The Wage and Hour Litigation Blog

Co-authored by John W. Egan and Robert Whitman

We reported [here] in November on the Second Circuit’s referral of two important Labor Law questions to the New York Court of Appeals in a challenge to Starbucks’ tip-pooling policy.  Briefing is now complete and oral argument is scheduled for next week. 

The consolidated appeal, in Barenboim v. Starbucks and Winans v. Starbucks, will clarify Section 196-d of the Labor Law, which prohibits employers and their “agents” from participating in employee tip pools and tip-sharing arrangements.

In a relatively rare occurrence, the New York State Department of Labor filed an amicus brief with the Court of Appeals.  The Department argues that its Hospitality Industry Wage Order [here] fully answers the first question certified by the Second Circuit: what factors make an employee an “agent” of his employer under Section 196-d such that he or she is ineligible to participate in a tip pool? 

Under the Wage Order, employees who personally serve customers as a principal and regular part of their job duties may participate in tip pools, while those who do so only occasionally or incidentally may not.  The Starbucks “baristas” argue that shift supervisors are “agents” of their employer because of their supervisory responsibilities and therefore should not be permitted to obtain a share of their tips.  In its amicus brief, the Department took direct aim at that argument, stating that the Labor Law does not categorically bar employees with supervisory titles or authority from participating in tip pools, so long as they regularly provide direct personal service to customers.

On the second question certified on appeal -- whether the Labor Law permits an employer to exclude otherwise eligible employees from participating in a tip pool -- the Department’s answer is: not necessarily.  Whether such a practice is valid depends, it says, on whether the practice is consistent with two underlying purposes of Section 196-d: the protection of subordinate employees and the reasonable expectations of customers. 

The Department concluded, however, that the Court of Appeals cannot properly assess Starbucks’ policy of excluding Assistant Store Managers from tip pools, since the federal district court did not resolve factual disputes over their actual responsibilities and whether customers reasonably expect the proceeds of their gratuities to be shared with these employees.

We will continue to follow these cases and will grind out further updates (as well as additional coffee puns) as warranted.

Co-authored by Richard Alfred and Patrick Bannon

In a post last week, we predicted that the Supreme Court’s opinion in Comcast v. Behrend would have “monumental” implications for wage and hour class actions (read more here). Some of our readers, especially although not exclusively on the plaintiffs’ side interpreted the opinion much more narrowly. 

Exactly five days after issuing Comcast, the Supreme Court made its intentions clear by applying the decision to a wage and hour class action.

Yesterday, the Supreme Court ordered the Seventh Circuit to rethink its decision in Ross v. RBS Citizens, N.A., in which the appeals court affirmed the certification of a wage and hour class action.  Specifically, the Supreme Court granted review of the Ross case, vacated the lower court’s judgment, and remanded the case to the Court of Appeals “for further consideration in light of Comcast Corp. v. Behrend.”

Ross is a wage and hour class action in which two groups of bank employees were approved to pursue class claims for overtime pay allegedly due under the Illinois Minimum Wage Law.  One group sought pay for several different kinds of off-the-clock work.  The other claimed to have been misclassified as exempt from overtime. 

The Bank argued that neither group could be certified as a class because neither group could satisfy the requirement that common issues predominate over individual issues, as explained in Wal-Mart v. Dukes.  Each employee in the first group would have to prove what kind of off-the-clock work he or she performed, and the Bank would be entitled to prove that it did not know about the extra work or other employee-specific defenses.  Similarly, each employee claiming to have been misclassified would have to prove his or her specific duties.  Thus, the Bank argued, the case would inevitably be dominated by individual rather than class issues.

The district court and the Seventh Circuit both rejected that argument, ruling that whether the Bank had an unofficial policy of denying the plaintiffs earned compensation was enough of a common issue to justify class certification. 

The Supreme Court’s handling of Ross is, at a minimum, an instruction to lower courts to review carefully and apply Comcast -- and necessarily, Dukes -- before certifying state law wage and hour claims as class actions.  In fact, as we reported in our post last week, we think Comcast ultimately means much more -- that state law wage and hour claims requiring individualized proof of damages are generally inappropriate for class treatment.

We will follow and report on the Seventh Circuit’s consideration of Comcast when it reconsiders its decision in Ross.

Co-authored by:  Jeremy W. Stewart and Kyle Petersen

On January 10, 2013, U.S. District Judge Barbara Crabb of the United States District Court for the Western District of Wisconsin issued an order denying the plaintiffs’ motion for class and collective action certification of unpaid meal period claims in Boelk, et al. v. AT&T Teleholdings, Inc., et al., No. 3:12-cv-0040-bbc (W.D. Wis. 2013).   This decision is significant for employers because the Court follows the instruction given by the Supreme Court in Wal-Mart Stores, Inc. v. Dukes to perform a “rigorous analysis” to determine if Rule 23(a)’s commonality requirement has been met, and because it provides guidance for defeating conditional certification -- a challenging task -- of a FLSA collective action under 29 U.S.C. § 216(b).

The Boelk plaintiffs are current and former non-exempt, field service technicians who claim that defendants failed to pay them and other field service technicians all wages owed because: (1) the defendants’ restrictions on where technicians take breaks and what they can do during their breaks are such that the breaks are not bona fide, and are therefore compensable, and (2) defendants’ efficiency rating system compels employees to work through meal breaks without reporting the time as hours worked.  Plaintiffs attempted to pursue these claims as a “hybrid” collective action under the FLSA and Rule 23 class action under Wisconsin’s Wage Payment Act.

Plaintiffs argued that their first claim satisfies the commonality requirement of Rule 23(a) because the primary question to be resolved as to all proposed class members is “whether the restrictions limited technicians’ breaks so much that the breaks should have been compensated.”  Judge Crabb held that this “common question” is insufficient because it is not framed in terms of the actual elements of a claim under state or federal law, which is critical because, “as the Supreme Court made clear in Dukes, commonality is not simply a matter of common questions, ‘even in droves,’ but rather, whether the class proceeding can generate ‘common answers, apt to drive the resolution of litigation.’”  Here, the plaintiffs cited no law supporting the proposition that an employer must pay employees for meal breaks because employer restrictions prohibit employees from doing what they want on break, regardless of whether employees are performing work or activities that predominantly benefit the employer.  The failure to properly frame the common question in terms of whether the meal period restrictions result in technicians engaging in activities that predominantly benefit defendants, which is compensable, coupled with a lack of individual or classwide evidence that the restrictions resulted in such activities, doomed the first claim. 

In reaching her decision, Judge Crabb, who also decided Espenscheid v. DirectSat USA (discussed here) and Ruiz v. Serco, Inc., two of the most employer friendly wage and hour decisions in recent memory, distinguished this case from the Seventh Circuit’s decisions in Ross v. RBS Citizens, N.A. (overtime), and McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (race discrimination), by noting that, unlike Ross and McReynolds, the plaintiffs failed to offer proof of companywide policy that resulted in the alleged violation.  Instead, the evidence suggested that local supervisors were charged with significant discretion in the enforcement of meal break restrictions.  Accordingly, the plaintiffs failed to show that common questions could be resolved on a classwide basis using common proof.

Judge Crabb also held that plaintiffs’ second claim – defendants’ efficiency rating system compels employees to work through meal breaks without reporting the time as hours worked – fails to satisfy the commonality requirement of Rule 23.  With respect to this claim, Judge Crabb identified the “crucial question” as “why plaintiffs and other technicians worked through all or part of their meal breaks without reporting their doing so.”  According to Judge Crabb, this question is incapable of resolution on a class-wide basis because the answer turns on fact-intensive, individualized inquiries as to why a technician worked during a meal period on any given day. 

After determining that  Rule 23 class certification was inappropriate for the Boelk plaintiffs’ state law claims, the Court turned to plaintiffs’ FLSA claim.  Because the plaintiffs were seeking conditional certification, they urged the Court to apply the lenient standard typically used by Courts at the first stage of the two-step certification process.  The Court rejected the plaintiffs’ argument because “the parties have conducted significant discovery.”  Specifically, the record contained declarations, all six named plaintiffs had been deposed, two potential opt-ins had been deposed, and plaintiffs had taken a Rule 30(b)(6) deposition.  The Court held that, accordingly, “it is appropriate to apply more scrutiny to plaintiffs’ claim than would normally be applied at the conditional certification stage.”  In doing so, the Court referred to its Rule 23 commonality analysis and concluded that the plaintiffs failed to establish that they and the putative class members “were victims of a common policy or plan that resulted in common injuries.”  Rather, the  “plaintiffs’ experiences with respect to the meal break restrictions were not common and varied depending on their individual practices and particular supervisor.”  Thus, the Court held that plaintiffs were not similarly situated to the putative class they sought to represent and denied plaintiffs’ motion for conditional certification under the FLSA.

This case shows that, despite the so-called lenient standard, courts are willing to scrutinize motions for conditional certification, especially where discovery has been taken.  Employers defending collective actions should consider taking early discovery aimed at identifying individualized issues that may ultimately result in a determination that a common answer(s) cannot resolve the claims at issue.

