Wage & Hour Litigation Blog

Another Year, Another All-Time High for Wage and Hour Litigation

Posted in Overtime

Co-authored by Richard Alfred and Kevin Young

Wage and hour litigation continues to soar to record highs. So says the federal judiciary’s most recent data on cases filed in federal court over the last federal fiscal year. After hitting an all-time high of 8,160 in FY14, the annual wage and hour caseload spiked another 7.6%to 8,781in FY15. In federal court, employers are more likely to face wage and hour claims than any other form of employment litigation.

The following graph tells the story:

As the graph depicts, this year’s increase in wage and hour litigation continues the year-over-year explosion in these cases over the past fifteen years. Since 2000, the incidence of wage and hour federal court filings has skyrocketed by more than 450%. During the past decade alone, such filings have increased in eight out of ten years. This year’s total of 8,781 cases is more than any two pre-2005 years combined.

Several factors have fueled the increase in wage and hour lawsuits over the past year. They include:

  • The DOL’s June 2015 proposal to revise the “white-collar” exemption regulations has invited increased attention to wage and hour issues. We expect the new regulations to be issued next fall. As we’ve discussed before, the new rules threaten to dramatically increase the exemptions’ minimum salary level, index that salary level to provide further annual increases, and, possibly, to change the exemptions’ duties tests.
  • Legal developments impacting independent contractor classification and joint employer status have led to a substantial rise in claims under these theories. These developments have included: (i) the Wage & Hour Division’s July 2015 Administrator’s Interpretation on independent contractors, which seeks to curtail employers’ ability to engage workers on this basis; (ii) the NLRB’s August 2015 BFI decision, which expands joint employer status under the National Labor Relations Act; and (iii) a number of highly publicized lawsuits against “on-demand” employers, such as Uber, that challenge business models reliant on the use of independent contractors.
  • Federal court cross-currents affecting the legal requirements for class and collective certification have led to a sharp rise in individual wage and hour claims following large class decertifications, and, at the same time, to a resurgence in class actions as plaintiffs’ counsel and some judges find ways to end-run the limitations set by the Supreme Court in Dukes, Comcast, and other precedent-setting opinions.
  • Continued talk of raising the federal minimum wage in the private sector, and of increases in the minimum wage at state and local levels, have further increased the focus on wage and hour issues.

These factors have added to those that we have reported on in past years (May 2013 and May 2014), which have sustained the surge in wage and hour lawsuits:

  • The FLSA is an old Depression-era statute created more for smokestack industries, where shifts started and ended with the sounding of a whistle, than for the modern workplace, where application of the Act’s mandates is often confusing and difficult.
  • Many of the terms essential to the FLSA were ill-defined, or not defined at all, when the law was enacted in 1938 and the DOL’s regulations were adopted soon thereafter. Those terms remain ambiguous today, leaving businesses with uncertainty and employees with the ability to second-guess their employers’ decisions.
  • State laws have provided additional sources of litigation, often regarding pay and other workplace practices not covered by federal law but often combined with FLSA claims.
  • Employees have become increasingly aware of their ability to sue for perceived management missteps in exempt status classifications, hours worked or off-the-clock claims, and overtime pay calculations.
  • Influenced by large settlements and court awards, plaintiffs’ lawyers have found wage and hour claims to be fertile ground for large fee recoveries.

With more developments in wage and hour laws on the horizon, we expect to see the upward trend continue in the coming year. Now more than ever, employers are well advised to audit their exempt status classifications, independent contractor classifications, and pay practices with experienced wage and hour counsel to identify and mitigate legal risk.

Where’s the (Pork)? Justices Sidestep Meatiest Issues at Oral Argument in Tyson Foods

Posted in Off-the-Clock Issues, Overtime, Rule 23 Certification, State Laws/Claims

Co-authored by Richard Alfred, Patrick Bannon, and Daniel Whang

Companies burdened by an avalanche of wage and hour class and collective actions have been hoping that Tyson Foods, Inc. v. Bouaphakeo might be the game-changing decision they have been waiting for.  If the oral argument before the Supreme Court this morning is an accurate indication (and it may not be), they may have to wait a little longer.

In thousands of cases over the last ten years, federal courts have struggled to decide when an employee can convert an ordinary wage dispute into a class action under state law or a collective action under the Fair Labor Standards Act.  Despite the frequency with which these issues arise, and their importance, Tyson Foods is the Supreme Court’s first opportunity to weigh in on the subject.

