Wage & Hour Defense Blog : Wage & Hour Lawyer & Attorney : Epstein Becker Green Law Firm : DOL Enforcement, FLSA Coverage

by Michael Kun

    The California wage-hour epidemic has entered its second decade.

    While there is little on the horizon to suggest that these cases are about to come to an end, there are a few glimmers of hope now. 

    The first glimmer of hope comes from a case that has been pending before the California Supreme Court since 2008.  California employers continue to await a ruling on meal and rest breaks from the California Supreme Court in Brinker.  A ruling that breaks need only be "made available," not "ensured," may not put an end to meal and rest break class actions, but it should slow them down considerably and make it exceedingly difficult to certify a class in most cases.

    The second glimmer of hope comes from this week's Hertz decision from the United States Supreme Court, which suggests that more class actions in California will now be removable to federal court under the Class Action Fairness Act.  Foreign companies previously had difficulty removing cases in California because they often did the most business in California or had the most employees there simply because of its size. As the court explained in Arellano v. Home Depot U.S.A., Inc., 245 F.Supp.2d 1102, 1107 (S.D. Cal. 2003), “it is unlikely that Congress intended that every corporation that does more business in California than any other state should be considered a citizen of California.”  It looks like the Supreme Court agrees, and now a "nerve center" test will be used.  Employers with headquarters outside California now should be able to remove many class actions filed in California as a result. 

    Now, there is a third glimmer of hope in the form of new bill that could change the game further. 

    The key word is "could."

    In an interview I did with EmploymentLaw360 last year, I mentioned the need to reform California's class action procedures to provide more guidance to the trial courts. Too much discretion for the trial courts, and not enough guidance, has created an untenable situation in which one judge could certify a class where the judge in the very next courtroom might have denied certification, leaving employers lost and often with no recourse other than to settle in the face of uncertainty. I also mentioned the need to address a form of litigation that rewarded plaintiff's attorneys, often for doing little work and often at the expense of their own clients. http://www.law360.com/articles/123717

    I wish I could say that my comments were profound, or that someone read my comments and decided to act.  It's enough to know that someone shared my thoughts and decided to do something about it.

    California Assembly Member Audrey Strickland has introduced a bill to reform California's class action procedures based on the "lack of clear standards for certifiction and management of class actions":  http://info.sen.ca.gov/pub/09-10/bill/asm/ab_0001-0050/abx8_38_bill_20100210_introduced.html

    The bill proposes standards modeled after Rule 23 of the Federal Rules of Civil Procedure, removing "any presumption or policy in favor of class certification," and only allowing class actions to proceed where all criteria are met. 

    That change alone would be a welcome one for class action defendants in California.

    But the bill goes further.  It also proposes a system by which a defendant can propose a settlement to the court that has not been approved by plaintiff's counsel, essentially removing one of the largest obstacles to settlement -- plaintiff's counsel who hold up settlements out of self-interest.

    Sounds logical to you and me.  And sounds like something the plaintiff's bar will fight to the death.  (Feel free to insert your own joke here about class action plaintiff's lawyers taking 40% of multi-million dollar settlements, often for doing little more than showing up for a mediation, where they meet their clients for the first time.  Think that doesn't happen?  I'm handling a class action now where plaintiff's counsel met their client for the first time 2 years after the lawsuit had been filed.  And, no, you didn't misread that last sentence.)

    Will this bill get passed?

    Will it gain any traction at all?

    If it were anywhere other than California, you would have to think there was a chance, perhaps even a significant one, that the bill would become law, even with some revision.

    But it's California. 

    The plaintiff's bar, and legislators counting their votes for the next election, may not let Ms. Strickland's bill get far.  And they will make Ms. Strickland's next election hellish.  In fact, they're probably already preparing fliers explaining to voters how Ms. Strickland is trying to make it more difficult for them to get money in lawsuits. 

    Now you can insert your own joke about why California is teetering on the edge of bankruptcy.  Again.   

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by Betsy Johnson

On November 23, 2009, the Chief Counsel of the California Division of Labor Standards Enforcement ("DLSE") issued an Opinion Letter on behalf of the Labor Commissioner, Angela Bradstreet, in which the DLSE modified its enforcement stance on the issue of making deductions from exempt employee accrued vacation to cover partial-day absences. In the Opinion Letter, the DLSE opined that there is nothing in California law that would prevent an employer from implementing a policy that provides for hour-for-hour deductions from accrued vacation leave for partial-day absences taken by exempt employees.

This change in the DLSE enforcement policy brings California law more in line with the federal Fair Labor Standards Act ("FLSA") regarding the "salary basis test" and deductions from exempt employee paid time-off accounts for partial-day absences.

Question Presented to the DLSE

The employer presented the DLSE with a series of factual scenarios in which it proposed different reductions in vacation and/or sick leave balances for full- or partial-day absences of exempt employees and asked whether the proposed reductions were permissible under California law.

