Millan v. Restaurant Enterprises Group, Inc.

Page 198

18 Cal.Rptr.2d 198

14 Cal.App.4th 477, 16 Employee Benefits Cas. 1951,

1 Wage & Hour Cas.2d (BNA) 517

Jose MILLAN, as Deputy Labor Commissioner, etc., Plaintiff and Respondent, v. RESTAURANT ENTERPRISES GROUP, INC., Defendant and Appellant.

G012006

Court of Appeal, Fourth District, Division 3, California.

Feb. 26, 1993.

As Modified on Denial of Rehearing March 24, 1993.

Review Denied May 19, 1993.

Musick, Peeler & Garrett and Dana D. Howells, Los Angeles, for respondent.

H. Thomas Cadell, Jr., San Diego, and Miles E. Locker, San Francisco, for petitioner.

MOORE, Associate Justice.

The Restaurant Enterprises Group, Inc. (appellant) appeals an order by the superior court compelling production of documents pursuant to an administrative subpoena duces tecum (subpoena) issued by the Division of Labor Standards Enforcement (DLSE). The DLSE seeks to determine whether appellant is subject to California Labor Code section 227.3 ¹, which prohibits the forfeiture of vested vacation time and requires the payment of accrued vacation time to employees upon separation from employment.

Appellant contends that because it maintained a Voluntary Employees' Beneficiary Association Trust (VEBA) under the Employee Retirement Income Security Act (29 U.S.C. § 1001 et seq., ERISA), the DLSE lacks authority to enforce California law on vacation pay. It also argues the subpoena fails to meet constitutional standards for enforcement because it is not for a lawful purpose, seeks irrelevant records, and is excessive for the purposes of its inquiry.

THE STATUTORY SCHEME AND PROCEDURAL BACKGROUND

An administrative subpoena may be enforced if it is issued "for 'a lawfully authorized purpose, within the power of [the legislative body] to command.' " (Craib v. Bulmash (1989) 49 Cal.3d 475, 482, 261 Cal.Rptr. 686, 777 P.2d 1120, quoting Okla. Press Pub. Co. v. Walling (1946) 327 U.S. 186, 209, 66 S.Ct. 494, 505, 90 L.Ed. 614.) The documents demanded must be relevant and " 'adequate, but not excessive, for the purposes of the relevant inquiry.' " (Ibid.)

Section 227.3 provides that employees must receive vested vacation pay upon separation from employment. ² "The right to a paid vacation, when offered in an employer's policy or contract of employment, constitutes deferred wages for services rendered.... [A] proportionate right to a paid vacation 'vests' as the labor is rendered. Once vested, the right is protected from forfeiture by section 227.3. On termination of employment, therefore, the statute requires that an employee be paid in wages for a pro rata share of his vacation pay. [Fn. omitted.]" (Suastez v. Plastic Dress-Up Co. (1982) 31 Cal.3d 774, 784, 183 Cal.Rptr. 846, 647 P.2d 122, hereafter Suastez.)

In Suastez, supra, 31 Cal.3d 774, 183 Cal.Rptr. 846, 647 P.2d 122, the Supreme Court held that although employers have no obligation to provide vacation benefits, if such benefits are provided they are earned and vest on a daily basis. Thus, prorated vacation benefits must be paid on termination of employment even in cases where employees do not meet prerequisites of the employer's policy, such as attaining a full year of employment. (Id. at pp. 781-784, 183 Cal.Rptr. 846, 647 P.2d 122.) After Suastez, certain types of vacation pay policies which were formerly permissible, such as policies allowing the forfeiture of vacation pay before one full year of service or which required employees to "use or lose" vacation pay by a specific date, were prohibited.

After Suastez was filed, a group of employer trade associations brought suit in federal court seeking a declaration that section 227.3, the DLSE's enforcement policy, and Suastez itself, were preempted by ERISA. The federal district court entered judgment in favor of the trade associations and issued an injunction prohibiting the DLSE from processing any vacation pay claims under section 227.3.

On appeal, the Ninth Circuit Court of Appeals considered whether ERISA preempted state regulation of unfunded vacation benefits policies, paid out of general assets of the employer as part of regular payroll while an employee is on vacation, and concluded it did not. (California Hosp. Ass'n v. Henning (9th Cir.1985) 770 F.2d 856, 859-861, hereafter Henning.) Following the Ninth Circuit's reversal of the district court's order, and its holding that payment of vacation benefits from an employer's general assets is outside the scope of ERISA, the district court issued a new order ruling that the DLSE has jurisdiction over any unfunded vacation pay policy and that ERISA preemption applies only to funded vacation plans.

