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Clean-Up Legislation for California’s New Paid Sick Leave Law is Forthcoming in Early July

Posted in Legislation

Breaking-News1.jpgThis post was authored by Gage Dungy and Stephanie Lowe

INTRODUCTION

The California Assembly recently passed Assembly Bill 304—clean-up legislation for California’s new Healthy Workplaces, Healthy Families Act of 2014 (“Paid Sick Leave Law” or “AB 1522”) on June 22, 2015, with bipartisan support by a vote of 69-0.  The bill is now currently pending in the California Senate awaiting passage before being sent to Governor Brown for his signature.  AB 304 is designated as an “urgency” bill, which means that it will go into effect immediately upon Governor Brown’s signature.  Every indication is that AB 304 will pass in the Senate and that Governor Brown will sign it into law.

Unfortunately, due to legislative procedures in the Senate, AB 304 will most likely not be passed before the July 1, 2015 effective date of the new Paid Sick Leave Law.  Rather it is anticipated that bill will be passed and sent to Governor Brown at some point before the Legislature’s Summer Recess on July 17, 2015.

Despite this slight delay, we still think it is important to provide a summary of the changes that we anticipate AB 304 will make to the Paid Sick Leave Law based on the current bill text while many employers are preparing for the implementation of the Paid Sick Leave Law on July 1, 2015.

SUMMARY OF AB 304 AMENDMENTS TO THE PAID SICK LEAVE LAW

Based on its current amendments, AB 304 will amend the Paid Sick Leave Law as follows if passed by the Senate and signed into law by Governor Brown as expected:

  • Public Agency Retired Annuitants Are Excluded From the Definition of “Employee” (Labor Code section 245.5(a))

AB 304 will expressly exclude CalPERS and ’37 Act retired annuitants from being eligible to receive paid sick leave.  Previously, it was unclear whether the Public Employees’ Pension Reform Act of 2013 (“PEPRA”) prohibitions that precluded retired annuitants from receiving fringe benefits such as paid sick leave preempted such sick leave benefits provided by the Paid Sick Leave Law.  With AB 304 adding in this express exclusion for retired annuitants, employers will be able to confidently exclude retired annuitants from the benefits of the Paid Sick Leave law once it becomes law.

Keep in mind that between July 1, 2015, and the expected passage and signing into law of AB 304 at some point in early to mid-July 2015, it still remains unclear whether the Paid Sick Leave Law applies to CalPERS and ’37 Act retired annuitants.  As a result, public agencies will have to make a risk assessment about whether they want to apply the Paid Sick Leave Law to such retired annuitants during this short time period between July 1, 2015 and the expected effective date of AB 304 in early to mid-July 2015.

 

  • Clarifies the Paid Sick Leave Law Applies to an Employee Who Works In California “For the Same Employer” for 30 or More Days Within a Year (Labor Code section 246(a).) 

The Paid Sick Leave law allows employers to set a 30-day waiting period before employees are entitled to paid sick leave.  Prior to AB 304, it was unclear how employers were supposed to measure this 30-day eligibility period for employees who may have worked with other employers previously within a year.

AB 304 will amend Labor Code section 246(a) to clarify that the 30-day eligibility period applies to time worked “with the same employer.”  This will mean that the 30-day eligibility period begins for a new employee with the first date of employment with a specific employer.

 

  • Provides Alternative Accrual Methods of Paid Sick Leave (Labor Code section 246(b)(3)-(4).

In addition to the standard one hour of paid sick leave for every 30 hours worked accrual method, AB 304 also will add two additional alternative accrual methods under Labor Code section 246(b)(3)-(4) to allow alternative accrual methods that are not necessarily tied to hours worked, but yet accrued on a regular basis:

“(3) An employer may use a different accrual method, other than providing one hour per every 30 hours worked, provided that the accrual is on a regular basis so that an employee has no less than 24 hours of accrued sick leave or paid time off by the 120th calendar day of employment or each calendar year, or in each 12-month period.

(4) An employer may satisfy the accrual requirements of this section by providing not less than 24 hours or three days of paid sick leave that is available to the employee to use by the completion of his or her 120th calendar day of employment.”

Under the new accrual method in Labor Code section 246(b)(3), an employer can allow an employee to accrue paid sick on a regular basis through an accrual rate other than hours worked (e.g., per week, per pay period, per month, etc.) so long as the employee has accrued no less than 24 hours of accrued sick leave by the 120th calendar day of employment, or each calendar year, or applicable 12-month period.  The new accrual method in Labor Code section 246(b)(4) appears to allow an alternative frontload method for new employees that would allow an employer to provide no less than 24 hours or 3 days of paid sick leave for use by the completion of the 120th calendar day of employment.

Although we anticipate these new accrual methods will be a part of the Paid Sick Leave Law once AB 304 is passed, there has been very little analysis on their application to date and we anticipate further clarification from the Labor Commissioner in the near future.  Employers are cautioned to be careful about applying such alternative accrual methods once implemented by AB 304 absent further clarification from the Labor Commissioner.

