Laborsphere

Summary of Key New California Laws for 2016: What Employers Should Know

Governor Brown has signed several laws impacting California employers. A summary of some of the key new laws follows. The effective date of the particular new law is indicated in the heading of the Assembly Bill (AB) and/or Senate Bill (SB). As a reminder, the minimum wage in California is increasing to $10 per hour on January 1, 2016 based on previous legislation signed by Governor Brown in 2013.

AB 622 – E-Verify System (Effective January 1, 2016)

By way of background, under U.S. law, companies are required to employ only individuals who may legally work in the United States – either U.S. citizens, or foreign citizens who have the necessary authorization. E-Verify is an internet-based system that allows employers to determine the eligibility of their employees to work in the United States. The E-Verify system is administered by the United States Citizenship and Immigration Services, the United States Department of Homeland Security (DHS), and the United States Social Security Administration (SSA).

In an effort to prevent discrimination in employment rather than to sanction the potential hiring and employment of persons who are not authorized for employment under federal law, AB 622 prohibits employers from using the E-Verify system to check the employment authorization status of existing employees or applicants who have not received an offer of employment, except as required by federal law or as a condition of receiving federal funds. The new law, which is codified in new Labor Code Section 2814, does not change employers’ rights from utilizing E-Verify, in accordance with federal law, to check the employment authorization status of a person who has been offered employment.

Further to the extent, the employer receives any notification issued by the SSA or the DHS containing information specific to the employee’s E-Verify case or any tentative nonconfirmation notice, which indicates the information entered in E-Verify did not match federal records, the employer will be required to provide the notification to the affected person, as soon as practicable.

Finally, in addition to other remedies available, an employer who violates this new law may be liable for a civil penalty not to exceed $10,000 for each violation, and each unlawful use of the E-Verify system on an employee or applicant constitutes a separate violation.

AB 970 – Enforcement of Employee Claims by Labor Commissioner (Effective January 1, 2016)

AB 970 expands the enforcement powers of the Labor Commissioner to enforce local laws regarding overtime hours or minimum wage provisions and to issue citations and penalties for violations, except when the local entity has already issued a citation for the same violation. This bill amends Labor Code Section 558 (pertaining to overtime) and Sections 1197 and 1197.1 (pertaining to minimum wage).

This bill also amends Labor Code Section 2802 pertaining to indemnification of employees by employers for expenses or losses incurred by the employee in direct consequence of the discharge of the employee’s duties or as a result of obeying the employer’s directions. In addition to a private right of action by the employee under Section 2802 to recover for these expenditures, this bill now authorizes the Labor Commissioner to issue citations and penalties against employers who fail to properly indemnify employees.

AB 987 – Employment Discrimination (Effective January 1, 2016)

AB 987 is in response to findings by the California Court of Appeal, such as Rope v. Auto-Clor System of Washington, Inc., 220 Cal.App.4th 635 (2013), where the Court found that a request for accommodation by an employee for a disability or religious belief or observance, without more, is not a “protected legal activity” and does not support a claim for retaliation under the Fair Employment and Housing Act (codified in Government Code Section 12940 et. seq.). This bill makes it an unlawful employment practice for an employer to retaliate or otherwise discriminate against an employee for “requesting” an accommodation for a disability or religious belief or observance, regardless of whether the request was granted.

AB 1506 – Labor Code Private Attorneys General Act of 2004 (Effective October 2, 2015)

AB 1506 amends Labor Code Sections 2699, 2699.3, and 2699.5 which codify California’s Private Attorneys General Act of 2004 (PAGA) and took effect as of October 2, 2015.

By way of background, PAGA authorizes an allegedly aggrieved employee to bring a civil action to recover specified civil penalties, that would otherwise be assessed and collected by the Labor and Workforce Development Agency, on behalf of the employee and other current or former employees for certain Labor Code violations. Under PAGA, an employer has the opportunity to cure certain alleged violations before a lawsuit is filed. However, there are also Labor Code violations that PAGA does not provide the employer with an opportunity to cure the alleged violation before a lawsuit is filed, such as violations under Labor Code Section 226, where an employer is required to provide an itemized wage statement (or paystub) containing very specific information, including but not limited to, wages, the inclusive dates of the pay period and the name and address of the legal employer.

