California Governor Passes New Laws and Vetoes Law That Would Have Created Obstacles for Employment Arbitration Agreements

Author: Regina Silva

Over the last few weeks, Governor Jerry Brown has passed important legislation affecting employers in the State of California and has vetoed a bill that would have had a substantial impact on Employer’s arbitration agreements in this state.  A summary of these bills follows:

Assembly Bill 1506 (amendments to Private Attorney General Act (“PAGA”))

Effective IMMEDIATELY, this legislation changes Labor Code section 2699 (“PAGA” law).  Under the old law, if there was a defect in an Employee’s wage statement, Plaintiff’s counsel could pursue a cause of action for inaccurate paystubs under PAGA, without the employer being provided the opportunity to correct its deficient paystubs in order to avoid a claim for PAGA penalties for failure to provide an accurate wage statement.  Under PAGA, an employee can recover penalties for themselves and former/current employees for wage/hour violations.  For the Labor Code provisions that do not set forth a penalty for that violation, PAGA has a catchall provision that allows each aggrieved employee to recover $100 per pay period for an initial violation, and $200 per pay period for each subsequent violation.  Although PAGA penalties can only go back one year, the resulting penalties an employer could face for PAGA penalties could be detrimental to an employer.  PAGA also allows for the recovery of attorneys’ fees and costs.

The old law also provided before an employee could pursue a PAGA claim, he/she needed to submit a notification letter to the Labor Workforce Development Agency (“LWDA”) detailing the alleged wage/hour violations the Employer had committed.  The old law also provided the Employer (upon receipt of this notification letter to the LWDA) had 33 days to cure the alleged wage/hour violation.  However, under the old law, the cure provisions did NOT apply to wage statement violations.  Hence, an employer when notified that its paystubs were inaccurate (for example, because the paystub did not provide the ending date of the payroll week, or did not contain the employer’s address), even if they corrected their paystubs within the 33 days of the LWDA notice, could not prevent a PAGA claim for inaccurate paystubs from being lodged against it.  Furthermore, due to changes to Labor code section 226, which took effect in 2013, employees no longer had the burden to show any actual injury as a result of a violation of Labor Code section 226, whether technical or not.  Due to this change in the law, more employee attorneys have pursued a cause of action for failure to provide accurate wage statements, and have tacked on a claim for PAGA penalties due to the inability to cure a paystub violation.

Under the new law, which became effective October 2, 2015, an employer who is notified its wage statement are inaccurate due to a technical violation of Labor Code section 226(a)(6) or (8) has the right to “cure” the defects, and upon proper notification to the LWDA, can avoid a PAGA claim for inaccurate wage statements for these technical violations.  Under Labor Code section 226(a), an employer is required to provide its employee with paystubs which set forth the following:

  1. gross wages earned;
  2. total hours worked by the employee (expect for salaried employees who are exempt from overtime pay);
  3. the number of piece-rate units earned (if the employee is paid on a piece-rate basis);
  4. all deductions;
  5. net wages earned;
  6. the dates of the period for which the employee is paid;
  7. the name of the employee and only the last four digits of the employee’s Social Security number;
  8. the name and address of the employer (or legal entity that is the employer); and
  9. all applicable hourly rates in effect during the pay period and numbers of hours worked at each hourly rate by the employee.

Now under the new law, when an employer engages in what has been referred to as a technical violation of this section, such as not providing in the paystubs the dates of the period for which the employee is paid or the name and address of the employer, the employer can now “cure” the technical violation(s) to avoid a claim for PAGA penalties.

What are the cure/notice requirements for an employer who has violated Labor Code section 226(a)(6) or (8)?  The new PAGA provision states within 33 calendar days of the LWDA notification of the inaccurate paystubs, the employer needs to show that it has provided a fully compliant itemized paystub to each affected employee for each pay period for the three-year period prior to the date of the written notification letter sent to the LWDA.  However, it is unclear why this new law requires the employer to go back and fix three years of employee paystubs when PAGA claims can only go back one year.

Notably, this new law only affects an employer’s exposure to PAGA penalties.  This new law does not prohibit an employee from pursuing a claim (or class action) for failure to provide accurate paystubs under Labor Code section 226(a), regardless of whether or not the violation is technical.  The statutory penalties for this violation are set forth in Labor Code section 226(e).

What does this mean for companies?

