All posts by Karen Marshall

Mariam Siddiqui has joined Wilke Fleury for the summer as a member of the Sacramento County Bar Association’s Diversity Fellowship program. Ms. Siddiqui received her bachelors degree from the University of California, Berkeley and recently completed her first year of law school at the University of Pacific, McGeorge School of Law. She is a Sacramento native and enjoys photography, traveling and spending time at the river.

Wilke Fleury welcomes Bianca Watts to its Summer Associate Program. Ms. Watts recently completed her second year of law school at the University of the Pacific, McGeorge School of Law. She is a staff writer for the McGeorge Global Business and Development Journal and an executive board member of the Black Law Student’s Association. Last summer, Ms. Watts participated in the Sacramento County Bar Association Diversity Fellowship Program. Ms. Watts is an avid fan of the New Orleans Saints and the Sacramento Kings, and is currently studying karate.

Construction contracts often contain indemnity provisions. Indemnity provisions generally allow one party to a contract who, if found liable in a lawsuit, may then seek reimbursement from the other contracting party. Indemnity provisions are commonplace in the construction industry, most significantly in contracts between general contractors and their subcontractors. When a developer or general contractor is sued by a commercial or residential property owner, they may seek indemnity, or reimbursement, from the subcontractors, who typically do most, if not all, of the actual work.

Indemnity Rights Can Be Assigned 
However, developers and general contractors are not always the only persons who can end up with indemnity rights. The law allows a person to assign their indemnity rights. While unusual, it is possible for a developer or general contractor to assign his or her indemnity rights to the plaintiff as part of the settlement of the lawsuit. Indemnity rights can be a valuable asset, but they can also be a liability.

Indemnity rights can become a valuable non-cash part of a settlement between a general contractor and a homeowner, for example. In a construction defect action, the homeowner may name the general contractor and certain subcontractors as defendants. The general may then, in turn, sue the subcontractors for indemnity, bringing them into the lawsuit as cross-defendants. If the homeowner settles with the general, he is relieved of liability, but the non-settling subcontractors are not. If, as part of the settlement, the general assigned his indemnity rights, the homeowner basically “steps into the shoes” of the general and may continue the lawsuit against the non-settling subcontractors for additional amounts and also based upon the indemnity rights in the contract between the general and the non-settling subcontracts.

For example, assume a homeowner sues a general contractor for negligence and breach of contract, and the subcontractor for negligence. The homeowner settles his lawsuit against the general contractor for $1.6 Million cash and an assignment of the indemnity rights in the contract. Further assume that the assignment has an estimated value of $200,000. The total settlement amount is thus $1.8 Million. The homeowner then continues the negligence lawsuit against the subcontractor and obtains a $3 Million judgment. At the same time, the homeowner also brings the general contractor’s indemnity action against the same subcontractor (based on the general contractor’s contract with the subcontractor) and the jury awards $1.5 Million. The homeowner’s $3 Million direct judgment against the subcontractor will be reduced by his earlier settlement amount, leaving the homeowner with $1.2 Million in his negligence action. The judgment based on the indemnity provision in the contract will not be reduced. The total judgment for the homeowner is $2.7 Million ($1.2 Million + $1.5 Million), which is less than the $3 Million in negligence damages the jury awarded him. Yet, when the homeowner adds the $2.7 Million judgment to the $1.6 Million cash from the settlement, the homeowner’s total recovery is $4.3 Million, or $1.3 Million more than the jury awarded him. Furthermore, if the assigned contract with the indemnity rights included an attorneys’ fees provision, the homeowner may also be entitled to attorneys’ fees.

Attorney Fees May Be Part Of The Claim
Consider however, that if the homeowner loses the lawsuit, the general contractor would not have been held liable for the work of the subcontractor. Therefore, the homeowner will not prevail on the assigned indemnity lawsuit making the indemnity provision worthless to the homeowner.

Although worthless to the homeowner, the indemnity rights may be quite valuable to the prevailing subcontractor since many contracts contain attorneys’ fees provisions that are also assigned with the contract. Attorneys’ fees provisions give the prevailing party, whichever party that is, the right to reimbursement for reasonable attorneys’ fees. When the lawsuit is based on a contract that contains an attorneys’ fees provision and other non-contract causes of action, the attorney fees can generally only be recovered for the contract cause of action. However, a court may grant attorney fees for the entire lawsuit, not just the contract cause of action, when the legal issues were common to the contract and non-contract causes of action.

