Not So Fast! The Ninth Circuit Reverses Itself and Rules Employers Cannot Consider Applicants’ Prior Salary in Setting Rate of Pay

By Megan Lewis on April 17, 2018 Posted in Wage and Hour

This post was authored by Megan Lewis.

Just one day before Equal Pay Day, April 10, 2018, the Ninth Circuit in Rizo v. Yovino ruled that an employer cannot perpetuate a gender pay gap by paying a female employee less than a male employee for the same work, simply because the female employee made less money in a prior position. The Ninth Circuit’s decision reversed its prior precedent and changed the law in a way designed to expedite elimination of pay gaps.

Last year, the Ninth Circuit Court of Appeal held that employers may rely on an applicant’s prior salary history in setting employees’ rates of pay. Aileen Rizo, a math consultant with the Fresno County public schools, sued the County under the federal Equal Pay Act (“EPA”) and other laws after discovering the County paid her male colleagues more for the same work. The District conceded that she received lower wages than male employees for equal work, but claimed the differential was permissible under the EPA because it was based on “a factor other than sex,” namely her prior salary. The District Court rejected the County’s argument, and the Court of Appeal reversed, holding the employer could rely on prior pay to justify a lower salary.

The Ninth Circuit subsequently granted a petition for en banc review of the decision and, on April 9, 2018, reversed its prior decision (and thereby overruled a thirty year old precedent). You can read the text of the new decision in full here.

The key takeaway from the new ruling is that salary history is not a “factor other than sex” for purposes of the Equal Pay Act, meaning that employers cannot rely on an applicant’s prior salary history to justify paying one employee differently than another employee of the opposite sex for similar work. As Judge Reinhardt wrote for the court:

“We conclude, unhesitatingly, that ‘any other factor other than sex’ is limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance. It is inconceivable that Congress, in an Act the primary purpose of which was to eliminate long-existing ‘endemic’ sex-based wage disparities, would create an exception for basing new hires’ salaries on those very disparities—disparities that Congress declared are not only related to sex but caused by sex. To accept the County’s argument would be to perpetuate rather than eliminate the pervasive discrimination at which the Act was aimed.”

In sum, because “[r]eliance on past wages simply perpetuates the past pervasive discrimination that the Equal Pay Act seeks to eradicate[,]” the court ruled that “past salary may not be used as a factor in initial wage setting, alone or in conjunction with less invidious factors.”

This ruling is consistent with legislative trends around the country. California recently passed AB 168, which restricts the ability of employers to gather applicants’ salary history information or consider such information when determining whether to offer employment to an applicant and/or what salary to offer. You can read our blog post about AB 168 here. Other states, including Massachusetts, Delaware, and Oregon have passed similar legislation, as have cities like New York, San Francisco, Boston, and Philadelphia.

Though the gender gap persists, this ruling is another step towards eradicating systemic discrimination against women in the workplace.

U.S. Department of Justice Sues the State of California Over Newly Enacted Immigration Laws

By Alysha Stein-Manes on April 12, 2018 Posted in Constitutional Rights

This blog was authored by Alysha Stein-Manes.

Last month, the United States Department of Justice (DOJ) filed a lawsuit in federal court against the State of California (the “State”), alleging that three laws enacted by the State between June and October 2017 – Senate Bill (SB) 54 and Assembly Bills (AB) 103 and 450 – are unconstitutional.

SB 54 and AB 450 address law enforcement agencies and public and private employers’ abilities to cooperate with federal immigration authorities.

SB 54, or the “California Values Act,” which amended Sections 7282 and 7282.5 of the Government Code, added Chapter 17.25 to the Government Code, and repealed Section 111369 of the Health & Safety Code, prohibits state and local law enforcement agencies, including school police and security departments, from using their resources to carry out immigration enforcement activities. Such activities include, but are not limited to, making arrests based on civil immigration warrants; performing the functions of an immigration officer; inquiring into an individual’s immigration status; and providing an individual’s personal information to federal immigration authorities. Despite these limitations, local and state law enforcement agencies continue to be permitted to share with federal immigration authorities information about an individual’s criminal history; make inquiries necessary to grant visas to potential victims of crime or trafficking; respond to a notification request by federal immigration authorities regarding persons currently serving sentences for violent felonies; and participate in a joint law enforcement task force with federal agencies, so long as the primary purpose of that task force is not immigration enforcement.
AB 450, which added Sections 7285.1 through 7285.3 to the Government Code and Sections 90.2 and 1019.2 to the Labor Code, places significant limitations on public agencies and private employers’, including private schools, ability to cooperate with federal immigration authorities and imposes fines for violating those limitations. These laws prohibit a public and private employer from giving voluntary consent for an immigration enforcement agent to enter nonpublic areas of the workplace, except as required by federal law or a judicial warrant. They also prohibit a private employer from giving voluntary consent for an immigration enforcement agent to access, review, or obtain employee records, except as required by federal law or a subpoena or court order. The law further requires employers to post a notice to employees when federal immigration authorities have given notice of an inspection of I-9 Employment Eligibility Verification forms and the written results of any such inspection to affected employees. Finally, private employers are now prohibited from re-verifying a current employee’s employment eligibility at a time or in a manner not required by federal law.