 

  • Clarifies That Providing the “Full Amount Of Leave” Under the Frontloading or Lump-Sum Method Means the Employer Must Provide Three Days or 24 Hours at the Beginning of Each Year, Calendar Year, Year of Employment, or 12-Month Basis.  (Labor Code section 246(d))

Labor Code section 246(d) discusses the ability for an employer to frontload the “full amount of leave” to an employee at the beginning of each year to avoid having to deal with accruals or the potential of paid sick leave carryover from year to year.  Prior to AB 304, it was not clear what constituted the “full amount of leave” or the measurement of a “year.” AB 304 will amend Labor Code section 246(d) to provide: “The term ‘full amount of leave’ means three days or 24 hours.”  As a result, an employer only needs to frontload 3 days or 24 hours of paid sick leave to satisfy this method of compliance.  AB 304 will also clarify that providing paid sick leave at the beginning of the year means providing it at the beginning of each calendar year, year of employment, or 12-month basis as determined by the employer.

 

  • Modifies the Requirements for Existing Paid Sick Leave and PTO Policies to Comply With the Paid Sick Leave Law.  (Labor Code section 246(e))

Labor Code section 246(e) is the provision of the Paid Sick Leave Law that provides that employers who already have sick leave/PTO policies in effect need not provide any additional paid sick leave under AB 1522 if their current polices make paid sick leave available for the same purposes and conditions as AB 1522. Section 246(e) provides two options for compliance:

  • The first option merely provides that the existing sick leave/PTO policy satisfy the accrual, carry over, and use requirements of the Paid Sick Leave Law; or
  • For the second option, AB 304 will revise Labor Code section 246(e)(2) to include a “grandfather clause” for existing paid sick leave/PTO policies provided to a class of employees that were in effect prior to January 1, 2015. Under this option, the Paid Sick Leave Law will allow such grandfathered policies to continue going forward for both current and new employees in the class covered by such policies where their accrual method is different than one hour per 30 hours worked and instead provides at least one day or eight hours of paid sick leave/PTO within three months of employment and the employee was eligible to earn at least three days or 24 hours of paid sick leave/PTO within nine months of employment.  Any changes to a grandfathered paid sick leave/PTO policy that would lower employee accruals will lose the grandfathered status and all other AB 1522 accrual requirements would then apply.

The application of this new “grandfathered paid sick leave/PTO policy” clause will depend on the specific terms and conditions of any paid sick leave/PTO policies in effect prior to January 1, 2015.  Assuming this new provision is enacted under AB 304, we strongly recommend working with legal counsel to review its applicability.

 

  • Clarifies the Paid Sick Leave Law’s Provisions Regarding the Reinstatement of Paid Sick Leave Upon Rehire Within 12 Months (Labor Code section 246(f)(2).)

AB 304 will also provide some much needed clarification regarding an employer’s obligation to reinstate paid sick leave to an employee who is rehired within 12-months of separation by amending Labor Code section 246(f)(2) in two ways:

  • This section will be amended to clarify that the reinstatement of paid sick leave upon rehiring would be “subject to the use and accrual limitations set forth in this section.” The significance of this amended language is that an employer who provides a more generous paid sick leave benefit to its employees is not necessarily required to reinstate all unused sick leave accruals upon rehire.  Rather, an employer would only have to reinstate up to the accrual cap of 6 days or 48 hours of unused accrued paid sick leave for an employee who is rehired within 12 months of a separation of employment.Example:  Acme Employer allows employees to accrue up to 100 hours of paid sick leave.  Employee John Doe works for Acme and accrues 100 hours of paid sick leave.  John then separates from his employment with Acme and Acme rehires him within one year from his date of separation.  Upon John’s rehire, Acme is only required to reinstate 48 hours or 6 days of his paid sick leave.  Acme does not need to reinstate the full 100 hours of paid sick leave John had upon his separation of employment.
  • This section will also be amended to confirm that if an employer is not obligated to restore any sick leave or PTO to an employee who was rehired within 12 months of a separation of employment if such sick leave/PTO was cashed out and no longer exists.

 

  • Adds That if an Employer Provides Unlimited Paid Sick Leave or Unlimited PTO, the Employer May Provide Written Notice That Such Leave Is “Unlimited.”  (Labor Code section 246(h).)

Pursuant to Labor Code section 246(h), employers are required to provide written notice of the amount of paid sick leave an employee has available on either the employee’s itemized wage statement or in a separate writing provided on the designated pay date with the employee’s payment of wages.  For those employers that have policies which provide “unlimited” amounts of paid sick leave or PTO to employees, it was not clear how this requirement would be satisfied.

AB 304 will amend Section 246(h) to allow an employer with an unlimited paid sick leave or PTO policy to simply indicate the leave balance as “unlimited” on an itemized wage statement or written notice provided to the employee each pay period.