Co-authored by: Ariel Cudkowicz and Jessica Schauer Lieberman

On Friday November 9, 2012, the First Circuit Court of Appeals issued a decision interpreting two key Massachusetts wage and hour statutes,  Mass. Gen. Laws ch. 149 § 152A (the “Tip Statute”), which regulates gratuities, service charges, and tip pools, and Mass. Gen. Laws ch. 149 § 150, which provides for mandatory treble damages for wage violations.

As we previously reported in this Blog, the plaintiffs in Matamoros v. Starbucks Corporation are baristas who claim that Starbucks violated the Massachusetts Tip Statute by allowing shift supervisors to receive a share of tips deposited by customers in tip jars located at the store’s cash registers.  Under the Tip Statute, only wait staff and other employees who have “no managerial responsibility” are permitted to share in tip pools. 

The district court held that although shift supervisors spend the majority of their time serving customers, they possess managerial responsibility for purposes of the statute because they also perform duties such as directing employees to workstations, opening and closing the store, opening the store’s safe, and handling and accounting for cash.   The First Circuit affirmed, rejecting Starbucks’ attempt to distinguish the shift supervisors’ relatively minor supervisory duties from “management” and holding that even extraordinarily limited managerial responsibility prevents an employee from participating in a tip pool.  The Court based its decision on the language of the statue, stating that “‘[n]o’ means ‘no,’ and we interpret that easily understood word in its ordinary sense: “not any.”

The First Circuit also affirmed the district court’s grant of class certification, refusing to accept the defendant’s argument that a fundamental conflict existed within the class.  Starbucks asserted that approximately 450 of the 11,000 baristas included in the class had been promoted to the shift supervisor position and would be financially disadvantaged by a decision striking down the company’s current tip-sharing policy.  The Court held, however, that this conflict was not “so substantial as to overbalance the common interests of the class members as a whole” and was cured by the fact that “barista[s]-turned-shift supervisor” retained the right to opt out of the class. 

Finally – and most importantly for Massachusetts employers in general – the Court upheld the Commonwealth’s mandatory treble damages provision.  Prior to 2008, the Massachusetts Supreme Judicial Court (“SJC”) held that because treble damages are punitive in nature, they could only be assessed for wage violations if the employer’s actions were “outrageous, because of the defendant’s evil motive or his reckless indifference to the rights of others.”  The legislature subsequently amended the statue, making the treble damages mandatory and labeling them “liquidated damages.”  Starbucks argued that the mandatory nature of the multiple damages violated due process.  The First Circuit held that treble damages do not create the kind of due process concerns that are implicated by jury-awarded punitive damages.   The Court then went on to state that the legislature had characterized the damages as liquidated damages, which are not punitive in nature.  Courts in other contexts (such as the Fair Labor Standards Act) have held that liquidated damages act as a stand-in for interest and other incidental damages.

The First Circuit’s decision, particularly as it concerns the treble damages law, strikes a blow to Massachusetts employers.  There are no exceptions to the Massachusetts treble damages provision – it applies to virtually all wage violations, regardless of the employer’s good faith, and thus creates the potential for massive liability for even minor wage payment errors.  The Matamoros decision closes off one avenue by which employers might have attempted to escape the effect of this draconian provision.  However, the First Circuit’s decision may not be the end of the story.  First, Starbucks may seek rehearing or Supreme Court review.  Second, since the First Circuit based its decision solely on federal constitutional law, employers may still be able to attempt to invalidate the provision based on state due process principles.  The SJC’s decision in Goodrow v. Lane Bryant, which held that pre-2008 treble damages provision to be punitive in nature, provides some language that may support a challenge to the current version of the law, although it remains to be seen whether state courts will in fact take a different view from the First Circuit.

Co-authored by Brandon McKelvey, Jeffrey Berman, and David Kadue

We previously reported that a San Diego Superior Court found See's Candy Shops violated California law by rounding employee time entries to the nearest-tenth of an hour, and that the California Supreme Court ordered the Fourth District Court of Appeal to review the case and decide the rounding issue.  On Monday, the Court of Appeal decided the issue of first impression in a published decision and held that “the rule in California is that an employer is entitled to use the nearest-tenth rounding policy if the rounding policy is fair and neutral on its face and ‘it is used in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked.”  This comes as great news to thousands of employers across California who utilize similar neutral rounding policies.    

The Court of Appeal became the first appellate court in California to adopt the long-held position of the US Department of Labor (“DOL”) and the state Division of Labor Standards Enforcement (“DLSE”) that rounding employee time entries "to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour" is lawful.  Both the DOL's regulations and the DLSE's Enforcement Manual note that rounding is acceptable provided that the practice is used "in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked.”  The Court of Appeal endorsed the DOL and DLSE’s position whole heartedly.  The Court said that “[a]ssuming a rounding-over-time policy is neutral, both facially and as applied, the practice is proper under California law because its net effect is to permit employers to efficiently calculate hours worked without imposing any burden on employees.”

The Court of Appeal rejected the plaintiff’s argument that rounding time entries violated various provisions of the Labor Code generally requiring payment of “all wages” and for “any work in excess of eight hours.”  The Court explained that the question of whether all wages have been paid is different from the issue of how an employer calculates the number of hours worked by a method such as rounding.  The Court further explained that none of the provisions in the Labor Code discussing payment of wages address rounding time entries and thus these Labor Code provisions do not invalidate or prohibit rounding.

Having found that neutral and unbiased rounding over time does not violate California law, the Court of Appeal vacated the trial court’s order granting summary adjudication in favor of the plaintiff as to several of See’s Candy Shops’ affirmative defenses.  The Court of Appeal held that determining whether a rounding rule is biased against an employee is a factual issue and not a legal one.  Because See’s Candy Shops presented evidence showing that its neutral rounding policy was unbiased over time there was a disputed issue of fact as whether the rounding policy operated over a period of time to undercompensate employees.  As such, the Court of Appeal found that summary adjudication in favor of the plaintiff was not proper.             

California employers have closely watched the See's Candy Shops case as neutral time rounding is a common practice in California and throughout the country.  In April, Seyfarth Shaw authored an amicus brief in the case on behalf of Employers Group, California Employment Law Council, and the California Chamber of Commerce urging the Court of Appeal to decide the rounding issue in line with the DOL and DLSE’s position.  The Court of Appeal provided much needed clarity on the issue and the decision may stem the tide of class action lawsuits in California challenging employer rounding practices on the basis that they violate the California Labor Code.  Employers in California who currently round employee time entries should nonetheless review their rounding policies and practices with counsel to evaluate potential issues and exposure.

Co-authored by George Preonas and Hayley Macon

On July 23, 2012, in Harris v. Superior Court (Liberty Mutual Ins. Co.), a case that the California Supreme Court previously had reversed and remanded, the California Court of Appeal stuck by its prior conclusion and held that insurance claims adjusters do not qualify for the administrative exemption from overtime pay requirements.

The Harris case involved claims for unpaid overtime by a class of Liberty Mutual insurance claims adjusters.  The claims adjusters argued that they were misclassified as administratively exempt.  After class certification, the claims adjusters moved for dismiss Liberty Mutual’s affirmative defense that they were exempt employees.  The trial court denied the motion.  On appeal, the California Court of Appeal reversed, applying the “administrative/production worker dichotomy” test set forth in two Bell v. Farmers Insurance Exchange cases—(collectively “Bell”)—and found that, because claims adjusters did not perform administrative work, they could not qualify for the administrative exemption.  The California Supreme Court granted review of the decision.

On December 29, 2011, the Supreme Court reversed the Court of Appeal’s decision, concluding that it had erred in relying on Bell because it was distinguishable.  The Supreme Court further ruled that the Court of Appeal had erred in relying primarily on the administrative/production dichotomy, instead of following the language of the relevant wage order and regulations.  The Supreme Court remanded, ordering the Court of Appeal to first apply the language of the statutes and wage order to the facts, and only then, if the statutes and wage order failed to provide sufficient guidance, look to the administrative/production dichotomy.

At issue on remand was one of the four requirements for the administrative exemption – whether the work is administrative.  Under the California Wage Order 4 and the federal regulations, administrative work must be “directly related” to the management policies or general business operations of the employer.  In order to be “directly related,” the work must be both administrative in nature and of “substantial importance” to the management policies or general operations of the employer’s business.  Harris addresses only the nature of the work.  

To consider whether the nature of the claims adjusters’ work qualified as exempt administrative work, the Court of Appeal cited the interpretative federal regulations, which provide that an employee’s work duties meet the exemption test only if they “relat[e] to the administrative operations of a business as distinguished from ‘production.’”  Relying heavily on a 1991 Third Circuit case, Martin v. Cooper Elec. Supply Co., and a federal case from Connecticut, the Court of Appeal interpreted this regulation to include only duties involving establishment of management policies or general business operations.  Under this rationale, claims adjusters cannot be exempt because they adjust individual claims, rather than set broader policy or run general business operations. 

