The California Supreme opinion in Arias v. Superior Court has created a potent new alternative to class actions for enforcing Labor Code provisions.
The Supreme Court granted review to decide whether plaintiffs must obtain formal class certification in order to bring claims under two different statutes -- the Unfair Competition Law (the "UCL," Business and Professions Code section 17200, et seq.) and the Labor Code Private Attorney General Act of 2004 ("PAGA," Labor Code section 2698, et seq.). The answers were "Yes" as to the UCL, and "No" as to PAGA.
The really interesting part of the decision, however, was the Supreme Court's elucidation of how principles of collateral estoppel should apply in a representative PAGA action which has not been formally certified as a class action. To understand the due process issues raised by such an action the Court first explained the burdens imposed on a defendant by the prospect of "one-way intervention."
Unfairness may result from application of collateral estoppel when, for example, various plaintiffs in separate lawsuits against the same defendant assert claims presenting common issues. Because collateral estoppel may be invoked only against a party to the prior lawsuit in which the issue was determined, and because in our example the defendant would be a party to every lawsuit while each of the various plaintiffs would be a party in only one lawsuit, the defendant would in later lawsuits be bound by any adverse determination of the common issues, while none of the plaintiffs would be similarly bound by prior determinations in the defendant's favor. Thus, one plaintiff could sue and lose; another could sue and lose; and another and another until one finally prevailed; then everyone else would ride on that single success. (Internal Citations omitted).
The Court went on to explain, however, that this "one-way intervention" problem cannot arise as to employee claims for the penalties provided solely by PAGA itself.
Because an aggrieved employee's action under the Labor Code Private Attorneys General Act of 2004 functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. . . . Accordingly, with respect to the recovery of civil penalties, nonparty employees as well as the government are bound by the judgment in an action brought under the act, and therefore defendants' due process concerns are to that extent unfounded.
Just as significantly, however, the Court went on to specifically approve "one-way intervention" for employees who wish to "piggyback" on a favorable PAGA ruling by seeking wages and other remedies which are not provided by PAGA itself.
[I]f an employee plaintiff prevails in an action under [PAGA] for civil penalties by proving that the employer has committed a Labor Code violation, the defendant employer will be bound by the resulting judgment. Nonparty employees may then, by invoking collateral estoppel, use the judgment against the employer to obtain remedies other than civil penalties for the same Labor Code violations. If the employer had prevailed, however, the nonparty employees, because they were not given notice of the action or afforded any opportunity to be heard, would not be bound by the judgment as to remedies other than civil penalties.
In short, as construed by the Supreme Court, an action under PAGA represents the best of both worlds for plaintiffs' attorneys. On the one hand, they need not obtain class certification to bring an action on behalf of an entire group of employees. And yet, a favorable decision on the merits will still bind the employer on a class-wide basis as to both PAGA and non-PAGA claims.
In almost every employment law class action filed, the plaintiff alleges a cause of action under California’s unfair competition law, found in California’s Business & Professions Code section 17200. Likewise, plaintiffs’ routinely allege causes of action under California Labor Code Private Attorneys General Act of 2004, found in Labor Code section 2698. These claims can be filed by one plaintiff as a “representative action” in which the individual plaintiff is seeking remedies on behalf of all other employees.
The issue decided by the California Supreme Court in Arias v. Superior Court was whether the plaintiff bringing a "representative action" must have the class certified as a class action when pursing a unfair competition claim and a Private Attorneys General Act claim. The Supreme Court held that a plaintiff must have the class certified as a class action when pursuing a Business & Professions Code section 17200 claim, but the plaintiff does not have to certify a class action to maintain a “representative action” under the Private Attorneys General Act.
The Court explained, “[a] party seeking certification of a class action bears the burden of establishing that there is an ascertainable class and a well-defined community of interest among the class members.” If a class is certified by a trial court, then everyone who fits the class definition receives notice that they are automatically in the class (unless they affirmatively opt out), and are bound by the ultimate outcome of the case.
Claims Under The Unfair Competition Law Must Be Certified As a Class Action
The Supreme Court explained that the unfair competition law prohibits “any unlawful, unfair or fraudulent business act or practice . . . .” Furthermore, in 2004, California voters passed Proposition 64 that amended Business & Professions Code section 17200 to only allow a plaintiff to bring a representative action under if he or she “suffer injury in fact and has lost money or property as a result of such unfair competition” and that the action must comply with California Code of Civil Procedure section 382, which (generally) allows for class actions under California law. The Supreme Court explained the intent of the voters in passing Proposition 64:
A thorough review of the Voter Information Guide prepared by the Secretary of State for the November 2, 2004, election at which the voters enacted Proposition 64 leaves no doubt that, as discussed below, one purpose of Proposition 64 was to impose class action requirements on private plaintiffs’ representative actions brought under the Unfair Competition Law.
Therefore, the Court held that claims brought under Section 17200 must be certified as a class action.
Claims Under The Private Attorneys General Act of 2004 Do Not Need To Be Certified As A Class Action
The Private Attorneys General Act (sometimes referred to as the bounty hunter law) was designed by the California Legislature offer financial incentives to private individuals to enforce state labor laws. As the Court noted in its opinion, at the time the legislation passed, the state’s labor law enforcement agencies did not have enough resources or staffing necessary to keep up with the rapid growth of California’s workforce. Therefore, the Act allows aggrieved employees to act like a private attorney general in collecting civil penalties for Labor Code violations. The employee must give 75% of the collected penalties to the Labor and Workforce Development Agency, and the remaining 25% is to be distributed among the employees affected by the violations.
Employees seeking recovery under the Private Attorneys General Act must comply with requirements that place the Labor and Workforce Development Agency and the employer on notice that the employee will be seeking remedies under the Act and give the Agency a chance to investigate itself. If the Agency does not investigate, then the plaintiff can proceed with the claim.
The Supreme Court did not agree with defendants' arguments that Private Attorneys General Act claims must be certified as a class action. The defendants argued that by not requiring class certification for these claims deprives defendants of their due process rights. Defendants explained that there is a scenario where plaintiffs could continually bring Private Attorneys General Act claims against their employer over and over for the same issues until they eventually prevail if the class certification is not required. The Supreme Court explained that this is not a concern:
Because an aggrieved employee’s action under the Labor Code Private Attorneys General Act of 2004 functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. The act authorizes a representative action only for the purpose of seeking statutory penalties for Labor Code violations (Lab. Code, § 2699, subds. (a), (g)), and an action to recover civil penalties “is fundamentally a law enforcement action designed to protect the public and not to benefit private parties."
Therefore, because all employees on whose behalf the representative plaintiff seeks remedies are bound by the ultimate outcome of the case, defendants are not faced with this possibility.
The Rodriguez decision arose when objectors challenged the lower court's approval of a $49 million settlement in an anti-trust action against the providers of the Bar-Bri and Kaplan bar review courses. The objectors claimed that a conflict of interest existed because Class Counsel and certain class representatives had agreed at the outset of the action to seek specific awards based on the amount of any future settlement. In particular:
[I]f the [settlement] amount were greater than or equal to $500,000, class counsel would seek a $10,000 award for each of them; if it were $1.5 million or more, counsel would seek a $25,000 award; if it were $5 million or more, counsel would seek $50,000; and if it were $10 million or more, counsel would seek $75,000.
The Court began its analysis by noting that there is nothing wrong or unusual about incentive awards to class representatives in general.
Incentive awards are fairly typical in class action cases. Such awards are discretionary, and are intended to compensate class representatives for work done on behalf of the class, to make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general. Awards are generally sought after a settlement or verdict has been achieved. (Internal citations omitted)
The Court proceeded to explain, however, that any agreement that purports to tie a class representative's compensation to particular settlement target may result in perverse incentives and conflicts of interest.
[O]nce the threshold cash settlement was met, the agreements created a disincentive to go to trial; going to trial would put their $75,000 at risk in return for only a marginal individual gain even if the verdict were significantly greater than the settlement. The agreements also gave the contracting representatives an interest in a monetary settlement, as distinguished from other remedies, that set them apart from other members of the class. Further, agreements of this sort infect the class action environment with the troubling appearance of shopping plaintiffships. If allowed, ex ante incentive agreements could tempt potential plaintiffs to sell their lawsuits to attorneys who are the highest bidders, and vice-versa. In addition, these agreements implicate California ethics rules that prohibit representation of clients with conflicting interests.
The Rodriguez decision thus seems to stand for the proposition that any "ex ante" agreement to seek a specific enhancement for class representatives is disapproved and may jeopardize the validity of any class settlement. Admittedly, this was a highly unusual arrangement to begin with. (As bar review customers the class representatives in Rodriguez were presumably lawyers or lawyers-to-be, which probably accounts for the unusually self-serving deal.)
Nevertheless, Rodriguez v. West Publishing is still an important decision because it expressly recognizes and approves of enhancement awards generally, as well as its discussion of the interplay between the financial incentives and fiduciary duties of class representatives.
The old version of the UCL allowed any person or organization to file a lawsuit on behalf of the "general public." Prop 64 curbed the perceived abuses of lawyers who were filing case without any real plaintiff involved in the case. Prop 64 did this by prohibiting anyone from representing the general public unless he "has some skin in the game" -- i.e., he must also have been injured in roughly the same way as those he is seeking to represent.
The gist of the Supreme Court's Tobacco II decision is that the same standard now applies for class certification of UCL and non-UCL class actions. In other words, while the standing requirement added by Prop 64 requires proof that the named plaintiff suffered some "injury," this imposes no higher standard than in any other class action.
As the Supreme Court explained, “the effect of Proposition 64 is to prevent uninjured private persons from suing for restitution on behalf of others.” An individual may therefore serve as a class representative in a UCL lawsuit so long as he has suffered some loss “as a result of” the alleged unfair business practice. But this requirement is pretty easily satisfied. For example, where the wrongful conduct is a false or deceptive statement, “the plaintiff is not required to allege that those misrepresentations were the sole or even the decisive cause of the injury-producing conduct.” Rather, he must only allege that the misrepresentations had some effect on his conduct – and even this minimal level of causation may be presumed where the defendant’s misrepresentations involved a material issue. This is the same injury standard applicable to individuals who file UCL actions solely on their own behalf.
On the other hand, the Court specifically rejected the argument that “all class members must individually show they have the same standing as the class representative in order to be part of the class.” Indeed, the Court repeatedly emphasized that “the UCL focus [is] on the defendant’s conduct rather, rather than the plaintiff’s damages.” Thus it is no defense to class certification to argue that some class members were not injured and could not recover under Prop 64. Instead, a class with sufficiently similar interests that meets the normal requirements of “typicality and adequacy of representation” has standing to sue “as an entity.”
The bottom line is that the UCL will continue to be a potent weapon for seeking certification in California, including class claims for unpaid wages and other employment claims.
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].
[In the interest of full disclosure – my firm represents Western Pizza in this case. Because of this, we are expressing none of our own analyses about the Court’s opinion, but are simply reporting the court’s findings.]
Octavio Sanchez works as a delivery driver for defendant. He filed a class action lawsuit alleging that the drivers not only are not adequately reimbursed for their expenses incurred in the performance of their job duties, but also as a result are paid less than the legal minimum wage. Sanchez signed an arbitration agreement that contained a provision that he would not participate in any class action litigation. Western Pizza filed a motion to enforce the arbitration agreement, which the trial court denied. Western Pizza appealed the lower court’s decision.
Western Pizza argued on appeal that:
The enforceability of the arbitration agreement is a question for the arbitrator to decide;
The Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq.) preempts California law to the extent that California law would prevent the enforcement of the agreement;
The class arbitration waiver does not impermissibly interfere with the employees’ ability to vindicate their statutory rights, and therefore is enforceable;
The terms of the arbitration agreement are neither procedurally nor substantively unconscionable.
The court, not the arbitrator decides the enforceability of the arbitration agreement
The court explained:
Accordingly, we conclude, consistent with the rule stated in Discover Bank, supra, 36 Cal.4th at page 171, that the question whether the arbitration agreement is enforceable based on general contract law principles, including the question whether it is unconscionable or contrary to public policy, is a question for the court to decide rather than an arbitrator, regardless of whether the FAA applies.
