Training Program Fees / Job Constraint, Reimbursement of Expenses, and Employee Payment of Attorneys’ Fees

• Has your employer ever offered a training program but wanted you to pay for at least part of it if you leave the company without working for a minimum period of time after the training? When can an employer do that?

• Does such a training program that requires you to stay or pay violate Business & Professions Code §16600 by restraining an employee from engaging in their profession?

• When must an employer reimburse the employee for business expenses?

• Can an employee be held liable for an employer’s attorneys’ fees defending a lawsuit brought by the employee for Labor Code violations?

                           
These questions were addressed in the recent case of USS-POSCO Industries v. Floyd Case[1].

Facts

Floyd Case worked for USS-POSCO Industries (“UPI”). UPI offered a three-year training program called the Learner Program which Mr. Case voluntarily chose to enroll in. This program trained him to become a Maintenance Technical Electrical worker (“MTE”). The conditions of the program were that UPI would pay for Case’s participation in the Learner program but if he quit his job within 30 months of completing the program, he would reimburse UPI $30,000 of the estimated $46,000 cost per person for the program, less $1,000 for each month Case worked at UPI after completing the Learner Program. This arrangement was negotiated by Case’s union and UPI management. Case agreed to this arrangement in writing (“Agreement”).

Two months after completing the Learner Program, Case left UPI to work for another employer. UPI sued Case for $28,000, the amount he owed UPI under the Agreement for leaving UPI two months after completing the Learner Program. Case cross-complained (filed claims against UPI in the same lawsuit) alleging the Agreement was unlawful for violations of various California Labor Codes and other laws, that the Agreement was an unfair business practice under Business & Professions Code §17200, and that UPI had violated various California Labor Codes.

UPI filed a motion for summary judgment (a process for obtaining a disposition of a lawsuit before trial). The trial court ruled in favor of UPI and then the parties agreed by stipulation to a judgment against Case for $28,000. However, when UPI applied for $166,798 in attorneys’ fees, Case objected, alleging that since Labor Code §218.5 was amended effective January 1, 2014, the amended code applied, which only allowed UPI attorneys’ fees if Case’s lawsuit was brought in bad faith. Case argued that his claims against UPI were not in bad faith. The trial court awarded UPI $80,000 in attorneys’ fees under Labor Code §218.5 in effect before January 1, 2014. On appeal, the California Court of Appeals reviewed the summary judgment and the attorneys’ fees issues.

Analysis

Labor Code §2802

Case alleged that Labor Code §2802 prohibits employers from passing on certain business expenses to employees and that the Agreement was illegally forcing Case to pay for UPI’s business expense of the Learner Program.

The relevant part of Labor Code §2802 states:

(a) An employer shall indemnify his or her employee for all necessary expenditures or losses
incurred by the employee in direct consequence of the discharge of his or her duties, or of his or
her obedience to the directions of the employer… [emphasis added]

At first glance, one might think that UPI was doing as Case alleged. However, a careful reading of the law shows that UPI was compliant with §2802 and following the intent of the law.

Labor Code §2802 applies to protect employees only if the expense was necessary in the discharge of the employee’s duties (or when obeying the employer’s directions). Here, participation in the Learning Program was voluntary. It was not necessary. Someone could become an MTE by simply taking a test, learning on their own, or enrolling in the Learner Program as Case did.

When organizing a training program or participating in such a program, it is important to consider whether the training program is necessary in the performance of a job and whether alternatives to the training program are available to determine whether a reimbursement requirement conditioned on length of employment is enforceable.

Labor Code §450

Case alleged that UPI violated §450(a) with its Learner Program.

§450 states:

(a) No employer, or agent or officer thereof, or other person, may compel or coerce any employee,
or applicant for employment, to patronize his or her employer, or any other person, in the purchase
of any thing of value. [emphasis added]

This law prohibits an employer from compelling or coercing an employee or applicant to purchase from the employer. Here, as noted above, Case voluntarily participated in the Learner Program and he had alternatives to becoming an MTE, so UPI did not compel or coerce Case and therefore it did violate Labor Code §450.

Business & Professions Code §16600

Case alleged that the Agreement was an unlawful restraint on employment under Business & Professions Code §16600, that it prohibited or at least limited his ability to engage in his profession.

