Wage & Hour Litigation Blog

Third Circuit Follows Suit in Expanding Reach of Successor Liability for FLSA Claims

Posted in Overtime

Co-authored by Scott Rabe and Nadia Bandukda

This month, the Third Circuit became the latest court of appeals (following the Seventh and Ninth Circuits) holding that the federal common law standard should be applied when determining whether a successor may be liable for FLSA violations allegedly committed by its predecessor. So what does this mean for employers? We expect the ruling likely will make it easier for plaintiffs to assert FLSA claims against employers and to hold them liable for violations by their predecessor.

The plaintiff in Thompson v. Real Estate Mortgage Network (3d Cir. Apr. 3, 2014) was employed by Security Atlantic Mortgage Company until she and her colleagues were asked by their supervisors to complete new job applications to work for Real Estate Mortgage Network.  Her employment was then transferred to REMN, she was put on the REMN payroll, and Security Atlantic subsequently went out of business. Plaintiff brought FLSA claims on behalf of herself and a collective of employees, alleging, among other things, that REMN was liable for FLSA overtime violations committed by Security Atlantic on a theory of successor liability. The case came before the Third Circuit on appeal from the district court’s grant of defendants’ motion to dismiss.

The Third Circuit reversed and, among other things, held that the that the appropriate standard to apply for purposes of determining successor liability under the FLSA is the more lenient federal common law standard as opposed to New Jersey’s more strict standard.  This is an important holding because the federal common law standard applies “a lower bar to relief than most state jurisprudence” by permitting successor liability to be imposed “to protect important employment-related policies.”

Absent fraud or an express agreement to assume liabilities, most jurisdictions, including New Jersey, will impose successor liability to FLSA claims only where there is a substantial continuity of operations between the predecessor and successor–in other words, where the successor is basically continuing the predecessors business operations with some or all of the same employees.

By saying the federal common law standard applies, however, the Third Circuit is requiring courts within the jurisdiction to look not only at whether there are (1) continuity of operations and workforce between the successor and predecessor entities, but also whether (2) the successor has notice of its predecessor’s legal obligations, and (3) whether the predecessor has the ability to provide adequate relief.  While it remains to be seen how this ruling will be interpreted and applied going forward, it is possible that it may demarcate a significant expansion in successor liability for FLSA claims to situations where a successor entity simply had knowledge of its predecessor’s FLSA violations or where a predecessor entity is judgment proof.

We are tracking developments in this area of the law and will keep you updated.

Another One Bites the Dust: Central District of California Joins the Chorus of Courts Enforcing Class Action Waivers

Posted in Arbitration Agreements

Authored by Gena Usenheimer

In a decision that is becoming more and more commonplace, last week the Central District of California enforced a class action waiver in an arbitration agreement, rejecting the panoply of arguments raised by the plaintiff in opposition.

In Appelbaum v. AutoNation, Inc., et al., the plaintiff sought to representative a putative class of service technicians and mechanics in a suit alleging the defendants failed to comply with California’s wage and hour and meal break laws.  In its April 8, 2014 decision, the Central District granted the defendants’ motion to compel arbitration on an individual basis.  Among other dubious arguments raised by the plaintiff, the Court rejected the contention that the Federal Arbitration Act did not govern the agreement as well as plaintiff’s argument that the arbitration agreement was so unconscionable as to be unenforceable under California law.  Dedicating much of its analysis to this unconscionability argument, the Court ultimately found that the substantive terms of this particular agreement were not so one-sided or unfair as to “shock the conscience” or to otherwise render the agreement unenforceable.   Notably, the Court found California PAGA claims are subject to arbitration on an individual basis and declined to follow D.R. Horton, expressly rejecting the argument that the National Labor Relations Act or Norris-LaGuardia Act preclude enforcement of class action waivers.

Thus, while employers utilizing class action waivers in arbitration agreements may still face scrutiny, particularly before the National Labor Relations Board, Appelbaum makes clear that the growing trend in the federal courts is to enforce them.

