USS-POSCO Industries v. Case: Employer Can Require Employees to Repay Educational Expenses

The introduction to USS-POSCO Industries v. Case (Cal.App. 1/26/16) gives a good summary of the case, so here it is (with a couple of edits):

Defendant and appellant Floyd Case [a union employee] voluntarily enrolled in a three-year, employer-sponsored educational program [that was the subject of an MOU between the employer and the union]. He agreed in writing that if he quit his job within 30 months of completing the program, he would reimburse his employer, USS-POSCO Industries (UPI), a prorated portion of program costs. Two months after completing the program, Case went to work for another employer. When he refused to reimburse UPI, the company sued for breach of contract and unjust enrichment. Case cross-complained, asserting the reimbursement agreement was unenforceable and UPI had violated the Labor Code and other statutory provisions in seeking reimbursement.

The trial court granted UPI’s motion for summary judgment on both its complaint and Case’s cross-complaint, and subsequently granted UPI’s motion for attorney fees for defeating Case’s wage claims. In granting the fee motion, the court applied the version of Labor Code section 218.5 in effect at the time of the summary judgment proceedings, rather than the version in effect at the time it awarded fees, which permits fees to a prevailing employer only when the employee’s wage claims have been brought in “bad faith.”

We affirm the summary judgment, but reverse and remand the attorney fees award. Under California Supreme Court precedent, statutory provisions that alter the recovery of attorney fees are deemed procedural in nature and apply to pending litigation.

The Court explained as follows:

The employer's voluntary, optional training program did not implicate Labor Code section 2802, which requires employers to indemnify employees for necessary expenditures or losses, or 450, which prohibits employers from requiring employees to patronize them. Case did not have to take the course, and UPI did not force him to do so. The Court distinguished In re Acknowledgment Cases (Cal.App. 8/12/15) (discussed here), in which the Court refused to allow the City of Los Angeles to recoup certain employer-mandated training expenses. Nor did the program implicate Labor Code sections 401 et seq., which prohibit the taking of certain bonds from employees.

The program did not violate Business and Professions Code 16600, which voids "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind." Case volunteered for the program and agreed to repay the training costs if he left UPI. The agreement did not prohibit or even limit him from working elsewhere, which he in fact did. It only required him to re-pay a prorated part of the training costs.

The agreement did not violate agreement did not violate sections 158(a)(5) and 159(a) of the National Labor Relations Act (NLRA), which prohibit employers from refusing to bargain collectively with employee representatives and provide that such representatives are the employees' sole bargaining agents. "An employee’s separate individual contract that is consistent with [a] collective bargaining agreement may be enforced." Case's MOU expressly authorized the reimbursement agreement, so the agreement was consistent with the MOU. 

The agreement did not lack consideration. UPI continued to pay Case his wages while enrolled in the program. In addition, Case received the training and, in consideration, agreed to repay a portion of the costs if he left. "That either Case or UPI could have terminated the agreement by ending the employment relationship at some point during the educational program does not render illusory the parties’ bargained-for exchange...." 

The agreement was not procedurally unconscionable. It was negotiated between UPI and the union, parties with equivalent bargaining power. The reimbursement provision was not a surprise, and Case could have obtained the training elsewhere if he so chose. 

Even if the agreement had been procedurally unconscionable, it was not substantively unconscionable. There was no evidence that the union colluded with UPI to overstate the training cost, and the agreement required Case to repay only a portion of it. 

Finally, the agreement did not violate Labor Code sections 221 to 223, which prohibit employers from recouping, withholding, or secretly paying less than agreed wages. 

UPI could not recover its attorney fees and costs from Case under the version of Labor Code section 218.5, which governs attorney fee awards in actions for the nonpayment of wages. Effective January 1, 2014, section 218.5 allows employers to collect such fees " only if the court finds that the employee brought the court action in bad faith." Although nothing in the legislative history indicated an intent to apply the amendment retroactively, under California law, "a new statute authorizing an award of attorney fees" or a statute "increasing or decreasing litigation costs, including attorneys’ fees" applies to actions pending at the time of enactment. This case was pending when the legislature amended section 218.5, and in fact the amendment went into effect before the trial court awarded UPI its fees. The court erred in not applying it. On remand, UPI would have to show bad faith to recover its fees. 