The Court of Appeal then applied the administrative/production dichotomy test in further support of its determination that claims adjusters are non-exempt.  Again relying on Martin from the Third Circuit, the Court of Appeal held that “production” employees do not qualify as exempt employees who are performing the exempt task of “servicing the business,” because they are not formulating general policy on behalf of the business.  The Court of Appeal reasoned that claims adjusters were production employees because Liberty Mutual’s product is risk transference, and claims adjusting is an essential part of risk transference.  Although the Court of Appeal thus applied the administrative/production dichotomy with the same result achieved in Bell, the Court of Appeal denied that it was following Bell, as the Court here was considering only employee’s duties, not their role. 

The Court of Appeal expressly declined to follow other federal and administrative authority, including applicable Ninth Circuit decisions, on the grounds that it is not bound by those other federal decisions, and instead preferred to rely on the Third Circuit’s decision in Martin.

The Court of Appeal also rejected Liberty Mutual’s argument that the class was too heterogeneous to certify a class, and instead relied on its categorical conclusion that the claims adjusters did not perform duties involving management policy or general business operations, so they could not be exempt. 

What Harris Means for Employer

The Court of Appeal’s decision is highly controversial because of its application of the administrative/production dichotomy, as well as its rejection of seemingly persuasive analogous federal law, including authority in the Ninth Circuit.  The panel’s decision to essentially reinstate what the Supreme Court had just reversed is difficult to reconcile with the high court’s decision.  Indeed, the appellate justice who authored the original opinion wrote a dissent from the panel’s decision on remand.

The Court of Appeal’s decision thus creates significant uncertainty for the trial courts and for employers.  If the decision stands, then the administrative exemption in California could have very limited application.  Insurance claims adjusters and many other employees currently classified as administratively exempt might have to be reclassified as non-exempt, unless they are among that small group of employees who are primarily involved in setting company policy or running general business operations.  We anticipate strenuous efforts to seek review of this decision.

Co-authored by Barry Miller and Jeremy W. Stewart

Owners and operators of gentleman’s clubs recently received a new arrow in their quiver in the ongoing dispute over a question that has created a barrage of lawsuits across the industry – “Are exotic dancers employees?”  A decision from the United States District Court for the Eastern District of Arkansas on July 12 answered this question in the negative, holding that exotic dancers were not employees under the FLSA or Arkansas Minimum Wage Act. 

Lawsuits asserting that exotic dancers are employees, rather than independent contractors, have increased in recent years, in part due to the varying answers courts have given on this question, the media attention these cases receive, and the substantial amount of potential damages such cases can place at issue.  As a result, club owners have been left with inconsistent guidance on this issue, which has been framed by some courts as a determination between whether these entertainers should be viewed as independent “booked acts” or more like servers who provide customers with drinks.  Club owners and dancers have traditionally treated the relationship as one between independent contractors because the realities of the adult entertainment industry provide club owners with very little control over the dancers who perform at their clubs, often on a very itinerant basis.

In Hilborn v. Prime Time Club, Inc., the court looked at several factors to determine whether entertainers who performed at Prime Time met the definition of “employee” under the FLSA, such as: who controls the manner in which the work is performed; who assumes the risk of loss or reward; who invests in the equipment and materials required to perform the work; whether there are special skills possessed by the worker; the degree of permanence of the working relationship; and whether the workers perform integral tasks of the business.  The entertainers in Hilborn agreed on several key points that ultimately tipped the scales in favor of Prime Time, including the fact that they kept approximately 75% of the fees they collected, submitted a schedule of the days and hours that they preferred to perform, largely controlled the number of performances they conducted and for whom, were responsible for providing their own supplies and equipment, and were free to perform at other clubs that were direct competitors of Prime Time.  The court also found that the entertainers possessed and exhibited special skills with respect to their activities at the clubs, even though none of those skills required a certification.  In analyzing whether the entertainers were integral to the business, the court noted that the entertainers were directly responsible for no more than one-quarter of Prime Time’s overall sales and revenues.  Based on these factors, the court concluded that the entertainers were not Prime Time’s employees for purposes of the state or federal wage and hour laws and dismissed the claims asserted in the lawsuit with prejudice. 

Even in states that have more burdensome laws pertaining to the use of independent contractors, courts have found reason for hesitation in concluding that exotic dancers are employees of the clubs at which they perform.  Massachusetts, for example, has a stringent independent contractor regime that requires workers to be classified as employees unless, among other requirements, the workers’ services are “performed outside the usual course of the business” of the putative employer.  Plaintiffs’ attorneys have argued that “strippers” working at a “strip club” are necessarily performing within the usual course of the club’s business and are therefore necessarily employees under this test.  However, as detailed in an opinion from the Massachusetts Superior Court in a case captioned Cruz  v. Kings Inn, the analysis is not so simple.  Analogizing to comedians working in a comedy club and actors performing in a dinner theater, Judge Raymond Veary noted that the specifics of the parties’ relationship are still critical to determining the relationship between a worker and the usual course of business of the facility in which the worker plies his or her trade.  Based on this more nuanced analysis of the governing statute, Judge Veary denied the plaintiffs’ motion for summary judgment on the question of their employee status.

Although the debate is likely to continue for some time, decisions like those in Hilborn v. Prime Time Club, Inc. and Cruz v. Kings Inn provide additional ammunition for club owners in litigating this issue. 

Co-authored by Jon Meer and Brandon McKelvey

We recently reported about a California trial court judge in Los Angeles issuing the first post-Brinker ruling denying class certification in a proposed meal and rest period class action. On Friday, the ruling became final when the judge issued his order. This appears to be the first ruling in California to deny class certification in a proposed wage-hour class action after Brinker. As previously reported, the ruling may be a good sign for employers as to how courts will interpret Brinker.

The Honorable John Shepard Wiley, a Los Angeles County Superior Court complex litigation judge, relied heavily on Brinker in ruling that class treatment for meal and rest breaks was inappropriate based on a lack of uniform evidence concerning policies and the diverse workplace situations of the workers. The court said that plaintiff's 43 "lawyer-drafted declarations" of putative class members, which described missed breaks, had to be "taken with a grain of salt, for the utter uniformity of experience they portray may stem both from similar workplace conditions and from the cut-and-paste function in the law firm's word processor." The court noted that plaintiff's 43 declarations only established that workplace conditions were similar for 6% of the putative class, while other declarations proffered by the defendants showed workplace situations varied drastically. Even if the plaintiff's 43 declarations were accepted on face value, the court said that would just mean there were 43 putative class members down with "716 left to go on the issue of liability." The court found this unacceptable, saying, "[a] civil defendant…enjoys the right to due process on the issue of civil liability."

The court further explained that, "There is no single way to determine whether [the defendant] is liable to the class for failure to provide breaks. Some workers did not get breaks. Other workers were on their own and at complete liberty to take breaks as they pleased, with no time or management pressure." The court indicated that it would take "hundreds of witnesses" to sort this out and determine whether there was or was not liability for improper breaks. The court went on to say, "This is not a practical trial. It is unworkable. The proposal to analyze these disputes as a class matter does not make common sense."

The court also rejected plaintiff's reliance on the concurrence in Brinker. The court said, "[plaintiff] repeatedly cites the Brinker concurrence. The concurrence commanded only two votes. It is not the law." This may be a good sign for employers who wondered how trial courts would interpret the Brinker concurrence, which seemed to suggest a lower bar for class certification in meal period cases than was provided by the actual unanimous decision.

Jon Meer and Brandon McKelvey of Seyfarth Shaw represented one of the defendants in this case and opposed class certification along with another defendant.  Jon Meer was interviewed by the National Law Journal about the ruling and talked about the decision in Brinker and what it means for wage-hour litigation in California.  To read the interview click here. 

Co-Authored by Sophia Kwan and Brandon McKelvey

On Monday, the California Supreme Court held in Kirby v. Immoos Fire Protection, Inc. that neither plaintiffs nor defendants can recover attorney's fees in meal or rest break cases under statutes that provide attorney's fees in actions to recover "wages." The decision is largely favorable to employers as it decreases incentives for plaintiffs' lawyers to bring meal and rest period suits and lowers employers' potential exposure in such suits. Nonetheless, because prevailing party fees are not available to either party, employers cannot recover fees in meal and rest period cases, which may make it more difficult to combat some frivolous meal and rest period suits.

The California Supreme Court had previously held that the remedy for failing to provide a meal or rest break (an hour of pay) constitutes a "wage" rather than a "penalty" for purposes of triggering a longer statute of limitations. Thus, the argument went that meal and rest period cases qualified for attorney's fee awards as they were actions to recover wages. In Kirby, however, the Supreme Court finely parsed the attorney's fee statutes and held that, while the remedy for meal and rest break claims was a wage, the action itself was an action for a failure to provide a meal and rest period as opposed to an action to recover wages. Under this interpretation, meal and rest break claims do not qualify for recovery of attorney's fees under the statutes at issue.

In what is good news for employers, the Supreme Court held that a plaintiff cannot recover attorney's fees under California's one-way fee shifting statute (Labor Code § 1194), which authorizes an award of attorney's fees only to employees who prevail on their "minimum wage" or overtime" claims. In what appears to be an attempt at balancing the playing field for employees, however, the Supreme Court held that neither party (including a defendant employer) can recover attorney's fees under the two-way prevailing party statute (Labor Code § 218.5).

