Employment Law - January 2017

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

In This Issue:
  • California: On-Duty, On-Call Rest Periods Violate State Law
  • SEC Continues Crackdown on Severance Agreements
  • OK to Decrease Commissions Based on Negative Growth, Seventh Circuit Affirms
  • New EEOC Document Discusses Mental Health Conditions
  • Employers Halt On-Call Scheduling After AGs Send Letters

California: On-Duty, On-Call Rest Periods Violate State Law

Why it matters

Ruling in a closely watched case, the California Supreme Court declared that on-duty and on-call rest periods violate state law. "During required rest periods, employers must relieve their employees of all duties and relinquish any control over how employees spend their break time," the court wrote. The dispute began when security guards at ABM Security Services sued their employer for failing to provide rest periods as mandated by state law because the workers were required to keep their pagers and radio phones on and respond to calls during their rest periods. A $90 million award by the trial court was reversed by an appellate panel, and the state's highest court agreed to consider whether employers must permit their employees to take off-duty rest periods and whether employers may require workers to remain on call during rest periods. Finding on-call rest periods impermissible, the court said employers must provide employees with off-duty rest periods where they are relieved of all duties. "[O]ne cannot square the practice of compelling employees to remain at the ready, tethered by time and policy to particular locations or communications devices, with the requirement to relieve employees of all work duties and employer control during 10-minute rest periods," the court concluded.

Detailed discussion

Several security guards at ABM Security Services filed suit against their employer, alleging that the company failed to provide the rest periods employees are entitled to receive under California state law. Because ABM required the guards to keep their pagers and radio phones on and to remain vigilant and responsive to calls when needs arose, the guards never truly received a break, they argued.

The employer countered that if it required anything at all during rest periods, it was merely that the workers remain on call just in case an incident required a response. ABM also offered evidence that guards regularly took breaks uninterrupted by service calls. But a trial court granted summary judgment in favor of the plaintiffs, reasoning that a rest period subject to such control was indistinguishable from the rest of a workday, awarding approximately $90 million in statutory damages, interest, and penalties.

An appellate panel reversed, holding that state law does not require employers to provide off-duty rest periods and that simply being on call did not constitute performing work.

The California Supreme Court then granted review to address two related issues: whether employers are required to permit their employees to take off-duty rest periods under Labor Code Section 226.7 and Industrial Welfare Commission (IWC) Wage Order No. 4-2001 and whether employers may require their employees to remain "on call" during rest periods.

The conclusion: "[S]tate law prohibits on-duty and on-call rest periods," the court wrote. "During required rest periods, employers must relieve their employees of all duties and relinquish any control over how employees spend their break time."

In 1932, the IWC started requiring employers to give employees rest periods, the court noted, and since then, even as the agency has revised its wage orders, "the rest period obligation remained unchanged." Looking to the language of Wage Order 4 itself, the court said the reference to a "rest period" evoked "quite plainly, a period of rest," which "in this context [conveys] the opposite of work."

This reading is the most consistent with Section 226.7, the court added. "We have explained that during meal periods, employers must 'relieve the employee of all duty and relinquish any control over the employee and how he or she spends the time,' " the California Supreme Court wrote. "It would be difficult to cast aside section 226.7's parallel treatment of meal periods and rest periods and conclude that employers had completely distinct obligations when providing meal and rest periods."

The absence of any language authorizing on-duty rest periods spoke louder than language prohibiting it, the court said, because an employee forced to take on-duty rest periods essentially performs free work for the employer, receiving the same amount of compensation that he or she would have if permitted to take an off-duty rest period.

The court then determined that employers cannot satisfy this obligation by requiring employees to remain on call during the rest period.

"[O]ne cannot square the practice of compelling employees to remain at the ready, tethered by time and policy to particular locations or communications devices, with the requirement to relieve employees of all work duties and employer control during 10-minute rest periods," the court said. "[A] rest period means an interval of time free from labor, work, or any other employment-related duties. And employees must not only be relieved of work duties, but also be freed from employer control over how they spend their time. Given the practical realities of rest periods, an employer cannot satisfy its obligations under Wage Order 4 … while requiring that employees remain on call."