ContractorGate: Court Awards Employer Over $550,000 In Attorney’s Fees And Costs Based On DOL’s Unreasonable Litigation Position

Posted in DOL Enforcement, Independent Contractors, Misclassification/Exemptions

Co-authored by Julie G. Yap and Rachel M. Hoffer

This week, the United States District Court for the Southern District of Texas ordered the Department of Labor to fork over $565,527.61 in attorneys’ fees and costs to a Texas employer.  Why such a hefty fee award?  The DOL’s position that the employer misclassified gate attendants as independent contractors was not “substantially justified”—nor was the DOL’s demand that the employer pay over $6 million in back wages and unpaid overtime.

The DOL began investigating Gate Guard Services L.P. in 2010 after the DOL Lead Wage and Hour Investigator received complaints from two friends he had met through “parties” and “the bars and stuff like that.”  GGS locates gate attendants (responsible for keeping track of vehicles that enter and leave oilfield operation sites) for oilfield operators.  The investigator’s friends were two of approximately 400 gate attendants who had contracts with GGS.

On July 19 and with no warning before hand, the investigator showed up at GGS’s office and spoke with the manager. The investigator came back ten days later for an “opening conference” at the facility.  Based on these meetings, his friends’ reports, and an interview with a third GGS worker, the investigator started crunching the numbers and concluded that GGS owed more than $6 million in back wages under the Fair Labor Standards Act.

With these initial calculations out of the way, the investigator resumed his investigation, interviewing fewer than 17 gate attendants over the next few months.  The investigator kept detailed notes of the gate attendants’ answers—which he shredded or burned after preparing witness interview statements.  Having interviewed less than five percent of the gate attendants, the investigator informed GGS that these workers were actually GGS employees, and advised GGS to pay $6,192,752 in back wages and unpaid overtime to gate attendants and service technicians.  The DOL District Director, Targeted Enforcement Coordinator, and attorney all stood behind the investigator’s findings:  if GGS did not reclassify the gate attendants and pay the $6 million, the DOL would file suit.

GGS—whose estimated net worth was slightly less than the DOL’s demand—then filed an action for declaratory judgment, seeking a determination that it was in compliance with the FLSA.  The DOL also filed an enforcement action in another division, which was transferred and consolidated with GGS’ suit over the DOL’s objection.  The court granted summary judgment on all of GGS’ claims, and GGS moved for attorneys’ fees under the Equal Access to Justice Act, which requires courts to award attorneys’ fees to qualifying prevailing parties when the government was not substantially justified in its legal position.  Under the EAJA, the government bears the burden to prove that its position, at every stage of the proceedings, was substantially justified, i.e., that its actions had a reasonable legal and factual basis.

The court granted GGS’s motion for attorneys’ fees, concluding that the “DOL failed to act in a reasonable manner both before and during the course of [the] litigation.”  Specifically, the court held that no “reasonable person could think that the DOL’s position that GGS’s gate attendants are employees was correct” where the gate attendants: (1) were free to reject assignments without penalty; (2) receive no training on how to do their job; (3) work with no day-to-day supervision; (4) are authorized to hire relief workers; (5) have the ability to increase their profits or suffer a loss; (6) work on a temporary, project-by-project basis; (7) are not precluded from other work; and (8) enter into independent contractor agreements with GGS.

The court openly criticized the DOL’s investigation, pointing out that had the DOL “interviewed more than just a handful of GGS’s roughly 400 gate attendants before presenting GGS with a $6,000,000.00 demand . . . , it would have known the gate attendants were not employees.”  The court also noted that, once discovery revealed the underlying facts of the case, “the DOL should have abandoned this litigation.”  Instead of abandoning the litigation, the DOL only protracted it by, among other things, making constant, improper objections throughout the investigator’s deposition and sending mass mailings to all of the gate attendants.

