New Employment Laws Take Effect in California January 1, 2012
December 29, 2011
Linda Auerbach Allderdice- Los Angeles
Effective January 1, 2012, several new employment-related laws take effect in California that affect all California employers. These laws increase employers’ obligations to provide and maintain health insurance benefits for pregnant employees, sharply limit employers’ ability to obtain and use credit history reports to make employment decisions, create new penalties for misclassifying employees as independent contractors, and provide new protections against discrimination based on gender identity and genetic information.
These developments could be of interest to employers outside of California as well, given the frequency with which employment laws in California affect those in other states.
California Insurers Must Provide, and Employers Must Maintain, Pregnancy Benefits
New laws (SB 299 and AB 592, along with SB 222 and AB 210) were passed to ensure that all pregnant women maintain their insurance benefits while on pregnancy-related leaves. They require California health insurers to cover pregnancy/maternity-related health issues and require employers to maintain insurance coverage in force during periods of legally protected pregnancy disability leave. In addition, they impact both small and large employers by potentially increasing healthcare costs and lengthening the period of time that employers must provide health insurance benefits to employees on pregnancy-related leaves.
SB 299 and AB 592
Until now, California law only required that an employer maintain health benefits for an employee on a pregnancy disability leave (PDL) to the same extent health benefits were maintained for employees on other medical or disability-related leaves. SB 299 and AB 592 now amend the California Fair Employment and Housing Act’s (FEHA) pregnancy disability provisions to mandate that employers provide pregnant employees the same level of insurance benefits during their pregnancy-related leaves as they received before they went on pregnancy leave. In other words, an employer is legally obligated to maintain a pregnant employee’s health benefits for at least the entire four-month period of time the employee is entitled to pregnancy disability leave under FEHA.
These amendments take effect January 1, 2012.
Employers might be thinking, “we already are required to maintain a pregnant employee’s health insurance benefits during 12 weeks of leave under the federal Family and Medical Leave Act (FMLA). This is only one month more.” But the amendments create obligations in addition to just another month of mandated health benefits.
First, the law’s reach is much broader than that of the FMLA. It applies to employers with only five or more employees, rather than 50 employees within 75 miles of the employee seeking leave, as does the FMLA. More significantly, the law applies to all pregnant employees, regardless of tenure, rather than only to employees with at least one year of employment and 1,250 hours of work within the year prior to seeking benefits. Thus, the law may require an employer to grant continued insurance benefits for four months to a pregnant employee who has just been hired.
Second, an employee who begins a PDL and then becomes eligible for leave under the FMLA and/or the California Family Rights Act (CFRA) after the PDL has begun may be entitled to receive continued health benefits coverage for up to seven months – up to four months under the new laws and up to 12 weeks under the FMLA and/or the CFRA. This can happen because the FMLA and CFRA require that the 12 weeks of leave and related benefits start to run when the employee becomes eligible for FMLA/CFRA protection even if the employer had already provided leave to that employee either voluntarily or under state law.
The employer may recover the amounts paid for continued health benefits during pregnancy leave if the employee fails to return to work at the end of the leave for reasons (a) other than taking additional leave afforded under the CFRA, and (b) that are within the employee’s control (such as finding another job or electing not to return to the workforce). This may be of limited help, however. In most circumstances, the additional leave that an employee takes after a PDL will be leave to “bond” with the child that is protected by the CFRA; in that situation, the employer would not be able to recover the amounts paid for continued insurance during the PDF.
From the legislative history of these two laws, it is clear that the amendments were proposed, in part, to alleviate the concern that pregnancy-related medical costs can be expensive, and should be insured. In order to “guarantee” that such costs are covered, additional legislation was also enacted related to insurance companies.
SB 222 and AB 210
SB 222 and AB 210 amend the California Insurance Code to require that all individual health insurance policies issued in California must provide coverage for maternity services for all insureds covered under the policy. Under existing law, if a health insurer provides maternity coverage, it may not restrict inpatient hospital benefits. However, the change in the law actually mandates that the maternity coverage be provided. This change goes into effect July 1, 2012.
Read together, the new laws mandate that insurance companies provide maternity/pregnancy benefits and employers, in turn, maintain that insurance for their employees who have chosen coverage under the employer’s health plan during periods of pregnancy-related disability. The pairs of new laws further mean that California employers will not be able to obtain insurance policies that do not cover maternity/pregnancy benefits, and, thus, that employers that choose to offer insurance benefits to their employees will be obligated to cover maternity/pregnancy benefits under their health insurance plans.
Importance of the New Pregnancy Benefits Laws
The passage of these pregnancy-related insurance coverage amendments will have a significant impact on employers. Employers should discuss with counsel the impact of these new laws and educate human resources and benefits professionals on how the laws will be applied. Employers also may wish to discuss with their insurance brokers the new legal requirements that apply to insurance companies and the effect of those requirements on employers.
Restrictions on Use of Credit Reports
Effective January 1, 2012, California employers will also need to respond to several other new laws affecting important workplace practices.
Until now, California employers have had the right to obtain and use a credit report of a job applicant or employee for employment-related purposes. Prior to obtaining a credit report, California employers had to obtain written authorization from the applicant or employment after providing them with prior written notice that the credit report would be used for employment decisions, that the report would be obtained from an identified source, that the applicant or employee could receive a free copy of the report, and that, if an adverse decision were based upon the credit report, the applicant or employee would be provided with the contact information of the consumer credit agency supplying the report.
