What happens when government (state or federal) is pathologically hostile to business
This post tells the story of a case on which I worked. It’s a true story.
Picture this: It’s 2001. You live in California and you own a small business that consists of you and maybe three to five at-will employees. Your profits are decent.
One morning, Jane, one of your employees, announces that she’s quitting, effective immediately, and stalks out. You know — or think you know — your California law, which requires that, when an employee quits, you have her payment ready within three days of her departure. (That would be Calif. Lab. Code :§ 202.) You therefore immediately prepare Jane’s final paycheck, covering the two hours she worked before she quit.
One day goes by, but no Jane. Two days, but still no Jane. On the third day, you actually drive over to her last known address to drop off the check, only to discover it’s a vacant apartment. You head back to the office, check still in hand. Jane didn’t ask that you mail the check to her, nor do you have a current address, so for the time being, you just hold on to it.
On the fifth day after quitting, Jane shows up, grabs the paycheck, and again disappears. You breath a sigh of relief, thinking you’re finally done with Jane. If only you knew, the story is just beginning….
A month goes by, and you suddenly get a notice from the California Labor Commissioner telling you that Jane is claiming that you violated California law. Your crime? You did not get Jane’s final paycheck to her within three days of her quitting. Since you had the paycheck ready immediately, and her failure to receive it was solely the result of her own unavailability, you laugh at this charge, thinking you’ve got a slam dunk case.
You show up on the assigned day to argue your case before the Labor Commissioner. The Labor Commissioner announces that the three day rule means the employee must have the money in hand by the end of the third day — regardless of either your efforts to pay her or her lack of effort to receive the money. To punish you, the Labor Commissioner imposes statutory sanctions (or “waiting time penalties”) against you, and insists that you pay Jane an amount 27 times greater than the wages she was actually owed.
Shocked by the unfairness of it all, you hire an attorney, who tells you that you’re right — you complied with your statutory duty, and the Labor Commissioner erred. The attorney tells you that this is indeed a slam dunk case, and that you should appeal it, which means filing an original action in Superior Court. Sounds good to you….
The case goes to trial. Jane is represented by the Labor Commissioner, so this is a freebie for her — the people of the State of California, through their tax dollars, are paying Jane’s attorneys fees. The judge appears confused by the issues and eventually announces what he believes is a Solomonic ruling. He holds that, despite the statute’s clear language — Calif. Labor Code :§ 202 explicitly imposes on the employer only the burden of having payment ready, not the burden of ensuring that the employee receives payment — you should have gotten the payment directly to Jane. However (and this is where the Solomon part comes in) the judge will halve the sanctions award against you.
While miffed at the fact that you couldn’t get the judge to agree with you entirely, you still leave the Court with a light heart — after all, you got the original award against you cut by 50%, which must be viewed as a clear victory. Au contraire, my innocent California employer.
In 2001 — when these events took place — the attorneys fee statute governing appeals from Labor Commissioner awards imposed attorney fees and costs against a party who appeared before the Court and was “unsuccessful in the appeal.” (That was Calif. Lab. Code :§ 98.2(c), repealed.) However, as of 2001, two California decisions had held that this facially-neutral language didn’t really mean what it said.
Instead, said the two cases, what that facially neutral language really meant was that, if an employee appealed a Labor Commissioner award and bettered his position by even a penny, he was deemed successful on the appeal, so that the employer would have to pay the employee’s (or, really, the tax funded Labor Commissioner’s) attorneys fees. The contrary, however, was not true. If an employer appealed a Labor Commissioner award and bettered his position by 99.9999%, but not by 100%, he was deemed unsuccessful. He therefore still got to pay the employee’s (or, rather, the Labor Commissioner’s) attorney fees.
What this meant for Jane’s employer was that, even though she managed to better her position on appeal by 50% — she still lost! She still got to pay the Labor Commissioner’s attorneys fees at fair market value.
The situation in 2001 was therefore as follows: No rational employer could take the risk of an appeal from a Labor Commissioner award, since there was a huge chance that the employer, whether entirely or even partially correct, would still end up with a judgment requiring him to pay something, even a nominal something, to the employee. (Judges hate giving employees nothing.) If that happened on appeal, the employer will be responsible for the oh-so-costly attorneys fees, fees that were usually far in excess of the underlying wage dispute.