As we have described in our earlier posts, [here, here, and here], several named plaintiffs claimed that Tyson Foods failed to pay a class of more than 3,000 employees in a pork processing plant for time spent “donning” and “doffing” various kinds of sanitary and protective gear and for other pre- and post-shift activities.  The trial judge allowed the case to proceed as a class action under Iowa law and allowed several hundred employees to opt in to an FLSA collective action.  At trial, the plaintiffs presented an expert witness who videotaped employees at the beginning and end of their shifts and calculated the average time they spent on various tasks.

The jury reached a $5.9 million lump-sum verdict in favor of the certified class.  Significantly, however, the jury’s verdict was much less than the amount plaintiffs’ experts had calculated by averaging the donning, doffing, and walking time spent by about several hundred of the class members.

In its Supreme Court briefing, Tyson Foods attacked (1) the determination of liability and damages by averaging the experiences of dissimilar class members, and (2) the inclusion in the class of individuals who never suffered any lost pay.  Underlying these issues are important questions regarding whether plaintiffs in a class action may satisfy the predominance requirement of Rule 23(b)(3) merely by alleging an unlawful compensation practice or policy, even if the challenged policy affects different proposed class members differently–and some not at all; and whether the “similarly situated” standard of FLSA §216(b) incorporates the requirements of Rule 23.

At oral argument, the Justices, although animated in their questioning of both sides (as well as of the government’s attorney who argued as a friend of the court for the Department of Labor), mostly bypassed these broad questions, focusing instead on more FLSA- and case-specific issues.

Much of the argument focused on whether the case should be decided, not on the application of Rule 23(b)(3) or the “similarly situated” standard for FLSA collective actions, but on the application of a 1947 Supreme Court decision, Andersen v. Mt. Clemens Pottery Co.  From nearly the beginning of the argument, first Justice Kagan and later Justices Kennedy, Breyer, and Sotomayor, peppered Tyson Foods’ attorney with questions about that case and whether it, rather than Rule 23, should drive the Court’s decision.  Relying on the part of Mt. Clemens Pottery in which the Court decided that evidence of the average time spent on a task could be used to determine FLSA damages if the employer did not keep records of actual time worked, these Justices questioned whether averaging might be proper because Tyson Foods had not kept records of the exact time spent by each class member putting on and taking off each specific article of gear.  In response, Tyson Foods’ attorney argued that Mt. Clemens Pottery only applied to the damages phase and should not be extended to a determination of liability.  Responding to questions from Justices Alito and Kennedy about whether it would be fair to penalize employers for not having records of time spent on activities that they believed in good faith were non-compensable, the Assistant Solicitor General arguing for the government in support of the plaintiffs, contended that Mt. Clemens required that result.

Several of the Justices seemed interested in whether it would be possible for the district court judge on remand to sort out which employees had and had not been injured and how the damages the jury awarded should be allocated.  Justices Kagan and Kennedy seemed to think that task would be easy.  Justices Roberts, Sotomayor and Alito pointed out, however, that the jury must have rejected some aspects of the plaintiffs’ evidence because of the large discrepancy between the verdict and the experts’ calculation of damages.  Would it be possible, these Justices wondered, for the district court judge to determine damages for specific class members when she could not know the reason for the jury’s damages reduction–whether the jury had concluded that the average times for donning and doffing specific items were inflated or whether some averages were accurate and others way off the mark?  And, these Justices worried that, without knowing which tasks were undercompensated, the judge would not know which class members the jury decided had been denied overtime pay.

The Justices also discussed whether Tyson Foods has standing to object to how the district court allocates the judgment among class members.  Even if some class members are overcompensated and others undercompensated, the employees’ counsel argued, the mistakes will not increase Tyson Foods’ liability.  Tyson Foods responded, however, that the legal peace that is created when an employee is paid all the wages he or she is owed gives the company standing to object if the employee’s share of the judgment is reduced because of payments to employees who were not truly injured.

Finally, several of the Justices devoted significant time to a surprisingly detailed discussion of the extent of variation among class members as to the clothing and protective gear they used and how long it took them to put on or take off specific items.  So specific were the Justices’ questions that, at one point, laughter broke out in the courtroom when Justice Ginsberg rehearsed the exact sanitary gear worn by class members (“hard hats, ear plugs or ear muffs, and boots”) and then chided class counsel, along with Chief Justice Roberts and Justice Scalia, for omitting “boots” from his list.