Losing Party May Be Forced To Pay Attorney Fees Twice

Consequently, the losing homeowner may be liable for attorneys’ fees both in his negligence action and in the indemnity action against the subcontractor based upon the indemnity provision in the assigned contract. The indemnity provision required the general contractor to be found liable for negligence so that the general contractor could indemnify the subcontractor for the subcontractors’ defective work. In other words, the subcontractor was not liable unless the general contractor was liable. Therefore, when the homeowner brought his negligence and indemnity causes of action, both causes of action were intertwined and the court had discretion to award attorneys’ fees to the subcontractor in defending itself against both the negligence and indemnity claims. This result occurs even though the homeowner was not a party to the original contract.

In conclusion, contractual indemnity provisions can provide protection to developers and general contractors who are later sued for defective work. In the event of a lawsuit, the indemnity rights may be assigned and become part of a negotiated settlement. When accepting indemnity rights, the risks and benefits associated with any attorneys’ fees provision must be considered.

A mechanic’s lien is a remedial mechanism by which a contractor or subcontractor on a private work project can guarantee payment for services and work provided. The reasoning behind this is that since the contractor or subcontractor provided services which increased the value of the private property, they should have an enforcement tool toward guaranteeing payment for those improvements. Take, for example, a not-uncommon scenario in today’s economy: a general contractor contracts with a roofer but fails to pay and files bankruptcy. A valid mechanic’s lien held by the roofer will likely require the homeowner to pay the roofer for his or her services even though the homeowner may have paid the general contractor in full.

The law provides this remedy to a very broad spectrum of claimants, essentially any person or business entity who at the request of a private owner, or his agent, has furnished labor, material, leased equipment or furnished any special skills and/or services to a project for improving real property may be entitled to record a lien against that property. (See Civil Code §3110.)

Step 1: Preserve Your Right To A Mechanic’s Lien By Recording And Serving A Preliminary Notice
Pursuant to Civil Code section 3114, before you can enforce a mechanic’s lien a preliminary twenty (20) day notice must be served. The notice must be in writing and must contain at least the following information:

(1) A general description of the labor, service, equipment, or materials furnished, or to be furnished, and an estimate of the total price thereof.

(2) The name and address of the person furnishing that labor, service, equipment, or materials.

(3) The name of the person who contracted for purchase of that labor, service, equipment, or materials.

(4) A description of the jobsite sufficient for identification.

(5) A heading, set forth in boldface type, stating “Notice to Property Owner,” and the subsequent statements as spelled out in Civil Code section 3097(c)(5).

Any tradesperson that provides services to a general contractor who in turn is providing services to a private landowner must serve a preliminary notice within twenty (20) days of the time services are first provided on the project. A general contractor and/or a subcontractor with a direct contractural relationship with the owner is not required to provide preliminary notice. Additionally, this preliminary notice must be served upon the owner or reputed owner, the original contractor, or reputed contractor, and to the construction lender within the twenty (20) day time period. A preliminary notice must be served either personally, by registered or certified mail.

Step 2: Record And Serve The Lien
If you are not timely paid during the course of the project or at the end of the job, the recordation of a mechanic’s lien is a powerful remedy. Often, payment follows shortly thereafter. It is important to understand, however, that the lien must recorded within ninety (90) days after the completion or cessation of the work on the project. However, if the owner of the property records either a notice of completion or a notice of cessation, the contractor has only thirty (30) days from the time the notice is recorded to record his mechanic’s lien. The lien should be recorded in the County in which the real property is situated. Pursuant to Civil Code section 3084, the mechanic’s lien must include the following:

(1) A statement of the amount owed, after deducting all just credits and offsets.

(2) The name of the owner or reputed owner, if known.

(3) A general statement of the kind of labor, services, equipment, or materials furnished by the claimant.

(4) The name of the person by whom the claimant was employed or to whom the claimant furnished the labor, services, equipment, or materials.

(5) The location or a description of the site sufficient for identification.

(6) The claimant’s signature and verification that the claims made in the mechanic’s lien are true and accurate.

Frequently, the mere recordation of a mechanic’s lien will motivate payment of any outstanding balance. If not, then the lien must be perfected by filing a lawsuit in the Superior Court.

