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As a courtesy to readers, printed below are summaries of recent appellate opinions that address significant employment law issues. Full text of the opinions are available at our California Daily Opinion Service, a searchable archive providing subscribers with the full text of all opinions handed down by the U.S. Supreme Court, Ninth Circuit U.S. Court of Appeals, California Supreme Court and the California courts of appeal. Hernandez v. Hughes Missile Systems Company Ninth Circuit U.S. Court of Appeals March 23, 2004 Material issue of fact was raised as to claim of violation of Americans with Disabilities Act, where jury could have inferred that employer’s decision not to rehire was based on past history of addiction. The court of appeals reversed a judgment of the district court. The court held that a former employee can present sufficient evidence from which a reasonable jury could determine that his former employer refused to re-hire him because of his past record of addiction in violation of the Americans with Disabilities Act (ADA), and not because of an unwritten company rule barring re-hire of previously terminated employees, where the hiring decision maker would have seen a letter in the former employee’s personnel file that made her aware of the fact that the former employee was a recovering alcoholic and that, with that knowledge, she would have checked his personnel file to determine the reason for his earlier termination. After receiving a right to sue letter from the Equal Employment Opportunity Commission (EEOC) on his claim that his job application with his former employer, appellee Hughes Missile Systems Company, had been rejected because of his disability, specifically, because of his record of drug addiction, appellee Joel Hernandez commenced an action in district court under the ADA. In his previous employment with Hughes, which had since been purchased by appellee Raytheon Company, Hernandez had completed a treatment program, but, after testing positive for cocaine, had resigned in lieu of being discharged for violating the company’s workplace code of conduct. Hernandez re-applied with Raytheon for the same position that he held prior to his discharge, stating on his application that he had previously been employed and attaching letters from his pastor about his active church participation and from his Alcoholics Anonymous (AA) sponsor/counselor. Joanne Bockmiller, in Raytheon’s Labor Relations Department, reviewed Hernandez’s application and rejected it. Bockmiller testified that she had received Hernandez’s application, including the attached letters, and his personnel file. The file would have revealed Hernandez’s prior misconduct, the drug test and results, and evidence of his continuous alcohol dependence, cannabis dependence, and cocaine abuse, and of his referral to a treatment program. Bockmiller first testified that she did not recall specifically if she would have reviewed every document, but that she did have access to the file. Bockmiller insisted that once she reviewed an employee separation summary and saw that Hernandez had been discharged for violating workplace conduct rules, she rejected his application outright on the basis of the company’s unwritten policy of not rehiring former employees whose employment ended due to violations of company personnel conduct rules. The district court granted summary judgment in favor of Raytheon. Hernandez appealed. The ADA makes it unlawful for an employer, with respect to hiring, to discriminate against a qualified individual with a disability because of the disability of such individual. The ADA protects individuals who have successfully completed or are participating in a supervised drug rehabilitation program and are no longer using illegal drugs, as well as individuals who are erroneously regarded as using drugs when in fact they are not. It would be reasonable to infer from the presence of the AA letter that Bockmiller was aware of the fact that Hernandez was a recovering alcoholic and that, with that knowledge, she would have checked his personnel file to determine the reason for his earlier termination. Further, a finder of fact could reasonably infer that Hernandez’s history of addiction, not an oral policy, actually motivated Bockmiller’s decision not to re-hire him. From the fact that Raytheon provided conflicting explanations of its conduct, a jury could reasonably conclude that its most recent explanation was pretextual. Finally, the jury could infer from the fact that nobody at Raytheon could identify the origin, history, or scope of the alleged unwritten policy, that it either did not exist or was not consistently applied. It had to be concluded that Hernandez presented sufficient evidence from which a reasonable jury could determine that Raytheon refused to re-hire him because of his past record of addiction and not because of a company rule barring re-hire of previously terminated employees. Wright v. Oregon Metallurgical Corp. Ninth Circuit U.S. Court of Appeals March 11, 2004 Employer’s refusal to permit participants in its stock bonus pension plan to sell higher percentage of employer securities than percentage permitted by plan’s express terms was consistent with ERISA fiduciary requirements. The court of appeals affirmed a judgment of the district court. The court held that an employer’s refusal to permit participants in its stock bonus pension plan to sell a higher percentage of employer securities than the percentage permitted by the plan’s express terms, in order to capture a premium generated by the merger of the employer with another