Two Recent Ninth Circuit Cases Apply Rights under the U.S. Constitution to Preclude a Claim for Equitable Consumer Remedies and Restrictions on Website Content

I. Introduction – Constitutional Principles Offer Businesses Potential Defenses

In two cases decided in June 2020, the Ninth Circuit U.S. Court of Appeals applied federal law and constitutional protections to limit state law rights and remedies.  In Sonner v. Premier Nutrition Corp., 2020 WL 3263043 (9th Cir. June 17, 2020), the Court held that where a plaintiff in federal court dismisses her state law causes of action for damages, the court must employ federal equitable principles, in part to protect the Seventh Amendment right to trial by jury, in determining the viability of the remaining state statutory equitable cause of action.  In IMDb.com Inc. v. Becerra, 2020 WL 3396306 (9th Cir. June 19, 2020), the Court held that a state statute that prohibits a specific category of publicly accessible websites from publishing age-related information is subject to a First Amendment free speech challenge, where the state fails to show that the statute is narrowly tailored and the least restrictive means of achieving the compelling governmental interest in reducing incidents of age discrimination. 

These cases teach the following lessons for plaintiffs, defendants, and businesses in general:

1. When bringing state law consumer claims in federal court, plaintiffs must carefully consider when and how doctrines under federal law will apply to impact their claims in that forum differently from how state law doctrines would apply.  Likewise, defendants should explore whether such doctrines could benefit them in such cases filed in federal court or in determining whether to remove a case filed in state court. 
2. The right to freedom of expression prohibits a legislature from adopting a law imposing content restrictions on a publicly accessible website even where the restrictions further a compelling governmental interest, like reducing incidents of age discrimination, where protections against age discrimination may be enforced without impacting speech rights. 
3. A law ostensibly directed toward such a content restriction on a membership-subscription website could escape strict scrutiny by the courts, but if the law extends beyond the bounds of that website to include an affiliated, but publicly accessible site, strict scrutiny will apply, with the results noted above. 

II. Sonner v. Premier Nutrition – Federal Equitable Principles Govern the Viability of Equitable Claims under State Law in Federal Court

In the consumer case, Sonner v. Premier Nutrition Corp., plaintiff had filed an amended complaint containing a consumer class claim for damages under California’s Consumer Legal Remedies Act, Civ. Code § 1782 (“CLRA”), and a class claim for restitution and injunctive relief under California’s Unfair Competition Law, Bus. & Prof. Code § 17200 et seq. (“UCL”).  Desiring to try the class claims to the court rather than a jury, plaintiff filed a second amended complaint dismissing the CLRA damages claim two months before trial. 

In its opposition to plaintiff’s motion for leave to file the second amended complaint, defendant argued that, if the legal claim were dismissed, the court would have to dismiss the equitable restitution claims under the UCL, because the plaintiff had an adequate remedy, for damages, at law.  At the hearing on the motion for leave, plaintiff received another warning that dismissal of the damages claim could result in dismissal of the equitable claim if defendant filed a motion to dismiss based on the adequate-legal-remedy doctrine, but plaintiff forged ahead.  In granting defendant’s subsequent motion to dismiss without leave to amend, the Court found that the UCL claims were subject to California’s adequate-legal-remedy doctrine. 

On appeal, plaintiff argued that the court had to apply state law in determining whether she had to show she lacked an adequate legal remedy as a condition to pursuing the UCL claims.  And she maintained that the California legislature had eliminated the requirement to show an inadequate remedy at law in pursuing equitable remedies under the UCL.  Defendant contended that federal equitable principles, including the requirement that a party pursuing equitable relief show it lacks an inadequate remedy at law, governed the court in a diversity case. 

Following the admonitions in U.S. Supreme Court Justice Felix Frankfurter’s opinion for the Court in Guaranty Trust Co. of New York v. York, 326 U.S. 99 (1945), the Ninth Circuit held that “a federal court must apply traditional equitable principles before awarding restitution under the UCL and the CLRA.”  For over a century, federal courts had adhered to the “fundamental principle . . . that state law cannot expand or limit a federal court’s equitable authority.”  This principle applies even where the outcome of a case under state law would be different if brought in federal court from the outcome in state court. 

