Co-authored by Kyle Petersen, John Giovannone, and Noah Finkel

Seyfarth Synopsis: By resurrecting reliance on the administrative/production dichotomy in FLSA administrative exemption cases, the Ninth Circuit is at odds with the California Supreme Court’s application of the state’s administrative exemption. California employers thus find themselves in a strange new world where the state construct is easier to understand and perhaps even provides a more favorable environment for California employers, particularly those with a service-oriented workforce.

Readers of the blog know that the Ninth Circuit recently exalted the status of the administrative/production dichotomy as an analytical tool for assessing whether employees satisfy the FLSA’s administrative exemption test. In doing so, the Ninth Circuit has created a peculiar situation in which California employees may satisfy the state’s administrative exemption—which the California Division of Labor Standards Enforcement says “shall be construed in the same manner as … under the Fair Labor Standards Act”—but be found nonexempt under the FLSA. Strange days indeed.

As we recently discussed, in McKeen-Chaplin v. Provident Bank, the Ninth Circuit applied the administrative/production dichotomy to invalidate the bank’s determination of exempt status. In doing so, the court stretched the definition of production work to encompass anyone whose job is “not so distinct from production” and concluded that the salient “question is not whether an employee is essential to the business, but rather whether her primary duty goes to the heart of internal administration—rather than marketplace offerings.”

In addition to setting up a circuit split begging for Supreme Court clarification, Provident Bank also stands in contrast to the California Supreme Court’s unanimous 2011 decision in Harris v. Superior Court and creates an intrastate conflict for California employers.

In Harris, the California Supreme Court considered the exempt status of insurance claim adjusters and, to the delight of many an employer, downplayed the administrative/production dichotomy as an analytical tool. Taking a more enlightened view, the Harris Court acknowledged that the dichotomy was outdated and not particularly useful in the context of a modern-day, post-industrial, service-oriented workplace. The case was ultimately remanded to the trial court for further proceedings in which the exempt status of the claims adjuster role was assessed in the context of the statutory language and appropriate federal regulations and with an understanding that “the [administrative/production] dichotomy is a judicially created creature of the common law which has been effectively superseded in this context by the more specific and detailed statutory and regulatory enactments.”

And while Harris left open the possibility that the administrative/production dichotomy could have some limited utility in the certain circumstances, Harris emphasized the dichotomy is “not a dispositive test” and should only be considered after the language of the statutes and regulations are assessed and compared to the specific duties and responsibilities at issue. But any state-gained peace of mind from Harris’s deemphasizing of the administrative/production dichotomy now appears short-lived as it stands in stark contrast to the murky federal fortification of the dichotomy in Provident. California employers now find themselves in a curious and frustrating position with no clear guidance on how to reconcile the divergent views of the state and federal courts.

Co-authored by Noah Finkel, Colton Long, Kyle Petersen, and John Giovannone

Seyfarth Synopsis:  FLSA cases holding against employers typically invoke a canon of construction that the FLSA should be construed broadly, and any of its exemptions narrowly. But a study of the roots of this language shows that the canon has a dubious foundation and that it tends to be applied inconsistently to justify a result.

As our readers saw earlier this week, the Ninth Circuit recently issued a decision in McKeen-Chaplin v. Provident Bank, turning the traditional administrative vs. production dichotomy of the administrative exemption on its head. In Provident Bank, the Ninth Circuit held that the bank’s mortgage underwriters are not exempt because their duties go to the heart of marketplace offerings rather than the administration of the bank’s business. In our view, that decision wrongly interpreted the administrative vs. production dichotomy and parted ways with the Sixth Circuit’s sound 2015 decision in Lutz v. Huntington Bank.

One additional point caught our eye: the prefatory language the Ninth Circuit used in Provident Bank in arriving at its conclusion that the administrative exemption did not apply. Indeed, the Ninth Circuit’s holding could have been predicted at the very beginning of the Court’s analysis. There, before even interpreting the administrative exemption, the court cleared its throat with a series of pronouncements we see all too frequently in FLSA jurisprudence:  “exemptions” the pronouncement goes, “are to be construed narrowly,” and must be “withheld except as to persons plainly and unmistakably within their terms and spirit.” The Ninth Circuit hearkened back to this language later in its opinion as well.

