New Year, New Laws?

Last year around this time we reviewed several pieces of legislation which California’s then-governor Arnold Schwarzenegger had vetoed, claiming that the proposed laws were “anti-business,” or that they exposed California employers to frivolous lawsuits.  In 2011, the Legislature passed many of the same measures, with high hopes that our new governor would sign them into law.  Here is a review of some of the proposed laws that would affect the entrepreneurial community, and what happened to them when they reached the Governor’s desk.

(A summary of all new California employment laws, prepared by the California Department of Industrial Relations, can be found here.)

Overruling “Chavez The reality of employment law cases in California is that many if not most of them are for such low dollar values that few lawyers would ordinarily be willing to handle them.  So why are there so many lawsuits filed by disgruntled employees against their former (or even current) employers?  Simply put, California law — unlike the laws of most states — allows plaintiffs in most employment cases to recover their attorneys’ fees if they win the case.  This provides major incentives to plaintiffs’ employment lawyers to file such cases, with the result that many employment lawsuits result in small awards to the plaintiff, followed by enormous awards of attorneys’ fees to the plaintiff’s lawyer (to be paid, of course, by the employer who lost the case).  Fear of a large attorneys’ fee award is what drives many employers to pay sizeable settlements for what they consider to be frivolous lawsuits.

Last year we reported that the California Supreme Court had held that prevailing plaintiffs in employment law cases can be denied recovery of all attorneys’ fees and costs of suit, if their verdict amount was for less than $25,000.  The case in question was Chavez v. City of Los Angeles (2010) 47 Cal.4th 970.  Because the Chavez case involved interpretation of statutes, and not the Constitution, California legislators retained the ability to essentially “overrule” the decision by amending the law.  And amend they did (or tried to do), by passing a bill to make it mandatory for judges to award attorneys’ fees, even for low dollar verdicts won by employees.  But in 2010, Governor Schwarzenegger vetoed the bill, reasoning that it would have increased costs for employers in a time of recession.  Overruling Chavez then became a top priority for the plaintiff-side employment bar; we wrote last year that we “[e]xpect to see this law cross the governor’s desk again in 2011.”

Sure enough, the Legislature did indeed send the same proposal — the “Equal Access to Justice Act” (AB 559) — to Governor Jerry Brown.  But the Governor rejected it, as had his predecessor.  In his veto message, Governor Brown maintained that the Supreme Court “got it right” in theChavez case, because judges “are in the best position to decide whether to award or deny fees in these instances.”

Reaction to the veto was predictable.  A tort reform group, the Civil Justice Association of California, applauded the veto, calling the bill “one of the more egregious proposals this year backed by plaintiffs’ attorneys.”  Meanwhile, the bill’s sponsor expressed disappointment, and vowed to “revisit these issues with the Governor next year.”

We will keep you posted if and when this measure is revived in 2012.

No Mandatory Bereavement Leave — The Legislature also attempted to require employers to provide up to four days of unpaid bereavement leave after the death of a close family member.  Bereavement leave is not specifically covered by the federal Family and Medical Leave Act (FMLA), but may be available if, for example, a serious health condition (such as clinical depression) is caused by the family member’s death.  The FMLA only applies to companies with 50 or more employees.

Governor Brown vetoed the bereavement leave proposal (AB 325), stating that the vast majority of businesses already provide for bereavement leave, but that a mandatory leave rule would “add a more far reaching private right to sue than is contained in related statutes.”

Forum Selection/Choice of Law Clauses — Many employees work in California for large national or international companies that are headquartered outside of California.  These employees are often subject to arbitration clauses that prevent them from suing their employers in court.  These contract clauses will typically set the arbitration’s location wherever the company is headquartered, and will require the law of that state to be applied in the arbitration. Because California law is more “employee-friendly” than the laws of most other states, these contract provisions are significant in controlling costs for employers, and in harmonizing the rules that apply to workforces located in several different states.

Assembly Bill 267 would have invalidated these so-called “forum selection” and “choice of law” clauses in arbitration agreements for employees who perform work in California.  Governor Brown vetoed the bill, arguing that “imposing this burden could deter out of state companies from hiring Californians — something we can ill afford at this time of high unemployment.”

Limits on Use of Credit Reports — In 2010 Governor Schwarzenegger vetoed Assembly Bill 482, which would have virtually eliminated an employer’s ability to use credit reports for employment reasons, including as part of the pre-hire screening process.  But the proposal was revived and signed into law last year by Governor Brown.
Starting this year, employers may not use credit reports for applicants or employees, with limited exceptions (for example, jobs with the California Department of Justice, law enforcement-related jobs, jobs at certain financial institutions, and managerial jobs).  Even where the law allows employers to use credit reports, advance notice must be given to the applicant or employee, who can then choose to receive a free copy of the report.  If the employer uses the credit report for an adverse employment decision, the applicant or employee must be informed of that fact, together with the name and address of the credit reporting agency.

Independent Contractors — Many companies use independent contractors to minimize tax and insurance costs; but the practice is illegal if the “contractors” should really be classified as “W-2” employees.  The difference between the two is not a bright line rule, but in cases of doubt the government will presume the person in question is an employee, who will therefore be subject to payroll taxes, worker’s compensation coverage, and other requirements. (Click here for a discussion of the relevant legal issues on independent contractors vs. employees, appearing on the webpage of the California Department of Industrial Relations.)

SB 459, signed into law with an effective date of January 1, 2012, creates stiff new penalties — ranging from $5000 to $25,000 per violation — for willful misclassification of employees as independent contractors.  Additionally, an errant employer may be ordered to display a public notice of the violation — even on the employer’s website.  Among other things, the notice must state that the employer has committed a “serious violation of the law.”  Forcing employers to stand in a pillory at the public square is intended to bring about quicker compliance than costly and time-consuming litigation.

Another part of the law — which had been vetoed by Governor Schwarzenegger in 2008 — imposes joint and several liability on individuals who, for money or other consideration, knowingly advise an employer to treat
“W-2” employees as independent contractors.  This part of the law seems intended to target accountants and business consultants, since lawyers are excluded from the reach of the statute.

Summary.  This issue of The Entrepreneurial Counselor is meant to cover only some of the employment-related measures passed by the Legislature last year.  For a review of the laws that were in fact enacted for 2012, please click here.