While the fee award was a big win for GGS, employers should know GGS wasn’t exactly made whole.  For one thing, the court rejected GGS’ motion for attorneys’ fees under a provision of the EAJA that would have allowed GGS to recover as much as all of its “reasonable fees and expenses,” finding that GGS failed to show that the DOL acted in bad faith.  Instead, GGS recovered under a provision that caps attorney fees at $125 per hour, though that hourly rate can be (and was) adjusted for cost of living.  And not all employers can recover under that provision; an employer with more than 500 employees, or with a net worth exceeding $7 million, is out of luck.  But, particularly for smaller businesses, the court’s decision offers some measure of hope that the DOL will be taken to task when it files and pursues frivolous actions.

Hitting the Unpaid Intern Trifecta: Litigation, Certification, and Settlement

Posted in Conditional Certification, DOL Enforcement, Overtime

Co-authored by Adam Smiley and Nadia Bandukda

With the Kentucky Derby less than a month away, we have a trifecta of unpaid internship developments for you:

  • First, On April 4th, the U.S. Department of Labor filed an amicus brief with the Second Circuit Court of Appeals, arguing in support of the Hearst unpaid interns, who are appealing the Southern District of New York’s May 2013 denial of class certification for their minimum wage and overtime allegations. 

In its brief, the DOL told the Second Circuit that the District Court in Hearst used the wrong test for determining whether an intern is an employee under wage and hour law. The DOL urged the Court to apply its own 6-part test rather than the “totality of the circumstances” or “primary benefit” test when evaluating whether or not interns should be paid.  The brief stated that the “subjective” totality of the circumstances test would make it “more difficult for both employers and interns, as well as courts, to determine whether interns are employees entitled to the protections of the FLSA.” 

The DOL also argued that its own test “allows employers, interns, and adjudicators to determine in an objective manner whether there is an employment relationship as broadly defined by the FLSA, thus best reflecting the economic reality of the situation [and] should therefore be [the test] adhered to strictly absent unusual circumstances.”

Stay tuned for oral arguments on this appeal, which is being held in tandem with the Fox Searchlight unpaid internship case.

  • Second, Viacom now faces a conditionally certified class of unpaid interns alleging minimum wage violations, also in the Southern District of New York.  U.S. District Court Judge Jesse Furman ruled last week that although the question was a “close one in some respects,” the opt-in plaintiffs met their low burden to show that they were “victims of a common policy or plan that violated the law” where the group had simply taken roles that would replace paid workers by using unpaid interns.  This decision will likely give the plaintiffs’ bar confidence that future unpaid internship lawsuits will clear the initial FLSA hurdle, and enable them to apply pressure on employers.
  • Third, reports have surfaced that Conde Nast has settled its own unpaid internship lawsuit, filed in June 2013, also in the Southern District of New York.  In response to the lawsuit, the publisher terminated its internship program this past October.  A settlement would come hot on the heels of Elite Model Management’s $450,000 unpaid internship settlement this January, and would set an important benchmark for future payouts.

Given these developments, any employer using unpaid interns should closely evaluate its program in order to ensure compliance with the law, and to avoid costly and time-consuming litigation.

 

Let’s Play Two: California Supreme Court Hears Oral Argument in Two Important Class Action Cases

Posted in Arbitration Agreements, Independent Contractors, Rule 23 Certification

Authored by Jim Harris

The California Supreme Court heard oral argument in two important cases involving employment-related class actions.  From the tenor of and comments made at the argument, it appears likely that the ultimate results will be a mixed bag for employers.

The first case, Iskanian v. CLS Transportation of Los Angeles, LLC, which we reported on late last year, presents related questions regarding the impact on California practice of the decision in Concepcion, where the High Court overruled a California Supreme Court decision under which class action waivers in certain arbitration agreements were deemed unconscionable.  The threshold issue in Iskanian is whether another California Supreme Court decision, Gentry, also must fall under ConcepcionGentry had held that a class action waiver in an arbitration agreement should not be enforced if a trial court were to determine that “class arbitration would be a significantly more effective of vindicating the rights of affected employees than individual arbitration.”  Even the most liberal member of the California Supreme Court, Justice Liu, seemed prepared to conclude that Gentry likewise is preempted by federal law because it runs head-long into Concepcion’s recognition that “requiring the availability of class-wide arbitration interferes with fundamental attributes of arbitration.”  The Justices also seemed unimpressed by Plaintiff’s contention that they could simply water-down Gentry to bring it into compliance with Concepcion.  And they appeared resistant to endorsing the National Labor Relations Board’s ruling in D.R. Horton that class action arbitration waivers violate the National Labor Relations Act, several Justices noting the chilly reception that D.R. Horton received in federal appellate courts.