The employer who sought the DLSE's guidance maintains a policy pursuant to which employees accrue vacation time to be used for absences for vacation and personal reasons, as well as for absences due to illness (when sick leave has been exhausted). The employer's policy also provides for the accrual of sick leave. The employer's vacation policy requires that employees use accrued vacation hours for illness when the employees do not have any sick leave left. In addition, employees must use all accrued vacation and sick leave before any unpaid time off is approved.

One of the questions presented to the DLSE was whether the employer's policy of deducting from exempt employee accrued vacation time to cover partial-day absences is consistent with the "salary basis test" for exempt employees under California law.

DLSE's Analysis

In order to qualify for an exemption from the overtime and minimum wage requirements of California law, an employee must meet both the "duties test" and the "salary basis test." For the purposes of the Opinion Letter, the DLSE assumed that the employees in question met the duties test for the "white collar" (executive, administrative and professional) exemptions described in the California Wage Orders.

At issue was whether the apportionment of accrued vacation to the partial-day absences outlined in the employer's factual scenarios violated California's salary basis test. One of the hallmarks of exempt status is the payment of a fixed, predetermined salary to employees for any day in which the employees perform any work. Improper reductions in exempt employees' salaries results in the loss of exempt status.

In one case, a California court held that the state salary basis test prohibits employers from making deductions from exempt employees' salary for a partial-day absences. See, Conley v. P.G.& E., 131 Cal.App.4th 260 (2005). However, the Conley court did allow the employer to deduct vacation time in four-hour increments to cover partial-day absences of exempt employees. In its Opinion Letter, the DLSE rejected the four-hour limitation placed on the employer's ability to deduct time from exempt employees' accrued vacation to cover partial-day absences, concluding that the holding in Conley is inconsistent with California and federal law.

The DLSE concluded that there is no state or federal regulation or law that provides for a "four or more hours" limitation for deductions from accrued vacation. The DLSE found that the applicable federal regulations and interpretations by the federal Department of Labor ("DOL") support the conclusion that an employer may reduce exempt employee vacation banks on an hour-for-hour basis to cover partial-day absences.

Specifically, the DLSE looked at 29 CFR § 541.602, which sets forth the general rule that exempt employees must be paid their pre-determined salary for any week in which they perform work and DOL opinion letters interpreting this regulation. The federal regulations also make clear that employers may not "dock" (reduce the dollar amount of exempt employees' salaries) exempt employees for taking partial days off. On the other hand, if exempt employees take partial days off, the DOL has opined that employers may apportion exempt employees' compensation for those days between regular salary, vacation pay and sick pay, so that the employees receive full pay for those days. The DLSE found that these federal guidelines are consistent with state law.

Therefore, the DLSE concluded, while it is impermissible for an employer to deduct from exempt employees' salaries for partial-day absences, employers may deduct from accrued vacation balances in connection with absences due to vacation or sickness of less than a full day under an express policy providing for such deductions without the employees losing their exempt status. The DLSE's conclusion is premised on the fact that the employer's policies provide for such deductions so that the employees are aware of how partial-day absences will be handled.

What This Means To Employers

While the DLSE Opinion Letter is not legally binding precedent in civil litigation, it should be given significant weight by the California courts. However, the Opinion Letter is binding precedent in any DLSE proceeding and signifies a favorable shift in the DLSE's enforcement policy in favor of giving employers more flexibility by allowing employers to implement vacation and sick leave policies that apportion paid time to partial-day absences of exempt employees.

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Often, employers ask their outside labor counsel to review job descriptions or other material to provide an opinion on whether a job, or group of jobs, should be classified as exempt from overtime requirements.  Such efforts would seemingly be a classic example of a privileged attorney client communication made for the purpose of providing legal advice.

In a recent case out of California state court, however, this answer was not so clear at the trial and appellate level, who both required the employer to hand over a redacted version of such a letter in a class action overtime suit.  The employer took the case to the California Supreme Court, who rightfully  weighed in and made clear that such opinion letters are privileged and should not be subject to discovery.

This opinion is good law for a number of reasons, not the least of which is that it encourages employers to do the right thing - police themselves.  Employers should not be punished by seeking out legal advice on whether their actions are correct.  Moreover, determining the applicability of overtime exemptions can sometimes be as much art as science.    If employers are afraid to discuss these nuances with their own lawyers, how can they ever hope to achieve compliance? Hopefully, this decision will set an example and avoid meritless discovery fights that often erupt in these ever growing wage and hour class actions.

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By Betsy Johnson

On August 19, 2009, the Chief Counsel of the California Division of Labor Standards Enforcement ("DLSE") issued an Opinion Letter on behalf of the Labor Commissioner, Angela Bradstreet, in which the DLSE reversed its enforcement stance on the issue of shortened workweeks with reduced salaries for exempt employees. In the Opinion Letter, the DLSE opined that there is nothing in California law that would prevent an employer from implementing a reduction in exempt employee salaries that is directly proportional to a reduction in the number of days worked per week.