But while exemptions must be construed narrowly, the quotation continues, the FLSA as a whole “is to be liberally construed to apply to the furthest reaches consistent with Congressional direction.” This language is not unique; it appears in most, though not all, FLSA administrative exemption cases, and variants of it appear in other FLSA contexts, usually in those opinions permitting FLSA cases to move forward. Earlier this summer, for instance, the Sixth Circuit rejected an employer’s decertification effort by first explaining that “Congress passed the FLSA with broad remedial intent,” and that the provisions of the FLSA are “remedial and humanitarian in purpose and must not be interpreted or applied in a narrow, grudging manner.”

This type of language, though perhaps useful in predicting the direction a court is heading without needing to read the opinion all the way through, is an otherwise meaningless canon of statutory construction and ought to be put out to pasture.

First, the language is applied inconsistently. Variants of the above language are often employed in cases in which courts find that an employee or groups of employees are or may be owed additional overtime compensation. But when no FLSA violation is found, this language is more frequently absent. Indeed, we studied all federal appellate decisions issued this century that interpret the administrative exemption, of which there are a total of 61. Of the 17 that find that an employee or group of employees do not or might not meet the requirements for application of the administrative exemption, 13 of them use this type of language (76%). But when an appellate court finds the administrative exemption to apply, and thus an employee or group of employees is not owed any additional overtime compensation, this type of language is found in only 21 of 44 opinions (48%).

The Ninth Circuit is the most result-oriented of the federal circuits. It has issued 10 decisions this century interpreting the administrative exemption. Four of those opinions find the employee to be non-exempt or potentially non-exempt, and 3 of the 4 (75%) contain language about narrowly construing exemptions and/or broadly construing the FLSA’s overtime provisions. Six of those opinions find employees to be properly classified as exempt, and only one of those opinions contains this language (17%).

In other words, language providing that the FLSA’s exemptions must be “narrowly construed” and/or which maintain that the FLSA is “remedial” or “humanitarian” and thus should be interpreted broadly appear to be used all too frequently as a tool to justify the outcome of a court’s decision, not as a meaningful analytical framework for reviewing the statute, interpreting its regulations, and determining whether job duties do or do not fall within an applicable FLSA exemption.

Second, delving into the origins of this language reveals its flimsy legal foundation. The language dates back to a 1945 Supreme Court case entitled A.H. Phillips, Inc. v. Walling, which held that a grocery store chain was not exempt from the FLSA’s requirements because it was not a “retail establishment” engaged primarily in the business of interstate commerce. The crux of Walling is that the employer was quite plainly trying to assert an exemption that did not apply. So the Supreme Court noted that it should not construe the FLSA’s exemptions too broadly and should give “due regard to the plain meaning of statutory language and the intent of Congress.” The Court then cited President Roosevelt’s May 24, 1934 message to Congress regarding the purpose of the FLSA, and declared, based on Roosevelt’s statement, that the FLSA is a “humanitarian and remedial” statute, and nebulously suggested that because the FLSA is “remedial” and “humanitarian” the exemptions should be “narrowly construed.” But the Supreme Court cited no authority in Walling for this assertion and provided no true reasoning. At its best, as noted below, this language is just an imprecise statement that the FLSA’s exemptions should not be construed so broadly that they swallow the statute’s other material provisions. At its worst, this language is just unsupported dicta that had no bearing on the outcome of the particular case and was never intended to be a grand pronouncement of how courts should interpret the FLSA or its exemptions moving forward.