Effective January 1, 2012, the right to obtain and use a “consumer credit report” for employment-related purposes will change for most private-sector employers, with certain limited exceptions. New Labor Code section 1024.5 prohibits an employer or prospective employer from using a “consumer credit report for employment purposes.” For its purposes, in general, a “consumer credit report” is any written, oral or other communication of any information that relates to an applicant’s or employee’s credit worthiness, credit standing or capacity to obtain credit, including credit-related information such as credit history, credit score or credit record.
Certain financial institutions regulated by federal law are exempt altogether from the new law’s requirements. Furthermore, an employer still may obtain a consumer credit report for employment-related purposes with respect to certain exempt positions, which are described below:
- A “managerial” position that satisfies the “executive” exemption from overtime pay under California Industrial Wage Commission (IWC) Order 4. (An “executive” means any employee who has all of the following qualifications: (a) whose duties and responsibilities involve the management of the enterprise in which he/she is employed or of a customarily recognized department or subdivision thereof; (b) who customarily and regularly directs the work of two or more employees; (c) who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight; (d) who customarily and regularly exercises discretion and independent judgment; (e) who is “primarily engaged” in duties – more than 50 percent of the time – which meet the test of the exemption; and (f) who earns at least twice the California minimum wage.)
- A position for which “the information contained in the report is required by law to be disclosed or obtained.”
- A position that involves regular access, for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, to all of the following types of information of any one person: bank or credit card information; social security numbers; and date of birth.
- A position in which the person is or would be a named signatory on the employer’s bank or credit card account, or is or would be authorized to transfer money or to enter into financial contracts on behalf of the employer.
- A position that involves access to confidential or proprietary information, including trade secret information.
- A position that involves regular access to cash totaling $10,000 or more of the employer, a customer or client during the workday.
If a “consumer credit report” is to be obtained and used for one of the exempt positions identified above, the employer must follow the process for obtaining the report provided in existing law, with an important new step added to the process. An employer must now identify the exception (from the list above) to the general prohibition of obtaining such reports that applies to the position for which the report will be obtained.
Significantly, the new law does not bar background checks that use a consumer investigative report, which verifies income or employment and character and reputation information. However, such a report must not include credit-related information such as credit history, credit score or credit record.
Going forward, employers should audit their background check processes. A “consumer credit report” can only be used for a position specifically listed as exempt from the new law. Furthermore, if a third-party resource is used to obtain the report, the employer must ensure that the third party is also in compliance with the new law.
New Penalties for Misclassification of Independent Contractors
Many state and federal agencies, including the IRS, are stepping up enforcement and imposing new penalties when employers improperly classify workers as independent contractors to avoid payroll and personal income taxes. California is no exception. Effective January 1, 2012, under new Labor Code section 226.8, employers which willfully misclassify workers as independent contractors will face steep civil penalties, from $5,000 to $15,000 for each violation, in addition to other penalties provided by law. If an employer is found by the California Labor and Workforce Development Agency or a court to have engaged in a “pattern or practice” of improperly classifying workers as independent contractors, the penalty can increase to between $10,000 and $25,000 per violation. It is also unlawful to charge a misclassified independent contractor for certain costs which could not be charged if the individual were properly classified as an employee.
Further demonstrating the importance of the issue to regulators, the new law will require employers who violate the law to publicize any findings of violations on either its website or in an area that is accessible to employees and the general public. The notice must be signed by a corporate officer and remain posted for one year. Moreover, successor companies are liable for a former entity’s violations if the same principals or officers of the prior company are engaged in the same or similar business. If a licensed contractor misclassifies workers as independent contractors in violation of the law, the contractor will be reported to the Contractor’s State License Board, which will initiate disciplinary proceedings.
New Labor Code section 2753 also imposes the new law’s obligations on third-party advisors, such as paid financial, accounting and human resources professionals, who “knowingly” advise an employer to misclassify a worker as an independent contractor. Such third-party advisors can be jointly and severally liable for the violations under the new law. Attorneys licensed to practice law are exempt from this penalty, as are employees providing advice to their employer.
The California Labor Commissioner is vested with authority to enforce the new Labor Code provisions, either by way of an administrative hearing or in a civil court proceeding. On its face, the new law does not provide for a private right of action, and under the recent California Supreme Court decision in Lu v. Hawaiian Gardens, 50 Cal. 4th 592 (2010), that should preclude private lawsuits. However, with the expanded remedies under the California Labor Code Private Attorneys General Act of 2004 (PAGA), and the liberal use of Section 17200 of the Business & Professions Code to challenge unfair business practices, we can expect this issue to be vigorously contested and resolved finally in the courts.
New Protections against Discrimination in Employment
The California Fair Employment and Housing Act (FEHA) has been amended in two important ways. First, under AB 887, the definition of “sex” as a protected trait has been clarified to include not only “gender” but also a person’s “gender identity” and “gender expression.” This change in the law is meant to give new protections to transgender persons. “Gender identity” is defined as a person’s “deeply internal sense of being male or female.” “Gender expression” is defined as a person’s gender-related appearance and behavior whether or not stereotypically associated with the person’s assigned sex at birth. Employers covered by the FEHA must also now permit employees to “appear or dress” in a manner consistent with their “gender expression.”
Second, under SB 559, the FEHA is amended specifically to add protections for “genetic information.” “Genetic information” is defined to mean an individual employee’s genetic tests and such tests for family members and the manifestation of a disease or disorder in family members of the individual. Employers may not discriminate in hiring or employment on the basis of this information.
Todd D. Steenson, a Partner and leader of Holland & Knight’s national Labor Relations for Management Team, contributed to the preparation of this Alert.
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