The Plaintiff in Iskanian seems more likely to prevail, however, on the second issue—whether an arbitration agreement may permissibly override the statutory right to bring representative claims under PAGA, the California Private Attorneys General Act of 2004.  The argument focused mainly on the nature of PAGA’s actions.   Defense counsel argued there is no principled distinction between a PAGA representative action and a conventional employment class action.  However, the Justices who addressed this question seemed skeptical.  Justices from across the ideological spectrum seemed inclined to characterize a PAGA action as belonging to the State, although prosecuted by individual plaintiffs.  On that premise, they seem inclined to rule that an arbitration agreement may not override the State’s  statutory right.

The Supreme Court granted review in the second case, Ayala v. Antelope Valley Newspapers, to resolve questions regarding how trial courts are to determine whether common issues predominate in wage-hour cases where one issue is whether the putative class members are employees or independent contractors.   The oral argument, however, barely addressed class action procedures or rules.  Rather, the argument focused almost entirely on determining the proper substantive standard for making the employee/independent contractor determination.   The Ayala case had been litigated in the lower courts on the premise that that the common law test adopted in Borello governed this inquiry.  The employer’s position was that the multi-factored inquiry required under Borello was inherently individualized, precluding class certification.  Prior to oral argument, the Supreme Court requested supplemental briefing as to whether the far broader, and simpler, “suffer or permit” standard embodied in California wage-orders should instead govern.   Plaintiff’s counsel jumped on this suggestion, arguing that certification should be upheld under the “suffer or permit” standard.  A proxy war ensued.  Two Justices—Justices Liu and Werdegar—clearly believe the broader substantive standard should control.  Several others—Justices Baxter, Chin and Corrigan—appeared to disagree strongly.  The ultimate views of the remaining two Justices were less clear.   What does seem clear is that the ruling on the standard will determine the outcome on certification.

Try This On For Size: Seventh Circuit Rejects Factory Workers’ Donning and Doffing Claims Based On Expansive View Of The “Workday”

Posted in Off-the-Clock Issues, Overtime

Co-authored by Arthur Rooney and Abad Lopez

Under FLSA section 203(o), time spent “changing clothes or washing at the beginning or end of each workday” is excluded from compensable time if it is treated as non-work time by a collective bargaining agreement.  So, does section 203(o) only apply to time spent donning and doffing at the beginning and end of the period in which the workers are at the plant?  Or does it also apply to such activities before and after lunch breaks?  The answer depends on the definition of “workday.”

The Seventh Circuit, in a 2-1 decision, answered this question in Mitchell v. JCG Industries, Inc.  In affirming the district court’s dismissal of the workers’ donning and doffing claims, Judge Posner took a broad view of the definition of “workday” and the applicability of section 203(o).

In Mitchell, line workers at a poultry plant sought compensation for time spent donning and doffing protective gear.  The main issue on appeal was whether section 203(o) applied to such activities before and after lunch breaks.  In its expansive interpretation of the “workday,” the Court held that when employees take a half-hour lunch or other meal break, they are “in effect working two four-hour workdays in an eight-and-a-half hour period.”  This is in stark contrast to the long held interpretation that the “workday” extends from the time the employee reports to work until the time he is free to clock out for the day.  In departing from this interpretation, the Court found that the period before and after each lunch break was the beginning of a new “workday.”  As a result, the Court concluded that the time employees spent donning and doffing gear before and after meal breaks need not be compensated under section 203(o). 

