Issue 4 - 2003

Although Gray Davis is no longer governor, before his ouster he signed numerous new laws aimed at employers. Here are summaries of the major new laws.

The Short Explanation.
Senate Bill 2 establishes the "Health Insurance Act of 2003" ("Act") which becomes effective on a tiered schedule beginning January 1, 2006. The Act requires medium and large size employers to provide health care coverage to certain employees and, in some cases, their dependents not otherwise covered by an employer-based health plan. Large size employers must provide coverage to eligible employees and their dependents. Medium size employers are required to cover only eligible employees.

Health care coverage will be provided to eligible employees through the newly established State Health Purchasing Program funded by a fee paid by employers to the Managed Risk Medical Insurance Board ("Board") in an amount determined to be necessary to pay for health care for all enrollees and, if applicable, their dependents.

The mandatory fee must be paid by all large and medium size employers regardless of whether the employer provides health insurance to its employees, subject to credits explained below. Employers who fail to pay the fee will be assessed a penalty of 200% of the amount due with interest.

Large v. Medium Size Employer

For qualification purposes, employers must include all employees in the count -- full and part-time, sole proprietors and partners. The count is based on all employees employed by one employer regardless of whether the employees work in field or branch offices, off-site or at home offices.

Effective Dates

Employers that become subject to the Act after the applicable effective date must begin complying within one month after reaching the coverage size threshold.

The Fee
For large size employers, the fee is based on the number of the employer's enrollees and dependents. For medium size employers, the fee is based on the number of the employer's enrollees, only.

"Enrollee" is defined as a person who works at least 100 hours per month for any individual employer and has worked for that employer for three months. As a practical matter, 100 hours per month pencils out to 23.09 hours or more per week, therefore, the Act affects full and part time employees, any seasonal employees who work for the employer three or more months out of the year, college students working during the summer, accountants who work just during the tax season, Christmas-season workers and agricultural workers.

"Dependent" is defined as spouse, domestic partner, minor child of a covered enrollee, or child 18 years of age or older who is dependent on the enrollee, but does not include a dependent who is provided coverage by another employer or who is an eligible enrollee as a consequence of that dependent's employment status.

Credit With Proof of Coverage - Narrow Parameters of Eligibility
An employer required to pay a fee to the fund may apply for a credit against the fee by providing proof of coverage for eligible enrollees and their dependents. The employer is eligible to apply for the credit, however, only if the health care coverage provided by the employer is provided to all employees without exception, and is a managed health care program, or a group health insurance program which covers hospital, surgical and medical care expenses if the maximum out-of-pocket expenses of insureds do not exceed the maximum out-of-pocket costs for enrollees insured under a health care service plan providing benefits under a preferred provider organization policy.

Employee Contribution
The Act provides that the employer may require an enrollee to contribute up to 20% of the fee and caps the contribution from low wage workers at 5% of wages.

Legal Challenges
ERISA Preemption
ERISA section 514 provides that, with certain exceptions, state laws which relate to any employee benefit plan are subject to ERISA and are superseded by federal law. Proponents of the ERISA preemption challenge argue that the language of the Act references health care service plans provided directly by employers, including employers' ERISA plans, and would therefore subject the Act to ERISA preemption.

The Supreme Court recently set forth a new test for determining whether a state law can escape ERISA preemption by reason of being a valid regulation of insurance. Under the two-prong test set forth in Kentucky Association of Health Plans, Inc. v. Miller, 123 S.Ct. 1471 (2003), in order for a new state law to escape ERISA preemption it must meet two requirements.

1. The law must be specifically directed toward entities engaged in insurance; and
2. The law must substantially affect the risk pooling arrangement between the insurer and the insured. Under the Kentucky Association test, it is argued that the Act does not meet either of these requirements because the new law is directed at employers, not insurers, and does not have a direct impact on the risk pooling arrangement between insurers and insured.

Unauthorized Tax
SB2 is also being challenged as an illegally enacted tax -- even though it is posited as an employer paid "fee." Proponents of the tax challenge argue that Article 13A of the California Constitution (implemented following the passage of Proposition 13) provides that any changes in state taxes enacted for the purpose of increasing revenue must be passed by a two-thirds vote of both houses of the California state legislature. SB2 did not have the required two-thirds vote necessary to impose the veiled tax on California employers. Absent a showing that the fee is not a tax, an illegal tax challenge could potentially prevail. Proponents of the challenge have until January 1, 2006 to prove their point.

Employers Caution
The word is not settled as to these legal challenges. Employers should plan to conform to the Act in 2006, as indicated. By then, the devil in these details should be properly exorcised. It is also possible that the law could be repealed before 2006. Stay tuned.

Assembly Bill 76
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Anti-Harassment. This bill was drafted in response to the case, Salazar v. Diversified Paratransit, Inc. (currently pending before the California Supreme Court), where the Court of Appeal found that an employer was not liable for the sexual harassment of an employee by a customer.

AB 76 amends the Fair Employment and Housing Act ("FEHA") to provide that an employer is liable for sexual harassment of an employee, applicant or person providing services pursuant to a contract in the workplace, by third parties (such as customers or vendors) where the employer or its agents or supervisors knew or should have known of the harassment and failed to take immediate and appropriate corrective action. This is consistent with federal precedent. Employers should ensure their No Harassment policies are broadly worded and effectively enforced. .