Federal Arbitration Act (FAA) does not preempt California law
The court held that under the FAA, the validity and enforceability of an arbitration agreement is governed by state contract law:
Under California law, the question whether an arbitration agreement is unenforceable, in whole or in part, based on general contract law principles is a question for the court to decide, rather than an arbitrator. (Discover Bank, supra, 36 Cal.4th at p. 171; Balandran v. Labor Ready, Inc. (2004) 124 Cal.App.4th 1522, 1530; see Cable Connection, Inc. v. DIRECTV, Inc. (2008) 44 Cal.4th 1334, 1365.) This includes the determination whether an arbitration agreement is unconscionable or contrary to public policy. (Discover Bank, supra, at p. 171.) Discover Bank concluded that the FAA, and particularly the opinion by the United States Supreme Court in Green Tree Financial Corp. v. Bazzle (2003) 539 U.S. 444 [123 S.Ct. 2402], did not conflict with California law on this point and that the California rule therefore governs.
The Enforceability of the Class Arbitration Waiver
The court set out the factors established in Gentry v. Superior Court to determine whether the class action waiver is unenforceable:
Gentry stated that a trial court determining whether a class arbitration waiver impermissibly interferes with unwaivable statutory rights must consider: “[(1)] the modest size of the potential individual recovery, [(2)] the potential for retaliation against members of the class, [(3)] the fact that absent members of the class may be ill informed about their rights, and [(4]) other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.” Gentry continued: “If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘ vindicate [their] unwaivable rights in an arbitration forum.’
(citations omitted). The court found that these factors supports the lower court’s holding that the agreement was unenforceable: the amounts at issue for reimbursement are modest, retaliation against low wage earners is “significant,” and most of the drivers here are immigrants with limited English skills “who are likely to be unaware of their legal rights.”
Unconscionability Of The Agreement\
The court held that the arbitration agreement was distinguishable from the agreement used in Gentry:
The record here does not indicate a distorted presentation of the benefits of arbitration to the degree that was present in Gentry, supra, 42 Cal.4th 443. The arbitration agreement states that the purpose of the agreement is “to resolve any disputes that may arise between the Parties in a timely, fair and individualized manner,” but otherwise does not extol the benefits of arbitration. The arbitration agreement does not limit the limitations periods, the remedies available, or the amount of punitive damages. It states, “Except as otherwise required by law, each party shall bear its own attorney fees and costs,” and therefore incorporates any statutory right to recover fees rather than creating a presumption against a fee recovery. Thus, the arbitration agreement neither contains the same types of disadvantages for employees as were present in Gentry nor fails to mention such disadvantageous terms. Moreover, the arbitration agreement expressly states that that the agreement “is not a mandatory condition of employment.”
The court still found, however, that there were elements of unconscionability in the agreement:
We conclude, however, that the record indicates a degree of procedural unconscionability in two respects. First, as in Gentry, the inequality in bargaining power between the low-wage employees and their employer makes it likely that the employees felt at least some pressure to sign the arbitration agreement. Second, the arbitration agreement suggests that there are multiple arbitrators to chose from (“the then-current Employment Arbitration panel of the Dispute Eradication Services”) and fails to mention that the designated arbitration provider includes only one arbitrator. This renders the arbitrator selection process illusory and creates a significant risk that Western Pizza as a “repeat player” before the same arbitrator will reap a significant advantage. These circumstances indicate that the employees’ decision to enter into the arbitration agreement likely was not a free and informed decision but was marked by some degree of oppression and unfair surprise, i.e., procedural unconscionability. We therefore must scrutinize the terms of the arbitration agreement to determine whether it is so unfairly one-sided as to be substantively unconscionable.
(citations and footnote omitted).
The court also held that the agreement did not provide for a neutral arbitrator. This is despite the fact that the arbitration agreement contained a clause that both parties had to agree to the arbitrator before the arbitrator could bind the parties. The court explained that “it seems likely that an employee in Sanchez’s position would not feel free to reject the arbitration provider designated by his employer under the terms of the agreement even after a dispute had arisen.”
In conclusion, the Court stated:
The arbitration agreement here includes a class arbitration waiver that is contrary to public policy and an unconscionable arbitrator selection clause, as we have stated. These are important provisions that, if they were not challenged in litigation, could create substantial disadvantages for an employee seeking to arbitrate a modest claim. Although it may be true that neither of these provisions alone would justify the refusal to enforce the entire arbitration agreement (see Gentry, supra, 42 Cal.4th at p. 466; Scissor Tail, supra, 28 Cal.3d at p. 828), we believe that these provisions considered together indicate an effort to impose on an employee a forum with distinct advantages for the employer. As in Armendariz, supra, 24 Cal.4th at page 124, we conclude that the arbitration agreement is permeated by an unlawful purpose. Accordingly, the denial of the motion to compel arbitration was proper.
The opinion, Sanchez v. Western Pizza, can be viewed at the Court’s website for a short period of time in Word and PDF.
This opinion comes on the heels of others that have also rejected arbitration agreements with class action waivers. And while the California Supreme Court left open the possibility that waivers may be enforceable in Gentry v. Superior Court, the recent line of lower appellate decisions (see Franco v. Athens Disposal Co.), including the decision in Sanchez v. Western Pizza, seems to have all but closed the door on any such possibility.
In Franco v. Athens Disposal Company, Inc. the Court refused to enforce a class action waiver in an arbitration agreement which the employer was attempting to use to thwart class claims for missed meal periods. The case vividly illustrates how attempting to enforce such an agreement will likely result in an early ruling on the desirability of class certification.
This is because the California Supreme Court's 2007 decision in Gentry v. Superior Court generally disapproved of arbitration agreements that purport to prohibit class-wide arbitration. The Court's rationale was that the procedural obstacles to enforcing small claims individually would typically be prohibitive -- so that waiving the class remedy would have the same effect as an "exculpatory" waiver of substantive rights. It thus left the door open just a sliver by allowing employers to try to prove a class-wide remedy is not necessary to ensure effective enforcement of the statutory rights of employees.
At such an early stage, however, the deck is stacked against the employer. And trying to meet the standard set by Gentry may amount to a trap that can prejudice any later attempt to avoid class certification. For example, just in the context of denying the motion to compel arbitration the Franco court concluded that: "Here, class treatment would be more practical than individual actions, regardless of whether the claims are adjudicated through arbitration or in the trial court."
When deciding to enforce an arbitration agreement employers will have to think carefully if precipitating such a ruling at the outset of the case is ultimately in their best interests.
President Obama signed the Ledbetter bill into law today. The bill overturned the Supreme Court’s ruling in Ledbetter v. Goodyear Tire & Rubber, which held that employees must file a discrimination claim within six months after being discriminated against. Ledbetter argued that the Supreme Court should apply a type of continuing violations doctrine to her situation. Under such a theory, Ledbetter argued that the first discriminatory act (receiving a lower than deserved raise because of her gender) continued with each additional pay raise because pay raises are cumulative over time. Therefore, she alleged that even though she had no evidence that her pay raises during the applicable 180 day time period to file a suit were discriminatory, the original discrimination continued into this time period. The Supreme Court rejected this argument, but now the new law allows employees to file a lawsuit 180 days after receiving their final paycheck, even if the discrimination took place decades earlier.
The new law removes any time limits on pay discrimination claims. A discrimination case can now be brought long after evidence has gone stale or witnesses have died, which was the case with Ms. Ledbetter's former boss. There is no doubt that this will result in more litigation against employers.
What is the effective date that this law applies? May 28, 2007. And yes, that is not a typo - the law is retroactive. This is the date of the Supreme Court's decision in the case.
What Does Obama Have Next For Employers?
The Paycheck Fairness Act. This bill, which Obama co-sponsored while in the Senate, provides for stronger remedies under the already existing Equal Pay Act. This Act was coupled with the Ledbetter bill, but Democrats were worried that the two bills together would raise too much of an opposition to their passage. Therefore, the PFA was severed from the Ledbetter bill, and will definitely be placed on the President’s desk in the next couple of months, if not sooner.
The PFA would create a new, more difficult legal standard for employers to meet in showing that their pay structures were not discriminatory. Under the new standard, employers would have to show that wage disparities are job-related, not sex-based, and could only use a defense if they prove that business necessity demands the unequal pay. Under the current Equal Pay Act, employers need only show that the difference in wages results from “any factor other than sex” and the employer does not have to show a business necessity for the difference in pay.
As James Sherk of the Heritage Foundation points out:
Under the PSA, the government will inject itself into areas of business over which it has no experience. For instance: Does experience constitute a "bona fide factor other than sex"? A woman earning less than a man with more experience could argue that her employer should be required to send her to training and then pay them identical wages. She would have a strong case to argue that experience was not a "bona fide" factor because an alternative employment practice would eliminate the disparity.
The paycheck fairness legislation would also require the use comparable worth in creating "voluntary" wage guidelines for industries, and makes class action lawsuits on these grounds easier to bring. The Wall Street Journal notes:
Voluntary or not, these guidelines would become the basis for more litigation against companies that didn't follow them. Meanwhile, the bill strips companies of certain defenses against claims of sex-based pay discrimination. It also makes it easier to bring class actions, and it allows plaintiffs to claim unlimited punitive damages even in cases of unintentional discrimination.
To close out 2008 wage and hour law, an appellate court issued a ruling in Crab Addison, Inc. v. Superior Court. The case is a very significant holding on employees' privacy rights in the context of wage and hour class actions.
Crab Addison, Inc. (CAI), which operates Joe’s Crab Shack, refused to disclose employee names and contact information when asked to do so by plaintiff’s counsel in a wage and hour class action. Plaintiff, Martinez, argued that this information was necessary to meeting his burden of proving class certification was appropriate, he was entitled to the information, and production of the information would not violate the witnesses’ right to privacy.
CAI argued that its employees had a heightened expectation of privacy as to their contact information based on forms they signed regarding release of their contact information. After the lawsuit was filed by plaintiff, CAI had its employees sign a form stating the following:
RELEASE OF CONTACT INFORMATION
From time to time, Joe’s Crab Shack (the “Company”) may be asked to provide your contact information, including your home address and telephone number, to third parties. The Company may be asked to provide such information in the context of legal proceedings, including class action lawsuits.
We understand that many employees may consider this information to be private and may not want it released. Accordingly, please indicate whether you consent to the disclosure of your contact information by marking the appropriate box.
No, I do not consent to the Company’s disclosure of my contact information to third parties.
Yes, I consent to the Company’s disclosure of my contact information to third parties.
I would like to be asked on a case-by-case basis whether I consent to the disclosure of my contact information to a particular third party, and my contact information should only be provided if I affirmatively consent in writing.
The bottom of the release forms contained the following:
NOTE: Your response does not create a guarantee that the Company will not release your contact information as circumstances may require or warrant it. For instance, the Company may be required or compelled by law to disclose your contact information, regardless of whether you consent to such disclosure, or it may determine that it must do so should it determine that you are a witness in a lawsuit or should it be requested by law enforcement officers. In such an event, the Company cannot be held responsible for disclosing this information even if you have not consented to disclosure or asked for a case-by-case determination of disclosure.
Arguing that this release form created a heightened expectation of privacy, CAI said that if the employees’ contact information is disclosed, only contact information for employees who affirmatively “opt in” to have their information disclosed should be given to plaintiff's counsel. Defendant argued for an “opt in” process because it would result in a smaller number of employees’ contact information being disclosed. This is opposed to an “opt out” process by which the employees’ contact information is automatically disclosed to plaintiff’s counsel unless they object to the disclosure.
