Because of concerns about employee theft, many employers have implemented practices whereby employees are screened before leaving work to ensure they are not taking merchandise with them.  While these practices are often implemented in retail stores, other employers use them as well when employees have access to items that could be slipped into a bag or a purse.

Over the last several years, the plaintiffs’ bar has brought a great many class actions and collective actions against employers across the country, alleging that hourly employees are entitled to be paid for the time they spend waiting to have their bags inspected when leaving work.  These lawsuits are often referred to as “bag check” cases.

While the Supreme Court’s decision in Integrity Staffing Solutions, Inc. v. Busk largely put an end to these cases under the Fair Labor Standards Act (“FLSA”), it did not do so under California law.  That is because of a critical difference between the FLSA and California law.  Unlike the FLSA, California law requires that employees be paid for all time when they are “subject to the control of the employer” or for all time that they are “suffered or permitted to work.”  And, not surprisingly, plaintiffs’ lawyers in California have argued that employees are “subject to the control of the employer” and “suffered” to work while they wait for and participate in security screenings.

In defending against these claims, not only do employers often argue that each employee’s experience differs such that class certification would be inappropriate, but they frequently argue that the time spent in “bag checks” is so small as to be de minimis – and, therefore, not compensable.

Courts throughout the country have recognized the principle that small increments of time are not compensable, including the United States Supreme Court.

In a class action in the Northern District of California where a class had been certified, Nike argued that the time its employees spent in “bag check” was de minimis.  And the Court agreed, awarding it summary judgment.

In Rodriguez v. Nike Retail Services, Inc., 2017 U.S. Dist. LEXIS 147762 (N.D. Cal. Sept. 12, 2017), the district court certified a class of all Nike non-exempt retail store employees since February 2010.  But in certifying the class, the Court specifically held that, “whether time spent undergoing exit inspections is de minimis is a common issue.  ‘That is, if the time is compensable at all, an across-the-board rule, such as sixty seconds, might wind up being the de minimis threshold.’”

Seizing on that holding, Nike commissioned a time and motion study.  That study revealed that an average inspection takes no more than 18.5 seconds.  Nike argued that such time was de minimis.  The Court agreed.

In reaching its conclusion, the Court found that the average inspection time was minimal, employees did not regularly engage in compensable activities during inspections, and it would have been administratively difficult for Nike to record the exit inspections.

The plaintiffs have already filed an appeal from the order granting summary judgment against them.

As noted in earlier postings, in March of this year, a federal judge in New York handed Chipotle Mexican Grill a significant victory, denying a request by salaried management apprentices alleging misclassification as exempt from overtime to certify claims for class action treatment under the laws of six states, as well as granting Chipotle’s motion to decertify an opt-in class of 516 apprentices under the Fair Labor Standards Act (“FLSA”).  The plaintiffs then sought—and in July 2017 the U.S. Court of Appeals for the Second Circuit granted—a discretionary interlocutory appeal of the ruling concerning the six state-law putative classes, allowing the plaintiffs to obtain immediate review of that decision under Rule 23(f) of the Federal Rules of Civil Procedure rather than waiting until after final judgment in the case to pursue an appeal as of right.

The plaintiffs also asked the district court for permission to appeal the order decertifying the FLSA collective action.  Under the pertinent statute, 28 U.S.C. § 1292(b), a district court may certify a non-final ruling for immediate appeal if the “order involves a controlling question of law as to which there is substantial ground for difference of opinion and … an immediate appeal from the order may materially advance the ultimate termination of the litigation[.]”  The plaintiffs argued that “a conflict exists in this Circuit between Rule 23 standards for class certification and FLSA Section [16(b)] standards for certification of a collective action” and that the court’s rulings regarding the FLSA and the state-law classes reflect uncertainty regarding the differences, if any, between the class certification standard and the FLSA decertification standard.

