Some Wage and Hour Claims May Be Insurance Covered -- California Daries, Inc. v. SRUI Indemnity Co.

One of the reasons employers purchase Directors and Officers (D&O) or Employment Practices Liability (EPL) coverage is to protect against employee lawsuits.  And the most important source of exposure for California employers is the seemingly ubiquitous class action lawsuits for Labor Code violations.  Once they have been sued, however, employers are sorely disappointed when their carrier contends that the policy contains a blanket exclusion for all wage and hour claims.

The standard verbiage excludes coverage for any alleged violation of the federal "Fair Labor Standards Act . . . or any similar provision of federal, state or local statutory law or common law." 

According to the Eastern District decisions in California Dairies, Inc. v.  RSUI Indemnity Co., however, this exclusion does not apply to all California wage and hour laws.  Rather, under the terms of the exclusion, the issue is whether a particular Labor Code provisions has a sufficiently "similar" analog within the FLSA to trigger the exclusion.  

Applying this analysis to the claims plead in the underlying lawsuit, the Court (unsurprisingly) held that claims for unpaid minimum wage and overtime under California law, which closely track federal law are within the scope of the exclusion.  In a much closer question, the Court further held that claims for meal period penalties under Labor Code section 226.7 were within the scope of the exclusion because federal implementing regulations require payment of minimum wages during rest breaks.  

But the Court found that federal law contained no analog to California Labor Code sections 226 (requiring accurate itemized wage statements), section 2802 (requiring reimbursement of employee expenses), and section 201-201 (requiring timely payment of wages at termination and imposing "waiting time" penalties.  The carrier was therefore required to cover defense and indemnity costs for these claims notwithstanding the so-called "wage and hour" exclusion.

The lesson for employers is (i) always tender employment related claims even if they involve wage and hour issues and (ii) you don't necessarily have to take "No" for an answer when the carrier denies coverage.      

California Courts Provide Yet More Guidance on Drafting Class Action Settlements -- Munoz v. BCI Coca-Cola Bottling Co.

In my prior post, I noted that the recent decision in Nordstrom Commission Cases by the Fourth Distrct Court of Appeal had given much needed guidance in drafting class action settlement agreements.  Well, there may be a trend afoot because the Second DCA has now weighed in with Munoz v. BCI Coca-Cola Bottling. 

Both cases are pro-settlement.  But while the Nordstrom case is mostly concerned with how the consideration is structured and allocated, Munoz v. Coca-Cola (which was decided the same day) provides more of a road map for the specific facts which the parties need to put in the record as part of the settlement review process.  The highpoints of the decision are:

  • Amount in Controversy.  To approve a settlement the reviewing court must be able to generally understand the "amount that is in controversy and the realistic range of outcomes."  But this does not require an "explicit statement of the maximum amount the plaintiff class could recover if it prevailed on all its claims." 
  • Source of Settlement Data.  It is immaterial whether the data used to determine the general amount in controversy has been obtained through formal discovery,other litigation or informal disclosures by the defendant.
  • Potential Certification Difficulties.  Class members must presumably share enough commonality to warrant the formation of a settlement class.  The court nevertheless cited the potential difficulty in obtaining a contested certification order as a factor favoring the adequacy of an agreed-upon settlement amount.
  • The Unsettled Status of Brinker Supports Settlement.   In a clear allusion to the California Supreme Court's ongoing (and seemingly never ending) review of Brinker v. Superior Court, the court found that "The uncertain state of the law with respect to meal and rest period claims was likewise a substantial concern" which favors settlement approval.
  •  No Opt-Out Form Need Be Provided.  Although potential class members must be informed of their right to opt-out of the settlement the parties are not required to provide a separate opt-out form with the class notice.
  • Incentive Payments for Named Plaintiffs.  "[N]amed plaintiffs are eligible for reasonable incentive payments to compensate them for the expense or risk they have incurred in conferring a benefit on other members of the class."  An additional incentive payment of $5,000 for the named plaintiff is reasonable where the average participating class member received $4,300.  

 As with Nordstrom Commissions Cases, the Munoz decision helps everyone involved by providing some fairly clear rules for approving class settlements.


Parties Have Flexibility in Allocating Settlement Amounts in Class Actions -- Nordstrom Commission Cases

In traditional litigation a plaintiff is obviously free to settle his differences with the defendant on whatever terms he chooses.  And if a settlement removes the case from an overcrowded docket the Court's normal reaction is to immediately grant a dismissal with a sigh of "good riddance."  

As class action practitioners are acutely aware, however, these cases are a whole different animal.  Because the Court has an obligation to safeguard the procedural rights of "absent class members," it must give approval to the class settlement after certifying that it is "fair and reasonable" to the class under the circumstances.  This places judges in the anomolous position of acting as a sort of quasi-advocate for the interests of one group of litigants.  As a result, there has been a great deal of uncertainty about exactly what the court must do in order to discharge its obligation to review and approve class settlements.

In Nordstrom Commission Cases the California Appellate Court has provided some useful guidance for the Courts that review class action settlements and the parties who negotiate and draft them.  The Appellate Court upheld the lower court's decision to approve a settlement involving the calculation and payment of commissions to Nordstrom sales clerks.  In doing so, it affirmed the following principles:

  • A lower court's determination that the relative "strength of the case" supports settlement approval will not be second-guessed so long as the parties have provided a "substantiated explanation of the strengths and weaknesses of the class's claims, as well as the potential total recovery by the class under various damage theories."
  • The parties need not allocate specific money to each claim and, in particular, may properly allocate "$0" to claims under PAGA.  This is significant because 75% of all PAGA penalties must be paid to the state of California.
  • Vouchers for products provided by the defendant are a proper form of settlement consideration and such so-called "coupon settlements" are not disfavored under California law.

By clarifying the standards and making settlements easier to negotiate and approve, the Nordstrom Commission case is actually beneficial to both plaintiffs and defendants.  


Promoting A Product Without The Ability to Close a Sale is not Exempt "Outside Sales" Activity -- In re Novartis Wage and Hour Litigation

Pharmaceutical representatives (aka "drug reps") are an unusual breed.  Their job duties are essentially the same as travelling salesmen -- i.e., visiting potential customers to sing the praises of their employer's products.  But it is only after these visits that the doctors will write prescriptions for their individual patients, which will be filled by independent pharmacists.  Unlike a true salesperson, drug reps therefore cannot actually close a sale.

In In re Novartis Wage and Hour Litigation, the Second Circuit determined that this was a crucial distinction which prevented Novartis from avoiding FLSA overtime payments under the "outside sales" exemption.  As the court explained, the essence of a salesperson is "obtaining commitments to buy" a product.  Merely proving information or promoting demand for a product is insufficient:

In sum, where the employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it, we conclude that it is not plainly erroneous to conclude that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale.

The Novartis decision is a reminder of the important distinction between "sales" and "promotion" work.  Promotion work can be counted toward satisfying a sales-based exemption only when it is done in furtherance of a salesperson's efforts to generate her own commissioned sales.  It can also be counted toward the administrative exemption if an employee also exercises "independent judgment and discretion" in important matters. 

But Novartis's drug reps fell short of both exemptions because they had no authority to close sales and no authority to make any important administrative decisions.