company, was entirely consistent with the Employee Retirement Income Security Act’s (ERISA’s) fiduciary requirements. The Oregon Metallurgical Corporation (Oremet) established a stock bonus pension plan for its employees (the plan). The plan’s terms mandated that a defined minimum percentage of each plan participant’s portfolio had to be invested in Oremet stock. Following Oremet’s merger with another company, appellants, Oremet employees Richard Wright, Greg Buchanan, and Darell Hagan, and other plan participants requested that appellees Oremet, the Oremet plan fiduciary, and former Oremet officers and pension plan administrators (collectively, Oremet) investigate investment alternatives and amend the plan to permit its participants to sell a higher percentage of employer securities than the percentage permitted by the plan’s express terms in order to capture the “premium” generated by the merger. Oremet rejected the plan participants’ demands. The plan participants brought suit against Oremet, the plan’s trustee Key Trust Company of the Northwest, and United Steel Workers of America Local 7150 (the Union), for breach of ERISA’s prudence, exclusive purpose, and prohibited-transaction provisions. The district court dismissed their claims with prejudice. The plan participants appealed. While eligible individual account plans (EIAPs) are exempt from ERISA’s diversification requirement and its prudence requirement to the extent that it requires diversification, and are also exempt from the percentage limitation on investments in an employer’s securities, ERISA’s prudence requirement, 29 U.S.C. � 1104(a)(1)(B), continues to apply to an EIAP’s fiduciaries. The Third Circuit in Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995), adopted a prudence standard pursuant to � 1104(a)(1)(B) that required EIAPs to diversify their employer stock holdings in certain circumstances, including when a company’s financial situation was seriously deteriorating such that there could be a genuine risk of insider self-dealing. Under this standard, an EIAP fiduciary who invests in employer stock is presumed to have acted consistently with ERISA; however, a plaintiff may overcome this presumption by showing that the fiduciary abused his or her discretion. To rebut the presumption, the plaintiff must show that the ERISA fiduciary could not have believed reasonably that continued adherence to the plan’s terms was in keeping with the settlor’s expectations of how a prudent trustee would operate. While this standard was difficult to reconcile with ERISA’s statutory text, the facts of the case did not necessitate a decision as to whether the duty to diversify survived the statutory text as the plan participants’ prudence claim was unavailing under any existing approach. If EIAPs were unconditionally exempt from ERISA’s duty to diversify, the refusal to diversify the plan beyond the set level did not constitute an actionable violation of ERISA’s prudence requirement. If the Moench standard controlled, the plan participants’ prudence claim still failed, as unlike in Moench, this was not a situation where the company’s financial situation was seriously deteriorating. Mere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the Moench presumption. The “premium” the plan participants emphasized was nothing more than a rise in share value following a major, though not necessarily unique, corporate development. The district court therefore did not err in concluding that the plan participants failed to state a claim for a violation of ERISA’s prudence requirement. ERISA’s exclusive purpose provision, � 1104(a)(1)(A), required that plans be administered for the exclusive purpose of: providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan. The plan participants’ exclusive purpose claim was derivative of their prudence claim and failed for the same reasons. ERISA requires fiduciaries to comply with a plan as written unless it is inconsistent with ERISA. Because Oremet complied with the plan’s lawful terms and were under no legal obligation to deviate from those terms, they provided the plan participants with their benefits due. The district court did not err in concluding that the plan participants failed to state a claim for violation of ERISA’s exclusive purpose requirement. With regard to ERISA’s prohibited-transaction provision, � 1106(a)(1), the decision by Oremet to continue to hold a percentage of plan assets in employer stock was not a “transaction.” It was merely a lawful decision to remain in full compliance with the explicit language of the plan’s terms. Thus, the plan participants failed to state a claim for violation of � 1106 based on the Plan fiduciaries’ decision to adhere to the plan’s terms. To be found liable under ERISA for breach of the duty of prudence and for participation in a breach of fiduciary duty, an individual or entity must be a “fiduciary.” The plan documents in no way gave the Union any discretionary authority or control to manage, administer, or interpret the plan, or to manage or dispose of the plan’s assets. Thus, the Union could not be found liable under ERISA for breach, or participation in the breach, of a fiduciary duty. Moreover, because the plan participants’ contention that the decision to hold the company’s stock was imprudent, the district court did not err in concluding that Key was immune from liability as a directed trustee. If the underlying fiduciary direction itself is not in violation of ERISA, the directed trustee’s compliance with that direction could not serve as a basis for liability. Lyle v. Warner Brothers Television Productions Second District Court of