On September 25, 2017, the district court granted the plaintiffs’ motion for an interlocutory appeal.  Although the court “disagrees with Plaintiffs’ argument that there is a ‘rift’ between” those standards, the court nevertheless concluded that the “Plaintiffs’ assertions do point to controlling questions of law which may have substantial grounds for a difference of opinion.”  (Order at 2.)  The court emphasized that “[t]he Second Circuit will review this Court’s Rule 23 class certification decision pursuant to Rule 23(f)” but that this review “would not likely encompass the portion of this Court’s decision decertifying the . . . collective action.”  (Id.)  Because “Plaintiffs are adamant that the two standards need elucidation and that this Court erred in applying the standards, it seems proper to grant Section 1292(b) relief in order for the Circuit to review the entire” ruling—i.e., both the FLSA and the state-law class aspects of the decision—and thereby “avoid the possibility of conflicting decisions on Plaintiffs’ class motions, promote judicial efficiency, and avoid piecemeal appellate litigation.”  (Id.)  The court also remarked that “the Second Circuit has recognized that class certification decisions have the potential to materially advance the ultimate termination of the litigation which the Second Circuit has held may warrant Section 1292(b) relief.”  (Id. at 3.)

Stepping back from the specific wording of the court’s decision, the ruling reflects a pragmatic approach to the matter: because the Second Circuit has already decided to take up the Rule 23 class certification issue in the case, there is no real harm in allowing the appellate court the opportunity to decide whether it also wants to address the FLSA decertification issue at the same time.  The district court’s decision certifying the matter for interlocutory appeal does not require the Second Circuit to hear the full case at this time; instead, it authorizes the plaintiffs to proceed with a petition for permission to that court to appeal the decertification order.

It remains to be seen to what extent this court and other courts will apply the actual verbiage of this decision even-handedly when employers seek review of orders granting class certification or conditionally certifying FLSA collective actions.  Will being “adamant” that the law needs “elucidation” and that the court “erred” features of nearly every employer-side request for interlocutory review—or the “potential” for class certification decisions “to materially advance the ultimate termination of the litigation” similarly lead to interlocutory review when employers make comparable requests?  Stay tuned for further developments.

On September 5, 2017, the Department of Labor filed with the Fifth Circuit an unopposed motion asking the court to dismiss its appeal of the nationwide preliminary injunction ruling issued last November by a Judge Amos Mazzant in the Eastern District of Texas.  The motion states that DOL’s appeal is moot in light of Judge Mazzant’s entry of final judgment on August 31, 2017.  Barring any unusual further developments, we anticipate that the Fifth Circuit will dismiss the appeal promptly.

By withdrawing the appeal, the Department is signaling that it intends to abandon the 2016 Final rule and, instead, to proceed with a new rulemaking in line with the Request for Information (“RFI”) the Department issued on July 26, 2017.  That RFI seeks public input regarding what salary level or levels, if any, the Department should use in place of the 2016 figures in order to update the $455 weekly / $23,660 annual salary requirement for the executive, administrative, and professional exemptions implemented in the Department’s 2004 rulemaking, as well as the $100,000 annual compensation threshold for the highly-compensated variant of these exemptions.

The comment period for the RFI currently ends on September 25, 2017.  To date, regulations.gov has received more than 138,000 comments in response to the RFI, though most of the comments appear to be identical submissions by numerous different commenters, as is common for this type of rulemaking.  Watch for a Notice of Proposed Rulemaking announcing a new salary level for the executive, administrative, and professional exemptions in the next few months.

 

Since last November, much of the discussion regarding the Obama-era overtime regulations that, among other things, more than doubled the minimum salary threshold for executive, administrative, and professional employees under the Fair Labor Standards Act (“FLSA”) has focused on the Department of Labor’s appeal of the nationwide preliminary injunction barring implementation and enforcement of the rule.

While everyone is awaiting the oral argument before the Fifth Circuit, currently scheduled for October 3, 2017, Judge Amos Mazzant of the Eastern District of Texas once again issued a bold ruling sure to grab the public’s attention.