Forecasting a Supreme Court decision based on oral argument is a hazardous proposition.  Whether it is a game-changer or not, we will report on this case again when the Supreme Court issues its decision–most likely in Spring 2016.

Another Watershed Moment for Class Actions? SCOTUS to Address Limits on Statistical Proof in Class and Collective Actions

Posted in Hybrid Lawsuits, Off-the-Clock Issues

Authored by Michael W. Kopp

In a case that is certain to provide an important sequel to the Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend decisions, the Supreme Court will hear argument next week on Tyson Foods Inc. v. Bouaphakeo, to address (1) the use of statistical averaging in class actions to prove liability and damages, and (2) whether courts may certify a class that includes individuals with no injury.

Tyson Foods is important because it likely will set further limits on use of statistical proof in Rule 23(b)(3) cases, and address for the first time the standard for certification of collective actions under the Fair Labor Standards Act.

The road to the Supremes. Tyson Foods reached the Supreme Court by way of a divided Eighth Circuit opinion affirming a $5.8 million verdict on an off-the-clock class claim. Plaintiffs claimed that Tyson’s Iowa meat processing facility had not paid over 3,000 plant workers for the time they spent changing in and out of various types of work gear and walking to and from the production line. The district court found there was a common question as to whether the challenged time was compensable, and certified the case as a collective action as to the FLSA claim, and as Rule 23 class action as to the state law wage and hour claims.

Tyson unsuccessfully attempted to decertify the class, and argued neither liability nor damages were “capable of classwide resolution … in one stroke,” as required by Dukes. Tyson pointed to variations in the type and amount of equipment worn by employees in the hundreds of classifications at issue, and highlighted the disparities in the routines and amount of time employees spent on these tasks. Unpersuaded, the district court permitted a nine-day jury trial on the class claims, where plaintiffs used an expert’s model to calculate the “average” time employees spent on the donning, doffing and walking activities at issue. These average activity times were then extrapolated to the class members. Although plaintiffs’ expert conceded that the actual times for these activities varied considerably – and more than 200 class members suffered no injury at all – the jury nonetheless awarded a lump sum verdict, to be divided among all class members.

Divided approaches to Dukes. The divided Eighth Circuit panel’s majority opinion and dissent highlight the inconsistent approaches lower courts have taken in interpreting Dukes. The panel majority found that there was a common question concerning whether the activities were compensable under the FLSA and state law, and that plaintiffs had “prove[n] liability for the class as a whole, using employee time records to establish individual damages.”

The dissent took the majority to task for ignoring the considerable differences in donning and doffing times, employee routes to their work stations, the amount of time Tyson allotted for such activities, shortened time shifts, “and a myriad of other relevant factors.” The dissent highlighted the fact that a rigorous inquiry into Rule 23’s requirements may overlap with the merits, and that in a wage-hour case the merits may be intertwined with damages questions. Using statistical models to gloss over differences pertinent to both liability and damages violated Dukes’ requirement that the action generate “common answers apt to drive the resolution of the litigation” and its prohibition against “trial by formula.”

For example, an employee who clocks 38 hours and alleges another 1.5 hours of off-the-clock work does not have a claim under federal law so long as he is paid no less than minimum wage for all of his work time taking into account his uncompensated time. If he claims a total of 2.5 hours of off-the-clock work, however, he would allege an FLSA violation that, if proven, would result in an hour of pay at the appropriate overtime rate. In such cases (and commonly for wage-hour claims), determining liability and damages is an inherently intertwined inquiry requiring the same evidence. For this reason, the common issues involved in determining liability would predominate over any individualized damages issues under Rule 23(b)(3), and bifurcation of a liability-only class would be inappropriate.

Why This Case Matters. First, the Supreme Court will have the opportunity to clarify the extent of Dukes’ limitations on the use of statistical techniques to establish damages and liability under Rule 23. Second, the case has particular significance in the wage and hour context, because it provides the opportunity for the Supreme Court to weigh in for the first time as to the standards that apply to certification of FLSA collective actions. Third, the case provides the opportunity for the court to address Tyson Foods’ constitutional argument that an award of monetary damages to uninjured class members is impermissible.

Stay Tuned … This case is set for oral argument on Tuesday, November 10, so be on the lookout for a follow up blog post here when a decision is reached.

Fifth Circuit Stands Pat, Again Rejects NLRB Attempt to Void Class and Collective Action Waiver

Posted in Arbitration Agreements, Jurisdiction

Authored by Andrew Scroggins

As expected, the Fifth Circuit once again has rejected the NLRB’s highly controversial position that the National Labor Relations Act (“NLRA”) prohibits employers from requiring mandatory arbitration agreements that preclude employees from filing class or collective claims in any forum.

