The Wage and Hour Litigation Blog

Co-Authored by: Jeffrey A. Berman and Anthony J. Musante

On July 2, 2012, the California Court of Appeal affirmed a trial court ruling denying class certification to a group of newspaper carriers claiming they were misclassified as independent contractors.  In Sotelo v. Medianews Group, Inc., the Court of Appeal concluded that plaintiffs’  proposed class of newspaper carriers could not be certified because the class was not ascertainable and common issues of law and fact did not predominate. 

The Trial Court Ruling

Plaintiffs, a group of seven newspaper carriers, sought certification of a class of all newspaper carriers who contracted with Medianews Group––newspaper publishers and conglomerates operating in California––claiming they were misclassified as independent contractors.  They argued that, as a result of the misclassification, they were entitled to the benefits of employment, and pled causes of action for, among other things, violation of California minimum wage and overtime laws, and failure to provide meal and rest breaks.

The trial court denied plaintiffs’ motion for class certification.  The court determined that the class was not ascertainable and there was not a preponderance of common issues of fact and law.  Specifically, there was no objective criteria by which class membership could be determined, because even if a person signed a contract to deliver newspapers, to ascertain whether they actually bagged and delivered newspapers during the class period would require a series of mini-hearings.  Likewise, the trial court found that individualized issues predominated because merely determining whether the newspaper carriers were misclassified as independent contractors was insufficient; plaintiffs still had to show there was a uniform policy and practice with respect to overtime and meal and rest breaks that could be established by common evidence.  Plaintiffs appealed.

The Appeal

Plaintiffs argued on appeal that the proposed class was ascertainable because it was sufficient for class members to come forward and identify themselves.  Alternatively, the class could be limited to include only those individuals who previously had been identified by defendants. 

The court acknowledged that self-identification by potential class members was appropriate in circumstances were class members had direct relationships with defendants.  Here, however, the unidentified class members had no discernable relationship with defendants because they folded and bagged newspapers for individuals who had the relationship. As such, there was a complete lack of objective evidence, such as business records, that would indicate class membership, so there was no way to notify perspective class members.  Thus, the “theoretical ability to self-identify as a member of the class” was useless where “one never receives notice of the action.” 

Plaintiffs further argued that since defendants were responsible for the difficulties in identifying putative class members because they failed to keep accurate records, they should not be permitted to defeat class certification by their own wrongdoing.  The court, however, disagreed. Noting that defendants’ obligation to track members of the class depended on the merits of the suit being brought––i.e. whether they were employees or independent contractors––the plaintiffs could not “bootstrap their action merely by assuming as true what they are obligated to prove.”

Plaintiffs’ alternative suggestion to narrow the class to include only those newspaper carriers previously identified was also rejected by the court.  While limiting the class would result in an ascertainable class because a list of putative class members had been generated during discovery, the proposed class still failed to meet the other requirements for class certification, namely predominance.

On the issue of predominance, the court reiterated that merely showing that the putative class was misclassified was insufficient, because this was only one part of the equation.  Even if plaintiffs showed that the putative class was misclassified, plaintiffs still had to provide evidence showing that there was a uniform policy or practice requiring newspaper carriers to work overtime.  Similarly, to win certification of a meal and rest break class, plaintiffs had to allege a uniform policy on defendants’ part to deny putative class members the ability to take meal and rest breaks.  It was insufficient for plaintiffs to merely claim that because they were misclassified, they were necessarily compelled to work overtime and were unable to take meal and rest breaks.

What Sotelo Means for Employers

The court’s ruling on plaintiffs’ motion for class certification is generally helpful to employers as the court made clear that to certify a class plaintiffs must show through common evidence that there was a uniform policy and practice in place.  The case, however, may have a rather limited application, arguably germane only to misclassification class actions. 

As the court notes, most class actions seeking remedies under the Labor Code will not have the same specific ascertainability and notice issues plaintiffs confronted here because employers are required to maintain business records that can identify putative class members.  The court’s ruling prohibiting the bootstrapping of an underlying claim to establish ascertainability and predominance, however, may be useful in those contexts where an employee claims a class-wide entitlement as a result of a showing on the merits.  The class action inquiry in these circumstances will consist of two parts: (1) whether the putative class member is entitled to the benefit in the first instance (i.e. was he or she properly classified); and (2) whether there was a uniform policy to deprive the class member of the benefit.  Thus, given the multi-level inquiry, employers will have additional opportunities to argue that individual issues predominate and class certification is inappropriate.

Authored by:  Noah Finkel, Brett Bartlett, Andrew Paley and Richard Alfred

Members of Seyfarth Shaw's Wage and Hour Litigation Practice Group have authored Wage & Hour Collective and Class Litigation, the first-of-its kind treatise on wage and hour litigation. Published by American Lawyer Media's Law Journal Press, the 912-page volume is the most comprehensive guide published to date that focuses on litigation strategy through all phases of wage and hour lawsuits, the area of high-stakes litigation that, as readers of this blog well know, has plagued employers in recent years.  Indeed, wage and hour lawsuits have outpaced all other types of workplace class actions in recent years, and have surged by more than 325% since the early 2000s.

