California Employers' Rights and Obligations: Lessons from Recent Appellate and Supreme Court Rulings

In the last two months, California courts of appeal and the California Supreme Court have issued rulings in several cases affecting California employers’ rights and obligations concerning vacation pay policies, subcontractors' employees, sales commissions, litigation under the Private Attorney General Act ("PAGA"), and traditional class action litigation. Important lessons for employers are found in each of these rulings.

Vacation Pay Policies

In Owen v. Macy’s Inc., the Court of Appeal considered the employer’s policy providing for vacation to vest in two halves, both in advance of the vacation being earned. The court determined that this policy was lawful and did not require the employer to prorate vacation pay for an employee who did not work through the vesting date. In so ruling, the court confirmed that as long as the policy is made clear to employees, vacation need not begin to accrue on the first day of employment, and proportional vesting is not required when the vacation vests in advance of the employee’s working to earn it.

The lesson:

Although retroactive vesting is not permitted, prospective vacation vesting is permitted, even when that vesting is semiannual rather than annual.

Responsibility for Subcontractor’s Employees

In Sanders Construction Company, Inc. v. Martin Cerda, the Court of Appeal held that the general contractor was liable for the unpaid wages of workers hired by an unlicensed subcontractor. In that case, the general contractor had hired the subcontractor to install drywall for a construction project. The subcontractor failed to pay its employees’ wages for the work they performed. When the employees sued the general contractor, the court agreed that the general contractor owed the employees’ wages, plus interest, even though it already had paid the subcontractor for the employees’ services.

The lessons:

The “joint employer” notion is alive and well, and general contractors should carefully consider the subcontractors with whom they do business.

Commission Plans Defined by Contract

In Nein v. Hostpro, Inc., the Court of Appeal ruled that the right of a sales person to a commission payment is determined by the terms of the contract, because the commission is a creature of that contract. Here, employee Nein had initiated a sale that his employer closed a month after it terminated his employment. When Nein sued for the commission, the court ruled against him because, it said, the employment contract clearly stated that he was eligible for commissions earned “only while employed by the company.” Thus, he was not entitled to commissions for a sale that closed after his employment ended.

The lesson:

Commission agreements, just like bonus agreements, should be carefully and clearly stated. While California does not usually countenance forfeitures of earned compensation, the courts will respect an agreement that is clear and reflects a “meeting of the minds.”

Developments in Class Action and PAGA Law

Rulings in two cases clarified the application to lawsuits of California’s Unfair Competition Law (Business & Professions Code Section 17200 et. seq. (“Section 17200”)) and Private Attorney General Act (Labor Code Section 2698 et. seq. (“PAGA”)).

In Arias v. Superior Court (Angelo Dairy), the Supreme Court held that an employee who sues under Section 17200 must satisfy the same standards as an employee seeking to bring a class action, but that an employee suing under PAGA need not do so. The Court differentiated the two laws, holding that an employee suing on behalf of others under section 17200 must have suffered an actual injury and thus, cannot represent the others without meeting class certification requirements. An employee who sues under PAGA, however, does so as the proxy or agent of the state’s labor enforcement agencies, and thus “fundamentally [brings] a law enforcement action designed to protect the public and not to benefit private parties.” Hence, these employees do not have to meet class standards.

In a separate case, Amalgamated Transit Union, Local 1756 v. Superior Court (First Transit Inc.), the Court of Appeal ruled that a labor union that had not suffered actual injury was not an "aggrieved employee," and thus, did not have standing to sue on behalf of employees under either Section 17200 or PAGA.

The lessons:

Section 17200 claims will continue to be brought within employee class action lawsuits but will not have practical significance beyond potentially adding a fourth year of liability on some of the claims. PAGA claims, however, although engendering relatively low liability, will continue to vex procedurally.

For more information, or if Davis Wright Tremaine can be of assistance with these or other employment issues, please don’t hesitate to contact us.