Step 3: Perfect the Mechanic’s Lien
If the contractor remains unpaid after the recordation of the mechanic’s lien, the claimant must file a lawsuit to foreclose the lien within ninety (90) days from the date the lien was recorded. A lawsuit is commenced by the filing of a complaint in the Superior Court. Failure to meet the filing deadline will result in the loss of your ability to enforce the lien.

While a contractor always retains the ability to proceed with a breach of contract action against the person or entity that actually hired you, (the homeowner or general contractor in most cases) the loss of lien rights through failure to file the preliminary notice or to perfect the lien may mean that you won’t get paid if the primarily responsible party has filed for bankruptcy protection or is otherwise judgment-proof. That is why it is always a good idea to have an attorney draft the paperwork and ensure that the filing deadlines are met. However, to save money, some contractors fill out the forms themselves and simply have the attorney review them before mailing or filing.

Construction law is constantly changing. A savvy contractor keeps abreast of those changes and adapts his business methods to conform to new requirements. Here are some recent legislative updates and court decisions that may affect your business.

Notice of Mechanic’s Liens Now Required 
As of January 1, Civil Code section 3084 now requires that lien claimants provide written notice to the property owner that the lien is recorded. The new law contains specific language and font size requirements. Most importantly, failure to provide the notice as required renders the lien unenforceable.

Notice of Pendency of Action to Become Mandatory
As of January 1, 2011, Civil Code section 3146 will mandate that a Notice of Pendency of Action (Lis pendens) be recorded within 20 days of the filing an action to foreclose a mechanic’s lien. Current law does not require the recordation of a Lis pendens. It is unclear if a failure to timely record the notice will affect the validity of the lien.

Unlicensed Contractors Ordered to Disgorge 
In White v. Cridlebaugh (2009) 178 Cal. App. 4th 506, the court of appeal recently held that an unlicensed contractor was required to reimburse an owner more than $80,000 for construction work performed while unlicensed. The appellate court found that Business & Professions Code section 7031(b) was designed to treat consumers consistently, regardless of whether or not they already paid the contractor for unlicensed work. Section 7031(b) protects an owner from suit for payment by an unlicensed contractor. This case now makes clear that unlicensed contractors cannot avoid the effect of the statutes by collecting prepayment before undertaking work or by retaining progress payments for completed phases of work.

Like it or not, if you have employees with access to the internet, they are likely using online social networking websites such as Facebook, Twitter, MySpace and LinkedIn. The explosion in the popularity and use of such sites creates a whole new (cyber)world of concern for employers trying to regulate and monitor the online activities of their employees. The ease with which users can now post information on the internet leads to the possibility that employees may damage their company’s reputation, reveal confidential information, or expose employers to claims of defamation or harassment. To deal with such risks, employers must consider creating a comprehensive set of policies to regulate and monitor the online activities of employees in the workplace, while at the same time remaining cognizant of privacy concerns and other limits on managing online activity and communications.

Liability for Harrassment
As most informed employers already know, federal and California anti-discrimination laws require that employers act to prevent or eliminate harassment in the workplace. With the advent of the online world, employers must now be aware of online activity such as posting unwelcome messages or statements which can form the basis of a hostile work environment claim. An employer may be held liable for such activity if the conduct has a sufficient nexus to the workplace and the employer has actual or constructive knowledge of the unwelcome conduct but takes no steps to stop it.

The risk of liability from employee conduct was illustrated in Blakey v. Continental Airlines, Inc., where the New Jersey Supreme Court found that an employer could be held liable for a hostile work environment claim arising out of derogatory statements posted on an Internet bulletin board designed for continental employees. While the bulletin board was provided by an outside vendor and not Continental itself, the board was available to all pilots and crew members. Continental argued that because the harassment did not occur at a workplace under its direct control, it should not be liable. The Court disagreed, finding that although the electronic board may not be located at a physical site, it may have been so closely related to the workplace and beneficial to the employer that harassment in the forum could be regarded as a part of the workplace. The Court recognized that privacy concerns were implicated by its ruling and emphasized that employers are not required to monitor all private communications of their employees, but that employers still have a duty to stop co-worker harassment in settings related to the workplace if they know or have reason to know that harassment is taking place. This case demonstrates that employers can no longer turn a blind eye to harassment in the virtual world.