The requirement under federal common law to show an inadequate remedy at law as a condition to pursuing equitable remedies “implicates the well-established federal policy of safeguarding the constitutional right to a trial by jury in federal court.”  Therefore, even assuming California made the policy decision to streamline UCL and CLRA claims by eliminating that showing for equitable claims under those statutes, “the strong federal policy protecting the constitutional right to a trial by jury outweighs that procedural interest.” 

In the procedural context of the case in the trial court, where, despite ample warning that doing so could jeopardize the viability of her UCL claims, the plaintiff had sought to dismiss the statutory damage claims “on the eve of trial,” the Court of Appeal held that the District Court had not abused its discretion in denying plaintiff leave to amend to reassert her damage claim when it granted dismissal of the UCL equitable claims. 

III. IMDb.com Inc. v. Becerra – Preventing Age Discrimination Cannot Justify Restriction of Speech Where Other Remedies Are Available

In IMDb.com Inc. v. Becerra, IMDb.com Inc., “a free, publicly available website that offers a comprehensive database of information about movies, television shows and video games,” filed an action to prevent enforcement of Assembly Bill 1687, Cal. Civ. Code § 1798.83.5, mainly on the grounds that it infringed its First Amendment speech rights.  AB 1687 prohibits “a commercial online entertainment employment service provider,” which offers services to paid subscribers, from publishing the subscriber’s date of birth or age information in the subscriber’s online profile or sharing that information with any internet website for publication, where the subscriber has asked the provider to remove that information.  The statute also requires the provider to “remove from public view in an online profile of the subscriber the subscriber’s date of birth and age information on any companion Internet Web sites under its control.”  The Court noted that the legislation at issue was directed at one website only, IMDb.com, and its subscriber employment service, IMDbPro. 

The challenge to the statute was focused on the latter requirement.  The issue was whether the part of the statute that required IMDb.com to remove from the public website age and birthdate information of a subscriber to IMDbPro, upon the subscriber’s request, and regardless of the source of that information, violated constitutional freedom of speech protections.  As a first step in its analysis, the Court concluded that AB 1687 “[o]n its face . . . restricts speech because of its content….  It prohibits the dissemination of one type of speech: ‘date of birth or age information.’…  And, perhaps more troubling, it restricts only a single category of speakers.”  Because it imposes “direct and significant restrictions” on a category of speech and does not apply generally, the First Amendment required that the statute be subjected to strict scrutiny. 

Rejecting the state’s contention that AB 1687 “merely regulates contractual obligations between IMDb and subscribers to IMDbPro,” the Court noted that “the statute reaches far beyond the terms of any subscriber agreement.”  It also applies to information on the publicly available IMDb.com website, to “prohibit[] the publication of information submitted by members of the public with no connection to IMDb.” 

Reviewing the categories of speech that, according to case law developed over the past few years, are not subject to such exacting scrutiny, the Court determined that AB 1687 did not fit in any of them.  First, the portion of the statute on which the case focused does not seek to regulate “commercial speech,” because “public profiles on IMDb.com do not ‘propose a commercial transaction.’”  The content on that database “is encyclopedic, not transactional.” 

Second, the challenged portion of the statute does not seek to “regulate activity that facilitates illegal conduct.”  This category of speech, as to which courts apply a lower level of scrutiny, involves “only those instances when the state restricts speech that itself that proposes an illegal transaction,” for example, advertising that discriminates by its language on the basis of sex or offers illegal transactions.  There was nothing “illegal about truthful, fact-based publication of an individual’s age and birthdate when that information was lawfully obtained.”  Rather than restricting such speech because of a concern about age discrimination, the state could provide for remedies to those who were damaged by such conduct or enforce remedies that already exist. 

