Paulo Morgado v. City and County of San Francisco

The City and County of San Francisco and affiliated defendants

(collectively, the City) challenge an order requiring them to pay Paulo

Morgado for future income lost due to his wrongful termination. In an earlier

chapter of the litigation, we granted an alternative writ of mandate directing

the trial court to clarify that order in certain respects or show cause for not

doing so. In response, the court ruled that the City may not avail itself of

deductions for side income Morgado earned while waiting for reinstatement.

Because the trial court’s clarification order failed to resolve the issue,

the parties return to this court, continuing to dispute the extent of the City’s

obligation to pay Morgado. The City contends Davis v. Los Angeles Unified

School Dist. Personnel Com. (2007) 152 Cal.App.4th 1122 (Davis) and Bevli v.

Brisco (1989) 211 Cal.App.3d 986 (Bevli) entitle it to the deductions it took.

Morgado argues to the contrary, and further claims that even if the City’s

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reliance on Davis and Bevli was correct, its deductions were calculated

incorrectly.

We agree with the City’s reading of Davis and Bevli and now confirm it

was correct to take deductions for Morgado’s side income, but conclude the

amount it deducted was incorrect. We therefore reverse the trial court’s

decision and remand for further proceedings consistent with this opinion.

I. BACKGROUND

In a previous appeal, we concluded that the City’s procedural approach

to punishing Morgado for misconduct violated the Public Safety Officers

Procedural Bill of Rights Act (Gov. Code, § 3300 et seq.) by not providing him

a valid avenue for administrative appeal of his 2011 termination. (Morgado

v. City and County of San Francisco (2017) 13 Cal.App.5th 1, 12.) We also

affirmed the trial court’s 2014 injunctive order directing the City to vacate

Morgado’s termination and reinstate him pending administrative appeal.

(Id. at p. 16.)

Morgado was duly reinstated, but was suspended without pay

retroactive to his 2011 termination. He sought and in April 2018 obtained an

order holding the City in contempt for its failure to comply with the prior

injunction. The contempt order required the City to vacate “unconditionally”

Morgado’s termination and suspension, compensate him with front pay and

benefits lost, and “refrain from attempts to suspend, withhold pay and

benefits, and take any other action” against Morgado.

Morgado then complained the City again took the route of partial

compliance. Instead of paying in full, it offset the payment owed to him

based on his post-termination earnings from side income as a mortgage

broker. Morgado originally did not dispute the City’s claimed entitlement to

an offset and suggested the issue could be worked out informally, but later

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challenged any offset, claiming that as a “post-Judgment, Court-mandated

obligation” the front pay could not be reduced. Even so, when asked, he

provided his federal tax returns for the years he was employed as a broker

and suspended as a police officer. The City used these tax returns to

calculate a total offset deduction of $181,402 from what it owed Morgado.

In protest, Morgado sought and obtained a second order of contempt

against the City. That order directed the City to pay Morgado the amount

deducted and to re-assign him to administrative duties. The City sought

review by mandamus and we granted writ relief, vacating the second order of

contempt. We concluded that the order did not “rest upon a ‘ “clear,

intentional violation of a specific, narrowly drawn order’ ” [citation], and

therefore must be vacated without prejudice to further proceedings specifying

the manner in which petitioners are directed to comply with previous judicial

determinations or other legal requirements.”

The parties remained in a stalemate following the issuance of our order

granting writ relief. In further proceedings before the trial court, they again

debated the deduction for side income, and the trial court again found the

deduction inapplicable to Morgado’s situation. For a second time, the court

found the first contempt order barring the withholding of payments or

benefits did not permit the City’s deduction, and it once again ordered the

City to pay the amount deducted in full to Morgado.

To break the logjam once and for all, this appeal followed.

II. DISCUSSION

Both parties agree the sole issue on appeal is whether the front pay

owed to Morgado is subject to a $181,402 deduction for side income. We

review such questions of law de novo. (Ghirardo v. Antonioli (1994) 8 Cal.4th

791, 799, 801.)

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In public and private employment cases, the governing remedial

principle for wrongful conduct by an employer is the same: “The remedy

should ‘return[] the [employee] to the financial position he would have been

in had the unlawful [conduct] not occurred. . . . [T]he offending employer is

made responsible only for losses suffered by the [employee] as a result of [its

misconduct].’ . . . ‘ “[W]hen a wrong has been done, and the law gives a

remedy, the compensation shall be equal to the injury. The latter is the

standard by which the former is to be measured. The injured party is to be

placed, as near as may be, in the situation he would have occupied if the

wrong had not been committed.” ’ ” (Davis, supra, 152 Cal.App.4th at

p. 1133.) The flipside of this principle is that employees are “generally not

entitled to a recovery in excess of make-whole damages.” (Id. at p. 1134.)

Thus, “courts must take care not to grant the employee a windfall” in

granting relief. (Id. at p. 1133.)