Liability for Monitoring
Given the myriad risks associated with employee online activity, employers clearly have an interest in monitoring social networking activities that relate to an employee’s work. While it’s true that employers cannot turn a blind eye to the virtual world, they must cautiously approach any type of online monitoring they undertake. Of primary concern is the employee’s right to privacy. In California, the courts balance the employee’s reasonable expectation of privacy against the employer’s business justification for the monitoring to determine whether an employee’s privacy has been violated. While it used to be well-settled that an employer in the private sector could monitor email and internet activity on equipment provided by the employer (so long as there was an explicit policy which called for such monitoring), the law is becoming increasingly unclear, particularly where an employee has restricted access to his or her online social network.

The Stored Communications Act (“SCA”) is a federal statute that prohibits third parties (i.e. employers) from accessing electronically stored communications – for example, email or Facebook entries – without proper authorization. While the SCA creates an exception where the conduct is “authorized”, most courts have construed that exception narrowly. Two recent cases are illustrative.

In Pietrylo v. Hillstone Restaurant Group, two employees were fired after posting derogatory comments about their employer on a MySpace user group that the employees had created to complain about their jobs. The user group was by invitation only and required a password to view, but the employees’ supervisor requested and received the password from another employee and viewed the postings. The employee who provided the password later testified that she feared her refusal to give the password to her supervisor would have affected her job negatively. The jury found that the employee was coerced into providing the login information and returned a verdict against the employer for violating the SCA. Similarly, in Konop v. Hawaiian Airlines, Inc., a pilot created and maintained a website wherein he posted entries critical of his employer. Access to the site was restricted by the pilot and he only allowed access to “authorized users.” Two of the users provided their login information to a Hawaiian official, who then accessed the site. The creator of the site sued Hawaiian under the SCA and the court held that Hawaiian was liable because there was no evidence that either of the authorized users who provided the login information had ever accessed the site themselves; and therefore, they were not “users” who could authorize the Hawaiian official’s access. These cases illustrate the confusing and unsettled waters employers must navigate when monitoring online activity.

Steps to Take
A final consideration for employers is what they may do once monitoring has uncovered unsavory information. California law prohibits employers from discriminating against employees for lawful conduct that occurs away from the workplace during non-work hours. There is also concern that certain employee online activity may be protected by the National Labor Relations Act. Further, even if an employer were to determine that it could (and should) take action, such action should be taken consistently so as to avoid claims that the employer has discriminated against a protected group by not imposing the same disciplinary action on other similarly situated employees.

So what is an employer to do?
Start by developing a comprehensive set of policies to regulate and monitor employee online behavior in the work context. An employer must consider the goals of these policies, which should include protection of the company’s reputation, confidential information, trade secrets, and the privacy of its employees. Such policies will be most effective if they (1) urge employees to go to human resources before venting online, (2) establish a disciplinary framework for misuse of social networking sites related to employment, (3) establish a reporting system for suspected violations of the policy and, (4) reiterate that the company may monitor email and internet use on company equipment. Above all, the policies must be enforced uniformly.

Wishing the internet away or eliminating its use by employees is, respectively, impossible and increasingly infeasible. Gaining control of the issue proactively through education and a well written policy allows employers to harness the good that can come from the internet while minimizing the bad.

In March of this year, the IRS began the Employment Tax National Research Program, the first comprehensive employment tax compliance study in 25 years. The IRS will randomly select 2,000 taxpayers each year for the next three years to conduct comprehensive audit examinations. Taxpayers selected for audit will receive notices describing the National Research Program process.

In these random audits, the IRS will focus on worker classification and fringe benefit policies. A fringe benefit is a form of compensation for the performance of services. However, a person who performs services for an employer for purposes of fringe benefit compensation does not have to be an employee. A person may perform services as an independent contractor, partner, or director. Furthermore, for fringe benefit purposes, a person who agrees not to perform services (such as under a covenant not to compete) is also considered to be performing services. An employer is considered the provider of a fringe benefit even if the benefit is actually provided by a client or customer of the employer. The key is that the benefit is provided to the employer’s employee, contractor, director, or partner for services performed for the employer. Similarly, the employee, contractor, director, or partner is still considered the recipient of the benefit even if it is actually provided to someone who did not perform the services for the employer, such as a family member. Again the key is that the benefit is provided for and because of services performed for the employer. Absent a specific exclusion, fringe benefits are taxable and must be included in the recipient’s pay, and therefore, creates an obligation on the employer to withhold, deposit and report employment taxes relative to fringe benefits.

