A new California Court of Appeal decision, Espejo v. Southern California Permanente Medical Group, elaborates on how to prove that documents signed online, digitally, are authentic, and therefore have the same effect as a handwritten signature.
California statutes mandate that an electronic signature has the same legal effect as a handwritten signature, but the document still must be proven as authentic before it is evidence. This statute states only that it is authentic if it is the “act of the person,” which can be shown through the “efficacy of any security procedure” used to determine the person to which the signature is attributable. This does not provide much practical guidance on how to show that “efficacy.”
The Court of Appeal explained that the proponent of the document must show how, or on what basis, it can be inferred that the electronic signature is the “act of the person.” The critical factual connection between the signature and the act of that person must be established. This is accomplished by detailed proof of (i) the security and privacy precautions used to protect the transmitted link to the document and the accompanying user id and password provided to the person, (ii) the steps that the person must take to place her name on the document, (iii) the procedures that insure that the name on the signature line could only have been placed by a person using the unique id and password, and (iv) that therefore the signature was made by the person intended.
In the Espejo case, the employer proved that it had a procedure in place that assured that the electronic signature was, in fact, the “act of” the intended employee. To establish the authenticity of the alleged agreement, this detailed, step by step process, must be followed and explained. If an agreement's authenticity, and binding effect, is challenged, courts will require detailed proof of the procedures that insured that the signature was placed by the person whose electronic signature appears on the document.
Stephen C. Gerrish, Employment Group
Employers in California should immediately review their harassment policies to ensure compliance with California's new harassment prevention regulations.
California law mandates that employers have an affirmative duty to prevent harassment and discrimination. Employers must take "all reasonable steps necessary to prevent discrimination and harassment." (Ca. Govt. Code section 12940(k)). With regard to sexual harassment, California law requires the posting of a state-developed poster and the distribution to employees of a state supplied pamphlet (form DFEH-185 brochure, or similar written notice). Now, new regulations have been promulgated that broaden an employer's notification and internal policy requirements. These regulations are effective April 1, 2016, and require employers to "develop a harassment, discrimination, and retaliation prevention policy that:
Founders of start-ups quickly discover there are not enough hours in the day. Their energy, time and efforts are consumed by getting the business off the ground, developing its products and services, and marketing and selling to customers. Any time spent on administrative or organizational matters is viewed as an unnecessary distraction to be avoided. However, there is much truth in the old adage– an ounce of prevention is worth a pound of cure. In other words, a relatively small investment of time spent on the fundamentals can yield significant dividends in the future – and help to avoid much distress. And, the first fundamental, particularly for founders who do not anticipate seeking venture capital, is to put in place a shareholder buy-sell agreement.
The benefits of a buy-sell agreement include controlling ownership of equity so that corporation's stock is held only by those actively involved in the business, providing liquidity for the founders (and/or for the founders' heirs) in the event of permanent disability or death, and addressing any potential disruptive governance issues which may occur when a founder or any other employee-shareholder leaves the business. Those disruptive events typically involve a departing founder or key employee-shareholder who:
In each of the examples described above, the potential problems that may arise can be avoided or minimized by having a buy-sell agreement in place. One of the purposes of a buy-sell agreement is to trigger a right of the corporation and the other shareholders to buy the shares held by such exiting shareholder. A termination of services triggers the option in favor of the corporation to purchase any or all of the shares held by the former founder or other key-employee at a either a predetermined, formula-based or appraised purchase price. The purchase price also may be discounted depending on whether the founder or other key-employee exits voluntarily or is terminated with or without good cause.
Death or permanent disability also commonly triggers the optional or mandatory purchase of shares, primarily to provide liquidity for the co-founder or other employee-shareholder who meets with an untimely death or suffers a long-term or permanent disability. Assuming the start-up doesn't have excess cash available to provide the needed liquidity for the deceased or disabled founder (and/or for the founder's heirs), insurance can be obtained by the company to provide the funding oftentimes at favorable rates, or if no insurance is obtained, the liquidity can be structured to be funded in installments over time to reduce the burden on the corporation to a manageable level.
