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Eleventh and Seventh Circuits Split on Extension of Federal Prohibition on Sex-Based Discrimination to Sexual Orientation

Decision: On March 10, 2017, in Evans v. Georgia Regional Hospital, an Eleventh Circuit panel held in a 2-1 decision that Title VII’s prohibition of sex-based discrimination does not prohibit discrimination on the basis of sexual orientation. Plaintiff Jameka Evans had alleged that Title VII protected her from discriminatory harassment and firing based on, first, her sexual orientation and, second, her gender nonconformity.

Judge Jose Martinez, writing for the majority, found that binding precedent compelled the panel to conclude that Title VII’s prohibition on sex-based discrimination did not extend to sexual orientation. Following the lead of other courts, however, the panel found that gender nonconformity was a separate, and potentially viable, ground for a discrimination claim under Title VII and remanded the case with instructions to allow the plaintiff leave to amend her complaint to attempt to state a claim on that theory. In a concurring opinion, Judge William Pryor emphasized the distinctions between sexual orientation and gender nonconformity claims, arguing that someone who experiences one does not necessarily experience the other. Judge Robin Rosenbaum dissented, arguing that Title VII does cover sexual orientation, because one who experiences discrimination on the basis of sexual orientation necessarily experiences discrimination on the basis of gender nonconformity.

Only a few weeks later, on April 4, the Seventh Circuit ruled in an 8-3 en banc decision that Title VII does protect sexual orientation. In the case Hively v. Ivy Tech Community College, Plaintiff Kimberly Hively had alleged that the defendant community college did not hire her as a full-time professor because she is a lesbian. Judge Diane P. Wood, writing for the majority, found that US Supreme Court precedent, “as well as the common-sense reality that it is actually impossible to discriminate on the basis of sexual orientation without discriminating on the basis of sex,” allowed the panel to overrule previous circuit authority. In a concurring opinion, Judge Richard Posner acknowledged that the Seventh Circuit’s decision would broaden the contours of Title VII as it was originally intended, but concluded that a broader interpretation was necessary given expanding societal concepts of sex and gender. The dissenting opinion, authored by Judge Diane Sykes, argued that the court was usurping Congress’s constitutional authority and rewriting the statute.

Impact: While debate continues over the proper scope of Title VII’s prohibition of sex-based discrimination, the momentum appears to be building for greater protection for LGBT employees. The Seventh Circuit’s landmark en banc decision made it the first circuit court to find that Title VII protects sexual orientation. But the Seventh Circuit panel decision that it reversed and a recent Second Circuit panel decision reaching a similar conclusion both expressed misgivings about their circuits’ binding precedent. In addition to those prior circuit-level opinions, the US Equal Employment Opportunity Commission (EEOC) has taken a formal position that Title VII does prohibit sexual orientation discrimination. Several lower courts have taken the position as well. In addition, the laws of many states and localities expressly prohibit discrimination on the basis of sexual orientation. The Seventh Circuit en banc decision breaks new ground in federal law, but it may prove to be an incremental step in a groundswell of activity with the potential to reshape the prevailing interpretation of Title VII.

California Court of Appeal Requires Separate Rest Period Compensation for Commissioned Employees

Decision: In Vaquero v. Stoneledge Furniture LLC, the California Court of Appeal held that employees who are paid solely on commission are entitled to separate compensation for rest periods mandated by California law and that employers violate this requirement by paying employees a guaranteed minimum hourly rate as an advance on commissions earned in later pay periods.

Under Stoneledge’s commission plan, sales associates were paid on a commission basis. The plan guaranteed sales associates “minimum pay” of at least $12.01 per hour in commission in any pay period. If associates did not earn the “minimum pay,” Stoneledge paid the associate a “draw” against future commissions. The commission plan did not provide separate compensation for any non-selling time, such as time spent in meetings, in training and during rest periods. The sales associates, however, recorded this non-selling work time in an electronic timekeeping system. Two former employees filed a putative class action against Stoneledge alleging that the commission plan failed to provide paid rest periods as required under California law. The trial court granted Stoneledge’s motion for summary judgment on that claim and held that Stoneledge’s payment system specifically accounted for all hours worked and guaranteed that employees would be paid more than $12 per hour for those hours.