Gender Discrimination. AB 196 expands the prohibition on sex discrimination and harassment in the FEHA to include gender. AB 196 was originally intended to prohibit discrimination and harassment against transgender individuals. However, the definition of gender in AB 196, imported with minor modifications from Penal Code Section 422.76 (regarding hate crimes), is much broader. Specifically, gender is defined as the applicant or employee's "actual sex", as well as the perception of the employer (or other covered entity or person subject to the applicable provisions of the FEHA) as to the employee or applicant's identity, appearance or behavior, whether or not that identity, appearance or behavior is that traditionally associated with the employee or applicant's sex at birth.

AB 196 also provides that "Nothing in this part relating to gender based discrimination affects the ability of an employer to require an employee to adhere to reasonable work place appearance, grooming, and dress standards not precluded by other provisions of state of federal law, provided that an employer shall allow an employee to appear or dress consistently with the employee's gender identity." Thus, an employer may not, for example, discriminate against a male employee whose gender identity is female and who wears clothing traditionally associated with females (such as a dress, make-up and jewelry).

The courts or the Legislature may refine the expansive definition of "gender" set forth in AB 196. However, until such time, employers should take steps to ensure that their employment policies and procedures reflect this new protected category.

Domestic Partner Health Benefit Law. This law prohibits any state agency* from entering into a contract for the acquisition of goods or services in an amount of $100,000 or more (in each fiscal year) with a contractor (business) who, in the provision of benefits, discriminates between employees with spouses and employees with domestic partners, or discriminates between the domestic partners and spouses of those employees.

• Effective Date: This law applies only to contracts executed or amended after January 1, 2007 or to bid packages advertised to the public or sealed bids received after January 1, 2007. If the contract executed or amended is for more than one year and is executed or amended prior to January 1, 2007, then the law applies after January 1, 2008.
• Domestic Partner: means one of two persons who has filed a declaration of domestic partner with the Secretary of State.
• The law applies to those portions of contractors operations within California; operations on real property outside the state, if the property is owned by the state; elsewhere in the USA where work related to a state contract is being performed.
• Contractors shall keep domestic partner benefit requests confidential to the maximum extent possible.
• There are a few exceptions that allow the provisions of this law to be waived (only after the state as taken all reasonable measure to find a contractor that complies): 1) There is only one contractor willing to perform the needed services; 2) Emergency contracts (public health, welfare or safety); 3) Where this law would violate or be inconsistent with the terms of a grant, subvention, or agreement (provided a good faith effort was made to change the terms); 4) Water, power, natural gas contracts where purchase may not be accomplished through the standard competitive bidding process.
• If the domestic partner benefits cost more, there is no violation if the employee is permitted to pay the excess.
• No violation if contractor is unable to provide a certain benefit despite taking all reasonable measures to do so.

* State Agency: includes every state office, officer, department, division, bureau, board, and commission. Typically, "state agency" does not include the California State University. The University of California (i.e. Berkeley, UCLA, etc.) is often treated as a state agency.

Leave for Crime Victims to Attend Judicial Proceedings. Senate Bill 478 adds Section 230.2 to the Labor Code to require employers to permit victims of certain felony crimes to be absent from work in order to attend judicial proceedings related to that crime. The statute also applies to a victim's immediate family, registered domestic partner, and child of a registered domestic partner. An employee absent for such purpose may elect to use vacation time, personal leave time, sick leave time, compensatory time off otherwise available to the employee, or unpaid leave time, unless otherwise provided by a collective bargaining agreement. The entitlement of any employee under this section may not be diminished by terms in a collective bargaining agreement.

Before an employee is absent from work pursuant to this statute, the employee is required, if feasible, to give the employer notice of each scheduled proceeding. When an unscheduled absence occurs, the employer shall not take action against the employee if the employee provides documentation verifying the proceeding within a reasonable time.

Employers may not discharge or in any way discriminate against an employee because the employee is absent from work pursuant to this section. An employee who is discriminated or retaliated against may file a complaint with the Department of Industrial Relations, within one year from the date of the occurrence.

The statute also requires employers to keep confidential all records regarding an employee's absence pursuant to this statute.

Labor Code Section 230.2 becomes effective January 1, 2004.

Whistleblower Protections. Senate Bill 777 amends Labor Code Section 1102.5 and adds new sections to the Labor Code to expand whistleblower protections. Prior to amendment, Section 1102.5 prohibited employers from making, adopting or enforcing a policy that prevents employees from disclosing possible violations or non-compliance with state or federal statute or regulation and from retaliating against an employee who makes such a disclosure. As amended, the statute provides the same protections to employees: (1) who disclose possible violations of a state or federal rule; (2) who refuse to participate in an activity which would result in a violation of state or federal statute, regulation or rule; and (3) who made any disclosures protected by the statute while working for another employer.

A violation of Labor Code Section 1102.5 is currently punishable as a misdemeanor. The amendments to this section add a civil penalty not exceeding $10,000 for each violation of the statute.

Labor Code Section 1102.6 is added to establish the evidentiary burdens of parties' participating in a civil action or an administrative hearing for violation of Section 1102.5. Once it is has been demonstrated by a preponderance of the evidence that a protected activity under the statute was a contributing factor in a prohibited action taken by the employer against the employee, the burden of proof is placed on the employer to demonstrate by clear and convincing evidence that the alleged action would have occurred for legitimate, independent reasons even if the employer had not engaged in protected whistleblower activities.

Labor Code Section 1102.7 is added to require the Attorney General to establish a "whistleblower hotline" for the purpose of receiving reports of violations of state and federal law. The Attorney General shall refer all such reports to the appropriate government authority. During the initial review of a call received through the hotline, the information received, including the identity of the caller, shall be held in confidence.

Labor Code Section 1102.8 is added to require employers to display a list of the employees' rights under the whistleblower statutes and to provide the telephone number for the whistleblower hotline.