Due to various lawsuits (including class action lawsuits) filed against employers on technical violations of Section 226 that did not in any way cause any injury to employees, this bill provides an employer with the right to cure a violation of the requirement that an employer provide its employees with the inclusive dates of the pay period and the name and address of the legal employer before an employee may bring a civil action under PAGA. The employer may cure the alleged violation within 33 calendar days of the postmark date of the notice it receives. This bill also provides that the alleged violation is deemed cured only upon a showing that the employer has provided a fully compliant paystub to each aggrieved employee and limits the employer’s right to cure with respect to alleged violations of these provisions to once in a 12-month period.

AB 1509 – Protections for Family Members (Effective January 1, 2016)

AB 1509 amends Labor Code Sections 98.6, 1102.5, 2810.3 and 6310, which generally prohibit an employer from discharging or taking any adverse action against any employee or applicant for employment because the employee or applicant has engaged in conduct protected by these code sections. Section 98.6 pertains to complaints of discrimination, retaliation or any adverse action made to the Labor Commissioner. Section 1102.5 pertains to complaints by whistleblowers. Section 6310 pertains to complaints about unsafe working conditions. And Section 2810.3 pertains to retaliation in alternative staffing context, such as temporary workers from staffing agencies or in the construction/contractor context.

This bill extends the protections of the foregoing provisions to an employee who is a family member of another person (i.e., where multiple family members work for the same employer) who engaged in, or was perceived to engage in, the protected conduct or made a complaint protected by these provisions. That is, an employer, or a person acting on behalf of the employer, shall not retaliate against an employee because the employee is a family member of a person who has, or is perceived to have, engaged in any acts protected by these provisions. The term “employer” or “person acting on their behalf” includes “client employers” (i.e., a business entity, regardless of its form, that obtains or is provided workers to perform labor within its usual course of business from a labor contractor) or a “controlling employer” (i.e., an employer listed in Labor Code Section 6400(b) regarding multi-employer worksites).

The bill further amends Labor Code Section 2810.3 to exclude liability on certain client employers, such as client employers that use Public Utilities Commission-permitted third-party household goods carriers.

AB 1513 – Piece-Rate Compensation (Effective January 1, 2016) (see footnote 1)

AB 1513, which adds new Labor Code Section 226.2 and repeals others, applies to employees who are compensated on a piece-rate basis for any work performed during a pay period. This new law requires that employees be compensated for rest and recovery periods and “other nonproductive time” (see footnote 2) separate from any piece-rate compensation as follows:

AB 1513, which adds new Labor Code Section 226.2 and repeals others, applies to employees who are compensated on a piece-rate basis for any work performed during a pay period. This new law requires that employees be compensated for rest and recovery periods and “other nonproductive time” separate from any piece-rate compensation as follows:

Rest and Recovery Periods. Employers are to compensate their employees for rest and recovery periods at a regular hourly rate that is no less than the higher of:

(i) An “average hourly rate” determined by dividing the total compensation for the workweek, exclusive of compensation for rest and recovery periods and any premium compensation for overtime, by the total hours worked during the workweek, exclusive of rest and recovery periods;

(ii) The “applicable minimum wage,” which is defined as “the highest of the federal, state or local minimum wage
applicable to the employment.”

For those employers who pay on a semimonthly basis, employees shall be compensated at least at the applicable minimum wage rate for the rest and recovery periods together with other wages for the payroll period during which the rest and recovery periods occurred. Any additional compensation required for those employees pursuant to the average hourly rate requirement is payable no later than the payday for the next regular payroll period.

Certain employers (see footnote 3) – who comply with the applicable minimum wage requirement – will have until April 30, 2016 to program their payroll systems to perform and record the calculation required under the average hourly rate requirement and comply with the itemized statement (or paystub) requirements (see below), so long as such employers pay piece-rate employees retroactively for all rest and recovery periods at or above the applicable minimum wage from January 1, 2016, to April 30, 2016, inclusive, and pay the difference between the amounts paid and the amounts that would be owed under the average hourly rate requirement, together with interest by no later than April 30, 2016.