 

  • Clarifies How to Calculate the Rate of Pay for Paid Sick Leave Provided to Employees.  (Labor Code section 246(k))

AB 304 will amend Labor Code section 246(k) to clarify how an employer will calculate the rate of pay for paid sick leave provided to nonexempt and overtime exempt employees.  For nonexempt employees, Section 246(k) will be amended to provide two methods to choose from:

  • Calculating paid sick time for nonexempt employees in the same manner as the regular rate of pay for the workweek in which the employee uses paid sick time. This method is more appropriate for nonexempt employees who are paid a regular hourly wage.
  • Calculating paid sick time by dividing the employee’s total wages, not including overtime pay, by the employee’s total hours worked in the full pay periods of the prior 90 days of employment. This method can be used to determine the paid sick leave rate of pay for nonexempt employees who have varying rates of pay, are paid on a salaried basis, or are paid on a piecemeal or commission basis.

For overtime exempt employees, Section 246(k) will be amended to note that paid sick leave wages should be calculated in the same manner as the employer calculates wages for other forms of paid leave time.

 

  • Provides That an Employer Is Not Obligated to Inquire Into or Record the Purpose for Which an Employee Uses Paid Leave or Paid Time Off.  (Labor Code section 247.5(b))

AB 304 will add a new Subsection (b) to Section 247.5 to clarify that an employer is not required to ask about or record the purposes for which an employee uses paid sick leave or paid time off.  We believe that this addition to the law is to address the concern that if an employer provides an unrestricted PTO policy that could be used for Paid Sick Leave Law purposes (among any other purpose), an employer does not have to track which PTO days are for Paid Sick Leave Law purposes or not.

However, if an employer does not have an unrestricted PTO policy in place and is providing a more traditional paid sick leave policy, this revision to the law does nothing to change the right of an employer to require an employee to confirm that the use of paid sick leave meets one of the purposes provided for in the law.  Employers with more generous paid sick leave policies should also exercise this right to seek confirmation of the purpose for the paid sick leave to better track compliance with California’s Kin Care law (Labor Code sections 233-234), which requires employers to allow employees to use up to one-half of their annual accrued sick leave or PTO to care for a parent, child, spouse, or registered domestic partner.

CONCLUSION

While the Paid Sick Leave Law still raises a number of questions concerning its interpretation and will continue to do so beyond its effective date of July 1, 2015, AB 304 will help to clarify some of these issues as employers continue working to implement this new law.  LCW will provide updates on the status of AB 304 – including its expected passage by the California Senate and approval by Governor Brown – as soon as they happen.

If you have any questions about this issue, please contact our Los Angeles, San Francisco, Fresno, Sacramento, or San Diego office.

To receive these Special Bulletins on the day they are released, please send your email address to info@lcwlegal.com.

The Supreme Court Has Spoken: Federal Health Care Subsidies Are Available to Qualifying Individuals Nationwide.

Posted in Healthcare

Healthcare.jpgIn January, we reported that the Supreme Court of the United States granted review in King v. Burwell to decide whether under the Patient Protection and Affordable Care Act (ACA) the Federal Government could offer subsidies to individuals who purchase health insurance through federally-funded exchanges.  The ACA requires all Americans to have health insurance or pay a fine.  As an incentive for individuals to purchase health coverage, the ACA encourages states to create exchanges, or marketplaces, where individuals can shop for insurance. Federal exchanges operate in states that fail to establish their own exchanges.  California is one of fourteen states that created a state exchange, known as Covered California.  To make insurance affordable for low-income consumers, the ACA offers federal subsidies, or tax credits, to qualified individuals through the state and federal exchanges.  Approximately three-dozen states have federally-run exchanges with more than six million people receiving subsidies through these federal exchanges.

Yesterday, the Supreme Court ruled that ACA permits the Federal Government to provide subsidies to qualified individuals through both state and federally-run exchanges.  The Supreme Court’s holding answered the question of whether an ambiguous phrase in the law was to be interpreted to only permit the Federal Government to provide subsidies to individuals who bought insurance through “Exchanges established by the State,” but not available through the federally-run exchanges.

The Internal Revenue Service’s (IRS) ACA regulation says that subsidies are permitted in state and federally-run exchanges. The plaintiffs/appellants argued, however, that the plain language of the ACA, which reads that qualified tax payers may receive subsidies when enrolled in “[e]xchanges established by the State,” precluded subsidies for persons enrolled in federally-run exchanges.

The Supreme Court agreed with the IRS’ interpretation, finding that “Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter.”  Interpreting the statutory language to prohibit subsidies in federally-run exchanges would destabilize the individual insurance market, a central tenet of the ACA, and have disastrous economic consequences which Congress did not intend.

As California established a state-run exchange, this Supreme Court decision does not have direct implications for California.  However the June 25, 2015 decision could have long term impacts, including signaling that the ACA’s statutory language should not be interpreted in a way that diminishes individual rights’ to purchase affordable and minimum essential health care coverage.

Up in Smoke: Is Ross v. RagingWire Telecommunications, Inc. Still Relevant to Employers?

Posted in Employment

marijuana_legal_gavelIn the 2008 case Ross v. RagingWire Telecommunications, Inc., the California Supreme Court held that employers are not required to accommodate an employee’s medicinal marijuana use irrespective of the Compassionate Use Act of 1996 [Health & Safety Code section 11362.5], which provides that persons using marijuana under the care of a physician are not subject to criminal prosecution by the State.  The Court commented that the Compassionate Use Act does not grant marijuana the same status as a legal prescription drug and noted marijuana is illegal under federal law, and therefore cannot be “completely legalize[d] for medical purposes.”  The Court reasoned that, since the California Fair Employment and Housing Act [Government Code section 12940 et seq. “FEHA”] does not require employers to accommodate illegal drug use, the employer could lawfully terminate the employee for using medical marijuana.  How relevant is that decision to employers seven years later?  Considering the direction many states, including California, are taking regarding use and full legalization of marijuana, the decision may become less relevant than it was in 2008.