This change in the DLSE enforcement policy brings California law more in line with the federal Fair Labor Standards Act ("FLSA") regarding "furloughs" and salary reductions for exempt employees. For more information regarding the FLSA rules regarding furloughs, please see our March 2009 Client Alert.

Question Presented to the DLSE

The employer sought to reduce the work schedule of its exempt employees and implement a corresponding reduction of their salaries as an alternative to layoffs. Specifically, the employer proposed reducing the number of workdays from five (5) days to four (4) days per week and making a proportionate reduction in the salaries of the exempt employees by 20 percent. The employer represented to the DLSE that the reduction in workdays and salaries would be a temporary measure to assist the employer in weathering the current economic downturn. The employer intends to restore both the full five-day work schedule and the full salaries of its exempt employees.

The question presented to the DLSE was whether the employer's planned salary reduction is consistent with the "salary basis test" for exempt employees under California law.

The DLSE's Analysis

In order to qualify for an exemption from the overtime and minimum wage requirements of California law, an employee must meet both the "duties test" and the "salary basis test." For the purposes of the Opinion Letter, the DLSE assumed that the employees in question met the "duties test" for the "white collar" (executive, administrative and professional) exemptions described in the California Wage Orders.

At issue was whether the planned change ran afoul of the "salary basis test" as set forth in Labor Code § 515(a) and the Wage Orders. The Wage Orders provide that, in order for employees to meet the "salary basis test" portion of the exemption, the employees "… must also earn a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment. Full-time employment is defined in Labor Code Section 515(c) as 40 hours per week." At present, the California minimum wage is $8.00 per hour, which equates to a minimum salary of $2,733.33 per month for exempt employees.

The DLSE concluded that there is no express provision in the California Labor Code, the Wage Orders or in any California cases that would restrict or prevent and employer from implementing a fixed reduction in exempt employee salaries during a period when the employer operates a shortened workweek due to economic conditions. Since the DLSE found no precedent in California law, the DLSE looked to the federal interpretations under the FLSA for guidance.

The DLSE found that the applicable federal regulations and interpretations by the federal Department of Labor ("DOL") support the conclusion that an employer may reduce its exempt employees' work schedule and salary without violating the salary basis test. Specifically, the DLSE looked at 29 CFR § 541.602, which sets forth the general rule that exempt employees must be paid their pre-determined salary in any week in which they perform work, and the series of DOL opinion letters interpreting this regulation.

The DLSE reviewed DOL opinion letters, dating as far back to 1970, in which the DOL consistently concluded that the salary basis test does not preclude a bona fide fixed reduction in the salary of exempt employees to correspond with a reduction in the normal workweek, so long as the reduction is not designed to circumvent the requirement that the employees be paid their full salary, and in no event less than the legal minimum salary, in any week in which they perform work.

The DLSE cited, with approval, several federal decisions which address this issue (see Archuleta v. Wal-Mart Stores, Inc., 543 F.3d 1226 (10th Cir. 2008); In re Wal-Mart Stores, Inc., 395 F.3d 1177 (10th Cir. 2005); and Caperci v. Rite Aid Corporation, 43 F.Supp.2d 83 (Dist. Mass 1999)). These decisions support the conclusion that the employer's proposal to reduce simultaneously its exempt employees' work schedule and salary for the specific reasons described above does not violate the salary basis test.

Finally, the DLSE addressed its previous enforcement position, which is found in an e-mail Opinion Letter issued by the DLSE in 2002 (see DLSE Opinion Letter 2002.03.12). In that opinion, the DLSE concluded that the federal and state regulations preclude an employer from reducing the salary of an exempt employee during a period in which the company operates a shortened workweek due to economic conditions. This conclusion relied in part upon the federal trial court decision in Dingwall v. Friedman Fisher Associates, P.C., 3 F.Supp.2d 215 (N.D. NY 1998). In Dingwall, the defendant employer reduced the workweek of its staff from five days to four and simultaneously reduced their salaries by 20 percent.

The DLSE analyzed the decision in Dingwall in relation to the more recent federal precedent and determined that Dingwall is not well reasoned and should not form the basis of the DLSE's enforcement position. Although the DLSE did not withdraw Opinion Letter 2002.03.12, the DLSE determined that the employer was not prohibited under California law from implementing the proposed reduction in the work schedule and salary of the exempt employees.

The DLSE's Conclusion

The DLSE concluded that, while there are differences between the federal and state salary requirements (e.g., minimum dollar amounts), the DLSE will follow the interpretation under the FLSA regarding the validity of a reduction in the work schedule and salary of exempt employees. The DLSE stressed that the exempt employees must still meet the salary basis test by earning a monthly salary of at least $2,733.33 (the equivalent of two times the state minimum wage for a 40-hour week), as provided in Labor Code §§ 515 and the Wage Orders.

The DLSE cautioned that its conclusion is based on the employer's representations that: 1) the "proposal to reduce the number of its employees' scheduled work days from five days to four days per week, with a corresponding reduction in salary, is based upon the employer having experienced significant economic difficulties due to the present severe economic downturn"; and 2) "as soon as the business conditions permit, the employer intends to restore both the full five-day work schedule and the full salaries of its exempt employees."