Other Nonproductive Time. Employers are to compensate their employees for other nonproductive time at an hourly rate that is no less than the applicable minimum wage. The amount of other nonproductive time may be determined either through actual records or the employer’s reasonable estimates, whether for a group of employees or for a particular employee, of other nonproductive time worked during the pay period.

Further, Section 226.2 requires that additional information be added to wage statements, making compliance with wage statements more difficult. In addition to the list of items that are required by Labor Code Section 226 for itemized statements, Section 226.2 requires that the itemized statements include (a) the total hours of compensable rest and recovery periods, (b) the rate of compensation, and (c) the gross wages paid for those periods during the pay
period.

Further, those employers that do not pay an hourly rate for all hours worked in addition to piece-rate wages, then such employers must also list on the itemized statements (a) the total hours of other nonproductive time, (b) the rate of compensation for that time, and (c) the gross wages paid for that time during the pay period.

In addition, this new law provides that, until January 1, 2021, an employer has an affirmative defense to any claim or cause of action for recovery of wages, damages, liquidated damages, statutory penalties, or civil penalties based solely on the employer’s failure to timely pay the employee the compensation due for rest and recovery periods and other nonproductive time for time periods prior to, and including, December 31, 2015, if the employer complies with certain specified requirements by no later than December 15, 2016, which include: (a) making payments to each of its employees, for previously uncompensated or undercompensated rest and recovery periods and other nonproductive time from July 1, 2012, to December 31, 2015; (b) paying accrued interest; and (c) providing written notice to the Department of Industrial Relations of the employer’s election to make payments to its current and former employees by no later than July 1, 2016.

Finally, it appears that Section 226.2 applies to companies with a unionized workforce as Section 226.2 does not have a collective bargaining exemption.

SB 327 – Wage Orders: Meal Periods (Effective October 5, 2015)

By way of background, Labor Code Section 512 requires two meal periods for work periods of more than 10 hours. However, employees are allowed to waive their second meal period if the total hours worked in their shift is no more than 12 hours. Under Section 11(D) of Wage Order 5, however, health care industry employees who work shifts in excess of 8 total hours in a workday are permitted to waive their second meal period.

A recent appellate court decision, Gerard v. Orange Coast Memorial Medical Center, 234 Cal.App.4th 285 (2015), held that Section 11(D) of Wage Order No. 5 is invalid to the extent that it conflicts with Labor Code Section 512 and that the California Industrial Welfare Commission exceeded its authority by creating an exception to Section 512’s meal period requirements.

Concerned that, without immediate clarification, hospitals will alter their scheduling practices as a result of uncertainties created by the Gerard decision, Governor Brown signed SB 327 on October 5, 2015 to amend Labor Code Section 516 effective immediately. Accordingly, this bill provides that the health care employee meal period waiver provisions in Wage Order 5 were valid and enforceable, and continue to be valid and enforceable.

SB 358 – Equal Pay Act (Effective January 1, 2016)

Under SB 358, known as the California Fair Pay Act, employers will be subject to one of the strictest and most aggressive equal pay laws in the country. The California Fair Pay Act is intended to increase requirements for wage equality and transparency and amends Labor Code Section 1197.5 relating to private employment. For a more thorough discussion of this new law, please click here.

SB 501 – Wage Garnishment Restrictions (Effective July 1, 2016)

SB 501 amends, repeals, and adds Section 706.050 of the Code of Civil Procedure, relating to wage garnishment. The new law reduces the prohibited amount of an individual judgment debtor’s weekly disposable earnings subject to levy under an earnings withholding order from exceeding the lesser of 25% of the individual’s weekly disposable earnings or 50% of the amount by which the individual’s disposable earnings for the week exceed 40 times the state minimum hourly wage, or applicable local minimum hourly wage, if higher, in effect at the time the earnings are payable.

