Employers Score Insurance Coverage From California Supreme Court

Employment Law

Employers Score Insurance Coverage From California Supreme Court

Why it matters

In a victory for employers, the California Supreme Court ordered an insurer to provide coverage to a policyholder facing a negligent hiring, retention and supervision lawsuit. Ledesma & Meyer Construction Co. contracted with a school district for a construction project. Several years later, a 13-year-old student sued L&M alleging that she was sexually abused by one of its employees. L&M tendered the action to Liberty Surplus Insurance Corp. The insurer provided a defense under a reservation of rights and filed a declaratory judgment action seeking an order that it was not obligated to defend against the lawsuit, which it argued was not an “occurrence” as defined by the policy. A district court sided with the insurer, and when the employer appealed to the U.S. Court of Appeals for the Ninth Circuit, the panel certified the issue to the state’s highest court. The California Supreme Court reversed, writing that “absent an applicable exclusion, employers may legitimately expect coverage for [claims of negligent hiring, retention or supervision when the employee’s conduct is deliberate] under comprehensive general liability insurance policies, just as they do for other claims of negligence.” The decision in the case—which the Ninth Circuit described as “of exceptional importance to injured parties, employers and insurance companies doing business in California”—should allow employers to breathe easier about coverage for claims of negligent hiring, retention or supervision.

Detailed discussion

Ledesma & Meyer Construction Co. contracted with the San Bernardino Unified School District to manage a construction project at a middle school. In 2003, the company hired a new assistant superintendent and assigned him to the project. In 2010, a 13-year-old student at the school sued L&M in state court alleging that the employee had sexually abused her.

Her claims included a cause of action against L&M for negligently hiring, retaining and supervising the employee. The employer tendered defense of the suit to its insurer, Liberty Surplus Insurance Corp. The insurer provided a defense under a reservation of rights and filed a declaratory action in federal court, arguing that it had no obligation to defend or indemnify L&M.

The commercial general liability (CGL) policy at issue provided coverage for “bodily injury” “caused by an ‘occurrence.’” The policy defined an “occurrence” as “an accident.”

A California federal court granted summary judgment in favor of the insurer, holding that the injury alleged in the underlying suit was not caused by an “occurrence” because the negligent hiring, retention and supervision claims were “acts antecedent” to the molestation and “too attenuated” from the injury-causing conduct. L&M appealed, and the U.S. Court of Appeals for the Ninth Circuit certified the issue to the California Supreme Court.

Specifically, the federal appellate panel asked, “When a third party sues an employer for the negligent hiring, retention and supervision of an employee who intentionally injured that third party, does the suit allege an ‘occurrence’ under the employer’s commercial general liability policy?”

The answer, the California Supreme Court held, turns on whether the injury can be considered “accidental.” As a general matter, the meaning of the term “accident” in a liability policy is settled in the state, defined as “an unexpected, unforeseen or undesigned happening or consequence from either a known or an unknown cause,” the court explained.

It is also important to keep in mind that a cause of action for negligent hiring, retention or supervision seeks to impose liability on the employer, not the employee, the court wrote, with the allegedly negligent hiring, retention and supervision by L&M being independently tortious acts that form the basis of its claim against the insurer for defense and indemnity.

The court said that causation is established if the defendant’s conduct is a “substantial factor” in bringing about the plaintiff’s injury under California law, with precedent that “negligent hiring, retention or supervision may be a substantial factor in a sexual molestation perpetrated by the employee, depending on the facts presented.”

“Here, [the employee’s] molestation was the act directly responsible for the injury, while L&M’s negligence in hiring, retaining and supervising him was an indirect cause,” the court wrote, noting that an injury may be the result of more than one cause. “[A] finder of fact could conclude that the causal connection between L&M’s alleged negligence and the injury inflicted by [the employee] was close enough to justify the imposition of liability on L&M. … L&M’s acts must be considered the starting point of the series of events leading to Doe’s molestation. L&M does not rely on any event preceding its own negligence to establish potential coverage. As alleged by Doe, the ‘occurrence resulting in injury’ began with L&M’s negligence and ended with [the employee’s] act of molestation.”