In Massachusetts v. Morash (1989) 490 U.S. 107, 109 S.Ct. 1668, 104 L.Ed.2d 98 (hereafter Morash ), the United States Supreme Court adopted Henning 's reasoning and holding. The court held that an employer's vacation program did not constitute an "employee welfare benefit plan" within the meaning of ERISA, where vacation benefits were paid out of the employer's general assets. As the court stated, "In enacting ERISA, Congress' primary concern was with the mismanagement of funds accumulated to finance employee benefits and the failure to pay employees' benefits from accumulated funds. [Henning, supra, 770 F.2d at p. 859.] To that end, it established extensive reporting, disclosure, and fiduciary duty requirements to insure against the possibility that the employee's expectation of the benefit would be defeated through poor management by the plan administrator. Because ordinary vacation payments are typically fixed, due at known times, and do not depend on contingencies outside the employee's control, they present none of the risks that ERISA is intended to address. If there is a danger of defeated expectations, it is no different from the danger of defeated expectations of wages for services performed--a danger Congress chose not to regulate in ERISA." (Morash, supra, 490 U.S. at p. 115, 109 S.Ct. at p. 1673.) Morash thus established that ERISA does not cover a program "whose vacation benefits come from the same fund from which [employees] receive their paychecks." (Id. at p. 120, 109 S.Ct. at p. 1676.)

On September 30, 1986, the DLSE issued a bulletin known as Interpretive Bulletin No. 86-3. In that bulletin, the DLSE noted many employers were designing vacation plans to comply with Henning and offered guidance on questions frequently asked by employers. The bulletin detailed the DLSE's enforcement policy as follows: "DLSE will accept only those claims for vacation pay which would be paid out of the employer's general assets. Claims for vacation pay filed against a third party such as a 'benefit association' or 'trust' or 'fund' have not heretofore been processed because such entities have customarily been part of a collective bargaining agreement. Papers filed in [Henning ] suggest that there may be vacation pay arrangements which are paid neither from general assets nor pursuant to collective bargaining agreements. Any claim involving [a funded] plan ... created in accordance with and subject to the provisions of ERISA must be pursued through state or federal courts. If an employer opposes a vacation pay claim by alleging ERISA coverage on any of the above grounds, enforcement as to that claim will be stayed for a reasonable period to allow the employer to submit evidence in substantiation of that defense."

The bulletin confirmed the DLSE's existing policy to exclude all funded vacation plans and assert jurisdiction over unfunded plans only. The DLSE never conceded it lacked jurisdiction over unfunded plans of any nature, including unfunded VEBAs.

In 1990, the United States District Court ruled that a vacation benefits trust created by an employer was not an ERISA employee welfare benefit plan where the trust maintained virtually no accumulated funds in its account. (Czechowski v. Tandy Corporation (N.D.Cal.1990) 731 F.Supp. 406, hereafter Czechowski.) The court refused to allow the employer to use an "advance and recapture" method as a means of evading section 227.3, stating: "Tandy disburses payments of vacation benefits directly to ... employees from its own general funds; the VEBA trust then reimburses Tandy on a quarterly basis for the money Tandy has disbursed to employees, and Tandy simultaneously gives a check to the VEBA trust for the same amount it has received from the VEBA trust.... Though the VEBA trust, since its inception, has disbursed over $1 million in vacation pay in this manner, it has never held more than $1,000." The court concluded Morash 's reasoning applied because that VEBA did not "implicate any concerns over mismanagement since no funds are accumulated in it. Further, the risk an employee bears is precisely the same as his employment risk: that he may be terminated and cease to receive wages and other compensation. The VEBA trust, therefore, is not a plan covered by ERISA." (Id. at p. 408.)

The DLSE contends that after the publication of Czechowski, it became aware that employers might use a VEBA trust as a subterfuge to deny separating employees payment of unpaid vacation wages. Then, in April 1991, two of appellant's former employees filed claims with the DLSE for payment of earned and unpaid wages. The DLSE issued subpoenas seeking records relating to the VEBA trust. The DLSE contended the documents were necessary to ascertain whether the VEBA was funded and whether it made direct payments of employees' vacation benefits, and to determine whether appellant was subject to the provisions of section 227.3. Appellant settled the claims filed by its two ex-employees, but the DLSE continued its investigation of appellant's vacation pay practices.

On July 11, the DLSE served appellant with a new subpoena seeking records showing whether the VEBA was funded and how it was operated. When appellant did not comply, the DLSE filed a petition to compel production, seeking production of documents in 19 categories related to the...