United States: Employment Law Commentary - April 2005

Case Law Potpourri: Age Discrimination Claims, Pre-employment Medical Tests, Commission Chargebacks, and More

This new year has brought a variety of new employment law cases from both federal and state courts. Most offer clarification on existing law, while a couple expand existing obligations or liability.

Federal Court Decisions

The U.S. Supreme Court has recently settled the question of whether older employees can bring disparate impact ¹ suits where neutral policies disparately impact older workers. In Smith v. City of Jackson, Mississippi, 125 S. Ct. 1536 (March 30, 2005), the Court held in a 5-3 decision (Justice Rehnquist did not participate) that the Age Discrimination in Employment Act ("ADEA") permitted such claims, although it found in that case the plaintiffs failed to state a viable claim for disparate impact.

In October 1998, the City of Jackson, Mississippi, adopted a new pay plan for its police officers. The plan treated employees differently depending upon their seniority: those with less than five years of service received a higher percentage raise than those with longer tenure who received higher dollar amounts but a smaller percentage increase. The plan was designed to give raises to City employees with a view to attracting and retaining qualified employees and remaining competitive with other public employers. In particular, the City was looking to bring the starting salaries of police officers up to the regional average. Most of the officers over 40 had more than five years of service, and thus received smaller percentage increases. A group of police employees who were over 40 sued the City under the ADEA, alleging both disparate-treatment and disparate-impact theories. The district court granted summary judgment to the City on both claims, and the Fifth Circuit held 2-1 that disparate-impact claims are not available under the ADEA.

Justice Stevens writing for the majority began by noting that except for the substitution of "age" for "race, color, religion, sex, or national origin," the language of ADEA § 4(a)(2) and Title VII § 703(a)(2) is identical:

"it shall be unlawful for an employer to limit, segregate, or classify its employees in any way which would deprive or tend to deprive any individual of employment opportunities or other- wise adversely affect his status as an employee, because of such individual’s age . . . ."

29 U.S.C. § 623(a)(2). Because the language is virtually identical, Justice Stevens ruled that Griggs v. Duke Power Co., 401 U.S. 424 (1971), interpreting the same language in Title VII, controlled the Court’s reading of ADEA.

In Griggs, the Court held that Title VII prohibited employers from imposing seemingly neutral policies (e.g., diploma requirements) where those policies were not significantly related to successful performance of the job and the policies had the disparate effect of excluding protected groups from employment or promotion. The significance of the Griggs ruling was that it targeted the consequences of employment practices not just the motivation behind them. Applying Griggs to ADEA, Justice Stevens determined that the disparate impact analysis applied to ADEA but it was limited by another ADEA provision.

ADEA provides that it shall not be unlawful for an employer "to take any action otherwise prohibited under the [Act…] where the differentiation is based on reasonable factors other than age." 29 U.S.C. § 623(f)(1) (the "RFOA provision"). Thus, ADEA does not prohibit neutral policies with an adverse impact on older workers where the adverse impact is attributable to a reasonable, nonage factor, such as seniority and rank.

This creates a significant difference between ADEA and Title VII. While both prohibit the same conduct, an employer’s liability for disparate impact is much broader under Title VII because Title VII does not have an RFOA provision and because Congress, since the Court’s decision in Griggs, has broadened employer liability under Title VII in the 1991 amendments. Under the 1991 amendments, an employer can be liable for an adverse impact — even if the factor in question is based on a legitimate business necessity — if the plaintiff can demonstrate that the employer could have achieved the same goal through an alternative means which would have caused less of an adverse impact.

Applying disparate impact under ADEA to the facts at hand, Justice Stevens concluded that the police officers in this case failed to state a claim because the evidence demonstrated that the City’s pay plan was adopted for the purpose of raising its junior officers’ salaries to make them competitive with comparable positions in the market. Thus, the disparate impact was attributable to factors of seniority and position, which were unquestionably legitimate factors other than age under the RFOA provision.