The appellate court heavily relied on the recent case, Puerto v. Superior Court (2008) 158 Cal.App.4th 1242. In that case the court explained that “[t]he ‘expansive scope of discovery’ is a deliberate attempt to ‘take the “game” element out of trial preparation’ and to ‘do away “with the sporting theory of litigation—namely, surprise at the trial.”” [citations omitted] Therefore, discovery statutes are broadly construed in favor of discovery whenever possible in order to aid the parties in preparation for trial. The court also noted, however, that there needs to be a balancing of interests. In summarizing the Puerto case, the court stated:
The right of privacy in the California Constitution (art. I, § 1), ‘protects the individual’s reasonable expectation of privacy against a serious invasion.’” (Puerto v. Superior Court, supra, 158 Cal.App.4th at p. 1250, quoting Pioneer Electronics (USA), Inc. v. Superior Court (2007) 40 Cal.4th 360, 370.)
While contact information generally is considered private, this “does not mean that the individuals would not want it disclosed under these circumstances.” (Puerto v. Superior Court, supra, 158 Cal.App.4th at pp. 1252-1253.) While employees would not likely want their contact information broadly disseminated, this does not mean they would want it withheld “from plaintiffs seeking relief for violations of employment laws in the workplace that they shared.” (Id. at p. 1253.) Rather, employees similarly situated to petitioners “may reasonably be supposed to want their information disclosed to counsel whose communications in the course of investigating the claims asserted in [petitioners’] lawsuit may alert them to similar claims they may be able to assert.” (Ibid.)
The court said there were two major differences between this case and the Puerto case. First, in Puerto, the employer voluntarily disclosed the identities of the witnesses but sought to protect addresses and telephone numbers. Here, CAI sought to protect the names of employees as well as addresses and telephone numbers. Second, in Puerto there was no release form like the one used here.
In quickly rejecting defendant’s argument on the first issue, the court found that employees’/witnesses’ names do not have any more heightened protection than their addresses and telephone numbers, and therefore should be disclosed.
The court then turned its analysis to the effect that the release forms had in this case:
CAI argues that these forms gave their employees a heightened expectation of privacy in their contact information, requiring that the contact information be given greater protection and making an “opt in” notice procedure proper. We are unconvinced by this argument.
We first address the question whether, as a matter of public policy, we should enforce a release form that may have the effect of waiving an employee’s right to notice of a pending class action lawsuit concerning the employer’s alleged violations of overtime and wage statutes. While not determinative, the Supreme Court’s recent opinion in Gentry v. Superior Court (2007) 42 Cal.4th 443 is instructive. In Gentry the court addressed the question “whether class arbitration waivers in employment arbitration agreements may be enforced to preclude class arbitrations by employees whose statutory rights to overtime pay [under the Labor Code] allegedly have been violated.” (Id. at p. 450.) The court noted the Legislature through its enactment in the Labor Code established “‘“a clear public policy”’” that “minimum wage and overtime laws should be enforced in part by private action brought by aggrieved employees.” (Id. at p. 455.) So great is the public policy protecting employees’ right to overtime compensation that the right is “unwaivable.” (Ibid.)
The court looked to a recent case, Gentry v. Superior Court, for guidance on this issue. Gentry did not deal with disclosure of putative class members’ contact information, but with arbitration agreements in which the employee agreed not to participate in class actions for wage and hour violations. The Gentry court observed that class arbitration waivers in wage and overtime cases would frequently exculpate employers for violations and undermine the enforcement of wage and overtime laws; second, current employees suing their employers run a greater risk of retaliation; and, third, that employees may be unaware of the violation of their rights and their right to sue.
Based on this analysis, the court in this case concluded that the release form used by CAI did not create a higher expectation of privacy in the employees’ contact information. The court found that “public policy concerns weigh in favor of enforcing unwaivable statutory wage and overtime rights through class action litigation over a right to privacy in “relatively nonsensitive [contact] information.” (citing Puerto v. Superior Court, supra, 158 Cal.App.4th at p. 1259.) The court held:
[T]o the extent the right to privacy is based on the release forms, there are strong reasons for not giving effect to those forms. Employees indicating that they did not want their contact information disclosed, or wanted disclosure on a case-by-case basis, were unaware at the time they signed the forms of the pending litigation to enforce their statutory wage and overtime rights through a class action lawsuit. We may presume that, had they known about the litigation, their response on the form would have been different. Additionally, the forms apprised them that their contact information could be disclosed if required by law, so they were aware of the limitation on privacy offered by the forms.
Therefore, Defendant was required to provide the employees’ names, addresses, and telephone numbers even though the release form had been utilized by Defendant in this case. The case is a must read for every wage and hour class action litigator in California.
As many readers have no doubt heard the venerable law firm of Heller Ehrman recently dissolved after nearly one hundred years in business. During this time it was intermittently the biggest firm in the Bay Area and close to the top in the state.
One unfortunate aspect of the dissolution is that the Firm apparently made a strategic decision not to pay accrued vacation to its terminated California employees. Under California law (Labor Code section 227.3) such accrued payments are deemed to be earned wages which are property of the employee every bit as much as regular salary. As a result, a class action lawsuit has been filed by former Heller Ehrman employees to recover these and other amounts allegedly due at termination.
The lawsuit is interesting on a number of levels. It is a reminder to employers that California vacation wages are an accrued liability that must be taken into account.
It is also a sad commentary on modern Big Firm economics. A law firm, no matter how large, is essentially a collection of individuals working together. The assets of the firm "leave the building every night" as the saying goes. And if they don't return the next morning, there is really nothing left for creditors, including employees. Clearly the plaintiffs challenge will not be establishing liability but satisfying any judgment from a defunct partnership.
In opposing class certification employers frequently argue that identifying the class members will be prohibitively expensive or time consuming due to lack of records. For example, it may be difficult to determine who was affected by certain commission terms, who worked overtime, or who did or did not take a full 30 minute meal break on particular days.
In the recent case of Harper v. 24 Hour Fitness, the Second District Court of Appeal emphasized that difficulty in ascertaining class members is no defense where the problems stem from deficiencies in the employer's own recordkeeping.
Harper involved a claim that 24 Hour's standard membership agrement violated certain consumer laws and was unconscionable. The Defendant argued that many members had handwritten modifications to their form contracts and that it would be extremely difficult to determine who had such modifications and whther the changes should exclude them from the class. The trial court found this persuasive and relied on this argument, in part, in deciding to decertify the class. The Appellate Court reversed, however, found that this analysis was error. The reviewing court noted in the process that a defendant "may not avoid class certification by comingl[ing] or fail[ing] to document" particular transactions.
Few businesses deliberately keep bad records to avoid a "paper trail" of potential misconduct. But for those who might consider this a valid strategy, Harper v. 24 Hour Fitness serves as caveat that this may not be an effective strategy, at least not in the class action arena.
The California Supreme Court announced today that it will be reviewing the much analyzed case Brinker v. Superior Court (Hohnbaum). The lower court ruling in the case was favorable to California employers, in holding that employers did not have to "ensure" that meal breaks were taken, but only that employers had to provide meals breaks. Click here for further analysis on the lower court's ruling.
This much awaited decision by the Supreme Court makes the lower court's ruling in the case non-citable, which means that it is not binding on courts in California. Therefore, California employers will have to wait for the Supreme Court decision to have some finality on this issue.
I recently founded the California Human Resources Networking Group in LinkedIn. I’ve found that LinkedIn is becoming more and more popular with human resource professionals as well as legal professionals, so I created the group in order to promote HR related discussions specific to California.
To join, visit the California Human Resources Networking Group page in LinkedIn, or drop me an email and I will approve your request. There are no particular qualifications required to join - only a need for a better understanding of California's employment laws.
The group is devoted to discussing questions about human resource and other employment law issues that arise in California.
If you know of anyone else that would find the group beneficial, please send them to the group.
To get things started, I will be conducting a free webinar for the group in early October on how to use the Internet to conduct background checks on applicants and/or employees without creating liability for your company. More information to come.
Previously, it had been well established that an arbitrator's decision was final and binding and could be vacated only for the most limited of reasons, such as outright corruption, refusing to hold a hearing, or exceeding his jurisdiction. By agreeing to arbitrate, parties were deemed to have accepted the risk that an arbitrator might commit errors of fact or law -- and to have thereby waived any right to second-guess the ruling in the event that they lost. Under this scheme, the whole point of arbitration was to allow disputes to be resolved quickly and economically with little or no involvement by the judicial system.
Under Cable Connections, however, the arbitrator's ruling is no longer necessarily final. Instead, if the parties' contract is interpreted to allow appellate review, the arbitrator's ruling may now be reviewed by an Appellate Court to the same extent as any findings of fact or law made by a Superior Court Judge or jury.
Significantly, the Court was coy about what contract language may trigger this new level of appellate review.
[T]o take themselves out of the general rule that the merits of the award are not subject to judicial review, the parties must clearly agree that legal errors are an excess of arbitral authority that is reviewable by the courts. Here, the parties expressly so agreed, depriving the arbitrators of the power to commit legal error. They also specifically provided for judicial review of such error. We do not decide here whether one or the other of these clauses alone, or some different formulation, would be sufficient to confer an expanded scope of review. However, we emphasize that parties seeking to allow judicial review of the merits, and to avoid an additional dispute over the scope of review, would be well advised to provide for that review explicitly and unambiguously.
Very few arbitration agreements currently contain an express provision allowing for appellate review. On the other hand, many, if not most, arbitration agreements contain some formulation to the effect that the arbitrator is required to "apply the substantive law" of California. If this latter type of clause is deemed sufficient to subject the parties to appellate proceedings, then arbitration in California may have just become significantly more costly and time-consuming.
Conventional wisdom among defense counsel has long been that arbitration is the preferable forum for resolving individual employment disputes such as wrongful termination, discrimination and sexual harassment. As a result, the number of employers with mandatory ADR programs skyrocketed in the 1990's and early 2000's.
By contrast, many defense counsel have come to believe that arbitration is a decidedly less favorable forum for employers when it comes to class-wide claims. The main reason is that the lack of a jury or meaningful appellate review, combined with the more flexible procedural rules of arbitration are likely to result in class certification.
The majority of arbitration agreements are simply silent on the whole question of class arbitration. As to these agreements, arbitrators consistently determine that they should be interpreted as allowing a class wide arbitration to take place (assuming, of course, that the arbitrator also finds that the case to be appropriate for class certification). For example, in a very informative post from The Metropolitan Corporate Counsel, authors P. Christine Deruelle and Robert Clayton Roesch surveyed the actual decisions on this issue by neutrals with the American Arbitration Association ("AAA"). They concluded that "At bottom, AAA arbitrators have - almost without exception - construed otherwise silent arbitration agreements to permit class proceedings." As the basis for their conclusion, the authors explained:
As of June 15, 2007, AAA arbitrators have rendered 51 Clause Construction Awards concerning otherwise silent arbitration agreements, and in all but two of those decisions, the arbitrators have allowed classwide proceedings. Three recurring rationales for interpreting an otherwise silent agreement to permit class arbitration appear in these AAA Clause Construction Awards: (i) if the parties intended to prohibit class arbitration, they could have included an express prohibition in their arbitration agreement to this effect; (ii) a misapprehension of Bazzle as specifically authorizing class arbitration where the applicable agreement is silent; and (iii) that silence regarding the propriety of class proceedings renders the agreement ambiguous, which requires that it be construed against the drafter, consistently resulting in a construction favoring class arbitration. In contrast to the 49 AAA Clause Construction Awards construing silence to permit class arbitration, only two such awards have reached the opposite conclusion.
Thus, the proliferation of employment class actions in recent years presents employers with a bit of a conundrum -- do the perceived benefits of arbitrating single plaintiff claims outweigh the perceived detriments of arbitrating employee class actions?
The Class Action Defense Blog published by Michael J. Hassen has made a regular weekly feature of tracking the new filings of class actions in state and federal courts in California. The weekly results confirm what most class action practioners have long-recognized -- the deluge of labor law class actions far outnumbers any other category. In fact, employment law class actions (the vast majority of which are based on wage and hour violations), consistently outnumber all other categories of class action lawsuits combined.
