California Court Finds Certain State Employees Exempt from Work Furloughs, as appeared in California Employment Law Letter

As appeared in California Employment Law Letter, April 2010.

In response to California's mounting budget deficit and fiscal crisis, on December 19, 2008, Governor Arnold Schwarzenegger issued an executive order directing the Department of Personnel Administration (DPA) to impose a furlough of represented state employees and supervisors for two days each month. The goal was to reduce current spending and create resources for funding the state's "essential services." The executive order raised questions regarding the governor's authority to regulate state personnel and, in particular, employees of the State Compensation Insurance Fund (SCIF). On March 19, 2010, the California Court of Appeal dealt a legal blow to the governor's furlough plan.

Of furloughs and legislative loopholes

In late 2008, projections estimated that California's general fund deficit would grow to $ 42 billion over the next 18 months. Governor Schwarzenegger's 2008 executive order, aimed at alleviating California's short-term cash-flow problems, ordered the DPA to "adopt a plan to implement a furlough of represented state employees and supervisors for two days per month, regardless of funding source." The executive order also indicated that it included "a limited exemption process."

Since then, Governor Schwarzenegger's executive order has met several legal challenges in California courts and has been the subject of national media coverage. The case discussed here is one of a handful of matters decided in favor of state employees.

California Attorneys, Administrative Law Judges, and Hearing Officers in State Employment (CASE) is the exclusive collective bargaining representative for a unit of legal professionals working in numerous state departments, boards, and commissions. Its membership includes over 3,000 attorneys, administrative law judges, and hearing officers. On January 5, 2009, CASE filed suit in the Sacramento County Superior Court to prevent the governor and the director of the DPA from implementing the furloughs for legal professionals employed by the state. It essentially argued that the governor lacked authority to meddle in matters of legislative concern and the furlough plan contravened both state laws and agreements between the state and workforce unions.

The court decided against CASE on January 30 but clarified that its ruling was applicable only to CASE members who were employees of state agencies in the executive branch since other offices weren't involved in the dispute. With that, the DPA had the green light to proceed with executing the governor's furlough plan.

After the DPA indicated that furloughs would be imposed on SCIF employees, CASE and other individuals filed a petition in the San Francisco County Superior Court against the governor, the director of the DPA, the state controller, and the president of SCIF. The petition asked the court to intervene and prevent the governor from subjecting CASE members employed by SCIF to work furloughs. This time, CASE argued that a provision of the California Insurance Code expressly prohibits the governor from imposing furloughs on SCIF employees. The San Francisco court agreed and issued a directive to the governor mandating that he set aside the executive order as it applies to CASE members employed at SCIF. The governor and the director of the DPA appealed the trial court's decision.

Appellate court's analysis: a matter of interpretation

The California Court of Appeal affirmed the San Francisco County Superior Court's decision. In reaching its conclusion, the court of appeal briefly examined SCIF and its implementing regulations. Although SCIF is a state agency, it's also an insurance carrier, and therefore, its operations and finances differ greatly from most other state agencies in California. Many of the characteristics that distinguish SCIF from other state agencies draw directly from legislation.

Central to the court's analysis was Section 11873 of the Insurance Code, which provides that SCIF "shall not be subject to the provisions of the Government Code made applicable to state agencies," with few exceptions and unless a provision explicitly indicates otherwise. The same section also exempts positions funded by SCIF from "hiring freezes and staff cutbacks otherwise required by law." The governor and the director of the DPA argued that those provisions didn't preclude the governor from reducing the number of hours each employee worked.

The court of appeal disagreed and held that Section 11873(c) limited the governor's authority to furlough SCIF employees. First, it noted that SCIF's board of directors, not the governor, retains sole authority to determine its staffing needs. Second, the court of appeal interpreted "cutback" to mean either reducing an employee's hours or terminating an employee. The Insurance Code therefore expressly provides SCIF employees an exemption from the governor's executive order. Finally, the court noted that furloughing SCIF employees wouldn't achieve the executive order's purpose of easing the state's financial obligations because any savings from furloughs would benefit accounts maintained exclusively for SCIF's use.

For those reasons, the court of appeal upheld the San Francisco County Superior Court's order directing the governor to set aside the executive order as it applies to CASE-represented individuals employed by SCIF. California Attorneys v. Schwarzenegger (California Court of Appeal, First Appellate District, 3/19/10).

Bottom line

Although application of the court of appeal's decision is limited to a small group of state employees, the decision tells a cautionary tale applicable to both public and private employers. Before imposing sweeping personnel decisions, you should examine legislation, contract provisions, current policies, collective bargaining agreements, and other items that might preclude the policy from being applied to certain members of your workforce.

Copyright 2010 M. Lee Smith Publishers LLC