SB 579 – Employee Time Off (Effective January 1, 2016)

SB 579 amends Labor Code Section 230.8, which applies to employers with 25 or more employees. Under Section 230.8, employers are prohibited from discharging or discriminating against an employee who is a parent, guardian, or grandparent having custody of a child in a licensed “child day care facility” or in kindergarten or grades 1 to 12, inclusive, for taking off up to 40 hours of unpaid time off each year for the purpose of participating in school activities, subject to specified conditions. The new law revises references to a “child day care facility” to instead refer to a “child care provider” and defines “parent” for these purposes as a parent, guardian, stepparent, foster parent, or grandparent of, or a person who stands in loco parentis to, a child, thereby extending these protections to an employee who is a stepparent or foster parent or who stands in loco parentis to a child. This new law also allows employees to take unpaid time off to enroll or reenroll their children in a school or with a licensed child care provider.

SB 579 also amends Labor Code Section 233, which applies to all employers. Under Section 233 (aka “California’s Kin Care Law”), employers are required to allow employees to use one-half of their accrued sick leave to care for a “family member” (as defined). In light of the Healthy Workplaces, Healthy Families Act of 2014 (Labor Code Section 245 et. seq.), which went into effect on July 1, 2015, this bill requires an employer to permit an employee to use sick leave for the purposes specified in the Healthy Workplaces, Healthy Families Act of 2014, redefines “sick leave” as leave provided for use by the employee during an absence from employment for these purposes, and prohibits an employer from denying an employee the right to use sick leave or taking specific discriminatory action against an employee for using, or attempting to exercise the right to use, sick leave for these purposes. In other words, employees may use paid sick leave for their own health condition or preventative care; a family member’s health condition or preventative care; if the employee is a victim of domestic assault, sexual violence, and/or stalking and needs to take time off. Further, “family member” now includes: a child regardless of age or dependency (including adopted, foster, step, or legal ward); parent (biological, adoptive, foster, step, in-law, or registered domestic partner’s parent); spouse; registered domestic partner; grandparent; grandchild; or siblings.

SB 588 – Judgment Enforcement by Labor Commissioner (Effective January 1, 2016)

Among the key provisions of this new bill, SB 588 provides the California Labor Commissioner with additional means to enforce judgments against employers arising from the employers’ nonpayment of wages. The new law authorizes the Labor Commissioner to use any of the existing remedies available to a judgment creditor and to act as a levying officer when enforcing a judgment pursuant to a writ of execution. The new law also authorizes the Labor Commissioner to issue a notice of levy if the levy is for a deposit, credits, money, or property in the possession or under the control of a bank or savings and loan association or for an account receivable or other general intangible owed to the judgment debtor by an account debtor.

For instance, if a final judgment against the employer remains unsatisfied after a period of 30 days after the time to appeal the judgment has expired and no appeal of the judgment is pending, the employer cannot continue to conduct business unless the employer has obtained a bond up to $150,000 (depending on the unsatisfied portion of the judgment) and has filed a copy of that bond with the Labor Commissioner. The bond shall be effective and maintained until satisfaction of all judgments for nonpayment of wages.

As a result of the foregoing new laws and amendments, employers should consult with legal counsel to ensure their policies are compliant and their employee handbooks are up to date.

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^1. AB 1513 also makes amendments to provisions of workers’ compensation for injuries sustained in the course of employment.

^2. “Other nonproductive time” is defined as time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis.

^3. These employers are defined as: those acquired by another legal entity on or after July 1, 2015, and before October 1, 2015; those who employed at least 4,700 employees in California at the time of the acquisition; those who employed at least 17,700 employees nationwide at the time of the acquisition; and those that were a publicly traded company on a national securities exchange at the time of the acquisition.

Lynne Anderson to Speak at Seton Hall Law’s Healthcare Compliance Certification Program

On October 15, Florham Park partner Lynne Anderson will speak at Seton Hall’s U.S. Healthcare Compliance Certification Program. The event, which will take place from October 12-15, offers a comprehensive overview of state, federal and international law governing prescription drugs, medical devices, and healthcare fraud. Topics include privacy and data protection, anti-kickback laws, the Foreign Corrupt Practices Act and the False Claims Act. Attendees include representatives from pharmaceutical companies and hospitals.

