California, The Bellwether

By Diane Cadrain December 1, 2007

HR Magazine, December 2007 Progressive employment laws and court decisions from the Golden State often influence state laws and company policies in the rest of the nation.

California gave the nation the Frisbee disc, McDonald's, the microchip, Silicon Valley and lots of employee-friendly laws. Employee rights that start in California spread to other states as quickly as plaintiffs' attorneys draft lawsuits and employee advocates get lawmakers' ears. Some novel moves, like paid family leave and mandatory sexual harassment training, come from the California legislature. Others, like standards on wrongful discharge and implied contracts, come from the courts.

While California doesn't set the pace in every law, most of the state's firsts carry implications for HR managers and employers nationwide. Especially for multistate organizations that conduct business in California, "the question is whether you want to extend the California protections to everyone or limit them to your employees in California," says Michael Lotito, SPHR, a partner in the San Francisco office of Jackson Lewis.

Furthermore, "when things happen in California, they're picked up and embraced throughout the country," adds Lynn Outwater, SPHR, a partner in the Pittsburgh office of Jackson Lewis.

From the Courts

"It's amazing how good the case law is here," says Cliff Palefsky, a partner of McGuinn, Hillsman & Palefsky in San Francisco, who represents employees in workplace litigation. He ticks off a list of employment law decisions from the California courts that draw national attention and range from wrongful discharge to arbitration agreements.

Courts in other states follow California court decisions closely, particularly"on arbitration agreements and wrongful discharge in violation of the covenant of good faith and fair dealing," says Lotito."The plaintiffs' trial bar has an association, they have meetings, and they share information and theories. They'll take a company that has operations in California, look at a theory of liability that has been used successfully against that company in California, and try to use it in another jurisdiction where the company operates. It's what lawyers do … and it's a kick for them. Judge-made rules are always subject to mischief."

Palefsky agrees that "Word on the cutting edge spreads pretty quickly." Shanti Atkins, president and chief executive officer of ELT, a California company that specializes in ethics and legal compliance training, says, "[Wage and hour] class action is a big trend." Lawyers like these class actions because the state law allows the benefit of the doubt to go to the employee, requires employers to have good records of hours worked and, in the absence of employer records, defers to the employee's word. If the employer is liable, damages can be enormous--up to three years of back pay, possibly doubled.

Lawmakers Weigh In

If California's courts tend to be employee-friendly, the state legislature may be even more so. Plenty of California laws create ripples nationwide and challenge employers, especially multistate employers, with their requirements in a number of areas.

Sexual harassment. California wasn't the first state to require employers to run training programs on sexual harassment; Maine and Connecticut did so in the early 1990s. But California's 2004 law far surpassed Maine's and Connecticut's with its specificity and stringency. Today, 15 states have versions of mandatory training, Outwater says.

HR managers in other states, even those not mandating such training, should be aware of California's law in this area because providing sexual harassment training can help avoid liability. "It's not illegal not to train your employees," says Atkins. "But there can be major liability for those [employers] that don't."

Paid family leave. California also broke ground with its 2002 paid family leave law allowing most California workers to take up to six weeks of family leave in 12 months to care for a new child or to care for a seriously ill family member. The benefit replaces up to 55 percent of wages. By contrast, leave guaranteed under the federal Family and Medical Leave Act and under other state laws remains unpaid.

This year, the California legislature passed an expansion of the paid family leave entitlement to those caring for grandparents, grandchildren or siblings. Senate Bill 727 was before Gov. Arnold Schwarzenegger (R) in mid-October.

When California set up its paid leave program, it had an advantage over most other states: a viable structure for its law provided by its state temporary disability insurance (TDI) plan, an employee-funded, statewide program providing partial wage replacement to employees who can't work because of nonwork-related illnesses or injuries, pregnancy, and childbirth. Only five other jurisdictions have similar employee funded TDI programs: Hawaii, New Jersey, New York, Puerto Rico and Rhode Island.