Although marijuana remains illegal under federal law, the approach the federal government is taking shows greater deference to states and their marijuana laws.  For example, in 2013, the U.S. Department of Justice (DOJ) basically abdicated its enforcement authority in states like Colorado and Washington (which have legalized recreational use), asked that the states create “strong, state-based enforcement efforts,” and noted that the DOJ “will defer the right to challenge their legalization laws at this time.”  In effect, the federal government said, “we surrender.”

The DOJ’s decision is important to states, and particularly employers, because disability advocates could use it to push marijuana into a protected category that would require employers to accommodate medicinal use.  It may take just one employee who is successful in a wrongful termination lawsuit to start the ball rolling towards an accommodation requirement.  Most state courts that hear the claims from medicinal marijuana users who have been fired for testing positive continue to rely on the fact that marijuana is illegal under federal law.  But, how long will this analysis hold up considering the number of states that are moving towards full legalization of marijuana and the DOJ’s deference to states to enforce its marijuana laws?

The practicalities of distinguishing between medicinal marijuana and other legal prescription drugs also contribute to the uncertainty of how the law may change for employers.  The reality is that an employer cannot terminate an employee because he has been prescribed pain medication, such as codeine.  Even more importantly, an employer may not necessarily be able to terminate an employee because he is under the influence of codeine while at work—it is going to depend on a number of circumstances, such as whether safety is a concern or work performance.

Many believe that placing medicinal marijuana in the same category as legal prescription drugs might not create the chaos that anti-marijuana proponents espouse.  An employee could test positive for codeine because it stays in the system for up to two days.  This, however, does not mean the employee was under the influence of codeine while at work.  The actual effect of codeine, depending on the dose, is only a few hours.  The discrepancy is apparent.  An employee could test positive for codeine but not be under the influence.  Should he be fired?  The same analysis can apply to medicinal marijuana.  The effects of marijuana may last a few hours, but the evidence of the drug (THC) could remain in the system for several days and as a long as a month.  In contrast to the situation with codeine, under existing law, an employee who is not under the influence of medicinal marijuana at work but tests positive for THC can be lawfully terminated.

Based upon the courts’ decisions in various states, medicinal marijuana is not protected because the federal government still considers it to be illegal.  The Colorado Supreme Court ruled on June 15, 2015, that an employee was lawfully terminated for testing positive for marijuana, but that case was brought under the theory of lawful off-duty conduct, not disability discrimination.  The argument against disability accommodation, however, may start to break down over time and employers could be forced to make difficult employment decisions.  Ross v. RagingWire Telecommunications, Inc. is still relevant to the extent the FEHA does not require an employer to accommodate an employee’s use of medicinal marijuana.  That case, however, could be subject to increased challenges as states continue to adopt laws that allow marijuana use.

Presently, there is a movement in California to put legalized marijuana on the ballot in 2016.  Considering California’s generous employee protections, it would not be surprising if California is the first to change course and allow employees to claim that medicinal marijuana use should be accommodated for employees with disabilities.  In the meantime, employers can continue to treat medicinal marijuana as an illegal drug that need not be accommodated in the workplace.

Special Wage and Hour Laws for Summer Employees: Are Lifeguards and Camp Counselors Exempt?

Posted in Wage and Hour

hourglass-small.jpg This Blog post was authored by Lisa Charbonneau

Many schools, colleges, and municipalities operate special programs and camps during the summer months.  Staffing these programs and camps frequently involves hiring temporary or “seasonal” personnel, such as lifeguards, camp counselors, swim instructors and boathouse attendants.  In recognition that many seasonal employees’ work days differ from that of the full-time, permanent employee, the law provides employers of such employees some exemptions to state and federal overtime and minimum wage requirements, if one of the following exemptions apply:

 California’s Organized Camp Exemption

If you operate what California law defines as an “organized camp,” your camp counselors may qualify for the “organized camp” exception to the California state minimum wage requirement.  This exception is set forth in California Labor Code section 1182.4.  To qualify as an “organized camp,” the camp must be accredited by or otherwise meet the minimum standards of the American Camping Association (click here to review the standards as of 2015).  In addition, the camp’s programs and facilities must have been established for the primary purpose of providing an “outdoor group living experience” for five days or more.  (Cal. Health & Safety Code §18897.)  The law does not currently define “outdoor group living experience.”  If both requirements are met, full-time camp or program counselors need only make a weekly salary of 85% of the state minimum wage for a forty-hour week, regardless of the number of hours worked.  Counselors who work less than 40 hours per week may be paid 85% of the state minimum hourly wage for each hour worked.  This exemption may be especially relevant for schools or municipalities with outdoor recreation facilities such as campgrounds or ranches.