Appeal April 21, 2004 “Creative necessity” was not affirmative defense to cause of action for sexual harassment but was factor jury could consider in determining whether defendants’ conduct created hostile work environment (Johnson, J.) The Second Appellate District reversed in part a trial court judgment. In the published portion of its opinion, the court held that “creative necessity” could not be used as an affirmative defense for using sexually coarse, vulgar and demeaning language in the workplace, but that such a “necessity” was a factor that a jury could consider in determining whether the defendants created a hostile work environment for the plaintiff employee. Amaani Lyle, an African-American woman, applied for a position as a writers’ assistant on the television show “Friends.” Two executive producers and writers on the show, Adam Chase and Gregory Malins, interviewed Lyle. She understood “one of the most important aspects of the job was taking very copious and detailed notes for the writers” when they were discussing story lines, jokes and dialogue. On the recommendation of Chase and Malins, Lyle was hired as a writers’ assistant in June 1999. According to Lyle, soon after she began working on the show she complained to Chase, Malins and other producers and writers about the fact “Friends” had no black characters. Lyle also contended she was subjected to racial and sexual harassment through offensive and bigoted comments and jokes made by Chase, Malins, Reich and other writers during writers’ meetings. Chase and Malins terminated Lyle from her job as a writers’ assistant four months after hiring her, citing poor job performance. Lyle filed a complaint under the Fair Employment and Housing Act with the Department of Fair Employment and Housing (DFEH) alleging she had been terminated based on race and gender discrimination and in retaliation for complaining about the show’s racial discrimination against African-American actors. She later amended her FEHA complaint to allege claims of racial and sexual harassment. After receiving a right-to-sue letter from the DFEH, Lyle sued several organizations and individuals involved in the production and writing of “Friends.” Her first amended complaint alleged causes of action under the FEHA for race and gender discrimination, racial and sexual harassment and retaliation for opposing racial discrimination against African-Americans in the casting of “Friends” episodes. The complaint also alleged common law causes of action for wrongful termination in violation of the public policies against racial and gender discrimination and retaliation for complaining about racial discrimination in violation of the FEHA. The trial court granted a defendants’ motions for summary judgment. As to Lyle’s causes of action under the FEHA the court ruled NBC and BKC were not Lyle’s employers and therefore not liable on any cause of action. Moreover, Lyle’s harassment claims were time barred, and in any event, she could not factually establish her claims of racial and gender discrimination, retaliation or harassment as to any defendant. As to Lyle’s common law causes of action for wrongful termination in violation of public policy, the trial court ruled Lyle could not establish defendants terminated her based on race or gender discrimination or in retaliation for her complaints about such discrimination against African-American actors. The court entered judgment for all defendants and awarded them costs. The court of appeal reversed in part, holding that as to most of the defendants, triable issues of fact existed as to whether the conduct at issue was sufficiently severe and pervasive to create a sexually hostile working environment. As to the remaining defendants, the court reversed the summary judgment on the causes of action for racial and sexual harassment in violation of the FEHA. The court found there was sufficient evidence from which a reasonable jury could find the writers’ room on “Friends” was a hostile or offensive work environment for a woman. The evidence in the record showed, in part, that Chase, Malins and Reich constantly engaged in discussions about anal and oral sex using explicit words, discussed their sexual exploits both real and fantasized, and commented on the sexual nature of the female actors on the show. Numerous court decisions have held evidence of misogynous, demeaning, offensive, obscene, sexually explicit and degrading words and conduct in the workplace is relevant to prove environmental sexual harassment. A jury could find the sexual conduct in this case particularly severe because Lyle was a captive audience, as she had to be in the writers’ room where most of the offensive conduct took place because of her job requirements. The defendants contended that even if the admitted language used by Chase, Malins and Reich might support liability for sexual harassment in other contexts, it did not support liability in this case because the writers of the show were required to have frank sexual discussions and tell colorful jokes and stories (and even make expressive gestures) as part of the creative process of developing story lines, dialogue, gags and jokes for each episode. Defendants maintained they were entitled to summary adjudication on Lyle’s cause of action for sexual harassment because, given the context of her employment, she could not establish she was subjected to a hostile working environment. The court found that the defendants’ theory of “creative necessity” had merit under the distinctive circumstances of this case, and defendants were entitled to pursue their theory at trial. The court found that defendants were not