Third, the Court found no case law to support a lower level of scrutiny for laws restricting content of “public speech touching on private concerns.”  The law at issue was not a law that would “regulate data collection and disclosure,” which would not trigger First Amendment concerns, such as statutes that prohibit “the misuse of information by entities that obtain that information from individuals through some exchange.” 

The state could not sustain its burden to show AB 1687 furthered a compelling governmental interest in the least restrictive manner narrowly tailored to that end.  It had failed to show that measures less restrictive of speech would be ineffective to further the compelling governmental interest in reducing incidents of age discrimination.  The evidence presented about increased incidents of age discrimination was generalized and murky; it did not show that “the current law, or another speech-neutral law, would be insufficient to address the problem.”  The underinclusiveness of the law was evidence that it was not narrowly tailored.  AB 1687 “restricts only websites like IMDb.com while leaving unrestricted every other avenue through which age information might be disseminated.”  The statute’s focus of its restrictions on those “who both (1) subscribe to IMDbPro and (2) request that IMDb remove his or her information from its public website,” called into question the state’s true motives in enacting the statute.  That underinclusiveness showed that it was not narrowly tailored. 

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Landmark Supreme Court Ruling Applying Title VII’s Sex Discrimination Protections to LGBT Employees also Presages Some Limits on the Protections

I. Introduction – A Case that Extends Needed Protections Against Firing Based on Sexual Orientation or Gender Identity, but Leaves Questions About Other Protections

In an opinion written by Justice Neil Gorsuch, which, to say the least, pleasantly stunned LGBTQ rights advocates, the United States Supreme Court on June 15, 2020, held that the prohibition in Title VII, 42 U.S.C. § 2000e-2(a)(1), against employment discrimination based on sex protects LGBTQ employees from termination motivated in part by their sexual orientation or gender identity.  In the case of Bostock v. Clayton County, Georgia, the Court concluded that an employer that fires an employee because the employee is gay or lesbian or is transgender “fires that person for traits or actions it would not have questioned in members of a different sex.  Sex plays a necessary and undisguisable role in the decision, exactly what Title VII forbids.”  The decision rejected the arguments of the employers, and of the Trump Justice Department, that Title VII’s protections do not extend to gay/lesbian or transgender employees. 

In each of the cases, the plaintiff had been a long-time employee with a good performance record.  Each was fired shortly after having revealed that he or she was homosexual or transgender, and allegedly for no reason other than that status. 

The Bostock decision gives the following guidance and leaves the following questions: 

1. In the more than 25 states that lack laws prohibiting termination of employment based on sexual orientation and gender identity, employees are now protected by the federal Civil Rights Act of 1964 from such discrimination.  Employers in those states should promptly update their employment policies to bring them into compliance with the law and train their human resource professionals and management personnel about their responsibilities to avoid employment decisions based on sexual orientation or gender identity. 

2. The opinion, which focused primarily on the text of Title VII, which the Court found unambiguous, shows that a strict textualist and originalist approach to statutory interpretation can lead to applications of a statute not anticipated at the time the statute was adopted.  The same result could occur where the Court construes constitutional provisions, but it is less assured with a document that was drafted more than 230 years ago.  It is at best unclear whether Justice Gorsuch’s application of this approach offers any hope when the Court tackles other civil rights issues, like a woman’s right to choose. 

3. The Court’s opinion supports its originalist and textualist approach with precedent.  It cites three Supreme Court cases, from 1971, 1978 and 1998, to show that its interpretation of Title VII, which leads to a result in Bostock that, as the employer defendants noted, would not have been expected in 1964 when the statute was adopted, is in line with prior cases in applying the plain meaning of the law to situations not contemplated at that time.  The Court also points out the many applications of Title VII over the years that would have to be unraveled if the expectation of the Congress that adopted it in 1964 – provided those expectations could be accurately discerned – dictated the limit on how the words of Title VII could be applied.  These buttressing analyses in the opinion could give some comfort with regard to how the Court will rule on other civil rights issues that are brought before it – or at least instruct civil rights advocates on the kinds of support that could sway a Justice many thought would tow the conservative line. 