Lynne will participate in the panel titled, “Being the Focus of a Government Investigation” to provide the perspective of dealing with an employee whistleblower. She will be joined by Mike Doyle of the Federal Bureau of Investigation; Jacob Elberg of the U.S. Attorney’s Office, District of New Jersey; Maureen Ruane of Lowenstein Sandler P.C.; Jim Sheehan of the Office of the New York Attorney General; and Professor Timothy Glynn of Seton Hall Law School.

Strict New California Fair Pay Act Will Become Effective January 1, 2016

In only a few months, employers in California will be subject to one of the strictest and most aggressive equal pay laws in the country. This week, Governor Jerry Brown signed the California Fair Pay Act (“Act”), Senate Bill 358, a new law intended to increase requirements for wage equality and transparency. The Act amends Section 1197.5 of the California Labor Code relating to private employment.

New “Substantially Similar Work” Standard

Under the Act, an employer is prohibited from paying employees of the opposite sex lower wage rates for “substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.” Previously, the equal pay statute was more limited. It prohibited employers from paying employees of the opposite sex in the same establishment for equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions. The new standard permits an employee to bring an unequal pay claim based on employee wage rates in any of their employer’s facilities and in other job categories as long as the work is substantially similar. The employer’s defense burden has also increased under the Act. An employer must establish that the entire wage differential is based on the reasonable application of one or more of the following:

• A seniority system;
• A merit system;
• A system which measures earnings by quantity or quality of production; or
• A bona fide factor other than sex, such as education, training, or experience. This factor will apply if the employer shows that the factor is not the result of a sex-based differential in compensation, is job related to the position, and is consistent with business necessity. An employee can defeat this defense by proving that an alternative business practice exists that would serve the same business purpose without producing the wage differential.

Increased Wage Transparency

The Act also seeks to decrease pay secrecy by further prohibiting employers from enacting rules, policies or otherwise engaging in conduct that prohibits employees from disclosing their own wages, discussing the wages of others, asking about other employees’ wages or aiding and encouraging employees to exercise rights under the Act. Yet, no one, including an employer, is obligated to disclose employees’ wages.

Additional Remedies and Cause of Action for Discrimination and Retaliation

The statute currently allows employee recovery of wages and interest, plus an equal amount as liquidated damages, and attorneys’ fees. The Act also prohibits discharge, discrimination and retaliation of employees for asserting rights under the Act and permits a civil action seeking reinstatement, reimbursement for lost wages and interest, an equal amount as liquidated damages, lost benefits, and other equitable relief. Such a claim must be brought within one year of the prohibited conduct. There is no requirement that an employee exhaust administrative remedies prior to filing suit.

Increased Record Keeping Requirement

Additionally, this new law requires that an employer maintain records of employees’ “wages and rates of pay, job classifications, and other terms and conditions of employment” for a three-year period.

Practical Takeaways

This new law goes into effect January 1, 2016. Employers would be wise to use this time to assure that their compensation practices are in defensible compliance with these new requirements. We suggest the following proactive steps:

• Conduct a wage audit/review of employee pay equity, including identifying opposite sex pay practices for “substantially similar” work;
• Review all pay and compensation-related policies and procedures, including job descriptions, employee handbooks, review and evaluation protocols;
• Consider the scope of information and documents that may fall within the Act’s three-year record retention requirement and modify policies and practices accordingly;
• Provide internal training to members of management who make decisions regarding employees’ pay and compensation; and
• Consider performing some or all of the foregoing under the shield of attorney work-product.

If you have any questions or concerns about this alert please contact the authors named below or your usual Drinker Biddle contact.

