Employment-Related Supreme Court Decisions: The Year in Review and What's Ahead

The United States Supreme Court and the California Supreme Court have been busy over the past year, deciding a variety of legal issues that will impact California employers. Several pending cases also will affect the workplace. While not an exhaustive list, the following is a very brief summary of some of the most significant developments in employment law.

The Year in Review

Preprinted Language in Workers' Compensation C & R Does Not Bar Civil Remedies

Claxton v. Waters: The California Supreme Court held that in executing the standard preprinted form used to settle workers' compensation claims, an injured worker does not release causes of action that are not exclusively subject to the workers' compensation law or are not within the scope of that law. Those causes of action, however, may be the subject of a separate settlement and release.

Affirmative Defenses Based on an Employee's Failure to Use Employer-Provided Complaint Process

Department of Health Services v. Superior Court (McGinnis): The California Supreme Court applied the "avoidable consequences doctrine" to harassment claims under the Fair Employment and Housing Act ("FEHA") and declined to adopt the Faragher/Ellerth affirmative defense available in Title VII cases. The Court ruled if an employer establishes an employee failed to take reasonable steps to use an employer-provided complaint process, the employer will only be liable for compensable harm the employee suffered before the conduct could have been stopped by using the complaint process. The employer will not be liable for any further harm the employee suffers that could reasonably have been avoided.

Pennsylvania State Police v. Suders: The United States Supreme Court examined whether the Faragher/Ellerth affirmative defense is available to an employer where the employee claims to have been constructively discharged. In reversing the Third Circuit's decision against the employer, the Supreme Court held the affirmative defense can apply to constructive discharge cases, but only where the constructive discharge is triggered by conduct which does not constitute "official acts." Where official acts, such as demotion or cuts in pay, create an intolerable working environment that forces the employee to quit, the defense is not available.

"Reverse" Age Discrimination Not Actionable Under the ADEA

Cline v. General Dynamics Land Systems, Inc.: The United States Supreme Court concluded an employee could not bring an action under the Age Discrimination in Employment Act ("ADEA") for "reverse" discrimination. The Court held the ADEA's structure, purpose, history and relationship to other federal statutes demonstrated it was not meant to preclude an employer from favoring older employees over younger employees. The employer did not violate the ADEA, therefore, when it enforced a provision in a collective bargaining agreement permitting the employer to eliminate post-retirement health benefits for all subsequently-retired employees except those who were 50 years or older.

Refusal to Re-Hire Policy Does Not Violate the ADA Under Disparate Treatment Theory.

Raytheon Company v. Joel Hernandez: The United States Supreme Court granted certiorari in this case on the issue of whether the Americans with Disabilities Act ("ADA") precludes an employer from refusing to rehire an employee separated from employment for illegal drug use.

Joel Hernandez, a 25-year employee, quit in lieu of termination after he tested positive for cocaine. When Hernandez reapplied to work for the employer and provided information showing he no longer was abusing drugs or alcohol, the employer refused to rehire him based on a policy of not rehiring employees who left the company for violating personal conduct rules.

Hernandez initially asserted only a claim for discrimination based on disparate treatment and belatedly attempted to assert a claim based on disparate impact. The Court refused to consider the disparate impact claim, and held the employer's neutral no-rehire policy satisfied its obligation to demonstrate a legitimate, nondiscriminatory reason for the failure to re-hire.

The Court's decision leaves open the question of whether no-rehire policies may violate the ADA under a disparate impact theory where the policy operates to exclude disabled applicants from rehire. On remand, the Ninth Circuit again reversed summary judgment in favor of the employer, concluding that disputed issues of fact remained for trial regarding whether the employer's proffered reason for refusing to rehire Hernandez—its neutral no-rehire policy—was pretextual.

Individuals Can Be Liable for Inducing Termination of At-Will Employment Relations

Reeves v. Hanlon: The California Supreme Court ruled an individual defendant may be held liable under an intentional interference theory for inducing an at-will employee to quit working for another entity. The individual defendants argued California law does not recognize a cause of action in favor of one employer against another employer for interference with contractual relations by virtue of an offer of employment to an at-will employee. The Court rejected their argument, and held that inducing the termination of an at-will employment relationship may be actionable under the standard applicable to claims for intentional interference with prospective economic advantage.

Class Certification in Wage-Hour Class Actions May Be Based on General Employer Policies and Procedures

Sav-On Drug Stores v. Superior Court (Rocher): The California Supreme Court, in a class action challenging an employer's failure to pay overtime wages, ruled the trial court did not err in certifying as a class of several hundred employees who were designated by the employer as salaried managers exempt from the overtime wage laws.

