Watkins v. Wachovia Corporation - New Class Action Opinion On The Effects Of Releases In Severance Agreements And Individually Settling With Named Plaintiffs

Plaintiffs Brown and Watkins brought a wage and hour class action against Wachovia seeking damages for unpaid overtime on behalf of all California sales assistants on the basis that they were misclassified as exempt employees or that Wachovia simply did not pay the hourly employees for overtime worked. 

Brown’s Release of All Claims In Connection With A Severance Package Precludes Her From Participating In This Lawsuit

At the trial court level, Wachovia brought a motion for summary judgment against Brown’s claims on the basis that Brown signed a release of all claims in conjunction with a severance package. Wachovia won the summary judgment motion at the trial court level, but Brown appealed. The issue on this appeal is whether Brown’s release of all claims in her severance package precluded her from bringing her claim for unpaid overtime in this case. 

In exchange for additional severance benefits when leaving Wachovia, Brown signed a release of all claims against Wachovia. Brown argued that the release is unenforceable because it violates the law in that Labor Code section 206.5(a) prohibits the release of all claims for unpaid wages unless payment is made in full for all claimed wages. The section provides:

“An employer shall not require the execution of a release of a claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of those wages has been made. A release required or executed in violation of the provisions of this section shall be null and void as between the employer and the employee.”

The court rejected this argument on the basis that section 206.5 must be read with Labor Code section 206(a). Section 206(a) provides “In case of a dispute over wages, the employer shall pay, without condition . . . all wages, or parts thereof, conceded by him to be due, leaving to the employee all remedies he might otherwise be entitled to as to any balance claimed.” 

The court noted that this exact argument proffered by Brown was rejected recently in another case, Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796. The court explained:

[The Pick Up Stix court] concluded that Labor Code section 206.5 simply prohibits employers from coercing settlements by withholding wages concededly due. In other words, wages are not considered “due” and unreleasable under Labor Code section 206.5, unless they required to be paid under Labor Code section 206. When a bona fide dispute exists, the disputed amounts are not “due,” and the bona fide dispute can be voluntarily settled with a release and a payment – even if the payment is for an amount less than the total wages claimed by the employee.

The issue then is whether there was a dispute of wages due when Brown signed her release. If there was a dispute about the amount of wages owed, then the release bars Brown from ever suing Wachovia. If there was no dispute at the time Brown signed the release with Wachovia, then she could sue for unpaid wages – even though she signed the release. 

The court ruled in Wachovia’s favor in holding that there was a dispute over unpaid wages at the time Brown signed the release. The court said this was evidenced by the fact that she complained to management earlier that she was not being paid overtime. The court also noted the fact that Brown was maintaining two time sheets while she was working for Wachovia – one time sheet she submitted to Wachovia and was paid for all time on, and another time sheet that included all of her overtime that was not paid. 

The court concluded: 

In other words, when Brown’s employment was terminated, she: (1) received all wages Wachovia conceded were due to her (based on the time sheets she had submitted); (2) believed she possessed a claim for further overtime pay; and (3) voluntarily elected to receive enhanced severance benefits in exchange for releasing her claims against Wachovia. Under these circumstances, the release is enforceable. Summary judgment was therefore appropriately granted.

Watkins’s Individual Settlement Precludes Her From Proceeding With The Class Action

Watkins filed a motion for class certification, which was denied by the lower court. The parties entered into settlement discussions, and she agreed to settle her individual claims, but purported to retain her rights to continue her appeal of the class action claims. Wachovia argued that Watkins’s appeal must be dismissed as moot because of the settlement she no longer has standing to pursue the class action. 

The court explained:

Watkins assumes, however, that her “class claim” for unpaid overtime wages has independent vitality and can continue after she has settled her “individual claim” for the same wages. The argument reflects a misunderstanding of the nature of a class action. A class action is a procedural device used “when the parties are numerous, and it is impracticable to bring them all before the court.” (Code Civ. Proc., § 382.) In such a situation, “one or more may sue or defend for the benefit of all.” (Ibid.) When a plaintiff brings a class action, the plaintiff undertakes a fiduciary duty to the other members of the class, under which the plaintiff agrees not to settle the other class members’ claims for the plaintiff’s individual gain. (La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 871.) But this duty should not be confused with an additional claim for relief. A representative plaintiff still possesses only a single claim for relief – the plaintiff’s own. That the plaintiff has undertaken to also sue “for the benefit of all” does not mean that the plaintiff has somehow obtained a “class claim” for relief that can be asserted independent of the plaintiff’s own claim. “[T]he right of a litigant to employ [class action procedure] is a procedural right only, ancillary to the litigation of substantive claims. Should these substantive claims become moot . . . , by settlement of all personal claims for example, the court retains no jurisdiction over the controversy of the individual plaintiffs.” (Deposit Guaranty National Bank v. Roper (1980) 445 U.S. 326, 332. (“Roper”)).