The court tried to downplay the impact of its decision, writing that nothing "in our holding circumscribes an employer's ability to reasonably reschedule a rest period when the need arises," or to pay employees premium pay to work during the rest period. "A rest period, in short, must be a period of rest," the court said.

A concurring and a dissenting opinion agreed that employers must provide off-duty rest periods pursuant to Wage Order 4-2001 but argued that "a bare requirement" to carry a communications device in case of emergency did not constitute "work." Instead, courts should consider on-call policies on a case-by-case basis, Justice Leondra Kruger (joined by Justice Carol Corrigan) suggested, to see whether they actually interfere with employees' ability to use their rest periods as periods of rest.

To read the opinion in Augustus v. ABM Security Services, click here.

SEC Continues Crackdown on Severance Agreements

Why it matters

Continuing its crackdown on severance agreements that purportedly limit whistleblower rights, the Securities and Exchange Commission (SEC) announced two new settlements. Virginia-based NeuStar Inc. included an overly broad nondisparagement clause forbidding former employees from engaging with the SEC and other regulators "in any communication that disparages, denigrates, maligns or impugns" the company, the agency said, with employees compelled to forfeit all but $100 of their severance pay for breaching the clause. The company agreed to pay a $180,000 penalty to settle charges that it violated the agency's whistleblower protection rule. In a second case, SandRidge Energy Inc. will pay $1.4 million after the SEC accused the employer of continuing to use restrictive language in its separation agreements after the whistleblower rule took effect in August 2011 and firing an internal whistleblower who raised concerns about public reports of oil and gas reserves. The actions provide an important reminder to employers, Jane Norberg, Chief of the SEC's Office of the Whistleblower, said in a statement, as they demonstrate "our continued strong enforcement of this critically important whistleblower protection rule and underscore our ongoing commitment to ensuring that potential whistleblowers can freely communicate with the SEC about possible securities law violations."

Detailed discussion

The Dodd-Frank Wall Street Reform and Consumer Protection Act established a whistleblower program for the financial services industries overseen by the Securities and Exchange Commission (SEC) in 2010.

Regulations promulgated by the agency prohibit companies from interfering with or restricting employees from reporting potential violations to the agency. Rule 21F-17 makes it a separate violation of law to "take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement."

Over the last few years, the SEC has taken several actions to enforce the rule, including two recently announced settlements.

Virginia-based NeuStar, Inc. began using a broad nondisparagement clause in its severance agreements in 2008, pursuant to which departing employees agreed "not to engage in any communication that disparages, denigrates, maligns or impugns" NeuStar and its various employees to regulators, including the SEC. Employees were compelled to forfeit all but $100 of any severance compensation in the event of such a breach. At least 246 employees signed agreements containing such language, the agency alleged. Further, although the Commission was unaware of any instances in which NeuStar took steps to enforce the nondisparagement clause, at least one former employee was impeded by the clause from reaching out to the SEC.

To settle the charges, NeuStar agreed to revise its severance agreement to remove any reference to "regulators" and replace it with language affirmatively advising former employees of their right to contact regulators with concerns about potential legal or regulatory violations. The nondisparagement clause now reads: "In addition, nothing herein prohibits me from communicating, without notice to or approval by NeuStar, with any federal government agency about a potential violation of a federal law or regulation."

NeuStar also promised to make reasonable efforts to contact former employees who signed a severance agreement with the challenged language to provide them with a statement that the company does not prohibit former employees from communicating their concerns with the SEC. The company will pay a civil money penalty of $180,000.

In the second case, the agency accused SandRidge Energy, Inc. of Oklahoma of similarly violating Rule 21F-17 by using separation agreements that prohibited voluntary, direct communication with the Commission after the rule took effect in August 2011 until April 2015.

The company used a "Future Activities" provision that stated a former employee could not "voluntarily contact or participate with any governmental agency in connection with any complaint or investigation pertaining to the Company." The agreement's "Confidential Information" and "Preserving Name and Reputation" clauses also imposed improper requirements on former employees, the SEC said.