What the DLSE Opinion Letter Means To Employers

While the DLSE Opinion Letter is not legally binding precedent in civil litigation, it should be given significant weight by the California courts. However, the Opinion Letter is binding precedent in any DLSE proceeding and signifies a favorable shift in the DLSE's enforcement policy in favor of giving employers more flexibility in implementing cost-cutting measures to address changing economic conditions. By implementing reductions in exempt employees' salaries and work schedules, an employer may be able to avoid layoffs and be in a better position to adjust to changes in the economy.

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by  Betsy Johnson and Aaron Olsen

On July 27, 2009, the U.S. Court of Appeals for the Ninth Circuit held that a corporation's managers can be held personally liable under the Fair Labor Standards Act ("FLSA") for wages that the corporation failed to pay to employees prior to the employer's filing for bankruptcy. This opinion serves as a cautionary reminder of the risks managers potentially face when a corporation files for bankruptcy and has failed to pay its employees for all wages earned prior to the filing.

In Boucher v. Shaw, ---- F. 3d ----, 2009 WL 2217517 (9th Cir. 2009), former employees of the Castaways Hotel, Casino and Bowling Center sued three senior managers for unpaid wages under Nevada state law as well as federal law. The managers moved to dismiss the claims based on, among other grounds, the fact that the hotel had filed for bankruptcy protection. The Ninth Circuit asked the Nevada Supreme Court to address the issue of whether, under state law, the managers could be personally liable as "employers" for the unpaid wages. The Nevada Supreme Court ruled that individual managers are not "employers" under state law. However, the Ninth Circuit ruled against the managers on the federal FLSA claims and allowed the employees' claims to proceed.

Prior Ninth Circuit opinions have given the FLSA's definition of "employer" an "expansive interpretation in order to effectuate the FLSA's broad remedial purposes." Lambert v. Ackerley, 180 F. 3d 997, 1011-12 (9th Cir. 1999) (en banc) (quoting Bonnette v. California Health & Welfare Agency, 704 F. 2d 1465, 1469 (9th Cir. 1983)). Under those opinions, where an individual exercises "control over the nature and structure of the employment relationship" or "economic control" over the relationship, that individual can be held to be an "employer" within the meaning of the FLSA and thus subject to individual liability. Lambert, 180 F. 3d at 1012.

Other circuits follow a similar analysis. For instance, in Chao v. Hotel Oasis, Inc., 493 F. 3d 26, 34 (1st Cir. 2007), the court held the corporation's president was personally liable where he had ultimate control over business's day-to-day operations and was the corporate officer principally in charge of directing employment practices. Likewise, in United States Dep't of Labor v. Cole Enters., Inc., 62 F. 3d 775, 778-79 (6th Cir. 1995), the court found the president and 50 percent owner of the corporation was an "employer" under the FLSA where he ran the business, issued checks, maintained records, determined employment practices and was involved in scheduling hours, payroll and hiring employees. In Donovan v. Grim Hotel Co., 747 F. 2d 966, 971-72 (5th Cir. 1984), a corporate officer with no ownership interest was held to be an "employer" where, among other things, he began and controlled the corporations, held their purse-strings, and guided their policies, and where, "speaking pragmatically, [the corporations] were [his] and functioned for the profit of his family."

In Boucher, the three defendants were the corporation's Chairman and Chief Executive Officer, who was alleged to own 70 percent of its shares; the Chief Financial Officer, who was alleged to have had responsibility for supervision and oversight of the company's cash management; and the manager responsible for handling labor and employment matters, who was alleged to own the remaining 30 percent of the shares. As the issues came before the District Court in the form of a motion to dismiss, all of the plaintiffs' allegations were accepted as true for purposes of deciding the motion. Significantly, for the purposes of the motion to dismiss, none of the defendants challenged their status as employers under the FLSA. Instead, they argued that any authority and duty that they had to pay wages to employees under the FLSA ended when the company entered into Chapter 7 bankruptcy proceedings. The District Court agreed with this argument and granted defendants' motion to dismiss.

The issue before the Ninth Circuit was whether the corporation's bankruptcy filing affected the liability of these individual managers under the FLSA. The managers argued that the automatic stay of claims against the bankrupt provided for under the Bankruptcy Code should apply to FLSA claims made against the executives and not only to the claims asserted against the corporation. The Ninth Circuit disagreed, and explained that the purpose of the automatic stay is to protect only the debtor (i.e., the corporation), by giving it room to breathe and potentially reorganize, and to protect the creditors as a group by ensuring that no single creditor obtains payment on its claims to the detriment of others. There is no such protection for non-debtor parties, such as the managers of the corporation.

The Ninth Circuit noted that since there were no allegations that the corporation was obligated to indemnify the individual managers for legal expenses or a judgment, any liability of the defendants to the employees would not affect the corporation's bankruptcy proceedings. The Court noted, however, that if a finding of liability on the part of the managers were to affect the assets and liabilities of the corporation through indemnification obligations or a directors and officers insurance policy, then the bankruptcy protections might apply to such claims.

