Employment Law

Deferred Vacation Policy Lawful, California Appellate Court Rules

Why it matters

A vacation policy that employees do not begin to earn vacation time until after their first year of employment is lawful, the California Court of Appeal has ruled, affirming dismissal of a former employee’s lawsuit. When Nathan Minnick left his job at Automotive Creations Inc. after six months, he was not paid any vacation wages in his final paycheck. He filed suit, alleging that the employer’s vacation policy requiring employees to work for a full year before accruing vacation days violated state law, which mandates that employers compensate employees for vested unused vacation time at the termination of the employment relationship. A trial court sustained the employer’s demurrer without leave to amend, and the appellate panel affirmed. While California state law requires employers to compensate employees for vested vacation time, employers may lawfully adopt a policy providing that employees do not earn vacation time for a specific period at the beginning of their employment, the panel explained. Therefore, because Minnick’s employment ended during his first year—before any vacation time vested due to Automotive Creation’s lawful policy—the plaintiff was not owed any vacation wages.

Detailed discussion

When Nathan Minnick began working for Automotive Creations Inc. in June 2014, the company had a vacation policy in place that provided employees would begin to accrue vacation benefits after the end of their first year of work. Specifically, the policy stated:

“In order that we all have the same understanding regarding vacation accrual, eligibility, use and payout, as well as sick days and paid holidays, I wanted to clarify [the] policy regarding each of these.

“All employees earn 1 week of vacation after completion of one year service and a maximum of two weeks’ vacation after two years of service. This means that after you have completed your first anniversary with the company, you are entitled to take one week of paid vacation, and after the completion of two years service, you will accrue two weeks paid vacation per year. This does not mean that you earn or accrue 1/12th of one week’s vacation accrual each month during your first year. You must complete one year of service with the company to be entitled to one week vacation.”

Minnick worked for the company for roughly six months. Consistent with the policy, he did not receive any vacation wages in his final paycheck because he had been employed for less than one year. He then sued for recovery of his vacation wages. He claimed Automotive Creations violated California law requiring an employer to compensate employees for vested unused vacation time at the termination of the employment relationship.

The employer demurred, arguing that its vacation policy was lawful and that it unambiguously stated that no vacation time is earned during the first year of employment, relying on Owen v. Macy’s Inc., a 2009 decision from the California Court of Appeal. A trial court judge sustained the demurrer without leave to amend, and the appellate court affirmed.

Section 227.3 of the California Labor Code requires employers to pay all vested vacation as wages upon termination. Interpreting this statute in 1982, the California Supreme Court held that once vested, the right to vacation pay is protected and may not be forfeited.

“Thus, although California law does not require an employer to provide its employees with any paid vacation, if an employer chooses to include paid vacation as a portion of the employee’s compensation, the employer is not free to reclaim it after it has been earned,” the panel explained.

More recently, the Owen court considered whether the rule against vested vacation pay forfeiture prohibits an employer from establishing a policy that an employee does not accrue vacation rights until he or she has worked for a specific period. In that case, the employee handbook imposed a six-month waiting period before new employees could begin to earn vacation time.

Although the Owen plaintiff argued that state law requires that an employee be credited with vacation time starting from the very first day of employment, the court disagreed, holding that the employer’s policy legitimately prohibited new employees from earning any amount of vacation for the first six months and, therefore, there was no unlawful forfeiture.

Applying these cases to the Automotive Creations policy, the panel found Minnick’s challenge to be legally unsupported as the precedent neither requires that an employer provide vacation pay vesting on day one of employment nor prohibits employers from imposing a waiting period.

“As Minnick concedes, an employer may lawfully decide it will not provide paid vacation,” the panel wrote. “By logical extension, an employer can properly decide it will provide paid vacation after a specified waiting period. This is similar to an employer’s authority to limit the amount of vacation pay that may be earned. If employers can lawfully restrict vacation accrual at the back end, it follows that employers can lawfully impose a waiting period at the front end.”

The plaintiff argued that the employer was attempting to “contract around” the rule against forfeiture of wages, but the court disagreed, holding that an employer does not contract around the forfeiture prohibition by providing that an employee does not begin to earn vacation pay until a certain date.