Several employees requested that the problematic language be modified when they received the agreements, and SandRidge did modify the language when requested. However, approximately 546 former employees signed separation agreements that contained all or some of the relevant provisions, the SEC said.

"The potential for its officers and employees to communicate with the Commission was not merely a hypothetical concern for SandRidge," the agency wrote in its cease and desist order. "Many of the violative separation agreements were in place, and a large number of agreements were executed, at times when SandRidge was subject to investigation by the Commission."

The company also engaged in whistleblower retaliation against one employee responsible for oversight of reservoir engineers of the company's drilling program. After the whistleblower repeatedly raised concerns about the company's process in calculating oil and gas reserves—triggering an internal audit that was never completed—senior management terminated him for being "disruptive," electing to replace him with someone "who could do the work without creating all of the internal strife."

Pursuant to its agreement with the SEC, SandRidge agreed to cease and desist from violations of Rule 21F-17 and pay $1.4 million. The action was the first time the agency charged a company for retaliating against an internal whistleblower, noted Chief of the SEC's Office of the Whistleblower Jane Norberg. "Whistleblowers who step forward and raise concerns internally to their companies about potential securities law violations should be protected from retaliation regardless of whether they have filed a complaint with the SEC," she said in a statement.

To read the order in In the Matter of NeuStar, Inc., click here.

To read the order in In the Matter of SandRidge Energy, Inc., click here.

OK to Decrease Commissions Based on Negative Growth, Seventh Circuit Affirms

Why it matters

Interpreting California and New York law, the Seventh Circuit Court of Appeals ruled that negative sales growth is a permissible way to decrease an employee's commissions. A pair of sales reps sued Medline Industries, Inc. over the employer's method of calculating commissions, which included year-to-year sales declines as a factor. The plaintiffs argued that instead of being reduced, their commissions should be zeroed out for such years, especially because the decline could be due to factors outside their control. But the federal appellate panel sided with the employer, finding that Medline's calculation was "a valid means of incentivizing their salespeople to grow business year over year in their assigned territories" pursuant to both California and New York law, where the two plaintiffs were located. The parties had contractually agreed Medline "could use both the carrot and the stick in promoting growth," the court noted, affirming summary judgment for the employer.

Detailed discussion

David Cohan and Susan Schardt worked as sales representatives for Medline Industries, a national manufacturer and distributor of healthcare supplies, in New York and California, respectively. Both received a base salary as well as commissions on sales of products to accounts within their assigned territory pursuant to the terms of written employment agreements.

Medline calculated commissions by starting with the salesperson's invoiced sales for the current month and subtracting their sales from the same month in the prior year. Depending on whether the salesperson sold more or less than in the year prior, that calculation could result in a positive or negative sales growth number. Medline then multiplied the salesperson's growth or decline by a commission percentage. The calculation always included all of the sales rep's business, including accounts with positive and negative sales growth.

Cohan and Schardt filed a putative class action against their employer, claiming that Medline's practice of accounting for year-to-year sales declines in calculating and paying commissions was impermissible under the terms of their employment agreements and state wage laws. Employees should simply not have earned commissions when they failed to grow sales year over year, the plaintiffs contended, with negative growth zeroed out. A district court judge disagreed, granting Medline's motion for summary judgment. A panel of the Seventh Circuit Court of Appeals affirmed.

The court rejected the plaintiffs' argument that the term "negative growth" is an oxymoron inconsistent with the plain language of the employment agreements and that the term "growth" should have been interpreted in the light most favorable to them at the summary judgment stage. The compensation plans provided by Medline as part of the employment agreements "clearly and unambiguously" explained how commissions were to be calculated and the positive examples used did not mean negative growth was not included, the panel said.

As for state law, the Seventh Circuit found that Medline's accounting for negative growth was not a deduction from earned commissions—which would have run afoul of both California and New York law—but "rather the contracted-to means of calculating commissions."

