California Supreme Court Says Company Policy Justified Firing

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An employer terminated an employee who was absent on approved medical leave, but engaged in outside employment in violation of company policy.  An arbitrator said that the employer did not violate the law by doing so and the California Supreme Court refused to overturn that decision. 

The case is Richey v. AutoNation.

After a hearing, the arbitrator relied on the federal “honest belief” defense and rejected the employee’s claim that the employer violated the employee’s right to reinstatement under the California Family Rights Act (CFRA) and its federal counterpart, the Family and Medical Leave Act of 1993 (FMLA).  The trial court confirmed the arbitrator’s award, but the Court of Appeal vacated the award in the employer’s favor.

The California Supreme Court granted review to determine whether, in the absence of an express agreement between the parties, courts may review and vacate an arbitration award involving both an employee’s statutory rights and an employer’s written policy forbidding outside employment while on leave.  The California Supreme Court concluded that although the arbitrator may have committed error in adopting a defense untested in California, any error that may have occurred did not deprive the employee of any statutory rights because the arbitrator found he was dismissed for violating his employer’s policy.

In 2004, defendant Power Toyota Cerritos, part of the AutoNation, Inc., consortium of automobile dealerships, hired plaintiff Avery Richey as an at-will employee.  Plaintiff received an employment manual noting that outside work while on approved CFRA leave was prohibited.  There was also a general understanding at Power Toyota that outside employment of any kind, including self-employment while on approved leave, was against company policy and that others had been fired for violating this rule.

As a condition of his hiring, plaintiff signed an agreement requiring that any employment dispute be settled by arbitration.  All disputes between Power Toyota and its employees were decided this way.  The agreement did not include an express provision stating that courts could review any arbitration award for legal error.  The agreement did say that the decision would be final and binding upon the parties.

Around October 2007, plaintiff began work on plans to open a restaurant.  Plaintiff’s supervisors at Power Toyota, concerned that the restaurant was distracting him, met with him in February 2008 to discuss performance and attendance issues.

On March 10, 2008, plaintiff injured his back while moving furniture at his home.  Plaintiff’s physician informed Power Toyota that plaintiff was unable to work.  On March 21, 2008, plaintiff filed for leave under the CFRA and FMLA.  Power Toyota granted plaintiff’s medical leave and extended it repeatedly.

On April 11, 2008, a supervisor sent plaintiff a letter stating that employees were not allowed to pursue outside employment while on leave and that plaintiff should call if he had any questions.  Plaintiff ignored the letter and never called.

On April 18, 2008, in response to information that plaintiff was working at his restaurant while on leave, Power Toyota dispatched an employee to observe the restaurant.  The employee testified seeing plaintiff sweeping, bending over, and hanging a sign using a hammer.  Other employees testified that plaintiff was working the front counter.  Plaintiff himself admitted to having handled orders and answering the phone at the restaurant, but claimed that these tasks were within the limited light duties his doctor authorized.

Power Toyota terminated plaintiff on May 1, 2008. In its termination letter, it stated that it dismissed plaintiff for engaging in outside employment while on a leave of absence, in violation of company policy.

After receiving a right-to-sue letter from the Department of Fair Employment and Housing, plaintiff filed a complaint in superior court against Power Toyota, its parent companies and his direct supervisor, alleging multiple claims under the California Fair Employment and Housing Act (FEHA) and the CFRA.  The claims included racial discrimination, harassment, retaliation for taking approved leave, and failure to reinstate following CFRA leave.  The trial court granted defendants’ motion to compel arbitration.

The arbitrator rejected each of plaintiff’s contentions.  First, he denied plaintiff’s claims of racial discrimination and harassment.  Plaintiff did not appeal the arbitrator’s decision as to those claims.  With regard to the plaintiff’s claims under the CFRA and the FMLA, the arbitrator framed the legal issue under both statutes as whether the law provides a protective shell over plaintiff that bars his termination until he is cleared to return to work by his physician, or does the law allow an employer to let an employee go, while on approved leave, for other non-discriminatory reasons?  The arbitrator found that although the employee manual was poorly written, there was a general understanding at Power Toyota that outside employment was against company policy and others had been terminated for violating this rule.  He concluded that case law allowed Power Toyota to terminate Mr. Richey if it has an honest belief that he is abusing his medical leave and/or is not telling the company the truth about his outside employment.  He also found that the weight of the evidence was overwhelming that Power Toyota fired Mr. Richey for non-discriminatory reasons and that his CFRA/FMLA status was not an absolute bar to termination.

Plaintiff asserted that the arbitrator exceeded his powers when he accepted defendants’ honest belief defense.  The trial court denied plaintiff’s motion to vacate the award, finding that the fact that the arbitrator may have applied the wrong legal standard did not constitute grounds to vacate the award.  Plaintiff appealed, alleging that Power Toyota violated his right to be reinstated following his leave.

The Court of Appeal vacated the arbitration award because it believed the arbitrator had committed legal error by adopting the honest belief equitable defense that is available mostly in federal Seventh Circuit interference cases.  However, the California Supreme Court said it need not decide whether that defense is viable in California employment law.  Even if the arbitrator erred, and even if such an error could serve as a basis for vacating an arbitration award, plaintiff did not show that the error was prejudicial.

The arbitrator found plaintiff was fired because he violated Power Toyota’s employment policy against outside work while on approved CFRA medical leave, not because he was on approved leave.  The evidence to support that finding, as reflected in the arbitrator’s factual findings, was overwhelming.  Power Toyota explicitly warned plaintiff that its policy prohibited any outside employment, including self-employment, while on leave.  Plaintiff knowingly ignored the warnings.  Power Toyota invited plaintiff to communicate regarding his outside employment, and he deliberately avoided any such communication.

The arbitrator found plaintiff’s firing was based on a clear violation of company policy—a legally sound basis for upholding the arbitrator’s award—and would likely have made that finding regardless of the findings as to the employer’s honest belief plaintiff was misrepresenting his medical condition.  The California Arbitration Act and the Federal Arbitration Act provide limited grounds for judicial review of an arbitration award and the California Supreme Court therefore upheld the arbitrator’s decision.

Even though this case does not adopt the honest belief doctrine for the CFRA, it is good news for California employers with binding arbitration agreements.  This case should also serve as a reminder to all employers of the importance of clear, written policies.

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