The U.S. Supreme Court’s decision will likely have little effect on California employers because state law is already very generous to older workers bringing disparate impact claims. In 1999, the California legislature codified the use of the disparate impact theory in age claims under the California Fair Employment and Housing Act ("FEHA"). Under FEHA, the use of a facially neutral policy which has a disparate impact on older employees is unlawful unless the employer can prove that the factor was supported by business necessity and there was no means to accomplish the same business purpose with a lesser adverse impact. See Cal. Gov’t Code § 12941; 2 Cal. Code Regs. § 7286.7.

Timing in Pre-Employment Medical Tests Plays a Determinative Role in Their Permissibility Under ADA and FEHA

In a Ninth Circuit decision, Leonel v. American Airlines, Inc., 400 F.3d 702 (9th Cir. 2005), the court reinforced the importance of refraining from any pre-hire medical questions or examinations until all other pre-employment contingencies have been removed. Additionally, the court held with respect to a privacy claim that consent to the withdrawal of blood as part of a pre-hire physical did not amount to consent for the employer to conduct any and all screens on the blood samples, such as an HIV screen.

Leonel, Branton, and Fusco, all of whom are HIV-positive, applied for flight attendant positions with American Airlines. They were interviewed at the company’s headquarters in Dallas, Texas, after which they were given each an offer of employment, contingent upon passing both background checks and medical examinations. Following the contingent offers, they were immediately sent to an on-site medical department where they filled out medical history questionnaires and gave blood samples. They were not given disclosure regarding the purposes for which the blood test was to be used, nor did they fill out a consent form. In fact, when questioned, the medical staff informed Fusco that his blood would be tested for anemia only. None of the three applicants disclosed his HIV-positive status or related medications. American subsequently discovered their HIV status after receiving the results of the complete blood count ("CBC") and receiving confirmation from each of the applicants’ personal physicians of their HIV status. American then rescinded the conditional offers of employment, citing their failure to disclose information during their medical examinations.

The appellants challenged the medical examinations and inquiries under the ADA and FEHA and further argued that their rights under California’s constitutional right to privacy had been violated by conducting CBCs on their blood samples without notifying them or obtaining their consent. The district court granted American’s motion for summary judgment on all claims. The Ninth Circuit found material issues of fact as to all issues and reversed.

The court relied on language in both the ADA and the FEHA that prohibits medical examinations and inquiries until after the employer has made a "real" job offer to an applicant. For a "real" offer under the ADA and FEHA, an employer must either have completed all non-medical components of its application process or be able to demonstrate that it could not reasonably have done so before issuing the offer. The purpose of this rule, the court held, is in part to protect the applicants’ privacy and in part to enable applicants to more easily discern whether the reason for their rejection was based on medical grounds alone. On the facts present in Leonel, the court held that American failed to show that it could not have reasonably completed the background checks and notified the applicants before initiating the medical examination process. The court further rejected American’s argument that it had not violated the statute because it did not evaluate the medical information until after it had received the results of the background checks. It held that the statutes regulate the sequence in which employers collect information, not merely the order in which they evaluate it.

The court also addressed the appellants’ argument that the CBC blood test, without notice or consent, violated their privacy rights under the California Constitution. The court quickly concluded that the first and third requirements of Hill v. Nat’l Collegiate Athletic Ass’n, 7 Cal. 4th 1 (1994), were met: (1) the drawing and testing of blood implicates a legally protected privacy interest and (3) the conduct of the test by the defendant amounts to a serious invasion of the protected privacy interest. Whether the applicants’ privacy claims could proceed, therefore, depended upon whether they had demonstrated a material issue of fact as to the reasonableness of their expectation of privacy. Although concluding that the applicants did not have a reasonable expectation of privacy that would prevent the drawing of blood, the court nevertheless concluded that the applicant’s consent to a blood test did not constitute a consent to any and all medical tests that American wished to run on the blood samples. (Indeed, the facts of this particular case suggested the applicants were given inaccurate and possibly misleading information as to the tests that would be run.) Thus, the court held that American had not met its burden on summary judgment of proving the absence of a material issue of fact as to the applicants’ reasonable expectation of privacy. Finally, the court noted that even in the event the appellants prove a reasonable expectation of privacy, the inquiry is not ended. The lower court must then balance the justification for the test against the intrusion on privacy.