New York's highest court has held that state law does not bar employers from structuring payment arrangements that include a "downward adjustment" in calculating commissions, the panel said, while California courts "have long recognized, and enforced, commission plans agreed to between employer and employee, applying fundamental contract principles to determine whether a salesperson has, or has not, earned a commission."

The court considered the plaintiffs' position that Medline's commission structure violated state law because it impermissibly recouped business losses from sales reps even when the losses are outside employees' control, such as natural disasters or if sales had already been in decline before the employee was assigned to the territory. But "the agreement between the parties specifies that commissions are earned in the first instance based on sales growth, including negative growth," the panel wrote. Moreover, the employment agreement also provided for the flip side: sales representatives received commissions from sales in their territory "irrespective" of whether they made the sale—meaning they could earn money even where they didn't make a sale.

Affirming summary judgment for Medline, the Seventh Circuit concluded the employer's commission calculation was "a valid means of incentivizing their salespeople to grow business year over year in their assigned territories."

To read the decision in Cohan v. Medline Industries, Inc., click here.

New EEOC Document Discusses Mental Health Conditions

Why it matters

The Equal Employment Opportunity Commission (EEOC) published a new resource document, "Depression, PTSD, & Other Mental Health Conditions in the Workplace: Your Legal Rights," explaining the rights afforded to employees with mental health conditions pursuant to the Americans with Disabilities Act (ADA). In addition to outlining the protection against discrimination and retaliation for job applicants and employees with mental health conditions, the document also discusses reasonable accommodations, or "work adjustments that can help individuals to perform their jobs and remain employed." The agency described types of accommodations, restrictions on employer access to medical information, and confidentiality. Charges of discrimination based on mental health conditions are on the rise, the EEOC said, with the agency resolving almost 5,000 charges and recovering roughly $20 million for workers during fiscal year 2016.

Detailed discussion

With discrimination and retaliation claims based on mental health conditions on the rise, the Equal Employment Opportunity Commission (EEOC) published a new resource document on the topic. "Depression, PTSD, & Other Mental Health Conditions in the Workplace: Your Legal Rights" explored the protections for workers suffering from a mental health condition available under the Americans with Disabilities Act (ADA).

The agency set forth three primary forms of protection for workers: a shield against discrimination and harassment, the existence of workplace privacy rights, and the right to obtain reasonable accommodations. Discrimination can occur in a variety of forms, the EEOC said, from termination, rejection for a job or an internal promotion, or forcing a worker to take leave.

First, employers do not have to hire or keep people in jobs if they can't perform the work or if they pose a "direct threat" to safety, defined by the agency as "a significant risk of substantial harm to self or others." But employers cannot "rely on myths or stereotypes" about mental health conditions and must have objective evidence that an employee cannot perform job duties or creates a safety risk—even with a reasonable accommodation—before taking negative action.

Second, as for employee privacy, a worker's condition can remain private in most situations. Employers are permitted to ask medical questions in four situations, however: (1) when a worker requests a reasonable accommodation; (2) after a job offer has been made but before employment begins so long as everyone entering the same job category is asked the same questions; (3) when engaging in affirmative action for people with disabilities; and (4) on the job, when objective evidence exists that an employee may be unable to perform job duties or poses a safety risk.

Finally, reasonable accommodations—such as altered break and work schedules, quiet office space, or permission to work from home—are available for mental health conditions "that would, if left untreated, 'substantially limit' your ability to concentrate, interact with others, communicate, eat, sleep, care for yourself, regulate your thoughts or emotions, or do any other 'major life activity,' " the EEOC explained.

A condition does not have to be permanent or severe, and conditions including major depression, post-traumatic stress disorder, bipolar disorder, schizophrenia, and obsessive-compulsive disorder "should easily qualify," the agency said.

To obtain a reasonable accommodation, ask for one at any time, the EEOC instructed, suggesting that "it is generally better to get a reasonable accommodation before any problems occur or become worse." Employees do not need to have a particular accommodation in mind but can ask for something specific.