SB 54, AB 450 and AB 103 — popularly known as California’s so-called “sanctuary laws,” – became effective January 1, 2018.

The DOJ’s lawsuit specifically alleges that these three newly enacted laws violate the “Supremacy Clause” of the United States Constitution (the “Constitution”) and other federal immigration laws. The Supremacy Clause, codified in Article VI, Clause 2 of the Constitution, establishes that the Constitution and federal laws enacted pursuant to the Constitution are the “supreme law of the land.” Because of the Supremacy Clause, states cannot make laws that are “contrary” to federal law. The Supreme Court of the United States has interpreted the Supremacy Clause to prohibit the enactment of state laws that stand “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” (See Hines v. Davidowitz (1941) 312 U.S. 52, 67 .) To the extent that state laws are found to be an “obstacle,” such laws are considered to be “preempted” by federal law and are therefore unconstitutional. For example, in the immigration context, the Supreme Court of the United States has held as unconstitutional an Arizona law that permitted state peace officers to arrest a person believed to be undocumented, without first obtaining a warrant, because the law provided state officers with greater authority than permitted under federal immigration law. (See Arizona v. U.S. (2012) 567 US 387, 407-410.)

In the instant lawsuit, the DOJ alleges that AB 103, AB 450, and SB 54 endanger federal immigration officials and therefore constitute an “obstacle” to the enforcement of federal law. The DOJ’s complaint asks the court to do two primary things. First, it asks that the court issue a “preliminary” injunction” against the State prohibiting it from implementing the provisions of these laws until the Court determines whether the newly enacted laws themselves are preempted by federal law. Second, it asks the court to find that these laws violate the Supremacy Cause and other federal immigration laws, thus making them unconstitutional, and that the court because of this, permanently prohibit the State from implementing the laws.

The DOJ’s lawsuit was filed in federal court in the Eastern District of California. The Court has yet to arguments from the DOJ and California regarding the preliminary injunction, as well as the constitutionality of the laws themselves. The Court will likely hear arguments regarding the DOJ’s request for a preliminary injunction before hearing arguments on the underlying issue of constitutionality.

If SB 54 is found unconstitutional, local and state law enforcement agencies may also have greater autonomy to voluntarily use their resources to assist federal officials in implementing federal immigration laws. Additionally, if the Court determines that AB 450 is unconstitutional, private employers in California will have more autonomy to voluntarily share employment data and provide federal immigration officers with access to their employees.

Law enforcement agencies and public and private employers may continue to adhere to the new laws if and until the Court grants the DOJ’s preliminary or permanent injunctions. However, whatever the outcome of the District Court’s ruling, it is likely that the “losing” party will appeal the matter to the Ninth Circuit and ultimately, the Supreme Court of the United States.

We will monitor this case and update you as it proceeds.

4/18/2018 Correction: AB 450 applies to public and private employers –the original article did not include public agencies.

Government-Hosted Social Media – How To Avoid First Amendment Claims

By David Urban on April 5, 2018 Posted in Social Media

This post was authored by David Urban.

Social media and the First Amendment is a fascinating and quickly-developing area of the law. All types of business organizations have a social media presence, for example, a Twitter page or Facebook account, and often on their own websites invite the public to comment. The same is true for news sources, from the most well-established like The New York Times and Los Angeles Times, to personal blogs and very small media outlets. Often public comments provide content that is just as interesting and informative as what the owner of the site originally publishes. Indeed, the owners may have a hand in this, because (unless their terms of service provide otherwise) they are free to pick and choose comments without concern about legal claims of censorship. The First Amendment does not apply to private organizations, only to the government, and these private organizations are free to curate comments on their sites.