On August 31, 2017, Judge Mazzant granted summary judgment in favor of the plaintiffs in the two consolidated cases challenging the overtime rule, holding that the salary level the Department selected in 2016 conflicts with the FLSA, Nevada v. U.S. Department of Labor and Plano Chamber of Commerce, E.D. Tex. No. 4:16-CV-731.

After dealing with preliminary procedural issues including standing, ripeness, and the applicability of the FLSA to the States, Judge Mazzant focused on the substance of the 2016 rule.  Applying the legal framework set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984), the Court determined that the statutory language establishing the exemptions, section 13(a)(1) of the FLSA, 29 U.S.C. § 213(a)(1), “is unambiguous because the plain meanings of the words in the statute indicate Congress’s intent for employees doing ‘bona fide executive, administrative, or professional capacity’ duties to be exempt from overtime pay.”  (Slip Op. at 13.)

In the Court’s words, “the Department does not have the authority to use a salary-level test that will effectively eliminate the duties test as prescribed by” the FLSA.  (Slip Op. at 14.)  “Nor does the Department have the authority to categorically exclude those who perform ‘bona fide executive, administrative, or professional capacity’ duties based on salary level alone.”  (Id.)

In short, “[t]he updated salary-level test under the Final Rule does not give effect to Congress’s unambiguous intent.”  (Slip Op. at 14.)  The Court noted that “[t]he Department estimates 4.2 million workers currently ineligible for overtime, and who fall below the minimum salary level, will automatically become eligible under the Final Rule without a change to their duties.”  (Id. at 16.)

The Court held that “the Department’s Final Rule is not ‘based on a permissible construction’ of Section 213(a)(1)” because by “doubl[ing] the previous minimum salary level” the regulation “eliminates a consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity’ duties.”  (Slip Op. at 16-17.)  For Judge Mazzant, “[t]he Department has exceeded its authority and gone too far with the Final Rule.  Nothing in Section 213(a)(1) allows the Department to make salary rather than an employee’s duties determinative of whether” an employee “should be exempt from overtime pay.  Accordingly, the Final Rule is not a reasonable interpretation of Section 213(a)(1) and thus is not entitled to Chevron deference.”  (Id. at 17.)

The Court also struck down the regulation’s mechanism for automatically updating the minimum salary threshold every three years.  (Slip Op. at 17.)

In a portion of the decision that may have a direct effect on the pending appeal, the Court “acknowledges its injunction order might have been confusing” insofar as some have read that decision as “invalidat[ing] all versions of the salary-level test that the Department has used for the last seventy-five years.”  (Slip Op. at 4 n.1.)

The Court clarified that “the Department has the authority to implement a salary-level test” and that the summary judgment ruling “is not making any assessments regarding the general lawfulness of the salary-level test or the Department’s authority to implement such a test.  Instead, the Court is evaluating only the salary-level test as amended by the Department’s Final Rule, which is invalid under both steps of Chevron.”  (Id. at 13 n.5.)

As a result of Judge Mazzant’s ruling, the pending appeal may be moot.  The Department’s reply brief before the Fifth Circuit expressly disavowed a defense of the salary level selected in the Final Rule, instead asking the Fifth Circuit to rule only on the question of whether the Department has the authority to implement a salary-level test at all.  Judge Mazzant’s decision acknowledges that the Department has that authority, which appears to address the Department’s concern. In light of the decision, the Department may well withdraw its appeal.

In Moon et al v. Breathless, Inc., the Third Circuit reviewed the dismissal of a class and collective action under the Fair Labor Standards Act, the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law.  The District Court for the District of New Jersey had dismissed the named plaintiff’s claims based on an arbitration clause in the written agreement between the her and Breathless, the club where she worked as a dancer.

In her lawsuit, the plaintiff alleged that she and other dancers were misclassified as independent contractors, and that Breathless unlawfully failed to pay them minimum wages and overtime pay.