The Fifth Circuit first took up the issue nearly two years ago, when it set aside the NLRB’s D.R. Horton, Inc. decision.  In the Fifth Circuit’s view, the strong congressional policy contained in the Federal Arbitration Act (“FAA”), which requires the enforcement of arbitration agreements “as written,” was not overcome by the NLRA’s general provisions protecting the rights to organize and to engage in various forms of protected concerted activity.  Most courts (including the Second Circuit and Ninth Circuit) to address the issue since then have followed suit.

Despite the courts’ dim view, the NLRB has been undeterred and continues to press its D.R. Horton rationale.  One such decision is Murphy Oil USA, Inc., 361 NLRB No. 72 (Oct. 28, 2014).  The facts are these:  Murphy Oil’s new hires signed binding arbitration agreements that included a waiver of the right to commence or participate in a group, collective or class action.  Despite having signed the agreement, several employees filed an FLSA collective action in federal court.  Murphy Oil filed a motion to dismiss and compel arbitration on an individual basis, which the court granted.

The plaintiffs did not appeal the district court’s dismissal order. Instead, they pursued unfair labor practice charges with the NLRB, contending that the arbitration agreement interfered with their rights under Section 7 of the NLRA to engage in protected concerted activity.

In a 3-2 decision, the Board majority invalidated Murphy Oil’s arbitration agreement, concluding that the “reasoning and result” of the D.R. Horton decision were correct, notwithstanding that it had been “rejected by the U.S. Court of Appeals for the Fifth Circuit and viewed as unpersuasive by decisions of the Second and Eighth Circuits.”

Murphy Oil petitioned the Fifth Circuit to review the decision. The court declined the NLRB’s request to hear the case en banc, and at oral argument the panel pointedly reminded the agency it would follow circuit precedent.  Unsurprisingly, then, the Board’s order was set aside by the court of appeals to the extent it conflicted with the earlier D.R. Horton decision.

Unfortunately for employers, the Fifth Circuit did not add to its earlier decision, offering only a matter of fact statement: “Our [D.R. Horton] decision was issued not quite two years ago; we will not repeat its analysis here.  Murphy Oil committed no unfair labor practice by requiring employees to relinquish their right to pursue class or collective claims in all forums by signing the arbitration agreements at issue here.”

The Fifth Circuit did uphold the Board’s order with respect to its conclusion that the arbitration agreement suggested that employees were prohibited from filing unfair labor practice charges with the Board. The court declined to hold that agreements must include an express statement of employees’ right to do so, but also opined that such a statement would be helpful in the event that “incompatible or confusing language appears” elsewhere in the agreement.

Perhaps the only surprising aspect of the decision is the court’s mild tone toward an agency that continues to flout the court’s authority. For example, Murphy Oil had pressed for a contempt order or sanction to address what it had characterized as the Board’s “defiance” of the D.R. Horton decision.  The court declined to do so (“We do not celebrate the Board’s failure to follow our D.R. Horton reasoning, but neither do we condemn its nonacquiescence.”), but its reasoning is perplexing.  As the court pointed out, employers typically can chose among several circuits when challenging a decision by the Board, so the “Board may well not know which circuit’s law will be applied on a petition for review.”  However, to date no circuit has taken a contradictory view – a point the court had earlier noted, when it explained that “several of our sister circuits have either indicated or expressly stated that they would agree with our holding in D.R. Horton if faced with the same question.”

Similarly, in its decision, the Board had award attorneys’ fees and expenses that the charging party had incurred to oppose Murphy Oil’s successful district court motion to compel arbitration – an action the Board concluded had been taken “with an illegal objective.” The Fifth Circuit also refused to enforce that portion of the order, but again the language is soft: “Though the Board might not need to acquiesce in our decisions, it is a bit bold for it to hold that an employer who followed the reasoning of our D.R. Horton decision had no basis in fact or law or an ‘illegal objective’ in doing so.  The Board might want to strike a more respectful balance between its views and those of circuit courts reviewing its orders.”

In the end, the Fifth Circuit’s Murphy Oil decision is unlikely to change the status quo.  While the precedent in this circuit has been bolstered, the decision seems unlikely to deter the Board from charting its own course, both within and without this circuit, and continuing to invalidate arbitration agreements that contain class and collective action waivers.