Fringe benefits, though, are distinguishable from expense reimbursement plans. Generally an advance, reimbursement or other expense allowance received under an “accountable plan” is not income to an employee and does not create employment tax obligations on the employer. An advance reimbursement, or other expense allowance, is treated as made under an “accountable plan” if:

1. the employee receives the advance reimbursement or other expense allowance for a deductible business expense that the employee paid or incurred while performing services as an employee of the employer,

2. the employee adequately accounts to the employer for the expense within a reasonable period of time, and

3. the employee must return any excess reimbursement or allowance within a reasonable period of time.

If an advance, reimbursement or other expense allowance to an employee does not satisfy all three of these conditions, it is treated as paid under a nonaccountable plan. All advances, reimbursements or other expense allowances paid under a nonaccountable plan are taxed to the employee and create an obligation on the employer to withhold, deposit and report employment taxes relative to all such nonaccountable plan payments.

Similarly, improper classification of employees or independent contractors could have a significant impact on federal and state tax liabilities (including unemployment tax liability), health and welfare benefit obligations, Code-qualified benefit plan participation and funding, as well as IRS penalty exposure for an employer. Worker classification can be a complex area as each case requires careful analysis of the facts and circumstances in light of general common law principles and divergent IRS and case rulings. In very general terms, classification depends on the degree of control by the employer versus independence of the worker. Factors that provide evidence of the degree of control and independence generally fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how, when or where the worker does his or her job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship be ongoing? Is the work performed a key aspect of the business?

However, there is no “magic” factor or set number of factors that will tip the determination one way or the other. In fact, more likely than not, there will be some factors indicative of employee status, while other factors indicate that the worker is an independent contractor. Furthermore, factors which are relevant in one situation may not be relevant in another. An in depth discussion of this issue is beyond the scope of this article, but the general recommendation is to pay careful attention to worker classifications because, again, mis-classification can result in significant liabilities for an employer.

Even if not randomly audited as part of the current IRS study, employers should be on notice that the IRS is giving greater scrutiny to employer practices and will ultimately use the information gathered through this study to focus on particular types of employers and employment tax and benefits issues. As such, it is prudent for employers to review their fringe benefit and expense reimbursement policies and procedures as well their independent contractor relationships for correct classification. Identification and correction of any errors, omissions or inconsistencies relative to employment tax and benefits is much easier and less costly if done proactively as opposed to after coming under IRS scrutiny.

In the event you receive a notice of audit pursuant to the Employment Tax National Research Program or would otherwise like assistance with compliance review of your employment tax and benefits policies and procedures or employee classifications, the employment and tax attorneys at Wilke Fleury are happy to assist you.

Wilke Fleury recently secured a victory before the Court of Appeal of the State of California, Third Appellate District, on behalf of bankruptcy trustee Michael Burkhart. In the underlying trial court proceedings, Wilke Fleury partners Megan Lewis and Daniel Egan obtained an order under which Mr. Burkhart was substituted into the litigation as the party plaintiff following the bankruptcy filing of defendant Wire Comm Wireless, Inc. That decision was disputed by the creditor plaintiff, New Cingular Wireless Services, Inc., which appealed the matter. Wilke Fleury partner Dan Baxter handled the briefing and oral argument before the appellate court. Just eight days after that oral argument, the court issued an opinion affirming the trial court’s ruling in full. To view the Court of Appeal’s decision, go to http://www.courtinfo.ca.gov/opinions/nonpub/C058837.PDF.

The following is a synopsis of the notable changes in California and federal employment laws that were enacted or modified in 2009.

California Law 
AB 5 – Electronic Discovery

Not specifically an employment bill, but it could dramatically affect employers’ costs of engaging in employment litigation. Amends California’s Civil Discovery Act to establish procedures for the discovery of electronically stored information (“ESI”). The party seeking production of ESI may specify the particular format. If no format is specified, the party producing the ESI may use any reasonable format when supplying the information. Further, the bill allows discovery through copying, testing, or sampling, as well as inspection.

AB 23 – Cal-COBRA 
Notice Requirements

Extends the federal COBRA premium subsidy to smaller employers (between two and nineteen employees) covered by Cal-COBRA. The bill imposes the following additional notice requirements on healthcare service plans, contract administrators, and insurers of small California employers:

• Notify qualified beneficiaries regarding the premium assistance available under the Federal American Recovery and Reinvestment Act of 2009 (ARRA) to subsidize Cal-COBRA coverage.