In response, Breathless pointed to an agreement signed by the plaintiff stating that she was an independent contractor and not an employee. Breathless moved for summary judgment based on language in the agreement stating: “In a dispute between [the plaintiff and Breathless] under this Agreement, either may request to resolve the dispute by binding arbitration.”

The Third Circuit noted that, under New Jersey law, there is a presumption that a court will decide any issues concerning arbitrability. Finding no evidence to overcome that presumption, the Circuit Court proceeded to decide whether the plaintiff was required to submit her class and collective action claims to arbitration.

The New Jersey Supreme Court’s decisions in Garfinkel v. Morristown Obstetrics & Gynecology Assocs. and Atalese v. U.S. Legal Servs. Grp. were determinative of the scope of the arbitration agreement in this case, concluded the Third Circuit.

In Garfinkel, the arbitration provision in a contract stated it applied to “any controversy or claim arising out of, or relating to, this Agreement or the breach thereof.”  That language that suggested that the parties intended to arbitrate only those disputes “involving a contract term, a condition of employment, or some other element of the contract itself.”  Accordingly, the plaintiff in Garfinkel was not compelled to arbitrate his statutory claims.

In Atalese, the arbitration provision in a service agreement covered “any claim or dispute … related to this Agreement or related to any performance of any services related to this Agreement.”  That language “did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court,” and therefore the plaintiff was not required to arbitrate those claims.

By contrast, the New Jersey Supreme Court required the arbitration of statutory claims in Martindale v. Sandvik, Inc., where the arbitration clause in an employment agreement stated that plaintiff agreed to waive her “right to a jury trial in any action or proceeding related to [her] employment…”

Because the arbitration agreement in the plaintiff’s agreement with Breathless applied to disputes “under this Agreement,” without reference to statutory wage claims, the Third Circuit applied Garfinkel and Atalese to conclude that Moon was not required to arbitrate her statutory claims under the FLSA and New Jersey law.

The award of summary judgment in favor of Breathless was therefore reversed, and the case was remanded to the District Court.

While the laws of other states may vary, the Third Circuit’s decision suggests that, at the very least, employers in New Jersey should expressly reference statutory wage claims in arbitration provisions if they intend to have statutory wage claims arbitrated.

In a much anticipated filing with the Fifth Circuit Court of Appeal in State of Nevada, et a. v. United States Department of Labor, et al, the United States Department of Labor has made clear that it is not defending the Obama Administration’s overtime rule that would more than double the threshold for employees to qualify for most overtime exemptions. However, the Department has taken up the appeal filed by the previous Administration to reverse the preliminary injunction issued blocking implementation of the rule, requesting that the Court overturn as erroneous the Eastern District of Texas’ finding, and reaffirm the Department’s authority to establish a salary level test. And the Department has requested that the Court not address the validity of the specific salary level set by the 2016 final rule because the Department intends to revisit the salary level threshold through new rulemaking.

The litigation stems from action taken by the Department in May 2016 to issue a final rule that would have increased the minimum salary threshold for most overtime exemptions under the Fair Labor Standards Act (“FLSA”) from $23,660 per year to $47,476 per year. The rule was scheduled to become effective on December 1, 2016, but a federal judge issued a temporary injunction blocking its implementation just days beforehand.

Section 13(a) of the FLSA exempts from the Act’s minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional [(“EAP”)] capacity * * * [specifically providing,] as such terms are defined and delimited from time to time by regulations of the Secretary [of Labor].” 29 U.S.C. § 213(a)(1). To be subject to this exemption, a worker must (1) be paid on a salary basis; (2) earn a specified salary level; and (3) satisfy a duties test.  In enjoining the 2016 rule, the District Court for the Eastern District of Texas reasoned that the salary-level component of this three-part test is unlawful, concluding that “Congress defined the EAP exemption with regard to duties, which does not include a minimum salary level,” and that the statute “does not grant the Department the authority to utilize a salary-level test.”