New Jersey Supreme Court Holds That Economic Loss is Not Needed To Recoup a Former Employee’s Salary for Breach of the Duty of Loyalty

On September 22, the New Jersey Supreme Court unanimously gave the green light to awards of the remedy of equitable disgorgement, even in the absence of economic loss, as a fair and practical response to an employee’s disloyal conduct. The Court also noted that the fear of disgorgement should serve to as a deterrent to employee misconduct. Bruce Kaye v. Alan P. Rosefielde (A-93-13) (073353), New Jersey Supreme Court.

The Facts of the Case

Bruce Kaye hired attorney Alan Rosefielde as a full-time, salaried employee after using him as outside counsel. Rosefielde served as Chief Operating Officer and General Counsel for some of Kaye’s timeshare businesses. Kaye terminated Rosefielde’s employment based on discovery of unauthorized self-dealing and other actions by Rosefielde that exposed Kaye’s companies to potential liability, and as result of dissatisfaction with Rosefielde’s job performance. Kaye sued Rosefielde for breach of fiduciary duty, fraud, legal malpractice, unlicensed practice of law and breach of the duty of loyalty. After a lengthy bench trial, Rosefielde’s egregious conduct was found to breach his duty of loyalty, among other claims. The trial court awarded compensatory and punitive damages, as well as legal fees. However, the court did not order disgorgement of Rosefielde’s salary as an equitable remedy because the breach of loyalty did not result in any actual damage to the employer’s companies. The Appellate Division affirmed.

Upon review of the limited question of whether a court may award the remedy of disgorgement of a disloyal employee’s salary to an employer who has sustained no economic damage, the New Jersey Supreme Court recognized that the remedy of equitable disgorgement has only rarely been discussed in appellate decisions. Writing for the unanimous court, Justice Anne Patterson stated that:

“[t]he disgorgement remedy is consonant with the purpose of a breach of the duty of loyalty claim: to secure the loyalty that the employer is entitled to expect when he or she hires and compensates an employee.…[w]hen an employee abuses his or her position and breaches the duty of loyalty, he or she fails to meet the employer’s expectation of loyalty in the performance of the job duties for which he or she is paid….[r]equiring an employer to demonstrate a that it has sustained economic loss ‘is inconsistent with a basic premise of remedies available for breach of fiduciary duty’”. (Opinion, Page 24/25).

As one example, the New Jersey Supreme Court cited to the determination that Rosefielde had engaged in multiple inappropriate sexual advances towards toward co-workers as a basis for disgorgement of Rosefielde’s salary – without requiring the employer to demonstrate that litigation resulted from the misconduct, or that any other economic loss resulted from the inappropriate behavior.

What type of conduct may justify an award of disgorgement of salary? Examples of the misconduct constituting breach of duty of loyalty in the Kaye case included: unauthorized business transactions that provided a personal financial benefit to the employee; billing the employer for non-business expenses during a Las Vegas trip (a hotel suite shared with three adult film stars); sexual advances towards female co-workers; a fraudulent application to a health insurer to obtain employee coverage for independent contractors; and retaliation against another employee who refused to participated in a self-dealing scheme.

In terms of application of the Kaye decision to unfair competition claims, employers will presumably no longer need to demonstrate economic loss to recoup salary for employee misconduct such as theft of confidential information or customers, use of employer time and resources to set up a competitive activity, misdirecting business opportunities to a potential new employer or failing to fully perform duties or responsibilities while anticipating a jump to a new employer.

How much salary can be recouped?

The New Jersey Supreme Court remanded for a determination on disgorgement, and instructed the trial court to apportion the employee’s compensation by focusing on time periods during which the employee committed acts of disloyalty, and to consider the following factors: the employee’s degree of responsibility and level of compensation; the number of acts of disloyalty; the extent to which those acts placed the employer’s business in jeopardy; the degree of planning to undermine the employer that is undertaken by an employee; and other factors that may guide a court in the exercise of its discretion to impose an equitable remedy.

The Court also directed that the trial court should order disgorgement for monthly pay periods in which the Rosefielde committed acts of disloyalty because he was paid his salary on a monthly basis.