The Kirby decision, in combination with the Supreme Court's recent decision in Brinker, may have a chilling effect on meal and rest break actions in California. The unavailability of attorney's fees under these statutes may decrease the incentives for plaintiffs' attorneys to file individual or class action meal and rest break lawsuits. The inability of the employer to recover attorney's fees, however, decreases the risk plaintiffs' attorneys have in pursuing a meal or rest break case that is frivolous and limits the ability of the employer to recoup costs in such cases.

Co-authored by Jeffrey Berman, Dana Peterson, and Brandon McKelvey

The California Supreme Court announced today that it will issue its decision at 10:00 a.m. tomorrow in the much-anticipated meal and rest period case of Brinker Restaurant Corp. v. Superior Court.  The Court is expected to decide whether California employers must ensure that employees actually take meal periods, or whether it is sufficient to just make meal periods available.  The Court is also expected to provide some guidance regarding the timing of meal periods and obligations with respect to rest periods.  Because the Brinker case is a class action the decision may also have a broader impact on wage-hour class action cases in California.  

Seyfarth Shaw will provide a summary and analysis of the Brinker decision on this blog tomorrow shortly after the decision is published.  In addition, Seyfarth Shaw will host a webinar on Wednesday, April 18 at noon Pacific to discuss the Brinker decision and its implications.  To view the webinar invitation and register for the webinar please click here.

Authored by Laura Reathaford and Catherine Dacre

Plaintiffs often argue in seeking class certification that an employer’s policy applicable to all or a certain group of employees provides sufficient evidence of commonality to justify the certification of the alleged class.  In Delodder v. Aerotek, Inc., the Ninth Circuit affirmed the district court’s decision denying certification of a class of recruiters who claimed they had been misclassified as exempt from California’s overtime requirements.  In reaching its decision, the Court of Appeals agreed with the lower court that evidence of material differences in the activities that the alleged class members actually performed carried greater weight than the defendant’s uniform corporate policies and training programs.

Plaintiffs in Delodder sought certification under Rule 23(b)(3) based on the theory that Aerotek had a common policy requiring all recruiters to complete the same training and follow the same policies when performing their jobs.  Plaintiffs relied on Fair Labor Standards Act regulations incorporated by reference into the California Wage Orders.  The regulations establish that routine screening of job applicants according to predetermined criteria does not require “discretion and independent judgment,” but that the selection of qualified candidates does.

Rejecting this argument, the district court found that some Aerotek recruiters had more authority to select and recommend candidates than others and thus, were not simply operating pursuant to any predetermined criteria.  The Ninth Circuit agreed stating that evidence of corporate policies and training programs is not dispositive of the class certification issue, “for the obvious reason that training and policies may not reflect what the class members actually do.”  The Court upheld the district court’s finding that class certification was inappropriate because the question of whether a putative class member lacks the requisite discretion depends on predominantly individualized issues.

The Ninth Circuit similarly rejected Plaintiffs’ effort at certification under Rule 23(c)(4) which permits a class to be maintained with respect to a particular issue.  Plaintiffs had sought certification of a limited class action to adjudicate their claim that class members do not perform “office or non-manual work directly related to management policies or general business operations.”  The Court upheld the district court finding that all putative class members were engaged in “meeting the needs of Aerotek’s customer companies,” a role that is directly related to Aerotek’s general business operations, and therefore qualified under the administrative exemption.

The Ninth Circuit’s decision was widely anticipated after the Court agreed to hear this discretionary appeal and has been the subject of prior posts on our Seyfarth Shaw’s Workplace Class Action Blog. Class action litigators were hoping for some guidance from the Ninth Circuit for close call cases requiring a fact-intensive inquiry.

At least to some degree, the decision delivered.  The Ninth Circuit confirmed that a trial court must “make a factual determination as to whether class members are actually performing similar duties” in exemption cases, and refuted the argument that a district court’s decision to afford more weight to evidence of actual work performed (rather than to the uniform policy evidence) was a clear error of judgment.  This ruling provides employers with helpful guidance on the type and quality of evidence needed to defeat class certification in exemption cases.

Authored by Catherine Dacre

Commissioned sales is one of the few areas in which California law is arguably more favorable to employers than the FLSA or laws of other states.  Specifically, California law recognizes an exemption from overtime for sales employees in many industries, provided they are primarily engaged in sales, earn at least one and one half times the minimum wage, and more than half of their income comes from commission earnings. 

Dubbed the “inside sales exemption,” this often-overlooked exception to the obligation to pay overtime applies to sales employees who do not qualify for the outside sales exemption because they work at their employer’s place of business.  In an opinion interpreting the applicability of the exemption broadly, the court of appeal in Muldrow v. Surrex Solutions Corporation confirmed the applicability of the exemption to employment recruiters. 

The recruiters in Muldrow were paid commissions based on both the price paid for the employee placed and the cost to their employer.  Stated simply, they were paid based on profitability of the deal, not just price.  The court clarified that factoring in cost does not destroy the commissioned nature of the pay, and prior cases on the issue (most notably Keyes Motors v. DLSE) did not intend such a restriction.  

In addition, the court rejected Plaintiffs’ argument that activities such as cold calling, interviewing candidates, inputting data, and submitting resumes were not sales related, finding instead that they were essential to accomplishing the sales. 

Finally, the court upheld the plan as a bona fide commission system based on evidence of earnings across the class.  The court found that many employees (unlike the class representatives) were paid in excess of their draws and thus the plan was bona fide.  On that issue, the court observed that limiting focus to any one group of employees would reward the unmotivated or unproductive employee.   

This is a useful case for a number of reasons.  It can be relied on to support a sales-related activity theory in either and inside or an outside sales case.  In addition, it applies a broad definition of “commission” for purposes of such exemption cases.  Finally, in the class action context, it validates the notion that the court must look at the class as a whole in examining the issues, rather than focus on a few (often outlier) class representatives.

Co-authored by Jeffrey Berman and Brandon McKelvey 

We recently reported that a San Diego Superior Court found that See's Candy Shops violated California law by rounding employee time entries to the nearest six minutes.  The Fourth District Court of Appeal let the ruling stand.  Yesterday the Supreme Court ordered the Court of Appeal to review the case and decide the rounding issue.

In September, the San Diego Superior Court found that See's Candy Shops violated California law by rounding employee time entries to the nearest six minutes. See's Candy petitioned the California Fourth District Court of Appeal for review and the petition was denied. See's then petitioned the California Supreme Court for review. Organizations representing employers, including Seyfarth Shaw, filed amicus letters urging appellate review of the trial court's ruling because of the widespread concern to California employers on the issue of rounding.  The Supreme Court granted the petition for review and ordered the Fourth District Court of Appeal to review and decide the case.

For years, the position of both the US Department of Labor ("DOL") and the California Division of Labor Standards Enforcement ("DLSE") has been that rounding employee time entries is lawful. The DOL's regulations and the DLSE enforcement manual permit rounding "to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour." Both the DOL's regulations and the DLSE's enforcement manual note, however, that rounding is acceptable provided that the practice is used "in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked." In the case against See's Candy, the San Diego Superior Court went against the DOL and DLSE interpretations and found that an unbiased rounding procedure violated California law, which according to the court, required payment for all time worked.

There have been a growing number of class action lawsuits in California challenging employer rounding practices and employers are concerned that the ruling in See's will lead to a wave of class actions against thousands of employers who round time entries in California. Now that the Fourth District Court of Appeal must review the case and decide this issue, employers may soon receive clarity on this issue. In the meantime, however, employers in California who round employee time entries should be aware of the potential threat for litigation and should review their rounding policies and practices with counsel to evaluate potential issues and exposure.

Authored by Andrew McNaught

On November 10, 2011 the California Court of Appeal, First District, heard oral argument in Duran, et al. v. U.S. Bank.  While perhaps overshadowed by the excitement surrounding the oral argument before the California Supreme Court in Brinker Rest. Corp. v. Superior Court, just two days prior, the Duran case presents extremely important issues relating to how class action trials are conducted in California.  In a matter of first impression, the Court of Appeal is considering whether class action plaintiffs may use statistical sampling and representative evidence to establish liability on a class-wide basis.

Plaintiffs filed the misclassification case in Alameda County Superior Court on December 26, 2001.  After class certification, Judge Robert Freedman granted Plaintiffs’ motion for summary adjudication on the Bank’s defenses of administrative exemption and commission sales exemption.  The case then went to a bench trial on the Bank’s remaining defense under the outside sales exemption.

The trial court conducted the liability phase of the trial based on a purportedly random sample of 20 class members out of 260 total.  It determined that the Bank had misclassified 19 of the 20 class members in the sample, and then extrapolated from that result that all 260 class members had been misclassified.  The trial court also refused to allow U.S. Bank to put on evidence at trial that at least 70 of the 260 class members, who had signed declarations for the company, were not misclassified.  After the damages phase, the trial court entered judgment against the Bank in the amount of approximately $15 million.

