Employment Law -- Sep 12, 2013

by Manatt, Phelps & Phillips, LLP

In This Issue:

Federal Agencies Respond to Supreme Court’s DOMA Ruling

In the wake of the U.S. Supreme Court’s decision to strike down part of the Defense of Marriage Act (“DOMA”), federal agencies are starting to respond with new policies and procedures.

The 5 to 4 opinion in U.S. v. Windsor held that Section 3 of DOMA, defining marriage as the union of one man and one woman, was unconstitutional. Now, roughly three months later, agencies are taking steps to comply with the ruling.

The Treasury Department and Internal Revenue Service released Ruling 2013-17, declaring that the IRS will look to the state of celebration to determine if a couple is validly married for all federal tax-related purposes. The ruling applies with equal measure to all federal tax considerations from income to gift and estate taxes, to personal and dependency exemptions, employee benefits and IRA contributions.

In addition, the ruling has retroactive effect. The three-year statute of limitations for filing a federal tax refund claim gives same-sex couples the chance for a “do-over” for tax years 2010, 2011 and 2012.

Employers are implicated by the ruling, which requires that as of September 16, all qualified employee benefit plans must treat same-sex spouses the same as opposite-sex spouses for all qualified plan purposes – such as survivor benefits, for example, regardless of whether the state itself recognizes same-sex marriage.

In addition to the IRS, several other federal agencies have taken steps to comply with the decision. Attorney General Eric Holder Jr. sent a letter to the Speaker of the House on September 4 stating that at the direction of President Obama, the Department of Justice will no longer enforce 38 U.S.C. Sections 101(3) and 101(31). The provisions covered veterans’ benefits and defined “spouse” as a “person of the opposite sex.” Same-sex spouses of veterans and some active duty or reserve members will now be eligible for benefits such as home loans and healthcare.

In August the Department of Labor issued an internal memorandum to update various documents, removing references to DOMA and making clear that spousal leave under the Family and Medical Leave Act is available to same-sex spouses in states that recognize same-sex marriage. Specifically, the definition of “spouse” in Fact Sheet #28F was updated to include “a husband or wife as defined or recognized under state law for purposes of marriage in the state where the employee resides, including . . . same-sex marriage.” Secretary Thomas Perez indicated to DOL staff members that the changes are “one of many steps the Department will be taking over the coming months” to implement the Windsor decision.

The Department of Defense followed suit, announcing that same-sex spouses of uniformed service members and DOD civilian employees will now be included in coverage as of September 3. As long as service members provide a valid marriage certificate, the DOD said benefits such as healthcare, housing allowance, and family separation allowance will be available as of the date of marriage or retroactive to June 26, the date of the Windsor decision. In addition, the Department said it intends to implement a policy allowing military personnel in a same-sex relationship to take non-chargeable leave for the purpose of travelling to a jurisdiction where a valid same-sex marriage can occur.

“This will provide accelerated access to the full range of benefits offered to married military couples throughout the department, and help level the playing field between opposite-sex and same-sex couples seeking to be married,” the Department announced.

To read the IRS ruling, click here

To read the DOL’s updated Fact Sheet #28F, click here

To read the DOD’s announcement, click here

Why it matters: The changes adopted by various federal agencies are a clear victory for same-sex married couples, who will now be eligible for a broad range of federal benefits. For employers located in states that recognize same-sex marriage – i.e., California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington and Washington, D.C. – minor adjustments may be necessary. Employers located in the 37 other states should get busy to comply with the guidance and deadlines set by the IRS and the DOL and be prepared to make more changes as the agencies continue to update their policies.

California Employers Must Show Bad Faith to Get Attorney’s Fees in Wage Suits

Pursuant to a new law signed into effect by Governor Jerry Brown in late August, employers that prevail in suits alleging nonpayment of wages, benefits, or pension contributions must show bad faith before they can recover attorney’s fees and costs in the state of California.

Existing law allowed a court to award “reasonable attorney’s fees and costs” to the prevailing party upon request at the initiation of the action. Now, Labor Code Section 218.5, which applies to actions for nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions, requires a higher standard for employers.

S.B. 462, which passed both the state Assembly and House by significant majorities, does not set a similar standard for employees in such suits. According to Sen. Bill Monning (D-Carmel), the bill’s sponsor, the law “corrects an historic injustice that allowed employers to collect attorney’s fees if they prevailed in a wage claim case, [and the] impact of this policy was to discourage and deter workers from pursuing wages they had rightfully earned.”