Third, and as a logical outgrowth of the second point, the way this canon of interpretation is now used by litigants and courts does not make sense. As an initial matter, it is hard to see why one section of a statute or regulation would be interpreted broadly and another narrowly, which is precisely what courts and litigants suggest when they cite to this language. Indeed, as suggested above and as Judge Posner noted in the Seventh Circuit’s decision Yi v. Sterling Collision Centers, Inc., the language likely just means that an exemption should not be construed so broadly that it “renders the statutory remedy ineffectual or easily evaded.” The language does not mean, though, that an employer bears a higher burden of proof in asserting an exemption–which, again, appears to be how this language is usually used. Further, courts and litigants justify their use of this language by reasoning that the FLSA is “humanitarian and remedial” legislation. If legislation is humanitarian and/or remedial, the reasoning goes, exemptions to the legislation must be viewed with a jaundiced eye and other provisions more generously. But this begs a key question: what piece of legislation passed by Congress is not intended as remedial or humanitarian? It would seem that one has to presume that Congress is always attempting to benefit the public, and that it does not classify its legislation as though some is for the public good, some is for the benefit of lobbying or business groups, and some is to score political points. All legislation is aimed in some way at benefitting the public interest (or at least we would like to, and have to, assume); it is both illogical and unjust that exceptions to one particular piece of legislation would be held to a higher standard of proof without articulation of that standard in the text of the statute itself. The FLSA should instead be interpreted to mean what it says, exemptions and all; one section should not receive a boost based solely on unsupported, gratuitous language drawn from a 72 year-old Supreme Court case.

And indeed, it appears that the Supreme Court may now be shying away from this “narrowly construe exemptions” language. The Supreme Court stated in Sandifer v. U.S. Steel and Christopher v. SmithKline Beecham Corp., for instance, that this language does not apply to the Supreme Court’s interpretation of the FLSA’s definitions section found at 29 U.S.C. § 203. The Court further intimated in Sandifer that it may revisit the “narrowly construed exemptions” language at a later date. And last year, Justice Thomas concluded his dissent in Encino Motorcars, LLC v. Navarro by noting that exemptions should not be construed any more narrowly than how they are written.

Perhaps the selective citation to unsound and outdated language applying the FLSA’s exemptions and construing the FLSA as a whole is a symptom of our modern legal research model, in which “copy and paste” can all too often supplant reasoned analysis. Or maybe it is just how lawyers and judges have always supported their arguments and decisions–searching for language to bolster a position without giving due regard to the implications or background of the language itself. Whatever the reason, case language maintaining that the FLSA should be broadly construed but that exemptions should be construed narrowly is a nebulous, unsupported, illogical, and inconsistently applied canon of statutory construction and we should stop using it.

Co-authored by John Giovannone, Kyle Petersen, and Noah Finkel

Seyfarth Synopsis: Earlier this month, the Ninth Circuit chose to side with the Second Circuit, and not the Sixth Circuit, to opine that mortgage underwriters fail to meet the FLSA’s administrative exemption from overtime test because underwriting duties “go to the heart of… marketplace offerings, not to the internal administration of” the mortgage banking “business.” That is, their duties were found to fall on the “production side” of the tortuous, judicially created “administrative/production” dichotomy.

Selling loans is not a duty that satisfies the FLSA’s administrative exemption test. But loan underwriters do not sell or even drive sales of loans. If anything, they apply the brakes after a loan officer has made the pitch and obtained a loan application from a prospective borrower.

Underwriters perform a distinct back-office role. They apply a multitude of factors to decide whether their employers should extend credit—after the application has been completed and the loan has been sold pending approval. We only have to look back about a decade to this country’s housing credit crisis to appreciate the central importance to a lender of a high-functioning and discerning underwriting team.

Historically, Underwriters Have Been Found Exempt Under The Administrative Exemption

Particularly now, given the odor that still wafts from the bursting of the housing bubble, one would think the modern judiciary would readily view underwriters as primarily providing a centrally important variety of “office or non-manual work related to the management or general operations of the employer” lender—work that thus satisfies this requirement of the administrative exemption test.

And in 2015, consistent with this common-sensical assessment of underwriting, the Sixth Circuit in Lutz v. Huntington Bank concluded that mortgage underwriters were administrative exempt precisely because they “assist in the running and servicing of the Bank’s business by making decisions about when [the Bank] should take on certain kinds of credit risk, something that is ancillary to the Bank’s principal production of selling loans.”

Ninth Circuit Denies Underwriters’ Administrative Exemption

Earlier this month, the Ninth Circuit, in McKeen-Chaplin v. Provident Bank deviated from the Sixth Circuit’s sound decision in Lutz. In assessing whether mortgage underwriters’ work is “related to the management or general operations” of the bank, examined a judicially created “framework for understanding whether employees satisfy [this] requirement [called] the ‘administrative-production dichotomy.’”