Retail Victory Delayed, But Not Denied: Following 6th Circuit Remand, Michigan Federal Court Rules (Again) That Assistant Manager is Exempt

Posted in Misclassification/Exemptions

Co-authored by Katy Smallwood and Kevin Young

Few industries have been as heavily targeted by FLSA plaintiffs’ attorneys as the retail industry. In a retail environment where salaried managers often pitch in to help complete the day’s work while simultaneously supervising and directing subordinates, plaintiffs’ attorneys routinely argue that the most relied upon overtime exemption in this area—the executive exemption—is not satisfied because the manager’s “primary” duty is something other than management. Given the pervasiveness of such claims, a victory for one retailer in this space is a victory for all retailers.

On that note, we highlight a decision rendered on Monday by a federal district court in Michigan, which found that the First Assistant Manager of a retail wheel/tire shop was properly classified as exempt. The decision, Little v. Belle Tire Distributors, Inc., adds to the retail industry’s long and growing list of victories in store manager and assistant manager misclassification cases. Little, however, is especially important due to its unique procedural history.

This is not the first time that the Eastern District of Michigan has ruled in Belle Tire’s favor. The court granted the retailer’s motion for summary judgment nearly two years ago. The plaintiff, Joseph Little, argued that management was not his primary duty—and thus he did not satisfy the executive exemption—because he spent as much as 90% of his time performing non-managerial work. The court rejected the argument, finding that even while Little performed hourly-type work, he simultaneously carried out a managerial function (e.g., supervising employees), which was his most important function as First Assistant Manager. Also notable, the court found, was that Little worked more than 20% of the time without the Store Manager present.

In October 2014, the Sixth Circuit vacated Belle Tire’s victory and remanded the case for further proceedings. The court identified two sources of evidence in support of Belle Tire’s motion—(i) deposition testimony by Little, and (ii) deposition and declaration testimony by Belle Tire’s corporate vice president and two Store Managers—and rejected the latter as lacking specificity about duties actually performed by Little. As to the former, the court found that a factual issue remained as to Little’s primary duty, given his testimony that whatever managerial functions he did perform were, in fact, mostly clerical and highly constrained by corporate policies.

In May 2015, the parties returned to the Eastern District of Michigan for a three-day bench trial. After considering the testimony of five witnesses, including Little, and exhibits reflecting his job duties, job performance, and compensation, the court entered judgment in Belle Tire’s favor for a second time. En route to that ruling, the court made several key findings, including:

  • Little worked opposite ends of the day as his Store Manager (i.e., one opened and the other closed), who was off-premises for 27% of Little’s working hours.
  • “On occasion,” Little interviewed job applicants and made recommendations about who to hire. The Store Manager considered those recommendations.
  • Little trained the technicians in the shop, as well as the front-end sales staff.
  • Little determined the sequence in which work orders generated by the sales team would be completed and assigned that work to the technicians.
  • Little advised technicians when they ran into problems, resolved disputes among them, and had authority to send them home if the day’s work lagged.
  • While Little performed some nonexempt sales work, that work comprised less than half of his workday.

Based on these findings, the court summarily ruled that as First Assistant Manager, Little satisfied multiple FLSA overtime exemptions, including the executive exemption.

At first whim, the Little decision is simply another win to add to the pile of retailer victories in this brand of cases—the findings, reasoning, and holdings are not terribly unique. What makes the decision especially important, however, is its procedural history. For the past year, the Sixth Circuit’s vacate-and-remand decision was no doubt viewed as a victory for the FLSA plaintiffs’ bar. By entering judgment for Belle Tire yet again, the Eastern District of Michigan has returned that victory to Belle Tire and confirmed, again, that store managers and assistant managers can be properly classified as exempt under the right circumstances.

Tip-Toeing Around Class Actions: Can a “No Tipping” Policy End Wage and Hour Litigation in the Hospitality Industry?

Posted in Uncategorized

Co-authored by Robert Whitman, Joanna Smith, and Samuel Sverdlov

Joining a budding national trend, renowned restaurateur Danny Meyer of Union Square Hospitality Group last week announced that he will eliminate formal tipping at his restaurants starting in 2016. Meyer stated that the new policy, aptly named “Hospitality Included,” is meant to better compensate “back of house” staff, who are legally restricted from receiving tips, and to make the dining experience less complicated for diners.

But is there a more subtle, yet potentially more significant, legal benefit as well? By eliminating tipping, Meyer and other like-minded restauranteurs might be shielding themselves from costly legal exposure for wage and hour violations.