• Provide written notice after certain qualifying events (occurring between September 1, 2008 and May 13, 2009) within fourteen calendar days of the bill’s effective date, or seven business days after receiving notice of the qualifying event, whichever is later.

AB 361 – Limitations on Employer’s Ability to Rescind Medical Treatment Authorization
Prevents an employer, regardless of whether it established a medical provider network or entered into contracts with health care providers, from rescinding an authorization made for workers’ compensation medical treatment if authorization was made before the treatment was provided.

AB 412 – Nooses Prohibited in Workplace
Expands the protections of California’s Hate Crimes Law to prevent anyone, who knows a noose to be a symbol representing a threat to life, from hanging one in a place of employment for the purpose of terrorizing an employee. A violator is subject to imprisonment and civil fines up to $5,000 for the first offense.

AB 485 – California Civil Air Patrol Military Leave
Employers with more than 15 employees must provide at least ten days of leave per year, beyond other legally required leave benefits, to employees who are volunteer members of the California Wing of the Civil Air Patrol (the civilian auxiliary of the U.S. Air Force) if the employee is called to respond to an emergency operational mission.

AB 1093 – Worker’s Compensation Coverage for Third-Party Torts 
Labor Code § 3600 has been amended to provide that injuries or death inflicted by third parties at the worksite because of an employee’s protected characteristic (race, religious creed, color, national origin, age, gender, disability, sex, or sexual orientation) will not be disqualified from worker’s compensation coverage.

AB X2 5 – Alternative Workweek Schedule
Labor Code § 511 has been amended to define a “work unit” as “a division, a department, a job classification, a separate physical location or a recognizable subdivision.” A “work unit” may also include an individual employee if the employee satisfies the criteria of a “reasonably identifiable work unit.” The bill further specifies that employers may include as an alternative work-week arrangement the option of a regular schedule of eight-hour days and allows employees who have adopted a menu of schedule options to move from one schedule to another on a weekly basis with employer consent.

AB X4 17 – Wage Withholding Tables 
Effective November 1, 2009, employers must use a new state income tax withholding table to increase the amount of income taxes withheld based on existing claimed exemptions by 10%. Additionally, the bill increases the withholding rates to 6.6% for supplemental wages and to 10.23% for stock options and bonus payments paid on or after November 1, 2009. The bill further accelerates quarterly estimated tax payments of corporations and individuals with non-wage income to 30% due in April, 40% in June, zero in September, and 30% in December. Of note, the new accelerated payment schedule begins for installments due in tax years starting on January 1, 2010.

SB 54 – Same Sex Out-Of-State Marriages Recognized as Legal
Effective January 1, 2010, a valid marriage between persons of the same sex that was entered into outside of California prior to the effective date of Proposition 8 (November 5, 2008) will be recognized as a valid marriage in California. Such couples will be entitled to all the same rights, protections, obligations and duties in California that are granted upon spouses.

SB 313 – Increased Workers’ Compensation Penalties 
Increases the penalty against employers who fail to carry workers’ compensation insurance to $1,500 per employee who is employed during the time the employer was uninsured. The bill further restructures the laws governing penalties for noncompliance with payment of workers’ compensation.

SB 367 – Price Discounts for Unemployed Consumers
Effective November 2, 2009, this bill establishes that discounts offered to or conferred on a consumer because of loss of employment (including a furlough) would not be considered discrimination in violation of the Unruh Civil Rights Act.

Federal Law 
National Defense Authorization Act of 2010

The National Defense Authorization Act of 2010 (“NDAA”) went into effect on October 28, 2009. This Act expands employers’ duties and family military entitlements of the Family Medical Leave Act of 1993 (“FMLA”). The FMLA applies to public agencies, including state, local and federal employers, schools (public and private), and private sector employers with fifty or more employees. The key changes effected by the NDAA include:

• Qualifying exigency leave is now available to family members of those in the regular components of the armed forces during the servicemembers deployment to a foreign country. Previously, such leave was only available to family of servicemembers in the National Guard or Reserve who had been called to active duty.

• A family member of a veteran undergoing medical treatment, recuperation, or therapy for a serious injury or illness incurred in the line of duty may take caregiver leave if the veteran was a member of the military within five years of receiving such treatment.