Sen. Monning also said state law on the issue was unclear in the wake of a 2012 decision from the California Supreme Court in Kirby v. Immoos Fire Protection Inc., 53 Cal.4th 1244. The Kirby case involved the issue of meal and rest break claims where the employer prevailed. But the court said the claims did not fall within the scope of “nonpayment of other wages” and therefore denied an award of attorney’s fees to the employer, which Sen. Monning argued left open the standard for attorney’s fees in such actions. He also pointed to the Fair Employment and Housing Act, which requires that a suit be “objectively frivolous, unreasonable, or without foundation” in order for a defendant employer to recover attorney’s fees. S.B. 462 would therefore align the two standards, he said.

The new law had the backing of the California Employment Lawyers Association, which claimed that the prior ability of employers to seek attorney’s fees had a chilling effect on plaintiffs considering wage claims. Because the amount available to a plaintiff may be small, the group argued that fear of losing and having to pay a former employer scared many employees from protecting their rights.

Opponents – such as the California Chamber of Commerce, the California Grocers Association, and the California Manufacturers & Technology Association – countered that the bill would result in frivolous litigation and would disrupt the balance of a two-sided attorney’s fees provision. Bad faith is also a difficult standard to prove, the groups argued.

The law will take effect January 1, 2014.

To read the new law, click here

Why it matters: Practically speaking, the new law will make it extremely difficult for employers to recover attorney’s fees despite successfully fending off an employee’s wage suit. The term “bad faith” is not defined in the statute, and how courts will interpret it remains to be seen, but employers hoping to recover attorney’s fees likely face an uphill battle to establish that an employee’s suit was frivolous or unreasonable.

PAGA Claims Cannot Be Aggregated, Ninth Circuit Rules

A plaintiff’s claims of labor code violations brought pursuant to the California Private Attorneys General Act (“PAGA”) may not be aggregated to meet the $75,000 threshold for removal to federal court, the Ninth U.S. Circuit Court of Appeals has ruled.

Pursuant to PAGA, if the Labor and Workforce Development Agency declines to investigate or issue a citation to an employer for an alleged violation of the California Labor Code, an employee may commence a civil action “on behalf of himself or herself and other current or former employees” against the employer.

The dispute began when former Orkin worker John Urbino filed a representative PAGA action. Although he was classified as a nonexempt, hourly paid employee, he claimed that Orkin illegally deprived him – and other nonexempt employees – of meal periods, overtime and vacation wages, and accurate itemized wage statements.

Georgia-based Orkin removed the case to California federal court based on diversity jurisdiction. Although Urbino’s claim amounted to just $11,602.40, Orkin argued that the potential claims of an estimated 811 other employees implicated by the PAGA claims amounted to $405,000 with possible penalties under the state labor code of more than $9 million – well over the jurisdictional threshold.

But calling it “a quintessential California dispute,” the Ninth Circuit sent the case back to state court.

The claims of class members can only be aggregated when they “unite to enforce a single title or right in which they have a common and undivided interest,” the court said, looking to “the source of plaintiffs’ claims.”

Unfortunately for Orkin, the Urbino plaintiffs did not derive their rights from a group status that was common and undivided, the federal appellate panel determined. Simply having questions of fact and law common to the group does not suffice.

“Aggrieved employees have a host of claims available to them – e.g., wage and hour, discrimination, interference with pension and health coverage – to vindicate their employers’ breaches of California Labor Code,” the majority wrote. “But all of these rights are held individually. Each employee suffers a unique injury – an injury that can be redressed without the involvement of other employees.”

Orkin’s obligation to the employees was not as a group but as individuals, and therefore their potential claims could not be aggregated for purposes of diversity jurisdiction, the court concluded.

Emphasizing the unique nature of a PAGA claim, Orkin argued that Urbino was really not asserting his own unique interest but the state’s collective interest, standing in the stead of the labor department. But the court said it was “unpersuaded” by the argument, as the state is not a citizen for diversity purposes.

A dissenting opinion tracked Orkin’s argument, emphasizing that Urbino’s suit asserted claims designed to protect the public, not to benefit himself or other private parties. A successful PAGA plaintiff does not win damages, but receives 25 percent of the civil penalties recovered with the remaining 75 percent going to the labor department, the dissent noted. “As such, PAGA plaintiffs do not represent ‘separate and distinct’ claims subject to the anti-aggregation rule,” the dissent stated, analogizing to a plaintiff in a shareholder derivative suit suing as proxy for an injured corporation.