The City argues Davis is controlling. To avoid granting Morgado a

windfall, it contends, what it owes him should be subject to deduction.

Morgado disputes this reading of Davis, arguing that the case dealt only with

back pay (payment for past uncompensated work), rather than front pay

(payment for future work lost). In his view, front pay is immune to offset.

We see no basis in logic or fairness to limit the principle of “makewhole” relief enunciated in Davis to the setting of back pay. The City is

correct, it seems to us, that the name of the remedy makes no difference. Nor

does the reason for the remedy compel Morgado’s narrow reading of Davis.

Both back pay and front pay seek to make a wrongfully terminated employee

whole. Both can result in an employee receiving more than necessary to

make him whole, and so both must be subject to deductions to avoid

overcompensation for the harm suffered. This holds true especially for

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Morgado’s taxpayer-subsidized payment, we think. As a general matter,

windfalls are to be avoided, and that is especially so when public funds are

the source of payment.

Morgado also claims San Francisco Police Department General Order

11.02(II)(A)(3) entitles him to “engage in secondary employment and retain

all income earned thereby so long as [he] obtains any necessary permission of

the Chief of Police.” (Italics omitted.) But that misstates the rule. Nowhere

within General Order 11.02(II)(A)(3) is the word “income” mentioned; it only

states that officers on suspension may engage in secondary employment

without written permission from the Chief of Police. Furthermore, even if

Morgado’s assertions were true, a deduction by the City would not prevent

him from retaining any income earned as a mortgage broker. Morgado can

keep all the income earned for himself; the City is simply using that amount

to offset the income he would have earned if not for his wrongful termination

from his job as a police officer.

Having confirmed the correctness of the City’s reading of Davis, we

turn to the specific deduction taken here. Was it permissible for the City to

take a deduction for income generated by “moonlighting” employment on the

side? This issue is governed by Bevli, supra, 211 Cal.App.3d 986. There, the

Second District held that an employer’s monetary obligation to a wrongfully

terminated employee “may be mitigated by deducting compensation or

benefits actually received by the employee that are inconsistent with the

original employment.” (Id. at p. 994.) If the employee would have earned

such income regardless of their original employment status, i.e., night or

weekend work, it cannot be deducted from their wrongful termination

compensation. (Ibid.)

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According to the City, Morgado’s mortgage broker employment would

have been inconsistent with his required duties as a police officer, and as a

result, under Bevli, it was justified in deducting $181,402 from his front pay.

Morgado, on the other hand, takes the position that his mortgage broker

income could not possibly be inconsistent with his job as an officer because he

worked as a broker only during the four-year post-judgment period in which

he could not work as an officer because the City refused to reinstate him.

Here, too, Morgado misreads the governing law. The City’s refusal to

reinstate him as an officer during the post-judgment period is irrelevant to

the analysis. The Bevli rule assumes that a plaintiff’s original employment

continues, and it uses that assumption to determine the inconsistency of side

income. (Bevli, supra, 211 Cal.App.3d at p. 994.) For example, in Bevli, the

plaintiff received workers’ compensation benefits after termination, but

without the termination, she would have never received any benefits. (Ibid.)

The court therefore held that these benefits could offset any possible

compensation if she was found to be wrongfully terminated because the

benefits were inconsistent with her employment. (Ibid.)

Applying the Bevli court’s reasoning here, Morgado’s employment as a

mortgage broker, too, is inconsistent with his employment as a police officer.

Absent his termination and suspension, Morgado would not have been able to

take up secondary employment; that income simply would not have been

earned. Accordingly, we conclude not only was the City entitled to take

deductions for front pay, but under Bevli it was entitled to take deductions

for Morgado’s mortgage broker income.

The only remaining issue is whether the City calculated the deduction

for Morgado’s mortgage broker income properly. There, we conclude that

Morgado has the better of the argument. The City’s figure of $181,402 is

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based on the total income Morgado made as a broker. But Morgado claims

this amount overstates his earnings, as that figure represents his pre-tax

income; after taxes, he contends, he earned much less. He argues that

deducting the pre-tax income amount from his post-tax front pay left him

short of the amount to which he is entitled by exposing him to extra tax

liability.

We agree. While the Davis and Bevli rules bar windfall recovery,

courts are also obligated to make sure a wrongfully terminated employee

receives exactly what he is owed, and not a penny less. Taking $181,402

away from Morgado when he earned only a portion of that figure after taxes

would deprive him of money that he is properly owed. Indeed, the City

agrees that its final figure “requires adjustment” to account for proper tax

liability. On remand, the parties should seek to agree upon the proper posttax amount that may be deducted, and if they cannot agree, the trial court

should decide the issue.

The trial court’s ruling is reversed and the case is remanded for further

proceedings consistent with this opinion. Appellant to recover costs on

appeal.