Nor did the court find merit in Minnick’s contention that the policy was ambiguous because it could be construed to mean that completing the first year was a condition to obtaining pay for the vested vacation benefit. “This interpretation of the policy language is not reasonable,” the panel wrote. “Viewed in a commonsense and reasonable manner, the policy language reasonably informs employees that their vacation accrual begins after the completion of their first year.”

Similarly, the policy could not be read that an employee receives the one-week vacation benefit as a vested benefit at the beginning of the second year, the court added. “An employer has the authority to ‘front-load’ the vacation benefit, permitting the employee to take a one week paid vacation during the second year, even before it is fully vested, but to provide that if the employee were to leave before the end of the second year, he or she would be entitled to only a pro rata share (the vested portion) of the benefit,” the court said. “An employer’s decision to do so does not provide evidence that it is requiring the forfeiture of vested vacation benefits.”

Finding that the opportunity to amend would not cure Minnick’s complaint, the appellate panel affirmed demurrer.

To read the opinion in Minnick v. Automotive Creations, Inc., click here.

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New I-9 Form Mandatory Come September

Why it matters

What do employers need to know about the new I-9 form? U.S. Citizenship and Immigration Services (USCIS) published the revised form in July, offering a few tweaks on the prior version. Most important, employers may begin using the new form now or continue to use the current form through Sept. 17, 2017. As of Sept. 18, however, use of the new I-9 form is mandatory. Changes to the form’s instructions include the new name of the Office of Special Counsel for Immigration-Related Unfair Employment Practices, now referred to as the Immigrant and Employee Rights Section. In addition, the instructions in Section 2 have been modified. As for the list of acceptable documents, USCIS added the consular Report of Birth Abroad as a List C document, while all the certifications of report of birth issued by the Department of State have been combined. As a result, the List C documents have also been renumbered, with the exception of the Social Security card, which remains #1.

Detailed discussion

Time for a change: U.S. Citizenship and Immigration Services (USCIS) has published a new edition of the I-9 Employment Eligibility Verification form, dated 07/17/17 N. While employers may continue to use the current form (dated 11/14/16 N) through Sept. 17, 2017, use of the new form will become mandatory on Sept. 18. The current storage and retention rules for previously completed I-9 forms remain in effect.

Used by employers to verify the identity and employment authorization of citizens and noncitizens, an I-9 form must be properly completed for each individual hired, with employees attesting to their employment authorization by presenting acceptable documents as evidence of their identity.

The updates impact both the form itself and the list of supporting documentation that can be provided by employees.

On the form itself, the revised I-9 noted the change in name from the Office of Special Counsel for Immigration-Related Unfair Employment Practices to the Immigrant and Employee Rights Section. Section 2 of the form was tweaked to now read: “Employers or their authorized representative must complete and sign Section 2 within 3 business days of the employee’s first day of employment.”

The list of acceptable documents in List C also saw some changes. The Consular Report of Birth Abroad (Form FS-240) was added, while all the certifications of report of birth issued by the Department of State (Form FS-545, Form DS-1350 and Form FS0240) were combined. As a result, all the List C documents were renumbered, with the exception of the Social Security card, which remained at the top spot.

To view the new I-9 form, click here.

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Back to the Drawing Board for White Collar Exemption

Why it matters

The Department of Labor (DOL) has released a request for information (RFI) on the white collar exemption to the Fair Labor Standards Act’s (FLSA) overtime rule, seeking input on how to update the exemption. Under the Obama administration, the agency released a final rule—originally set to take effect Dec. 1, 2016—that would have raised the salary floor to $913 per week, or $47,476 annually. The rule faced multiple lawsuits, with one of the cases still pending before the U.S. Court of Appeals, Fifth Circuit. Instead of changing the final rule, the DOL took an additional step back with the RFI, characterizing it as “an opportunity for the public to provide information that will aid the department in formulating a proposal to revise these regulations.” Specifically, the agency asked for comments on whether the salary level set by the final rule effectively identifies employees who may be exempt or whether a different salary level would be more appropriate or effective, as well as if a test for exemption that relies solely on the duties performed by the employee (without regard to salary) would be preferable to the current test. Comments will be accepted until Sept. 25.

Detailed discussion

In May 2016, the Department of Labor (DOL) published the final regulations updating the so-called white collar exemptions to the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA).