While the press following the announcement of this case suggested that it limited employers’ ability to conduct pre-employment medical examination, this is not so. Leonel v. American Airlines, Inc. merely emphasizes that the sequence of events in conducting the medical examinations is crucial to their lawfulness. So long as an offer of employment has been extended and all other impediments to employment have been removed (e.g., conducting reference checks, completing background investigations), employers may require that employees submit to job-related physicals.

California Appellate Court Decisions

The First District, California Court of Appeal, has issued an opinion reaffirming the requirement that, in the retaliation context, an adverse action must have a detrimental and substantial effect on the plaintiff’s employment. In doing so, the court rejected the more lenient Ninth Circuit test, which establishes an adverse action provided the act is based on retaliatory motive and is reasonably likely to deter the plaintiff and others from engaging in protected activity, such as filing a discrimination charge.

In McRae v. Department of Corrections, 25 Cal. Rptr. 3d 911 (1st Dist. 2005), Dr. McRae, a surgeon employed by the Department of Corrections, alleged that she was discriminated against on the basis of race when she was denied a promotion and was retaliated against when she protested the discrimination by filing charges with the Department of Fair Employment and Housing (the "DFEH"). On her retaliation claim, Dr. McRae alleged that in retaliation for the DFEH charges, the Department of Corrections:

• issued her a letter of instruction instructing her to read various regulations and memoranda requiring that she not leave her post during work hours without notifying her supervisor (following a report that Dr. McRae had left her post unattended without notifying management);

• conducted an internal investigation (related to reports that she had failed to follow two directives and failed to provide sufficient care to prison hospital patients) and proposed a 30-day suspension. Because Dr. McRae; was then on extended medical leave, she was never notified of the decision and the suspension was never implemented; and

• transferred her reporting site to another prison facility.

The jury found against Dr. McRae on the discrimination claim but for her on the retaliation claim. The Department of Corrections appealed.

On appeal, the Department of Corrections argued that the first two acts were not adverse because they did not have a substantial and detrimental effect on Dr. McRae’s employment, and the third act, the transfer, was not detrimental because Dr. McRae had failed to show that the assignment was less desirable or more dangerous. Dr. McRae countered that the "adverse acts" test previously adopted by California appellate courts is too restrictive and argued that the court should adopt the more lenient Ninth Circuit test.

The court began its analysis by recognizing that the California retaliation/adverse action test serves two competing goals: preventing employment actions which might have a chilling effect on claimants’ rights under FEHA and avoiding the judicial micromanagement of business practices which would lead to suits over any action that was not to the employee’s liking. By requiring a substantial, detrimental action, the California test serves the first goal without running afoul of the second. In contrast, the Ninth Circuit deterrence test advocated by Dr. McRae — according to the court — serves the first goal by sacrificing the second. Specifically, the court stated that the breadth of the deterrence test — any adverse treatment that is likely to deter complaints — could support a finding that nearly any employment action or decision is adverse. As the court noted, "[a]n employee quite possibly and reasonably might wish to avoid the move of an office or a desk, the addition or subtraction of other employees, the addition or subtraction of responsibilities, a change in opening or closing times, or the introduction of a dress code; yet we believe that none of these things, in and of themselves, should provide the basis for a claim of retaliation."

Against the backdrop of the dual goals of the retaliation–adverse action test, the court reaffirmed the application of the California test, aligning itself with existing California decisions requiring that an employment action cause substantial and tangible harm, such as a material change in the terms and conditions of employment. Further, the court held that only final employment actions — i.e., those that are not subject to reversal or modification through internal review processes — could form the basis of a retaliation claim.

Applying the California standard, the court found that the issuance of a letter of instruction did not constitute an adverse action because it did not result in any loss of pay, status, or job responsibilities. Similarly, there was no evidence that the letter itself could or did lead to any alteration of the terms and conditions of Dr. McRae’s employment or that its existence deprived her of any promotional opportunities. Accordingly, while it might deter Dr. McRae from filing a charge under the Ninth Circuit deterrence test, the written criticism of Dr. McRae’s performance, even if unwarranted, was not sufficient to support a retaliation claim under California law. Indeed, even where the written criticism later forms the basis of an adverse employment action, such as a termination, the unwarranted nature of the criticism merely goes to deciding whether the employer’s motive for the subsequent adverse action was retaliation. The court was careful to note, however, that its holding did not mean that a negative assessment of an employee’s performance could never be an adverse employment action. Rather, a pattern of negative evaluations or a negative evaluation accompanied by other conduct might create a hostile work environment, providing grounds for a retaliation claim on that basis.