In seeking reversal of the preliminary injunction, the Department has argued that the Fifth Circuit expressly rejected the claim that the salary-level test is unlawful in Wirtz v. Mississippi Publishers Corp. In Wirtz, the Court reasoned that “[t]he statute gives the Secretary broad latitude to ‘define and delimit’ the meaning of the term ‘bona fide executive * * * capacity,” and he rejected the contention that “the minimum salary requirement is arbitrary or capricious.”  Further, the Department argues that every circuit to consider the issue has upheld the salary-level test as a permissible component of the EAP regulations.

By many accounts, the Department’s recently-appointed Labor Secretary, Alexander Acosta, has made clear that he does not think the salary level should be at $47,476 per year, but rather set at a more reasonable level between $30,000 and $35,000 per year. While Secretary Acosta may disagree with the salary level of the 2016 rule, the Department’s brief seems to make clear that he wants to ensure that he has the authority to set any salary threshold.

In issuing the preliminary injunction, the District Court did not address the validity of the salary level threshold set by the 2016 rule. Because the injunction rested on the legal conclusion that the Department lacks authority to set a salary level, it may be reversed on the ground that the legal ruling was erroneous. As a result, by requesting that the Fifth Circuit not address the validity of the salary level set by the 2016 rule, should the Court reverse the preliminary injunction without ruling on the salary level’s validity, it is unclear whether the 2016 rule will immediately go into effect pending new rulemaking. Employers need to stay tuned.

Since 2000, the number of wage and hour cases filed under the Fair Labor Standards Act (“FLSA”) has increased by more than 450 percent, with the vast majority of those cases being filed as putative collective actions.  Under 29 U.S.C. § 216(b), employees may pursue FLSA claims on behalf of “themselves and other employees similarly situated,” provided that “[n]o employee shall be a party plaintiff to any such action unless he gives his consent in writing to become such a party and such consent is filed in the court in which such action is brought.”  Despite the prevalence of FLSA collective actions, the legal implications and consequences of being a “party plaintiff” in such an action continue to be addressed.  The Court of Appeals for the Third Circuit recently examined this issue, in an opinion that may prove useful to defendants seeking to obtain discovery from all opt-in plaintiffs in a putative collective action.

In Halle v. West Penn Allegheny Health System, Inc. et al., the named plaintiff filed a putative collective action alleging defendants violated the FLSA by failing to properly pay employees for work performed during meal breaks.  The district court dismissed the collective action allegations based on a related case that had previously been decided, and dismissed the opt-in plaintiffs’ claims without prejudice to re-filing individual actions.  After the named plaintiff subsequently settled his individual claim, three opt-in plaintiffs sought to appeal the district court’s decision.

The Third Circuit held the opt-in plaintiffs lacked the right to appeal, because they were no longer “parties” after the collective action claims were dismissed. The opt-in plaintiffs retained the right to pursue their own individual claims, but they had no right to pursue an appeal from the named plaintiff’s individual final judgment.  The court held that, “[b]y consenting to join Halle’s collective action, these opt-in plaintiffs ceded to Halle the ability to act on their behalf in all matters, including the ability to pursue this appeal.”

In reaching this decision, the Third Circuit engaged in an extensive analysis of the “fundamental question arising from the procedural history of this case: just what is a ‘collective action’ under the FLSA?” Unlike a class action brought under Federal Rule of Civil Procedure 23, where all putative class members are bound by the court’s ruling unless they affirmatively “opt out” of the case, “the existence of a collective action depends upon the affirmative participation of opt-in plaintiffs.”  As the Third Circuit noted, “[t]his difference means that every plaintiff who opts in to a collective action has party status, whereas unnamed class members in Rule 23 class actions do not,” prompting “the as-yet unanswered question of what ‘party status’ means in a collective action.”