• The definition of “injury or illness” is modified to include the aggravation of pre-existing injuries. Therefore, covered employees may now take up to 26 weeks of FMLA leave to care for a service member who had a pre-existing injury that was aggravated in the line of military duty.

American Recovery and Reinvestment Act
On December 21, 2009, President Obama signed into law an extension of the COBRA subsidy created by the American Recovery and Reinvestment Act (“ARRA”). This legislation both extended the period during which involuntary terminations would trigger subsidy eligibility and expanded the duration of the subsidy. The following new rules apply:

• The maximum subsidy period is extended from 9 to 15 months.

• The period during which a COBRA-qualifying event can trigger eligibility for the subsidy is extended from December 21, 2009 to February 28, 2010. Eligibility for the subsidy is conditioned on the timing of the qualifying event, which is the event causing the loss of coverage. Subsequently, if an employee experiences an involuntary termination on or before February 28, 2010, the employee will be eligible for the subsidy regardless of when COBRA coverage would eventually start.

• Employees who exhausted their nine months of subsidized COBRA coverage and did not elect to continue coverage by paying the full premiums are able to continue coverage by paying premiums retroactively. Their employers can apply the same refund rules in the ARRA so that the employees can take advantage of the subsidy for the full 15 months.

• A notice must be issued to all individuals who were or are assistance-eligible or terminated on or after October 31, 2009. Special notice must also be sent to individuals who dropped COBRA or paid the full premiums when their nine-month subsidy expired. The notice must explain their eligibility to either reinstate their coverage retroactively at the subsidized rate or receive a credit.

• To assist employers with the notice effort, the Department of Labor just issued three new Model Notices to advise employees and their dependents of these new rights.

Health Information Technology for Economic and Clinical Health Act
The Health Information Technology for Economic and Clinical Health Act (HITECH Act) was enacted on February 17, 2009 as part of the federal economic stimulus bill. The HITECH Act establishes new notice requirements for employers and health care providers when there is any breach of unsecured protected health information (PHI) of individuals. In the case of such a breach, employers and health care providers must provide notice to the affected individuals, the U.S. Department of Health and Human Services (HHS), and prominent medial outlets in certain circumstances. According to the HITECH Act, any notices are subject to the following requirements:

• The notice must contain a brief description of what happened, the types of unsecured PHI involved in the breach, steps the affected individual can take to reduce the risk of harm from the breach, a description of the entity’s investigation, efforts to mitigate harm and steps taken to prevent recurrence, and the contact information for obtaining additional information.

• The notice must be sent by first-class mail to the affected individual’s last-known mailing address. If unknown, the entity must post the notice on its website.

• If the breach involves 500 or more affected individuals, the entity must also notify HHS. If the breach involves 500 or more individuals from a state or jurisdiction, the entity must notify prominent media outlets serving the state or jurisdiction.

• An individual can prevent a covered entity from disclosing PHI if the PHI pertains to care for that individual that was paid solely out of pocket.

• The exception of not accounting for certain disclosures has been eliminated, thus requiring all disclosures of PHI to be accounted for by the covered entity in the case of a request of accounting.

• Business associates (contractor or other non-workforce member who performs services or activities) of covered entities must amend their agreements with covered entities to reflect the new privacy and security requirements under HITECH that apply to covered entities and are also now subject to same criminal and civil penalties applicable to an entity violating the same provision. Business associations must notify the covered entity if there is a loss of PHI.

• State attorneys general are now authorized to enforce these requirements after Feb. 22, 2010. Moreover, the penalties have gone up to 1.5 million for a breach of PHI that is the product of willful neglect.

Revised I-9 Form for Employers
Effective August 7, 2009, employers were to start using a new I-9 form. The new form includes changes to the types of documents that can be accepted for purposes of identity and work authorization. Expired documents cannot be accepted. Employers need not go back and change or update previously completed I-9 forms.

Generally, when an employee quits or is fired, the employer must immediately pay all earned and accrued compensation, including wages, commissions, vacation pay and productivity-based bonuses. However, an employer need not pay amounts that have not yet been earned, such as commissions or bonuses where the employee has not satisfied the conditions necessary to earn the commission or bonus.