4. The Court explicitly left open how other claims of discrimination under Title VII, for example, restricted use of restrooms, would fare.  And it noted that how religious freedom claims would impact the application of Title VII to claims of transgender or sexual orientation discrimination is an open question. 

II. The Court’s Reliance on the Meaning of Title VII’s Words as of Its Enactment, after Finding the Language Unambiguous

The Court determined that the broad language of Title VII was unambiguous and set out to interpret it in accordance with the “ordinary public meaning” of its terms at the time it was adopted.  Finding no ambiguity in the import of the statutory language, the Court eschewed delving into the legislative history of the statute.  “After all, only the words on the page constitute the law adopted by Congress and approved by the President.”  Limiting its interpretation to the words of the law gave “the people” the “right to continue relying on the original meaning of the law they have counted on to settle their rights and obligations.” 

Title VII provides:  “It shall be an unlawful employment practice for an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin . . . .”  42 U.S.C. § 2000e-2(a)(1). 

For purposes of interpreting and applying the statute, but without deciding the issue, the Court adopted the employers’ definition of “sex,” that is, that it referred “only to biological distinctions between male and female.”  Turning to the term, “because of,” the Court concluded that it incorporated the “simple” and “traditional” “but-for causation” analysis.  Such causation is established “whenever a particular outcome would not have happened ‘but for’ the purported cause.”  Where the “but-for” causation analysis is applied to a claim under Title VII, an employer cannot escape liability by citing some other facts that contributed to the challenged employment decision.  Even where a plaintiff/employee’s sex is one but-for cause of an employer’s decision, Title VII is triggered. 

Again accepting for the sake of argument the employer defendants’ contention that Title VII concerns only employee terminations that involve discrimination, the Court found that, when the statute was enacted in 1964, the terms to “discriminate against” a person meant to treat one person worse than other similarly situated persons.  In cases like those before the Court, in which a plaintiff employee claims disparate treatment, the difference in treatment had to be shown to be intentional. 

The Court held: “So, taken together, an employer who intentionally treats a person worse because of sex – such as firing the person for actions or attributes it would tolerate in an individual of another sex – discriminates against that person in violation of Title VII.” 

III. Title VII Focuses on an Employer’s Treatment of Individuals, not on Its Treatment of all Employees of the Same Sex

Rejecting the employer defendants’ contention that, where an employer treats all members of a sex the same way as a group, there can be no Title VII violation, the Court explained that, based on the language of the statute, Title VII’s prohibition against discrimination focuses on protection of an individual, not on a group, for example, of all women or all men. 

Out of the ordinary meaning of the statutory language, the Court discerned the straightforward rule:  “An employer violates Title VII when it intentionally fires an individual based in part on sex.” 

IV. The Court’s Clear Admonition – An Employer that Makes an Employment Decision Based on an Employee’s Sexual Orientation or Gender Identity Discriminates Because of the Sex of the Employee, in Violation of Title VII. 

The Court went further to note:  “The statute’s message for our cases is equally simple and momentous: An individual’s homosexuality or transgender status is not relevant in employment decisions.”  This is so, because it is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex.  An employer that discriminates against an employee on the ground of the employee’s homosexuality or transgender status “inescapably intends to rely on sex in its decisionmaking.” 

The Court addressed the employer defendants’ (and dissenting opinions’) arguments.  That even the plaintiffs might not describe their claims as discrimination based on sex, rather than based on sexual orientation or gender identity, was of no import, because sex was a factor in the employers’ decision to fire the employees.  The absence of “sexual orientation or “transgender status” as protected categories in Title VII does not support a conclusion that Title VII does not protect discrimination against persons of one of the other status, because discrimination based on either status “necessarily entails discrimination based on sex . . . .”  Moreover, “when Congress chooses not to include any exceptions to a broad rule, courts apply the broad rule.” 

