California Supreme Court Issues Three Key Decisions
with Bad News/Good News for California Employers
or Employers with California Operations

9/19/2007

The California Supreme Court recently issued three decisions of which employers should be aware. The three decisions are a “mixed bag” for employers, with the California Supreme Court delivering both “bad news” and “good news.” Importantly, and perhaps portending an ever-changing environment for California employers, the Court was split, 4-3, in each of these cases. First, the “bad news.”

Gentry v. Superior Court

On August 30, 2007, the California Supreme Court issued its decision in Gentry v. Superior Court regarding the enforceability of class action waivers in employment arbitration agreements.  In a 4-3 opinion, the California Supreme Court, while stopping short of applying a “bright-line” rule banning all class action arbitration waivers in employment contracts, ruled that class action waivers may be unenforceable even if an arbitration agreement itself is not procedurally unconscionable as a whole.

The Court held that "at least in some cases, the prohibition of classwide relief would undermine the vindication of the employees' unwaivable statutory rights and would pose a serious obstacle to the enforcement of the state's overtime laws." In determining whether a class action waiver is valid where it is "alleged that the employer systematically has denied proper overtime pay," a trial judge now must apply the following four-pronged test: "(1) the modest size of the potential individual recovery; (2) the potential for retaliation against members of the class; (3) the fact that absent members of the class may be ill informed about their rights; and (4) other real world obstacles to the vindication of class members' right to overtime pay through individual arbitration." The opinion does not explain its reference to "other real world obstacles"; employers may expect this language to be used by the plaintiffs’ bar to argue that every class action waiver should be invalidated.

After applying these factors, if the trial judge determines that "a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer's violations, it must invalidate the class arbitration waiver."

Shifting away from the “unconscionability” doctrine, the Court relied on public policy in reaching its decision: “Class arbitration waivers cannot, consistent with the strong public policy behind [the overtime statute], be used to weaken or undermine the private enforcement of overtime pay legislation by placing formidable practical obstacles in the way of employees' prosecution of those claims."

In addition, the Court also found that the agreement’s 30 day opt-out provision "did not represent an authentic informed choice," and, therefore, could not act as a safe harbor for unconscionability.

While the decision provides no effective relief for employers facing an onslaught of employee class actions, the Court refused to declare all arbitration agreements with class action waivers as unconscionable per se. Indeed, employers may argue that the opinion is limited to the enforcement of class action waivers as applied only to overtime claims, given that the opinion repeatedly focuses its analysis on the public policies underlying overtime legislation in reaching its conclusions.

Now, the “good news”:

Prachasaisoradej v. Ralph's Grocery Company, Inc.

On August 23, 2007, the California Supreme Court issued another divided decision, in this case one that is favorable to California employers.  In another four to three decision, the Court approved a bonus plan using a net profit calculation. The court held that an employer may offer bonuses over and above regular wages based on a profit calculation which takes into account such items as operating losses, workers’ compensation costs, tort claims and other business expenses beyond the employees’ control. The Court stated that an employer does not "violate California wage-protection laws by providing...supplementary compensation designed to reward employees, over and above their regular wages, if and when their collective efforts produced a positive financial result for the store where they worked."

The Court rejected the argument that the bonus program shifted the costs of doing business to employees, noting that "after fully absorbing the expenses at issue, [the employer] simply determined what remained as profits to share with its eligible employees in addition to their normal wages."

Thus, California employers may offer profit-based bonus plans, above and beyond regular wages, that are calculated on the costs of doing business.

Green v. State of California

In another piece of good news for employers, on August 23, 2007, the California Supreme Court issued yet another 4-3 decision in Green v. State of California. Overruling a Court of Appeal's decision which had ruled that, in a disability discrimination case, the employer bears the burden of establishing that the plaintiff is not qualified to perform the job, the Supreme Court held that it is the plaintiff's burden to establish that he or she is qualified as part of his or her prima facie case. The employer does not have to prove affirmatively that plaintiff was unqualified to avoid liability.

Under the Supreme Court’s decision, "a plaintiff must demonstrate that he or she was qualified for the position sought or held in the sense that he or she is able to perform the essential duties of the position with or without reasonable accommodation." Only after the plaintiff has made this showing does the burden shift to the employer to articulate a legitimate, non-discriminatory reason for its actions.

Additional Information

Should you have any questions about these decisions and their impact on you, please contact your Dykema employment law attorney or John L. Viola at 213-457-1747 or jviola@dykema.com or Jeffrey Deane at 213-457-1823 or jdeane@dykema.com.