United States: Labor Code Private AG Act; Outsourcing; and Illegal Bonuses (Ralphs Grocery Co.)

In our November 2003 Employment Law Commentary, we reported on both the Labor Code Private Attorneys General Act (S.B. 796) and also the appellate court decision in Ralphs Grocery Co. v. Superior Court of Los Angeles (David Swanson), 112 Cal. App. 4th 1090 (2003). Enactment of S.B. 796 caused consternation in the employer community. A recent complaint filed in Ventura County demonstrates why that consternation was justified. In Ralphs Grocery, denial of review by the California Supreme Court ends any uncertainty for the time being about including certain expenses in profit-based bonuses. In our January 2004 Employment Law Commentary, we reported on outsourcing and the human resources concerns that need to be taken into account. Outsourcing is now on both the national and state political agendas, and recent bills in the California Legislature should be of concern to employers.

As discussed more fully in our November 2003 Employment Law Commentary, S.B. 796 (now Labor Code § 2699) provides a private right of action for any alleged Labor Code violation. To the extent the particular Labor Code provision does not have monetary penalties attached, S.B. 796 imposes new penalties of up to $200 per employee per pay period for a violation of the Labor Code. The statute has been called a "bounty hunter" measure because 25% of any penalties recovered go to the prevailing plaintiff. Attorneys’ fees and costs are also awarded to prevailing plaintiffs. Employers were understandably concerned that complaints alleging a series of technical violations of the Labor Code could be filed against them, and with the penalties assessed on a per-employee-per-pay period basis, liability could be very significant.

A recent complaint filed in Ventura County demonstrates that the fear was not unfounded. The complaint alleges five substantive causes of action for violation of various posting and other relatively obscure provisions of the Labor Code and demands the penalties provided in S.B. 796. The causes of action include:

• Violation of Labor Code section 1102.8 for failure to prominently display the telephone number of the whistleblower hot line required by Labor Code section 1102.7. Section 1102.7 was effective January 1, 2004, and plaintiff claims the violation continued from January 1, 2004, to February 2004.

• Violation of Labor Code section 1183 for failure to post the Industrial Welfare Commission Order. Plaintiff alleges this violation extends back to 1999.

• Violation of Labor Code section 3550 requiring the employer to post in a conspicuous location a notice stating the name of the current workers’ compensation carrier of the employer. Plaintiff alleges the violation began January 1, 2004.

• Violation of Labor Code section 432.5, which precludes an employer from requiring an employee to agree in writing to any term or condition which the employer knows to be prohibited by law. Plaintiff alleges that the arbitration agreement which the employer requires employees to sign requires the employee to pay 50% of all arbitration costs, which plaintiff alleges is illegal under California law. Plaintiff alleges this practice began as early as 1996.

• Violation of Labor Code section 431, which requires all employers to file any application of employment which an employee is required to sign with the Office of the Division of Labor Standards Enforcement (Labor Commissioner). Plaintiff alleges that the employer has never filed such an application with the DLSE.

Plaintiff pleads this complaint as both a class action and a representative action under Business and Professions Code section 17200, the Unfair Business Practices Act.

There are several bills in the Legislature to overturn or modify S.B. 796. A.B. 2181 (Campbell) would repeal outright S.B. 796. A.B. 2650 (Bates) would exclude employers with fewer than 100 employees within a 75-mile radius. S.B. 1861 (Ashburn) would require employees intending to file claims under the statute to first report their grievances to the labor agencies and if one of the labor agencies does not act within 60 days, only then would the employee be able to file directly in civil court under the statute. However, it is unlikely that the Legislature will soon make significant changes to S.B. 796 since the legislators who recently enacted it are all still in the Legislature.

The lesson for employers is that they must be extremely vigilant about compliance with all of the requirements in the Labor Code and Industrial Welfare Commission Orders. Even the most innocuous or seemingly hyper-technical requirement of the Labor Code now provides the potential for a lawsuit and the imposition of significant penalties.

In our January 2004 Employment Law Commentary, we reported on the various forms of outsourcing and the human resources implications of them. The issue has now been put on the national agenda with President Bush announcing his intention to appoint a manufacturing "czar" to address US job losses and being criticized for his failure to do so in a timely fashion. Indeed, the term "outsourcing" has now become part of the presidential campaign, especially in the industrial Midwest, which has seen outsourcing and/or the loss of manufacturing jobs.

In California, the issue has reached the Legislature. Earlier this month, a State Senate committee held hearings about the potential for California regulating outsourcing. Concern was expressed not only for the loss of jobs but also for the potential for the release of private medical, financial, or homeland security information outside the United States. Several bills have been introduced to address these concerns:

• S.B. 1452 (Figueroa) would forbid (to the extent not in conflict with federal law) the State from contracting with any company that employs persons or subcontractors outside the United States to perform and complete the State contract.

• S.B. 1451 (Figueroa) and S.B. 1492 (Dunn) indicate the intent of the Legislature to deal with the medical, financial, and homeland security information problems of outsourcing but do not provide any specifics.

• S.B. 1453 (Figueroa) would require that any employer outsourcing jobs when it would result in the replacement of 20 or more workers in California must notify EDD and the affected workers 60 days before the employer enters into the contract with the contractor or subcontractor outside the US.

Clearly, this is an issue that will be on both the political and the policy agendas for the rest of the year; employers involved in these activities should be monitoring them.

In the November 2003 issue of the Employment Law Commentary, we reported on Ralphs Grocery Co. v. Superior Court, 112 Cal. App. 4th 1090 (2003). The decision called into question the way many employers calculate profit-based bonuses that they pay to their employees at the end of the year. The case held that for profit-based bonuses for exempt employees, employers may not take into account the costs of workers’ compensation. For non-exempt employees, employers may not include the expenses of cash shortages or workers’ compensation costs. Obviously, deducting these costs from a profit-based bonus calculation will have the effect of increasing the profit and therefore increasing the bonus paid to the employee in a way not originally contemplated when the bonus methodology was designed.

The case was vigorously litigated by Ralphs, and an appeal was filed in the California Supreme Court. However, on February 18, 2004, the court denied review; the appellate court decision is therefore final and is binding on all lower courts in the State. Presumably, an appellate court in another district could reach a different conclusion and set the case up for ultimate review by the California Supreme Court. However, until that happens, employers are bound by this decision and should review their bonus plans to ensure that they are not including either of these illegal expenses for the applicable employees.

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

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