The Court also held that this time could be excluded as de minimis.  In doing so, Judge Posner took the unusual step of having the court’s staff don and doff the clothing at issue.  Although the plaintiffs claimed that it took up to 15 minutes to don and doff the gear, the court’s staff was able to do so in less than two minutes.  According to Judge Posner, this in-camera time study “was not ‘evidence,’ . . . but it is information that confirms the common sense intuition that donning and doffing a few simple pieces of clothing and equipment do not eat up half the lunch break.”

The Seventh Circuit’s broad view of the “workday” expands an employer’s arsenal for excluding time spent by employees donning and doffing protective gear.  The decision also reinforces many courts’ view that collectively bargained for rights regarding payment of pre- and post-work activities cannot be circumvented through alternate theories of recovery.

Eleventh Circuit Compels Individual Arbitration Of FLSA Claims, Finding Plaintiffs Have No Substantive Right To Proceed Collectively

Posted in Arbitration Agreements

Co-authored by Christina Meddin and Louisa Johnson

On Friday, March 21, 2014, the Eleventh Circuit affirmed the dismissal of an FLSA putative collective action and compelled two employees’ claims to arbitration on an individual basis pursuant to the terms of an arbitration agreement.  The employees had argued that § 16(b) of the FLSA, which provides the mechanism for employees to pursue their claims on a class basis, creates a non-waivable substantive right to bring a collective action.  The Eleventh Circuit rejected this argument and agreed with all Circuit Courts of Appeal that have previously considered the issue–including the Second, Fourth, Fifth, and Eighth Circuits–in concluding that the FLSA “does not provide for a non-waivable, substantive right to bring a collective action.”  The decision, Walthour v. Chipio Windshield Repair, LLC, is a significant victory for employers who have an express class waiver provision in an arbitration agreement and desire to use it to avoid the threat of collective action certification under the FLSA.   

At the outset of the plaintiffs’ employment, both employees signed arbitration agreements, voluntarily consenting that any disputes arising out of, or related to, their employment would be submitted to arbitration.  The agreement also waived their right to proceed on a class or collective basis, stating, “employee and employer agree that each may bring claims against the other only in his/her/its individual capacity and not as a plaintiff or class member in any purported class or representative proceeding.” 

Despite entering into this agreement, the employees filed a putative collective action in the U. S. District Court for the Northern District of Georgia alleging violations of the minimum wage and overtime provisions of the FLSA.  The employees agreed that their dispute was covered by the terms of their arbitration agreement.  They nevertheless argued that the class/collective action waiver provision of the agreement was unenforceable and thus that the arbitration agreements were invalid because the agreements attempted to waive a non-waivable, substantive right to a collective action.

Ruling in the employers’ favor, the court upheld the validity of the arbitration agreement in the FLSA context and enforced the collective action waiver provision.  After an extensive examination of the FLSA’s legislative text, history, purpose, and prior court decisions, the court found that there was “no contrary congressional command” or “explicit provision” in the FLSA precluding enforcement of a class or collective action waiver which should override the clear mandates of the Federal Arbitration Act favoring arbitration. 

The court discussed the Supreme Court’s decision in Gilmer v. Interstate/Johnson Lane Corp. in which the Supreme Court had found that the “right” to an opportunity to bring a collective action did not mean that Congress intended to bar individual lawsuits and that a governmental agency (the EEOC in that case) could still bring an action seeking class-wide relief.  

In addition, the court discussed the Supreme Court’s recent decision in American Express Co. v. Italian Colors Restaurant at length, noting that the Supreme Court had found in that case that the waiver of class arbitration did not prohibit an individual from pursuing his or her own substantive rights under the statute. 

This recent decision by the Eleventh Circuit is significant for employers utilizing express class action waivers in arbitration agreements as a means for avoiding the enormous burden of a possible class or collective action.  This decision may prompt more frequent implementation of class waiver provisions in arbitration agreements by employers, but employers should consider the pros and cons of such an agreement before implementing one.  Individual arbitration proceedings are not always better than a collective action in court.