Policy reasons also weighed on the court. “We recognize society’s interest in providing an incentive for employers to take precautions against sexual abuse by their employees,” the California Supreme Court wrote. “However, the threat of liability for negligent hiring, retention and supervision is a significant deterrent even when insurance coverage is available.”

While insurance does not generally cover intentionally inflicted injuries, the court added, “the public policy against insurance for one’s own intentional sexual misconduct does not bar liability coverage for others whose mere negligence contributed in some way to the acts of abuse. In such cases … there is no overriding policy reason why a person injured by sexual abuse should be denied compensation for the harm from insurance coverage purchased by the negligent facilitator.”

If the court sided with the insurer, it would leave employers without coverage for claims of negligent hiring, retention or supervision whenever the employee’s conduct was deliberate.

“Such a result would be inconsistent with California law, which recognizes the cause of action even when the employee acted intentionally,” the court concluded. “The requirements for liability of this kind are not easily met, but they are well established. Absent an applicable exclusion, employers may legitimately expect coverage for such claims under comprehensive general liability insurance policies, just as they do for other claims of negligence.”

To read the opinion in Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., Inc., click here.

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PAGA Claim Requires Other Employees, Court Rules

Why it matters

Lacking evidence of harm to other employees, a California federal judge dismissed a plaintiff’s Private Attorneys General Act (PAGA) claim against an automotive parts store. A delivery driver for O’Reilly Auto Enterprises who was paid on an hourly basis, Kia Davidson, alleged the company violated the state Labor Code with regard to requirements for overtime, minimum wage, meal breaks and rest periods. O’Reilly moved for summary judgment, arguing that Davidson failed to introduce any evidence of other aggrieved employees, leaving her unable to pursue her PAGA claim. The court agreed. PAGA is a representative action undertaken on behalf of the state to enforce the Labor Code, the court said, requiring other current or former employees. Because the plaintiff offered only evidence of Labor Code violations against herself, she was unable to prevail on her PAGA claim, and the court dismissed her cause of action. This should allow companies to breathe easier in regards to some PAGA claims.

Detailed discussion

From June 2016 to July 2017, Kia Davidson worked as an hourly paid, non-exempt delivery driver for O’Reilly Enterprises, a retail store selling automotive parts. Davidson filed a lawsuit, asserting that during the time she was employed with O’Reilly, she was denied meal breaks, rest periods and overtime pay in violation of the California Labor Code.

She brought a Private Attorneys General Act (PAGA) claim based on O’Reilly’s alleged violations of the Labor Code along with other absent “aggrieved employees” to collect civil penalties.

O’Reilly moved for partial summary judgment on Davidson’s PAGA claim, arguing that Davidson failed to introduce any evidence as to other aggrieved employees, and without that evidence, she could not pursue an individual PAGA claim.

U.S. District Judge R. Gary Klausner agreed, granting the motion.

Under PAGA, an “aggrieved employee” may bring an action against an employer “on behalf of himself or herself and other current or former employees” to recover civil penalties for violations of the California Labor Code. The statute defines an “aggrieved employee” as one “against whom one or more of the alleged violations was committed.” To prevail on a PAGA claim, the court explained, the plaintiff must “prove Labor Code violations with respect to each and every individual on whose behalf plaintiff seeks to recover civil penalties.”

Davidson failed to satisfy these statutory requirements, Judge Klausner wrote.

“Here, Davidson offers only evidence of Labor Code violations against herself,” the court said. “For example, she puts forth evidence that she frequently had to work an additional 30 to 45 minutes without pay after clocking out; that O’Reilly denied her meal breaks; and that O’Reilly prevented her from taking rest periods because the workplace was too busy. Davidson does not, however, offer any evidence that O’Reilly violated any provision of the Labor Code with respect to anyone else. As a result, Davidson ‘lacks the evidence to proceed with litigation on behalf of other aggrieved employees.’”