entitled to summary adjudication, however, because “context” is only one factor to be considered in determining the existence of a hostile working environment and because there were triable issues of fact as to whether defendants’ conduct was indeed necessary to the performance of their jobs. To the extent the defendants could establish the recounting of sexual exploits, real and imagined, the making of lewd gestures and the displaying of crude pictures denigrating women was within “the scope of necessary job performance” and not engaged in for purely personal gratification or out of meanness or bigotry or other personal motives, the defendants might be able to show their conduct should not be viewed as harassment. The court found that triable issues of fact existed as to whether the conduct of Chase, Malins and Reich was a necessary part of their work in producing scripts for “Friends.” The court also held that triable issues of fact existed as to whether Lyle suffered harassment “based on sex.” The court disagreed with defendants’ argument that Lyle could not prevail on her cause of action for sexual harassment in the workplace because she could not establish that “the harassment complained of was based on sex.” Finally, the court rejected a contention that, in order for Lyle to establish sexual harassment, she had to show the allegedly harassing conduct was directed at her personally. A woman may be the victim of sexual harassment if she is forced to work in an atmosphere of hostility or degradation of her gender. Salus v. San Diego County Employees Retirement Association Fourth District Court of Appeal March 11, 2004 Cash payments in lieu of accrued sick leave to former county employees could not be used in calculating retirement benefits. The Fourth Appellate District affirmed a judgment. The court held that cash payments in lieu of accrued sick leave to which county employees became entitled only after they left county service could not be used in calculating their retirement benefits. Larry Salus and others worked for the County of San Diego. The County offered these employees the chance to retire early. As part of the deal, the County agreed to pay the employees an amount equivalent to one-half of their accrued sick leave, payable only after the employers left County service. The County informed the employees that the sick leave payments would not be used in calculating the employees’ retirement benefits. The employees filed a petition for a writ of mandate, contending that the sick leave payments should have been included in their retirement benefits calculations. The trial court denied the petition. The court of appeal affirmed, holding that the trial court did not err in finding that the sick leave payments should not have been included in the calculation of the employees’ retirement benefits. The court pointed out that under the County Employees Retirement Law of 1937 (CERL), retirement benefits are calculated on the basis of a retired employee’s “final compensation.” The court further stated that final compensation under CERL must meet three criteria. It must be in the form of cash. It must be earned during a usual work period (as opposed to cash earned for overtime). Lastly, it must be earned before retirement, rather than at or after retirement. Because the payments at issue here were payments the employees became entitled to only after they retired, they did not meet the last of these three criteria: they were not payments earned prior to retirement. Because the sick leave payments were not final compensation, the employees were not entitled to have the payments included in the calculation of their retirement benefits. Mason v. Lake Dolores Group LLC Fourth District Court of Appeal April 9, 2004 Workers’ compensation exclusive remedy rule no bar to negligence action brought by water park employee for injuries sustained while using water slide after hours and without permission. The Fourth Appellate District reversed a judgment. The court held that the workers’ compensation exclusive remedy rule did not bar an action brought against a water park by a park employee who was injured when using a water slide after park hours and without his employer’s permission. James Mason was an employee at a water park owned by Lake Dolores Group LLC. Before clocking in for work one day, Mason asked a fellow employee to turn on the park’s water slide so he could go for a ride. The park was closed at the time and Mason did not have his employer’s permission to use the slide. Because the ride had been turned off before Mason used it, the pool at the bottom of the slide was not filled enough to cushion him when he landed. Mason hit a concrete barricade and was rendered paraplegic. He sued the park for his injuries, claiming negligence. The case went to trial before a jury, which found in favor of Mason. The trial court granted judgment notwithstanding the verdict in favor of the park, finding that Mason’s negligence action was barred by the workers’ compensation exclusive remedy rule. Mason appealed. The court of appeal reversed, holding that the trial court erred in finding that Mason’s negligence action was barred by the workers’ compensation exclusive remedy rule. Substantial evidence supported the jury’s finding that Mason was not acting in the course of his employment when he was injured. Thus, the workers’ compensation exclusive remedy rule did not bar Mason’s negligence action against the park. More specifically, Mason was not entitled to workers’ compensation benefits for his injuries because his injuries did not arise out of nor occur in the course of his employment. The evidence