The Bank’s arguments on appeal centered on four separate points: (1) the trial court’s grant of class certification was an abuse of discretion; (2) the trial court’s grant of Plaintiffs’ motion for summary adjudication as to two of the Bank’s defenses was legal error; (3) the trial plan approved by the court was unconstitutional because it violated the Bank’s due process rights to present individualized defenses and resulted in a 43.3% margin of error as to the class-wide liability determination; and (4) the trial court erroneously expanded the remedies available to Plaintiffs by awarding class-wide restitution.

The panel appeared receptive to the Bank’s arguments.  The Court had “significant questions” about the trial court’s trial management plan which appeared to implicate the Bank’s due process rights, and also regarding the trial court’s exclusion of defendant’s evidence supporting individualized defenses.  The panel also demonstrated considerable concern regarding the trial court’s approval of extrapolating class-wide liability to 260 class members based on a trial sample of only 19, which resulted in a 43.3% margin of error.  While at least one California appellate court has held that statistical sampling can be utilized to prove damages (Bell v. Farmers Insurance Exchange), no California appellate court has ever held that statistical sampling may be used to prove liability.

It appears that the Court of Appeal may be poised to overturn the judgment against U.S. Bank and at the very least reject the trial plan and use of sampling for liability authorized by the trial court.  The Court may follow the U.S. Supreme Court’s guidance in Wal-Mart Stores v. Dukes, disapproving “trial by formula” because “a class cannot be certified on the premise that [a defendant] will not be entitled to litigate its statutory defenses against individual claims.”  A decision in the Duran case is expected before the end of February 2012.

Authored by Brandon McKelvey

Recently a San Diego Superior Court found that See's Candy Shops violated California law by rounding employee time entries to the nearest six minutes.  See's Candy Shops petitioned the California 4th District Court of Appeal for review, and the California Chamber of Commerce has asked the appeals court to review the trial court's ruling because of the widespread concern to California employers on the issue of rounding. 

For years, the position of both the US Department of Labor ("DOL") and the state Department of Labor Standards Enforcement ("DLSE") has been that rounding employee time entries is lawful.  The DOL's regulations and the DLSE enforcement manual permit rounding "to the nearest 5 minutes, or to the nearest one-tenth or quarter of an hour."  Both the DOL's regulations and the DLSE's enforcement manual note, however, that rounding is acceptable provided that the practice is used "in such a manner that it will not result, over a period of time, in failure to compensate the employees properly for all the time they have actually worked."

There have been a growing number of lawsuits in California challenging employer rounding practices.  These lawsuits are often brought as class actions and allege that employer rounding in the aggregate results in the failure to compensate employees for time worked.  This is a big concern for California employers.  As the California Chamber of Commerce explained in it's amicus letter to the California appeals court, "the trial court decision in the See's case may lead to the filing of many more class actions attacking rounding practices that employers have believed were completely lawful.  Many employers will feel they have no choice but to stop their practice of rounding time to avoid the risk of class litigation, which often leads to large settlements due to the costs of defending these cases." 

Employers in California who round employee time entries should be aware of the potential threat for litigation and should review their rounding policies and practices with counsel to evaluate potential issues and exposure.  

Co-authored by Richard Alfred and James Hlawek

A Massachusetts Superior Court judge recently invalidated an arbitration class action waiver, even though the U.S. Supreme Court found in its AT&T Mobility LLC v. Concepcion ruling earlier this year that federal law preempts state laws that interfere with an employer’s ability to enforce arbitration agreements with class action waivers.  This ruling shows that, at least in Massachusetts, courts may still be willing to invalidate class action waivers in arbitration agreements, particularly where the waivers are not carefully drafted or where small claims are at stake.

In Feeney v. Dell, Inc., two plaintiffs sought to bring a consumer class action against Dell arising out of Dell’s collection of sales tax on their computer service contracts.  Their claims were both worth less than $250.  The plaintiffs’ contracts with Dell required arbitration and prohibited arbitration class actions.  The arbitration provision did not allow consumers to be awarded anything more than the value of their claims.

In 2009, the Massachusetts Supreme Judicial Court invalidated Dell’s class action waiver because it found that the waiver was contrary to public policy.  The SJC ruled that, given the small amount of damages at stake, aggregation of claims was the only realistic option for the consumers to pursue their claims against Dell.

After the SJC’s ruling, the U.S. Supreme Court ruled in AT&T Mobility v. Concepcion that the Federal Arbitration Act (“FAA”) preempted a California rule that banned class action waivers in a certain category of consumer arbitration agreements.  The Supreme Court found that the California rule required companies with certain arbitration agreements to allow class-wide arbitration, even though class actions are more formal, riskier, and less efficient than individual arbitrations.  The Supreme Court therefore decided that the rule frustrated the company’s ability to resolve disputes efficiently, thereby interfering with one of the purposes of the FAA.

The Supreme Court pointed out that arbitration class action waivers could not be invalidated simply because claims were likely to involve small amounts that would not be prosecuted on an individual basis.  The Supreme Court added that the claim before it was likely to be prosecuted on an individual basis because the company agreed to pay claimants at least $7500 and twice their attorneys’ fees if they obtained an arbitration award greater than the company’s last settlement offer. 

After Concepcion was issued, Dell argued in Massachusetts Superior Court that the SJC’s earlier ruling was no longer valid because, similar to Concepcion, the SJC required Dell to allow arbitration class actions, thereby frustrating the purpose of the FAA.  The Superior Court judge, however, found that, unlike the arbitration provision in Concepcion, Dell’s provision did not include features that would make individual-based arbitration of small claims feasible.  The judge concluded that the SJC’s ruling did not frustrate the purpose of the FAA because efficient, individual-based arbitration was not a realistic option for Dell’s consumers.  The judge added that he would have upheld Dell’s class action waiver if Dell had made individual-based claims feasible.

Employers, at least in Massachusetts, should be aware of the Feeney decision because it shows that, regardless of Concepcion, some judges may continue their skepticism towards arbitration class action waivers, particularly where small-dollar claims are involved.  However, given the Supreme Court’s broad ruling in Concepcion, those waivers should be enforceable.  Employers that have or plan to have arbitration agreements with class action waivers may nonetheless want to consider taking a relatively conservative approach in their arbitration agreements that include class action waivers by making individual-based arbitrations more feasible for small-dollar claims.

As the law in this area is evolving rapidly, it is important for employers to consult with their employment counsel before implementing any new policies or programs in this area.

 Co-authored by Kerry Friedrichs and Kimberly Brener

Almost four years after granting review, the California Supreme Court heard oral argument last week in Harris v. Superior Court, a case addressing the scope of the administrative exemption from California’s overtime pay requirements.  The Court’s decision, which will issue within the next 90 days, is expected to clarify a very significant issue for California employers -- whether or not the “administrative/production worker” dichotomy is determinative in assessing whether employees qualify for the administrative exemption.  If the Court finds that this dichotomy strictly governs the application of the exemption, employees who are involved in “production” work (e.g., either producing the product or providing the service that the employer sells) cannot qualify for the administrative exemption, no matter how significantly their job duties impact their employer’s business operations.

Background on Harris v. Superior Court:

California courts have taken different approaches to determining whether, and to what extent, the administrative/production worker dichotomy (a test used to determine the extent employees perform work related to the general operations of a business) governs the application of the administrative exemption.  In Harris, 64 Cal.Rptr.3d 547 (2007), the Court of Appeal strictly applied the so-called “administrative/production worker dichotomy” set forth in Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805 (2001) (“Bell”) and held that insurance claims adjusters could not qualify for the administrative exemption as a matter of law because adjusting claims was part of the “product” that their employer (Liberty Mutual) sold.

In contrast, other California Courts of Appeal and the Ninth Circuit have rejected a strict application of the “administrative/production worker” test.  For example, in Hodge v. Aon Insurance Services, the California Court of Appeal declined to apply the dichotomy, finding it to be “unworkable,” and held that insurance claims adjusters qualified for the administrative exemption because they were engaged in work of a “substantial importance” to the general business operations of their employer’s customers.  

Oral Argument in Harris:

During oral argument, counsel for the plaintiff argued that the Court of Appeal correctly held that the claims adjusters were non-exempt “production” workers because adjusting claims is an essential part of the product that Liberty Mutual offers.  However, he conceded that in some circumstances a claims adjuster could be exempt.  In opposition, counsel for Liberty Mutual argued that the administrative/production worker dichotomy was simply a tool for courts to use and should not be strictly applied to Liberty Mutual’s claims adjusters, who performed quintessential administrative work that was of “substantial importance.”  

At the outset of oral argument, Justice Corrigan characterized Liberty Mutual’s appeal as a request “for a shot to prove” the exemption applies (e.g., by evaluating employees’ duties and the time spent performing such duties).  Later she noted that the administrative/production worker test has been criticized as being of limited utility in today’s work environment and noted the practical difficulties of applying the test to insurance claims adjusters.

However, questions from the bench about the California Court of Appeal decision in Bell (which strictly applied the administrative/production worker test) suggest that the Court is inclined to distinguish Bell, rather then reject it entirely.  For example, multiple justices asked whether the Court would need to disapprove of Bell to hold that the Court of Appeal in Harris got it wrong.  Justice Corrigan specifically highlighted, as a way to distinguish Bell, that it predated the Wage Orders which expressly incorporated the federal regulations.

