Why it matters 

The California Supreme Court ruled that an employer did not violate the California Family Rights Act (CFRA) when it terminated an employee while out on medical leave because the worker engaged in conduct in violation of the employer’s policy. During his employment, the employee received an employment manual stating that outside work while on approved CFRA leave was prohibited. While still working for the employer, the employee opened a seafood restaurant. He injured his back at home in March 2008 and was placed on a CFRA medical leave of absence. But when the employer learned that the employee was working at his restaurant, he was terminated. The employee sued and a trial court sent the case to arbitration. An arbitrator determined the employee was properly terminated based on his violation of the company policy. An appellate panel reversed, but the California Supreme Court reinstated the arbitrator’s decision. Just because he was on CFRA leave, the employee had “no greater right to reinstatement or to other benefits and conditions of employment than if [he] had been continuously employed,” the court wrote. 

Detailed discussion 

Avery Richey was hired in 2004 by Power Toyota Cerritos. He received an employment manual stating that outside work while on approved CFRA leave was prohibited. A general understanding existed at Power Toyota that outside employment of any kind, including self-employment while on approved leave, was against company policy and that other employees had been fired for violating the rule. 

In October 2007, Richey began working on plans to open a local seafood restaurant, which opened in February 2008. In March, Richey injured his back while moving furniture in his home and filed for leave under both the CFRA and the Family and Medical Leave Act (FMLA). Power Toyota granted Richey’s request for leave and extended it on multiple occasions. 

While on leave, a supervisor sent Richey a letter reiterating the company’s policy that employees were not allowed to pursue outside employment and to call with any questions. Richey ignored the letter and never contacted his employer. 

The employer learned that Richey was working at his restaurant while on leave, and fellow employees testified they observed him sweeping, bending over, and hanging a sign using a hammer. Richey himself admitted to having handled orders and answered the phone at the restaurant while on leave.

Power Toyota terminated Richey on May 1, 2008, prior to the expiration of his leave. The termination letter stated he was dismissed for violating company policy by engaging in outside employment while on a leave of absence.

Richey sued his former employer based on claims of racial discrimination, harassment, retaliation for taking approved leave under the CFRA, and failure to reinstate following CFRA leave. Based on the arbitration agreement signed by Richey at the time he was hired, Power Toyota moved to compel arbitration.

A trial court judge granted the motion. Following an 11-day arbitration hearing, the arbitrator rejected all of the plaintiff’s claims. The defendants moved to confirm the award in the trial court, and Richey sought to vacate the award in part.

He argued that the arbitrator applied the incorrect standard when it considered his CFRA claims by using the “honest belief” of the employer test from FMLA case law. That defense allows an employer to dodge liability under the FMLA when the allegedly discriminatory or retaliatory action is based on an honest but mistaken belief about the employee’s misconduct.

The trial court confirmed the award but an appellate panel reversed.

The CFRA was enacted in 1991 as a state counterpart to the FMLA, with many provisions mirroring the federal statute (such as the right to reinstatement), the California Supreme Court pointed out, noting that California courts often use language from the FMLA and CFRA interchangeably.

The state’s highest court said that it was unnecessary to decide whether the “honest belief” defense under the FMLA was viable in California defense law. “Even if the arbitrator erred, and even if such an error could serve as a basis for vacating an arbitration award, plaintiff has not shown the error was prejudicial,” the court said.

“Here, 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 court wrote. “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’s findings indicated Richey “blatantly ignored his superiors’ clear instructions not to work at the restaurant while on CFRA leave,” the court added. “To ignore this fact and to hold that Power Toyota could not have fired plaintiff under any circumstances for violating company policy while on leave would ignore the rule that plaintiff had ‘no greater right to reinstatement or to other benefits and conditions of employment than if [he] had been continuously employed’ during the statutory leave period.”

“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 evidence or findings as to the employer’s honest belief plaintiff was misrepresenting his medical conditions,” the court said. “Thus, even if the arbitrator was mistaken in relying on an honest belief defense, plaintiff was not prejudiced thereby and the arbitrator’s award in defendants’ favor will stand.”

Whether the honest belief defense applies when an employer terminates an employee based on a reasonable belief that the employee is violating company policy while on CFRA or FMLA leave is an unsettled question of law in the state, the California Supreme Court noted.

To read the decision in Richey v. AutoNation, Inc., click here.