Many public agencies, including law enforcement, cities, counties, and educational institutions, themselves host social media sites for the benefit of the community, and encourage the public to post comments. The First Amendment, however, does apply to these government agencies, and curating or censoring comments can, in some circumstances, lead to claims of First Amendment violations and expensive lawsuits. For example, in 2012, the Honolulu Police Department faced a legal challenge to its decision to remove two local residents’ comments from its Department Facebook page. The residents argued that the Police Department had created a public forum in its maintenance of the Facebook page, and that removal of their posts constituted unconstitutional censorship. The Department’s guidelines described the page as “a forum open to the public,” yet the Department allegedly removed the residents’ posts simply because they were critical of the Department. The case eventually settled with a payment by the Department of attorneys’ fees, and an agreement to revise its social media policies

How can agencies honor their obligations under the First Amendment yet avoid having to serve inadvertently as the message board for certain types of content? There are a number of ways.

First, and primarily, the agency can put into place a policy, carefully vetted by legal counsel, that sets forth what comments are authorized and what are not. For example, the policy can specify that obscene, defamatory, and other similar types of comments are not permitted. The policy can also specify that comments have to relate to the matter originally posted. In general, the policy however, must satisfy the “forum analysis” standards of free speech law, a primary requirement of which is that the policy operate in a “viewpoint-neutral” way. This means that the agency in almost all circumstances cannot suppress one view on a topic yet allow comments favoring the opposing view. In addition, the agency must be able to justify its restrictions on certain types of comments in a way that will satisfy forum analysis requirements.

Second, in theory, an agency can take an alternative approach that rests on the “government speech” doctrine. In this approach, the agency would pick and choose only a few public comments to publish, and argue that its decision-making process constituted the expression of the agency itself. This approach has support in U.S. Supreme Court cases from other contexts, such as from Pleasant Grove City v. Summum , in which the Court found that a city’s selection of which monuments to place in a public park constituted government speech, so that its decision not to select a particular monument was not censorship but the choice of the agency itself not to express itself in that way. The approach has not been tested by case law in the context of social media, but could be valid under existing First Amendment law as a way to moderate content.

Third, although it does not help as a proactive approach, there is a particular litigation defense articulated by commentators to lawsuits against public agencies for censoring social media. Some commentators have taken the position that speech on an agency-hosted platform is, in fact, not subject to the First Amendment, because the actual site itself belongs to a private entity. In the case of a Facebook or Twitter page, the actual platform in cyberspace belongs to those organizations. This theoretical defense, however, has not yet been explicitly approved by any Court.

It may well be approved or disapproved soon, however. In a well-publicized case, Knight First Amendment Institute v. Trump, individuals barred from President Trump’s Twitter page have sued under the same First Amendment theories described here. The plaintiffs’ theory is that President Trump’s page constitutes one that is government-hosted, so that First Amendment standards apply. The case is worth watching for indications on how Courts will view social media platforms, and we will provide relevant updates.

Tips from the Table: Evaluating “Flores” Compliance at the Table

By Tips From The Table on March 27, 2018 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 Collective Bargaining 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.

Agency Policy Bars Lawsuit: Employee Must First Exhaust Internal Agency Process

By Erin Kunze on March 20, 2018 Posted in Discrimination, Employment

This post was authored by Erin Kunze.

In 2009, Santa Barbara County, like many public agencies in California, faced a budget shortfall for the 2009-2010 fiscal year. In response, the County determined the need to lay off 35 employees, including employee Shawn Terris. Terris endeavored to exercise bumping rights, but it was determined that she did not possess the special skills needed to exercise bumping. Terris, who was then laid off, filed a complaint with the County’s Civil Service Commission. She alleged the termination violated her seniority rights, and that it was discriminatory based on her exercising rights as a County employee, on her exercising her rights as an elected County Employees’ Retirement Board Trustee, and on her filing a claim against a public entity.

The Civil Service Commission ruled that it could make a determination about Terris’ bumping rights and whether proper procedures for terminating her employment were followed. However, it determined that it could not rule on Terris’ discrimination claims because she had not yet exhausted her agency-provided administrative remedy by first filing a discrimination complaint with the County’s Equal Opportunity Office (EEO). The Commission advised Terris and her attorney that she must first file with the EEO to have her discrimination complaint heard. The Commission offered to continue her hearing so that she could first proceed through the internal EEO process and so that the Commission could hear all claims at once. Terris chose not to file the EEO complaint. When her claim was rejected, Terris sued the County, asserting that she was not obligated to exhaust her employer’s internal administrative remedies prior to bringing her claim forward, based on a federal trial court holding that interpreted California Labor Code section 244, subdivision (a) to mean that internal policies requiring the exhaustion of administrative remedies are contrary to state labor law.