With respect to the Department of Corrections decision to suspend Dr. McRae, the court found the mere decision to suspend, alone, was not a substantial, detrimental change in Dr. McRae’s employment. Rather, a decision to suspend is only an adverse employment action once it has been implemented. In reaching this conclusion, the court looked also to the fact that the decision was subject to grievance procedures within the Department of Corrections. The court reasoned that to find the decision amounted to an adverse action in its pre-final state would encourage litigation before an employer has an opportunity to correct the decision through internal procedures.

Finally, with respect to the transfer to another prison facility, the court found there was no substantial evidence in the trial record to support a finding that the transfer amounted to a materially adverse employment action. While Dr. McRae had asserted the site was less desirable and more dangerous, she offered no evidence other than her own testimony, and that testimony was undercut by the fact that Dr. McRae had previously actively sought a position in the facility.

For California employers this case further solidifies an existing body of California case law holding that, unlike the Ninth Circuit, an adverse employment action requires a material change in the terms and conditions of employment that results in a substantial and tangible harm. Thus, to a certain degree, employers with appropriate caution and counsel can continue to manage their complaining employees, even where that management may result in negative written or verbal criticism.

Protected Employees Under CAL-OSHA Expanded to Include Employees Suspected of Intending to File Health and Safety Reports in the Future

In a relatively straightforward case, Lujan v. Minagar, 124 Cal. App. 4th 1040 (2d Dist. 2004), the Second District Court of Appeal has expanded the reach of Labor Code section 6310(a), which by its terms prohibits retaliation only against persons who have reported health or safety violations or has participated in an investigation or proceeding based on such a report, to include persons suspected of intending in the future to report a health or safety violation.

On the same day that Cal-OSHA inspected and cited Minagar’s Malibu beauty salon, Minagar terminated facialist Susan Grana and hair stylist Noel Dianella. The Labor Commissioner cited Minagar for firing Dianella in retaliation for the Cal-OSHA complaint, in violation of Labor Code section 6310(a), which provides:

"(a) No person shall discharge or in any manner discriminate against any employee because the employee has done any of the following: (1) Made any oral or written complaint to the division, other governmental agencies having statutory responsibility for or assisting the division with reference to employee safety or health, his or her employer, or his or her representative. (2) Instituted or caused to be instituted any proceeding under or relating to his or her rights or has testified or is about to testify in the proceeding or because of the exercise by the employee on behalf of himself, herself, or others of any rights afforded him or her."

Minagar was ordered to rehire Dianella, but refused. The Labor Commissioner sued to enforce the order. At trial, the evidence revealed that Grana had made a complaint to Cal-OSHA, but that Dianella had played no role in that complaint. Minagar testified on direct that she terminated Dianella "because she did too many mistakes in my shop and I [was] afraid she will be next one to report me." The trial court found section 6310 was a jurisdictional prerequisite that was not met because Dianella admitted she had not made a Cal-OSHA complaint. On appeal, the Labor Commissioner argued that section 6310 could not be interpreted literally because it would be contrary to legislative intent.

The appeal court agreed with the Labor Commissioner and interpreted section 6310 as preventing retaliation against workers who are suspected of planning to file workplace safety complaints. The court reasoned that to "hold otherwise would create a perverse incentive for employers to retaliate against employees who they fear are about to file workplace safety complaints before the employees can do so, therefore avoiding liability under section 6310." The California Supreme Court has denied a petition to review and depublish the opinion.