Plaintiffs argued the company's standardized policies and procedures justified grouping all of the managers at issue into a class for litigation purposes. In contrast, Sav-On maintained such company-wide policies and procedures alone were not sufficient to establish the managers could be certified as a class because individual issues such as a store's size, location, physical layout and sales volume impact the manager's specific job duties more than generic company-wide job descriptions. The Court disagreed with Sav-On, and rendered a decision certain to encourage the filing of more class actions involving wage-hour issues.

Preview of the California Supreme Court's 2004-2005 Docket

In the upcoming months, the California supreme court will decide a variety issues of interest to California employers. The following is a summary of the most significant pending cases and the issues involved.

Lyle v. Warner Brothers Television Productions: The court will determine two issues: (1) whether the use of sexually coarse and vulgar language in the workplace constitutes sexual harassment under the FEHA; and (2) if the potential imposition of liability under the FEHA for sexual harassment based on such speech infringes on a individual's right of free speech.

McClung v. Employment Development Department: The court will decide whether the provision of FEHA enacted in 2000 to impose personal liability on non-supervisory coworkers who engage in harassment applies retroactively. The Court of Appeal held the provision is retroactive.

Mackey v. Department of Corrections: The court will consider whether, under the FEHA, a male supervisor's preferential treatment in promotions and other employment decisions of female employees with whom the supervisor had a consensual sexual relationship constitutes sexual harassment or discrimination against employees who were never asked to provide such favors. The Court of Appeal ruled a supervisor who grants favors to his "paramours" has not engaged in sexual harassment or sex discrimination under California law.

Reynolds v. Bement: The court will determine whether corporate managers and officers may be held personally liable for unpaid wages owed by the corporation. The Court of Appeal held that under California law, only "employers" are liable for unpaid wages and individual corporate officers are not "employers."

Yanowitz v. L'Oreal USA, Inc.: The court will consider whether a manager's termination for refusing to carry out her supervisor's discriminatory order to terminate another employee because the employee was not attractive enough may constitute retaliation under the FEHA. The Court of Appeal ruled in favor of the manager.

Discover Bank v. Superior Court (Boehr): The court will decide whether the Federal Arbitration Act ("FAA") preempts state courts from applying state substantive law to strike arbitration agreement provisions prohibiting class actions. The Court of Appeal held the FAA preempted California contract law.

Dore v. Arnold Worldwide, Inc.: The court will determine whether an offer letter that states "your employment with [the employer] is at will" and "[t]his simply means that [the employer] has the right to terminate your employment at any time" permits an employer to terminate the employee at any time without cause. The Court of Appeal found the employer did not have the right to fire the plaintiff without cause because his offer letter defined at-will employment only as the employer having the right to terminate the plaintiff at any time—there was no mention of the employer's right to terminate the plaintiff without cause.

Preview of the United States Supreme Court's 2004-2005 Docket

The United States Supreme Court has granted certiorari in several important employment cases and will review the following issues in its coming term starting in October.

Jackson v. Birmingham Board of Education: The Court will decide whether Title IX provides a private cause of action for individuals who suffer retaliation for complaining about gender discrimination against others. The plaintiff, a girl's basketball coach, sued under Title IX claiming he was retaliated against for complaining that certain practices violated the team's rights under Title IX. Ruling that Title IX did not create a private cause of action under these circumstances, the trial court dismissed the action and the Eleventh Circuit Court of Appeals affirmed.

Smith v. City of Jackson: The Court will determine whether an age discrimination claim can be based on a disparate impact theory. The plaintiffs, police officers and dispatchers employed by a city, claimed a performance compensation plan discriminated against older workers because it resulted in larger pay increases to younger employees with less tenure. The trial court and Fifth Circuit Court of Appeals held the plaintiffs could not pursue a claim under the ADEA on a disparate impact theory.

Banks v. Commissioner of Internal Revenue and Commissioner v. Banks and Commissioner v. Banaitis: The Court will consider whether the portion of a settlement paid to the plaintiff's attorney must be included in the plaintiff's gross income. The federal court of appeals in both of these cases rejected the Internal Revenue Service's ("IRS") contention that all amounts paid in settlement must be included in a plaintiff's gross income, including amounts paid to attorneys as part of contingency fee agreements.

This issue is significant for employers because the IRS's position has caused plaintiffs and their attorneys to make higher settlement demands based on concerns the entire settlement amount is taxable.


The decisions of the United States and California Supreme Courts often have far-reaching consequences for employers. This column will provide analyses of the most significant employment-related cases as they are decided.

Note: This article appears in the October 5, 2004 edition of the Daily Recorder.