Import of Harris and Predictions:

While Harris and several other cases addressing the administrative/production worker dichotomy involve insurance claims adjusters, the outcome of this case will be very significant for California employers in nearly all industries.  Many high-level employees who perform work of substantial importance to the management or operation of the employer’s business perform duties that are related to the products or services that their employer offers.  Based on the Court’s questions and comments at oral argument, we anticipate that the opinion in Harris will clarify that the administrative/production worker dichotomy does not categorically render these employees non-exempt (i.e. distinguish Bell and give Liberty Mutual its “shot” to prove the exemption applies).   Employers can expect a final answer from the Supreme Court by the end of the year.

Coming Soon:

Next up, on November 8, 2011, the Court will hear oral argument in Brinker v. Superior Court, the highly-anticipated case concerning an employer’s obligation to “provide” meal periods under California law (i.e., whether an employer must ensure that meal breaks are taken or make such breaks available and afford employees the opportunity to take them).

Authored by Aaron Warshaw

In the first reported decision to address the retroactivity of the New York Wage Theft Prevention Act (“Act”), a state trial judge has ruled that the Act’s provision increasing liquidated damages from 25% to 100% applies to Labor Law violations occurring prior to the Act’s April 9, 2011 effective date.  As we have previously reported, the Act substantially amends various aspects of New York’s wage and hour law.

Justice Jane Solomon issued the decision addressing the retroactivity of the Act’s liquidated damages provision in Ji v. Belle World Beauty, Inc., No. 603228/2008 (N.Y. Sup. Ct., N.Y. Cnty., Sept. 22, 2011), in response to the plaintiffs’ motion to amend their complaint to “reflect recent amendments” under the Act.  In pertinent part, the plaintiffs sought to amend their complaint to seek “100%” rather than “25%” liquidated damages under their New York wage claims.  Although the case was filed well before the Act took effect, Justice Solomon granted the motion.  She first noted that the “general rule that a statute should be construed as prospective unless the language of the statute, either expressly or by direct implication, requires a retroactive constructive.”  However, the judge also noted that “remedial statutes are given retroactive construction to the extent that they do not impair vested rights or create new rights.”  The court then reasoned that the Act was remedial in nature, that the increase in liquidated damages does not affect any of the defendants’ vested rights, and that the provision does not create a new right of recovery.  As a result, Justice Solomon held that the increase in liquidated damages applies retroactively and permitted the plaintiffs to amend their complaint to reflect this change.

Although the 100% liquidated damages provision applicable to violations of the New York Labor Law is the same rate for liquidated damages under the Fair Labor Standards Act, the potential impact of the Act is considerably greater because New York’s statute of limitations for wage violations is six years, compared to two or three years under the FLSA.  This particular issue did not arise in Ji because the alleged wage underpayments occurred in 2007, only one year prior to the date the action was filed.  Nonetheless, the decision raises the risk that retroactive 100% liquidated damages might apply not only to actions pending as of April 2011, but also to acts occurring well beyond the federal three-year statute of limitations.

The decision also reflects a broader willingness of New York courts to retroactively apply changes to labor and employment laws absent express statutory language to the contrary.  Another recent example can be found in Nelson v. HSBC Bank USA, No. 2009-04273 (N.Y. App. Div., 2nd Dep’t, Sept. 13, 2011), where an intermediate appellate court held that 2005 changes to New York City’s human rights law apply retroactively to an action brought in 2003.  However, as we recently reported, this approach stands in contrast to a recent decision in which Massachusetts’ highest court held that a statute mandating automatic treble damages for wage and hour violations applies only to conduct occurring after the new law’s effective date because the change was substantive rather than procedural or remedial.

Authored by Beth L. Gobeille

The Massachusetts Supreme Judicial Court altered the state’s wage and hour landscape with two critical decisions affecting businesses across the Commonwealth.

Rosnov v. Molloy:  In a decision that will benefit many defendants in wage and hour cases in Massachusetts, the Massachusetts Supreme Judicial Court has declared that a statute mandating automatic treble damages for most violations of the Commonwealth’s wage and hour laws only applies to conduct occurring after its effective date of July 12, 2008. 

Rosnov sued Molloy for nonpayment of wages, and the Superior Court held that Molloy was automatically liable for treble damages pursuant to the July 12, 2008 amendment even though his alleged conduct predated that amendment.  Molloy appealed this finding and successfully petitioned the SJC for direct appellate review. 

Molloy argued before the SJC that the statute could not apply retroactively because it affected substantive rights and was not mere procedural or remedial legislation.  He further argued that the legislative history bore no indication that the legislature intended the amendment to apply retroactively.  The SJC agreed, holding that treble damages affect substantive rights because they greatly increase a defendant’s liability, and further holding that the legislature history is “murky” at best and cannot support a finding of retroactivity.

Employers already defending wage and hour claims in Massachusetts that involve violations dating from before July 12, 2008, may rely on this ruling to reduce exposure.  However, this decision does not insulate defendants from treble damages before the statutory amendment became effective.  To obtain multiple damages prior to that time, plaintiffs must prove that the employer’s conduct was “outrageous, because of the defendant’s evil motive or his reckless indifference to the rights of others.”  Wiedmann v. Bradford Group, 444 Mass. 698, 710 (2005).  For violations after July 12, 2008, the statutory amendment mandating treble damages will apply, subject to possible constitutional challenge that the Court in Rosnov did not reach. 

Awuah v. Coverall North America, Inc: The SJC’s decision in Coverall places significant restraints on lawful deductions from wages and timely payment of wages.  The Coverall class action plaintiffs are individuals who entered into contracts with Coverall for the provision of commercial janitorial services to third-party customers.  In response to questions certified to the SJC by the U.S. District Court, the SJC held that employers may not use accounts receivable financing systems to pay an employee at the time the customer pays the employer for the employee’s work rather than when the work is performed, even with the employee’s consent.  Instead, the SJC held that wages are “earned” and due within a fixed period after the employee completes his or her labor, and not when the employer receives the customer’s payment. 

In addition, the SJC held in Coverall that employers violate the Wage Act when they deduct the costs of worker’s compensation and other work-related insurance coverage from an employee’s pay, even if the employee consents to the deduction and still receives at least the minimum wage.  The SJC held that the purpose of the Worker’s Compensation Act would not be fully realized unless the cost of workplace injuries falls squarely on the employer because the Act makes such injuries part of the employer’s “cost of business.” 

The SJC further determined that other insurance costs, such as those for comprehensive liability insurance, may not be passed on to employees.  While employees can sometimes be liable to employers for property damage, such liability must only be assigned after the employee has received a “procedurally fair” adjudication of responsibility.  “An employer may not deduct insurance costs from an employee’s wages where those costs are related to future damages that may never come to pass, and if they do, may not be the responsibility of the employee.”  Similarly, Coverall provides that employers may not lawfully deduct franchise fees from wages because such fees are “special contracts” in which employees purchase their jobs from employers and therefore violate public policy.

Rosnov v. Molloy strikes a blow to the plaintiffs’ bar that has been pushing courts and employers alike to presume that mandatory treble damages are available to plaintiffs regardless of the timing of their allegations.  However, employers should exercise caution in the aftermath of Coverall, as the scope of permissible deductions and the latitude on timely payment of wages are both significantly constrained by that decision.

Authored by Brandon McKelvey

Relying on the Supreme Court's recent decision in Dukes v. Wal-Mart, a federal judge in California decertified a class of Dollar Tree store managers claiming they were misclassified as managers under California law.  The Supreme Court's decision in Dukes, as well as recent Ninth Circuit decisions in employment class action cases, persuaded the court that the class he had previously certified could not proceed to trial as a class action because of "unmanageable difficulties." 

 Over the course of two years plaintiffs saw what was once a certified class slowly whittle away in the wake of Ninth Circuit and Supreme Court decisions denying class action treatment in employment cases.  In May 2009, the court initially certified a class of 718 store managers based on Dollar Tree's practice of having the store managers answer "yes" or "no" on a weekly payroll certification form that asked whether they spent the majority of their time performing management duties.  In September 2010, however, the court partially decertified and narrowed the class to the 273 managers who answered "no" on the weekly payroll certification in response to the Ninth Circuit's decisions in Vinole v. Countrywide Home Loans, Inc. and In re Wells Fargo Home Mortgage Overtime Pay Litigation. 

 After the court's partial decertification order, both parties presented evidence that the payroll certification forms were not reliable, including testimony from class members under oath that the certifications were not truthful.  Based on this testimony plaintiffs revealed that at trial they would rely on individual testimony as opposed to the payroll certification forms.  The court found that plaintiffs' proposed plan to try the case based on representative testimony from a handful of class members, while questionable under prior law, was untenable in light of the Ninth Circuit's decision in Marlo v. UPS and the Supreme Court's decision in Dukes.  The court pointed out that both Marlo and Dukes required class action plaintiffs to produce common proof of class-wide liability and that the plaintiffs had failed to produce such proof by relying solely on the testimony of individual class members.  The court concluded that without the common element of the certification form responses, there was no "glue" holding all of the individualized experiences of the class members together and thus continued class treatment was inappropriate.   