It is currently unclear how this interpretation of section 6310 will be applied. As a practical matter, it would be rare for an employer to make a declaratory statement of intent such as that provided by Minagar. Accordingly, plaintiffs will need to look to other indicia of the employer’s intent to terminate the employee for a suspicion that the employee intend to make a health or safety report. For this reason, employers should exercise caution in taking adverse employment actions against employees who have expressed such an intent or who have made internal complaints regarding safety/health issues. While employers may still take such actions, they should consult counsel to determine the best means of taking the action and the best way of documenting the legitimate reasons supporting the action.

Employers Can Charge Back the Payment of Advanced Commissions

The Second District Court of Appeal has put its blessing on an employer’s system of deducting previously paid commissions from current commissions where the requirements for receiving those prior commissions were ultimately not achieved.

In Steinhebel v. Los Angeles Times Communications, 126 Cal. App. 4th 696 (2d Dist. 2005), the Los Angeles Times hired telesales employees to sell new and upgraded subscriptions to the newspaper. Each employee was paid minimum wage for each hour worked and an additional sum for commissions earned on sales. At hiring, each employee signed an employment agreement providing that commissions would be paid only on "commissionable orders." Commissionable orders were defined to exclude all orders where the customer canceled the subscription on or before the 27th day. Orders not kept for at least 28 days were called charge-back orders.

Under the agreement, employees would receive commissions on sales two weeks in advance (i.e., before the 28-day limit expired) subject to deductions against future commissions for any subscription cancelled by the customer within 28 days. The agreement additionally provided that the employee "authorized" these chargebacks for previously advanced commissions. The employees also signed a statement that they had read the employment agreement and understood it.

Based on the employment agreements, a group of former newspaper telesales employees sued the newspaper, alleging that the newspaper’s commission advance and chargeback policy violated the Labor Code and unfair competition laws. Specifically, the telesales employees alleged that the charge-backs violated Labor Code section 221, which provides, "[i]t shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee." On the newspaper’s motion for summary judgment, the trial court held that the chargebacks were lawful. The telesales employees appealed.

On appeal, the court of appeal held that an employer may legally advance commissions to its employees prior to the completion of all conditions for payment and, by agreement, charge back any excess advance over commissions earned against any future advance should the conditions not be satisfied. The court reasoned that Labor Code section 221 did not apply to the advanced commissions because, under the terms of the employment agreement, the commissions were not earned until all conditions precedent were met (i.e., 28 days had elapsed without the customer canceling the order). Thus, the advanced commissions were not "wages" under section 221 because at the time of both their payment and their chargeback they had not yet been earned. The court found support for its reasoning in commission cases permitting deductions from future commissions based on the overpayment of past commissions where the parties have agreed to reconciliations.²

The court took pains to distinguish cases in which the employee receives advances for wages not yet earned (which can be subject to deductions) from deductions against earned wages for debts owed the employer or for business losses, which remain unlawful.³

For employers wanting to take advantage of a commission advance and chargeback system, Steinhebel demonstrates that several key provisions are necessary for such an agreement. First, the agreement must explicitly define what conditions must be met before commissions will be deemed earned. Second, the agreement must explicitly state what commissions will be paid in advance and how advanced commissions will be reconciled against earned commissions. Finally, the agreement must include a provision stating that the employee has read and understands the commission advance and chargeback structure and authorizes deductions from his/her commissions for chargebacks.

Employers Must Provide, Within a Reasonable Time, Copies of Public Records Obtained for the Purpose of Conducting an Internal Investigation Related to the Suspicion of Wrongdoing or Misconduct

The Fourth Appellate District recently clarified the necessary timelines for the disclosure of public records⁴ used in investigations conducted internally by the employer.

In Moran v. Murtaugh, Miller, Meyer & Nelson, 126 Cal. App. 4th 323 (4th Dist. 2005), a law firm associate conducted a legal database search that turned up three unpublished appellate opinions in which a newly hired paralegal was a party. The three cases revealed that the paralegal had a felony record for theft offenses. Five days later, on April 8, 2003, the associate anonymously placed printouts of the cases on the chairs of two partners, who forwarded them to the firm’s managing partners. On April 9, 2003, the managing partners met with the paralegal to discuss whether he had ever been convicted of a felony and, when he answered affirmatively, they requested and received his immediate resignation. On April 19, 2003, the former employee requested copies of the public records that the adverse decision was based upon, citing the ICRA. The firm mailed copies of the cases to him on April 21, 2003. The former employee subsequently filed suit alleging a violation of Civ. Code § 1786.53(b)(1) of the California Investigative Consumer Reporting Agencies Act ("ICRA") arguing that whether measured from the time the cases were discovered or from the date the managing partners asked him to resign, the copies of the public record information were not provided to him "within seven days after the receipt of the information."

