Day By Day© by Chris Muir.

Wednesday, July 27, 2005

And while we're on the subject of labor. . . .

This post tells the story of a case on which I worked. It's a true story. Picture this: It’s 2001. You live in California and you own a small business that consists of you and three to five at-will employees. Your profits are decent. One morning, Jane, one of your employees, announces that she’s quitting, effective immediately, and stalks out. You know -- or think you know -- your California law, which requires that, when an employee quits, you have her payment ready within three days of her departure. (That would be Calif. Lab. Code § 202.) You therefore immediately prepare Jane’s final paycheck, covering the two hours she worked before she quit. One day goes by, no Jane. Two days, no Jane. On the third day, you actually drive over to her place to drop off the check, only to discover it’s a vacant apartment. You head back to the office, check still in hand. Jane didn’t ask that you mail the check to her, nor do you have a current address, so for the time being, you just hold on to it. On the fifth day after quitting, Jane shows up, grabs the paycheck, and again disappears. You breath a sigh of relief, thinking you’re finally done with Jane. If only you knew, the story is just beginning.... A month goes by, and you suddenly get a notice from the California Labor Commissioner telling you that Jane is claiming that you violated California law. Your crime? You did not get Jane’s final paycheck to her within three days of her quitting. Since you had the paycheck ready immediately, and her failure to receive it was solely the result of her own unavailability, you laugh at this charge, thinking you’ve got a slam dunk case. You show up on the assigned day to argue your case before the Labor Commissioner. The Labor Commissioner announces that the three day rule means the employee must have the money in hand by the end of the third day -- regardless of your efforts to pay her, and her lack of effort to receive the money. To punish you, the Labor Commissioner imposes statutory sanctions (or “waiting time penalties”) against you, and insists that you pay Jane an amount 27 times greater than the wages she was actually owed. Shocked by the unfairness of it all, you hire an attorney, who tells you that you’re right -- you complied with your statutory duty, and the Labor Commissioner erred. The attorney tells you that this is indeed a slam dunk case, and that you should appeal it -- which in this case means filing an original action in Superior Court. Sounds good to you.... The case goes to trial. Jane is represented by the Labor Commissioner, so this is a freebie for her -- the people of the State of California, through their tax dollars, are paying Jane’s attorneys fees. The judge appears confused by the issues and eventually announces what he believes is a Solomonic ruling. He holds that, despite the statute’s clear language -- Calif. Labor Code § 202 explicitly imposes on the employer only the burden of having payment ready, not the burden of ensuring that the employee receives payment -- you should have gotten the payment directly to Jane. However (and this is where the Solomon part comes in) the judge will halve the sanctions award against you. While miffed at the fact that you couldn’t get the judge to agree with you entirely, you still leave the Court with a light heart -- after all, you got the original award against you cut by 50%, which must be viewed as a clear victory. Au contraire, my innocent California employer. In 2001 -- when these events take place -- the attorneys fee statute governing appeals from Labor Commissioner awards imposes attorney fees and costs against a party who appears before the Court and “is unsuccessful in the appeal.” (That’s at Calif. Lab. Code § 98.2(c), repealed.) However, by 2001, it turns out that two California decisions have held this facially-neutral language doesn’t really mean what it says. What it really means, say these decisions, is that, if an employee appeals a Labor Commissioner award and betters his position by even a penny, he has been successful on the appeal and the employer gets to pay the employee’s attorneys fees. The contrary is not true. If an employer appeals a Labor Commissioner award, and betters his position by 99.9999%, but not by 100%, he is unsuccessful, and he gets to pay the employee’s attorney fees. What this means for you, the employer, is that, even though you managed to better your position on appeal by 50% -- you still lost! And you’ve got to pay the Labor Commissioner’s attorneys fees at fair market value. So this is the situation in 2001: No rational employer can take the risk of an appeal from a Labor Commissioner award, since there is a huge chance that the employer, whether entirely or even partially correct, will still end up with a judgment requiring him to pay something, even a nominal something, to the employee. (Judges hate giving employees nothing.) And then the employer will be responsible for the oh-so-costly attorneys fees. Your case is the perfect example, since you were right as a matter of law, and you reduced the Labor Commissioner award against you, but you still ended up being obligated to pay something to your ex-employee. Therefore, you -- the victor -- had to shell out the big bucks to the Labor Commissioner. And when you stop and think about it, this perverted reading of a facially neutral statute is a green light to the Labor Commissioner to do some nasty stuff. Any Labor Commissioner employees who are generally unsympathetic to employers have an incentive to rachet up sanctions to ridiculous amounts, knowing that the employer cannot afford an appeal. Even if the employer prevails on the appeal by lowering the sanction to a more reasonable amount, the employer will still be impossibly burdened by the Labor Commissioner’s attorneys fees. Keep in mind, too, that these attorneys fees are a complete windfall for the Labor Commissioner, since the Commission attorneys are automatically paid by the State of California for their efforts. And last I heard, when they receive attorneys fees from some hapless employer, the Labor Commissioners offices are not refunding the taxpaying citizens in that amount. There was a brief, shining moment in 2002/2003 when the California Supreme Court, in a burst of profound rationality, said that courts couldn’t take a facially neutral attorneys fee statute, and read it to impose disproportionate burdens on employers. (That moment of common sense was brought to you by Smith v. Rae-Venter Law Group (2002) 29 Cal. 4th 345.) That was too good to last, of course. In 2003, the California legislature announced its explicit intention to overturn Smith v. Rae-Venter. The current version of the fee shifting statute now gouges the employer in no uncertain terms: “If the party seeking review by filing an appeal to the superior court is unsuccessful in the appeal, the court shall determine the costs and reasonable attorney's fees incurred by the other parties to the appeal, and assess that amount as a cost upon the party filing the appeal. An employee is successful if the court awards an amount greater than zero.” (See Calif. Lab. Code § 98.2(c).) In other words, the employer can avoid paying the employee’s attorneys fees (read, “the Labor Commissioner’s fees”) only if the employer walks out of Court owing the employee nothing -- and obtaining that outcome, especially in liberal courts in the Bay Area or L.A., is a pretty big risk for any small employer to take. This means that employers simply have to swallow the cost when a greedy employee manages to get the ear of a Labor Commissioner who believes it’s fine to impose disproportionate sanctions against a hapless employer, so as as that sanction will benefit a “downtrodden” employee. Why does this sad story matter? It matters because this little bit of social engineering -- unknown to most people -- is driving business out of California. I personally know of at least two businesses that have just packed up and moved to other states precisely to avoid these kind of hidden costs. Those oh-so-clever judges misinterpreting the law before 2002, and the “compassionate” Legislature enacting unfair laws in 2003, all think their good intentions say it all. They truly believe they’re insulating poor, downtrodden employees from the risk of attorneys fees. What they’re not thinking about, though, is the fact that these employees will be even more downtrodden when businesses keep pulling out of California, leaving the State without enough jobs -- and the government without enough taxpayers to run itself. UPDATE: If you're visiting here from Point of Law, welcome. Needless to say, I'd be delighted if you took a few minutes and checked out the rest of this blog. UPDATE II: If you're visiting here from Positive Liberty, welcome. Please feel free to take a few minutes to look around and see if anything else on this blog interests you. UPDATE III: If you're visiting from the Motley Fool, welcome. By now it's redundant for me to say I'd love it if you'd take a minute to look around, isn't it?