Historically, restaurants have been able to offset part of their payroll costs by taking advantage of federal and state tip credits, which allow them to pay waiters and other customer-facing “front of house” employees at a lower hourly rate, provided they receive a certain amount in tips. Despite the obvious financial advantage to this approach, the industry has been plagued in recent years with class and collective actions stemming from alleged tipping violations. (See examples here, here, and here.) Such claims include failing to pay minimum wage, improperly including kitchen workers in servers’ tip pools, using a portion of tips to servers of alcohol and wine to pay sommeliers’ salaries, and failing to provide required notice of the tip credit.

Furthermore, some hospitality industry experts, such as Michael Lynn of the Cornell University School of Hotel Administration, believe that tipping inherently disadvantages minority workers, suggesting that tipping practices could put employers at risk of disparate impact discrimination class action suits.

A “no tipping” policy eliminates these litigation risks. In addition to simplifying an employer’s payroll and reducing paperwork, the end of tipping could mean the end of costly class action allegations of tip pool, tip share, and service charge violations, as well as minimum wage and overtime violations predicated on an improper tip pool or share.

Moreover, over the next few years, the benefit to employers from tipping will be greatly reduced as more municipalities and states raise their minimum wage rates while reducing the tip credit. For example, as of December 31, 2015, the minimum wage rate in New York is set to rise to $9.00 an hour. New York’s Acting Commissioner of Labor has accepted the recommendation of a Wage Board to reduce the tip credit from $4.00 an hour to $1.50 an hour as of December 31, 2015. This will effectively increase the minimum wage for tipped workers in New York from $5 to $7.50 an hour at the end of this year. Other increases in minimum wage rates are occurring nationwide—San Francisco voted last November to increase its minimum wage to $15 per hour by 2018, Chicago will bring the minimum wage to $13 by 2019, and many other cities and states have follow suit.

The success of Meyer’s “Hospitality Included” approach remains to be seen. For now, it seems that adopting a no-tipping policy has several strategic benefits that will help the hospitality industry combat class and collective actions stemming from tipping violations and a rapidly increasing minimum wage.

Don’t Throw the Class Waiver Baby Out With the Arbitration Agreement Bathwater

Posted in Arbitration Agreements

Co-authored by Tim Rusche and Adam Vergne

Sound advice that the world has lived with since 1512…until recently flushed by the Ninth Circuit. Not so quick to discard 500 years of wisdom, however, the Supreme Court has agreed to consider whether this idiom will rest in peace or be given new life. It recently accepted review of Zaborowski v. Managed Health Network Inc., in which the Ninth Circuit refused to compel arbitration of a putative class and collective action alleging that the defendant avoided paying overtime by improperly classifying counselors as independent contractors.

In 2013, U.S. District Judge Susan Illston found the underlying arbitration agreement so permeated with unconscionability that the entire agreement should be thrown out with the dirty water. The court held that the agreement was procedurally unconscionable because it was a condition of employment not subject to negotiation and buried in the employment contract, thereby creating “unfair surprise.” The court also pointed to the agreement’s six month limitations period, arbitrator selection process, fee shifting provision, prohibition on punitive damages, and the fees associated with filing an arbitration to find it substantively unconscionable. Ultimately, the district court denied arbitration and refused to sever the agreement’s bad provisions from the good because the dirty water “so permeated” it.

This refusal to parse the bathwater will take center stage when the Supreme Court hears oral argument during the upcoming term.

Notably, the Ninth Circuit panel affirming the decision split on that issue. The majority noted, “the Federal Arbitration Act expresses a strong preference for the enforcement of arbitration agreements” and “we may have reached a different conclusion” but ultimately concluded the district court did not abuse its discretion.

The dissent, authored by Judge Ronald Gould, concluded the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion mandated that courts not reflexively dump the entire tub by “creat[ing] a presumption in favor of severance” so long as the agreement could still be enforced after severing the unconscionable provisions. Judge Gould even included a blackline of the arbitration provision—pictured below—striking the unconscionable provisions that could be thrown out with the bathwater while saving the remainder. 

Should the Supreme Court provide new life to our favorite German idiom, it will have a profound effect on the extent to which employers can use waivers in arbitration agreements to avoid class and collective actions and provide guidance about whether employers may include novel or more favorable language in agreements. In the meantime, the case provides an important reminder that employers must take great care when crafting arbitration agreements to avoid provisions that will taint the entire bath.