This opinion highlights issues that employers and senior management, including substantial shareholders in closely held corporations, ought to consider not only in the context of consideration of a possible filing for bankruptcy protection but in the ordinary course of business as well. For example, addressing such matters as the corporation's obligation to defend and indemnify key members of senior management in the structuring of employment agreements and other such arrangements may allow for the protection of executives from such personal liability notwithstanding a bankruptcy filing.

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By Michael Kun and Matthew A. Goodin

California employers are celebrating a new California Supreme Court decision that effectively prevents unions from filing suit under the Labor Code Private Attorneys General Act ("PAGA") and the Unfair Competition Law ("UCL").

 There is no reason to celebrate.

What appears to be a major victory for employers is, in fact, no victory at all once one considers the practicalities of litigation.

On June 29, 2009, the same day that it issued its highly anticipated opinion in Arias v. Supreme Court, holding that employees need not bring representative actions under the PAGA as class actions, the California Supreme Court also affirmed the Court of Appeal’s decision in Amalgamated Transit Union, Local 1756, AFLCIO v. Superior Court (First Transit, Inc.). In Amalgamated Transit, the Court concluded that a labor union that had not suffered actual injury under California’s UCL and that was not an “aggrieved employee” under PAGA could not bring a representative action under either of those laws.

Cause to celebrate, right?

Wrong.

While the decision would seem to suggest that there will be fewer UCL and PAGA lawsuits because unions may not bring them, the practicalities are very different. Instead of bringing UCL or PAGA claims themselves, it would seem that unions need only find a single employee to act as the named plaintiff in such actions in order to proceed with identical claims.

Think a union is going to have difficulty finding that one person?

Think again.

As such, an apparent victory for employers may not be any victory at all.

Case Overview

California’s UCL allows a private party to bring an unfair competition action on behalf of others, but only if the person “has suffered injury in fact and has lost money or property as a result of the unfair competition.” Similarly, PAGA provides that an “aggrieved employee” may bring an action to recover civil penalties for violations of the Labor Code “on behalf of himself or herself and other current or former employees … .”

Amalgamated Transit presented the question whether a labor union that has not suffered actual injury under the UCL and is not an “aggrieved employee” under PAGA may nevertheless bring a representative action under those laws either as the assignee of employees who have suffered an actual injury and who are aggrieved employees, or as an association whose members have suffered actual injury and are aggrieved employees. The California Supreme Court has confirmed that a union may not do so.

The UCL prohibits “any unlawful, unfair or fraudulent business act or practice … .” Before 2004, the UCL allowed “any person acting for the interests of itself, its members or the general public” to seek restitution or injunctive relief against unfair acts or practices. But California voters changed the law in 2004 by passing Proposition 64. The law now requires that a representative claim seeking relief on behalf of others may be brought only by a “person who has suffered injury in fact and has lost money or property as a result of the unfair competition.”

In Amalgamated Transit, the union conceded that it did not suffer any actual injury, but instead contended that employees who had suffered an actual injury could assign their claims to the union. The Court reasoned that allowing employees to assign such claims to a labor union would defeat the entire purpose of Proposition 64, which was specifically amended to require that a person asserting an unfair competition claim must have suffered an actual injury or have lost money as a result of the alleged unfair competition.

In September 2003, California’s Legislature enacted PAGA. PAGA permits a civil action “by an aggrieved employee on behalf of himself or herself and other current or former employees” to recover civil penalties for violations of other provisions of the Labor Code. An “‘aggrieved employee’” is “any person who was employed by the alleged violator and against whom one or more of the alleged violations was [sic] committed.” Again, the union conceded that it was not an “aggrieved employee,” but argued that an aggrieved employee’s claim could be assigned to the union. The Court noted that an individual may assign a legal claim to another only when the claim arises out of a legal obligation or a violation of a property right. The court observed that PAGA does not create property rights or any other substantive rights. Rather, it is simply a procedural statute allowing an aggrieved employee to recover civil penalties for Labor Code violations that otherwise would be sought by state labor law enforcement agencies. Under existing case law, the right to recover a statutory penalty may not be assigned.

The union next argued that unions may maintain the actions as entities in their own right based on the legal concept of associational standing. Under this concept, an association, such as a labor union, may bring an action on behalf of its members when the association itself would not otherwise have standing. Associational standing exists when: (a) the association’s members would otherwise have standing to sue in their own right; (b) the interests the association seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit. The Court reiterated, however, that a plaintiff has standing to bring an UCL action only if the plaintiff has suffered “injury in fact” and a plaintiff has standing to bring an action under the PAGA only if the plaintiff is an “aggrieved employee” The court concluded that associations suing under either law are not exempt from these express requirements.

Looking Ahead: What Does This Case Mean To Employers?