Note that on May 22, 2015, the California State Senate passed SB 476, which, if passed, will expand the scope of the organized camp exemption (click here for more on the status of the legislative bill.)  In relevant part, the bill would eliminate the “outdoor” aspect of the “group living experience” requirement from the legal definition of organized camp and would amend the definition to explicitly include day camps. Assuming the bill’s wording remains the same, its passage into law would mean more camp employees would fall under this exemption.

The F.L.S.A.’s Recreational Establishment Exemption

In addition, employees employed by seasonal “recreational establishments” or organized camps may be exempt from the minimum wage and overtime requirements of the federal Fair Labor Standards Act.  (29 U.S.C. §213(a)(3).) To qualify for the exemption, the establishment must not operate for more than seven months in any calendar year, or the establishment’s receipts for any six months of the preceding calendar year cannot be more than one third of its average receipts for the other six months of the preceding calendar year.  (Id.) The term “establishment” means a “distinct physical place,” such as a summer camp, a golf course, a fairground, or a swimming pool.  This exemption may be especially relevant for municipal entities that operate seasonal pools and boathouses, or operate seasonal programs at distinct physical sites, such as a seasonal camp at a golf course or nature center.

Are You Sure Those Retirement Benefits Are Vested? A Cautionary Tale for Labor Negotiators

Posted in Negotiations, Retirement

Retirement-Sign.jpg

This blog post was authored by Danny Yoo.

Parents of young children can relate to when a child refuses to eat something they do not like; vegetables tending often to be the culprit.  When the child refuses, the parent will ask, “Why don’t you want to eat it?”  The inevitable response is, “Because I don’t want to!”  Rather than addressing the fallacy of circular logic, many times the parent will simply tell her that just because she doesn’t want to does not mean she doesn’t have to.

In County of San Luis Obispo (2015) PERB Decision No. 2427-M (click here for decision), two unions argued that they did not have to negotiate employee pension contributions because employees had vested rights to those contributions.  The Public Employment Relations Board (PERB) disagreed and held that the unions unlawfully refused to bargain because of their incorrect belief that their employees had vested rights.

The County of San Luis Obispo maintains its own independent retirement system, the San Luis Obispo County Pension Trust (Trust).  In 2011, the County requested to bargain with the San Luis Obispo Deputy County Counsel Association and the San Luis Obispo Government Attorneys’ Union (Unions) over employee contributions to the Trust due to increased pension costs.  The Unions rejected the County’s request and asserted that this was non-negotiable because bargaining would impair vested contractual right to specific contributions.  In fact, the Unions had a pending lawsuit against the County on this very issue.  The Unions’ negotiator claimed that the County was putting them in an “impossible position” because if they agreed to bargain, they may be making an admission that could be used against them in the lawsuit.

The County filed unfair practice charges against the Unions for refusing to bargain over the employee contributions, and PERB issued complaints (the complaints were consolidated for purposes of hearing).  In their answers, the Unions each admitted to having “refused to bargain” on the grounds that negotiations would impair vested rights.  The Administrative Law Judge and PERB held the Unions to what they admitted in their answers, i.e., that they had, in fact, refused to bargain.

In its opinion, PERB addressed the “threshold question” of whether there is a vested right.  PERB analyzed the Trust’s Plan and determined that there was no vested right to a continued employee contribution rate. Specifically, PERB stated that “the governing terms of the Plan do not clearly demonstrate a legislative intent to bind the County with respect to the amounts or distribution of employee contributions towards future retirement benefits.”

There are a few takeaways from this decision:

  • Because the answer to a PERB Complaint must be verified, what an agency puts in its answer will be held against it.  If there is a PERB charge or complaint filed against your agency, seek legal counsel before responding.  Here, PERB relied heavily on the Unions’ own admissions in their answers to a PERB complaint that they “refused to bargain” with the County.
  • PERB will make a determination on whether benefits are vested.  Most often, we see this issue litigated in court, as was the case here.  In this case, however, the ALJ and PERB decided to address this “threshold question” before getting to the issue of whether the Unions refused to bargain. Employers should also be aware that there continues to be litigation concerning whether PERB has jurisdiction in the first instance to determine if there exists Constitutionally-protected vested benefits.  Therefore, this issue remains unsettled.
  • If your agency is considering negotiating retiree benefits, first determine whether those benefits are vested.  As discussed in the bullet point above, PERB presently takes the stance that it can and will make a determination on the issue.  PERB could have decided differently and bound the County to an unfavorable decision.

To learn more about vested benefits and what your agency can do about them, please sign up for the LCW webinar “Understanding ‘Vested’ Pension and Other Post-Employment Benefits” presented by Frances Rogers and Michael Youril on June 23, 2015.  Click here for more information.

Court Clarifies that Lease-Leaseback Arrangements Must be “Genuine”; and Simultaneously Creates Split among the Courts of Appeal on the Requirement for Validation Actions

Posted in Education

ConstructionSunset.jpgIn September 2012, Fresno USD’s governing board adopted a resolution authorizing the execution of lease-leaseback construction contracts without competitive bidding.