The court concluded that Watkins’s appeal must be dismissed. She voluntarily released her wage claim against Wachovia for $51,000. As the court explained, her “class claim’ is simply a procedural device by which she pursued her substantive claim for overtime wages. Having settled her substantive claim, the class claim disappears, and her appeal of the denial of class certification must be dismissed.”


The opinion, Watkins v. Wachovia Corporation, is a must read for wage and hour litigators [especially the analysis regarding “pick off” cases – when defendants try to stop class actions from going forward by picking off the named plaintiff by entering into an individual settlement with them]. 



Unions Can Require Their Members to Arbitrate Claims For Violation of Individual Statutory Rights -- 14 Penn Plaza v. Pyett

The National Labor Relations Act (NLRA) has always encouraged unions and management to contract for an exclusive grievance and arbitration procedure to resolve claims for violation of their collective bargaining agreements (CBAs).  Since at least 1991, the Supreme Court has also allowed individual employees to contract for mandatory arbitration of their individual claims for violation of statutory rights.  Until now, however, the Court had never squarely addressed the next logical question -- i.e., Can a union collectively bind its members to a CBA provision that requires them to arbitrate their own individual statutory claims such as claims for discrimination?     

The 5-4 majority opinion in 14 Penn Plaza v. Pyett, answers that question in the affirmative.  But the reasoning is so riddled with prerequisites, caveats, and reservations that few, if any, real-world CBAs could be read to actually require arbitration of individual statutory claims. 

First, the arbitration provision must "clearly and unmistakeably" cover such claims.  Most CBAs include a generic "non-discrimination" clause.  But virtually none go as far as the Penn Plaza agreement, which specifically listed various state and federal anti-discrimination statutes and provided that "All such claims shall be subject to the grievance and arbitration procedures [of the CBA] as the sole and exclusive remedy for violations."

Second, the Penn Plaza decision deliberately sidesteps the most important issue -- whether the procedural limitations of a union-controlled grievance and arbitration process amount to an unenforceable waiver of substantive rights.  For example, what if (as is usually the case) the grievance and arbitration process can be initiated only by the union and not the employee.  And what if (again, the usual case) the CBA imposes shortened limitations periods and no access to discovery.  

Under the substantial body of case law governing non-labor arbitration agreements, including the California Supreme Court's Armendariz decision, such limitations would render an arbitration agreement unconscionable and unenforceable.  Should a different result apply merely because an arbitration agreement is part of a collective bargaining agreement?   

The parties in Penn Plaza had a live dispute as to whether the procedural limitations of the arbitration clause amounted to a  de facto waiver of substantive anti-discrimination rights.  But the Supreme Court merely remanded these issues back to the lowers courts without any constructive guidance.  As a result, the main upshot of the Penn Plaza decision will be to spawn a wave of lower court litigation to determine whether CBA arbitration remedies can be stretched to include statutory claims for violation of Title VII, the FEHA, and wage and hour laws.     





The Perfect Storm

Employers in California and across the nation are facing some of the most difficult times in almost 80 years on the employment and labor front. In addition to the bad economy, employers are struggling with the new regulations already put into place by the Obama administration, such as the newly enacted Ledbetter Fair Pay Act. Employers are also concerned about the looming regulations the administration said it supports, primarily the Employee Free Choice Act. Oh, and we cannot forget, the new Secretary of Labor, Hilda Solis, has vowed to ramp up the Department of Labor’s field audits on employers with the help of 150 new investigators it will be hiring under the American Recovery and Reinvestment Act.

What should employers do?

First, it is not a bad time to conduct an audit of pay practices to ensure compliance with the existing regulations. If an employer is going through layoffs, there is a very good likelihood that its pay practices will be under close scrutiny. Second, employers need to understand what their obligations will be if the Employee Free Choice Act is actually enacted. With the decrease of union membership over the last few years, employers need to review what their obligations are when dealing with unionizing efforts.