In a decision last month, Terris v. County of Santa Barbara, the Court of Appeal for the Second District of California determined that the federal trial court got it wrong, noting that the decision was a clear contradiction to controlling State Supreme Court precedent. Specifically, the Court of Appeal held that Labor Code section 244 – providing that an individual is not required to exhaust administrative remedies in order to bring a civil action against his or her employer – applies only to administrative remedies provided by the State Labor Commissioner. Therefore, the Terris court held, the statute does not impact a public employee’s duty to exhaust administrative remedies available through his/her employer before filing a civil lawsuit.

In text, Labor Code section 244, subdivision (a), states that an individual is “not required to exhaust administrative remedies or procedures in order to bring a civil action under any provision of this [the labor] code, unless that section under which the action is brought expressly requires the exhaustion of an administrative remedy…” While the statutory language may appear clear on its face, the Terris court explained the legislative history indicating that the “administrative remedies” described by the section 244, are specific to remedies provided by the Labor Commissioner, not the remedies available through a public employer’s internal procedure.

Prior to the enactment of Labor Code section 244, subdivision (a), the California Supreme Court, in the 2005 case Campbell v. Regents of University of California, held that public employees must pursue appropriate internal administrative remedies before filing a civil action against their employer. Following Campbell, California courts began to rely on the decision for diverging principles: (1) that an employee had to exhaust only internal administrative remedies before filing a civil suit, and (2) that an employee had first bring a claim before the Labor Commissioner before filing such suit. Later, in 2013, after this controversy developed (see our related article here*), the State Legislature passed Senate Bill No. 666, enacting Labor Code section 244, subdivision (a), and amending Labor Code section 98.7 (involving Labor Commissioner claims) in an effort to resolve the divergent interpretations arising from Campbell. While the statutory language is broad, the Terris Court looked to commentary by Senate Bill No. 666’s author. In his commentary, the author explained that Labor Code section 244, subdivision (a) was enacted to protect the rights of employees to sue without first having to exhaust Labor Commissioner administrative proceedings (e.g. wage theft and retaliation claims). Accordingly, the Terris court determined that the holding in Campbell remains intact. Thus, public employees, including Terris, must pursue “appropriate internal administrative remedies,” such as internal grievance procedures or an EEO complaint process provided by a public agency employer, prior to filing a civil lawsuit regarding the same action.

This case emphases the importance of internal public agency grievance and complaint procedures, which may assist your agency in preventing unnecessary civil litigation – begging the question, does your agency maintain internal grievance and complaint procedures? If so, are your agency’s grievance policies and procedures clear and concise? Does your discrimination, harassment, and retaliation prevention policy include a complaint process? If not, there’s no time like the present to submit your policies for a check-up. See the Liebert Library and Model Personnel Policy Portal for additional tools for your agency: https://liebertlibrary.com/.

*Note: The Court’s decision is consistent with LCW’s interpretation of the law following the 2013 controversy. See https://www.lcwlegal.com/news/plaintiff-was-not-required-to-file-complaint-with-labor-commissioner-before-filing-suit-for-whistleblower-retaliation-under-labor-code-section-11025

Three Tips For An Effective Workplace Security Plan

By Melanie Chaney on March 15, 2018 Posted in Workplace Policies

This post was authored by Melanie L. Chaney.

Recent national events remind us that violence in the workplace has been, and continues to be, a huge issue for employers. The beginning of a new year is a great time for reflection on events from the previous year, identifying any lessons learned, and making any necessary adjustments.

In California, the law imposes a duty on all employers to provide a safe workplace. All employers are required to have a workplace security plan. If your agency does not have a workplace security plan, or if the plan has not been reviewed recently, we recommend taking the time now to address the matter. Here are a few preventative measures employers should incorporate into an effective workplace security plan.

Demonstrate a strong management commitment to preventing workplace violence.

All employees should be made aware that the agency is committed to providing a safe work environment that is free of violence and that management will not tolerate violence, or the threat of violence, against or by any employee.

The security plan should provide that management will investigate and appropriately deal with any reported act of violence or threat of violence. Dealing with threats of violence can be particularly challenging. In the majority of cases, a threat will not lead to a violent act. However, a threat affects workplace security and requires a response. No threat should be taken lightly. All threats, whether idle or serious, should be taken seriously and investigated. Every case should be examined and evaluated on the basis of its particular nature and circumstances. Even if, after investigation, it is determined that a threat was made in jest, a record of the threat should be made. If a pattern develops, threats that appear harmless in the beginning may turn out to be indicative of a more serious problem.