Pursuant to the final rule, the agency increased the minimum salary threshold from $455 per week (or $23,660 per year) to $913 per week (or $47,476 per year), equal to the 40th percentile of weekly earnings for full-time salaried workers working in the lowest-wage census region.

But before the final rule could take effect as scheduled on Dec. 1, 2016, a coalition of 21 states filed suit, seeking a preliminary injunction. After reviewing the history of the FLSA and the white collar exemption, a federal court judge granted the motion. The DOL appealed to the U.S. Court of Appeals, Fifth Circuit, where the case remains pending.

With the change in administration, the DOL adopted the position that while the Secretary of Labor has the authority to establish a salary level test, the DOL has elected not to advocate for the specific salary level set in the final rule, electing instead to undertake further rulemaking to determine what the salary level should be.

To that end, the DOL issued a request for information (RFI), opting not to jump into a notice of proposed rulemaking (NPRM) yet. “The Department believes that gathering public input on the questions below will greatly aid in the development of an NPRM and help us move forward with rulemaking in a timely manner,” according to the RFI.

The DOL recognized stakeholder concern that the standard salary level in the final rule was too high and inappropriately excluded from exemption too many workers who pass the standard duties test.

“The Department invites comments on the 2016 revisions to the white collar exemption regulations, including whether the standard salary level set in that rule effectively identifies employees who may be exempt, whether a different salary level would more appropriately identify such employees, the basis for setting a different salary level, and why a different salary level would be more appropriate or effective,” the DOL said.

More specifically, the RFI wondered if updating the 2004 salary level for inflation would be an appropriate basis for setting the standard salary level and, if so, what measure of inflation should be used. The DOL questioned whether use of the 2004 salary level would require changes to the standard duties test and, if so, what changes would be necessary.

Alternatively, the DOL queried whether the regulations should contain multiple standard salary levels and how such a system would be set—by size of employer, census region, census division, state, metropolitan statistical area or some other method. Maybe the DOL should set different standard salary levels for the executive, administrative and professional exemptions as it did prior to 2004, the RFI suggested, questioning what the impact would be if it switched back to this model.

The DOL asked for input on which methodology works best with the standard duties test—the short test salary level, the long test salary level or some other option—and whether the standard salary level set in the final rule would work effectively with the standard duties test or whether it eclipsed the role of the duties test in determining exemption status.

The RFI asked what kind of preparations employers undertook in preparation for the 2016 effective date of the final rule, such as increasing the salaries of exempt employees to retain their exempt status or converting worker pay from salary to hourly wages, and also wondered what the impact of these changes has been.

Would a test for exemption that relies solely on the duties performed by the employee without regard to the amount of salary paid by the employer be preferable to the current standard test? The DOL also requested that stakeholders weigh in on whether the salary level in the final rule excluded from exemption particular occupations that have traditionally been covered by the exemption.

For the first time, the final rule permitted nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level. Is this an appropriate limit, the RFI questioned, or should the regulations feature a different percentage cap?

Finally, the DOL asked for discussion on the highly compensated employee exemption, including whether there should be multiple total annual compensation levels (and if so, how they should be set) and if this standard salary level should be automatically updated on a periodic basis (and what mechanism should be used).

Comments will be accepted for 60 days.

To read the RFI, click here.

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Fifth Circuit Reverses NLRB on Handbook Provisions—With Exception

Why it matters

Primarily siding with T-Mobile, the U.S. Court of Appeals, Fifth Circuit reversed several findings of the National Labor Relations Board (NLRB) with regard to policies found in the company’s employee handbook. Several union members filed charges with the NLRB in 2014, and an administrative law judge (ALJ) ruled that more than a dozen policies in the handbook ran afoul of the National Labor Relations Act (NLRA). T-Mobile appealed four of the stricken provisions, including one prohibiting all photography and audio or video recording on-site by employees. The NLRB said all four of the provisions violated employees’ rights, but the federal appellate panel reversed with respect to three of the provisions, emphasizing that “context matters.” For example, one provision encouraging employees to “maintain a positive work environment” did not violate the statute, as it merely advocated for a positive workplace, the court said. The panel did find fault with the recording policy, however, as it could be read as “plainly forbidding a means of engaging in protected activity,” enforcing the NLRB’s order with regard to just the one provision.