The lease-leaseback structure permits builder-financed construction.  A school district leases real estate it owns to a construction firm for $1.00 per year and the contractor agrees to build new facilities on that real estate.  This gives the contractor sufficient property rights to “leaseback” the property, and serves as collateral the construction firm can use to obtain third-party financing.  Under the financing method, the school can pay the builder back, via the terms of a lease, which can last up to forty years.  Under Education Code section 17406(a)(1), a school district is exempt from the competitive bidding process otherwise required by Education Code section 17417 and the Public Contract Code.

Relying on Education Code section 17406(a)(1), the Fresno USD leased its project site to a contractor for $1 in rent with the contractor agreeing to construct facilities in accordance with the District’s plans and specifications in exchange for payments under a “Schedule of Lease Payments.”  The lease set out scheduled lease payments as “monthly progress payments” until project completion, at which point the District made final payment for all work, and the term of the lease ended.  The lease was in effect only during the construction of the school facilities; and the funds Fresno USD paid were solely for the construction services performed by the Contractor.

In November 2012, Davis, a local taxpayer, filed a lawsuit challenging Fresno USD’s lease-leaseback process.  In his lawsuit, he alleged failure to comply with the competitive bidding requirements.  He also alleged a conflict of interest by Contractor based on its participation in the planning and design of the project as a consultant to Fresno USD before the District awarded contracts for the project’s construction, and related legal theories.

Fresno USD and the Contractor filed demurrers, arguing that actions by other school districts to validate other, similar arrangements were routinely unopposed.  Courts in similar cases found that site leases, subleases, and pre-construction services agreements entered into by school districts pursuant to section 17460 were not subject to Public Contract Code requirements for award of construction contracts to the lowest responsible bidder.  The trial court sustained the demurrers, dismissed the suit, and entered judgment in favor of Fresno USD and the Contractor.

On appeal, the Court determined that the terms of Fresno USD’s contract with its builder was more akin to a traditional construction contract, and not a lease.  The payment schedule aligned with progress for construction services; whereas under a lease, payments are for a set time, such as monthly, during which the lessee occupies and uses the real property.  Not only was “leaseback” in effect only during the course of the construction, the school district did not occupy and use the new facilities as a “rent-paying tenant” for any set length of time.  Because the contractual arrangement was for “construction services” and not a true lease-leaseback as a method of financing, the Court determined that Davis had sufficiently alleged that Fresno USD had violated the competitive bidding requirements.  (Davis v. Fresno Unified School District)

In drawing this conclusion, the Court explained that the legislature’s primary purpose in enacting Section 17406(a)(1) was “to create a way for school districts to pay for construction over time and avoid the constitutional limitation on debt.”  (Davis)  The Legislature created the lease-leaseback exception to the competitive bidding process to encourage a new source of financing, and allow school districts, contractors, and third-party lenders to enter into “earnest negotiations” of the construction and financing arrangements “without the concern that the deal would be subsequently derailed by the competitive bidding process.” (Id. at p. 12)

With these underlying alternate-financing principles in mind, the Davis Court determined that Section 17406 applies only to “genuine or true leases,” though it did not go further in agreeing with the plaintiff that lease-leaseback arrangement should be restricted to situations where a school district does not otherwise have sufficient funds available to cover the cost of building.  (Id. at p. 17.)

To determine whether a lease-leaseback contract is a “true lease,” and not simply a traditional construction contract the Court will look to: (1) provisions in the contract that define who holds what property rights, and when those rights and interests are transferred between parties; and (2) the amount and timing of payments.  (Id. at 20)  To be a “true” lease in compliance with Section 17406(a)(1), a school district must actually use the newly constructed premises, as a tenant,during the term of the lease.”  (Davis – emphasis original)  The school district must use the building, and not another entity.

In addressing the conflict of interest claim, the Court found that Davis had alleged sufficient facts to allow the case to proceed on the conflict of interest claim.  The Court stated that whether Davis will prove this claim will depend on the evidence presented in the trial court.

In Los Alamitos Unified School District v. Howard Contracting, Inc., a different Court of Appeal determined that a public agency could “indirectly but effectively” self-validate an action (under Code of Civil Procedure sections 863, 860) by refraining from initiating a validation action.  The Court explained that an interested person may bring an action to determine the validity of the matter, but they must do so within 60 days.  (Code of Civil Procedure, sections 863, 860.)  If no interested person commences such action, and if the public agency does not initiate such action, within the 60-day period, the action becomes immune from attack. (Los Alamitos)Thus, the agency could “self-validate” an action, simply by doing nothing.

In a footnote to the Fifth District’s June 1, 2015 decision in Davis, the Court noted that Defendants “could have avoided this post-completion taxpayer challenge by bringing a validation action under Code of Civil Procedure section 860 prior to the construction of the project.”  (Davis  at p. 5)  This conflicts with the holding in Los Alamitos, which did not require a validation action to commence “prior to [] construction,” but within 60 days of the underlying action – in that case entry into the lease-leaseback agreement.

Because of the potential conflict between the 60-day inaction and resultant self-validation period described by Los Alamitos, and the “prior to [ ] construction” language articulated in Davis, this issue may be ripe for review by the California Supreme Court.