Have a clear, written workplace violence policy provided to employees.

It is critical to ensure that all employees know the workplace violence policy and understand that all claims of workplace violence will be investigated and remedied promptly. Accordingly, the workplace violence policy should be provided to all employees and be easily accessible. The policy should make clear to all employees that engaging in violence or the threat of violence is unacceptable and could lead to discipline, up to and including termination, and/or criminal prosecution.

The policy should also provide a system for employees to communicate information about workplace security hazards, including means by which employees can inform the employer of hazards without fear of reprisal. The policy should expressly state that any person, acting in good faith, who initiates a complaint or reports an incident under the policy, will not be subject to retaliation or harassment.

Provide workplace violence prevention training and education for all employees.

Training is a key factor in an effective workplace security plan. The agency should regularly train and educate all employees, supervisors, and managers regarding risk factors, crime awareness, assault and rape prevention, how to diffuse hostile situations, and what steps to take during an emergency.

If you need any assistance with developing or reviewing your workplace security plan or anti-violence policies, attorneys at all LCW offices are available to consult.

California Supreme Court Rules that State Law Requires a Different Regular Rate of Pay Calculation than the Fair Labor Standards Act

By Lisa S. Charbonneau on March 7, 2018 Posted in FLSA, Wage and Hour

The post was authored by Lisa S. Charbonneau.

On March 5, 2018, the California Supreme Court issued a decision in the case Alvarado v. Dart Container Corporation, in which employee Hector Alvarado sued his employer under the California Labor Code for back overtime compensation under the theory that his employer had incorrectly calculated his “regular rate of pay.”

Under both the California Labor Code and the Federal Fair Labor Standards Act (FLSA), the regular rate of pay is the rate an employer must use to pay overtime premiums to employees who work overtime hours. The regular rate of pay can change from workweek to workweek because it must reflect the per-hour value of all compensation the employee has earned. This includes additional compensation an employee could earn on an hourly basis (e.g., shift differentials or on-call pay) and any non-hourly compensation an employee could earn (e.g., a flat dollar amount for a bonus or bilingual pay). Specifically at issue in Alvarado was how to calculate the per-hour value of a lump sum bonus of $15 per day paid for work performed on a weekend day for purposes of the regular rate under California law.[1]

Regulations promulgated by the U.S. Department of Labor (DOL) unequivocally state how to calculate an employee’s regular rate under the FLSA when he or she is paid a lump sum bonus. As set forth in the DOL regulations at 29 C.F.R. section 778.110(b), to calculate the per-hour value of a lump sum bonus under the FLSA, an employer must divide the weekly bonus amount by the total hours actually worked by the employee in the week.[2] In Alvarado, the employer followed the FLSA in its method of calculating the regular rate when an employee was paid the $15 per day bonus. The plaintiff challenged this method as illegal under State law.

In a matter of first impression, the California Supreme Court in Alvarado departed from the Federal regular rate standard, opining that under State law, the per-hour value of a lump sum bonus such as that paid to Mr. Alvarado must be calculated by dividing the lump sum bonus by the number of non-overtime hours actually worked in the week. Applied to the example in footnote 2, under California law as announced in Alvarado, to arrive at the per-hour value of the $75 bonus, the employer must divide the $75 by 40, the number of non-overtime hours actually worked in the week. The California method results in a per-hour value of $1.88 (as opposed to the $1.50 result under the FLSA), which would be added to the $30 hourly rate for a regular rate of $31.88 (as opposed to the $31.50 result under the FLSA).

The California Supreme Court’s Alvarado decision is limited to flat-sum bonuses or pays (e.g., $75 a week, $300 per month or any flat dollar amount that can be converted into a weekly equivalent). As such, other pays which are not flat-sum amounts are likely not covered by the decision.

The significance of Alvarado for private sector employers in California may be great where employers have been relying on the FLSA to incorporate non-discretionary lump sum bonuses (or other flat-sum payments) into the regular rate calculation. The significance of Alvarado for most public sector employers, however, is negligible. Although Alvarado sets a new standard for calculating the regular rate under the California Labor Code, most public sector agencies are exempt from the requirements of the California Labor Code and need only comply with the overtime requirements of the FLSA. Indeed, for public sector employers, this decision offers clarity in that the California Supreme Court has confirmed that under the FLSA, the required regular rate divisor is that of all hours actually worked, not just all non-overtime hours worked.