Detailed discussion

Based on charges filed by the Communication Workers of America, the National Labor Relations Board (NLRB) brought a complaint against T-Mobile in 2014, alleging that several of the provisions in the company’s employee handbook violated the National Labor Relations Act (NLRA).

An administrative law judge (ALJ) held that more than a dozen policies violated the statute. T-Mobile appealed with respect to four provisions: the workplace conduct policy (providing that all employees should behave in “a professional manner” and are expected to “maintain a positive work environment”), the commitment-to-integrity policy (which sets forth a list of examples of “unacceptable” acts, including arguing or fighting with coworkers), the recording policy (which prohibited the recording of “people or confidential information using cameras, camera phones/devices, or recording devices (audio or video) in the workplace”), and the acceptable use policy (banning the access or transfer of certain information without T-Mobile’s authorization).

The NLRB determined that all four of the provisions violated the NLRA, ordering T-Mobile to cease and desist from using the policies, distribute a revised handbook, and notify employees of the changes.

T-Mobile appealed. Analyzing each of the provisions in turn, the U.S. Court of Appeals, Fifth Circuit agreed with the employer that three of the policies were lawful, although the panel affirmed that the recording policy violated the NLRA.

Considering the workplace conduct policy, the court said a reasonable employee would not read the language as discouraging protected activity, including candid, potentially contentious discussions of unionizing.

“To a ‘reasonable employee,’ context matters in the interpretation of these rules,” the court said. “A reasonable employee of T-Mobile would interpret the policy as requiring professional manners, positive work environment, effective and courteous communications, getting along with everybody, common sense, and people skills. The reasonable T-Mobile employee would understand the rule to express a universally accepted guide for conduct in a reasonable workplace.”

The NLRB had evaluated how a reasonable employee could interpret the policy, the court said, when it should have relied upon its own precedent to consider how a reasonable employee would interpret the policy.

Similarly, the commitment-to-integrity policy would not be read by T-Mobile workers as infringing on their rights, the panel said. “[A] reasonable employee would be fully capable of engaging in debate over union activity or working conditions, even vigorous or heated debate, without inappropriately ‘arguing or fighting,’ ‘failing to treat others with respect,’ or ‘failing to demonstrate appropriate teamwork,’” the court wrote.

As for the acceptable use policy, the panel said the NLRB disregarded the context in which the policy was meant to be read and understood. The provision includes a section on “Scope,” which states that the policy “applies to all non-public T-Mobile information.”

“Where a company policy prohibits the disclosure of non-public information, courts presume that a reasonable employee would not construe the policy to prohibit the disclosure of information that may be properly used in protected activity, such as wage and benefit information, so long as the policy does not explicitly state that it encompasses such information,” the court explained.

Because T-Mobile’s policy applies only to “the sort of proprietary business information that an employer may properly restrict its employees from sharing outside of the company,” a reasonable worker would not believe that the provision includes protected wage and benefit information, the court said.

The panel declined to enforce the NLRB’s order as to all three policies.

However, the court then turned to the recording policy, expressing concern with the “broad reach” of the provision. “This ban is, by its own terms alone, stated so broadly that a reasonable employee, generally aware of employee rights, would interpret it to discourage protected concerted activity, such as even an off-duty employee photographing a wage schedule posted on a corporate bulletin board,” the panel wrote.

T-Mobile’s argument that it had legitimate business interests to maintain individual privacy and protect confidential information did not persuade the court, as the operative language of the policy prohibited Section 7 activity on its face. Unlike the other three provisions, “a reasonable T-Mobile employee, aware of his legal rights, would read the language of the recording policy as plainly forbidding a means of engaging in protected activity,” the court concluded, affirming the NLRB’s order with respect to this policy.

To read the opinion in T-Mobile USA v. National Labor Relations Board, click here.