Davis v. Fresno Unified School District (2015) — Cal.App.4th —- [2015 WL 3454720]

Note: 

For a discussion of the Los Alamitos case, please see our October 2014 Education Matters article. We will follow this issue closely and keep you informed of further developments.

Tips from the Table: Avoiding Distractions During Negotiations

Posted in Labor Relations, Negotiations

We are excited to continue our video series – Tips from the Table. In these monthly videos, members of LCW’s Labor Relations and Negotiations Services practice group will provide various tips that can be implemented at your bargaining tables. We hope that you will find these clips informative and helpful in your negotiations.

Supervisor-Related Anxiety and Stress is Not a Recognized Disability under FEHA

Posted in Employment

Medical LeaveLast week, in Higgins-Williams v. Sutter Medical Foundation, the Court of Appeal of the State of California, Third Appellate District, upheld the trial court’s granting of summary judgment for an employer where it determined that an employee’s inability to work for a particular supervisor, because of anxiety and stress related to the supervisor’s standard oversight of job performance, is not a disability recognized under the California Fair Employment and Housing Act (FEHA).

In Sutter Medical Foundation, Michaelin Higgins-Williams worked for Sutter as a clinical assistant.  She reported to an immediate supervisor, who in turn, reported to a regional manager.  Higgins-Williams reported to her treating physician that she was stressed because of her interactions with her managers.  Her physician diagnosed her with having adjustment disorder with anxiety, and specifically noted that her stress resulted from “dealing with her Human Resources and her manager.”

After exhausting her available CFRA and FMLA leave entitlements, Higgins-Williams briefly returned to work.  Soon after her return, she suffered a panic attack while at work, and never returned to her job.  Sutter granted Higgins-Williams multiple leaves of absence.  Status reports from the employee’s physician indicated that she could return to work “without limitations” if she worked under different supervisors.

Thereafter, Higgins-Williams’ physician informed Sutter that she could not return to work and asked that she be placed on light duty to start two months later.  Sutter responded by informing Higgins-Williams that her physician did not provide any information about when she could return to work as a clinical assistant, that there was no information to support a conclusion that additional leave would ultimately lead to her return as a clinical assistant, and that if she did not provide such information within a week, she would be terminated.  When Sutter did not receive this information by the deadline, it terminated Higgins-Williams.

Higgins-Williams alleged four causes of actions under FEHA relating to her mental disability, including disability discrimination, failure to engage in the interactive process, retaliation, and wrongful termination.  For each cause of action, she was required to establish that she suffered from a mental disability.

FEHA provides broad protections against disability discrimination for California employees. A qualifying “mental disability” under FEHA includes “any mental or physiological disorder…such as…emotional or mental illness” that “limits a major life activity.”  In order to establish a prima face case of mental disability discrimination under FEHA, a plaintiff must show that (1) she suffers from a mental disability; (2) she is otherwise qualified to do the job with or without reasonable accommodation; and (3) she was subjected to an adverse employment action because of the disability.

Relying on past precedent, the Court ruled that an employee’s inability to work for a particular supervisor because of anxiety and stress related to standard supervision regarding the employee’s job performance is not a covered disability under FEHA.  Given the ruling that Higgins-Williams did not have a FEHA-qualifying mental disability, each of her claims failed.

The lesson from this decision is that if an employee’s sole claim of a disability is stress or anxiety related to standard oversight by a specific supervisor(s), an employer need not provide accommodations to the employee.  That being said, employers should remain sensitive to the big picture and engage in a timely, good faith interactive process for employees or applicants who request reasonable accommodations that extend beyond the mere inability to work with a particular supervisor.

Is it Already time to Start Preparing For Cost Sharing Changes in 2018?

Posted in Pension, Retirement

Retirement-Sign.jpgThis blog post was authored by Steven M. Berliner.

Cost sharing has become a very valuable tool for employers seeking to cut the cost of retirement benefits.  It is where the employee pays part of the employer’s required contribution to the retirement system and therefore, results in an immediate reduction in employer costs.  Prior to passage of the Public Employees’ Pension Reform Act of 2013 (“PEPRA”) cost sharing was limited in scope.  For CalPERS agencies, cost sharing could not exceed the cost of optional benefits provided since 1979, which not only limited the amount of cost sharing possible, but also made it difficult to even determine what the cost sharing limit was.  Another major restriction on cost sharing is that it must be the result of a collectively bargained agreement.  Cost sharing could not be imposed.

Fast forward to 2013, and PEPRA immediately eliminated the caps on the amount of cost sharing allowed.  The parties to a collectively bargained agreement can now agree that employees pay up to 100% of the employer contribution.  Again, no imposition is allowed.  However, PEPRA also enacted Government Code section 20516.5, which provided changes to cost sharing beginning in what then seemed to be the distant future:  2018.  In 2018, employers for the first time had the ability to impose a limited amount of cost sharing on Classic PERS members.  (A similar cost sharing statute, Government Code section 31631.5, applies to ’37 Act agencies).  Since employers are starting to negotiate agreements that extend into 2018, it is important to know what Government Code 20516.5 provides:

1. Section 20516.5 does NOT compel any action.  It is not mandatory and is merely a cost saving tool that employers may choose to utilize.