The plaintiff countered that she could pursue her PAGA claim as an individual aggrieved employee, but the court pointed to the statute, which provides that plaintiffs can recover penalties through a civil action brought “on behalf of himself or herself and other current or former employees,” emphasizing the “and.”

“In other words, a PAGA action must include the plaintiff and ‘other current or former employees,’” the court wrote. “Because PAGA is a representative action undertaken on behalf of the state to enforce the Labor Code, a plaintiff cannot bring a PAGA claim on an individual basis. Consequently, because Davidson cannot bring a PAGA claim as a single aggrieved employee, and because she cannot show evidence of Labor Code violations against ‘aggrieved employees’ other than herself, Davidson cannot prevail on her PAGA claim as a matter of law.”

To read the order in Davidson v. O’Reilly Enterprises, LLC, click here.

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Wage Theft Costs California Restaurants Almost $15M

Why it matters

Providing a warning to employers in the industry, the California Labor Commission hit eight restaurants with fines totaling nearly $15 million for wage theft violations in recent weeks. In the San Francisco area, the commission cited one restaurant for violations totaling $5.16 million involving 133 workers, while another restaurant with six different locations was ordered to pay $4.96 million for 298 underpaid workers. The violations and civil penalties included failure to pay minimum wage, overtime and split shift premiums, the commission said. A few days later, the commission found Cheesecake Factory Restaurants liable for wage theft of $4.57 million after underpaying 559 janitorial workers at eight locations in Orange and San Diego counties, even though the restaurant contracted their services through a third party. The workers are due $3.94 million in minimum wages, overtime, liquidated damages, waiting time penalties and rest period premiums, the commission said.

Detailed discussion

Taking a closer look at restaurants in the Bay Area, the California Labor commissioner cited Kome Japanese Seafood & Buffet in Daly City, Burma Ruby Burmese Cuisine in Palo Alto and six locations of Rangoon Ruby Burmese Cuisine for various wage theft violations, totaling more than $10 million.

Kome’s citations involved 133 workers for a total in excess of $5.16 million. Of that amount, workers will receive $4,381,461 in unpaid wages, premiums and liquidated damages, with civil penalties assessed of $780,400.

An investigation and payroll audit by the labor commission determined that 69 cooks, sushi chefs and dishwashers typically worked north of 55 hours per week but were paid a fixed salary that did not include overtime. Those workers are owed almost $3 million in unpaid wages and penalties, the commissioner said, while other staff members—such as hosts, servers and bussers—will receive more than $1.4 million for overtime, split shift premiums and unpaid minimum wage violations (including the illegal counting of tips received as part of the minimum hourly wage).

At the Burmese restaurant chain, 87 cooks were paid a fixed salary but typically clocked more than 10 hours of unpaid overtime each week. For unpaid overtime wages, minimum wages, split shift premiums, liquidated damages, waiting time penalties and failure to provide accurate itemized wage statements, they will receive $3.8 million. The remaining 211 workers were not paid the daily extra hour of minimum wage required when their employer scheduled them to work split shifts, the commissioner said, and are due $590,072.

The Burmese restaurant chain’s total $4.96 million payment includes civil penalties of $574,150.

“Our job is to protect working people’s right to a just day’s pay for a hard day’s work, and to stop employers who embrace wage theft as a business model,” Labor Commissioner Julie A. Su said in a statement.

A few days later, the commission announced another significant enforcement action against Cheesecake Factory Restaurants, citing the company for $4.57 million in wage theft—despite the fact it subcontracted its janitorial work to a third party.