Still, lawmakers outside California followed the lead. This year, Washington came the closest with enactment of a law granting up to five weeks of parental leave at a rate of $250 per week as of October 2009. But lawmakers didn't figure out how to pay for it, so they set up a task force to brainstorm a solution and appropriated up to $18 million to get the program going. In Oregon, another state without a pre-existing disability system, a paid family leave bill passed the House but died in the Senate this year.

Meanwhile, in New York and New Jersey, states with TDI programs, family leave advocates made some inroads: A bill passed the New York Assembly in June and was before the Senate Labor Committee in mid-October. It would provide disability benefits to employees who take family leave, either to bond with a child under age 1 or to care for a sick relative. Like California's TDI program, employees--not employers--primarily fund New York's plan by paying 45 cents per week prior to July 1, 2009. After that date, the amount will be set by the New York Insurance Department.

In New Jersey, pending companion bills would offer 10 weeks of paid leave, capped at two-thirds of weekly pay, up to a maximum of $488.

On the federal level, the bipartisan Family Leave Insurance Act of 2007 (S. 1681), introduced by Sens. Christopher Dodd, D-Conn., and Ted Stevens, R-Alaska, would set up a fund for which employers, employees and the federal government would share the cost.

Disability discrimination. Similarly, California's disability discrimination statutes are more protective than the federal Americans with Disabilities Act (ADA). For example, California considers an employee to be disabled if he or she is limited in a major life activity. By contrast, the ADA requires a showing that the employee is substantially limited in a major life activity.

Other significant differences:

  • California considers work to be a major life activity, even if the disability only affects the ability to do one job. But most federal courts have ruled that, under the ADA, working is a major life activity if someone is unable to perform a broad range of jobs.
  • California evaluates an employee's disability without the effect of corrective measures such as eyeglasses, so that even if a disability is mitigated, in California that employee may still be considered to have a disability. Under the ADA, though, a person's disability is evaluated after the effect of any corrective measures, meaning it's more difficult for a person to qualify as disabled.
  • Both California law and the ADA require an employer and employee to undertake an interactive process to brainstorm any employer accommodations that might make it easier for an employee to work. But California requires a higher level of due diligence from employers by giving employees an independent cause of action against an employer that fails to engage in the interactive process in good faith.

Noncompete agreements. "California, by statute, doesn't enforce covenants not to compete," says Palefsky. In most states, an employee's promise not to compete with an employer after leaving is enforceable if limited to a reasonable time and geographic area.

Tony Oncidi, a partner with the Los Angeles office of Proskauer Rose, explains how the California law on noncompete agreements can trip up employers in other states: "If you have an employee with a noncompete agreement who's going to work in California, you should waste no time to enforce your noncompete in the courts of the state the employee leaves. It can be a rush to the courthouse: If the employee begins work in California before you bring your enforcement action, you'll have very few options."

How To Decide

Should multistate employers apply California's standards in all their operations or only in that state? HR professionals approach that decision on a case-by-case basis, depending on the law.

California's wage and hour laws, for example, are more detailed and demanding than the federal Fair Labor Standards Act (FLSA) and laws in most other states. Whenever a state wage and hour law offers better employee protections than the FLSA, courts follow the more protective state law standard. California requires the payment of overtime after eight hours in a day, while the federal law requires it only after 40 hours in a week.

Lotito lays out the options for multistate employers: "If your company has a value proposition that people are the company's most valuable asset, then chances are that extending California protections to everyone will be consistent with that value proposition. If you're trying to create an employer-of-choice environment, then the progressive nature of California law is consistent with that goal. Another plus is that you'll create a single set of rules." But "California's standard is extremely burdensome. Why would anyone want to create an eight-hour overtime rule?" he continues. "That doesn't make good business sense."Whatever you decide, HR has to make sure that the businesspeople understand that California is different," says Lotito."You have to look at all your contracts, your handbooks and all your rules with an eye to California. Your handbook, your executive employment agreement, and your training all have to be changed."

Consider the number of employees potentially impacted by a mistake with the California overtime rules, Lotito advises. "Within the context of risk assessment, if five individuals may be misclassified, the financial liability to which the organization is exposed would be modest compared to the liability for 5,000 individuals."