That Congress had not adopted legislation since the enactment of Title VII, to add sexual orientation or transgender status to the statute, or that Congress had included those statuses in other protective statutes does not support a restrictive interpretation of Title VII.  Such “subsequent legislative history” leads to speculation that is a “particularly dangerous” basis on which to rest interpretation of an existing law that a prior Congress had enacted. 

The Court refused to limit Title VII based upon the employers’ argument that few in 1964 would have expected Title VII to apply to discrimination against homosexuals and transgender persons.  The Court explained that legislative history does not come into play when the language of the statute is unambiguous.  The meaning of Title VII’s broad language had not changed.  And the Court noted that the employer defendants’ argument was not an attempt to ferret out the meaning of the statutory terms at the time Title VII was enacted, but rather was an attack based on the notion that few in 1964 would have expected the result of application of the statute as in the cases before the Court.  The Court cautioned that determining what was and was not expected at that time is a problematic exploration without clear standards.  Engaging in such an analysis carries the risk that it would not be used neutrally, but rather to deny application of broad protective laws to politically disfavored groups.  And such an analysis could require the unraveling of many other applications of Title VII by the Court to circumstances not expected by the drafters.

Responding to the employers’ argument that dire consequences would ensue from the Court’s decision, the Court stated that it was deciding Title VII’s application to the employment terminations involved in the cases before it, and not to issues that the cases did not present – like restroom use.  Nor was the Court determining how Title VII’s application would impact religious freedom or how its application would be impacted by the Religious Freedom Restoration Act, 42 U.S.C. § 2000bb et seq. 

Clear Lines Reaffirmed: No Right to Jury in California Unfair Competition and False Advertising Claims; No Right to Attorneys’ Fees in Claim for Missed Rest/Meal Breaks

In two cases decided on April 30, 2020, the California Supreme Court used an outlier appellate court decision and the California Court of Appeal used a trial court decision that granted relief not warranted by the record or case authority to reaffirm constitutional and statutory rights and limitations.  In one case, the Supreme Court clarified that claims under California’s Unfair Competition Law (Bus. & Prof. Code § 17200 et seq.) (“UCL”) and False Advertising Law (Bus. & Prof. Code § 17500 et seq.) (“FAL”) are equitable, providing no ground to assert a right to a jury trial.  In the other, the Court of Appeal reversed a trial court award of attorneys’ fees in a claim for missed rest and meal breaks, because the Labor Code section granting the right to fees was inapplicable to the claim.

These decisions instruct (1) that all UCL and FAL claims will be tried to the court, without a jury, and (2) a claim for premium pay for missed meal and rest breaks will not support an attorneys’ fees award under Labor Code section 218.5(a).

I.  Nationwide: California Constitutional and Statutory Provisions Do Not Support Trial by Jury of Claims under the UCL and FAL

In Nationwide Biweekly Administration, Inc. v. Superior Court (Apr. 30, 2020) 9 Cal.5th 279, the California Supreme Court exhaustively reviewed California statutory and constitutional case law, as well as legislative and common law history, to hold that claims under the UCL and FAL are equitable and, therefore, there is no right to a jury trial.  Supreme Court review was prompted by a Court of Appeal decision that, according to the Court, was alone in determining that, where the government seeks civil penalties in an action under either of these two statutes while also seeking injunctive or other equitable relief, the California Constitution requires a jury trial.

In line with their broad remedial intent and purpose, the UCL and FAL were “fashioned to permit courts to utilize their traditional flexible authority, tempered by judicial experience and familiarity with the treatment of analogous business practices in [California] and other jurisdictions, in evaluating whether a challenged business act or practice or advertising should properly be considered impermissible under” the UCL or FAL.  Moreover, based upon the broad discretion that the statutes granted the courts to determine whether and in what amount civil penalties should be assessed, together with the other equitable remedies available, including injunctive relief and restitution, the Court concluded “that the gist of both the UCL and FAL causes of action . . . is equitable,” rather than an action akin to “legal causes of action in which the right to jury trial existed at the time of the first [California] Constitution’s adoption in 1850 . . . .”  Therefore, the right to jury established by the California Constitution did not apply to claims for injunctive and restitutionary relief and for civil penalties under those statutes.

