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Over the course of the last decade, employment cases have increasingly turned into bet-the-company lawsuits with millions (and sometimes tens of millions) of dollars at issue. Plaintiffs have hit employers with a tidal wave of wage-and-hour class action cases attacking exemptions from overtime, meal period practices, wage deductions, commission plans, language on employment applications and a host of other issues. Big-ticket harassment claims continue to be filed, particularly involving the executive ranks where stock options and other big money damages appeal to plaintiffs’ counsel. While there is little an in-house legal department can do to kill off all such claims, the low- or no-cost ideas discussed in this column will allow employers to identify, correct and prevent the practices that can lead to this kind of enormously expensive litigation. After bleeding the retail industry dry with thousands of class action lawsuits attacking whether store managers are properly classified as exempt under California’s tough exemption criteria, plaintiffs’ counsel have moved to other industries and pay practices. Recent cases have attacked the exempt criteria of planners, quality control engineers, software engineers, accountants and others. It is a rare California employer that is not at some risk in the overtime exemption area. Many employers continue to classify as exempt administrative employees who do not come close to meeting any exemption requirements, managers who cannot meet the requisite independent judgment and discretion tests, and IT employees who fail to meet California’s rigorous salary requirements (currently more than $94,000 annually). For most employers, it is high time to conduct an audit to determine what positions, if any, are misclassified. This process should be performed carefully and with the advantage of attorney-client privilege protections, particularly because of the problems it may reveal. And that’s the easy part. The more difficult task is restructuring the non-compliant positions as non-exempt, which should be done only after careful consideration and with expert legal advice. 2. Review other wage-and-hour practices The California Labor Code is filled with traps for the unwary. Do you deduct for half-day absences for exempt employees? Doing so may cause the labor commissioner to assert that those employees have lost the exemption for that pay period. Do you allow employees to take six months of their accrued sick leave to care for family members who are sick? Do you ensure that your non-exempt employees take meal periods in a timely and regular fashion? Can employees take time off to participate in activities at their children’s school or to deal with problems involving domestic violence? Do you allow employees to take time off to serve as volunteer firefighters, witnesses in judicial proceedings or to vote? (See Labor Code sections 233, 226.7, 201 and 230.) If you fail to comply with these and other requirements, you are opening your company up to representative or class lawsuits. The liability for such lawsuits — and thus the incentives to file them — has been increased by the penalties provided by Private Attorney General Act (California Labor Code sec. 2699), which was signed into law in the last days of Gov. Gray Davis’ administration. 3. Emphasize your anti-harassment policy and train the troops Few things are as messy and disruptive as sexual harassment claims in the executive ranks. In the Ellerth/ Faragher cases, the U.S. Supreme Court held that an affirmative defense may exist for employers in a sexual harassment action if they can show that (1) they exercised reasonable care to prevent and correct sexual harassment and (2) the employee unreasonably failed to take advantage of such preventive or corrective opportunities. Although the California Supreme court undercut the Ellerth/ Faragher affirmative defense in State Department of Health Services v. Superior Court ( McGinnis), 31 Cal. 4th 1026 (2003), the affirmative defense still provides some limited protections on damages. In the McGinnis case, the state Supreme Court concluded that the affirmative defense would reduce damages that a harassed employee would be able to recover but not bar liability as Ellerth/ Faragher provides. Nonetheless, the Ellerth/ Faragher affirmative defense may still lessen liability exposure in California (and thus increase the chance of settlement, often a key objective). In any case, juries expect employers to police their environments and are swift to punish companies that fail to take reasonable steps to protect employees from harassment. Accordingly, to protect against harassment claims: � Review your anti-harassment policy and ensure that it complies with applicable law. Make sure the policy properly prohibits unlawful conduct, provides alternative complaint channels (but not too many of them) and does not discourage complaints, for example, by implying that there can be negative repercussions for doing so. � Reissue your anti-harassment policy with a cover memo from senior management that emphasizes its importance. � Train your workforce. Government Code section 12950.1. which takes effect on Jan. 1, 2006, will require employers with at least 50 employees to provide training for supervisory employees. � Deal with harassment complaints promptly and take effective action. Seek outside help when dealing with harassment allegations at the most senior level to ensure that your investigation is both perceived to be and actually is objective. 4. Fix your employment applications California laws contain many tricky prohibitions when it comes to job application forms. Do you ask about arrest records? If you ask about criminal convictions, do you allow employees the option of not including convictions for marijuana-related offenses? Do you inquire about marital status, age, disabilities or national origin? Be careful before smugly answering no. The California Department of Fair Employment and Housing takes a very broad view of these prohibitions, which means that your forms may include inadvertent violations. For example, do you request a list of organizations to which the applicant belongs, without specifying that the applicant may omit those that reflect race, religious creed, color, national origin? Also on the prohibited list: questions that seek the date of high school completion or military service (responses can determine the applicant’s age); maiden name (that could demonstrate national origin or ethnicity); and virtually any other inquiry that would point toward membership in a protected classification. 5. Review your bonus plans Under the category of “no good deed goes unpunished” that so often applies to California law, bonus plans recently came under attack in a Court of Appeal ruling that plans applying to exempt employees cannot include calculations for workers’ compensation losses (which yours probably does). The court, in Ralphs Grocery Company v. Superior Court, 112 Cal. App. 4th 1090 (2003), also held that bonus plans applicable to non-exempt employees cannot include deductions for losses not attributable to employee misconduct such as theft, breakage and the like. Because many bonus plans are based on profitability and include, either implicitly or explicitly, calculations from revenue for certain costs such as workers’ compensation, you should examine yours quickly and make any necessary adjustments. The bottom line? Even a modest amount of attention to the issues discussed above can be instrumental in warding off class and representative actions or at least mitigating their size and potential value. Consider investing that effort now. Your litigation budget will thank you. Lynne C. Hermle is a partner at Orrick, Herrington & Sutcliffe, where she heads the firm’s Silicon Valley employment group.

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