The 559 janitorial workers at eight locations in Orange and San Diego counties are due $3.94 million in minimum wages, overtime, liquidated damages, waiting time penalties, and meal and rest period premiums, the commissioner said. The remaining $632,760 was assessed for the failure to provide properly itemized pay stubs and other civil penalties.

An investigation by the commission found that janitorial workers started their shifts around midnight and worked until morning without proper meal or rest break periods. Some workers were not even released after eight hours of work until a kitchen manager conducted a walkthrough, which frequently led to additional tasks that had to be completed before the worker was released, the commission said, resulting in each worker building up 10 hours of unpaid overtime each week.

“This case illustrates common wage theft practices in the janitorial industry, where businesses have contracted and subcontracted to avoid responsibility for ensuring workers are paid what they are owed,” Su said in a statement. “Client businesses can no longer shield themselves from liability for wage theft through multiple layers of contracts. Our enforcement benefits not only the workers who deserve to be paid, but also legitimate janitorial businesses that are underbid by wage thieves.”

To read the commission’s press release about the Bay Area restaurants, click here.

To read the commission’s press release about the Cheesecake Factory, click here.

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NLRB’s Notice of Proposed Rulemaking on Joint Employer Standard Coming Soon

Why it matters

In a letter to lawmakers, National Labor Relations Board (NLRB) Chair John Ring confirmed that the agency will engage in formal rulemaking to establish a new “joint employer” standard. The long-running battle over the standard dates back to a 2015 decision in Browning-Ferris Industries of California, Inc. and continues through the decision to vacate a subsequent standard reversal in Hy-Brand Industrial Contractors, Ltd. & Brandt Construction Co. earlier this year after a new board member failed to recuse himself. When the NLRB indicated that it was considering notice-and-comment rulemaking on the issue, Sens. Bernie Sanders (I-Vt.), Elizabeth Warren (D-Mass.) and Kirsten Gillibrand (D-N.Y.) wrote to Ring, expressing their “strong concerns” that the board might issue a regulation undermining labor rights. In a published response to the lawmakers, Ring confirmed that “a majority of the Board is committed to engage in rulemaking” and work toward issuance of a notice of proposed rulemaking “as soon as possible.”

Detailed discussion

For several decades, the National Labor Relations Board (NLRB) followed a single standard in evaluating the scope of joint employer liability. But in 2015, the board adopted a controversial new standard in the Browning-Ferris Industries of California, Inc. decision.

In that case, the board held that even when two entities have never exercised joint control over the essential terms and conditions of employment, and even when any joint control is not “direct and immediate,” the two entities will still be joint employers based on the existence of “reserved” joint control or based on indirect control or control that is “limited and routine.”

The employer appealed the decision to the U.S. Court of Appeals for the D.C. Circuit. While the case was pending, however, things got more complicated with the subsequent Hy-Brand Industrial Contractors, Ltd. & Brandt Construction Co. case. There, an administrative law judge applied the Browning-Ferris standard to find that the two entities were joint employers for purposes of the National Labor Relations Act when they terminated a total of seven workers.

But when the employers appealed to the NLRB, the board—featuring new members courtesy of President Donald Trump—took the opportunity to throw out the Browning-Ferris standard and establish a new test.

Although the decision was hailed by employers, the victory was short-lived. In a motion for reconsideration, for recusal and to strike, the charging parties requested that the NLRB vacate its decision and that Board Member William J. Emanuel recuse himself. The NLRB’s inspector general launched an investigation into whether Emanuel was required to recuse himself because his former law firm represented Leadpoint, another entity involved in the Browning-Ferris case.

After the inspector general agreed that Emanuel should have recused himself, the NLRB vacated its decision in Hy-Brand. In response, the NLRB suggested that notice-and-comment rulemaking could be the solution.

Concerned, Sens. Bernie Sanders (I-Vt.), Elizabeth Warren (D-Mass.) and Kirsten Gillibrand (D-N.Y.) reached out to NLRB Chair John Ring. Public trust in the board’s impartiality “has been substantially tarnished over the past year,” the senators said, “largely due to the Board’s rushed reversals of several significant precedents churned out without public notice or input,” like the Hy-Brand decision.