2. Section 20516.5 allows an employer to impose upon represented Classic members that they pay up to 50% of normal cost, or the following amounts as employee contributions, whichever is LOWER:

  • Local miscellaneous or school members:  8%
  • Local police, local fire or County peace officers:  12%
  • All other local safety:  11%
  • (Since new members already pay 50% of normal cost, this statute does not apply to them.)

3. All meet and confer obligations, including impasse procedures, must be exhausted.

4. Section 20516.5 does not apply if the parties have already agreed to a cost sharing arrangement under section 20516 that has employees paying 50% or more of their normal cost.

The possibility of imposing cost sharing, even in the limited amounts allowed by section 20516.5, should be considered when negotiating agreements.  For example, will it result in more employee groups agreeing to cost sharing under section 20516?  Maybe.  Do you need a reopener in 2018 to address this issue in any long-term contract negotiated today?  Possibly, but the mere fact that section 20516.5 is on the horizon might help reach cost saving agreements that do not require imposition.  It may prove to be a valuable tool even if never used.

Timekeeping for Telecommuters Under the FLSA

Posted in Wage and Hour

hourglass-small.jpg This blog post was authored by Alex Polishuk.

In today’s technological world, a rising number of employees telecommute, e.g. work from home.  Employers who allow non-exempt employees to telecommute must remain mindful of their obligation under the Fair Labor Standards Act (“FLSA”) to track the hours worked by a non-exempt telecommuting employee.  A recent 11th Circuit Court of Appeals decision demonstrates that although non-exempt employees who telecommute are required to track their own work hours, employers must provide these employees with timesheets or an alternative method to track their time and the nature of the work completed.

Under the FLSA, a non-exempt employee who brings a claim for unpaid overtime wages must demonstrate that he or she performed work for which he or she was not properly compensated. The FLSA provides that it is the employer’s duty to keep records of the wages, hours, and other conditions and practices of employment.  Where the employer cannot or fails to keep these records, an employee satisfies a relaxed standard of proof by showing the amount and extent of the work performed with evidence of  “just and reasonable inference.” The 11th Circuit Court of Appeals decision, Jackson v. Corrections Corporation of America, explains that where a non-exempt employee is allowed to work from home, and the employer cannot practically track the employee’s hours worked, the responsibility for accurate timekeeping falls on the employee. An employee who fails to accurately track the time worked and the nature of work performed may be precluded from asserting an FLSA claim.  However, the Court also suggested that the employer is responsible for providing the employee timesheets or other methods to allow the non-exempt employee to track the hours worked.

In Jackson, the plaintiff, Verneisa Jackson, worked as a librarian aide when she developed irritable bowel syndrome.  She requested to work from home more often and her employer, Corrections Corporation of America (“CCA”), approved a modified work schedule.  CCA provided Jackson with timesheets and instructed her to keep a log of hours worked and tasks completed.   When she was passed over for a promotion and returned to a normal work schedule, Jackson retired and then sued CCA under the FLSA for allegedly failing to compensate her for hours worked at home.  The trial court granted CCA’s motion for summary judgment against Jackson’s FLSA claim on the grounds that Jackson failed to “track and log her time accurately” while working from home.  The 11th Circuit Court of Appeals affirmed the trial court’s ruling.

In its decision, the Court of Appeals emphasized that Jackson failed to meet even the relaxed burden of “produc[ing] sufficient evidence to show the amount and extent of that work as a matter of just and reasonable inference.”  The Court indicated that Jackson’s failure to complete the timesheets that CCA provided her and state with any clarity or precision the number of hours she allegedly worked at home, the nature of the work, where or when the work was completed or anything else that would assist a factfinder in approximating Jackson’s unpaid overtime was fatally detrimental to her claim.  Resultantly, the Court of Appeal ruled that Jackson failed to create a genuine issue of material fact about whether she performed work for which she was not paid.

While the 11th Circuit Court of Appeals faulted the employee for not completing the employer’s timesheets, the case could have easily gone against the employer if the employee were able to provide evidence such as: witness testimony regarding uncompensated time worked, testimony regarding the employer’s practice of maintaining inaccurate or no time records at all, or the employee’s informal records of uncompensated time worked.  Moreover, in this case, the employer’s failure to maintain records of employee work hours likely violated the FLSA’s recordkeeping requirements.  This case is a good reminder to employers that while it is an operational and modern day reality that non-exempt employees may work remotely while out in the field or from home, these situations can also expose the employer to significant potential FLSA liability if left unmonitored.  With all non-exempt employees, but with those who work remotely in particular, it is essential that the employer require the employees to complete and submit timely and accurate time records of the employee’s actual hours worked, and not simply the employee’s scheduled work hours.  The employer should also have and enforce a detailed and strongly worded overtime policy.  Finally, employers should be strategic in determining which employees should be allowed to telecommute or have remote access to the agency’s email or computer network at all.  Making sure the proper procedures and policies in place now will help your agency save “time” and money later on.

The full text of the Jackson v. Corrections Corporation of America decision can be found here.