The buy-sell agreement also will establish other terms and conditions to make the buy-out process go smoothly, including the timing of the consummation of the purchase and sale of the shares, the period of payment of the purchase price and interest rate on any deferred portion of the purchase price and, in some cases, the imposition of a non-compete provision so that the former founder or other key employee will not be free to compete with the company upon leaving the company.
A buy-sell can also contain provisions that (i) prevent the shares from being held by a former spouse of a former founder or other key employee, (ii) require a shareholder to sell her or his shares if the other shareholders decide to sell their shares as part of the sale of the business (so-called drag-along rights), or (iii) allow the other shareholders to share a pro-rata portion of their shares if the ROFR is not exercise (so-called co-sale rights).
Buy-sell agreements come in all shapes, sizes, colors and levels of complexity and can be tailored to the start-up company's situation and the needs of its founders and other key employee-shareholders. And, as the company grows, the buy-sell agreement can be modified and enhanced to provide more benefits and protections for the parties to the agreement. The most important thing is to put one in place from the beginning, even if it is not designed to cover every likely scenario, so that the basics are covered initially. Then as the company grows and developments occur, appropriate modifications can be made as desired.
Anyone who holds restricted stock of a non-public company, such as Twitter, Box, or Palantir among others, probably has discovered it is possible to find buyers for their stock by contacting Second Market or Shares Post or other broker-dealers who specialize in assisting in the purchase and sale of restricted stock of companies experiencing rapid growth and share appreciation. Although such companies may go public at some point, it seems that more companies are choosing to wait longer before doing so. Examples from the not too distant past include Facebook, Zynga, and LinkedIn.
For many employees, investors, and former employees, restricted stock holdings may constitute the most significant portion of their personal net worth. As a result, they may decide to liquidate at least a portion of their stock holdings to diversity their assets. However, because the restricted stock they hold is not freely tradable, there are a number of issues that a potential seller should be aware of before proceeding with a sale.
First, many companies require, as a condition of exercising stock options or purchasing stock under a company stock plan, that their employees agree in writing to very specific requirements that must be strictly followed in order to resell their stock. The contractual restrictions may include a right of first purchase or refusal (ROFR) in favor of the company and/or a co-sale right. The company's bylaws may also prohibit any transfer of shares without first obtaining the written consent of the company.
In any case, to move forward with a potential stock sale under either or both of those restrictions, a written notice of the proposed sale must be given to the company well in advance of the consummation of the contemplated transaction. The content of that notice, and to whom and how it must be given, are often specified in detail. These notice requirements must be satisfied in all respects or else the entire process may have to be repeated to remedy any non-compliance or other shortcomings.
As alluded to above, the required notice must be sent out in advance, making it uncertain as to whether the proposed sale will be approved. Therefore, the potential seller should to have a written agreement with the buyer making the seller's obligation to sell subject to (i) the company not exercising the ROFR and (ii) the company authorizing the seller to move forward with the stock sale transaction.
Besides complying with any ROFR and prior written consent conditions, the company will likely require the seller and buyer to enter into a stock transfer agreement containing specific investment intent and sophistication representations, and obligating the buyer to abide by the same restrictions on any future transfers of the stock. In addition, the company will likely require the buyer's agreement to be bound by a lock-up provision that is triggered if the company undertakes an initial public offering (IPO) of its stock. The company-required stock transfer documentation usually does not adequately protect the seller's interest in connection with the sale to the buyer (its primary intent is not to be used for that purpose), so a separate written agreement should be used for that purpose. However, the separate agreement will need to be coordinated with the company's documentation.
The company also will likely impose other conditions on the sale and transfer of the seller's shares, including requiring that the seller provide an opinion from an attorney that the proposed sale of restricted stock is exempt from the registration requirements under Federal and state securities laws and sign (along with the seller's spouse, if applicable) stock assignment documents, and that the buyer sign stock assignment documents "in blank."