The dichotomy’s purpose, Provident Bank explained, “is to distinguish between the goods and services which constitute the business’ marketplace offerings” (so-called non-exempt production work), “and work which contributes to ‘running the business itself’” (so-called exempt administrative work).

          Provident Bank’s Labored Discussion of The Administrative/Production Dichotomy And The Circuit Split.  Provident Bank applied its strained view of administrative/production dichotomy by first observing that, “in the last decade, two of our sister Circuits have assessed whether mortgage underwriters qualify for the FLSA’s administrative exemption and have come to opposite conclusions. The Second Circuit held in Davis v. J.P. Morgan Chase [in] 2009.. that ‘the job of an underwriter… falls into the category of production rather than administrative work.’ … In contrast, the Sixth Circuit held recently that mortgage underwriters are exempt administrators, explaining that they ‘perform work that services the Bank’s business, something ancillary to [the Bank’s] principal production activity’… . [W]e conclude the Second Circuit’s analysis in Davis should apply.”

Having voiced a preference for the Second Circuit’s more restrictive application of the administrative/production dichotomy (which had, perhaps erroneously, assumed that underwriters were involved in the sale of mortgages), Provident Bank applied the dichotomy to hold that the mortgage underwriters were production workers, even while conceding a number of non-production components of mortgage underwriter work.

Provident Bank observed, for example, that mortgage underwriters “do review factual information and evaluate the loan product and information and … assess liability in the form of risk,” but then immediately dismissed this important role by concluding that the bank’s promulgation of underwriter “guidelines that [the underwriters] do not formulate,” somehow reduced the administrative quality of the work.

Provident Bank even went on to acknowledge the existence of significant differentiation between non-exempt “loan offers in the mortgage production process [and mortgage underwriters]—most significantly [the distinguishing fact that underwriters’] primary duty is not making sales on Provident’s behalf.”

          A “Not So Distinct From Production” Standard?  Despite these factual findings, the Provident Bank court still applied the administrative/production dichotomy to invalidate the bank’s determination of exempt status. To accomplish this goal, Provident Bank articulated a “not so distinct from production” standard, explaining that the mortgage underwriters were still not administrative exempt because their duties “are not so distinct” from loan officers’ role in the “mortgage production process” so “as to be lifted from the production side [of the dichotomy] to the ranks of administrators.” The Ninth Circuit then ratcheted the standard up by explaining that “the question is not whether an employee is essential to the business, but rather whether her primary duty goes to the heart of internal administration — rather than marketplace offerings” (emphasis added).

This “not so distinct from production” standard highlights the limitations of the administrative/production dichotomy and runs afoul of its intended purpose. For example, the Department of Labor’s 2004 regulations, and case law, have made clear that this “dichotomy has always been illustrative – but not dispositive – of exempt status.” The dichotomy “is only determinative if the work ‘falls squarely’ on the production side of the line.”

Certainly, work that “is not so distinct” from the production side of the line is a far cry from work that “falls squarely” on the production side of the line. But a finding that work is not so distinct from production, though virtually meaningless, is all that Provident Bank seems to require.

The Administrative-Production Dichotomy Has Been Stretched Beyond Its Utility, Resulting In A Circuit Split And Confusion

Provident Bank’s finding that underwriting work “is not so distinct from production” work has little to do with the test for administrative exemption or the Department of Labor’s explanation of the limitations of the administrative/production dichotomy. Yet Provident Bank threatens to flip the dichotomy on its head, as it could be read to require an employer to show that that the work “falls squarely” off “the production side of the line” rather than establishing merely what the FLSA requires: that the employee performed office or non-manual work related to the management or general operations of the employer.

Sometimes, work such as underwriting does not obviously fall squarely on one side of the administrative/production dichotomy line or the other. That is why, for example, even the historically exemption-resistant California Supreme Court in Harris v. Superior Court (2011) observed “the limitations of the administrative/production worker dichotomy itself as an analytical tool” and thus reversed a decision that “improperly applied the administrative/production worker dichotomy as a dispositive test” with respect to insurance claims adjusters.  Harris explained that since “the dichotomy suggests a distinction between the administration of a business on the one hand, and the ‘production’ end on the other, courts often strain to fit the operations of modern-day post-industrial service-oriented businesses into the analytical framework formulated in the industrial climate of the late 1940’s’” when they should not force a strained application of the dichotomy, which is just an illustrative tool. Indeed, the Seventh Circuit of Appeals similarly reasoned in Roe-Midgett v. CC Services, Inc., (7th Cir. 2008) that the “typical example” of the dichotomy is a factory setting, an analogy that is “not terribly useful” in the service context.