While many may believe Amalgamated Transit to be a major victory for employers, the practicalities may be otherwise. While unions may not bring UCL or PAGA lawsuits themselves, it may not be difficult for them to find employees willing to act as the named plaintiffs in such actions.

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By Michael S. Kun and Aaron Olsen

You probably remember the scene in Jaws when Roy Scheider's character first sees the shark that he and his crew have been pursuing.

And you probably remember what he says: "We need a bigger boat."

Well, after the California Supreme Court's latest ruling, California employers may need a bigger boat.

Already besieged by wage-and-hour class actions, California employers now need to brace themselves for a new wave of representative actions under California’s Private Attorneys General Act ("PAGA") after the California Supreme Court has made it easier than ever for employees to pursue such claims.

In Arias v. Superior Court of San Joaquin County (Angelo Dairy), No. S155965 (June 29, 2009), the California Supreme Court concluded that representative actions for alleged Labor Code violations brought under PAGA, often referred to as the "Bounty Hunter" or "Sue Your Boss" law, need not be brought as class actions. Instead, a single employee may proceed with an action on behalf of all aggrieved employees without the need to comply with class action requirements. Although the Court also held that representative actions brought under California’s Unfair Competition Law ("UCL") must be brought as class actions, the ruling on the PAGA issue will likely lead to more employees and their counsel bringing PAGA lawsuits because they will not have to comply with the procedural burdens inherent in class actions.

That's right. Largely because the legislature left out a few words here or there in their haste to pass PAGA, the Supreme Court has held that employees may pursue the equivalent of a class action without having to actually get a class certified.

Making matters worse, employers could be forced to defend a series of individual actions alleging violations of the Labor Code that would be difficult to settle on a global basis. Although the California Supreme Court determined that, with respect to civil penalties, nonparty employees as well as the government are bound by the judgment in an action brought under PAGA, the Court made it clear that different plaintiffs could bring a series of individual lawsuits seeking other remedies. A proliferation of coordinated individual actions would be difficult to settle because the parties would not have the benefits of the class action settlement process. While class action settlements can oftentimes be complicated, the process is fairly well established. Class action settlements generally provide a procedure by which class members either "opt-in" to the lawsuit or "opt-out," leaving the parties with a great deal of certainty as to whom a settlement involves. That would not appear to be the case in a non-class action representative claim under PAGA.

Will the legislature step in to correct this matter?

That seems unlikely.

Will employees and their counsel start filing new PAGA lawsuits tomorrow?

Of course.

Employers need to brace themselves by auditing their employment practices even more vigilantly than they already were.

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by Kathryn McGuigan

Post-termination payment of bonuses and commissions is a frequent subject of wage and hour claims in California. In Nein v. Hostpro, Inc., No. B199497 (June 3, 2009), the California Court of Appeal addressed this issue, affirming summary judgment in favor of the employer, holding that the plain language of an employment agreement barred the employee’s recovery of commissions after he was terminated. Because the employment agreement contained a carefully drafted, clearly defined commission plan, the Court found in favor of the employer. Had the agreement been ambiguous or less straightforward, it would not have been enforceable.

Case Overview

In Nein, an employee salesperson entered into an agreement with his employer which provide that he would be “eligible for commission pay as set forth in this [document], so long as [plaintiff] remains employed with the Company as a Sales Representative.”  The employee and employer also agreed that the agreement could only be amended by a written agreement executed by both parties.

One and a half years later, the employer promoted the employee and the parties entered into a new oral agreement which provided that the employee would receive commissions of “20% of the up front costs’ revenues on all accounts” he brought in, either by his own efforts or through contacts. Thereafter, the employee brought a transaction to his employer.  The employee was terminated eleven months later and the transaction was consummated less than thirty days later.

The employee was not paid any commission for the transaction. He filed suit against his employer, seeking payment of commissions under the agreement because the transaction occurred through his “contacts and efforts.” He also sued for violation of California Labor Code §2926 for non-payment of wages. The Court of Appeal disagreed.

Because the employment agreement stated the employee would be eligible for commission as long as he remained employed with the employer, the Court found only one reasonable interpretation of the agreement – “once plaintiff ceased to be employed by defendant, he would no longer be eligible for commission pay.”  The written agreement precluded the employee from collecting additional commission post-termination. 

Even though the Court observed that commissions are wages, for purposes of enforcing the provisions of the Labor Code, it found that the rights of an employee to commission depend on the terms of the contract for employment. Because the employee’s rights to commission were governed by the provisions of the agreement, he was not entitled to any further commissions once he was terminated.

In a footnote, the Court cautioned employers that, while a commission agreement would be enforced, where a contract provision is unconscionable, it will  not.  Because the employee did not plead unconscionability, the Court did not consider it. 

What This Means to Employers

Disputes over commission payments are commonly brought by employees after termination. Employers who compensate their employees with commission payments should re view their plans and agreements. A well-drafted commission agreement will be enforced even if it bases payment on continued employment.