To read the decision in Urbino v. Orkin Services, click here.

Why it matters: The Ninth Circuit decision will limit the ability of employers to remove PAGA suits to federal court but does provide some clarity on the standard for when claims under the statute may be aggregated. Under the Ninth Circuit’s reasoning, simply filing a PAGA suit does not create a common and undivided interest sufficient to aggregate the claims of the potential plaintiffs; instead, the court will look to the source of the plaintiff’s claims to determine if they are separate and distinct – like the court’s finding in Urbino – or function as a group, making it possible to aggregate them.

Kentucky Court: Morbidly Obese Employee Disabled, Discrimination Suit Can Go Forward

A five-foot four-inch female weighing 425 pounds established that her morbid obesity constituted a disability pursuant to Kentucky law, the state’s appellate court recently ruled, allowing her discrimination suit to continue.

Melissa Pennington was fired after 10 years working as a Wagner’s Pharmacy food truck operator. On one of her days off, she stopped by the office to pick up her paycheck, and as the court noted, “she was not at her best appearance,” being in the process of moving. Soon after, the manager who gave her the paycheck instructed Pennington’s supervisor to terminate her due to “personal appearance.” Pennington submitted affidavits from coworkers that the manager said her firing was due to being “overweight and dirty.”

Pennington filed suit alleging unlawful discrimination based on her disability of morbid obesity. A trial court granted Wagner’s motion for summary judgment, relying on the employer’s assertion that Pennington was fired for low sales.

But the unanimous appellate court reversed. Kentucky’s discrimination statute tracks the Americans with Disabilities Act, the court said, looking to the federal statute for guidance. As the parties did not dispute that Pennington was qualified to perform her job or that her termination constituted an adverse employment action, the court focused on just one requirement of the plaintiff’s prima facie case: whether or not she was disabled according to statute.

Based upon the deposition of a doctor familiar with morbid obesity submitted by Pennington, the court said her obesity met the statutory definition of disability because it was caused by an underlying physiological condition. The exact cause varies from patient to patient, but the doctor “reiterated that ‘morbid obesity like [Pennington’s] is caused by a cluster of often unknown physiological abnormalities and that morbid obesity like hers is in itself an abnormal physical condition or disease.’ ”

This testimony was sufficient to find that Pennington’s condition had an underlying physiological cause, the panel said.

The plaintiff’s impairment has resulted in diabetes and sleep apnea, affecting multiple body systems. Sleep apnea is a condition causing difficulty breathing during sleep, and there “is no dispute that breathing is a major life activity,” the court said. In addition, “caring for oneself” is also a major life activity, which the plaintiff’s doctor testified “is difficult for patients with morbid obesity. He also said that a simple activity such as tying one’s shoes is complicated and difficult due to the condition.”

Concluding that Pennington had sufficiently set forth a prima facie case of discrimination, the court said Wagner’s had also failed to provide a nondiscriminatory reason for her termination.

Although the supervisor was instructed to fire Pennington based upon her “personal appearance,” the court said this was a “nonspecific reason…just as likely to be discriminatory as nondiscriminatory.”

“In this case, the record does not reflect that Pennington was ever given any reason concerning what aspect of her personal appearance was the basis of her dismissal at the time of her termination,” the court wrote. “Throughout her ten years of employment, Wagner’s had never complained about her performance or asked her to change anything about her appearance. It is reasonable to take judicial notice of the fact that morbid obesity is very likely the most obvious and noteworthy aspect of one’s physical appearance.”

A resolution of the issue was “wholly within the purview of a jury,” the court concluded.

To read the decision in Pennington v. Wagner’s Pharmacy, click here.

Why it matters: Finding that the plaintiff established a prima facie claim of disability discrimination based upon her morbid obesity tracks growing recognition by courts of similar claims. Earlier this summer, the American Medical Association declared obesity to be a disease, upgrading it from a condition, potentially providing more support for plaintiffs alleging a violation of discrimination laws. Coupled with a growing number of jurisdictions – six cities and one state, Michigan – prohibiting discrimination based upon physical appearance or obesity, employers should be prepared to be on the receiving end of a similar suit, particularly with an estimated one-third of American adults classified as obese (according to the AMA).