Two Circuits have now built the administrative/production dichotomy into something larger than it was ever intended to be. The focus on the administrative/production dichotomy has overshadowed and confused focus on the actual rules and regulations intended to be assessed in considering the administrative exemption.

Provident Bank creates more questions than answers for employers seeking to classify their workforce, and calls out for Supreme Court review, or for Department of Labor clarification on how courts are supposed to apply the administrative-production dichotomy.

Co-authored by Julie Yap and Michael Cross

Seyfarth Synopsis:  The California Court of Appeal affirmed a denial of class certification on the ground that the plaintiff’s expert report failed to establish claims could be determined on common evidence. The ruling highlights that trial courts are permitted to weigh conflicting evidence related to whether common or individual issues predominate. While expert reports often inform merits questions relating to damages, when those reports are the main source of support for certification, they equally inform issues of liability.

Plaintiff, a former Oracle technical analyst, filed suit alleging that Oracle’s employment practices violated various state wage and hour laws and constituted unfair business practices. Plaintiff’s case, both in the trial and appellate courts, turned largely on the reliability of his expert’s report.

Plaintiff’s expert’s opinion was based on a comparison of Oracle’s (1) payroll records, (2) internal time records, and (3) time cards. In comparing those data sets, Plaintiff’s expert purported to find a discrepancy between the number of overtime hours technical analysts worked and the number of overtime hours for which Oracle had paid them. In addition, by reviewing the time cards, the expert purported to uncover that many analysts took shortened or late meal breaks, or missed them altogether. Plaintiff moved to certify a class relying on a handful of putative class member declarations, but, in large part, through reference to a concurrently-filed expert report, arguing that his claims were subject to common proof through the expert’s comparison and analysis of Oracle’s records.

Oracle opposed Plaintiff’s motion to certify, relying on its own expert’s report and 42 declarations, 22 of which were from putative class members. Oracle’s rebuttal expert identified significant flaws in the methodology and care used by the Plaintiff’s expert. Among other flaws, Plaintiff’s expert included on-call, non-worked, and sick time in his time card numbers, which created significant discrepancies between the purported time worked and the time paid. In addition, the Plaintiff’s expert misread Oracle’s spreadsheets and ignored a $21 million overtime payment that Oracle had made. Finally, the expert made a number of assumptions about the data he analyzed, but failed to disclose those assumptions in his report.

The Trial Court’s Denies Certification

In denying Plaintiff’s motion for certification, the Court concluded that Plaintiff’s expert report was unreliable based largely on the reasons set forth in Oracle’s opposition. Specifically, the court found that because Plaintiff relied on his expert’s report to establish that three of his claims could be determined by common proof, and because that report was unreliable, he could not establish commonality for those claims.

The Appellate Court Affirms The Denial of Certification

Plaintiff appealed the trial court ruling on two main grounds. He first argued that whether or not his expert’s calculations were accurate should not have been considered on his motion for certification. Accuracy of expert reports, he argued, is a merits question. Second, Plaintiff argued that the trial court improperly weighed the competing declarations submitted by the parties.

In evaluating the first question, the Court of Appeal noted that whether or not common issues predominate over individual ones is often closely tied to the ultimate merits of a claim. But the Court did not stop there. The Court rejected Plaintiff’s argument that Plaintiff’s expert’s opinion went only to the merits of alleged damaged in the case, holding that when a party’s expert report serves as its sole support for establishing that common questions predominate, the party has transformed that report into evidence of liability, not damages. As the Court explained:

Plaintiff’s only evidence that uncompensated overtime and missed, late, or short meal breaks could be established classwide with common proof was [his expert’s] declaration and his comparison of [two of Oracle’s] databases. The issue here is whether Plaintiff can establish that class members worked overtime for which they were not paid or had late, short, or missed meal breaks on a classwide basis, and this is a question of entitlement to damages, not damages themselves.

