non-discriminatory reason for termination of employment, and intangible qualities such as plaintiff’s management skills and style, leadership qualities and “unprofessional demeanor” may support lawfulness of such decisions). Another new defense to retaliation claims is the employee’s failure to exhaust an employer’s internal complaint resolution procedures. See Palmer v. Regents of University of California , 107 Cal.App.4th 899 (2003). WAGE-HOUR LAW TAKES CENTER STAGE The Legislature passed and Gov. Davis signed a host of new laws in 2003 that increase penalties against employers for wage-hour violations. For example, SB 796 implements the “Labor Code Private Attorney General Act of 2004,” giving employees the ability to bring private rights of action to enforce the wage-and-hour laws and obtain civil fines and penalties. The measure also allows employees who successfully bring wage-and-hour violation actions to keep 25 percent of the civil penalty recovered. In addition, the bill requires that the employer pay the employee’s attorneys fees and costs. Similarly, AB 276 increases by 500 percent fines levied under 158 different Labor Code misdemeanor violations. The maximum amount of the fine for Labor Code violations would increase to $500, and the penalty for the first violation increases to $100 (from $50), with penalties for subsequent or willful or intentional violations increasing to $200. Another new law, AB 223, requires employers to pay for an employee’s attorneys fees when a court finds for the employee, even if the court recovery is less than the DLSE (labor commissioner) award. Notably, this law expressly overturns the California Supreme Court’s decision in Smith v. Rae-Venter Law Group , 29 Cal.4th 345 (2002). On the other hand, the court of appeal, in California School of Culinary Arts v. Lujan , 112 Cal.App.4th 16 (2003), held that the DLSE Interpretations and Enforcement Manual and longstanding opinions of the California Labor commissioner were not entitled to any deference in determining whether culinary academy teachers were exempt professionals under California law. “As well intentioned as the representative of DLSE may be,” noted the court, “it is not entitled to invoke an internal policy definition to interpret IWC wage orders simply because it divines that was the intent of IWC many decades past.” ARBITRATION: PANACEA OR LITIGATOR’S DREAM? Mandatory arbitration of employment disputes continues to generate controversy. Somewhat surprisingly, Gov. Davis recently vetoed AB 1715, which would have invalidated employment arbitration agreements requiring arbitration of FEHA claims as a condition of employment or continued employment. And in a surprising reversal, an en banc Ninth Circuit panel joined nearly every other federal circuit in holding that �118 of the Civil Rights Act of 1991 does not preclude employers from requiring employees to submit Title VII claims to compulsory arbitration. Any employer interested in mandatory arbitration should study the defects in iterations of Circuit City’s mandatory arbitration agreement (see Circuit City Stores, Inc., v. Mantor, 335 F.3d 1101 (9th Cir. 2003); and Ingle v Circuit City Stores , 328 F.3d 1165 (9th Cir. 2003)), and incorporate the Armendariz minimum due process requirements (see, e.g., Fittante v. Palm Springs Motors, Inc., 105 Cal.App.4th 708 (2003) ( Armendariz applies to claims brought under any statute enacted for “public reason”); O’Hare v. Municipal Resource Consultants , 107 Cal.App.4th 267 (2003) (trade secrets “carve out” for employer’s benefit rendered arbitration agreement unconscionable); Little v. Auto Steigler, Inc., 29 Cal.4th 1064 (2003) (endorsing concepts of “severing” unconscionable provisions that do not permeate agreement and incorporating in certain “legal formalities,” such as summary judgment motions and legal principles governing “just cause”). PRIVACY Invasion of privacy and “identity theft” claims also increased in 2003. One new law, SB 1386 (which went into effect July 1 as California Civil Code ��1798.29, 1798.82), requires any employer that stores computerized personal information (such as Social Security numbers, account and credit card numbers, drivers licenses, etc.) to provide immediate notice if the security of that information is breached or compromised in any way. One exception is encrypted data. In Intel Corp. v. Hamidi , 30 Cal.4th 1342 (2003), a sharply divided California Supreme Court held that Intel could not, on a trespass to chattels theory, prevent a former employee from sending unsolicited e-mails criticizing Intel’s employment practices to some 35,000 employees via Intel’s e-mail system. The court noted, however, that “on facts somewhat similar to those here,” a company or its employees may be able to plead claims for interference with prospective economic relations, interference with contract or, under appropriate facts, defamation, publication of private facts or other speech-based torts. Tyler M. Paetkau is a labor and employment partner in the Silicon Valley office of Bingham McCutchen. His e-mail address is [email protected].

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