For example, over the past week labor law class actions represented nearly two thirds of the total class actions filed. As Mr. Hassen summarizes:
This report covers August 8 - 14, 2008, during which time 37 new class action lawsuits were filed. Labor law class action lawsuits generally top the list of new class action filings in California state and federal courts, often by a wide margin, and this again proved to be the case. Twenty-four (24) new labor law class action lawsuits were filed during the past week, representing 65% of the total number of new class action lawsuits filed during the time period. The only other category that satisfied the 10% threshold involved class action lawsuits alleging unfair business practice claims, which include false advertising claims, with 5 new filings (14%).
The California Supreme Court's decision last year in Pioneer Electronics v. Superior Court, 40 Cal.4th 360 (2007), held that the privacy rights of current and former employees will not normally prevent a class action plaintiff from discovering their names, addresses, phone numbers and other data in litigation. Pioneer explained that any privacy concerns could be dispelled by providing the targets of the discovery with a written notice and an opportunity to object.
The Facts of Alch: 47,000 Privacy Notices and 7,700 Objections.
In the aftermath of Pioneer, a steady stream of appellate decisions have reinforced and expanded plaintiffs' rights to pre-certification discovery regarding potential class members. Alch v. Superior Court, 2008 WL 3522099 (2008), is the latest and most expansive of these decisions.
Alch involved a discovery dispute arising as part of a complex litigation alleging that studios and talent agencies have systematically discriminated against older television writers. The plaintiffs subpoenaed documents showing the ages and work histories of thousands of Writers Guild members in the hope that the data would demonstrate a statistically significant pattern of discrimination.
Following the procedure approved in Pioneer, 47,000 members of the Writers Guild received privacy notices. Of these, 4,700 filed objections to the disclosure of their information. The plaintiffs then asked the court to overrule these privacy objections and allow the discovery anyway. The trial court barred further discovery as to the 7,700 objectors. The appellate court granted writ review and reversed the trial court's decision.
The Holding: Privacy Interests Insufficient to Avoid Discovery.
In reaching this result, Alch is interesting for two main reasons.
First, it makes clear that a third party's objection in response to a privacy notice is not at all dispositve. Rather, notwithstanding an individual's objection, the public interest in “facilitat[ing] the ascertainment of truth and the just resolution of legal claims," may still override his or her privacy interest.
In fact, this aspect of Alch tends to beg the question of why the parties should have been required to send 47,000 privacy notices in the first place if the requested information was to be produced regardless of whether anyone objected. (In fairness to the trial court, however, the plaintiffs had trimmed the scope of their discovery requests somewhat by the time the case reached the appellate court). In the future, Courts will inevitably cite the reasoning of Alch as a rationale for dispensing with the cumbersome and expensive privacy notification altogther and merely ordering disclosure in the first instance.
Secondly, Alch is significant for its categorical rejection of what might be termed the "cart-before-the-horse" defense argument to discovery -- i.e., that class-wide discovery should not be allowed until the plaintiffs have first demonstrated that the requested information will prove their claims. As the Court explained:
Real parties' argument is, in effect, a claim that, because privacy interests are involved, the writers must prove that the data they seek will prove their case before they may have access to the data. But there is no support in law, or in logic, for this claim. . . . [s]uch a rule would be wholly impractical and unreasonable in the context of class action litigation requiring complex statistical analysis. . . Some information in the databases doubtless will be, in the end, irrelevant or unusable for any number of reasons, including the subject's lack of interest or availability for television writing. But that does not mean that the overall body of information subpoenaed-demographic and work history information of Writers Guild members-is not directly relevant and essential to the writers' case.
In short, there is now a fairly unassailable wall of authority in place allowing plaintiffs to discover the contact information and vital statistics of potential class members. Many employers may be better served if their defense counsel were to simply acknowledge this new reality rather than engaging in expensive, but ultimately futile attempts to block the discovery.
One of the main findings of the study is that plaintiffs, statistically speaking, stand to gain more in taking a settlement offer than litigating the case.
“The lesson for plaintiffs is, in the vast majority of cases, they are perceiving the defendant’s offer to be half a loaf when in fact it is an entire loaf or more,” said Randall L. Kiser, a co-author of the study and principal analyst at DecisionSet, a consulting firm that advises clients on litigation decisions.
The article also found that defendants made the wrong decision of going to trial (i.e., they plaintiff was willing to take less in a settlement than what the jury eventually found for the plaintiff) less often than plaintiffs. Defendants made the incorrect decision only in 24 percent of cases, according to the study, where plaintiffs were wrong 61 percent of the time. The article states that “[i]n just 15 percent of cases, both sides were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.”
However, the study also concluded that a wrong decision by defendants cost them much more (costing $1.1 million), as opposed to if plaintiffs got it wrong (costing $43,000).
The findings are consistent with research on human behavior and responses to risk, said Martin A. Asher, an economist at the University of Pennsylvania and a co-author. For example, psychologists have found that people are more averse to taking a risk when they are expecting to gain something, and more willing to take a risk when they have something to lose.
“If you approach a class of students and say, I’ll either write you a check for $200, or we can flip a coin and I will pay you nothing or $500,” most students will take the $200 rather than risk getting nothing, Mr. Asher said.
But reverse the situation, so that students have to write the check, and they will choose to flip the coin, risking a bigger loss because they hope to pay nothing at all, he continued. “They’ll take the gamble.”
Definitely some food for thought for litigators that have to assit clients in the difficult decision about whether to settle or try a case.
Brinker analyzes this question based on the language of California Labor Code section 512(a), which provides that “An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes.”
The Meal Period Timing Issue
At first glance, the phrase “work period” in the above-quoted provision might seem self-explanatory. In fact, hundreds of millions of dollars and the daily activities of millions of people hinge on the semantic ambiguity arising from these two words. The two competing interpretations are as follows:
Interpretation # 1: The Continuous “Work Period.” The five-hour “work period” must refer to any five-hour period of continuous work. Thus, employers must provide at least one meal period for each continuous five-hour period of work.
Interpretation #2: The Cumulative “Work Period.” The five-hour “work period” must refer to the total number of hours worked by the employee during any day. In other words, the statute is merely saying that whenever an employee is required to work more than a total of five hours in a day he must receive a 30 minute meal break at some point in the day – but the statute is not intended to dictate when during the day that break must be taken.
In Brinker v. Superior Court-- the first published opinion to address the issue – the lower court agreed with interpretation # 1. The Appellate Court, however, reversed in favor of interpretation #2. So does this mean that employers now have carte blanche to schedule meal breaks at whatever time of day they wish so long as they give the correct number of meal breaks per day?
We wouldn’t recommend it.
To begin with, there is a good chance that the California Supreme Court will grant review of Brinker– thereby rendering it non-citable. Moreover, the Brinker opinion has some pretty sizable holes in its reasoning. Thus, we would not bet the farm on Brinker’s interpretation holding up in the long run. Any employer who relies on Brinker to aggressively schedule meal breaks very close to the start or end of the workday could therefore find itself exposed to massive penalties if, and when, Brinker is eventually overturned by the Supreme Court.
The Vulnerabilities of Brinker Brinker is vulnerable to be being overruled on several grounds. For example, Brinker rejects Interpretation #1, above, on the ground that if the Legislature meant to trigger a meal period for each consecutive five hour work period it could have done so without using the words “per day” in the phrase “a work period of more than five hours per day.” Adopting an interpretation that gives significance to every word is one goal of statutory interpretation. But this “per day” reference is a fairly thin reed to grasp for purposes of making this argument.
For one thing, the monetary penalties imposed by the Labor Code do not even arise from Section 512. Rather, it is Labor Code Section 226.7 which imposes a penalty of “one additional hour of pay at the employee's regular rate” for any failure “to provide an employee a meal period . . . in accordance with an applicable order of the Industrial Welfare Commission.” Each of the IWC’s Wage Orders, however, conspicuously omits the very “per day” language that Brinker used as the basis for its ruling.
Brinker dismisses the significance of the Wage Orders themselves by holding that they must be interpreted as if they merely track the text of Section 512(a) verbatim. But why would the Legislature have used a violation of the IWC Wage Orders as the triggering event for imposing a penalty if it believed that the Wage Orders could only duplicate the text of Section 512? Brinker’s dismissive treatment of the actual text of the Wage Orders thus arguably repeals the portion of Section 226.7 that incorporates the Wage Orders by reference. In doing so, Brinker potentially violates its own standard that the words of a statute cannot be rendered meaningless.
Brinker also fails to address the significance of Labor Code Section 512(b), which authorizes the IWC to adopt Wage Orders allowing meal periods to begin "after six hours of work" if it determines that this is "consistent with the health and welfare of the affected employees." This provision presupposes that, in the absence of any new Wage Order provision, an employee cannot agree to wait more than six hours for a meal break.
Brinker also leads to some problematic practical results. For example, the over-arching Legislative purpose was to afford relief from fatigue and hunger that could result from long stretches of constant work. But under Brinker, an employer could schedule an employee to begin work at 9:00 a.m., take a meal break from 9:05 to 9:35 a.m., and then work thirteen hours straight before taking another 30-minute meal break immediately before leaving at around 11:05 p.m. It is hard to envision the Supreme Court endorsing this result as the true intent of the Legislature.
Conclusion
Notwithstanding the undeniably pro-employer Brinker decision, prudent employers should still strive to establish a record of good faith, affirmative efforts to enforce internal meal and rest break policies. Part of this record includes scheduling employee meal periods to begin before the start of any sixth consecutive hour of work. These steps may not be easy at an operational level, but they are necessary to avoid exposure to large-scale class action liability in the long run.
I was co-counsel for the employees in the appellate-level proceedings, and my normal policy is not to blog about my own cases (with an occasional exception if they are already getting outside press or blogosphere coverage). I am putting up this post only because I must clarify a comment that was attributed to me in the Recorder article:
[Kralowec] also said the 4th District's decision creates an appellate split that likely will ensure Supreme Court review. In Cicairos v. Summit Logistics Inc., 133 Cal.App.4th 949, Sacramento's 3rd District ruled in 2005 that employers have an affirmative duty to ensure that employees receive meal periods.
I do believe that the new Brinker decision creates a split in authority with Cicairos, and I also believe that the Supreme Court often grants review to resolve issues that are the subject of a split among the lower courts, particularly when two Court of Appeal panels have handed down conflicting published opinions. However, I did not say that I thought that in this specific case, the split between Brinker and Cicairos "likely will ensure Supreme Court review." I would never say something so presumptuous. It would have been more accurate to say that Brinker creates an appellate split, that such splits often lead to Supreme Court review, that Brinker is a particularly appropriate case for review, and that I certainly hope that the Supreme Court decides to grant review.
Wow. So, this is a major decision that could bring meal and break period class actions to a screeching halt, even though the Legislature does not seem inclined to do so. The only thing is, if the Supreme Court grants review, the decision could disappear for as much as a couple of years and could get reversed by the High Court.
I will post more later on this opinion, after I have chance to evaluate it further. For now, courts with pending meal break, rest break and off-the-clock claims should expect for the inevitable onslaught of paper that this will generate.
However, it was not the first, and Brinker disagrees with many prior opinions, most specifically, Cicairos v. Summit Logistics, Inc. (2005) 133 Cal.App.4th 949, 962-963, which it discussed at length, and Bufil v. Dollar Financial Group, Inc. (2008) 162 Cal.App.4th 1193, which it did not even mention, and more generally, a string of cases which promote class actions as an efficient way to resolve wage and hour disputes and a string of cases which discuss the remedial nature of wage and hour laws in California. With Brinker and Cicairos presenting such starkly contrasting views on California law, with Brinker presenting so many novel ideas regarding wage and hour claims and class actions, and with so many U.S. District Court cases disagreeing with Cicairos and each other, this case looks like an outstanding candidate for Supreme Court review.
Why do I bring this up in a Connecticut blog? For a few reasons. First, there are several Connecticut employers that have California employees, whether through sales or otherwise. Second, California tends to be on the cutting edge of some legal issues. With nearly 36 million people (or roughly 10 times the population of Connecticut), those issues just tend to pop up more than in a small state like Connecticut. Third, the case provides a good opportunity to highlight the Connecticut meal period law -- an underappreciated law that lays out what is necessary and is much different than California.