The Court limited its holding to the claims and remedies provided for in the UCL and FAL, in contrast to “other statutory causes of action that authorize both injunctive relief and civil penalties,” as to which the Court expressed no opinion regarding whether the state Constitution would protect the right to jury trial.  The “nature of the substantive statutory standards and remedies embodied in the civil causes of action under the UCL and FAL establish the equitable nature of the actions,” and an analysis of other statutes with similar remedies but with different applicable standards might result in a different conclusion.

Nevertheless, the Nationwide decision offers parties guidelines and standards by which to argue against or for the right to a jury trial on claims under other statutes authorizing similar relief.

II.  Betancourt: Premium Wage Claims for Missed Meal and Rest Breaks Do Not Support a Right to Attorneys’ Fees as a Claim for Wages

In Betancourt v. OS Restaurant Services, LLC (Apr. 30, 2020) 2020 WL 2570839, the California Court of Appeal held that, where the claims in an employment lawsuit were for premium pay for missed rest and meal breaks under Labor Code section 226.7(c), a trial court erred in awarding attorneys’ fees after settlement of those claims, because none of them entitled the plaintiff to fees under section 218.5 of the California Labor Code.  Section 218.5(a) provides:  “In any action brought for the nonpayment of wages, . . . the court shall award reasonable attorney’s fees and costs to the prevailing party if any party to the action requests attorney’s fees and costs upon the initiation of the action.”  (To recover fees, a prevailing defendant employer must, in addition, show “that the employee brought the court action in bad faith.”)

Following the California Supreme Court decision in Kirby v. Immoos Fire Protection, Inc. (2012) 53 Cal.4th 1244, the Court explained that “an action for nonprovision of meal or rest breaks is not an action brought for nonpayment of wages.  The remedy for nonprovision of meal or rest breaks is an additional hour of pay (often described in the case law as ‘premium wages’), but that does not turn a lawsuit for violation of meal or rest breaks into a lawsuit for nonpayment of wages.”

Likewise, the claim for premium pay for missed rest and meal breaks did not entitle the plaintiff to recover penalties for alleged waiting time and wage statement violations, under sections 203 and 226 of the Labor Code.  Therefore, she could not recover attorneys’ fees under section 226(e) of the Labor Code, which authorizes such an award for “section 226 derivative penalties” claims.

Although the plaintiff sought to characterize the “predicate misconduct” that her claim addressed as the “failure to pay earned wages,” the trial record did not support that characterization.

Unclear Does Not Equal Unlimited: How Employers Can Avoid Uncertainty about Their Vacation Pay Obligations to California Employees

I. Introduction: An Employer Cannot Escape Its Obligation to Pay Accrued Unused Vacation Pay by Having an Unclear Policy; Steps to Comply

In McPherson v. EF Intercultural Foundation, Inc. (Apr. 1, 2020) 2020 WL 1543339, the California Court of Appeal settled two issues of first impression:

(1) an employer’s paid-time-off (PTO) policy that is unclear about how much vacation may be taken but does not state that it is unlimited is not an unlimited PTO policy under which PTO pay does not accrue; therefore, section 227.3 of the California Labor Code obligates an employer with such a policy to pay all accrued and unused PTO pursuant to that policy upon an employee’s termination; and

(2) section 227.3 does not apply to a non-resident employee who works in California for a limited period of time for a non-California employer.

According to the McPherson Court, an ambiguous PTO policy does not preclude recovery by a terminated employee of accrued PTO, but rather raises issues of proof of the amount accrued and unused, and therefore owed to the terminated employee. In dicta, the Court also strongly suggested that an employer with a clearly written policy providing unlimited PTO not as a form of deferred compensation but more in the nature of, or as part of, a flextime policy, would not be subject to the requirement under section 227.3 to pay accrued PTO upon termination of employment.