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by Kathryn McGuigan

 In Sonic-Calabasas A, Inc. v. Moreno, B204902 (May 29, 2009, Second Dist, Div. Four), the California Court of Appeals considered whether an admittedly valid employment arbitration agreement, governed by the Federal Arbitration Act (“FAA”) may be enforced to dismiss a former employee’s administrative wage claim for unpaid vacation time.

 Plaintiff and his employer had an arbitration agreement, which Plaintiff conceded was valid. The agreement required both parties to submit their employment disputes to arbitration under the FAA.  Plaintiff left his position with Defendant and thereafter Plaintiff filed his administrative wage claim with the California Labor Commissioner according to the “Berman” process provided in Labor Code §§ 98 et seq.  The employer responded with a petition to compel arbitration and to dismiss the Berman proceeding.  The superior court denied the petition as premature. The superior court stated that until there was a preliminary non-binding hearing and decision by the Labor Commissioner, the arbitration agreement was unenforceable.

The Appeals Court reviewed the agreement and found it stated that it allowed Plaintiff to file administrative proceedings only before the California Department of Fair Employment and Housing or the Equal Employment Opportunity Commission.  Because neither the Labor Commissioner nor the Division of Labor Standards Enforcement was listed among the stated exceptions, Plaintiff was barred from pursuing an administrative wage claim.  The arbitral forum provided in the arbitration agreement was adequate to allow Plaintiff to vindicate his statutory rights.  The employer’s petition to compel arbitration was granted.

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by Michael Kun

How quickly can $87 million go up in smoke?

Pretty darned quickly, especially if you are referring to the $87 million that was awarded to plaintiffs and their attorneys in a tip-pooling class action against Starbucks in San Diego.

In Chau v. Starbucks (CA4/1 D053491 6/2/09), Jou Chau, a former Starbucks barista, brought a class action against Starbucks challenging the Company's policy that permits certain service employees, known as shift supervisors, to share in tips that customers place in a collective tip box.
If you've ever been to a Starbucks, you know exactly where that tip box is. (And if you haven't been to a Starbucks, then you must be new to the country. Welcome.)

Chau alleged the Company's policy violates California's Unfair Competition Law, Bus. & Prof. Code, § 17200, based on a violation of Labor Code section 351. After certifying a class of current and former baristas and conducting a bench trial, the trial court found Chau had proved his claim, and awarded the class $87 million in restitution, plus interest and attorney's fees.

And now it's gone.

Up in smoke that smells vaguely like soy latte.

A California Court of Appeal has overturned the decision, ordering the trial court to enter judgment in Starbuck's favor.

The Court of Appeal concluded that applicable statutes do not prohibit Starbucks from permitting shift supervisors to share in the proceeds placed in collective tip boxes. The Court explained that the trial court's ruling was improperly based on a line of decisions that concerns an employer's authority to require that a tip given to an individual service employee must be shared with other employees. As the Court explained, the policy challenged in Chau presented the flip side of this mandatory tip-pooling practice as it concerned an employer's authority to require equitable allocation of tips placed in a collective tip box for those employees providing service to the customer.

This one can be chalked up as a major victory not just for Starbucks, but for the entire hospitality industry, which has been hit with an epidemic of wage-hour class actions in California. To those who represent employers in these matters, congratulations must go out now only to Starbucks' attorneys, but to Starbucks itself, for holding firm rather than paying an enormous settlement, as plaintiffs surely sought both before and after their trial court victory.

Now we can sit back and wait to see if the California Supreme Court wishes to hear the case, as plaintiff's counsel will certainly request.

While it's always a fool's game to bet on what the California Supreme Court might do, the early read on this case is that it is not a matter that the Supreme Court will have interest in.
 

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by Michael Kun and Kathryn McGuigan

In recent years, the alleged misclassification of employees under California’s wage and hour laws has been a hotly contested issue and the subject of a great many class actions. Faced with several appeals pending before it, the Ninth Circuit has now sought guidance from the California Supreme Court on the outside salesperson and administrative exemption tests as they apply to pharmaceutical sales representatives. Such guidance should prove invaluable to employers in the industry, and to parties to these claims.

 In D’Este v. Bayer Corporation, 07-56577 (9th Cir. 2009), a pharmaceutical sales representative brought a class action lawsuit against her employer, claiming that she had been misclassified as an exempt employee and had not been paid overtime or provided meal and rest breaks in compliance with California’s wage and hour laws. The district court granted summary judgment in favor of the employer, finding that the employee was exempt under California’s outside salesperson exemption; it declined to reach the question whether she was exempt under the administrative exemption. The employee appealed to the Ninth Circuit.

 D’Este is not the only class action on appeal to the Ninth Circuit on this issue. Three other class actions on appeal before the Ninth Circuit -- and four other class actions filed in the Central District of California -- all involve the question of whether pharmaceutical sales representatives are exempt under California’s outside salesperson and administrative exemptions.