Under ICRA, California employers conducting their own investigations must provide employees with copies of all public records found (unless waived) or used (even if waived) in any adverse employment decision. The time limitations placed on that production of copies, however, vary based on the type of investigation. The court, looking to the time provisions in ICRA, held that section 1786.53(b)(1), which requires production of the public records within seven days, did not control investigations conducted by an employer (i) related to suspicions of wrongdoing or misconduct and (ii) without the aid of an outside agency, as occurred here. Rather, sections 1786.53(b)(3) and (4) control such investigations. Those sections do not specify a particular window of time for compliance. Rather, those sections only require that the public records be provided to the employee within a reasonable time. Applying the "reasonable time" provisions of sections 1786.53(b)(3) and (4), the court held that what constitutes a reasonable time depends on the circumstances of each case. Here, where the managing partners confirmed with the paralegal the relevant facts of the background check (i.e., that he was a felon) and provided him with copies of the documents within eight business days of confronting him, this was a reasonable amount of time as a matter of law.

In addition, the court noted that the statute does not require an elaborate investigation to defer disclosure. According to the circumstances, the employer may choose to interview fellow employees, conduct surveillance, contact prior employers, or make other inquiries. Further, the employer also may choose to withhold the background check results temporarily to confront the employee with the information therein and measure character, veracity, and other factors according to his or her response.

Moran helps clarify existing law with respect to the highly regulated field of background checks and investigations.⁵ As a basic summary for internal investigations, a California employer who obtains public records for the purpose of conducting its own background checks or investigations must:

• For background checks and investigations for purposes other than investigating allegations of misconduct or wrongdoing, provide a copy to the subject of the background check "within seven days after receipt of the information." Cal. Civ. Code § 1786.53(b)(1).

• For misconduct or wrongdoing investigations, provide a copy of the public record to the employee/applicant within a reasonable amount of time after the completion of the investigation, unless the employee/applicant has waived this right.
  Cal. Civ. Code § 1786.53(b)(3).

• If the employer takes any adverse action based on the information contained in the public record, provide a copy of the record to the employee within a reasonable amount of time after completion of the investigation regardless of waiver.
  Cal Civ. Code § 1786.53(b)(4).

ICRA requirements are complicated and technical, and employers should make sure of their obligations when conducting an investigation which includes a review of public records.

The Veterans’ Employment and Training Service of the Department of Labor issued an interim final rule, effective March 10, 2005, to implement 38 U.S.C. § 4334. This is a new requirement of the Veterans Benefits Improvement Act of 2004 ("VBIA"), which amended the Uniformed Services Employment and Reemployment Rights Act ("USERRA"). Section 4334 provides, "Each employer shall provide to persons entitled to rights and benefits under [USERRA] a notice of the rights, benefits, and obligations of such persons and such employers under [USERRA]." The interim final rule includes the text for the poster "Your Rights Under USERRA." This poster can be downloaded from the website of the United States Department of Labor at http://www.dol.gov/vets. Employers must post this notice where employee notices are customarily placed. Alternatively, employers can provide the notice to employees "in other ways that will minimize costs while ensuring that the full text of the notice is provided," such as handing out or mailing out the notice, or distributing the notice via e-mail.

Comments on the interim final rule must be received on or before May 9, 2005. This interim final rule does not affect the DOL’s pending proposal to implement the USERRA, which was published in the Federal Register of September 20, 2004. The interim final rule can be obtained at http://www.regulations.gov/fredpdfs/05-04871.pdf.

Employment Law Commentary, October 2001, "Military Leaves: A Primer for Employers on the Uniformed Services Employment and Reemployment Rights Act," provides a comprehensive overview of USERRA.