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Arbitrator Should Decide Whether Agreement Prohibits Class Claims

Why it matters

An arbitrator—and not the court—should decide if an arbitration agreement between an employer and a former employee prohibits class claims, a California appellate panel recently ruled. Erik Papke initiated arbitration proceedings against his former employer, alleging violations of state and federal wage laws. Network Capital responded with a declaratory judgment action, asking the court to declare that pursuant to the arbitration agreement signed by Papke in 2011, he could not pursue a class effort and must individually arbitrate his claims. A trial court judge agreed, but the appellate panel reversed, analogizing to the California Supreme Court’s decision in Sandquist v. Lebo Automotive. “Based on the striking similarities between the arbitration agreement Papke signed with Network Capital and the arbitration agreements in Sandquist, the California Supreme Court’s analysis in Sandquist applies with equal force here and compels us to conclude the arbitrator must decide the class arbitration question in this case,” the court wrote.

Detailed discussion

Erik Papke began working for Network Capital Funding Corp. in October 2011, when he signed the “Employment Acknowledgment and Agreement.” The agreement contained a binding arbitration agreement, wherein Papke agreed to “resolve all disputes that may arise out of or be related to my employment in any way.”

In June 2013, Papke initiated arbitration proceedings against Network Capital by serving a demand for class arbitration. He alleged wage and hour claims under the Labor Code and Unfair Competition Law, later amending his demand to add a representative claim under the Private Attorneys General Act.

Network Capital informed Papke that the arbitration agreement did not authorize class arbitration and told him that the trial court needed to resolve any disagreement over the availability of class arbitration—not the arbitrator. Papke disagreed.

The employer then sought a judicial declaration that it was the court’s responsibility to decide whether the arbitration agreement authorized class arbitration and, further, that the agreement prohibited class arbitration. Siding with Network Capital, the trial court said the issue of whether the agreement permits class arbitration was for the court and then held that the agreement required Papke to proceed as an individual.

Initially, the appellate panel affirmed and Papke appealed to the California Supreme Court. However, the state’s highest court held the case pending its decision in Sandquist v. Lebo Automotive, then under consideration.

In that case, the California Supreme Court concluded that no universal rule exists allocating the decision of whether the parties’ arbitration agreement authorizes class arbitration to the court or to the arbitrator. Instead, the allocation of that decision is a matter of agreement between the parties, and each case turns on whom the parties assigned that decision to under the terms of their contract.

The state’s highest court then remanded the instant dispute to the appellate panel, which changed course and reversed the trial court, finding that the language of the agreement signed by Papke closely tracked the agreement in Sandquist.

“[W]e conclude the arbitration agreement between Papke and Network is strikingly similar to the arbitration agreements at issue in Sandquist, and therefore the Supreme Court’s reasoning compels the conclusion the arbitration agreement here allocated to the arbitrator the decision whether Papke and Network Capital agreed to class arbitration,” the court said.

For example, the arbitration agreements in Sandquist required arbitration of “any claim, dispute, and/or controversy,” while the agreement Papke signed applied to “any claim, dispute, and/or controversy that either [Papke] may have against [Network Capital]” or vice versa.

In addition, the Sandquist agreements applied to all claims “arising from, related to, or having any relationship or connection whatsoever with [the employee] seeking employment with, employment by, or other association with the [employer],” and Papke’s agreement governed “all disputes that may arise out of or be related to [Papke’s] employment in any way.”

Both of the employees signed form contracts that were drafted by the employer and imposed on the employee as a condition of his employment, and the agreements made similar exceptions for claims arising under the National Labor Relations Act brought before the National Labor Relations Board as well as claims for medical and disability benefits under the California Workers’ Compensation Act.

“Given these similarities, we see no basis for distinguishing Sandquist and concluding the Arbitration Agreement allocates the Class Arbitration Question to the court, not the arbitrator,” the panel wrote.

Network Capital attempted without success to distinguish Papke’s agreement from those in Sandquist, pointing out that the agreement used the singular possessive “my” to limit claims arising out of Papke’s employment only. The agreement in Sandquist also used the term “my,” the court said. “Moreover, class claims that Papke alleges as a class representative necessarily arise out of or relate to his employment because he cannot allege or pursue the claims unless he, as an individual, has claims that are typical of the class.”

As a result of the conclusion that the arbitrator should decide whether the parties agreed to class arbitration, the panel did not reach the issue of whether Papke and Network Capital actually agreed to class arbitration, remanding with directions for the trial court to grant Papke’s motion to compel arbitration.

To read the opinion in Network Capital Funding Corporation v. Papke, click here.

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