The book blueprints the mechanics of wage and hour cases, examines how employers in multiple industries are targeted for wage and hour lawsuits, and provides substantive procedural and practical considerations that determine the outcome of such actions in today’s courts.  Principally designed to assist employment litigators and in-house counsel, Seyfarth’s book should also prove useful to senior management seeking to fend off wage-hour actions before they strike.

The guide has already received praise from the Honorable Elaine L. Chao, the 24th U.S. Secretary of Labor, who stated: “Given the recent explosion of wage and hour litigation, both management- and plaintiff-side attorneys will find this publication to be an invaluable reference. With its painstaking attention to the law and procedure, this treatise will certainly be the go-to resource when practitioners ponder questions of strategy and substance in the context of wage and hour cases.”

The book was authored by Noah Finkel, Brett Bartlett and Andrew Paley, who practice in the firm’s Chicago, Atlanta and Los Angeles offices respectively. Richard Alfred, Boston-based chair of  Seyfarth’s national Wage & Hour Litigation Practice, served as senior editor.  More than 70 other Seyfarth attorneys, many of them regular contributors to this blog, contributed to the book, which will be updated regularly.

Wage & Hour Collective and Class Litigation takes up 27 chapters and covers the complex rules surrounding all types of wage and hour lawsuits. These include claims under the Fair Labor Standards Act, claims under state wage and hour laws, or hybrid cases involving both, as well as special issues involving government contractors. It advises employers on:  how to respond to a wage and hour complaint; what to consider when deciding whether to remove a case to federal court; how to assess the particular merits of a claim; whether to settle; how to oppose plaintiffs' motion to facilitate notice for conditional certification; what kinds of affirmative defenses are best; and how to tilt the odds in favor of the defense.

Among topics covered by the book:

• The certification process and the impact of conditional certification
• Decertification and its sometimes unexpected consequences
• Defending against state law wage and hour class actions brought under Federal Rule of Civil Procedure 23
• Discovery issues and strategies in class and collective actions
• Special considerations under California law, one of the country’s leading venues for wage-hour cases
• Issues raised by ERISA claims in wage and hour cases
• Coordinating or consolidating multiple simultaneous class actions
• Meeting the duty to preserve information, including electronically stored information
• The pros and cons of arbitration
• Motions for summary judgment and the optimal time to file
• Civil remedies, including calculation of unpaid overtime and liquidated damages
• Actions by the Secretary of Labor to recover unpaid wages and overtime
• Defending  "independent contractor"  cases
• Calculating the  "regular rate"  for purposes of the FLSA

Wage & Hour Collective and Class Litigation can be purchased from Law Journal Press by clicking here.  Readers of Seyfarth's Wage & Hour Litigation blog can use discount code 2128982 at checkout to obtain a special discounted introductory price of $195 for the print & online access bundle or $163 for online access only. The purchase price includes a one-year long subscription to all updates.

Authored by Jeff Burns

On September 22, 2011 the IRS announced a new Voluntary Classification Settlement Program (VCSP) that allows companies (technically, any taxpayer) to voluntarily reclassify workers as employees for employment tax purposes in exchange for partial relief from federal employment taxes that would otherwise be owed for the period of time prior to the reclassification.   In describing the VCSP in Announcement 2011-64, the IRS acknowledged that “the determination of the proper worker classification status under the common law may not be clear.”  Because of this lack of clarity, the IRS determined that “it would be beneficial to provide taxpayers with a program that allows for voluntary reclassification of workers outside of the examination context and without need to go through normal administrative correction procedures applicable to employment taxes.”  A copy of IRS Announcement 2011-64 can be found here, and the IRS’ Frequently Asked Questions can be found here.  Companies that are accepted into the VCSP will only owe 10% of the payroll taxes that would have been owed for the previous year had the workers been classified as employees, will not owe any interest or penalties, and will not be audited by the IRS on payroll taxes related to these reclassified workers for prior years. 

Eligibility: There are three criteria for eligibility.  Applicants must: (1) consistently have treated the workers as non-employees; (2) have filed all required Forms 1099 for the workers in the previous three years; and (3) not currently be under audit by the IRS, Department of Labor or any state agency concerning the classification of its workers.  Additionally, companies must be in compliance with the results of previous IRS or DOL classification audits.  (Of course, if an IRS or DOL audit confirmed that workers were properly classified as independent contractors, the benefits of participating in the VCSP are less than clear.) 

Process: To apply, companies must submit Form 8952 at least 60 days before they intend to begin treating their workers as employees.  Companies that are accepted into the VCSP must enter into a closing agreement with the IRS, in which, among other things, they agree to prospectively treat the workers as employees.  Additionally, for the first three years of the program participating companies will be subject to a special six year statute of limitations, rather then the usual three years that generally applies to payroll taxes.  Along with the signed closing agreement, companies must make full and final payment of any amount due under the VCSP.

Worth it? As the IRS acknowledged, whether workers should be classified as independent contractors or employees requires a detailed factual and legal analysis.  While the VCSP does provide some protections to companies that desire to reclassify their workforce, it has no effect on any back taxes or penalties that might be assessed by any state or local taxing authority, and participation in the VCSP could result in wage and hour lawsuits from reclassified workers, including claims for overtime.  Companies are strongly advised to consult with legal counsel before applying for the VCSP.