The court’s analysis of this issue, while tangential to Halle’s holding, highlights the tension inherent in the language of FLSA § 216(b), which, according to the Third Circuit, “raises more questions than it provides answers.  While the first sentence [of § 216(b)] sounds in representational terms (to proceed ‘in behalf of’ others ‘similarly situated’), the second sentence refers to those who file consents as ‘party plaintiffs,’ seeming to imply that all who affirmatively choose to become participants have an equal, individual stake in the proceeding.”  This tension is particularly significant with regard to defendants’ discovery rights in a collective action.

Under Rule 33 and Rule 34 of the Federal Rules of Civil Procedure, in the absence of any court-imposed limits, a party may serve interrogatories and document requests “on any other party.”  Based on this language, and FLSA § 216(b)’s designation of individuals who opt in to a collective action as “party plaintiffs,” arguably a defendant in a collective action should be entitled to serve discovery requests on each individual who opts in to the litigation, unless the court orders otherwise.  Despite this fact, the Third Circuit noted that, “[f]requently,” discovery in collective actions “focuses on the named plaintiffs and a subset of the collective group,” a limitation that may hinder defendants’ ability to present individualized defenses that may not be applicable to all opt-in plaintiffs.

While the Third Circuit did not fully resolve the question of what it means to be a “party plaintiff,” two aspects of the Halle decision may prove helpful to defendants seeking to assert their right to obtain discovery from all opt-in plaintiffs in a collective action.  First, as noted above, the Third Circuit emphasized that each opt-in plaintiff “has party status.”  This language, when read in conjunction with the Federal Rules of Civil Procedure regarding the scope of discovery, should support defendants’ right to seek discovery from “any other party,” including all opt-in plaintiffs.

Second, in holding that the opt-in plaintiffs had no right to appeal a final judgment involving the named plaintiff, the court emphasized the importance of “the language of their opt-in consent forms, which handed over all litigation authority to named plaintiff.” The Third Circuit noted that courts often rely on the language of the opt-in consent form “to determine which rights opt-in plaintiffs delegated to the named plaintiffs.”  Based on this guidance, defendants may wish to propose including language in the opt-in consent form stating that individuals who join the collective action may be required to provide documents and information, sit for depositions, and/or testify at trial.  Such language may help demonstrate that the opt-in plaintiffs were meant to be treated as active parties to the litigation, with the same rights and obligations as named plaintiffs.

While a court may ultimately exercise its discretion to impose limits on the scope of discovery, particularly in collective actions with a large putative class, the Third Circuit’s analysis in Halle may prove useful to defendants seeking support for their argument that they should be entitled to obtain discovery from each opt-in plaintiff.

A federal district court in California has weighed in on the question of whether student-athletes are employees for the purposes of minimum wage and overtime laws. And, like the courts before it, it has rejected that notion.

In Dawson v. National Collegiate Athletic Association, No. 16-cv-05487-RS (N.D. Ca. April 25, 2017), the United States District Court for the Northern District of California has joined the Seventh Circuit Court of Appeals and other courts in holding that athletes are not employees entitled to minimum wage and overtime time pay.

In Dawson, a former college football player for the University of Southern California filed a putative class action against the NCAA and the associated conference, claiming he was denied full pay for all hours worked, including overtime. Rather than applying the four factor “economic reality” test that the Ninth Circuit has adopted, the district court focused on the “true nature of the relationship.” Borrowing from the Seventh Circuit’s reasoning in Berger v. Nat’l Collegiate Athletic Ass’n, 843 F.3d 285 (7th Cir. 2016), the court concluded that “student athletic ‘play’ is not ‘work,’ at least as that term is used in the FLSA.”

The court rejected the Plaintiff’s argument that the situation differed from Berger because the students in that case were track and field athletes, while the Dawson athletes played Division I football, which generates massive revenue for schools. The court noted that Plaintiff cited no authority to support this distinction.