 The court's decertification of the class is consistent with rulings from the Supreme Court and Circuit Courts denying class action treatment in employment class action cases, particularly those involving misclassification claims.

Authored by Laura Reathaford

How should employers classify junior accountants who perform accounting work but do not hold a CPA license?  The Ninth Circuit has provided an answer: employers may, depending on the nature of the work performed, classify these employees as exempt from overtime pursuant to California’s “learned professional” and administrative exemptions.  While this decision is based on state law, its rationale may be applied nationally to claims brought under the Fair Labor Standards Act that challenge the exempt status of junior accountants and similar professionals.

The language of the professional exemption provides that it applies to any employee who is (a) licensed or certified by the State of California and is primarily engaged in the practice of law, medicine, dentistry, optometry, architecture, engineering, teaching or accounting (commonly referred to as the licensed professional exemption), or (b) primarily engaged in an occupation commonly recognized as a learned or artistic profession (commonly referred to as the learned professional exemption).

In Campbell v. PricewaterhouseCoopers, the Ninth Circuit considered whether a class of junior accountants who performed audits for PwC clients were properly classified as exempt from overtime under the learned professional exemption.  The plaintiffs argued that they were misclassified because they were not yet licensed but were engaged in the accounting profession. Plaintiffs’ position was based on the idea that since the accounting profession was listed as exempt under the licensed professional exemption, this was the only professional exemption which could apply.  Anyone who performs accounting work but does not hold a license, cannot be exempt under the learned professional exemption.

The Court disagreed.  Specifically, the Court held that the plain language of the exemption – specifically – the word “or”, indicates that an employee may satisfy either the licensed prong or the learned prong of the professional exemption   The Court also noted that since all of the IWC exemptions apply to individuals and not to professions as a whole, it would be illogical to conclude that the IWC intended to exclude the entire accountancy (or any other) profession from the learned professional exemption.

The Court rejected the idea that the exemption’s overall structure requires a contrary interpretation.  The Court found that while the exemption contemplates three categories of employees which could fall within the exemption (licensed, learned and artistic), nothing in the exemption’s text or structure suggests that the licensed category is exclusive from the remaining two categories.  Instead, the Court found that the structure of the professional exemption strongly suggests that the IWC intended for subsection (b) to cover some accountants.  It noted that subsection (e) mandates that subparagraph (b) should be construed in accordance with the then existing federal regulations which provided that if employees actually performed accounting work, they could fall within the professional exemption.

The Court did not overlook the widespread implications of a contrary decision either.  For example, adopting Plaintiffs’ view would mean that employers would likely have to pay mandatory overtime to people such as medical school graduates working as residents at hospitals and first year law firm associates who are waiting to receive their bar exam results.  These widespread implications, the Court held, could not be what was intended when the IWC created the professional exemption.

The Court also found that PwC was not precluded from relying on California’s administrative exemption.  Acknowledging that “Plaintiffs are on the low end of PwC’s hierarchy”, the Court saw “no authority that would bar their audit work from meeting the test of the administrative exemption.”  The Court recognized that the former federal regulations incorporated by the administrative exemption included white-collar employees such as tax consultants whereas examples of non-exempt employees included primarily clerical jobs such as bookkeepers.  Accordingly, the Court found that if PwC proved that the junior accountants performed “white collar” functions more than 50% of their time, it might succeed in establishing they met the test of the administrative exemption.

Although the Campbell decision is based on the California Labor Code, it could have nationwide implications since the California exemption closely parallels the federal regulatory definition of the administrative exemption.  In particular, the Court’s finding that audit work could relate directly to the management or general business operations of the employer could mean that these employees qualify for the same exemption under the federal Fair Labor Standards Act.

Authored by C.J. Eaton

On Friday, May 20, 2011, the First Circuit overturned a jury verdict against American Airlines and held that the Airline Deregulation Act of 1978 (ADA) preempts claims brought under the Massachusetts Tip Statute.

In 2005, American, along with many other airlines, began charging passengers who checked their luggage at curbside stations using skycaps a $2 per-bag fee. The plaintiffs in DiFiore v. American Airlines were skycaps who challenged American’s retention of the curbside fee, alleging that the $2 fee was a “service charge” under the Tips Statute – and thus had to be distributed to the skycaps – because customers “reasonably expect[ed]” it to be given to the skycaps.

Early in the litigation, American moved to dismiss the complaint, principally on the ground that the claims were barred by the ADA, which vests exclusive jurisdiction in the federal government to regulate most aspects of air travel and expressly preempts any state law that “relate[s] to a price, route, or service of an air carrier.”  American argued that the Tip Statute impacted both its prices and services.  The District Court denied American’s motion, and after an eleven-day trial, a jury returned a verdict of more than $325,000 in favor of the skycaps.

Relying on a trio of U.S. Supreme Court cases that interpreted broadly the phrase “related to a price, route, or service,” the First Circuit found that the Tip Statute “has a direct connection to air carrier prices and services and can fairly be said to regulate both” because arranging for transportation of luggage from the curbside into the airline terminal is a part of the “service” referred to in the ADA, and an airline’s “price” includes charges for ancillary services as well as for the flight itself.  In reaching this conclusion, the First Circuit found that “price” must be read broadly to include more than simply the ticket price and “service” to include actions “that occur before and after the airplane is actually taxiing or in flight.”

The First Circuit rejected plaintiffs’ argument that the Tip Statute’s effect on prices and services was tenuous because the airline could have complied with the state law without great expense by adopting various measures, including using larger fonts on the signs describing the fee or allowing credit card payments, because regardless of the cost, such regulation by the states of advertising and service arrangements is exactly what Congress sought to avoid in enacting the ADA.  The Court also rejected plaintiffs’ argument that there is a strong presumption against preemption in areas of “traditional state regulation” such as employment law, finding that none of the Supreme Court cases on point support placing such limitations on the ADA’s preemptive powers. 

As noted by the First Circuit, by the time American filed its appeal, three additional decisions had been issued by two other judges in the District of Massachusetts on this issue, and those decisions conflicted with one another and with Judge Young’s decision in DiFiore.  This decision resolves the split in the lower courts and affirms that the ADA must be read broadly to preempt any claims brought under a state law that has a direct impact on an airline’s prices and services, even if the state law does not expressly purport to have such an effect.

Authored by Dana Fleming

The Ninth Circuit recently affirmed a district court decision to decertify a class of full-time supervisors employed by United Parcel Service, Inc. (“UPS”) where the only basis for class-wide treatment was UPS’s uniform policy treating all of its supervisors as exempt from overtime pay and meal- and rest-break requirements.  A common strategy of plaintiffs’ counsel is to base their class certification argument on the argument that the mere existence of a uniform policy or practice treating a challenged job in a misclassification case as exempt suffices to obtain class certification for Rule 23 purposes.  In Marlo v. UPS, a case decided recently by the Ninth Circuit, the court rejected that argument.

Marlo sued UPS in 2003 on a class basis, claiming that UPS misclassified its full-time supervisors as exempt under California law.  The district court initially certified a class of approximately 1,200 full-time supervisors.  The following year, the district court granted summary judgment for UPS, but Marlo appealed, and the Ninth Circuit reversed and remanded. 

On remand, the district court decertified the class, concluding that the existence of a uniform policy classifying all supervisors as exempt was insufficient to proceed on a class-wide basis.  The court also concluded that California law requires a week-by-week showing that the work actually performed by employees will qualify them for exemption. 

Marlo proceeded to trial on an individual basis, and the jury returned a partial verdict in his favor. UPS and Marlo both appealed.

The Ninth Circuit affirmed both the district court’s decision to decertify the class and (unfortunately for UPS) the $1.4 million jury verdict for Marlo.  After reviewing the district court’s reasoning in the case, the Ninth Circuit found no abuse of discretion and concurred that Marlo had failed to satisfy his burden to establish predominance because he had only submitted evidence of UPS’s centralized control and its uniform policies and practices.  In the Ninth Circuit’s own words:  “The fact that UPS expects supervisors to follow certain procedures or perform certain tasks does not establish whether they actually are ‘primarily engaged’ in exempt activities during the course of the workweek.”

To maintain class certification, the court ruled, Marlo had to do more than point to a few general corporate policies about the exempt status or general duties of UPS supervisors.  He had to provide some “common proof” that all full-time supervisors at the company were actually engaged in nonexempt work.  This, the Ninth Circuit concluded, Marlo had failed to do. 

The Ninth’s Circuit decision in Marlo is consistent with recent rulings from the U.S. Supreme Court and Circuit Courts, which suggest closer scrutiny of certification decisions and a possible trend away from large-scale class action treatment.  Of course, the much anticipated Supreme Court decision in Dukes v. Wal-Mart will provide further guidance on this issue. (See Seyfarth Shaw's March 29, 2011 Management Alert for additional information in Dukes v. Wal-Mart.)