Often other items must be addressed, including the possible use of an escrow where the purchase price will be deposited by the buyer and held pending the satisfaction of the ROFR period and the other conditions of the sale. An escrow may be advisable to ensure that the buyer has the requisite funds available to complete the purchase and to reduce the risk of the buyer not completing the purchase if something unexpected occurs, including that the value of the stock decreases between the time the parties agree to the terms of the share sale and the closing of the transaction, which may take 45 days, or longer.
Using an experienced intermediary such as Second Market or Shares Post to facilitate the share sale can be beneficial, especially if the seller is not able to find a qualified buyer for the shares. Intermediaries charge commissions, which can range from 5% to 8% depending on the total selling price of the shares.
Even in transactions where an experienced intermediary is involved, a seller should consider engaging an attorney. While intermediaries are helpful in shepherding the share transfer process to completion, they are not able to provide legal advice to the seller. Because their compensation is based on closing the transaction, they may not be in the best position, or have the same motivation, to protect the seller's interest through the use of a separate purchase and sale agreement alluded to above.
A seller should not hesitate to inform the intermediary that the she or he would feel more comfortable engaging independent counsel to prepare (or at least review before signing) the separate purchase and sale agreement and provide advice during the process, as well as the requisite opinion letter. Experienced intermediaries will understand such request and will agree to reimburse the seller for the legal fees incurred by the seller out of the intermediary's commission from the sale transaction. The intermediary also may agree to pay the company's transfer fee out of the intermediary's commission.
The sale of restricted stock of an emerging growth company that has decided to delay its IPO can be highly beneficial to former employees and early investors holding stock in the company, but strict attention must be paid to the detailed transfer requirements and other potential issues for a successful transaction to occur.
The answer to the question posed in the title is, "Yes," according to a new decision of a California Court of Appeal. The decision, Sanchez v. Swissport, Inc., based on the law and regulations in place in 2009, also indirectly reinforces the meaning and intent of California's new disability regulations that became effective in January of this year.
The court stated that this was a "case of first impression" and posed the issue as "whether an employee who has exhausted all permissible leave available under the Pregnancy Disability Leave Law (PDLL)...may nevertheless state a cause of action under the California Fair Employment and Housing Act (FEHA)."
Ms. Sanchez' pregnancy was high-risk and required bedrest. Her baby was due in October, but her condition was diagnosed in February, when she was placed on temporary leave of absence. According to Ms. Sanchez, Swissport was aware of all the relevant circumstances, including that she would need to be on leave until the birth of the baby, and that thereafter she would be able to return to work with little or no acccommodation.
After allowing Ms. Sanchez 19 weeks of leave, Swissport "abruptly" terminated her employment in July. The complaint alleged that there had been no attempt by Swissport to engage Sanchez in a timely, good faith interactive process to indentify reasonable accommodations.
Sanchez' claims were varied, but all were based on the termination during her leave. She did not claim that she was denied her rights under the PDLL, only under FEHA. Swissport argued strenously that the four months of allowed PDL is the employee's exclusive remedy, and that once the leave entitlement has expired, and the employee does not and cannot return to work, she cannot complain about being terminated. This argument was rejected by the court. Presaging a future interpretation of California's new disability regulations, the court said that the rights of a woman under the PDLL are independent of, and in addition to, her rights under the FEHA. FEHA has been interpreted to require leaves of longer than four months as a reasonable accomodation for a disability. Thus the fact that the four month PDL had expired did not prevent the employee from seeking accommodation in the form of additional fixed-term leave beyond those four months. While the employee's claims under the PDLL might be lost after four months of leave, her rights under FEHA are not. The court pointed out that the employer can always argue that such an extended leave would impose an "undue hardship."
This case is significant, both legally and practically. It appears the court gave great weight to the new regulations, which state, in part, that "the right to take pregnancy disability leave...is separate and distinct from the right to take a leave of absence as a form of reasonable accommodation" under FEHA. From a practical point of view, it adds complexity to pregnancy leave management.
Of course all of the rights and obligations that accompany the right to leave as an accommodation under FEHA, including the need for reasonable medical documentation in support of a proposed accommodation, are in play. The extention of PDL into FEHA accommodation leave is not automatic. But, the distinct nature of the two leaves, and their independent statutory requirements and process deserve heightened attention.