DOL’s New Companionship Exemption to Take Effect on October 13

Posted in Misclassification/Exemptions, Overtime

Authored by Gena B. Usenheimer

As we previously reported, this past August, the D.C. Circuit Court of Appeals upheld the Department of Labor’s Final Rule imposing sweeping changes to the former companionship exemption under the Fair Labor Standards Act. The group of home care associations that challenged the scope of the new regulations in court recently asked the U.S. Supreme Court to delay the Rule’s implementation date, pending disposition of their yet to be filed petition of certiorari. On Tuesday, the Supreme Court denied that request. The Court’s refusal to stay implementation of the Final Rule does not impact its ability to ultimately accept certiorari, once a petition is filed.

Absent some other form of immediate intervention, the Circuit Court’s ruling upholding the regulations will take effect on October 13, 2015. According to its website, the DOL will not begin enforcing the Final Rule for 30 days, or until November 12. Nevertheless, the DOL’s delayed enforcement does not extend to private plaintiffs, who are free to bring claims any time after October 13.

A Cure for PAGA? At Least for Some Frivolous Wage Statement Claims

Posted in State Laws/Claims

Authored by Simon L. Yang

California employers had reason to celebrate over the weekend, as Governor Jerry Brown signed legislation to curb frivolous “PAGA” lawsuits alleging noncompliance with itemized wage statement requirements in California Labor Code section 226(a). Unlike when they woke up last Friday, employers now have a means to avoid PAGA lawsuits alleging that wage statements lacked either the inclusive dates of pay periods or the employer’s legal name and address.

PAGA—a four-letter word familiar to California employers that is short for California’s Labor Code Private Attorneys General Act—permits any aggrieved employee to sue on a representative basis to recover penalties that could be assessed by the state labor commissioner. While PAGA raises numerous problematic issues requiring legislative attention, Assembly Bill 1506 at least addresses two wage statement violations used by plaintiff’s attorneys as the basis for a current PAGA action du jour.

While wage statement claims previously had been tagalong claims to other wage and hour allegations, California employers and courts have been flooded with PAGA lawsuits alleging only that employees received wage statements that lacked either the inclusive dates of pay periods or the employer’s legal name and address. The uptick in the number of these lawsuits is not surprising, since plaintiff’s attorneys—ever vigilant for arguments to obtain PAGA penalties—focused their attention on California’s itemized wage statement provisions following a January 1, 2013 amendment to section 226. While we’ve previously suggested the amendment didn’t change the law and that the plain text of PAGA does not even authorize separate PAGA penalties for Labor Code section 226(a) violations (apart from preexisting penalties in California Labor Code section 226(e)), PAGA lawsuits alleging wage statement violations only are increasingly common.

Prior to the amendment, once an employee provided notice of these wage statement issues, employers had no means to avoid a PAGA action. And the reality is that many employers—rather than endure lengthy litigation and incur legal fees—felt forced to settle these lawsuits. Now, the Governor’s signature on Assembly Bill 1506, which was deemed an urgency bill and immediately amends PAGA, provides employers a 33-day window to cure these wage statement issues and preclude a PAGA lawsuit. To do so, an employer must provide fully compliant itemized wage statements to all allegedly aggrieved employees for the three years preceding notification of the PAGA claim.

While it makes little sense to require an employer to provide three years of wage statements (since the statute of limitations for PAGA penalties is one year), a burdensome way out (even if impracticable) must be better than no way out? California employers will take it—especially since the California legislature hasn’t generally provided employers a cure for any of the other sick aspects of PAGA.

Ninth Circuit’s Pro-PAGA Decision Is Not the Death Knell for Class Waivers in Arbitration Agreements

Posted in Arbitration Agreements

Authored by Emily Barker

This week, in Sakkab, et al v. Luxottica Retail North America, Inc., the Ninth Circuit ruled that an employee cannot waive the right to bring a representative action under the Private Attorneys General Act (“PAGA”) through an arbitration agreement or any other means. In so doing, it found the California Supreme Court’s “Iskanian Rule”—which essentially says that pre-dispute agreements to waive PAGA claims are unenforceable under California law—was not preempted by the Federal Arbitration Act (“FAA”).

The FAA generally preempts any law that creates a special rule disfavoring arbitration or conflicts with the FAA’s objectives. The Luxottica Court found that the Iskanian Rule was simply a ground for the revocation of any contract. “The rule bars any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement.” The Court also held that it did not conflict with the FAA’s  purposes and thus was not preempted.