“While there is nothing inherently suspect about an agency proceeding by rulemaking, it is impossible to ignore the timing of this announcement, which comes just a few months after the Board tried and failed to overturn Browning-Ferris and appears designed to evade the ethical constraints that federal law imposes on Members in adjudications,” according to the letter. “The Board’s sudden announcement of rulemaking on the exact same topic suggests that it is driven to obtain the same outcome sought by Member Emanuel’s former employer and its clients, which the Board failed to secure by adjudication.”

The lawmakers also took issue with some of Ring’s public statements and tweets, which they said gave the impression he had prejudged the issue. “We therefore urge you to reconsider this decision and refrain from initiating a rulemaking process on the joint employer standard,” Sens. Gillibrand, Sanders and Warren wrote.

Ring replied that the NLRB was no longer merely considering rulemaking but actively working toward it. “A majority of the Board is committed to engage in rulemaking, and the NLRB will do so,” he wrote to the legislators. “Internal preparations are underway, and we are working toward issuance of a Notice of Proposed Rulemaking as soon as possible, but certainly by this summer.”

Rulemaking “opens an avenue of communication with the Board” for thousands of commenters, the chair noted, while case decisions, even with briefing, involve less public input and are limited to their facts.

“With rulemaking, by contrast, the Board will be able to consider and apply whatever standard it ultimately adopts to selected factual scenarios in the final rule itself,” Ring wrote. “In this way, rulemaking on the joint employer standard will enable the Board to provide unions and employers greater ‘certainty beforehand as to when [they] may proceed to reach decisions without fear of later evaluations labeling [their] conduct an unfair labor practice,’ as the Supreme Court has instructed us to do.”

Ring also tried to put the senators’ minds at ease about prejudgment. “I will not pretend that I am devoid of opinions on the subject of the joint employer standard, any more than my predecessors,” he said, but added he has “an open mind” and intends to consider all comments the NLRB receives from interested parties.

To read the letter from the lawmakers, click here.

To read the letter from Ring, click here.

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NLRB Memo Offers Guidance on Employee Handbook Rules and Policies Post-Boeing

Why it matters

How should employee handbook rules be interpreted by the National Labor Relations Board (NLRB)? In a new memorandum, the board’s general counsel offered guidance on how the regional offices should be reviewing unfair labor practice charges that involve employer handbook and work rules in light of a 2017 decision in The Boeing Co. GC Memorandum 18-04 provides additional insight into the three different categories of employment policies, rules and handbook provisions established by the decision, with examples of common employer rules followed by guidance as to whether a complaint should be issued. The memo also instructs regional offices to adopt a shift in focus: ambiguities should no longer be interpreted against the drafter, and generalized provisions should not be read to ban all activity that could conceivably be included. A must-read, the memo offers employers the opportunity to revise or refine their handbook rules in accordance with the new standard and philosophy of interpretation set forth by the NLRB.

Detailed discussion

In December 2017, the National Labor Relations Board (NLRB) threw out the prior standard for evaluating handbook rules found in Lutheran Heritage Village-Livonia and adopted a new standard in The Boeing Co.. The new standard focuses on the balance between the rule’s negative impact on employees’ ability to exercise their Section 7 rights pursuant to the National Labor Relations Act (NLRA) and employers’ right to maintain discipline and productivity in their workplace.

The board also delineates three categories of employment policies, rules and handbook provisions. Category 1 includes rules the board designated as lawful to maintain “either because (i) the rule, when reasonably interpreted, does not prohibit or interfere with the exercise of NLRA rights; or (ii) the potential adverse impact on protected rights is outweighed by justifications associated with the rule.”