The court also relied on the U.S. Department of Labor’s Field Operations Handbook, which indicates that students who participate in extracurricular activities generally are not employees of the school, distinguishing them from work-study students who typically are considered employees. The court drew a distinction between sports and work-study programs, labelling the latter as programs that benefit the school. Conversely, the court felt that football exists for the benefit of the student and only in limited circumstances, for the benefit of the school.

Thus, one federal court in California has joined the parade of courts that have rejected the concept of student athletes being employees of the schools where they are engaged in sports. The issue is likely to be appealed to the Ninth Circuit. And only time will tell whether the Ninth Circuit will confirm this result or whether it will conclude that student-athletes in fact are employees.

Claims that employees have been misclassified as independent contractors remain a focus for private plaintiffs and government agencies. Contracts that exert control over the business of another company may be a particularly fertile source of misclassification claims by plaintiffs seeking unpaid wages.

Two recent suits arising from franchise agreements with Jani-King, described by the Third Circuit as “the world’s largest commercial cleaning franchisor,” demonstrate the potential liability that can arise under these circumstances.

Wage Hour Division Sues Based on Misclassification of Franchisees

Last week, the Department of Labor filed suit claiming that franchisees of Jani-King of Oklahoma Inc. are actually employees under the Fair Labor Standards Act.

The DOL alleges that the franchisees typically have no employees of their own, but rather are individual who are required to pay Jani-King a franchise fee, royalties, and other payments to receive cleaning assignments.

The suit contends that Jani-King, among other things, sets customer cleaning rates; negotiates with customers over the cleaning contracts under which franchisees work; reassigns cleaning contracts from one franchise to another; handles “all aspects of how and whether cleaners are paid for the work they perform;” and collects payments from customers.

Notably, the only claim in the DOL’s Complaint is for an injunction requiring Jani-King to begin keeping records of the wages and hours its alleged employees. The fact that the DOL has chosen to pursue injunctive relief in the absence of any other remedy suggests a strong interest in the principles at issue in the case.

Third Circuit Affirms Class Certification Based on Franchise Agreement & Manuals

The DOL suit was preceded by a September 21, 2016, decision by the Third Circuit Court of Appeals.  That decision upheld a district court’s order certifying a Rule 23 class action of approximately 300 Philadelphia-area franchisees who claim to be Jani-King employees.

In determining whether an employee has been misclassified as an independent contractor under Pennsylvania law, the Third Circuit stated that “the paramount factor is the right to control the manner in which the work is accomplished.”

The District Court’s opinion had pointed to specific provisions in the Jani-King franchise agreement, policy manual and training manual through which Jani-King (among other things) mandated how often a franchisee communicated with customers and dictated how franchisees addressed customer complaints, maintained their records and solicited business.

The District Court stated that “[t]hose documents also demonstrated that Jani-King controlled the franchisees’ work assignments, has the right to inspect the franchisees work, and has the ability to change the policies and procedures as it sees fit.”

Because the Jani-King franchise agreement, policies manual, and training manual were common to the class, they supported the conclusion that common issues would predominate in misclassification cases by franchisees. Therefore, the Third Circuit affirmed the District Court’s class certification order.  The plaintiffs will therefore be able to pursue class claims against Jani-King under the Pennsylvania Wage Payment and Collection Law.

The sometimes-rigid nature of franchise relationships can not only be evidence of the level of control characteristic of an employment relationship, but can also provide a basis for arguing that claims should joined in a Rule 23 class action. Companies, therefore, should consider whether the controls imposed by franchise agreements (or any other contracts) are justified by their potential to create unwanted employment relationships.

US Supreme CourtOn March 22, 2016, the United States Supreme Court issued its much anticipated decision in Tyson Foods, Inc. v. Bouaphakeo, a donning and doffing case in which a class of employees had been awarded $2.9 million following a 2011 jury trial that relied on statistical evidence. (A subsequent liquidated damages award brought the total to $5.8 million.)

In a 6-2 opinion, the Supreme Court affirmed that award.  While the Supreme Court’s decision may not have been the outcome many were expecting, the Court did not issue a broad ruling regarding the use of statistical evidence in class actions, and the decision may prove to have limited application.