The consensus across the commentators (including our take on the issue) is that the California Supreme Court will likely grant review of this monumental ruling.
The Appellate Court, Fourth Appellate District, Division One, issued a much awaited opinion today in Brinker Restaurant Corporation, et al. v. Hohnbaum, et al. (July 22, 2008). The case is one of the first California state appellate court to rule on the parameters of employers’ duties under the California Labor Code requiring rest and meal breaks for hourly employees. As discussed below, the court’s opinion was across the board in favor for California employers. The primarily holding by the appellate court was that an employer does not have to “ensure” that meal and rest breaks are taken, therefore making these types of cases very difficult to certify as a class action.
Due to the monumental impact this case will have on the vast wage and hour litigation in California, this post is longer than we typically like to write. And this post will definitely not be the last time we discuss the case.
Case Background
In November 2005 Brinker filed its first petition for writ of mandate (D047509) in this matter. In the petition, Brinker challenged the court's July 2005 meal period order. Specifically, Brinker requested a writ directing the trial court to "vacate its earlier order holding that: (1) a non-exempt employee is entitled to a meal period for each five-hour block of time worked[; and] (2) the premium pay owed for a violation of [section 226.7] is a wage."
In support of its petition, Brinker argued the trial court erred by interpreting section 512 to mean that an hourly employee's entitlement to a meal period is "rolling," such that "a separate meal period must be provided for each five-hour block of time worked . . . regardless of the total hours worked in the day. In other words, the [court] interpreted the law to be that . . . [o]nce a meal period concludes, the proverbial clock starts ticking again, and if the employee works five hours more, a second meal period must be provided."
Brinker also argued that although an employee working more than five hours and less than 10 hours is entitled under section 512 to a 30-minute meal period at some point during the workday, "nothing in [s]ection 512 . . . requires a second meal period be provided solely because [the] employee works five hours after the end of the first meal period, where the total time worked is less than [10] hours." Brinker further asserted that IWC Wage Order No. 5 also "does not dictate the anomalous result that meal periods must be provided every five hours" because, like section 512, it requires only that an employee working more than five hours "gets a meal period at some point during the workday." Brinker complained that the court's meal period ruling "requires servers to sit down, unpaid, during the most lucrative part of their working day."
Plaintiff’s Motion For Class Certification
Plaintiffs moved to certify a class of "[a]ll present and former employees of [Brinker] who worked at a Brinker[-]owned restaurant in California, holding a non-exempt position, from and after August 16, 2000 ('Class Members')." In their moving papers, plaintiffs alternatively defined the class as "all hourly employees of restaurants owned by [Brinker] in California who have not been provided with meal and rest breaks in accordance with California law and who have not been compensated for those missed meal and rest breaks."
Plaintiffs' motion also sought certification of six subclasses, three of which are pertinent to the appeal: (1) a "Rest Period Subclass," consisting of "Class Members who worked one or more work periods in excess of three and a half (3.5) hours without receiving a paid 10 minute break during which the Class Member was relieved of all duties, from and after October 1, 2000"; (2) a "Meal Period Subclass," consisting of "Class Members who worked one or more work periods in excess of five (5) consecutive hours, without receiving a thirty (30) minute meal period during which the Class Member was relieved of all duties, from and after October 1, 2000"; and (3) an "Off-The-Clock Subclass," consisting of "Class Members who worked 'off-the-clock' or without pay from and after August 16, 2000."
The class in question is estimated to consist of more than 59,000 Brinker employees.
Plaintiffs Rest Break Claims
Plaintiffs allege Brinker willfully violated section 226.7 and IWC Wage Orders Nos. 5-1998, 5-2000 and 5-2001 by "fail[ing] to provide rest periods for every four hours or major fraction thereof worked per day to non-exempt employees, and failing to provide compensation for such unprovided rest periods." Section 226.7, subdivision (a) provides: "No employer shall require any employee to work during any meal or rest period mandated by an applicable order of the [IWC]." (Italics added.)
The pertinent provisions of IWC Wage Order No. 5-2001 are codified in California Code of Regulations, title 8, section 11050, subdivision 12(A), which provides:
Every employer shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time per four (4) hours or major fraction thereof. However, a rest period need not be authorized for employees whose total daily work time is less than three and one-half (3 1/2) hours. Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages. (Italics added.)
The court held that the phrase "per four (4) hours or major fraction thereof" does not mean that a rest period must be given every three and one-half hours:
Regulation 11050(12)(A) states that calculation of the appropriate number of rest breaks must "be based on the total hours worked daily." Thus, for example, if one has a work period of seven hours, the employee is entitled to a rest period after four hours of work because he or she has worked a full four hours, not a "major fraction thereof." It is only when an employee is scheduled for a shift that is more than three and one-half hours, but less than four hours, that he or she is entitled to a rest break before the four hour mark.
Moreover, because the sentence following the "four (4) hours or major fraction thereof" limits required rest breaks to employees who work at least three and one-half hours in one work day, the term "major fraction thereof" can only be interpreted as meaning the time period between three and one-half hours and four hours. Apparently this portion of the wage order was intended to prevent employers from avoiding rest breaks by scheduling work periods slightly less that [sic] four hours, but at the same time made three and one-half hours the cut-off period for work periods below which no rest period need be provided.
The court also held that the DLSE’s opinion that the term "major fraction thereof" means any time over 50 percent of a four-hour work period is wrong because it renders the current version of Regulation 11050(12)(A) internally inconsistent. As an employee cannot be entitled to a 10-minute break if she or she "works more than 2 . . . hours in a day," if the employee is not entitled to a 10-minute break if he or she works "less than three and one-half" hours in a day. The court also noted that it is not required to follow the DLSE opinion on the matter, citing Murphy v. Kenneth Cole, 40 Cal.4th at p. 1105, fn. 7.
The court also held that the law does not required employers to provide rest breaks before meal breaks:
Furthermore, contrary to plaintiffs' assertion, the provisions of Regulation 11050(12)(A)do not require employers to authorize and permit a first rest break before the first scheduled meal period. Rather, the applicable language of Regulation 11050(12)(A)states only that rest breaks "insofar as practicable shall be in the middle of each work period." (Italics added.) Regulation 11050(12)(A)is silent on the question of whether an employer must permit an hourly employee to take a 10-minute rest break before the first meal period is provided. As Brinker points out, an employee who takes a meal period one hour into an eight-hour shift could still take a post-meal period rest break "in the middle" of the first four-hour work period, in full compliance with the applicable provisions of IWC Wage Order No. 5-2001.
The court explained that Regulation 11050(12)(A) allows employers some “discretion to not have rest periods in the middle of a work period if, because of the nature of the work or the circumstances of a particular employee, it is not ‘practicable.’” In explaining what “practicable” means, the court specifically mentioned that:
…this discretion is of particular importance for jobs, such as in the restaurant industry, that require flexibility in scheduling breaks because the middle of a work period is often during a mealtime rush, when an employee might not want to take a rest break in order to maximize tips and provide optimum service to restaurant patrons. As long as employers make rest breaks available to employees, and strive, where practicable, to schedule them in the middle of the first four-hour work period, employers are in compliance with that portion of Regulation 11050(12)(A).
Ultimately, the court held that a determination about whether it is practicable to permit rest breaks near the end of a four hour work period is not an issue that can be litigated on a class-wide basis. In overruling the trial court’s granting of class certification the Appellate Court stated:
Had the court properly determined that (1) employees need be afforded only one 10-minute rest break every four hours "or major fraction thereof" (Reg. 11050(12)(A)), (2) rest breaks need be afforded in the middle of that four-hour period only when "practicable," and (3) employers are not required to ensure that employees take the rest breaks properly provided to them in accordance with the provisions of IWC Wage Order No. 5, only individual questions would have remained, and the court in the proper exercise of its legal discretion would have denied class certification with respect to plaintiffs' rest break claims because the trier of fact cannot determine on a class-wide basis whether members of the proposed class of Brinker employees missed rest breaks as a result of a supervisor's coercion or the employee's uncoerced choice to waive such breaks and continue working. Individual questions would also predominate as to whether employees received a full 10-minute rest period, or whether the period was interrupted. The issue of whether rest periods are prohibited or voluntarily declined is by its nature an individual inquiry.
Plaintiffs argued that even if the trial court erred in failing to define the elements of plaintiffs' rest period claims prior to certifying the class the appellate court should remand the case to the trial court to permit the trial court to rule on if plaintiffs' "expert statistical and survey evidence" makes their rest break claims amenable to class treatment. The appellate court refused to remand the case, stating that while courts may use such evidence in determining if a claim is amenable to class treatment, here, that evidence does not change the individualized inquiry in determining if Brinker allowed or forbade rest periods. The court stated:
The question of whether employees were forced to forgo rest breaks or voluntarily chose not to take them is a highly individualized inquiry that would result in thousands of mini-trials to determine as to each employee if a particular manager prohibited a full, timely break or if the employee waived it or voluntarily cut it short. (Brown v. Federal Express Corp. (C.D.Cal. 2008) ___ F.R.D. ___ [2008 WL 906517 at *8] (Brown) [meal period violations claim not amenable to class treatment as court would be "mired in over 5000 mini-trials" to determine if such breaks were provided].)
For these reasons, the appellate court vacated the order granting class certification for the rest break subclass.
Plaintiffs’ Meal Break Claims
In their second cause of action, plaintiffs allege Brinker violated sections 226.7 and 512, and IWC Wage Order No. 5, by failing to "provide meal periods for days on which non-exempt employees work(ed) in excess of five hours, or by failing to provide meal periods [altogether], or to provide second meal periods for days employees worked in excess of [10] hours, and failing to provide compensation for such unprovided or improperly provided meal periods." Plaintiffs claim that Brinker’s “early lunching” policy that required its employees to take their meal periods soon after they arrive for their shifts, usually within the first hour, and then requiring them to work in excess of five hours, and sometimes more than nine hours straight, without an additional meal period violated California law.
Plaintiffs asserted that common issues predominate on their rest break claims because they "presented corporate policy evidence of a pattern and practice by Brinker of failing to provide a rest period prior to employees' meal period as a result of its practice of scheduling meals early." Specifically, plaintiffs argued that "Brinker maintains company-wide policies discouraging rest periods, including requiring servers to give up tables and tips if they want a break and failing to provide rest periods prior to scheduled early meals."
1. Rolling five-hour meal period claim
The lower trial court in this case, found that a meal period "must be given before [an] employee's work period exceeds five hours." The lower court also stated that "the DLSE wants employers to provide employees with break periods and meal periods toward the middle of an employee[']s work period in order to break up that employee's 'shift.'" The court further stated that Brinker "appears to be in violation of [section] 512 by not providing a 'meal period' per every five hours of work."
In overruling the lower court, the appellate court ruled that this interpretation of the law was incorrect and that the trial court’s class certification order rests on improper criteria with respect to the plaintiffs' rolling five-hour meal period claim.
The appellate court began its analysis with Labor Code Section 512, subdivision (a), which provides:
An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes, except that if the total work period per day of the employee is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee. An employer may not employ an employee for a work period of more than 10 hours per day without providing the employee with a second meal period of not less than 30 minutes, except that if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of the employer and the employee only if the first meal period was not waived.
The appellate court held that Section 512(a) thus provides that an employer in California has a statutory duty to make a first 30-minute meal period available to an hourly employee who is permitted to work more than five hours per day, unless (1) the employee is permitted to work a "total work period per day" that is six hours or less, and (2) both the employee and the employer agree by "mutual consent" to waive the meal period.
The appellate court also held that this interpretation of section 512(a), regarding an employer's duty to provide a first meal period, is consistent with the plain language set forth in IWC Wage Order No. 5-2001, which provides in part: "No employer shall employ any person for a work period of more than five (5) hours without a meal period of not less than 30 minutes, except that when a work period of not more than six (6) hours will complete the day's work the meal period may be waived by mutual consent of the employer and the employee."