[Note: I use the terms “vacation” and “PTO” interchangeably throughout this post.]

How Employers Should Respond: In light of McPherson, employers with California employees should review their PTO policies to make sure they bear the following attributes:

1. Unless an employer has a clear, written policy offering unlimited PTO to employees that is not a form of compensation, (a) the employer’s PTO policy should clearly state how and in what amount PTO accrues, and (b) the employer should carefully record how much accrued PTO has been used by employees.
2. Where an employer wants to offer unlimited PTO to employees and avoid the obligation of paying accrued PTO upon an employee’s termination under section 227.3, the employer’s policy and practices should comply with the following:

(a) The policy should be in writing and include the following: (i) a clear statement that employees’ ability to take PTO is not a form of additional wages for services performed, but rather part of other employment policies, like a flexible work schedule that includes employees’ ability to decide when and how much time to take off; and (ii) clear provisions that spell out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;

(b) The employer’s practices should (i) allow sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and (ii) be administered fairly so that the unlimited PTO policy neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.

II. The Employer’s PTO Policy in McPherson and the Requirement to Pay Accrued and Unused PTO to Terminated Employees as a Result

A. EF Intercultural Foundation’s PTO Policy

In McPherson, the employer, EF Intercultural Foundation, Inc. had a vacation policy in its employee handbook that applied to some exempt employees but not to the plaintiffs, who were “area managers” and classified as exempt. EF provided other salaried employees with a fixed amount of vacation days per month based on length of service. It allowed those employees to carry over from year to year up to 10 accrued unused vacation days and paid employees for the value of the accrued unused vacation days that exceeded the 10-day carryover limit. The policy also put a stop to vacation accrual when an employee reached the annual maximum number of annual vacation days plus 10 carryover days.

EF contended that its PTO policy for area managers allowed for unlimited vacation time, but the evidence did not support that contention. The policy applicable to area managers was unwritten and informally communicated to them. EF “never told plaintiffs it had an ‘unlimited vacation policy or that their paid time off was not part of their compensation.” EF supervisors informally told new area managers that “they could take paid vacation outside the busy season, but their vacation did not accrue,” and that (1) they had to notify their supervisor before taking vacation and ensure they could complete their work, and (2) that they were not required to track their vacation in the system used by other employees. Supervisors did not tell area managers that they could take as much vacation as they wanted.

EF’s practices clearly contemplated limits on the vacation its employees could take. In practice, EF’s policy was “to give plaintiffs some fixed amount of vacation time,” in a range “typically available to corporate employees” – two to six weeks. On average, the plaintiff had taken only about two weeks of vacation a year annually. They certainly did not “reap[] the benefits that . . . unlimited time off policies provide to employees.”

EF described its vacation policy applicable to area managers as unaccrued paid time off. But the Court determined, based on the evidence, that the number of days permitted was not unlimited and that, under California law, vacation days did accrue.

B. Under an Ambiguous PTO Policy that, in Practice, Limits the Amount that Can Be Taken, Days of PTO Do Accrue, and Section 227.3 of the Labor Code Requires Payment for Unused PTO upon Termination.

The appellate court concluded that the trial court correctly held the employer liable for the area managers’ vacation pay under section 227.3 of the California Labor Code. Section 227.3 provides that, except as provided by a collective bargaining agreement, where an employment agreement or policy “provides for paid vacations, and an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages at his final rate in accordance with” the agreement or policy “respecting eligibility or time served . . . .” Section 227.3 prohibits an employer that offers paid vacation from providing “for forfeiture of vested vacation time upon termination.”

In Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 784, the California Supreme Court had characterized the right to paid vacation under an employer’s policy or an employment agreement as “deferred wages for services rendered,” and concluded, therefore, that “a proportionate right to a paid vacation ‘vests’ as the labor is rendered.” Section 227.3 protects that vested right from forfeiture and requires payment of an employee’s pro rata share of his vacation pay upon termination of employment.