The good news for employers is they will no longer be exposed to representative PAGA actions for technical paystub violations so long as they cure the technical violation(s) within the proscribed time.  Because of the changes to Labor Code section 226(a) in 2013, there has recently been an onslaught of 226 claims including PAGA representative actions against employers for technical violations.  In practice, this put small to mid-sized companies at risk of going out of business for technical violations in their paystubs.  Hopefully, the next development we will see is either a further change to Labor Code section 226(a) or appellate decisions addressing the outstanding concern employers can still be subject to liability for technical violations of their paystubs given the 2013 amendment to 226, which states an employee does not need to show injury as a result of a violation in order to assert a claim.

Senate Bill 358- California Fair Pay Act Passed

The Governor has also recently signed into law the California Fair Pay Act, which is considered the strongest equal pay act in the country.  This new law was passed to address disparities in pay between women and men.

This law takes effect January 1, 2016. 

SB 358 amends California Labor Code section 1197.5 which currently sets forth the law on equal pay.  The new law reduces the burden of proof required for employees who complain they are not paid the same as their opposite gender.  Specifically, before this new amendment, under section 1197.5, an employee had to demonstrate they were not paid the same rate as a member of the opposite sex who worked in the “same establishment” “for equal work on jobs the performance of which requires equal skill, effort, and responsibility….”  Per the amendment, “same establishment” has been deleted, and the employee only needs to show that he/she is not being paid at the same rate for “substantially similar work.”  “Substantially similar work” is viewed as a “composite of skill, effort, and responsibility, and performed under similar working conditions….”

The new amendment also now requires the employer affirmatively demonstrate the wage difference is based upon one of more of the following factors:

  • a seniority system;
  • A merit system;
  • A system that measures earnings by quantity or quality of production; or
  • A bona fide factor other than sex, such as education, training, or experience.

While the above four factors are set forth in the prior law, this new law sets forth the requirements as an affirmative burden.  In addition, the new law added a caveat to the fourth factor, which diminishes its application.  Specifically, in order to meet this four factor, the employer has to demonstrate the difference in pay it is not derived from a sex-based differential in compensation, is related to the position in question, and there is an overriding “business necessity” justifying the wage difference.  Moreover, the business necessity defense shall not apply if the employee demonstrates an alternative business practice exists which would serve the same business purpose without producing the wage differential.  Under the new law, the employer must further demonstrate its reliance on any of the factors is applied reasonably and one or more of the factors relied upon accounts for the entire wage differential.

The new law also added in prohibition from discharging, discriminating or retaliating against an employee who invokes their own rights under this statute, or assists others in invoking their rights under the statute.  Furthermore, the new law also prohibits an employer from restricting employees from disclosing their wages, discussing the wages of others, inquiring about other employee’s wages, or aiding or encouraging other employees to exercise their rights under the statute.  Finally, the new law amended the employers’ requirement to maintain records containing employee’s wages, wage rates, job classifications, and other terms and condition of their employment from two years to three years.

What does this mean for companies?

This new law will make it easier for employees to demonstrate pay disparity in the workplace.  In this light, we suggest employers review employee positions, current salaries, and job descriptions to identify any pay disparities.  If pay disparities exist, employers should analyze whether any of the above factors legitimately explain the pay differential and confirm these factors are supported by personnel file documentation.  Employers need to also remove and/or revise any problematic provisions contained in handbooks to ensure they are consistent with the new amended law, including potentially adding new language consistent with the new law.  Employers should also review recordkeeping policies and practices to ensure compliance with the new three year requirements.

Governor Vetoes Bill that Was Considered Arbitration Agreement Killer in California

In better news for employers, the Governor recently vetoed Assembly Bill 465, which would have added a provision to the California Labor Code prohibiting any person from requiring an employee, as a condition of employment, to waive the bringing of any Labor Code claim in a court of law or state/local agency including the right to file a class action case for Labor Code violations.  This proposed law was in direct contradiction to federal and state courts which have all favored arbitration agreements, which waive employee rights to seek enforcement of any employment claim in the court system, and also waive employee rights to file a class action case.  This proposed law also, on its face, would have interfered with the Federal Arbitration Act (“FAA”).  In rejecting this law, the Governor commented that this law would have resulted in costly litigation concerning the potential violation of the FAA.

ABOUT THE AUTHOR
Ms. Silva is a graduate of University of the Pacific. She is the head of the firm’s Employment Practices Group. She is a former prosecutor and has considerable trial experience. Contact her at rsilva@tysonmendes.com.

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