On the issue regarding when an meal break must be provided the court stated:
With respect to the issue of when an employer must make a first 30-minute meal period available to an hourly employee, Brinker's uniform meal period policy (titled "Break and Meal Period Policy for Employees in the State of California") comports with the foregoing interpretation of section 512(a) and IWC Wage Order No. 5-2001. It provides that employees are "entitled to a 30-minute meal period" when they "work a shift that is over five hours."
The court continued in holding that Section 512(a) also provides that an employer has a duty to make a second 30-minute meal period available to an hourly employee who has a "work period of more than 10 hours per day" unless (1) the "total hours" the employee is permitted to work per day is 12 hours or less, (2) both the employee and the employer agree by "mutual consent" to waive the second meal period, and (3) the first meal period "was not waived."
Plaintiffs argue that Brinker's written meal policy violates section 512(a) and IWC Wage Order No. 5 (specifically, Cal. Code Regs., tit. 8, § 11050, subd. 11(A)) because it allows the practice of “early lunching” and fails to make a 30-minute meal period available to an hourly employee for every five consecutive hours of work. Plaintiffs maintained that every hourly employee should receive a second meal break five hours after they return from the first meal break. The court found this argument unpersuasive:
Under this interpretation, however, the term "per day" in the first sentence of section 512(a) would be rendered surplusage, as would the phrase "[a]n employer may not employ an employee for a work period of more than 10 hours per day without providing the employee with a second meal period of not less than 30 minutes" in the second sentence of that subdivision.
The appellate court held that without a proper interpretation of section 512(a), the lower court could not correctly ascertain the legal elements that members of the proposed class would have to prove in order to establish their meal period claims, and therefore could not properly determine whether common issues predominate over issues that affect individual members of the class.
2. Brinker's failure to ensure employees take meal periods
Plaintiffs also claim that Brinker's uniform meal period policy violates sections 512 and 226.7, as well as IWC Wage Order No. 5, by failing to ensure that its hourly employees take their meal periods. In the primary holding of the case, the appellate court stated:
We conclude that California law provides that Brinker need only provide meal periods, and, as a result, as with the rest period claims, plaintiffs' meal period claims are not amenable to class treatment.
The appellate court disagreed with Plaintiffs’ contention that an employer’s duty was to ensure a meal break. The court stated:
If this were the case, employers would be forced to police their employees and force them to take meal breaks. With thousands of employees working multiple shifts, this would be an impossible task. If they were unable to do so, employers would have to pay an extra hour of pay any time an employee voluntarily chose not to take a meal period, or to take a shortened one.
3. Amenability of plaintiffs' meal break claims to class treatment
The appellate court held that because meal breaks need only be made available, not ensured, individual issues predominate in this case and the meal break claim is not amenable class treatment. The court explained:
The reason meal breaks were not taken can only be decided on a case-by-case basis. It would need to be determined as to each employee whether a missed or shortened meal period was the result of an employee's personal choice, a manager's coercion, or, as plaintiffs argue, because the restaurants were so inadequately staffed that employees could not actually take permitted meal breaks. As we discussed, ante, with regard to rest breaks, plaintiffs' computer and statistical evidence submitted in support of their class certification motion was not only based upon faulty legal assumptions, it also could only show the fact that meal breaks were not taken, or were shortened, not why. It will require an individual inquiry as to all Brinker employees to determine if this was because Brinker failed to make them available, or employees chose not to take them.
The appellate court also found that the evidence does not show that Brinker had a class-wide policy that prohibited meal breaks. Instead, the evidence in this case indicated that some employees took meal breaks and others did not, and it requires the court to perform an individualized inquiring into the reasons why an employee did not take the break. The court also held that the plaintiffs’ statistical and survey evidence does not render the meal break claims one in which common issues predominate because while the time cards might show when meal breaks were taken and when there were not, they cannot show why they were or were not taken.
Plaintiffs’ Off-the clock claim
Plaintiffs also allege Brinker unlawfully required its employees to work off the clock during meal periods. This claim was comprised of two theories: (1) time worked during a meal period when an individual was clocked out; and (2) time “shaving,” which is defined as an unlawful alteration of an employee's time record to reduce the time logged so as to not accurately reflect time worked.
The court held, and the Plaintiffs did not dispute, that employers can only be held liable for off-the-clock claims if the employer knows or should have known the employee was working off the clock. (citing Morillion v. Royal Packing Co., 22 Cal.4th at p. 585.) The evidence also established that Brinker has a written corporate policy prohibiting off-the-clock work. Because of these facts, the court found that plaintiffs' off-the-clock claims are not amenable to class treatment. As the court stated:
Thus, resolution of these claims would require individual inquiries in to whether any employee actually worked off the clock, whether managers had actual or constructive knowledge of such work and whether managers coerced or encouraged such work. Indeed, not all the employee declarations alleged they were forced to work off the clock, demonstrating there was no class-wide policy forcing employees to do so.
The opinion can be viewed at the court’s website [Word] [PDF]. This case will no doubt change many wage and hour litigator's case strategies, unless the California Supreme Court grants review of the decision.
In Advanced-Tech v. Superior Court, Ester Roman worked as a security guard for Advanced-Tech Security Services, Inc. (Advanced-Tech). Ms. Roman brought a class action lawsuit against Advance-Tech for violations of Labor Code sections 510, 1194, and 1198, as well as failure to provide accurate itemized statements to her in accordance with section 226 and unfair business practices in violation of Business and Professions Code 17200.
At issue in this case is the interpretation of Labor Code section 510, subdivision (a) that requires that an employer pay an employee time and one-half of the employee’s “regular rate of pay” for (1) more than 8 hours of work in one workday, (2) more than 40 hours of work in any workweek, and (3) for the first eight hours worked on the seventh consecutive workday. Any work over 12 hours in one day must be paid at twice the regular rate of pay, as well as work longer than eight hours on the seventh consecutive day of work.
Advance-Tech provided its employees with “holiday pay” at time and one-half for hours worked on designated holidays pursuant to the Employee’s Handbook. Ms. Roman worked 12 hours on Labor Day in 2006, and argued that the 4 hours of daily overtime should have been paid at time and one-half of her higher “holiday” rate of pay, instead of at her normal, non-holiday rate of pay. Therefore, Ms. Roman asserted that the time and one-half she was paid for working on Labor Day should be considered her “regular rate of pay” and that she was entitled to be paid one and one-half times the premium holiday rate for the hours she worked on Labor Day.
The court disagreed with Ms. Roman’s interpretation of Labor Code section 510. The court held that premium holiday pay is not considered as a “regular rate” of pay an employee receives for a normal workday. An employer is allowed to credit the time and one-half premium pay on holidays against the overtime owed to the employee.
Side Note: Generally, there is no obligation for employers to provide a higher rate of pay for work completed on holidays. As done by Advance-Tech in this case, an employer may voluntarily agree to pay a higher rate of pay to incentivize and/or reward employees to work on holidays. However, employers' policies (as set forth in the employee handbook or elsewhere) could arguably create a contractual right for the employee to receive the higher pay rate promised, and employers should use caution when drafting such policies.
As any reader of our blog knows, pursuant to Labor Code section 226.7 and the Wage Orders (for example Wage Order 4-2001, section 11(b)), each failure to provide the specified meal period entitles the employee to receive an additional compensation premium equal to one hour of pay.
The Wage Order provides for an “on duty” meal period that is an exception to the required meal break if the following requirements are met:
An "on duty" meal period shall be permitted only when the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to. The written agreement shall state that the employee may, in writing, revoke the agreement at any time.
Wage Order No. 4-2001(a)(emphasis added). Unfortunately, the definition of the “nature of the work” is not clear, and the only real guidance California employers have on this issue is a Department of Labor Standards Enforcement (“DLSE”) opinion letter. Click here to download the opinion letter.
In the opinion letter, the DLSE addressed the issue of whether a shift manager in a fast food restaurant working the night shift would be allowed to take a “on duty” meal period. The DLSE began its analysis in stating that the off duty meal period is the default requirement, and any exceptions to this requirement should be narrowly construed.
The DLSE set forth factors it considered in determining whether the nature of the work prevents the employee from taking an off-duty meal period. The factors included:
the type of work
the availability of other employees to relieve the employee during a meal period
the potential consequences to the employer if the employee is relieved of all duty
the ability of the employer to anticipate and minimize these staffing issues such as by scheduling employees in a manner that would allow the employee to take an off-duty meal break and
whether the “work product or process” would be destroyed or damaged if the employee were given an off-duty meal period.
The DLSE concluded that based on the facts presented in the situation of the fast food restaurant, it did not understand why the nature of the work in the restaurant prevented the shift manager from being relieved of all duties for 30 minutes.
As this issue has yet to be addressed by the courts (maybe the court in Bufil will provide some guidance), employers should follow the limited analysis set forth in the DLSE opinion letter, even though the DLSE opinion letter is not binding on the courts.
This case is a class action lawsuit filed by Caren Bufil for violations of California’s meal and rest break laws, and violation of California’s Unfair Competition Law against Dollar Financial Group, Inc. (Dollar). Bufil v. Dollar Financial Group, Inc. (filed April 14, 2008, ordered published May 13, 2008). Dollar is a company with 130 retail stores in California that provides check cashing, Western Union services and loans.
The plaintiff’s suit defined the putative class as consisting of two subclasses of hourly employees working in California from September 2003 until the present. The two subclasses were employees for whom Dollar’s meal break records showed that they did not receive a meal break because (1) they were the only employee working in the store at the time of their meal break or (2) they were training another employee who could not be left alone to operate the store when their meal break should have been taken.
Dollar’s “On-Duty” Meal Period Agreement
In 2001 Dollar implemented an "on-duty" meal agreement with hourly employees. The agreement was given to all new employees and states that (1) Dollar and the employees acknowledge that the nature of the business may prevent employees from being relieved of all duties during meal periods; (2) Dollar and the employees agree that an employee may take an on-duty meal break, and be paid accordingly; and (3) the employees may revoke their right to have the meal break deemed “on duty” by giving 24-hour written notice to a supervisor.
Dollar introduced an updated meal break policy effective September 2003. The revised policy sets forth that on-duty meal breaks are only permitted when the hourly employee (1) is the only employee in the store working during the entire work shift; and (2) is working with only one other employee who has been employed less than 90 days and is not certified to transact business alone. An e-mail to store managers in June 2006 reiterated this policy.
Dollar’s rest break policy did not require consecutive 10-minute breaks, but permitted a “net” 10 minutes of time that the employee could use throughout the day. The appellate court, relying upon a DLSE opinion letter, stated that the rest breaks had to be consecutive, and held that Dollar did not permit employees working alone or who were supervising other employees had the ability to take a 10-minute rest break.
Dollar Defeats Class Certification In Its First Wage & Hour Class Action: Chin v. Dollar Financial Group
Bufil’s lawsuit was filed just four months after an appellate court upheld a denial of class certification in favor of Dollar in a case that alleged similar violations of California’s wage and hour laws. In Chin, the plaintiff in that case filed a lawsuit against Dollar for missed meal and rest breaks, and proposed to certify a class of employees who were (1) employed for a period of more than five hours without a meal period of not less than 30 minutes, and/or (2) not authorized or permitted to take a rest break for every four hours of work.
In the Chin case, the court held the trial court properly ruled that the action was not suitable for class treatment because common questions of fact and law did not predominate over individualized issues. Because each employee would have to testify as to the particular facts pertaining to his or her case, it therefore was not a case suitable for class wide treatment.
Bufil’s Procedural History
The Plaintiff Bufil moved for class certification, and Dollar moved for judgment on the pleadings. Dollar argued that Bufil’s case was collaterally stopped because the earlier Chin litigation resolved these issues, and it is unfair that it has to defend itself again for the same issues already litigated in the previous lawsuit. The trial court agreed with Dollar, dismissed Bufil’s class allegations and denied plaintiff’s motion for class certification.
The appellate court overruled the trial court with the following holdings.
1. Bufil Is Not Precluded From Brining Her Suit On the Basis of the Collateral Estoppel Doctrine.
The principle behind the collateral estoppel doctrine is to prevent re-litigation of issues previous argued and resolved in an earlier proceeding. As the court set out, in order for the doctrine to apply, the issues must be identical to an issue that was actually litigated and decided to be final on the merits.