The California Supreme Court's Harris decision, discussed in our last post, not only clarifies the standard of proof and alters remedies available to an employee in mixed-motive cases, it provides guidance and raises questions on several practical aspects of employment law and litigation.
An Employer has the burden of proving that the same employment decision would have been made in the absence of any discriminatory motivation. If the jury has found that mixed motives were in play, making a "same decision" showing will preclude the recovery of damages. So, how to prove this? It is vital to be able to prove with unambiguous testimony that the same decision would have been made at the time the actual decision was made. The court warned that this is NOT an invitation to show that the same decision would have been justified. Employers should be able to show that the legitimate reason for the decision was communicated to the employee and was a documented, serious issue that was legitimately addressed. The employer should not avoid advising the employee of this reason; not doing so may foreclose later reliance on the the "same decision" defense. Documentation and clear commuication remain the best policy, in practice, and the best proof, in court. The court relied on one case that made this clear, stating, "...the employer cannot make a same-decision showing 'by offering a legitimate and sufficient reason for its decision if that reason did not motivate it at the time of the decison.'" A history of poor performance will do no good if it was not the motivating reason; an element of proving this is that it was communicated, and documented.
Of practical significance to attorneys is the court's rejection of two standard California jury instructions, CACI 2500 and BAJI 12.26. Both are now incorrect statements of the law and will need to be corrected, in particular CACI's reliance on a lesser standard of proof, and both instructions' statement that proof of the legitimate reason for the decision precludes liability of any kind. Presumably the editors of standard instructions will correct this. Otherwise, special instructions based literally on Harris should be crafted.
The court also established a new "same decision" affirmative defense, which must be pleaded by the employer defendant in its answer. The court specifically held that "...if an employer wishes to assert the defense, it should plead that if it is found that its actions were motivated by both discriminatory and nondiscriminatory reasons, the nondiscriminatory reasons alone would have induced it to make the same decision." The court made clear that the employer can assert both a traditional "legitimate non-discriminatory reason" defense, which assumes no mixed-motive, and would provide a complete defense to liability, if proven, and the somewhat inconsistent "same decision" defense, which assumes mixed-motivations" and leaves the employer open to injunctive and declaratory relief, and attorneys fees.
This inconsistency, combined with potential differing remedies depending on whether the jury finds a mixed-motive or not, leads to another practical, procedural choice: should the mixed vs. single motive aspect of the case be bifurcated and tried first the jury, before the damages/remedy section of the case. Depending on the facts and strategic implications, it will be important to decide whether to obtain a finding on the mixed-motive issue, before the damages/remedies phase, potentially limiting the relief available to the plaintiff and the nature of the relevant testimony. The significant difference in available remedies could well justify bifurcation, esepcially when coupled with an offer of proof showing that the legitimate reason was, in fact, the motivating (and communicated) reason.
These procedural and practical aspects of Harris will undoubtedly be explicated with time.
The California Supreme Court's decision in Harris v. City of Santa Monica established a new standard of proof in mixed-motive discrimination cases and dramatically changed the remedies available in those cases. In a "mixed motive" case "there is no single 'true' reason for the employer's action." The Court explained the dilemma facing a jury, asking, "[W]hat is the trier of fact to do when it finds that a mix of discriminatory and legitimate reasons motivated the employer’s decision? That is the question we face in this case." The court's answer to that question provides important practical guidance to lawyers and employers.
When the reasons behind an action are mixed, an employer will strive to establish that despite the mixed motivations, the legitimate business reasons would have dictated that it make the "same decision." But if illegal discriminatory reasons also exist, whatever their weight, how does a court reconcile finding no discrimination, which is, after all, against the law.
The Court had to decide between three possible standards, and in addition sort out other ancillary, but significant, issues. Ms. Harris argued that she should win, and collect damages, if she proved that some discriminatary intent was the "motivating factor" for the decision, even though other factors may have contributed. She did win in the trial court, and was awarded $177,905 in damages, most of which was for non-economic, emotional injury, and $401,187 in attorneys' fees.