The opinion is available here. 

Gordon v. City of Oakland: City May Require Police Officer to Repay Training Costs Under FLSA

In Gordon v. City of Oakland, --- F.3d ----, 2010 WL 4673695 (9th Cir. November 19, 2010), the Ninth Circuit Court of Appeals held that a city did not violate the minimum wage provisions of the Fair Labor Standards Act (FLSA) by requiring the plaintiff, a former police officer subject to a collective bargaining agreement, to repay a portion of her training costs when she voluntarily left the City's employment before completing five years of service. The Court quoted 29 C.F.R. § 535.31, which provides in pertinent part:

Whether in cash or other facilities, ‘wages' cannot be considered to have been paid by the employer and received by the employee unless they are paid finally and unconditionally or ‘free and clear.’ The wage requirements of the Act will not be met where the employee ‘kicks-back’ directly or indirectly to the employer or to another person for the employer's benefit the whole or part of the wage delivered to the employee. This is true whether the “kick-back” is made in cash or in other than cash.

It then held:

Because Gordon did not allege she was paid below the federal minimum wage for any given week, the only way Gordon has stated a cognizable claim is if her payment to the City for a portion of her training costs is a “kick-back” payment as described in section 535.31.

Slip op. at 3.

Finally, the Court held that the costs of training were similar to a loan to the plaintiff, not a kickback to the employer, and the City paid the plaintiff at least minimum wage for her final work week before deducting the training costs. Slip op. at 4.

The opinion is here.

DLSE Sets Forth Test for Unpaid Interns

In a new opinion letter authored by Acting Chief Counsel David Balter, the DLSE has revised the standard for determining whether "trainees" are exempt from California's minimum wage requirements.

The opinion letter considered a program called "Year Up, Inc., a non-profit 501(c)(3) organization (the 'Program'), that serves 18-24 year olds in primarily underserved communities who have not progressed beyond a GED or high school diploma. The objective of the program is to 'close the Opportunity Divide by providing urban young adults with the skills, experience, and support that will empower them to reach their potential through professional careers and higher education.'" Year Up sought an opinion "as to whether California law requires that the trainee/interns enrolled in the program are to be treated as employees subject to California’s wage and hour laws."

Stating that California law does not answer this question, the letter looks to federal regulations for help and notes that the DOL has used a six-part test to determine whether a "trainee" is exempt from minimum wage requirements:

1. The training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school;
2. The training is for the benefit of the trainees or students;
3. The trainees or students do not displace regular employees, but work under their close observation;
4. The employer derives no immediate advantage from the activities of trainees or students, and on occasion the employer’s operations may be actually impeded;
5. The trainees or students are not necessarily entitled to a job at the conclusion of the training period; and
6. The employer and the trainees or students understand that the trainees or students are not entitled to wages for the time spent in training.

The letter then disavows use of an eleven-factor test previously outlined in a number of opinion letters.

In the past, DLSE has articulated an “11-factor test” which consisted of the 6 factors from DOL’s criteria interpreting federal law, plus 5 additional factors which are identified in Wilcox, California Employment Law, §104[1](e). (See also, DLSE OLs 1998.11.12, 1993.10.21) However, the 5 additional factors do not appear to be based upon any source statute or regulation from which they derive nor are the additional factors identified with specific case law. More recently, DLSE applied a 6-factor test for the trainee/intern exemption under an economic realities test for determining an employment relationship where the 6 factors differed, in part, from the above-stated 6 factors used by DOL. (DLSE OL 2000.05.17)

Through an exhaustive analysis of the facts provided, the letter finds that Year Up satisfies the six-factor test. The opinion letter is here. The DLSE web pages for all opinion letters are here: organized by date, organized by topic, and those withdrawn since Arnold Schwarzennegger became Governor in 2003.