In 2007, Tyson Foods employees at a meat processing facility in Iowa filed suit under both state law and the Fair Labor Standards Act (“FLSA”), alleging that they were not paid overtime for the time spent donning and doffing protective gear.  Because Tyson Foods did not have records of the amount of time employees actually spent in those activities, employees’ filled the “evidentiary gap” at through the presentation of representative evidence. This included not only employee testimony and video recordings, but, most importantly, an expert study showing the average time employees spent in such activities as observed by the expert.

In seeking to reverse the jury award, Tyson Foods argued to both the Eighth Circuit Court of Appeals and the Supreme Court that the amount of time spent donning and doffing varied from person to person – and that some persons did not work sufficient time to be entitled to overtime in any event – such that individualized issues predominated over common ones. And Tyson Foods argued that the use of statistical evidence presented it from presenting individualized defenses.

In making these and other arguments, Tyson Foods sought a broad ruling prohibiting the use of statistical evidence in class actions. The Supreme Court rejected that request, concluding that such a rule would “reach too far.” And it explained that its landmark 2011 Wal-Mart v. Dukes decision “does not stand for the broad proposition that a representative sample is an impermissible means of establishing class-wide liability.”

Instead, the Supreme Court held that a “representative or statistical sample, like all evidence, is a means to establish or defend against liability. Its permissibility turns not on the form a proceeding takes — be it a class or individual action — but on the degree to which the evidence is reliable in proving or disproving the elements of the relevant cause of action.” It further explained, “Whether and when statistical evidence can be used to establish classwide liability will depend on the purpose for which the evidence is being introduced and on ‘the elements of the underlying cause of action’ . . . .”

Under the facts presented to it, the Supreme Court  concluded that statistics could be used to infer the amount of time Tyson Foods employees spent donning and doffing because those statistics could have been used in individual suits by the employees.

Importantly, in reaching its conclusion, just as it declined to issue a blanket rule forbidding the use of statistical evidence, the Court also declined to issue a broad rule affirming the use of statistical evidence in all class actions.

The Court noted that its opinion “is not to say that all inferences drawn from representative evidence in an FLSA case are ‘just and reasonable.’ . . . . Representative evidence that is statistically inadequate or based on implausible assumptions could not lead to a fair or accurate estimate of the uncompensated hours an employee has worked.”  In other words, a defendant can challenge an expert’s methodology, which Tyson Foods did not do.

The Court concluded its discussion of representative evidence by declining to issue any broad rule: “The Court reiterates that, while petitioner, respondents, or their respective amici may urge adoption of broad and categorical rules governing the use of representative and statistical evidence in class actions, this case provides no occasion to do so. Whether a representative sample may be used to establish classwide liability will depend on the purpose for which the sample is being introduced and on the underlying cause of action. In FLSA actions, inferring the hours an employee has worked from a study such as [the expert’s] has been permitted by the Court so long as the study is otherwise admissible. . . . The fairness and utility of statistical methods in contexts other than those presented here will depend on facts and circumstances particular to those cases.”

While the decision is a victory for Tyson Foods employees, it is those sentences quoted directly above that will likely limit the decision from having widespread application.  The decision will no doubt be cited by plaintiffs’ counsel in class and collective actions to support their efforts to use statistical evidence to establish both liability and damages in their cases, even where there are individuals who have not been harmed. And defense counsel in those cases will just as certainly point to language in the decision that would indicate that it is a narrow ruling limited to its facts.

Not unimportantly, one issue left unaddressed by the Court pertains to Tysons Foods’ argument that uninjured class members should not recover damages.  The Court declined to address that issue, holding that that question was not fairly presented to it in this case because the damages award has not yet been distributed and  the record does not indicate how it will be done. Accordingly, Tyson Foods may raise a challenge to the allocation method when the case returns to the trial court for distribution of the award to address persons who were not injured.