The City, on the other hand, asserted that she must prove that "but for" a discriminatory reason, she would not have been terminated, a very strict standard. The Court rejected both views, and selected a third standard, that discrimination may be established if it is proven that the discriminatory motivation was a "substantial factor" in the decision. But the Court did not stop there.
The City claimed that if the plaintiff could not establish the standard, whatever it is, it is relieved of all liability for discrimination, even though it necessarily is the case that some element of its motivation was discriminatory, and against the law. The Court could not accept this result and established not only the new standard, but also a new formulation of remedies uniquely limited to a "mixed motive" case.
The court explained its ruling as follows:
When a plaintiff has shown by a preponderance of the evidence that discrimination was a substantial factor motivating his or her termination, the employer is entitled to demonstrate that legitimate, nondiscriminatory reasons would have led it to make the same decision at the time. If the employer proves by a preponderance of the evidence that it would have made the same decision for lawful reasons, then the plaintiff cannot be awarded damages, backpay, or an order of reinstatement. However, where appropriate, the plaintiff may be entitled to declaratory or injunctive relief. The plaintiff also may be eligible for an award of reasonable attorney’s fees and costs under section 12965, subdivision (b).
Thus, in a mixed motive case if the plaintiff proves her case, but the employer establishes it that it would have made the same decision, albeit for legitimate reasons, the plaintiff cannot recover monetary relief, other than attorneys fees. The plaintiff may also obtain an injunction against further such discrimination and a judicial declaration of the employer's discrimination. The court found that the potential award of attorneys fees would also be a significant deterrent to employers.
The decision makes a signifcant change in California law in this form of discrimination case. But the court cautioned about what properly qualifies as a legitimate motive, emphasizing the requirement that it must have been a motivation in place at the time of the discriminatory event, i.e., there is a signficant evidentiary difference between what led to "making" a decision and what might have "justified" a decision.
This distinction is of important practical value, and, along with other procedural implications affecting employment litigation, will be the subject of the next blog posting.
Stephen C. Gerrish, Esq., Employment Group
Under California's new Wage Theft Protection Act of 2011 (AB 469 (Chapter 655, Statutes of 2011); Labor Code section 2810.5), which became effective on January 1, 2012, an employer must give every new hire a form of notice at the time of hire that, in general, identifies the employer, states the employee's wage rates and pay-day schedule, and provides workers' compensation coverage information. The Labor Commissioner was mandated to develop the form and make it available. Since December, the Labor Commissioner has twice revised its new form, most recently effective April 12, 2012. A Word version of the new version of the form can be found here. In addition, the Department revised its Frequently Asked Questions regarding the new law and the form, which can be found here.
The new form has been simplified, and the employee's acknowledgement of receipt is now optional. An employer does not have to re-issue the new version of the form if an earlierapproved version was used before April 12, but new hires after that date must be given the revised form.
Other components of the new law remain in place: employees must be notified in writing within seven days of any changes to the information in the form, unless the changes are reflected on a timely wage statement.
The full text of the new law can be found here.
Stephen C. Gerrish, Employment Group
The legal blogs and Internet newsletters have been full of news of the California Supreme Court's Brinker decision on the interpretation of California's meal period and rest break laws. Justice Werdegar succinctly stated the court's holding that "[A]n employer’s duty…is an obligation to provide a meal period to its employees. The employer satisfies this obligation if it relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so."
But little attention has been givenso far on what is perhaps the most important question for California employers: What is required, practically, to comply with the mandate that an employer "… relieves its employees of all duty, relinquishes control over their activities and permits them a reasonable opportunity to take an uninterrupted 30-minute break, and does not impede or discourage them from doing so." On this important, practical question, the court gave no answer. Instead, we were told "it depends." The court stated:
What will suffice may vary from industry to industry, and we cannot in the context of this class certification proceeding delineate the full range of approaches that in each instance might be sufficient to satisfy the law.