The court examined Alvarez v. May Dept. Stores Co. (2006) 143 Cal.App.4th 1223, which held that two cases filed against May Department Stores prior to the Alvarez case precluded the Alvarez case from proceeding under collateral estoppel. In Alvarez, the court held collateral estoppel applied because the two prior cases sought to certify the same class of employees, concerned the same policies, concerned the same time period, and one of the prior cases had the same attorneys. In this case, however, the court held that Bufil’s legal issues were not the same as the issues litigated in the prior Chin lawsuit against Dollar. The court held:
Unlike Alvarez, the class that Bufil asserts is not identical to the class asserted by Chin. Rather, it is a distinct subclass restricted to hourly employees who tracked Dollar’s recordkeeping system from September 2003 to the present with the designation of not having taken a meal period because the employee was the only employee in the store or was supervising a trainee who could not be left alone.
The court held Bufil’s theory that the meal period waivers for employees who were the only employees working at the store or who were providing training to employees are invalid because the waivers do not meet the “nature of the work” exception in Wage Order No. 4-2001 is different than the issues litigated in the Chin case. Wage Order No. 4-2001 provides:
An "on duty" meal period shall be permitted only when the nature of the work prevents an employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to. The written agreement shall state that the employee may, in writing, revoke the agreement at any time. (emphasis added)
The court ruled that this is a legal question that was not present in the Chin litigation, and therefore was not barred under the collateral estoppel doctrine.
2. Bufil’s Case Is Appropriate For Class Certification.
The court also held that the lower court’s finding that “commonality”, an element that plaintiffs must prove in order to proceed as a class action, did not exist in this case was flawed. Despite Dollar’s argument, the court held that the individual employee’s understanding of the meal period waiver was irrelevant in this case. The court also held that a class was ascertainable in this case through Dollar’s records, which allowed the employee to electronically record if they did not take the meal break due to (1) the fact they were the only person in the store or (2) they were the only person with a trainee. Finally, the court held that Bufil could show that the class action was a superior method to resolve the litigation as class actions permit individuals to resolve all of their claims at the same time, it is more efficient and avoids repetitive actions, and allows for recover of small amounts of damages that may be too insignificant for individual litigation.
CNN Money.com reports that many companies across the U.S. are encountering wage and hour issues that California companies are all too familiar with. The article reports:
Rod Cotner, owner of Jericho Mortgage in Lancaster, Ohio, was shocked when the U.S. Department of Labor showed up at his door to investigate a wage-and-hour lawsuit filed on behalf of his 54 loan officers and sales managers.
His company was growing - sales exceeded $4 million that year - and his employees were profiting: "Some of the staffers named in the lawsuit were making over $150,000," he says. "After working in the industry for years, I'd never heard of this happening. Everyone pays their officers on a commission basis. How can someone who makes six figures a year demand back wages for his time?"
In 2006 the U.S. Department of Labor collected $172 million in back wages from employers, which is reported to be 3.6 percent higher than 2005.
Also, the article illustrates that while these laws were intended to protect employees, the laws often times have the opposite effect. This is especially true in California where the meal and rest break laws are so rigid that the employees cannot enter into agreements with their employer to skip meal breaks when needed for family issues. The article quotes Don Turner, the owner of the Golden Bear Inn in Berkeley:
"I had an employee who wanted to watch his child's Little League game at four, but he was scheduled to get off at 4:30," he says. "He asked me if he could work through his lunch break instead, and I had to refuse him - the overtime law just wouldn't let me."
The article concludes with a very appropriate caution to employers:
For now, the best that a small-business owner can do to avoid overtime lawsuits is keep painstaking payroll records for nonexempt employees and consult an employment lawyer to verify workers' status. And make sure to keep a sharp eye out for the kind of dedicated worker who might be tempted to skip lunch.
As a final warning, California employers need the advice of an attorney well versed in California labor and employment law - California law is more restrictive than federal law in almost every aspect. Courts apply the law that provides employees with the most protection, which means that California law applies in almost every case.
On January 15, 2008, the Court of Appeal in Puerto v. Superior Court (Wild Oats) [PDF] [Word], concluded that an opt-in notice established by the trial court as a process to obtain witnesses' residential contact information "unduly hampered" plaintiffs' in conducting discovery.
In October 2006, Plaintiffs filed suit against Wild Oats alleging they were misclassified as exempt employees, and are seeking recovery for overtime compensation, compensate for all hours worked, and unfair business practices.
Plaintiffs served written discovery on Wild Oats that included Form Interrogatory No. 12.1, which requested that Wild Oats: “State the name, ADDRESS, and telephone number of each individual: [¶] (a) who witnessed the INCIDENT or the events occurring immediately before or after the INCIDENT; [¶] (b) who made any statement at the scene of the INCIDENT; [¶] (c) who heard any statements made about the INCIDENT by any individual at the scene; and [¶] (d) who YOU OR ANYONE ACTING ON YOUR BEHALF claim has knowledge of the INCIDENT (except for expert witnesses covered by Code of Civil Procedure section 2034).”
Wild Oats disclosed between 2600 and 3000 names and positions in the responses to Interrogatory No. 12.1. However, Wild Oats withheld the individuals’ residential telephone numbers and addresses, citing privacy rights on behalf of the individuals listed.
After plaintiffs brought a motion to compel disclosure of the individuals’ contact information, the trial court approved a process by which a third party administrator would send a letter to each of the individuals informing them of plaintiffs’ request for their contact information. The letter contained an opt-in provision that stated, “The court has ordered the parties to send this letter to you so that you may decide whether or not you wish to disclose this information to the Plaintiffs’ attorneys. If you consent to the disclosure of your contact information, please complete and return the enclosed postcard to the Third-Party-Administrator . . . .”
The Court of Appeal found that the trial court’s use of the opt-in procedure was an abuse of discretion that exceeded the protections necessary to safeguard the legitimate privacy interests in the addresses and telephone numbers of the witnesses. The Court of Appeal stated:
While the trial court here implicitly found that a serious invasion of privacy would result unless an opt-in notice was used, we believe that conclusion is unsupported by facts or law. Here, just as in Pioneer, the requested information, while personal, is not particularly sensitive, as it is merely contact information, not medical or financial details, political affiliations, sexual relationships, or personnel information. [citations] This is basic civil discovery. These individuals have been identified by Wild Oats as witnesses. Nothing could be more ordinary in discovery than finding out the location of identified witnesses so that they may be contacted and additional investigation performed. [citation] As the Supreme Court pointed out in Pioneer, the information sought by the petitioners here—the location of witnesses—is generally discoverable, and it is neither unduly personal nor overly intrusive. [citation] In some respects, the potential intrusion here is even less significant than that in Pioneer, because here the requested disclosure does not involve individuals’ identities, which had already been disclosed by Wild Oats prior to the filing of the motion to compel. There simply is no evidence that disclosure of the contact information for these already-identified witnesses is a transgression of the witnesses’ privacy that is “sufficiently serious in [its] nature, scope, and actual or potential impact to constitute an egregious breach of the social norms underlying the privacy right.” [citation]
It is important to note that the court also recognized that the employer has a duty to protect employee’s contact information and “[s]hould any individual identified as a witness later feel that there has been an unnecessary invasion of his or her privacy, this will become an issue between the employee and [the employer], not the employee and [plaintiffs].”
The Court of Appeal did, however, still leaves open alternative discovery avenues to limit public disclosure of employee contact information:
This is not to say that the trial court was without the ability to enter a protective order limiting the dissemination of the witnesses’ contact information: Certainly the trial court may require that the information be kept confidential by the petitioners and not be disclosed except to their agents as needed in the course of investigating and pursuing the litigation. Moreover, should the trial court find that the record evidences discovery abuse warranting a protective order as to the manner and means of contacting witnesses, the trial court always retains the discretion to impose such an order.
In Kakani v. Oracle, 2007 WL 1793774 (N.D.Cal. 2007), Judge Alsop of the Northern District of California denied approval of a proposed class settlement agreement. In doing so, he cast doubt on so-called “claims made” or “reversionary” settlement agreements that are commonly used to settle wage and hour class actions.
Class action settlement agreements must be reviewed and approved by the court to ensure that the settlement is “fair and reasonable” to the absent class members. In recent years class action settlements typically provide a release of all class claims and also set forth a maximum amount that may be recovered by the class. All class members are given notice by mail of the settlement terms. However, for any individual class member to claim his or her portion of the settlement he or she must complete and return a written claim form. Any portion of the settlement which is not claimed in this fashion will “revert” back to the employer. Significantly the fees awarded to class counsel under such agreements are generally calculated based on a percentage (usually about 25%) of the gross settlement amount, before any reversion to the employer.
In Oracle, Judge Alsop held that this settlement model was inherently unfair to the many class members that inevitably fail to file claim forms and thereby receive no consideration for the release of their legal claims. The Court further held that such agreements were likely to over-compensate class counsel by basing their fees on settlement amounts that may ultimately go unclaimed by the class.
While Oracle is merely a district court decision, and is not binding on other trial courts, Judge Alsop’s analysis has already had a tremendous influence on both federal and state courts throughout California. In the future, class settlements are much more likely to be “non-reversionary” – i.e., the entire settlement amount must be distributed to class members and may not revert to the employer.
By altering the economic incentives of the various participants, this change will have a profound and far reaching effect on class action litigation in California. This shift will likely create an unusual alignment of winners and losers:
The Losers: Class Counsel and Employers.
Employers are economic “losers” under the emerging Oracle settlement model because they will be unable to retain the unclaimed portion of the settlement amount, which often amounts to 30-50% of the total settlement. Moreover, in return for this higher price of settlement, employers are also likely to receive a less expansive release of liability.
Class counsel are also “losers” because they must base their court-approved contingency fee on the amount actually recovered, rather than the amount theoretically available to the class. To justify their fee class counsel will thus feel compelled to hold out for more money, work up the case more extensively, and settle later in the action.
The Winners: Defense Counsel and Absent Class Members.
Class action defense counsel will likely receive more work in the aftermath of Oracle, because class actions are likely to be litigated longer prior to settlement, thereby generating higher hourly fees.
Absent class members will likely receive more money on average in any particular class settlement, as post-Oracle settlements will allow them to receive compensation regardless whether they submit valid timely claim forms.
[UPDATE: On July 22, 2008 - the Fourth Appellate District court issued a published decision (which can be read about here) after the Supreme Court transferred the case back to the court for reconsideration.]
The Fourth Appellate District today issued its much-anticipated decision in Brinker Restaurant v. Superior Court (Hohnbaum). The case had come to the appellate court via a grant of writ review following the trial court’s certification of a class of approximately 60,000 employees who were seeking compensation for “missed” meal and rest breaks.
Meal Periods
The big issue in Brinker was how to interpret the word “provide” when construing Labor Code section 512’s directive to “provide” a 30-minute meal period to employees. Does an employer meet its obligation by simply allowing its employees to take the statutory meal period if they wish to? Or must the employer effectively “force” its workers to take the unpaid break and be strictly liable for penalties if they refuse? Or is there perhaps some middle ground between a completely optional meal period and one that is completely mandatory?
For those who wanted a definitive resolution, Brinker was definitely a disappointment. First, the decision is unpublished, and hence un-citable as precedent. Second, the appellate court ducked the main issue and sent the case back to the trial court with directions to make a determination of its own regarding the scope of the duty. (The trial court had also ducked the issue by certifying the class without deciding exactly what elements the plaintiffs would have to prove).
Rest Breaks
The Brinker opinion does, however, contain a useful discussion of the separate statutory duty to “authorize and permit” rest breaks, which all parties agreed are generally waivable by employees. The court first disposed of some rather strained statutory interpretations by the plaintiffs as to when rest breaks must be provided during a shift. The Court then determined that – given that rest periods are waivable – it was necessarily an abuse of discretion for the trial court to have certified a rest period class. As the Court explained:
[B]ecause (as the parties acknowledge) Brinker’s hourly employees may waive their rest breaks, and thus Brinker is not obligated to ensure that that its employees take those breaks, any showing on a class basis that plaintiffs or other members of the proposed class missed rest breaks or took shortened rest breaks would not necessarily establish, without further individualized proof, that Brinker violated the provisions of [Labor Code] section 226.7, subdivision (a) and IWC Wage Order No. 5 as plaintiffs allege in the complaint.