And when you stop and think about it, this perverted reading of a facially neutral statute was a green light to the Labor Commissioner to do some nasty stuff. Begin with the fact that Labor Commissioner employees are generally unsympathetic to employers. This non-intuitive, twisted, backwards reading of a facially neutral statute gave these employees an incentive to ratchet up sanctions against employers to ridiculous amounts, because the Labor Commissioner employees knew that the employer couldn’t afford an appeal. Even if the employer prevailed on the appeal by lowering the sanction to a more reasonable amount, the employer would still be impossibly burdened by the Labor Commissioner’s attorneys fees.
Keep in mind, too, that these attorneys fees were a complete windfall for the Labor Commissioner, since Commission attorneys are automatically paid by the State of California for their efforts. And last I heard, when they receive attorneys fees from some hapless employer, the Labor Commissioners offices are not refunding the taxpaying citizens in that amount.
Bad as the above-described situation sounds, it actually got worse after 2001. There was a brief, shining moment in 2002/2003 when the California Supreme Court, in a burst of profound rationality, said that courts couldn’t take a facially neutral attorneys fee statute, and read it to impose disproportionate burdens on employers. (That moment of common sense was brought to you by Smith v. Rae-Venter Law Group (2002) 29 Cal. 4th 345.) That was too good to last, of course.
Here’s the “got worse” part: In 2003, the California legislature announced its explicit intention to overturn Smith v. Rae-Venter. The current version of the fee shifting statute now gouges the employer in no uncertain terms: “If the party seeking review by filing an appeal to the superior court is unsuccessful in the appeal, the court shall determine the costs and reasonable attorney’s fees incurred by the other parties to the appeal, and assess that amount as a cost upon the party filing the appeal. An employee is successful if the court awards an amount greater than zero.” (See Calif. Lab. Code :§ 98.2(c).)
There is now no possibility of another Smith v. Rae-Venter decision helping hapless employers. The Legislature has declare in no uncertain terms that the employer can avoid paying the employee’s attorneys fees (read, “the Labor Commissioner’s fees”) only if the employer walks out of Court owing the employee nothing — and obtaining that outcome, especially in liberal courts in the Bay Area or L.A., is a pretty big risk for any small employer to take. This means that employers simply have to swallow the cost when a greedy employee manages to get the ear of a Labor Commissioner who believes it’s fine to impose disproportionate sanctions against a hapless employer, so as as that sanction will benefit a “downtrodden” employee.
Why does this sad story matter? It matters because this little bit of social engineering — unknown to most people — is driving business out of California. I personally know of at least two businesses that have just packed up and moved to other states precisely to avoid these kind of hidden costs. Those oh-so-clever judges misinterpreting the law before 2002, and the “compassionate” Legislature enacting unfair laws in 2003, all think their good intentions say it all. They truly believe they’re insulating poor, downtrodden employees from the risk of attorneys fees.
What they’re not thinking about, though, is the fact that these employees will be even more downtrodden when businesses keep pulling out of California, leaving the State without enough jobs — and the government without enough taxpayers to run itself.
There’s a reason I’m telling this story today: it’s because the problem I’ve described above is not limited to the state level. The National Labor Relations Board has held that Boeing cannot build a plant in South Carolina:
In a stunning move well beyond the scope of their legal mandate, the Obama Administration appointee controlled National Labor Relations Board is suing Boeing Corporation for, get this, building a second production line for their new Dreamliner passenger plane in South Carolina rather than in Washington state.
South Carolina is a right to work state whose voters this past November overwhelmingly amended their state’s constitution to ensure that a worker has the right to vote on whether they want to be represented by a labor union. The workers at the Boeing plant in South Carolina have also taken the bold step of booting out the union that represented them, effectively ending the International Association of Machinists and Aerospace Workers stranglehold on Boeing production.
Now, Obama’s NLRB is attacking Boeing’s job creation in South Carolina as “union retaliation” directly related to a 2008 labor strike which crippled Boeing’s production in Washington state.
Now that those state governments that are in thrall to unions and labor have made it virtually impossible to do business in State A, the federal government is upping the ante by making it illegal for a business to move to State B. I’ll reiterate here what I often say: The Left may call them corporate fat cats or “rich people,” but I call them employers. When you make it impossible for them to do business, they’re going to leave. And if you make it impossible to leave, they’re going to die on the vine, leaving both State A and State B without jobs.
Cross-posted at Bookworm Room