Hunton Employment & Labor Law Perspectives : Employment Lawyers & Attorneys : Hunton & Williams Law Firm : Labor Law Legislative Updates

The Paycheck Fairness Act would amend the Equal Pay Act of 1963 (prohibiting wage discrimination on the basis of sex) and significantly alter the proof and enforcement provisions of that long standing federal law.  The proposed amendments would provide additional remedies for claims of pay discrimination, including uncapped punitive damages, and would increase the burden on employers to prove that pay differences resulted from factors other than gender.  It also would prohibit retaliation against employees who inquire about, discuss, or disclose their own wages or the wages of other employees. 

Although it is difficult to predict whether the Senate will ultimately vote on and pass the Paycheck Fairness Act, the fact that a Senate committee is turning its attention to bill in today’s financial and political environment should signal to employers that the legislation is not likely to go away any time soon.  Indeed, President Obama mentioned the issue in his State of the Union address in January, stating,  “We are going to crack down on violations of equal pay laws -- so that women get equal pay for an equal day’s work.”  True to his words, the President created the National Equal Pay Enforcement Task Force in January.  In addition, the U.S. Equal Employment Opportunity Commission, which administers Title VII and Equal Pay Act claims, added more than 150 new hires by the end of 2009 and received an additional $23.9 million in funding for the current fiscal year for enforcement.  It is seeking $18 million on top of that for fiscal year 2011.

In light of the growing threat of legislative action, regulatory enforcement, and civil litigation (including class actions alleging systemic discrimination), employers should take proactive steps now to position themselves optimally for a legal challenge.  This may involve a privileged audit of the employer’s pay practices, including a review of policies and procedures and a statistical analysis of compensation data.  Because these are steps that undoubtedly would be taken in the event of a government audit or private lawsuit, employers should not wait until a legal proceeding to identify and address any problems that might exist.

Proactive steps such as these can have substantial benefits in risk reduction.  Employers need a well organized plan for identifying vulnerabilities, assessing employment policies and practices, monitoring outcomes of decisions on a statistical basis, and identifying solutions to address risk, all under the protection of attorney-client privilege.  In addition, employers need systems and tools to help ensure the most informed and defensible decision making.   A privileged compensation audit can help employers meet all of these needs.

Facts Of The Case

The incentive plan at issue in Schachter provided officers and other key employees of Smith Barney (now a subsidiary of Citigroup) the opportunity to elect to receive as much as 25% of their total compensation in the following year as restricted stock.  A participating employee could not sell, transfer, pledge, or assign the restricted shares for two years following the date of the award, and the restricted shares would not be reflected in his or her taxable income until after the expiration of the two-year vesting period. 

The provision of the plan that led to the lawsuit was its forfeiture provision.  If a participating employee resigned or was terminated prior to the expiration of the two-year vesting period, he or she would forfeit the shares.  If the employee was terminated without cause, however, he or she would receive a cash payment equal to the portion of his or her annual compensation that had been paid in restricted shares. 

The plaintiff, David Schachter, enrolled in the incentive compensation plan and elected to receive a percentage of his total compensation in restricted stock for the years 1995 and 1996.  Schachter later resigned in March 1996, before his shares were vested.  Accordingly, under the terms of the incentive plan, Schachter forfeited his stock and the portion of his income that had been allocated to purchase the shares.

In 1998, Schachter brought a class action against his former employer, alleging that the plan’s forfeiture provision violated Labor Code Sections 201 and 202, which require the prompt payment of wages upon the employee’s separation from employment, and Labor Code Section 219, which provides that the wage payment statutes cannot be contravened or set aside by private agreement.  After years of litigation, the trial court ultimately granted the company’s motion for summary judgment and the Court of Appeal affirmed.

The Court’s Decision And Reasoning

In a unanimous decision, the California Supreme Court upheld the plan’s forfeiture provision, rejecting Schachter’s argument that the portion of compensation he directed be paid to him in the form of restricted stock constituted a wage that remained earned but unpaid following his resignation.  (Schachter conceded that the forfeiture of the stock as a result of his resignation during the stock’s restricted period was lawful.)

The Court observed that “employers and employees are free to prospectively and bilaterally alter the terms of employment.”  Therefore, when Schachter enrolled in the plan, he agreed to a restructured compensation package that included a lower annual salary and payment in the form of restricted stock, subject to the terms and conditions of the plan.  The Court cited the well established rule that “[o]nly when an employee satisfies the condition(s) precedent to receiving incentive compensation, which often includes remaining employed for a particular period of time, can that employee be said to have earned the incentive compensation.”  Because Schachter elected not to remain employed for the duration of the vesting period, he “‘did not earn -- and thus had no right to receive -- either the restricted stock or the funds used to purchase it.’” 

Given that no earned wages remained unpaid upon termination for cause or resignation, the Court held that the plan’s forfeiture provision did not violate California Labor Code Sections 201, 202, or 219.

What The Decision Means For California Employers  

The decision in Schachter v. Citigroup, Inc. is a reassuring sign that California courts will enforce contracts related to employment even when they are deemed to benefit the employer rather than the employee.  To be sure, the overwhelming tilt of laws in California is in favor of the employee.  The California Labor Code imposes numerous burdens on employers above and beyond those faced by employers in other states, with onerous penalties and damages obtainable against employers for infractions.

The Schachter decision demonstrates that California courts will not blindly negate any employment agreement under Labor Code Section 219 simply because it turns out to be unfavorable to an employee.  Even in employee-friendly California, employers can accomplish the results they need with careful drafting of compensation plans and contracts.  That said, the need for experienced and creative counsel is crucial for employers operating in California.

While the benefits of doing business in California abound, there are many challenges, including legal ones, that must be navigated.  With a growing presence in California, Hunton & Williams LLP is helping more and more clients make the most of their business opportunities on the West Coast.

Shiu is considered to be an aggressive advocate of employee rights and disadvantaged persons.  This, coupled with an expected increase in the OFCCP’s budget, suggests that the OFCCP’s enforcement efforts will be particularly active under her leadership.  Her new position currently is classified as a Deputy Assistant Secretary of Labor, which does not require Senate confirmation.  However, following a reorganization in the DOL, Shiu will report directly to Labor Secretary Hilda Solis, which could elevate her title to Assistant Secretary of Labor and require Senate confirmation.

Shiu has been an employment attorney with the Legal Aid Society of San Francisco since 1983.  She focuses primarily on employment cases of alleged race and sex discrimination.  Shiu also directs the Legal Aid Society’s Works and Family Project and is the Vice President of Programs.  Shiu graduated from the University of San Francisco School of Law, and spent several years in private practice before joining the Legal Aid Society.

In the federal arena, Shiu’s experience includes an appointment to the Department of Education’s Civil Rights Reviewing Authority during the Clinton administration.  She is also a former board member and past vice president of the National Employment Lawyers Association, a plaintiffs’ attorney group.