Starbucks Ruling Makes the Most of the De Minimis Doctrine

Posted in Defenses, Off-the-Clock Issues

Co-authored by Rishi Puri, Noah Finkel, and Andrew Paley

At this point, California employers are all too familiar with litigation seeking compensation for preliminary and postliminary activities.  The de minimis doctrine is a main line of defense in actions for these claims.  Recognized in the seminal U.S. Supreme Court decision of Anderson v. Mt Clemens Pottery Co., the de minimis doctrine is the embodiment of the common sense proposition that the law does not care about trivialities.  A court applying the de minimis doctrine looks at (1) whether the work tasks in question are administratively feasible to capture, (2) the amount of unpaid time spent performing a task and (3) the regularity of the additional work.  A plaintiff is not entitled to compensation for time that is de minimis

The recent case of Troester v. Starbucks Corporation, decided in the Central District of California, answered several important open questions regarding application of the de minimis doctrine.  In that case, the plaintiff worked as a shift supervisor and sought payment—and related penalties—for postliminary activities such as setting the alarm, walking to the front door, turning the lock in the front door, walking employees to their cars, etc.  On average, the activities took four minutes and nearly always took less than 10 minutes.  Starbucks filed for summary judgment, arguing that the time in question was de minimis

The court granted Starbucks’ motion for summary judgment.  The court first looked at the amount of time in question.  The court took the common sense approach of analyzing the amount of time in question each day.  In doing so, the court stated that most cases that have addressed the question have found that time will be found de minimis if it is less than 10 minutes a day.  Here, where the amount of time was almost always under 10 minutes, the time was de minimis in nature.  Troester accordingly stands for the crucial proposition that a small task, even if regularly performed, can be de minimis

The ruling is also helpful in understanding the administrative feasibility prong.  The standard argument made by the Plaintiff’s bar is that a timekeeping system stationed at the exit would capture a greater amount of activity (e.g., a timekeeping system at the door would capture time spent walking to the exit of a facility).  Troester soundly rejects this argument.  The court did not require Starbucks to show that no timekeeping system could have captured the postliminary time.  Rather, the court determined administrative feasibility with the context of Starbuck’s current timekeeping system.  Starbucks standard software required employees to clock out prior to setting the alarm, so capturing postliminary activities was not feasible.  The court did not require Starbucks to explore the feasibility of every timekeeping system under the sun. 

While it is not a complete panacea to the recent wave of off-the-clock litigation, Troester goes a long way towards ensuring that common sense prevails in the determination of the de minimis nature of off-the-clock claims.

D.R. Horton Rehears a Who: NLRB Files Petition for Rehearing with Fifth Circuit

Posted in Arbitration Agreements

Co-authored by Joshua Seidman and Nadia Bandukda

D.R. Horton Who?  Who is not the question here, it is why and what is going on with the NLRB saga?  Last week, the NLRB filed a petition for rehearing with the Fifth Circuit seeking reconsideration and reversal of the appellate court’s December 2013 decision regarding employee class action waivers. 

The Board’s petition seeks an answer to a simple question:  can employers require employees, as a condition of their employment, to agree to an arbitration provision that limits their ability to file class or collective actions in court?   The petition once again highlights the Board’s unwavering belief that the NLRA prohibits employees from entering into arbitration agreements that limit their ability to file class or collective actions because, in the NLRB’s view, it prohibits employees’ right to “engage in concerted activity for mutual aid or protection.”

Despite the Fifth Circuit’s decision, which found that an employer’s arbitration policy containing class and collective action waivers does not run afoul of the NLRA, the Board apparently now hopes to huff and puff and blow D.R. Horton’s house down by gaining momentum against the string of recent pro-arbitration Supreme Court and appellate decisions. 