While the Court did caution that the trial court should not order a wholesale disgorgement before conducting the analysis cited above, it did include a footnote in the Kaye decision allowing for disgorgement of the employee’s entire salary if there is a determination that the employee was disloyal during all pay periods. (Opinion, fn.8).

The Takeaway

Employers should include breach of duty of loyalty claims when suing for “on the job” misconduct, especially for highly paid employees. Such claims may very well have the deterrent effect intended by the New Jersey Supreme Court by allowing employers to recoup salaries without having to show economic loss. Deterrence may be especially relevant with regard to claims of unfair competition, as subsequent employers will likely not able to offer enforceable indemnification guaranties for disgorgement awards.

The DOL Announces Final Rule for the Obama Administration’s 2014 Pay Transparency Executive Order

As we’ve previously covered here, on April 8, 2014 President Obama signed Executive Order 13665 (“Non-Retaliation for Disclosure of Compensation Information), at an event commemorating National Equal Pay Day, an annual public awareness event that aims to draw attention to the gender wage gap. On September 10, 2015, the Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”) announced the Final Rule implementing the Order, which will take effect on January 11, 2016.

In its press release announcing the Final Rule, the DOL highlighted its intent to specifically address the gender pay gap, stating that “a culture of secrecy keeps women from knowing that they are underpaid, and makes it difficult to enforce equal pay laws. Prohibiting pay secrecy policies and promoting pay transparency helps address the persistent pay gap for women . . .”

The Final Rule seeks to promote pay transparency by, among other things:

Revising the Equal Opportunity Clause included in covered federal contracts to include a provision prohibiting employers from discriminating against employees or job applicants for discussing or disclosing their or their co-workers’ compensation;
Requiring covered contractors to notify employees and applicants of these nondiscrimination protections in existing policies;
Enabling employees and job applicants who believe they have been discriminated against for discussing or inquiring about pay to file discrimination complaints with the OFCCP.

The Final Rule outlines two defenses that a contractor may assert where a violation of the nondiscrimination requirement is alleged. The first is a “general defense” that the contractor “disciplined the employee for violation of a consistently and uniformly applied company policy . . . [which] does not prohibit, or tend to prohibit, employees or applicants from discussing or disclosing their compensation or the compensation of other employees or applicants.” The second is the “essential job functions” defense, which essentially permits a contractor to take action against an employee (such as a Human Resources Director) whose job duties and functions necessarily entail access to compensation information, and who discloses such information other than in response to a formal complaint, charge, investigation, or proceeding.

The Obama administration has in the past few years issued multiple orders or memoranda to accelerate change in employment-related areas it believes are within the authority of the Executive Branch, without the need for legislation. As described in more detail here, there is an often lengthy rule-making process required for these mandates to become effective law, but the DOL is close to (or has) announced Final Rules on many of the administration’s proposals. Accordingly, employers should be aware that many of the prospective regulatory changes discussed in the past few years are, in the near future, set to become reality.

Obama Board Reaffirms Successor’s Right to Set Initial Terms of Employment when Taking Over Unionized Operation

Last week, the National Labor Relations Board issued a refreshingly employer-friendly decision which allowed a successor company to implement new pay terms without having to first bargain with the labor union. In Paragon Systems, Inc., 362 NLRB No. 182 (2015), a divided three-member Board panel held that the new guard service, Paragon Systems, Inc. (Paragon), had given sufficient notice to employees of a change in pay and therefore could assert its right to unilaterally set the initial terms and conditions of employment when it assumed a federal contract from the predecessor employer, MVM, whose work force was represented by The Federal Contract Guards of America International Union.

A Successor Can Make Unilateral Changes

In 2011, the Board reinstated the “successor bar” doctrine, where a union is presumed to retain its majority status when the employees it represents are hired to work for a successor employer. UGL UNICCO Service Co., 357 NLRB 76 (2011). This decision overturned MV Transportation, 337 NLRB 770 (2002) in which the Bush Board had refused to impose a successor bar in favor of the employees’ right to free choice of a union representative.