The relevant part of §16600 states:

Except as provided in this chapter, every contract by which anyone is restrained from engaging in a
lawful profession, trade, or business of any kind is to that extent void.

One might think that being required to stay with an employer for 30 months following a training program or alternatively, reimbursing an employer for the training expense, was a limit on the employee’s freedom to engage in their profession. In this situation, the Court of Appeals said it wasn’t.

Case voluntarily chose to enroll in the Learner Program which provided him with advanced training. This advanced training actually prepared him to be more mobile in his profession because he was better trained after the Learner Program than before. The Agreement did not restrict Case’s future employment. It did not constrain where he could work. He could leave UPI and work for anyone. In fact, he did leave UPI after two months of completing the Learner Program. The Agreement simply asked that Case reimburse UPI if he left within 30 months of completing the course. The Court held that the Agreement did not violate Business & Professions Code §16600.

Some employment agreements have been held to prohibit or limit subsequent employment. They often prohibit working for a competitor.  In Golden v. California Emergency Physicians Medical Group[2], the federal Ninth Circuit Court of Appeal asked the lower District Court to determine whether a work restriction in a settlement agreement was a violation of §16600. That restriction said that the employee could not work for the consortium (California Emergency Physicians Medical Group) or at any facility it serviced or owned in the future. These type of restrictions have been common in settlement agreements between employees and employers.

The Court in USS-POSCO Industries v Floyd Case was not concerned with Golden and the Ninth Circuit’s remand to the District Court to “determine in the first instance whether the no-employment provision constitutes a restraint of a substantial character to Dr. Golden’s medical practice”[3] [emphasis added], even though this quantitative analysis was a key issue in the 1916 California Supreme Court case of Chamberlain v. Augustine[4]. The USS-POSCO Industries court said that the Learner Program Agreement, voluntarily accepted by Case and whose benefits transcend any specific employment, was not a restraint on employment.

Whether training program reimbursement agreements or future employment restriction agreements violate Business & Professions Code §16600 is often not clear.

Attorney Fees

UPI prevailed on the Labor Code §§221-223 claims with its motion for summary judgment. UPI sought attorneys’ fees of $166,798 and the court awarded $80,000 in attorneys’ fees. Case did not challenge the amount of the award but the fact of the award. Case alleged that the old version of Labor Code §218.5 which allows for recovery of attorneys’ fees, was inapplicable and that the new version of the code applied. Case argued that under these circumstances, the new §218.5 precluded UPI from recovering any attorneys’ fees.

Prior to 2014, the relevant part of Labor Code §218.5 stated,

(a) In any action brought for the nonpayment of wages, fringe benefits, or health and welfare or
pension fund contributions, the court shall award reasonable attorney’s fees and costs to the
prevailing party if any party to the action requests attorney’s fees and costs upon the initiation of the
action.

Thus, the prevailing party in a lawsuit involving the issues noted in the code, except for those covered by Labor Code §1194 and other exceptions, was entitled to recover attorneys’ fees from the losing party. This meant that whether the prevailing party was an employer or employee did not matter.

Beginning January 1, 2014, Labor Code §218.5 changed to favor the employee. The relevant part of the new code asserts,

However, if the prevailing party in the court action is not an employee, attorney’s fees and costs shall
be awarded pursuant to this section only if the court finds that the employee brought the court
action in bad faith. [emphasis added]

The court did an extensive analysis on whether the new code should apply retroactively because generally, courts have ruled against retroactive application unless the legislature made it clear that the code was to apply retroactively. Ultimately, because numerous California courts have determined that code changes affecting attorneys’ fees while cases are pending in court are “procedural,” and that is prospective in character and consequently not at odds with the general rule against retroactivity. Therefore, the Court of Appeals decided that the new Labor Code §218.5 applied and that the lower trial court should determine on remand, whether the claims under Labor Code §§221-223 were brought in bad faith or not.

Conclusion

If any employer or employee is a party to a pending case involving Labor Code §218.5 that was filed before January 1, 2014, they should consider the impact of this decision on attorneys’ fees.  The 2014 change in Labor Code §218.5 is now making employees and their legal counsel more daring with new lawsuits and may encourage settlement of lawsuits involving §218.5.