The court of appeal reversed, explaining that California law requires employers to separately compensate employees for rest periods if an employer’s compensation plan does not already include a minimum hourly wage for such time and that this requirement applies to “any . . . compensation system that does not separately account for rest breaks and other nonproductive time,” including those for commissioned employees and employees paid by piece rate. The court of appeal went on to hold that Stoneledge’s commission plan did not allow employees to earn wages during rest periods because the formula it used to determine commissions did not include any component that directly compensated sales associates for rest periods. Rather, Stoneledge merely multiplied sales associates’ weekly sales by an applicable commission rate and paid that amount if it exceeded the minimum contractual rate. Sales associates falling into this category received the same amount of compensation regardless of whether they took rest breaks. For sales associates whose commission did not exceed the minimum rate in any given week, the company clawed back (by deducting from future paychecks) wages advanced to compensate for hours worked, including rest periods. The advances or draws against future commissions were not compensation for rest periods but rather, according to the court, “interest-free loans.” The court of appeal stated that “taking back money paid to the employee effectively reduces either rest period compensation or the contractual commission rate, both of which violate California law.” Accordingly, the court of appeal held that Stoneledge’s commission plan did not separately compensate sales associates for rest periods as required by California law and that the trial court erred in granting it summary judgment.

Impact: This decision is the latest in a line of California cases in federal and state court holding that employers who use an alternative compensation scheme, such as compensation on a piece-rate only basis, must directly compensate employees for rest periods. This case is significant, however, because it is the first case to extend this reasoning to commission compensation plans. As a result, employers who use alternative compensation arrangements, including commission-based plans, should take this opportunity to evaluate their policies and practices against California’s most recent pronouncements on rest break requirements, as well as its minimum wage and overtime requirements.

California District Court Holds That McDonald’s Is Not a Joint Employer with its Franchisee

Decision: On March 10, 2017, in Salazar et al v. McDonald’s Corp., et. al., Case No. 3:14-cv-209, the Northern District of California held that, under California law, joint employer status cannot be based on an "ostensible" (as opposed to actual) agency relationship. The court thus resolved a question that it had left open in a prior summary judgment ruling in the case.

In Salazar, the plaintiffs sought to hold McDonald’s Corp. and McDonald’s USA LLC (collectively “McDonald’s”) liable for alleged violations of California wage laws at one of its Bay Area franchisee’s restaurants. They argued that McDonald’s was their joint employer together with the franchisee. The court had previously granted partial summary judgment to McDonald’s, holding that it did not "suffer or permit" plaintiffs to work or otherwise “engage” plaintiffs, nor did it directly or indirectly control the terms of their employment. However, the prior order left open whether, under California law, McDonald’s might be deemed a joint employer on the basis of an "ostensible" (or apparent) agency relationship between McDonald’s and the local franchisee. The court's March 10 ruling answered that question in the negative, holding that ostensible agency is not a valid theory upon which to base joint employer status.

The decision turned on the definition of "employer" in the California Industrial Welfare Commission’s Wage Order 5-2001. The wage order defines an employer as one who "directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person." The plaintiffs argued that the phrase "through an agent" meant that McDonald’s could be deemed their joint employer if there was an ostensible agency relationship between McDonald’s and the local franchisee, even if there was no actual agency relationship. The court rejected this interpretation, noting that the wage order still requires that an employer "exercise control" over the workplace environment (which McDonald’s did not do). Even if the local franchisee was McDonald’s ostensible agent, the court determined that could not alone turn McDonald’s into a joint employer under California law.

Impact: The law of joint employer status has seen significant development in recent years. The National Labor Relations Board’s (NLRB) 2015 decision in Browning Ferris Industries of California, 362 N.L.R.B. No. 186 (Aug. 27, 2015), rejected the "direct and immediate" control test, holding that even the exercise of "indirect control" could support a finding of joint employer status. That decision on its own creates added risk for franchisors who want to impose (and maintain) quality standards on their local franchisees but without assuming the attendant liabilities that the franchise model is in part designed to avoid. The plaintiffs' theory in Salazar threatened a massive expansion of joint employer status well beyond that contemplated by Browning Ferris: even appearing to have an agency relationship with the local franchisee could form the basis for joint employer status. Although the plaintiffs claimed that they were merely seeking to apply well-worn agency principles, the court recognized that California law could not be construed so expansively.

Ninth Circuit Holds in Favor of Arbitration, Finding Unconscionable and Unlawful Provisions Severable

Decision: In Poublon v. C.H. Robinson Co., et al., the Ninth Circuit reversed a decision by the District Court for the Central District of California that a dispute resolution clause in C.H. Robinson’s incentive bonus agreement was unenforceable and held that the unenforceable portions of the contract could be severed without affecting the agreement’s overall validity.