Category 2 contains rules “that warrant individualized scrutiny in each case as to whether the rule would prohibit or interfere with NLRA rights, and if so, whether any adverse impact on NLRA-protected conduct is outweighed by legitimate justifications.”

In Category 3 are rules designated as unlawful to maintain “because they would prohibit or limit NLRA-protected conduct, and the adverse impact on NLRA rights is not outweighed by justifications associated with the rule.”

In an effort to provide additional guidance to regional offices, the NLRB general counsel (GC) published Memorandum 18-04 with tips on the placement of various types of rules into the three categories.

The memo was clear in stating that the Boeing decision not only added a balancing test but “significantly altered its jurisprudence on the reasonable interpretation of handbook rules. Specifically, the Board severely criticized Lutheran Heritage and its progeny for prohibiting any rule that could be interpreted as covering Section 7 activity, as opposed to only prohibiting rules that would be so interpreted. Regions should now note that ambiguities in rules are no longer interpreted against the drafter and generalized provisions should not be interpreted as banning all activity that could conceivably be included.”

With regard to the nine types of rules in Category 1, the GC said that charge allegations arguing such rules are facially unlawful should be dismissed. The nine types of rules include civility rules (“Behavior that is rude, condescending or otherwise socially unacceptable is prohibited”; “Disparaging or offensive language is prohibited”); no-photography and no-recording rules; and rules against insubordination, non-cooperation or on-the-job conduct that adversely affects operations (“Being uncooperative with supervisors or otherwise engaging in conduct that does not support the [Employer’s] goals and objectives is prohibited”).

Similarly, disruptive behavior rules (prohibiting “Boisterous and other disruptive conduct,” for example); rules protecting confidential, proprietary and customer information or documents (“Do not disclose confidential financial data, or other non-public proprietary company information. Do not share confidential information regarding business partners, vendor or customers”); and rules against defamation or misrepresentation (“Misrepresenting the company’s products or services or its employees is prohibited”) all fall under Category 1.

Rules against using employer logos or intellectual property; rules requiring authorization to speak for the company; and rules banning disloyalty, nepotism or self-enrichment are also presumed to be legal, the memo said.

Some of these rules may implicate NLRA activity, the GC acknowledged, but an employer’s legitimate justifications outweigh any NLRA-related concerns. For example, in the case of a rule that “[e]mployees are forbidden from using the Company’s logos for any reason,” “some protected concerted activity might fall under such a rule, including fair use of an employer’s intellectual property on picket signs and leaflets.”

Under the new perspective of Boeing, “usually employees will understand this type of rule as protecting the employer’s intellectual property from commercial and other non-Section 7 related uses,” according to the memo. “Furthermore, even where employees would reasonably interpret such a rule to apply to fair use of an employer’s logos as part of a protected concerted activity, it is unlikely that the rule would actually cause them to refrain from so using them.”

Turning to Category 2, rules warranting individualized scrutiny, the GC said that the legality of such rules will often depend on context, and “such rules should be viewed as they would by employees who interpret work rules as they apply to the everydayness of their job. Other contextual factors include the placement of the rule among other rules, the kinds of examples provided, and the type and character of the workplace.”

All Category 2 rules should be submitted to the Board’s Division of Advice, the memo said, offering as examples rules regarding disparagement or criticism of the employer (as opposed to civility rules regarding disparagement of employees), rules banning off-duty conduct that might harm the employer (as opposed to rules addressing conduct at work), confidentiality rules broadly encompassing “employer business” or “employee information,” and rules generally restricting speaking to the media or third parties (and not just restricting speaking on the employer’s behalf).

Finally, the GC discussed rules that are unlawful to maintain in Category 3. Confidentiality rules specifically regarding wages, benefits or working conditions (“Employees shall not disclose any information pertaining to the wages, commissions, performance or identity of employees of the Employer”) and rules against joining outside organizations or voting on matters concerning the employer both fall into this category.

To read GC Memo 18-04, click here.

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