showed that Mason was not performing any task that was part of his job when he was injured. Further, his ride on the water slide directly contravened park policy forbidding employees from using the water slide other than during break times when the park was open. It could thus not be inferred, the court found, that Mason’s use of the slide was either beneficial to the park or reasonably contemplated by his employment. Salazar v. Diversified Paratransit Inc. Second District Court of Appeal March 30, 2004 Recent statutory amendment specifying that employer can be found liable for nonemployee’s sexual harassment of employee under Fair Employment and Housing Act was applicable to pending case. The Second Appellate District reversed a trial court judgment. The court held that the legislature’s recent passage of a bill, which specified an employer may be responsible for a nonemployee’s sexual harassment of an employee, is merely a clarification of the existing Fair Employment and Housing Act (FEHA), and thus is immediately applicable to a case already pending. Raquel Salazar, an employee of Diversified Paratransit Inc., repeatedly was subjected to sexual harassment by a client of Diversified. Salazar reported the conduct to Diversified. Diversified failed to take any corrective action. Three other female employees had also previously filed complaints regarding the same client. Salazar quit her job. Salazar sued Diversified and her former supervisor (collectively, Diversified). The trial court granted nonsuit in favor of Diversified on the ground FEHA does not protect an employee from sexual harassment by an employer’s client or customer. Salazar appealed. The court of appeal, in a 2-1 decision, upheld the trial court’s ruling (Salazar I). Salazar petitioned for California Supreme Court review. The petition was granted. Less than two months after the court of appeal’s decision in Salazar I, AB 76 was introduced in the Legislature. AB 76 proposed that FEHA expressly hold employers liable for sexual harassment of employees by “nonemployees,” provided the employer knew or should have known of the conduct and failed to take immediate and appropriate corrective action. AB 76 also declared its “intent … to construe and clarify the meaning and effect of existing law and to reject the interpretation given to the law in” Salazar I. The Legislature adopted AB 76. The Supreme Court transferred the matter back to the court of appeal for reconsideration in light of the new enactment. This time, the court of appeal reversed, holding that AB 76 was a clarification of existing law and thus applied retroactively to the case at issue. The California Supreme Court has found that a legislative amendment “which in effect construes and clarifies a prior statute must be accepted as the legislative declaration of the meaning of the original act, where the amendment was adopted soon after the controversy arose concerning the proper interpretation of the statute….” In this case, AB 76, abrogating Salazar, was introduced less than two months after the issuance of the court of appeal’s initial decision in this case. According to the high court, “[W]here a statute provides that it clarifies or declares existing law, �[i]t is obvious that such a provision is indicative of a legislative intent that the amendment apply to all existing causes of action from the date of its enactment.’” The appellate court found that, in adopting AB 76, the Legislature declared its intent to “clarify the meaning and effect of existing law and to reject the interpretation given to the law in Salazar.” Moreover, AB 76 was adopted swiftly after the controversy arose concerning the proper interpretation of � 12940. Therefore, it was appropriate to accept the Legislature’s declaration in AB 76 that rather than effecting a substantive change, it was merely clarifying � 12940. Further, as reflected in the differences of opinion expressed in Salazar with respect to the proper interpretation of section 12940, the statute was somewhat ambiguous and in need of clarification. On the one hand, the preamble to the 1984 amendment to � 12940 specifically referred to protecting employees from sexual harassment by an employer’s “clientele.” On the other hand, the legislative history leading up to the 1984 amendment provided support for a contrary, more restrictive, interpretation of � 12940. In part, a draft of the amendment stating that “Harassment of an employee or applicant by any person other than an agent or supervisor shall be unlawful ….” was modified by substituting “an employee” for the original language, “any person.” Obviously, there was an inconsistency between the preamble’s specific reference to protecting employees from sexual harassment by an employer’s “clientele” and the legislative history. The court of appeal concluded that AB 76 was nothing more than a clarification of � 12940. Thus, an employer may be held liable under the FEHA for sexual harassment by clients or customers. Because AB 76 was a clarification of � 12940, rather than a substantive change, it applied to the present case. Therefore, the matter had to be remanded to the trial court for further proceedings, guided by the Legislature’s clarification of the statute. Justice Kitching dissented, writing that AB 76 constituted a significant, substantive change in the law, expanding the scope of employer liability and the scope of a plaintiff’s cause of action against an employer for sexual harassment by its clients under the California Fair Employment and Housing Act. Thus, he concluded, AB 76 should only be applied prospectively.

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