At one point in the decision the court referred to a 1991 DLSE Opinion Letter responding to a question "concerning employees working in the field free of direct supervision and control." The DLSE opined that if "the employee has a reasonable opportunity to take the full thirty-minute period free of any duty, the employer has satisfied his or her obligation." (Dept. Industrial Relations, DLSE Opinion Letter No. 1991.06.03 (June 3, 1991)). But even this begs the question of what an employer must do to provide a reasonable opportunity? How will the employer's approach vary if the employee works in a more controlled environment, rather than "in the field free of direct supervision and control."
The Supreme Court is right - the answer depends on the circumstances, but undoubtedly several actions are advisable. The employer should have a clear policy reinforcing the right to take the meal period and that the employee is free of control or supervision during that uninterrupted period. If any form of employment letter or agreement is used, it should recite the entitlement and perhaps include a copy of the employee's working hours that displays the meal period. In more controlled environments, daily reminders might be used that announce the period. When employees are in the field and not under direct supervision, such daily reminders are not practical. The employee and any immediate supervisor will have to determine when they have a reasonable opportunity to take the meal period, or whether they might choose to work through it. What is important is that those employees know they have the opportunity, and that California law does not require the employer to "ensure" that it is taken.
What if an employee chooses to work during the meal period. The question of whether or not the employer knew or reasonably should have known that the employee chose to work during his or her meal period will also generate disputes and questions - if the employer did not know, the employer is not liable for straight time pay. In footnote 19 of Brinker, the court adopts the DLSE's explanation of the practical pay-no-pay-premium pay implications of working during a meal period:
… The DLSE correctly explains the distinction in its amicus curiae brief: “The employer that refuses to relinquish control over employees during an owed meal period violates the duty to provide the meal period and owes compensation [and premium pay] for hours worked. The employer that relinquishes control but nonetheless knows or has reason to know that the employee is performing work during the meal period, has not violated its meal period obligations [and owes no premium pay], but nonetheless owes regular compensation to its employees for time worked.” (See also Wage Order No. 5, subd. 2(K) [defining “ ‘[h]ours worked,’ ” for which compensation is owed, to include “all the time the employee is suffered or permitted to work, whether or not required to do so”].)
Whether or not an employer reasonably should have known an employee was working during the meal period, and is thus entitled to be paid will be a very factually specific inquiry, and the employer should err on the side of reasonableness. An email from an employee might be sufficient to trigger the obligation to pay.
A California Court of Appeal has written another chapter in the unfinished epic struggle between the federal and California courts over the enforceability of employment arbitration agreements. And it reads against enforceability. The decision, Mayers v. Volt Management Corp., is of practical value, and provides guidance on drafting and implementing an employment arbitration agreement and can be found here.
In summary, the court found Volt’s arbitration agreement unenforceable for two reasons.
First, the agreement was procedurally flawed: it required plaintiff to submit all employment related claims to arbitration pursuant to the “applicable rules of the American Arbitration Association in the state” where plaintiff was employed. But, the employee was not provided a copy of the rules and was not advised in the agreement or otherwise which set of AAA rules would apply or how he could find or review the rules. The court even suggested that the exact title of the rules, as promulgated by AAA, should be recited. The remedies for these errors are apparent.
Next, the agreement was found to be substantively flawed because it provided that the prevailing party in the arbitration may recover attorneys’ fees, and this mandate effectively changed federal and state law, which provides a strict threshold of proof before a defendant employer may recover attorneys fees. Thus, the agreement was all the more one-sided, and limited the employee’s substantive rights. Again, fixing this flaw is not difficult from a drafting standpoint. But agressive employer-oriented policy decisions about the arbitration process may be more responsible than poor drafting.
The decision is another reminder of the attention that must be paid not only to the details of drafting the arbitration agreement, but also to the implementation of the agreement. Volt’s arbitration agreement was contained in the employment application, an employment agreement, and the Acknowledgement of Receipt of the Employee Handbook, all of which were signed. So, the existence of the provision was no surprise – but it was a mandatory condition of employment, and thus the court applied the scrutiny required under California law. The agreement was found wanting.