This decision is also a reminder of the importance of clearly articulating negotiated forms of compensation in labor agreements. Failure to specify whether a payment is purely hourly, paid on a certain number of hours, or has no bearing on hours may have unintended FLSA regular rate consequences. For example, if you do not intend on paying an agreed upon additional hourly pay for overtime hours, state that clearly in your MOU.

If you have questions about whether your agency is covered by State wage and hour laws and therefore subject to the holding in Alvarado v. Dart Container Corporation, or about any other aspect of this decision our attorneys are available to help with your questions.

[1] Under California and Federal law, non-discretionary bonuses must be included in the regular rate of pay.
[2] For example, where an employee paid $30 per hour works 50 hours in a week and earns a bonus (or other lump sum includable in the regular rate) of $75 for the week, under the FLSA, the regular rate of pay is calculated as follows: $30 x 50 = $1500 + 75 (for the additional bonus) = $1,575.00. $1,575.00 divided by 50 = regular rate of pay of $31.50. As you can see, under the FLSA, the per-hour value of the bonus is divided by the total hours actually worked by the employee.

Supreme Court Hears Oral Argument on Agency Shop Fees Case

By Joshua Goodman on March 6, 2018 Posted in Labor Relations

This post was authored by Joshua A. Goodman.

In October 2017, we reported that the U.S. Supreme Court agreed to review Janus v. AFSCME, a case out of Illinois challenging the constitutionality of mandatory agency shop fees for public employees. Illinois, like California, is one of several states where agency shop arrangements are authorized in the public sector.

An agency shop requires that, as a condition of employment, an employee within the defined bargaining group either join the recognized employee organization, or pay a service fee to the organization (typically an equivalent amount) for collective bargaining and other activities conducted on the employee’s behalf. However, the Supreme Court has held that unlike union dues, agency shop fees may not be used to express political views, support a political candidate, or otherwise advance an ideological cause unrelated to collective bargaining, as doing so violates First Amendment free speech principles.

The plaintiffs in Janus assert that an agency shop arrangement likewise infringes on their free speech rights because collective bargaining with a government agency is essentially tantamount to political speech intended to influence policymaking. The Supreme Court addressed, and rejected, the same argument 40 years ago in Abood v. Detroit Bd. of Ed. Thus, the plaintiffs in Janus have requested that Abood be overruled.

This is not the first time the Supreme Court has considered overruling Abood. The same issue recently arose in the 2016 case of Friedrichs v. California Teachers Assoc. However, that case resulted in a 4-4 split among the justices at a time when the ninth seat on the Court was vacant following the death of Justice Antonin Scalia. As a result, Abood remained the law.

Oral arguments at the Supreme Court in Janus were heard by the justices on February 26, 2018. The justices and lawyers addressed issues including, but not limited to, the “free-rider” issue of non-dues/fee payers benefitting from union representation, the efficacy of unions and the number of collective bargaining contracts that may be invalidated if Abood is overturned, the scale and scope of matters within the realm of public concern, and the impact of the decision on labor peace.

While Friedrichs had a split vote, that will not happen in Janus because Justice Neil Gorsuch was appointed to fill the vacant position. Analysts predict that Abood will now be overruled, effectively putting a stop to agency shop arrangements in every state.

A decision is expected by June 2018. As an initial step, agencies with agency shop agreements should review their collective bargaining agreements to determine if there is a severability clause and the parameters of these clauses. A severability clause essentially provides that if any provision of the contract is deemed to be illegal, the rest of the terms of the agreement survive. Agencies may receive requests from union representatives trying to anticipate and/or determine next steps. Specific strategies on how to respond will need to be developed with your agency’s chief negotiators and legal counsel, and of course will ultimately depend on the final decision in Janus.

We will continue to monitor the case and provide updates as they become available.

CalPERS Reduces Amortization Period with Impacts to Employer Contribution Rates

By Stephanie Lowe and Frances Rogers on March 1, 2018 Posted in Retirement

This post was authored by Stephanie J. Lowe and Frances Rogers.