Federal Court Tosses EEOC Suit Over Background Checks

A federal judge had harsh words for the Equal Employment Opportunity Commission while dismissing the agency’s suit against an employer for its policy of conducting background checks.

Last year, the EEOC issued guidance to employers about the use of background checks, cautioning that the agency was keeping a close eye on the issue. Multiple suits followed, including two highly publicized cases filed in June, alleging that employers violated Title VII because the background checks had a disparate impact on African-American employees and were therefore an unlawful employment practice.

But in ruling on a third suit making similar allegations filed by the agency, U.S. District Court Judge Robert W. Titus cast serious doubt about the agency’s theory of liability and expressed concern about employers faced with the choice of hiring a potential criminal or conducting a check and facing a lawsuit from the EEOC.

“By bringing actions of this nature, the EEOC has placed many employers in the ‘Hobson’s choice’ of ignoring criminal history and credit background, thus exposing themselves to potential liability for criminal and fraudulent acts committed by employees, on the one hand, or incurring the wrath of the EEOC for having utilized information deemed fundamental by most employers,” he wrote.

The case involved Freeman Decorating Services, a national provider of integrated services for expositions, conventions, corporate events, meetings, and exhibit programs. Having experienced problems with workplace violence, embezzlement, and theft, the company began conducting background checks in 2001. The type of check varied depending on the nature of the job. Those applying for a general position underwent a criminal investigation, while applicants seeking a “credit sensitive” position also faced a credit history review. Applicants were informed of the checks and signed an authorization form.

Freeman had a multistep evaluation process for reviewing the results of the checks, from comparing results to the application to evaluate truthfulness to a look at outstanding arrest warrants, followed by an individualized review of any criminal convictions. The company relied upon few bright-line rules, the court noted, and had a specific list of issues of concern, such as violence and job-related misdemeanors.

Significantly, the EEOC did not challenge any of the specific criteria or procedures used in the defendant’s process. Instead, the agency alleged that the company engaged in a pattern or practice of discrimination against African-American job applicants by using poor credit history as a hiring criterion and against African-American, Hispanic, and male job applicants by using criminal history as a hiring criterion. Because the hiring criteria had a significant disparate impact on the identified suspect classes, the agency said they constituted an unlawful employment practice under Title VII.

But, criticizing the statistical evidence presented by the agency, the Maryland federal judge said that it failed to carry its burden to plead a case of disparate impact, granting summary judgment for the employer. Judge Titus found the EEOC’s expert report unreliable, with “such a plethora of errors and analytical fallacies” that it was insufficient to support a finding of disparate impact. From cherry-picking applicants to be included in the sample to including applicants outside the time period identified in the agency’s claims, the “mind-boggling number of errors” rendered the report worthless, the court concluded.

Even if the report had been relevant, the court said the EEOC’s claims would fail because the agency did not identify the specific policy or policies causing the alleged disparate impact. Merely pointing to statistical disparities does not suffice, and if the policy has multiple levels of procedures, the plaintiff must isolate a specific and discrete element that results in the discriminatory outcome. “[I]t is simply not enough to demonstrate that criminal history or credit information has been used,” the court said. “Rather, a disparate impact case must be carefully focused on a specific practice with an evidentiary foundation showing that it has a disparate impact because of a prohibited factor.”

“Something more, far more, than what is relied upon by the EEOC in this case must be utilized to justify a disparate impact claim based upon criminal history and credit checks,” Judge Titus wrote. “To require less, would be to condemn the use of common sense, and this is simply not what the discrimination laws of this country require.”

To read the opinion in EEOC v. Freeman, click here.

Why it matters: The court ruling is a significant victory for employers, with Judge Titus’ explicit statement about the “Hobson’s choice” facing companies in light of the EEOC’s suits challenging background checks recognizing the practical realities facing employers. “Careful and appropriate use of criminal history information is an important, and in many cases, essential, part of the employment process of employers throughout the United States,” Judge Titus acknowledged. “As Freeman points out, even the EEOC conducts criminal background investigations as a condition of employment for all employees, and conducts credit background checks on approximately 90 percent of its positions.” The decision also reiterates the need to establish a multifaceted review policy that includes an individualized review of the applicant. Judge Titus noted that Freeman’s evaluation process – with multiple levels of review, including an individualized assessment – was reasonable on its face and suitably tailored to its purpose of ensuring an honest workforce.

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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