Schachter v. Citigroup, Inc.
In a recent case, an employer offered a voluntary stock purchase plan to its employees as an incentive for the employees to work efficiently and stay with the company. Under the plan, employees could designate a percentage of their salary to be used to purchase company stock. If the employee remained with the company for two years following purchase of the stock, title to the shares vested in the employee. On the other hand, if the employee quit or was fired for cause before the end of the two-year period, the employee forfeited the shares and the wages used to purchase the shares. If the employee was fired without cause, the employee still forfeited the stock but received, without interest, a cash payment equal to the amount the employee had invested in the stock.

The plaintiff was an employee who signed up for the stock purchase plan but voluntarily quit less than two years after he purchased the stock, thereby forfeiting all his stock and the wages he used to purchase the stock. He sued his employer in a class action lawsuit, alleging the employer failed to pay earned wages. The employee argued that, since he had used earned wages to buy the stock and since he forfeited those wages when he quit less than two years later, he had not really been paid the wages at all.

The California Supreme Court rejected that argument, explaining that eligibility to receive incentive based compensation is determined by the specific terms of the plan. Because incentive based compensation rewards future, as opposed to past, conduct, it is not “earned (and the employer has no obligation to pay) until the conditions set forth in the plan have been met. Since the employees in the class action did not continue their employment for the full two years after they voluntarily purchased stock through the company incentive plan, they never met the conditions set forth in the plan and they forfeited the stock and the wages used to purchase the stock.

Lessons for Employers
Incentive based compensation is not earned unless and until the terms of the incentive plan have been satisfied. Accordingly, it is very important that the terms of your incentive-based plans be clear as to any conditions that must be met to earn the compensation. Regardless of the terms of your plan, however, you cannot fire an employee without cause simply to prevent the employee from earning the incentive based compensation. An incentive based plan constitutes a contract and all parties have an obligation of good faith and fair dealing.

In 2009, Wilke Fleury raised $2,400 through its “Jeans Friday” program for the Down Syndrome Information Alliance (DSIA). “Jeans Friday” is an initiative that allows Wilke Fleury employees to wear jeans on Friday if they contribute $5.00 toward a charity that has been selected by employee vote. The charity selected for 2009 was Sacramento’s Down Syndrome Information Alliance, which provides support and resources for those affected by Down Syndrome to improve their knowledge and quality of life. DSIA develops and distributes informational materials, conducts outreach with local healthcare and service providers and develops a community support network to benefit families affected by Down Syndrome. Trevor Stapleton, a Wilke Fleury partner, is a member of the Board of DSIA and also serves as the organization’s treasurer. Wilke Fleury is proud to support DSIA’s efforts in our community.

Wilke, Fleury, Hoffelt, Gould & Birney, LLP is pleased to announce the arrival of two new associates, Samson R. Elsbernd and Natalie A. Johnston.

Mr. Elsbernd joined the firm as an associate in September 2009. He attended Pacific McGeorge School of Law, graduating with distinction. He received the Certificate of Governmental Affairs and the Witkin Award in Legislation. He served as President of the McGeorge Federalist Society, and was a member of the Labor and Employment Practice Group Executive Committee for the national Federalist Society. While completing his studies, he was a legal extern for the California Emergency Management Agency. Additionally, he was a certified student attorney for Community Legal Services, a non-profit civil practice clinic, and for the Solano County Public Defender.

Ms. Johnston joined the firm as an associate in November 2009 after a year long judicial clerkship with the Honorable John E. Suddock of the Alaska Superior Court. She graduated with her J.D. and M.B.A. from the University of California, Davis in 2008. While in law school, Ms. Johnston served as a member of the U.C. Davis Law Review and chaired the King Hall Legal Foundation, a student-run nonprofit benefiting public interest law, and the Asian Pacific American Law Students Association. She also served as a teaching assistant for the U.C. Davis undergraduate studies program and volunteered to assist with the annual Prison Law Symposium.

Daniel L. Baxter, Wilke Fleury Hiring Partner, said, “We are truly excited to have Natalie and Samson on board, and know that our clients will appreciate the level of service these two talented lawyers will provide.”

Daniel Egan, who Chairs the Firm’s Bankruptcy Practice, recently spoke at the 2009 Annual Conference of the California Association of Local Agency Formation Commissions on the topic of municipal bankruptcy law. Mr. Egan’s speech included a review of Chapter 9 of the Bankruptcy Code, and discussed some of the benefits, as well as challenges, faced by a city or public entity that chooses to commence a bankruptcy case.