The Court also found it was within the lower court’s discretion to weigh competing declarations from the parties in order to determine whether the requirements for class certification were satisfied, and that doing so was not an improper evaluation of the merits.

Employers defending against class certification motions that rely on expert opinions to establish liability can, and should, offer contrary evidence, and make clear to the court that they are arguing certification and liability issues, not simply damages issues.

Authored by Rachel M. Hoffer

It’s a common business model in the fast-food industry: a massive restaurant company provides the menu, the marketing—including catchy slogans and a universally recognized logo—and the basic operational standards for the restaurant,
and a franchisee provides the rest—including hiring, training, and firing restaurant employees. Unfortunately for the fast-food giants (the notorious FFGs, if you will), it’s also common for disgruntled employees to name them in lawsuits—particularly super-sized class-action lawsuits—against the franchisee.

In March 2014, three fast-food workers from Oakland did just that—they sued the family-owned company that operates 8 franchise restaurants in Northern California, and they brought the FFG along for the ride under a joint employment theory, serving up a complaint chock full of California Labor Code, Private Attorneys General Act (PAGA), and negligence claims. Last August, a federal judge in California dismissed the negligence claim on summary judgment and rejected the workers’ theory that the franchisee acted as the FFG’s actual agent. But the judge didn’t toss out the workers’ claims completely, finding the plaintiffs had presented enough evidence of ostensible agency to have their day in court with the FFG.

Determined to have it their way, right away, the plaintiffs settled their claims against the franchisee but moved to certify a class of more than 1,200 hourly workers who had worked at the franchisee’s eight restaurants. Unwilling to pick up the franchisee’s remaining tab, the FFG moved to deny class certification and to strike the representative PAGA claim. And the FFG did what Giants tend to do in San Francisco—it won. Last week, the judge found that the workers’ ostensible agency theory required too many individualized inquiries to be decided on a class basis.

Under an ostensible agency theory, the FFG is on the hook for the franchisee’s actions if the worker can prove: (1) in dealing with the franchisee, the worker reasonably believed the franchisee had the authority to act on the FFG’s behalf; (2) the worker’s belief was caused by something the FFG did or failed to do; and (3) the worker wasn’t negligent in relying on the franchisee’s apparent authority.

The workers argued that the questions of law or fact common to potential class members outweighed the questions that affected only individual members, and that a class action was the best way to fairly and efficiently decide their claims. In support of this argument, the workers asserted that the “belief” prong of the first requirement—that the potential class members believed the franchisee had the authority to act for the FFG—could be inferred from the circumstances. The judge wasn’t convinced that the law allows such an inference, nor was he convinced that the evidence supported such an inference. Instead, the evidence showed that class members received different information about the franchisee’s authority, and some actually understood that the FFG was not their employer. So, the question of belief had to be decided on an individual basis.

The judge also found that there was no way to determine, on a class basis, whether such a belief was reasonable and not negligent. Rather, what each worker knew (or should have known) varied depending on the circumstances. Some workers, for example, were told during orientation that the franchisee was their employer and the FFG was not. Some workers received and read documents informing them that the franchisee, not the FFG, was their employer; others either did not receive or did not read that paperwork. In other words, whether a belief was reasonable and not negligent depended on the information available to each worker.

Likewise, the judge found that reliance can’t be determined on a class-wide basis. The workers—pointing to out-of-context case law—argued that courts often presume reliance when there is no evidence that the plaintiff knew or should have known that the purported agent was not an agent of the principal. But even if that case law applies in the franchise context, the workers’ argument begged the question; the presumption couldn’t apply on a class-wide basis because, as the judge had already explained, the knew-or-should-have-known question couldn’t be answered on a class-wide basis. The order: individualized inquiries, all the way.

The workers also argued that the court should certify a class because they were seeking injunctive relief on a class-wide basis. But the judge didn’t see how an injunction against the FFG could help the franchisee’s employees, when he had found in his summary-judgment opinion that the FFG didn’t control the aspects of their employment at issue in the case. Simply put, where’s the beef?