The California Public Employees’ Retirement System (CalPERS) recently decided to change its Actuarial Amortization Policy (“Amortization Policy”), which will impact employer contribution rates for contracting agencies. The revised Amortization Policy will go into effect for public agencies in the 2021-2022 fiscal year, which will be based on the June 30, 2019 actuarial valuations. The policy changes include:

Shorter amortization periods from 30 years to 20 years.
Level dollar amortization payments for unfunded accrued liability (“UAL”) bases
Elimination of 5-year ramp-up and ramp-down on UAL bases attributed to assumption changes and non-investment gains and losses that occur on or after the effective date of the policy change.
Elimination of 5-year ramp-down on investment gains and losses occurring on or after the effective date of the policy change.
A 15-year maximum amortization period for inactive employers (this provision is effective for the June 30, 2017 actuarial valuations).

In layman’s terms, an amortization period broadly refers to the length of time which a borrower pays off a debt. CalPERS amortizes gains and losses in investments over a standard amortization period which is currently 30 years. Longer amortization periods generally provide lower annual contributions but greater cumulative contributions due to interest costs. Further, to control rate volatility, the current policy uses “direct rate smoothing” that phases in certain costs associated with actuarial assumptions over a 5-year period and phases them out again during the last 5 years of the amortization period (i.e., the ramp-up and ramp-down).

According to CalPERS, the combination of the current amortization schedule, “direct rate smoothing,” and the payment escalators have contributed to more “negative amortization” in the earlier years of the amortization schedule. Negative amortization means the payments on the debt are not sufficient to cover the interest accrued on that debt. Thus, reducing an amortization period, as well as eliminating direct rate smoothing for most sources of unfunded liability, can provide faster recovery of funded status following market downturns and decrease expected cumulative contributions, according to a CalPERS Finance and Administration Committee report.

While contracting agencies had the voluntary option to contribute based on a 20 or 15 – year amortization period, most contribute on the 30-year schedule because employer contribution rates remain lower. Thus, agencies on the 30-year schedule will experience higher employer contributions once the revised amortization policy goes into effect. The change to the amortization base established prior to the effective date of this new policy will continue according to the employer’s current schedule.

Level Dollar Amortization for UAL Payments

Under the current policy, payments on changes that adversely impact an employer’s UAL base begins with a lower initial payment that increases each year by the payroll growth assumption (“escalator” approach). The revised Amortization Policy will require agencies to pay a higher initial amortization payment for changes in the UAL base established on or after the effective date of the new policy, and thereafter the employer will a level dollar amount throughout the remainder of the amortization period, assuming no changes to the discount rate or amortization methods occur. This will result in higher initial payments, but is expected to reduce interest costs and eliminate negative amortization.

Elimination of Direct Rate Smoothing for Non-Investment Impacts

The current Amortization Policy utilizes direct rate smoothing, or a “ramp-up” and “ramp-down” approach, for phasing-in contribution increases resulting from changes in actuarial assumptions and non-investment gains and losses. This allows for gradual contribution increases in the first five years of the amortization period and gradual lower payments in the last five years. The policy now eliminates this direct rate smoothing due to a change in actuarial assumptions or experience and non-investment gains and losses. The policy will keep ramp-ups for investment gains and losses.

Elimination of Ramp-Downs for Investment Gains and Losses

Under the current policy, CalPERS allows a “ramp-down” in base payments for investment gains and losses at the end of the amortization period. For example, under a 30 year amortization period, agencies would pay a reduced percentage of the base payment in the final four years for investment gains and losses (80% of the base payment in Year 27, 60% in Year 28, 40% in Year 29, and 20% in Year 30). The policy changes completely eliminate all ramp-downs, which includes ramp downs for investment gains and losses, UAL due to a change in actuarial assumptions, and non-investment gains and losses.

Amortization Periods for Inactive Employers

Public agencies without active CalPERS members are subject to a closed amortization period of no more than 15 years. This change will begin with the June 30, 2017 actuarial valuations.

Effect on CalPERS Agencies

Annual actuarial valuation reports published by CalPERS for each contracting agency already contain information regarding the 20-year amortization schedule as an alternative to the 30-year schedule. An agency can refer to these reports to see what the agency’s balance and payment structure would be like under a 20-year amortization schedule, although they do not necessarily reflect all impacts of the changes in the Amortization Policy.

Under the revised policy, employers will experience additional contribution rate increases over the next few years. Employers may also see higher year-to-year contribution increases due to actuarial losses than would otherwise be expected under the current policy. Agencies should prepare for these increased costs as they prepare for future negotiations and long-term budgeting.