Co-authored by Alfred Sanderson and Brandon McKelvey

On February 16, 2011, a California Court of Appeal upheld a trial court’s denial of class certification on meal and rest period claims brought against a health services company with hospitals across the state.  In Tien v. Tenet Healthcare Corp., the court ruled that employers need only make meal and rest periods available to employees, and also ruled that individualized issues as to whether employees took meal periods and why meal periods were not taken precluded class certification.  In reaching this decision, the court relied on two other California appellate court decisions, Brinker Restaurant Corp. v. Superior Court and Brinkley v. Public Storage, Inc., both of which are pending before the California Supreme Court.  The court also distinguished Cicairos v. Summit Logistics, a case often relied upon by employees asserting meal and rest period claims.

In Tien, the court found that, while an employer may not frustrate the use of meal breaks, an employer does not have an obligation to ensure that an employee actually takes breaks.  In affirming the denial of class certification on plaintiffs’ meal period claims, the court agreed with “the common-sense notion” applied by the trial court that individual questions about the reasons an employee might not take a meal or rest period predominate if the employer need only offer meal or rest periods, but need not ensure that employees take those breaks.  The court also ruled that class certification of pay stub claims required class members to show actual injury from noncompliant pay stubs, and affirmed denial of class certification on this claim because there were individualized inquires as to whether each class member actually suffered injury under plaintiffs’ theory that class members were not able to understand their pay stubs. 

The Tien decision is helpful to employers, particularly those in the healthcare industry, that are facing class actions based on meal and rest period and pay stub claims.  However, with these same issues currently pending before the California Supreme Court in Brinker and Brinkley, we will have to wait for that court to decide those cases before employers can be certain whether California law requires them to do more than simply make meal and rest breaks available. 

Authored by John Duke

A Massachusetts  Superior Court recently held for the first time that severance payment are “wages” covered by the Massachusetts Wage Act, Mass. Gen. Laws ch. 149, §§ 148 et seq. 

In Juergens v. MicroGroup Inc., Albert Juergens alleged that his employer, MicroGroup, promised to pay him six months salary in severance if he was terminated without cause.  A couple of years later, MicroGroup informed Juergens that his position was being eliminated and laid him off without paying the promised severance.

Juergens sued MicroGroup alleging that MicroGroup violated the Wage Act by not paying him severance upon his termination.  MicroGroup moved to dismiss the claim, relying on the Massachusetts Appeals Court’s decision in Prozinski v. Northeast Real Estate Services, LLC, which held that severance payments were not “wages” under the Wage Act.  With little analysis other than pointing out that the Prozinski decision had issued before the Supreme Judicial Court had “authorized a more expansive interpretation of the Wage Act,” the court held that the definition of “wages” under the Wage Act should “not be limited to exclude severance pay” and denied the motion to dismiss. 

While Massachusetts courts have long held that employees may assert contract claims against their former employers based on severance agreements, this is the first time a Massachusetts court has held that severance agreements are subject to the Wage Act.  Employers should be concerned about the Juergens decision because, if other courts were to follow it, it would open up the full panoply of Wage Act remedies for an employer’s failure to pay severance, including treble damages and attorneys’ fees.

Co-authored by Kevin Young and Laura Reathaford

Does California law require employers to merely provide employees a meal break, or must they also ensure that such breaks are taken?  For well over two years now, employers have waited for the California Supreme Court to decide a growing list of cases it has agreed to review, starting with Brinker Restaurant Corp. v. S.C, 80 Cal. Rptr. 3d 781 (Cal. Ct. App., July 22, 2008), which supports the idea that meal breaks need only be provided, not ensured. 

Last October, in Hernandez v. Chipotle Mexican Grill, the California Court of Appeals issued yet another decision rejecting the idea that employers must ensure meal breaks are taken.  While the court initially issued Hernandez as an unpublished decision, Seyfarth Shaw and others successfully petitioned for its publication.  The request was granted on October 28, providing employers much needed guidance on the parameters of California’s meal break standard.  This precedent was short lived, however: on Wednesday, the California Supreme Court granted review of Hernandez and depublished the appellate court decision.

Hernandez was a sign that the California Court of Appeal was ready to decide this issue despite the pendency of Brinker.  While acknowledging that Brinker and others were pending before the California Supreme Court, the Hernandez court speculated that the Supreme Court will “likely” reject the “ensure” requirement.  The court went on to definitively hold that “employers must provide employees with breaks, but need not ensure employees take breaks.”  To require otherwise, the court reasoned, would be “impractical,” placing “an undue burden on employers whose employees are numerous or who . . . do not appear to remain in contact with the employer during the day.” 

The Supreme Court’s grant and hold of Hernandez is significant, but not all that surprising given the similar treatment of other appellate cases on this issue.  Whether the decision in this instance is based on the Court’s desire to lock the issue down until it decides either way, or whether it signals that Hernandez was simply wrong, remains to be seen.  In the meantime, employers will have to wait a little longer to find out what the meal deal is in California.

Authored by Laura Reathaford

On January 20, 2011, the District Court for the Southern District of California granted Home Depot’s motion to dismiss a putative class action involving plaintiff’s claim for penalties associated with Home Depot’s purported failure to include earned vacation hours on employee itemized wage statements.  Plaintiff’s complaint alleged that California Labor Code Section 226(a), which requires an employer to itemize an employee’s “gross wages earned” on employee wage statements, includes a line item for earned vacation wages. 

In determining that earned vacation hours need not be itemized, the court recognized that the plain language of Section 226(a) does not enumerate a requirement that earned vacation hours be itemized on wage statements.  The court then looked at the statutory scheme.  It recognized that California Labor Code §200, which defines “wages,” does not indicate that “wages” include earned vacation hours.  Further, Labor Code §227 distinguishes earned vacation hours from wages insofar as it permits an employee to transform his unused vacation hours into wages at the time of termination.  Finally, the court noted that pursuant to Labor Code §227.5, employers are required to furnish employees with statements of payments made pursuant to a vacation plan.  The court found that this provision, in particular, provides employees with a mechanism to track their earned vacation hours.

Finally, the court noted the absence of any legal authority to support the plaintiff’s position.  Plaintiff cited to cases which effectively equated earned vacation hours with “additional wages.”   The court indicated that this authority was not persuasive because none of the cases addressed whether earned vacation hours are a “wage” within the statutory meaning of §226(a).  The case is Heinzman v. Home Depot USA, Inc., (SACV 10-01827-CJC (RNBx), S.D. Cal. (So. Div.) 1/20/2011).

Co-authored by Lorie Almon and Aaron Warshaw

On December 15, 2010, the New York State Department of Labor quietly adopted a major change to New York’s wage rules affecting the restaurant and hotel industries.  The new regulation seeks to clarify existing wage orders by creating a single, more straightforward Hospitality Wage Order.

The Hospitality Wage Order’s effective date is January 1, 2011.  In response to industry concerns about the practical hardship to payroll and bookkeeping practices, the New York Department of Labor will permit employers until March 1, 2011 to come into compliance.  However, any additional wages due under the regulation must be paid retroactively.

The full text of the regulation, contained in 12 NYCRR 146, can be found here.  Employers should also be aware that the New York State Department of Labor has provided a new poster that must be displayed in the workplace for businesses in the New York hospitality business.

Some of the key changes that affect payroll practices are as follows:

            - Increased hourly wages for tipped employees

The regulation increases the required wages for some workers through the elimination of certain exceptions and tiered job definitions.  The regulation imposes the following minimum hourly wages:

• For tipped food-service employees: $5 (from $4.65) with a tip credit of no more than $2.25;
• For service employees who earn tips: $5.65 (from $4.90) with a tip credit of no more than $1.60; and
• For employees working in resort hotels: $4.90 (from $4.35) with a tip credit of no more than $2.35.

The regulation emphasizes that hospitality employees must be paid overtime at a wage rate of 1½ times the employee’s regular rate for hours worked in excess of 40 hours in one workweek.  This rule is consistent with existing New York law.

            - Hourly pay rate is mandatory

Under the former rules, employers were permitted to pay New York hospitality employees on a piece rate, salary, or other basis provided that the wage rules are met on an hourly basis.  The regulation specifically eliminates this discretion and requires that all hospitality employees be paid on an hourly basis.

            - Notification of tip credits

As under the former rules, the regulation provides that an employer may issue a credit toward the basic minimum hourly rate if the service employee or food service worker receives tips.  However, employers must now notify employees in writing of any tip credits that are taken against the minimum wage, consistent with federal law.

            - “Spread of hours”

As under the former rules, an employee who works more than 10 hours in a single day is entitled to one extra hour of pay at minimum wage.  However, this rule now applies to all employees working in restaurants and all-year hotels, regardless of their wages.  Further, the additional hour of wages may not be considered part of overtime pay, and the extra hour of wages may not be offset by a meal credit.

            - Written notice of pay upon hire and rate change

The regulation requires that employees be provided with written notice of wages upon hire and prior to any change in wages.  As under former rules, employers are required to keep a written acknowledgement on file for six years. 

 In addition, the Hospitality Wage Order modifies some other practices in New York’s hospitality industry.  For instance, both “tip sharing” and “tip pooling” are now permitted, consistent with federal law.  The regulation creates an exception to the requirement that employers provide payment for required uniform maintenance if the uniforms fall within a defined category of “wash and wear” material.  The regulation also explicitly permits employers to deduct credit card service fees from tips on a pro rata basis.