Consider All Implications

Niloofar Nejat-Bina, general counsel at Ascent Media Group, a post-production media company with operations in California and at least a dozen other states, says,"Generally, when we develop policies we rely on California law and decide to err, if at all, on the side of caution. In many cases, if you deal with California, you've got the other states covered." If the policy in question has expense ramifications, such as benefits and leaves of absence, Nejat-Bina says, Ascent tends to rely more on the rule in the local jurisdiction. On maternity leave, for example, "California is more generous than, say, New York, so we go with New York's rules. We do that on a case-bycase basis. But on policies that don't have as tangible a cost, such as sexual harassment training, we use the California standard."It's a really tough challenge on a lot of different levels," she admits. "The differences are hard to keep in your head. There's a lot of granularity to keep track of. Also, it creates a little business confusion. Educating managers is a constant educational effort. And it costs more because of constantly relying on outside sources." Nejat-Bina says Ascent has two handbooks, one for California and a generic one for everywhere else.

Oncidi says most of his clients "have a separate handbook addendum, or even a whole separate handbook, for California. There's something to be said for uniformity, but California is much more onerous in its benefits and requirements."

Laura Lea Clinton, director of HR management at CARE USA in Atlanta, which operates in nine states, including California, says the organization takes three factors into account when deciding which standards to apply where.

First, "if employees in California are entitled to more generous provisions, and you apply that generous standard only to them but not to employees in other states, that's a fairness question. You have to assume that there's a grapevine and that employees in other states will find out what applies in California," she says.

Second, employers should compare the degree of administrative burden required by California law and the laws of other states, says Clinton, a member of the Society for Human Resource Management's Employee Relations Special Expertise Panel. "What's the cost-benefit analysis across the board?" Finally, employers should consider whether there would be legal issues for employees in other states if California law were followed there. "Would it contravene the law of the other state?" she asks, noting that that is unlikely.

Companies with multistate operations also should consider these issues:

  • What to expect with employment practices liability insurance. For operations in California, the insurer will require a good-faith effort to comply with California law. Underwriters know there is more risk in certain jurisdictions and industries, and that is reflected in the premiums.
  • Whether to have noncompete clauses in executive employment agreements.
  • Whether to require arbitration agreements and whether the arbitration process meets California's standards.

As an HR professional, Lotito says, ask yourself the following question: Does your company "want to do the bare minimum or … go beyond the minimum? Most companies don't engage in a robust discussion on these issues until they're in trouble, and then they have a rude awakening. If HR wants a seat at the table, HR should be in a position to help the organization assess the risks and have a tough discussion on its value proposition.

"It's what makes this area of the law very complex and difficult. If you operate in California and multiple jurisdictions, you really have to think long and hard."

Diane Cadrain is an attorney and has been covering workplace legal issues for 20 years. She is a member of the Human Resource Association of Central Connecticut.

Web Extras

SHRM video:
Michael Lotito, employment lawyer, on how employment law in California differs from the rest of the country 

SHRM video:
Michael Lotito on why employees in California sue more often than employees in other states. 

California Workplace Law News

More Employee Protections from California

Through the years, California lawmakers have enacted laws and judges have made civil rulings that have dramatically strengthened worker protections. Here are some examples:

  • Arbitration agreements. "There's a whole raft of arbitration legislation that applies here-- the best in the country," says Cliff Palefsky, a partner of McGuinn, Hillsman & Palefsky in San Francisco. "Arbitration agreements have to meet minimum standards. They use unconscionability as a standard to assure fairness. The agreement has to be mutual, the arbitrator has to be neutral, the discovery has to be adequate, the decision has to be written, and the remedies must be full."
  • Confidentiality of Social Security numbers. "A 2002 California law required employers to safeguard the confidentiality of employee Social Security numbers," says Lynn Outwater, SPHR, a partner in the Pittsburgh office of Jackson Lewis. "It gives employers rules for transmitting and using them. Now, 11 states have similar laws."
  • Wrongful discharge in violation of public policy. A 1990 California Supreme Court decision (Tameny v. Atlantic Richfield Co., 27 Cal. 3d 167 (1980)) established that employers may not discharge at-will employees who refuse to participate in an illegal scheme at the employer's request. This concept of wrongful discharge in violation of public policy is a significant exception to the concept of employment at will, under which an employer may fire an employee at any time and for any reason or no reason. After this decision, employers are not absolute sovereigns over employees, and there are limits to employer prerogative.
  • Commission contracts. California employers may no longer require employees to sign sales commission contracts that force them to forfeit commissions if the company decides to reassign or fire them before the commissions are due to be paid. Such contracts have been found unconscionable in McCollum v. Xcare.Net Inc., 212 F. Supp. 2d 1142 (N.D. Cal. 2002).
  • Wrongful termination. Despite her at-will status, an employee may sue an employer for wrongful discharge after the company fired her based on her dating relationship with an executive in a competing firm, according to Rulon-Miller v. IBM Corp., 162 Cal. App. 3d 241 (1984).
  • Implied contracts in employers' policies, verbal statements or company handbooks. An employer policy can amount to an implied contract, and employees have a right to hold employers to those promises. So, for example, if an employer has adopted a specific procedure for adjudicating employee disputes, the employer is bound to follow that policy and violates an implied contract if it discharges an employee without using its announced and adopted procedure (Cleary v. American Airlines Inc., 111 Cal. App. 3d 443 (1980)).

"By the late '80s the theory of implied contract had spread to 40 states," says Palefsky. However, the California Supreme Court disapproved of any suggestion in Rulon-Miller and Cleary that an implied covenant of good faith and fair dealing may impose limits on an employer's rights beyond those expressed or implied in an employment contract (Guz v. Bechtel National Inc., 24 Cal. 4th 317 (2000)).

Why California?

People have different theories about how California came to be the bellwether on employee protections:

  • "Because California has a state economy as big as or bigger than many countries. It's the fifth largest economy in the world," says Jeanne Mejeur, program director in the Legislative Services Information Program of the National Conference of State Legislatures in Washington, D.C.

  • "There's this dynamic energy because of California's demographics, size and diversity," says Rona Sherriff, policy consultant for the California Senate Office of Research.

  • A lot of people lean to the liberal side in California and are more demanding about employee rights, says Shanti Atkins, president of ELT, a California company that specializes in ethics and legal compliance training.

  • "Because of its size and diversity, California tends to have more creative thinking in terms of the needs of a diverse employee population," says Marjorie Fochtman, a partner with Nixon Peabody in San Francisco.

  • "Because the state labor movement is pretty strong, and they've championed family leave issues," says Netsy Firestein, executive director of the Labor Project for Working Families in Berkeley, Calif.

Coming Next?

Paid sick leave represents another area in which California is ahead of the rest of the country. "Only one jurisdiction in the country now requires employers to give paid sick leave, and that's San Francisco," says Kate Kahan, director of work and family for the National Partnership for Women and Families in Washington, D.C. A November 2006 ballot initiative that passed took effect in February 2007.

Advocates in other states introduced similar legislative measures during 2007. A Connecticut bill that passed the Senate but died in the House would have required businesses with 50 or more employees to allow them to accrue up to 6 1/2 paid sick days per year.

Two Florida bills would have guaranteed a minimum level of sick leave accrual and barred employers from retaliating against employees who try to use it. Both died in committee, but advocates say they'll try again in 2008.

Lawmakers in Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Vermont and Wisconsin also had paid sick leave bills before them during 2007. And in Congress, Sen. Edward Kennedy (D-Mass.) and Rep. Rosa DeLauro (D-Conn.) have introduced a mandatory sick leave proposal, the Healthy Families Act, requiring employers of 15 or more employees to provide at least seven paid sick days per year.

"A lot of people are working on this issue," says Kahan. "Passage of the San Francisco ordinance shows that voters think people need paid sick days."



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