Employers are allowed to ask for an accommodation request in writing, a description of the condition and how it impacts the job, as well as a letter from a healthcare provider documenting the condition. Unless the accommodation involves significant difficulty or expense, employers must provide it, the agency wrote, although the employer may make a selection among choices if more than one accommodation would work.

If an employee still can't perform all the essential functions of a job to normal standards and has no paid leave available, he or she may still be entitled to unpaid leave as a reasonable accommodation, the EEOC said, "if that leave will help [the employee] get to a point where [he or she] can perform those functions." Workers also have the option of asking their employer to be reassigned to a different position as a reasonable accommodation.

Finally, the resource document noted that the ADA prohibits harassment and advised employees to follow their employer's reporting procedures in order to stop the problem.

"Many people with common mental health conditions have important protections under the ADA," EEOC Chair Jenny R. Yang said in a statement. "Employers, job applicants, and employees should know that mental health conditions are no different than physical health conditions under the law. In our recent outreach to veterans who have returned home with service-connected disabilities, we have seen the need to raise awareness about these issues. This resource document aims to clarify the protections that the ADA affords employees."

To read the EEOC document, click here.

Employers Halt On-Call Scheduling After AGs Send Letters

Why it matters

More employers have agreed to halt the practice of "on-call scheduling" after receiving warning letters from a coalition of state Attorneys General. Led by New York Attorney General Eric T. Schneiderman, the AGs of seven other states and the District of Columbia sent missives to 15 national retailers arguing the practice—where employees call their employer an hour or two before a scheduled shift to see if they will work that day—"take[s] a toll on employees," resulting in "higher incidences of adverse health effects, overall stress, and strain on family life." Six of the recipients agreed to stop the practice, Schneiderman announced, which will impact an estimated 50,000 employees nationwide. Four of those companies also promised to provide work schedules at least one week in advance to workers. The other nine employers responded that they either did not use the practice or had already stopped it. The focus on the practice began in 2015, when both regulators and employees challenged on-call scheduling in investigations and class actions.

Detailed discussion

In 2015, New York Attorney General Eric T. Schneiderman launched a campaign against the practice of "on-call scheduling," expressing concern about the impact of such a practice on the workforce. After sending a series of letters to employers operating in the state, Schneiderman announced that several retailers—including Abercrombie & Fitch, Gap, J.Crew, Urban Outfitters, and Pier 1 Imports—agreed to halt the use of such scheduling, which requires employees to call their employer, typically a few hours before their shift, to confirm whether they will be working that day.

Joined by the Attorneys General of California, Connecticut, the District of Columbia, Illinois, Maryland, Massachusetts, Minnesota, and Rhode Island, Schneiderman sent another round of letters to national retailers last April.

"Unpredictable work schedules take a toll on employees," the AGs wrote. "Without the security of a definite work schedule, workers who must be 'on call' have difficulty making reliable childcare and elder-care arrangements, encounter obstacles in pursuing an education, and in general experience higher incidences of adverse health effects, overall stress, and strain on family life than workers who enjoy the stability of knowing their schedules reasonably in advance."

The letter was triggered by these concerns as well as the fact that certain states have laws regarding reporting or call-in pay laws, the AGs added. For example, New York has a "call-in pay" regulation that provides: "An employee who by request or permission of the employer reports for work on any day shall be paid for at least four hours, or the number of hours in the regularly scheduled shift, whichever is less, at the basic minimum hourly wage."

Of the 15 recipients, 9 (American Eagle, BCBG Max Azria, Coach, Forever 21, Justice: Just for Girls, Payless, Tilly's, Inc., Uniqlo, and Vans) replied that they either did not engage in on-call scheduling or recently stopped the practice. Six more promised to stop, an agreement that will impact an estimated 50,000 employees nationwide, Schneiderman said. In addition, four of the companies also committed to providing their workers with schedules at least one week in advance of the workweek.

"On-call shifts are not a business necessity and should be a thing of the past," Schneiderman said in a statement. "People should not have to keep the day open, arrange for child care, and give up other opportunities without being compensated for their time. I am pleased that these companies have stepped up to the plate and agreed to stop using this unfair method of scheduling."

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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