What the Ninth Circuit’s blessing of the Iskanian Rule will ultimately mean for California employers is still open to debate. The decision appears contrary to the United States Supreme Court holding in AT&T Mobility LLC v. Concepcion. There, the High Court held that the FAA preempted a California rule banning class action waivers in arbitration agreements because a rule “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration,” namely its informality, and “creat[ed] a scheme inconsistent with the FAA.” Because the rule stood as an  obstacle to the accomplishment and execution of the full purposes and objectives of Congress, it was preempted.

The Luxottica court attempted to distinguish PAGA actions by noting that unlike class actions, PAGA actions are not relegated to any particular procedure for resolution by due process. Since parties may agree to more informal measures of resolution for PAGA claims, it is possible to structure an arbitration agreement to align with the aims of the FAA. But as pointed out by the dissent, this “reasoning overlooks the simple fact that, by preventing parties from limiting arbitration only to individual claims arising between two contracting parties, the Iskanian rule interferes with the parties’ freedom to craft arbitration in a way that preserves the informal procedures and simplicity of arbitration.”

The dissent likewise highlights that while PAGA actions do not require the procedural formality of a class action, there will still need to be some mechanism to determine the number of other employees affected by the labor code violations, the number of pay periods that each of the affected employees worked, etc. This would require multiple, individual fact determinations regarding employment status and discovery of a breadth not normally conceived of in arbitration. “All of these additional tasks and procedures necessarily make the process substantially slower, substantially more costly, and more likely to generate a procedural morass than non-representative, individual arbitration”—all of which are contrary to the FAA’s aims.

And there is yet another piece of the Luxottica decision, not highlighted by the dissent, which seems to rest on circular logic, contra Concecpcion. The Luxottica Amici argued that  the Iskanian Rule conflicts with the FAA’s purpose to overcome judicial hostility to arbitration because it prohibits arbitration of individual PAGA claims. The Luxottica court summarily rejected this argument claiming Iskanian expressed no preference as to whether individual PAGA claims are litigated or arbitrated. “[The Iskanian Rule] provides only that representative PAGA claims may not be waived outright … [it] does not prohibit the arbitration of any type of claim.”

But this determination begs the question—when could an employee ever bring an individual PAGA claim if he is never allowed to waive his right to bring the claim in a representative capacity? The Iskanian Rule as adopted by the Ninth Circuit then would seem to squarely prevent arbitration of individual PAGA claims and should therefore be preempted under Concepcion.

While California employers must wait and see if the most-oft reversed Circuit lives up to its reputation, they are not out of options entirely when it comes to structuring cost-saving arbitration agreements.

It should be noted that both the Iskanian and Luxottica decisions left open the possibility of claim bifurcation through arbitration agreements.  That is, a court can compel an employee’s non-PAGA claims to arbitration, leaving only PAGA claims in court if the agreement makes clear this is the parties’ intent. For this reason, employers may wish to continue to include representative action waivers in their arbitration agreements, stating explicitly that to the extent not enforceable, the provisions applicable to PAGA claims are severable, do not void the entire agreement, and that it is the parties’ intent in such cases that the PAGA claims alone remain in court.

While such a provision could at first blush appear to increase costs by subjecting the employer to suits in two fora, one other factor should be considered. Neither the Iskanian Rule nor the Luxottica holding precludes setting the procedural order of adjudication of a PAGA claim by agreement; it mandates only that such claims cannot be waived. Employers thus could conceivably include provisions in their agreements providing that non-PAGA claims subject to a class action waiver must be adjudicated in arbitration before adjudication of any PAGA claims. This would essentially stay any PAGA claims in court until the arbitration was completed.

Such provisions would seem to be in line with the purposes of PAGA and the Luxottica decision. PAGA claims can only be brought by an “aggrieved” employee, so allowing a determination of whether the employee is aggrieved through individual arbitration prior to subjecting the employer to a PAGA suit would seem to comport with the statute. Likewise, the Luxottica reasoning is heavily based in the theory that employers can structure their agreements to allow for a streamlined PAGA adjudication in keeping with the goals of the FAA.

In the end, every employer needs to weigh the pros and cons of continuing to address PAGA claims in arbitration agreements, and there is no one size fits all approach. Given the apparent conflict between the Luxottica/Iskanian rule and Supreme Court precedent, the possibility of relegating the PAGA claims alone to court and staying them pending individual arbitration, and the generally shortened statute of limitations period for PAGA claims, implementation of an arbitration agreement may yet offer substantial protections against class and representative actions.