Whether the Board’s rehearing campaign prevails will largely depend on the strength of its argument that the Fifth Circuit’s reliance on two Supreme Court decisions—Gilmer v. Interstate/Johnson Lane Corp. (1991) and AT&T Mobility LLC v. Concepcion (2011)—was misplaced.  The petition repeatedly points out that neither decision discussed or decided the issue presented in D.R. Horton—whether the NLRA “guarantees” the right to pursue a class or collective action.  Specifically, the petition argues that Gilmer and Concepcion did not touch upon the NLRA rights at stake in D.R. Horton and instead addressed “a strictly procedural forum waiver agreement that did not impair any substantive federal right and a law that conditioned enforcement of an arbitration agreement on the availability of class action procedures.”

With respect to Gilmer, the NLRB’s petition notes that the Fifth Circuit’s purported misinterpretation of the case caused it to improperly view the NLRA in the same light as other federal statutes, such as the ADEA or FLSA.  The NLRB argues that statutes such as the ADEA and FLSA are “individual rights” statutes, and thus cannot be appropriately compared to the NLRA, which “does vest employees with a substantive right to act in concert.”  The petition then draws parallels between class or collective lawsuits, on the one hand, and strikes and “other disruptive protests,” on the other hand, arguing that the former is “an alternative” to the latter.  The NLRB finally alleges that unified action by workers “of this sort” lays the groundwork for stronger collective bargaining.

Turning to Concepcion, the NLRB claims that the Fifth Circuit erred by not distinguishing between situations where procedural forum waivers are at issue, as in Concepcion, and situations where a party seeks to waive substantive rights.  Since the waiver in D.R. Horton “extinguishes its employees’…substantive right to litigate employment claims,” the NLRB alleges that the Fifth Circuit should have affirmed the Board’s decision invalidating the waiver.

Despite unfavorable decisions in multiple U.S. Courts of Appeals, as we reported, until the Supreme Court intervenes, employers must expect the D.R. Horton saga to remain in full effect and the NLRB to continue seeking new ways to advance its position.

PAGA PENALTIES FAIL TO ADD UP FOR FEDERAL JURISDICTION

Posted in Jurisdiction, State Laws/Claims

Co-authored by Sheryl Skibbe and Simon L. Yang

Private Attorney General Actions (PAGA) brought by individuals as representative actions on behalf of the State of California and other aggrieved employees are not sufficiently similar to federal Rule 23 class actions to support federal jurisdiction under the Class Action Fairness Act (CAFA).  But is there still a way into federal court?

Last year in Urbino v. Orkin Services of California, Inc., the Ninth Circuit held that potential PAGA penalties could not be aggregated to meet the minimum jurisdictional amount required for traditional diversity removal.  The panel rejected aggregation of penalties for jurisdictional purposes because the Court found that the plaintiffs primarily asserted “the state’s collective interest in enforcing its labor laws through PAGA,” rather than their own individual interests.  Urbino did not address removal under CAFA.

Baumann v. Chase Investment Services does, and the Ninth Circuit again ruled there was no jurisdiction under CAFA.  PAGA representative actions lack the statutory class action requirements for numerosity, commonality, typicality, or adequacy of representation.  They do not require notice to absent class members or an opt out procedure, and class action judgments, unlike PAGA judgments, are preclusive as to all claims the class could have brought.  Consistent with Urbino, the Court found, “[t]he employee’s recovery is thus an incentive to perform a service to the state, not restitution for wrongs done to members of the class.”

These cases now hinder removal of PAGA representative actions to federal court.  But whether a federal court may allow a PAGA action otherwise within its original jurisdiction to proceed under Rule 23 as a class action remains an open question.

Complaints that allege PAGA claims as class actions meet the statutory requirements under CAFA for class actions, but whether aggregation of the potential penalties to meet the $5 million mark is now in doubt.  One recent district court decision, Sanchez v. Rez-Care, Inc., interpreted Urbino to permit aggregation of only the 25% recoverable by putative class members.  And what if the complaint alleges a PAGA representative action with an FLSA claim?  Courts may choose to exercise supplemental jurisdiction over the PAGA claims, but how procedurally is the PAGA action tried?