Changes to Projections Due to Reduction in Discount Rate

According to the CalPERS Finance and Administration Committee report, the policy changes will also affect amortization projections and payments related to the scheduled discount rate change from 7.25 percent to 7 percent. The discount rate, or rate of return, is the percentage of expected returns on investments CalPERS makes. In December 2016, the CalPERS Board voted to adopt an incremental reduction in discount rate over a three-year period beginning with the 2018/2019 fiscal year for contracting agencies. Each one of the three reductions to the discount rate have a five-year ramp up. The result is a long-term payment of interest-only. Projections on the impact to employer contribution rates as a result of the lowered discount rate did not take into consideration a reduced amortization period that goes into effect with the 2021-2022 fiscal year. The new changes to the Amortization Policy could result in unanticipated increases to employer contributions.

Tied into the changes in the Amortization Policy, the CalPERS Board of Administration recently approved new actuarial assumptions based on a study of CalPERS membership. CalPERS released Circular Letter 200-014-18 (February 8, 2018) to inform agencies that the assumption changes will impact employer contribution requirements by increasing the percentage of payroll costs and the employer UAL contribution. CalPERS will implement the new actuarial assumptions with the June 30, 2017 actuarial valuations, which will set the employer contribution requirements effective July 1, 2019.

For more information on these changes, please contact one of our offices. The issues presented here are not exhaustive so please consult with legal counsel for further information.

U.S. Appeals Court Tells Public Employers to Stay Out of Employee’s Bedrooms

By Megan Lewis on March 1, 2018 Posted in Employment, Privacy, Public Safety Issues

This blog was authored by Megan Lewis.

Earlier this month, in Perez v. City of Roseville, the U.S. Court of Appeals held that terminating a police officer for engaging in an off-duty, extramarital affair with a co-worker could violate the officer’s right to privacy under the U.S. Constitution.

Background Facts

Perez, a probationary police officer, was initially reprimanded after an internal affairs investigation revealed that she had been involved in an off-duty sexual relationship with a fellow officer. (The investigation was initiated by a complaint from the second officer’s wife.) Though the investigation found no evidence of on-duty sexual contact between the two officers, the investigator found a number of calls and texts between them while one or both was on duty, which “potentially” violated Department policy. Perez was reprimanded for “conduct unbecoming” and “unsatisfactory work performance.”

The officer appealed the reprimand and, after her appeal hearing, she was terminated by the Police Chief without explanation. The Chief claimed he made the decision to terminate Perez based on performance issues that arose after the internal affairs investigation that were unrelated to the affair.

The Court of Appeals’ Ruling

The officer filed an action in federal court alleging among other things that her termination violated her constitutional rights to privacy and intimate association because it was impermissibly based in part on management’s disapproval of her private, off-duty sexual conduct. The trial court granted summary judgment for the City, but the Court of Appeals reversed as to the privacy and intimate association claims because Perez had presented sufficient evidence that “[a] reasonable factfinder could conclude that [the Internal Affairs Captain overseeing the investigation] was motivated in part to recommend terminating Perez on the basis of her extramarital affair, and that he was sufficiently involved in Perez’s termination that his motivation affected the decisionmaking process.” Perez now has an opportunity to prove her allegations at a trial.

The appellate court stated it has “long held” that public employers must take care not to “encroach excessively or unnecessarily upon the areas of private life,” or to “eliminate the development of ordinary human emotions from the workplace…unless such development is incompatible with the proper performance of one’s official duties.” Therefore, the Court held, terminating a police officer for private, off-duty sexual conduct violates the “constitutional guarantees of privacy and free association” unless the department can demonstrate that “such conduct negatively affects on-the-job performance or violates a constitutionally permissible, narrowly tailored regulation.”

What does this mean for your agency?

The Court viewed the case as addressing “how much control the government can force individuals to cede over their private lives in exchange for the privilege of serving the public by means of government employment.” The answer seems to be not much (at least in terms of off-duty sexual conduct) unless the conduct negatively impacts the employee’s performance or violates a legitimate policy.

The majority opinion was authored by Judge Stephen Reinhardt with full agreement from a Montana federal court judge sitting temporarily with the Court of Appeals. Judge A. Wallace Tashima issued a strongly worded concurrence that also included major disagreements with Reinhardt. Whether either side seeks review by the U.S. Supreme Court remains to be seen. However, the bottom line is that this decision was not a final victory for Perez. The case was returned to the trial court in Sacramento where Perez will need to prove at trial that the true reason for her termination was her managers’ personal disapproval of her off duty conduct. As a probationary employee, she was subject to termination for any reason, or indeed no reason, as long as the reason was not an illegal one.

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