Paragon was deemed a successor because the majority of its work force was made up of former MVM guards. Paragon conceded that it was a successor and in fact, agreed to recognize and bargain with the union. However, without first consulting with the union, Paragon implemented employee pay terms that were different from what its predecessor had in place. Specifically, Paragon reduced the amount of paid “guard mount” time – time spent getting and returning weapons and ammunition – from 30 minutes to 10 minutes per day and discontinued paying for “guard mount” time on weekends.

The union filed an unfair labor practice charge against Paragon which was dismissed by the Administrative Law Judge.

On appeal, the union and the NLRB’s general counsel argued that Paragon as a successor violated Section 8(a)(5) and (1) when it unilaterally made changes to the pay terms. In analyzing the case, the Board stated that “a ‘successor’ employer under NLRB v. Burns International Security Services, 406 U.S. 272 (1972), and Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27 (1987), is free to set initial employment terms without first bargaining with an incumbent union, unless ‘it is perfectly clear that the new employer plans to retain all of the employees in the unit,’ in which case ‘it will be appropriate to have him initially consult with the employees’ bargaining representative before he fixes terms.’” Paragon Systems, Inc., 362 NLRB. No. 182, slip op. at p. 2 (quoting Burns at 294-295). The Board went on to state that “[o]nce a Burns successor has set initial terms and conditions of employment, however, a bargaining obligation attaches with respect to any subsequent changes to terms and conditions of employment.” Id. In other words, once the successor has established the initial terms, it cannot make any unilateral changes to employment terms without first bargaining with the union.

The Board held that it was undisputed that Paragon was a Burns successor and had properly implemented the initial terms and conditions of employment when it started operations. Accordingly, the Board held that Paragon did not violate the Act when it made unilateral changes to the pay terms that had been in place under the prior employer’s agreement.

Effective Notice to Employees Is Critical

The key issue in this decision was not whether the successor had the right to implement its initial terms and conditions upon becoming the new employer, but the sufficiency of the notice given to employees regarding the change in pay terms. The majority found that Paragon provided adequate notice to employees that there may be a change in such terms. Specifically, prior to taking over the contract, Paragon announced that it had the right to establish compensation, benefits and working conditions; its job applications specifically advised applicants that employees would have to conform to all Paragon policies and reiterated Paragon’s right to set compensation, benefits and other terms and conditions of employment; and Paragon specifically informed applicants that shift schedules would be set in accordance with the operational needs of the contract being serviced by Paragon.

Taken together, these statements were found by the Board to have made clear to employees that Paragon was not adopting MVM’s practice regarding paid guard mount time. Additionally, the implementation of these pay changes occurred on the first day that Paragon assumed operations. The Board majority concluded that the change in pay was within Paragon’s right to set initial terms and conditions of employment.

The sole dissenting Board member argued not that the successor was prohibited from setting the initial terms and conditions of employment, but that the implementation of this change was unlawful because Paragon had not provided specific notice of the specific change. The dissent noted that none of Paragon’s prior statements and communications to employees specifically addressed paid guard mount time.

Moreover, noted the dissent, even if Paragon’s general statements regarding its right to establish compensation, benefits and other working conditions were broad enough to cover the guard mount pay, the fact that Paragon provided detailed information in the contingent offer letter regarding many of the changes in wages and benefits, but was silent regarding guard mount time, reasonably conveyed to employees that no change would be made to such pay.

Practical Takeaways

This decision is good news for potential buyers of businesses, and other employers who are deemed to be successor employers of unionized operations having union contracts, because it reaffirms a successor’s right to make unilateral changes to the initial terms and conditions of employment upon commencement of operations (so long it is not “perfectly clear” that the successor intends to follow the existing agreement – a doctrine beyond the scope of this alert, as the “perfectly clear” doctrine is anything but perfectly clear).

In order to make such changes lawfully, however, the successor must make certain to provide adequate notice about the changes to employees. Notice will be deemed adequate if the successor communicates that it has the right to establish wages, benefits, and working conditions and provides enough general detail about the terms that may be subject to change. A cautious employer should be as specific as it can be when setting initial terms and conditions.