 In light of the number of actions regarding the classification of pharmaceutical sales representatives, the Ninth Circuit certified the following two questions to the California Supreme Court:

 1. Does a pharmaceutical sales representative qualify as an “outside salesperson” under Industrial Welfare Commission’s (“IWC”) Wage Orders 1-2001 and 4-2001 if the pharmaceutical sales representative spends more than half the working time away from the employer’s place of business and personally interacts with doctors and hospitals on behalf of drug companies for the purpose of increasing individual doctors’ prescriptions of specific drugs?

 2. Is a pharmaceutical sales representative involved in duties and responsibilities that meet the requirements of a person employed in an administrative capacity as defined under IWC Wage Order 4-2001?

 The Ninth Circuit will accept the California Supreme Court’s decisions on these questions.

 The California Supreme Court’s review of these questions should provide employers with a clear understanding of the application of outside salesperson and administrative exemptions from overtime and meal and rest break requirements for pharmaceutical sales representatives employed in California. The Supreme Court’s ruling will provide invaluable guidance to employers in the industry about how to classify these persons going forward, and a clearer understanding to parties already litigating this issue. Should the ruling suggest that these persons normally fall under one or both exemption, litigation of these claims by pharmaceutical sales representatives may end. Should the ruling suggest that these persons normally fall under neither exemption, a new wave of class actions could be expected.

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 By Michael Kun

     The wage hour class action epidemic that has plagued California employers for the last decade or so appears to have no end.

    If anyone tells you otherwise, they are not paying enough attention. 

    And if they tell you the California Supreme Court is about to put an end to the epidemic, they are mistaken about that, too. 

    The California Supreme Court couldn't put an end to it even if it wanted to, at least not with the issues now before it.  And who is to say that they want to do that anyway?

    As in recent years, employers and their counsel are awaiting several important rulings from the California Supreme Court that relate to these wage hour class actions.   

    In Brinker v. Superior Court and Brinkley v. Superior Court, the Supreme Court should finally clarify whether employers must "ensure" that meal and rest periods be taken, or merely make them "available" to employees.

    In Arias v. Superior Court, the Supreme Court should finally clarify whether claims brought under the Private Attorneys General Act ("PAGA") for alleged Labor Code violations must be brought as a class action and satisfy the requirements for class treatment, or whether an employee can represent a group of employees merely by filing suit under PAGA. 

    And in Pineda v. Superior Court, the Supreme Court should finally clarify whether California's Unfair Competition Law allows employees restitutionary recovery of "waiting time" penalties.

    More than a few commentators are predicting victories for employers in all four cases. 

    Hopefully, no one is placing any bets.  Predicting what the California Supreme Court will do is, respectfully, a fool's game. 

    At the beginning of the decade, many predicted an employer friendly ruling from the Supreme Court in Sav-On v. Superior Court, anticipating that the Supreme Court would hold that wage-hour claims were not appropriate for class treatment, killing the epidemic early.  Those predictions, of course, were wrong.  Very wrong. 

    Little more than two years ago, most commentators predicted that the Supreme Court would rule that premiums for missed meal and rest breaks were "penalties," rather than "wages," and hold that they were subject to a one-year limitations period, rather than three (or four) years.  The ruling in Murphy v. Kenneth Cole, of course, was otherwise, surprising virtually everyone.  And, unless there's a signed and dated document to prove it, anyone who tells you that he or she expected that the Supreme Court was going to rule that premiums for missed breaks were somehow "wages," not "penalties," just isn't being candid with you.   

    So, what should employers expect the Court to do in Brinker, Brinkley, Arias and Pineda?

    No predictions here.

    But, reading the cases, the applicable statutes and their legislative history would suggest that employer friendly decisions should be rendered in Brinker, Brinkley and Pineda -- and, unfortunately, an employee friendly decision in Arias (largely because of missing verbiage in the statute specifiying that PAGA claims are to be brought as class claims). 

    But there's an enormous difference between should and will.

    Based on the Supreme Court's recent history in employment cases -- particularly Sav-On and Murphy --  it would seem prudent for employers to adopt the same conservative, New England-ish approach that, until recently, fans of the Boston Red Sox favored for years-- expect the worst, and be pleasantly surprised if something better arrives. 

    That said, anyone who believes that even employer friendly decisions will put an end to the wage hour class action epidemic in California is mistaken.

    These cases make far too much money for plaintiffs' lawyers, and they are not going to walk away from them without finding ways to get around any unfavorable Supreme Court decision. 

    And getting around them may not be too difficult. 

    If, for instance, the Supreme Court rules that meal and rest periods need only be made "available," not "ensured," you can be certain that plaintiff's counsel will simply change the boilerplate allegations in their complaints to say that meal and rest periods were not made "available." 

    In the few seconds it takes to make a global change in a document, even an employer friendly Supreme Court decision could effectively be undone. 

    And in the few seconds it takes to pick up the phone, calls will be placed to legislators throughout the state demanding that the laws be rewritten to provide that breaks must be "ensured," which would completely undo that Supreme Court decision.  

    Such is the life of the employer who does business in California.

    Even a victory can be taken away. 

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