California Supreme Court Lets Arbitration Award Stand, Dodges “Honest Belief” Defense

Richey v. Autonation, Inc., No. S207536 (January 29, 2015): On January 29, 2015, the California Supreme Court issued a decision holding that an employee who is on medical leave does not have a greater right to reinstatement or to other benefits and conditions of employment than if he or she had been continuously employed. Further, the court addressed when a court can vacate an arbitrator’s award, holding that an arbitrator’s award should stand as long as the employee was not prejudiced. The state high court did not address whether the “honest belief” defense applies when an employer discharges an employee based on a reasonable belief that the employee is violating company policy while on medical leave.

Avery Richey worked as a sales manager at Power Toyota of Cerritos since 2004. In 2008, while Richey was on approved leave under the California Family Rights Act (CFRA), his employer discharged Richey on the basis that he was working at a restaurant that he owned while he was on leave. The employer’s policy barred employees from engaging in other employment while on a leave of absence.

Richey filed a lawsuit, alleging that his discharge violated the CFRA. The trial court ordered the case to arbitration based on an arbitration agreement between Richey and his employer. Despite acknowledging that the company policy barring other employment was confusing and that Richey did not believe he was violating company policy, the arbitrator denied Richey’s CFRA claim on the basis that the employer was allowed to discharge Richey if it had an “honest belief” that Richey was abusing his medical leave, even if that belief was mistaken.

Richey asked the trial court to vacate the arbitrator’s ruling but the trial court denied the request. Richey appealed. The California Court of Appeal reversed the trial court’s decision, finding that the arbitrator violated Richey’s right to reinstatement under the CFRA when he applied the honest belief defense. The employer appealed.

The California Supreme Court disagreed with the Court of Appeal. The state high court held that the arbitrator’s decision did not prejudice the employee. The court noted that the pivotal issue was the employee’s violation of the employer’s policy barring outside employment. The court noted, “Even if Power Toyota‘s employment manual could have more clearly stated the rule about outside employment, the award indicates [Richey] blatantly ignored his superiors’ clear instructions not to work at the restaurant while on CFRA leave.” In allowing the arbitrator’s award to stand, the state supreme court pointed to 29 C.F.R. section 825.216 (a), which states that “an employee has no greater right to reinstatement or to other benefits and conditions of employment than if the employee had been continuously employed” during the leave period.

According to a shareholder in the San Diego office of Ogletree Deakins, “The court’s decision is significant because of two practical components that support enforcement of employer policies as long as they are applied consistently. One component is that, although the court stated that the employer’s policy was not the most artfully crafted policy, everyone knew this was the employer’s policy. The court’s decision shows that the employer still has the right to take action for violations of its policies. The second component is communication. Here the court heavily focused on the fact that the employer explicitly warned the employee and tried to communicate with him about his outside employment but the employee chose to ignore the communication.”

Perez continued, “The legal component of the decision reaffirms the fact that an employee is not entitled to more rights because he or she is on CFRA leave. Of course, the employee is entitled to protections from harassment or retaliation under the CFRA, but he or she cannot violate company policy and expect to be protected because he or she is on CFRA leave.”

According to Jack Sholkoff, a shareholder in the Los Angeles office of Ogletree Deakins, “The court’s decision demonstrates that while an arbitrator’s decision on the merits remains subject to significant deference by courts, an arbitrator’s procedural error that results in the denial of a party even having the chance to vindicate an otherwise unwaivable statutory right may be subject to reversal by a court.   Thus, the court in this case recognized that the arbitrator had carefully examined the merits of the plaintiff’s CFRA claim and upheld the arbitrator’s decision on the merits without specifically opining on the validity of the arbitrator’s reasoning. The case reaffirms a narrow path for parties to challenge arbitration decisions; however, employers should recognize that when they go to arbitration, their ability to challenge the arbitrator’s decision will remain limited, unless they specifically provide for appellate review of arbitration decisions.”