Thus, the Suastez Court explained, even where, under an employer’s policy employees did not become eligible to take a paid vacation until they had been employed for a year, an employee whose employment terminated before the anniversary of his start date was entitled to his pro rata share of accrued vacation at termination. Vacation pay under that policy was akin to deferred compensation (like pension or retirement benefits), which vested upon acceptance of employment, notwithstanding that the right to immediate payment did not mature until a subsequent condition occurred (like the anniversary of employment or retirement, depending on the benefit). An employee “has earned some vacation rights ‘“as soon as he has performed substantial services for his employer,”’” and the fact that the subsequent condition to taking the vacation has not occurred does not preclude the right to payment for the vacation accrued upon termination of employment.

The Court contrasted such a policy with an employment policy under which vacation did not begin to accrue until the employee had worked for the employer for a specified period of time. In the latter circumstances, an employee whose employment terminated before the specified time had elapsed would not be entitled to vacation pay, because none would have accrued.

Under the circumstances in McPherson, “[o]nce EF opted to provide plaintiffs with paid vacation, by default that paid time off constituted additional wages attributable to the services plaintiffs rendered during the year, vesting as they labored under Suastez.”
Where an employer’s policy leaves the amount of vacation undefined but the employer “impliedly limit[s] the time actually available for approval,” it cannot avoid the obligations imposed by section 227.3 of the Labor Code. “If EF intended to limit plaintiffs’ ability to earn vacation pay or treat their paid time off as something other than deferred wages, its ‘unlimited’ policy had to be express and clear.”

III. An Employer with a Clear Unlimited PTO Policy that Is Tied to Policies Other than Compensation, such as a Flextime Policy, May not Be Subject to Section 227.3 Obligations.

As explained by the Court in McPherson, the attributes of a truly “unlimited time off” policy that might not be subject to section 227.3 – attributes that EF’s policy for area managers lacked – include the following:

“Such a policy may not trigger section 227.3 where, for example, in writing it (1) clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule—including employees’ ability to decide when and how much time to take off; (2) spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off; (3) in practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and (4) is administered fairly so that it neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off. Unlimited paid time off under such a policy—depending on the facts of the case—very well may not constitute deferred compensation for past services requiring payment on termination under section 227.3.”

IV. Section 227.3 of the Labor Code Does Not Apply to Employees Who Are not California Residents and Who Live and Work for Part of the Year in California.

The other issue of first impression in McPherson related to one of the plaintiffs, who had moved from California to Virginia and continued to work for EF, including coming to California during the busy summer season and continuing to manage California staff from her home in Virginia. The Court held that section 227.3 did not apply to work she performed in Virginia or during her periodic stays in California.

As the Court explained, “where a nonresident, exempt employee of a non-California employer has periodically performed work within California, has received no California wages, and has paid no California income taxes on any wages earned,” section 227.3, “a law that governs the payment of unused vested vacation time when an employee’s employment ends,” does not apply. California had no interest in “ensuring an employee who voluntarily leaves California to become a resident of another state is paid vacation wages at the end of her employment by a non-California employer when she worked temporarily within the state.” From the time she left California until her retirement, she was never again a California resident, even when she worked in California during EF’s busy summer season.

The state did not have the same concerns about accrued unpaid vacation for nonresident employees who worked temporarily in California as it had in enforcing the state’s overtime laws for such employees. The California Supreme Court, in Sullivan v. Oracle Corp. (2011) 51 Cal.4th 1191, had held that California’s overtime law requires California employers to pay nonresident employees who worked in California and other states for their work in California. Not applying the overtime laws to such employees would incentivize employers to hire nonresident employees to avoid California’s overtime laws.

The overtime laws have an immediate impact on an employee’s pay, in contrast to the obligation to pay accrued unused vacation pay upon termination of employment. And requiring an employer to pay overtime for work performed in California during a pay period does not create the practical record-keeping and allocation problems of enforcing, upon termination of employment possibly years after having worked temporarily in California, payment of unused vacation accrued by a nonresident while working there.