The interesting part of this holding is that it reversed certification despite recognizing that the trial court’s decision is entitled to “great deference on appeal.”
This aspect of the ruling also illustrates why the stakes are so high in construing the duty to “provide” meal periods. If the duty is only to provide an optional, waivable meal break it would follow that the same result should apply – and meal period claims would likewise be un-certifiable as a matter of law in most cases.
Petitions to publish the opinion will presumably be filed shortly and we’ll post again if there is any change in the opinion’s current status as non-citable authority.
Daniel Schwartz over at the Connecticut Employment Law Blog, notes that Business Week's cover story on "Wage Wars" is not exactly breaking news (or at least should not be) for HR professionals and companies.
Audit your exempt employees. Go over job descriptions and compare that with actual duties. Sometimes "managers" are just glorified sales workers.
Take seriously any complaints by employees about their overtime. If there is a problem, odds are the complaining employee isn't the only one with the problem. And that means the potential for a class action case.
California has been "leading" the wage and hour class action trend mentioned in the Business Week article. These cases have arguably been the leading types of lawsuits filed in California for over the last five years. This is primarily due to California's unique wage and hour laws. Employers not familiar with California law mistakenly believe that because their policies comply with the FLSA, they are in compliance with California law. This is a costly mistake, as California's labor code is very unique, and out-of-state employers should always seek a California employment attorney's advice regarding whether the complies with California law. For example, the following are issues that illustrate how unique California law is compared to the rest of the country:
Meal and Rest Period Penalties
This is the current favorite claim of plaintiff’s class action attorneys in California. A 2001 statute imposes substantial penalties on employers who do not comply with very technical regulations concerning the timing and duration of employee lunch and rest breaks. In general, employees must receive a 30-minute meal break (during which they must be relieved of all duty and be free to leave the premises) before they complete 5 hours of work if their shift will be longer than 6 hours for the day. Employees are entitled to a second meal break whenever their shift will be longer than twelve hours. And employees are also entitled to take paid rest periods of at least 10-minutes for every four hours of work, taken as close to the middle of each work period as possible. The aggregate liability that can result over time was apply demonstrated by a 2005 jury verdict in a meal and rest break class action against Wal-Mart that awarded over $192 million in penalties and punitive damages.
California Overtime Exemptions Are Based on “Counting Hours” Test
Like the FLSA, California law provides that various job categories are exempt from overtime, including outside salespeople, commissioned salespeople and “white collar” employees. Employers have often defined positions on a nation-wide basis as salaried or hourly based on the definitions of exempt duties provided by the FLSA and its implementing regulations. California law, however, frequently rejects these federal rules in favor of its own, narrower definition of exempt duties. For example, under federal law, a position may be exempt from overtime where its “primary,” or most important job functions are exempt. In California, by contrast, the duties test is strictly quantitative — i.e., “does the employee spend more than 50% of his or her time performing exempt duties?” If not, the position may be misclassified and substantial back overtime may be due.
Daily Overtime and Double-Time
Virtually all employers know that the FLSA requires payment of “time-and-one-half” premium pay for all hours worked beyond 40 hours in one workweek. But a surprisingly large number of employers who set up shop in California are ignorant of the fact that California also requires “time-and-a-half” overtime for all hours worked beyond eight in a single workday and for the first eight hours worked on the seventh consecutive day worked in a workweek. Unlike, the FLSA, California also requires overtime at a double-time rate for all hours worked beyond 12 hours in a single workday and for hours worked beyond eight on the seventh consecutive day worked in a single week.
Mandatory Sexual Harassment Training for Supervisors
California law requires employers with 50 or more employees to provide two hours of sexual harassment training to all supervisors once every two years. Regulations are currently being proposed to clarify the extent to which this obligation applies to supervisors who are located outside California, but supervise California employees and other issues raised by the requirement.
No “Use-It-Or-Lose-It” Vacation Policy
California treats earned, but unused vacation time, as a form of vested compensation, which cannot be forfeited and must be paid out in full at the termination of employment. So-called “use-it-or-lose-it” vacation plans, which are permissible in most other states, are therefore illegal in California.
Appellate arguments were made recently in the case Brinker v. Superior Court (Hohnbaum). One issue that is being closely watched by all wage and hour attorneys raised in the appeal is whether the term “provide” in Labor Code § 512 requires employers to force employees to take meal breaks or whether employers only need to offer meal breaks to employees (similar to the "authorize and permit" requirement for rest breaks).
California Labor Code § 512(a) states:
An employer may not employ an employee for a work period of more than five hours per day without providing the employee with a meal period of not less than 30 minutes, except that if the total work period per day of the employee is no more than six hours, the meal period may be waived by mutual consent of both the employer and employee. An employer may not employ an employee for a work period of more than 10 hours per day without providing the employee with a second meal period of not less than 30 minutes, except that if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of the employer and the employee only if the first meal period was not waived.
This distinction argued in Brinker is critical in meal and rest break class actions. If the appellate court holds that Labor Code § 512 imputes a requirement on employers to force employees to take their meal and rest breaks, plaintiffs will have an easier argument that meal and rest break cases are subject to class certification. On the other hand, if the court holds that employers only need to make meal breaks available for employees, then class certification would be much harder to achieve because the court would have to make an individual inquiry into whether each employee could have taken a meal break and voluntarily waived it, or if the employee was forced to forego the break.
Courts that have reviewed this issue have reached differing conclusions about the meaning of the term “provide” in § 512. One court, in Cicairos v. Summit Logistics, Inc. (2005) 133 Cal.App.4th 949, held that “employers have ‘an affirmative obligation to ensure that workers are actually relieved of all duty.’” Id. at 962 - 963 (citing Dept. of Industrial Relations, DLSE, Opinion Letter 2002.01.28, p. 1.). However, another California federal district court held employers are only required to offer meal breaks. White v. Starbucks, Corp., (N. D. Cal. July 2, 2007) 497 F.Supp.2d 1080, 2007 WL 1952975. The court refused to follow the DLSE opinion letter relied upon in Cicairos, and stated:
In the absence of controlling California Supreme Court precedent, the court is Erie-bound to apply the law as it believes that court would do under the circumstances. See Wyler Summit Partnership v. Turner Broadcasting System, Inc., 135 F.3d 658, 663 (9th Cir.1998). The interpretation that White advances-making employers ensurers of meal breaks-would be impossible to implement for significant sectors of the mercantile industry (and other industries) in which large employers may have hundreds or thousands of employees working multiple shifts. Accordingly, the court concludes that the California Supreme Court, if faced with this issue, would require only that an employer offer meal breaks, without forcing employers actively to ensure that workers are taking these breaks. In short, the employee must show that he was forced to forego his meal breaks as opposed to merely showing that he did not take them regardless of the reason.
The California Labor & Employment Defense Blog will post about the appellate court’s ruling in Brinker v. Superior Court once it is issued.
Based on a very quick review of the opinion, it appears that the Court has pushed the issue back to the trial courts and provides instruction to the trial courts to make the determination regarding the enforceability of class action waivers based on a number of factors. The Court states:
Nonetheless, when it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider the factors discussed above: the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration. If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can “vindicate [their] unwaivable rights in an arbitration forum.” (Little, supra, 29 Cal.4th at p. 1077.) The kind of inquiry a trial court must make is similar to the one it already makes to determine whether class actions are appropriate. “[T]rial courts are ideally situated to evaluate the efficiencies and practicalities of permitting group action . . . .” (Linder v. Thrifty Oil, Co., supra, 23 Cal.4th at p. 435.) Class arbitration must still also meet the “community of interest” requirement for all class actions, consisting of three factors: “(1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class.” (Sav-On Drug Stores, supra, 34 Cal.4th at p. 326.)
We will definitely post more analysis on the ruling once we have some time to digest the opinion further.
The California Supreme Court will be issuing its opinion in Gentry v. Superior Court this morning. This case is a landmark labor and employment case deciding if an arbitration agreement entered into between an employer and an employee is enforceable when the employee agrees not to participate in class action lawsuits brought against the employer.
We attended the oral arguments before the Supreme Court back in June, and our thoughts on the arguments can be read here. While we have our normal workload today, we will try to have at least some analysis posted today, and if time permits possibly a podcast discussing the case posted by Monday.
FedEx is still litigating its classification of its drivers as independent contractors. FedEx lost a case recently in California in Los Angeles and the court ruled the company owes 200 drivers $5.3 million in expenses. In addition, the California Employment Development Department (EDD), which is responsible for collecting payroll taxes, assessed FedEx Ground owed more than $7.88 million in back payroll taxes because it also held the drivers were misclassified as independent contractors. The audit covered the period July 2001 to June 2004 and concluded that some of the drivers were properly classified as independent contractors, but found the “single-route” drivers were employees.
As these cases illustrate, California employers need to approach the independent contractor classification very carefully. If a worker is properly classified as an independent contractor it can save the company money and give the workers great flexibility. However, misclassifying employees as independent contractors exposes the company large damages for unreimbursed expenses, unpaid overtime, back payroll taxes, and many other items.
For guidance on whether employers have properly classified its workers as independent contractors, the California Division of Labor Standards Enforcement (“DLSE”) provides an explanation of the “economic realities” test. The DLSE maintains that the most indicative fact determinative of whether a worker is an employee or an independent contractor depends on whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. The DLSE also sets forth the other factors that are considered when determining an employee’s status:
Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
Whether or not the work is a part of the regular business of the principal or alleged employer;
Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
Whether the service rendered requires a special skill;
The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
The length of time for which the services are to be performed;
The degree of permanence of the working relationship;
The method of payment, whether by time or by the job; and
Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
Further details about the DLSE’s position on who classifies as an independent contractor can be found here. The DLSE’s information provides a great starting point for employers to audit their classifications of employees, but each case may present different facts, and the economic realities test may change depending on the jurisdiction (i.e., civil court or an EDD assessment) and whether state or federal law is at issue.
The U. S. Department of Labor’s Wage and Hour Division website provides a self assessment tool for restaurants that employ minors. The assessment covers common violations of the Fair Labor Standards Act (FLSA ). Restaurant owners should note that this assessment does not cover California state law items. The assessment covers items that the DOL found in the past to be some of the most common problems encountered in restaurants, and therefore, are likely issues a DOL investigator will look for in a restaurant.
Here is a list of a few of the items covered in the assessment:
Do any workers under 18 years of age do the following: 1. Operate or clean power-driven meat slicers or other meat processing machines?
2. Operate or clean any power-driven dough mixer or other bakery machines?
3. Operate, load, or unload scrap papers baler or paper box compactors?
4. Drive a motor-vehicle on the job?
Do any workers under 16 years of age do the following:
5. Cook?
6. Bake?
7. Clean cooking equipment or handle hot oil or grease?
8. Load or unload goods from a truck or conveyor?
9. Work inside a freezer or meat cooler?
10. Operate power-driven bread slicers or bagel slicers?
11. Operate any power-driven equipment?
12. Work from ladders?
13. Work during school hours?
14. Work before 7:00 a.m. on any day?
15. Work past 7:00 p.m. between Labor Day and June 1?
16. Work past 9:00 p.m. between June 1 and Labor Day?
17. Work more than 3 hours on a school day, including Fridays?
18. Work more than 8 hours on any day?
19. Work more than 18 hours in any week when school was in session?
20. Work more than 40 hours in any week when school was not in session?
21. Do you employ any workers who are less than 14 years of age?
22. Do you fail to maintain in your records a date of birth for every employee under 19 years of age?
Click here to take the entire assessment. At the end of the assessment, there is a rules summary that explains an employer’s responsibility under the FLSA for the issues on the assessment.