Poublon signed the agreement at issue in December 2011. The agreement included a dispute resolution clause requiring that any claims the employee might raise against the employer be mediated or arbitrated but allowing any claims brought by the company against the employee to proceed in court. The clause also prohibited class, collective and representative actions and contained a provision allowing any parts of the clause that were found to be illegal or void to be severed from the rest of the agreement without affecting its overall validity.

The company terminated Poublon’s employment in early 2012. Shortly thereafter, she filed a class action alleging that she and others similarly situated were improperly classified as overtime-exempt employees. Poublon also asserted a claim under California’s Private Attorneys General Act (PAGA). The district court denied CH Robinson Co.’s motion to stay proceedings, compel arbitration of claims arising out of Poublon’s employment, and dismiss the class and representative claims, holding that the dispute resolution clause was not enforceable.

The Ninth Circuit reversed and held that although the portion of the dispute resolution clause that permitted the company, but not Poublon, to seek resolution of its claims in court was unconscionable, the “provision can be extirpated without affecting the remainder of the paragraph and is collateral to the main purpose of the contract, which is to require arbitration of disputes.” The appellate court further held that the contract provision prohibiting class and collective actions was not substantively unconscionable but nonetheless was unenforceable under California and Ninth Circuit law to the extent that it prevented Poublon from bringing a representative PAGA action. The court held that clause, too, “could be limited without affecting the remainder of the agreement.” The Ninth Circuit rejected a number of other procedural and substantive unconscionability challenges to the agreement that Poublon raised, including challenges to the agreement’s confidentiality, sanctions and unilateral modification provisions as well as a challenge to the agreement’s limitations on discovery.

Impact: The decision provides the Ninth Circuit’s most recent word on the enforceability of many aspects of arbitration agreements in the employment context. Notably, however, the Ninth Circuit did not give any guidance as to the way in which the plaintiff’s representative PAGA claim should proceed, including whether it should be stayed pending resolution of the employee’s individual wage claims in arbitration or arbitrated in the same forum with the individual claims. Thus, how the district court and the parties proceed with Poublon’s PAGA claim may be of interest to employers faced with similar scenarios. Moreover, to the extent that businesses are concerned with the possibility of arbitrating PAGA claims, they should assess whether their arbitration agreements are drafted to account for the Ninth Circuit’s most recent decisions in this area.

US Supreme Court Articulates Deferential Standard for EEOC Subpoena Enforcement Review

Decision: The US Supreme Court recently ruled in McLane Co. Inc. v. Equal Employment Opportunity Commission that appellate courts should use a deferential standard to review trial courts' decisions on whether to enforce US Equal Employment Opportunity Commission (EEOC) subpoenas. The Ninth Circuit decision at issue had reversed a trial court’s refusal to enforce an EEOC subpoena seeking “pedigree information” (i.e., names, Social Security numbers and telephone numbers) for all individuals subjected to the job testing that formed the basis for the plaintiff’s discrimination charge. In so holding, the Ninth Circuit used a de novo standard of review, contrary to the standard of review used by all other circuit courts of appeal to have addressed the issue. The Supreme Court held that the Ninth Circuit should instead have reviewed the trial court’s ruling for abuse of discretion. Noting the longstanding practice for appellate courts to review district court decisions on the enforcement of administrative subpoenas for abuse of discretion, the Supreme Court explained that “Congress amended Title VII to authorize EEOC subpoenas against this uniform backdrop of deferential appellate review, and today, nearly every court of appeals reviews a district court’s decision whether to enforce an EEOC subpoena for abuse of discretion. This ‘long history of appellate practice’ … carries significant persuasive weight.” Additionally, basic principles of institutional capacity counseled in favor of deferential review. “In the mine run of cases, the district court’s decision whether to enforce a subpoena will turn either on whether the evidence sought is relevant to the specific charge before it or whether the subpoena is unduly burdensome in light of the circumstances. Both tasks are well suited to a district judge’s expertise.”

Impact: Given the Supreme Court’s announcement of this deferential review standard, district courts’ decisions concerning the enforceability of EEOC subpoenas are more likely to withstand challenges on appeal. The Court also provided, in dicta, guidance concerning the analytical framework with which the district court can evaluate the enforceability of EEOC subpoenas. For example, the Court explained that “[t]he decision whether evidence sought is relevant requires the district court to evaluate the relationship between the particular materials sought and the particular matter under investigation—an analysis ‘variable in relation to the nature, purposes and scope of the inquiry.’” It further noted that “the decision whether a subpoena is overly burdensome turns on the nature of the materials sought and the difficulty the employer will face in producing them.”