The workers’ PAGA claim fared no better; the judge found that a representative PAGA action wouldn’t be manageable because it relied on the ostensible agency theory, which could only be established through individualized inquiries. So, while the three plaintiffs can still pursue their individual claims against the FFG on an ostensible agency theory, those are small fries compared to the representative claims they had hoped to bring on behalf of more than 1,200 other workers.

The take-home for the notorious FFGs who franchise independent restaurant owners, of course, is to stay out of the kitchen when it comes to the relationship between the franchisee and its employees. And, for the FFGs’ sake, franchisees should make sure employees know where their bread is buttered.

Authored by

Seyfarth Synopsis: In what many employers will see as a “break” from workplace reality, the Supreme Court, in Augustus v. ABM Security Services, Inc., announced that certain “on call” rest periods do not comply with the California Labor Code and Wage Orders. As previously reported on our California Peculiarities Employment Law Blog, this decision presents significant practical challenges for employers in industries where employees must respond to exigent circumstances.


On December 23, 2016, the California Supreme Court issued its long-anticipated decision in Augustus v. ABM Security Services, Inc., affirming a $90 million judgment for the plaintiff class of security guards on their rest break claim. The Supreme Court found that the security guards’ rest breaks did not comply with the California Labor Code and Wage Orders, because the guards had to carry radios or pagers during their rest breaks and had to respond if required.

The Supreme Court took a very restrictive view of California’s rest break requirements, concluding that “one cannot square the practice of compelling employees to remain at the ready, tethered by time and policy to particular locations or communications devices, with the requirement to relieve employees of all work duties and employer control during 10-minute rest breaks.” Thus, in the Supreme Court’s view, an employers may not require employees to remain on call—“at the ready and capable of being summoned to action”—during rest breaks.

See our One Minute Memo for more details on the decision and thoughts on the implications of this case for California employers. The Augustus decision presents significant practical challenges for employers, especially in industries in which employees must be able to respond to exigent circumstances.

Workplace Solution:

The holding that “on call” rest periods are not legally permissible should prompt employers to evaluate their rest-break practices. In industries where employees must remain on call during rest periods, employers should consider seeking an exemption from the Division of Labor Standards Enforcement. Lawyers in the Seyfarth California Workplace Solutions group can assist with other suggestions for responding to this decision.

Co-authored by Sherry Skibbe and Andrew Paley

Allstate Insurance Company “insured” a major victory last week in an off the clock class action pending in Los Angeles Superior Court, vindicating employers’ argument that plaintiffs cannot simply intone the magical incantation of “statistical sampling” as a means of collective proof in a class action. Rather, plaintiffs must proffer a detailed and manageable trial plan that relies on sound statistical science. Likening Plaintiff’s trial plan to a house built on a poor foundation, Judge John Shepard Wiley rejected the statistically unsound trial plan because it would be “an enduring source of grief.”

After almost nine years of litigation, Judge Wiley granted Allstate’s motion to decertify both an off-the-clock and wage statement class because none of the multiple trial plans suggested by Plaintiff complied with the requirements in the California Supreme Court’s 2014 decision in Duran v. U.S. Bank National Association or last month’s U.S. Supreme Court decision in Tyson Foods, Inc. v. Bouaphakeo.

Over the past two years, Plaintiff offered several trial plans based on statistical sampling and extrapolation suggested by two different experts. The court, however, found that each of the plans failed to comply with sound statistical methodology and were “premised on invalid logic.” Recognizing that a 95% confidence interval and a 5% margin of error is the common convention, the court roundly criticized Plaintiff’s expert who proposed an 84% confidence interval and anywhere from a 10-20% margin of error. The court also rejected Plaintiff’s plea to let him proceed with trial and enter a directed verdict if he could not prove his claims because such a plan was “doomed to be an expensive waste of time.” Under proper sampling methodologies, the case would be unmanageable at trial as the sample size would require testimony from at least 495 class members.

Significantly, the court’s decision implicitly rejects the Plaintiff’s argument that not all members of his proposed survey need to testify at trial. The decision is therefore powerful ammunition to counter plaintiffs’ oft repeated argument that a “sample of a sample” is sufficient to testify at trial. If sound statistical methodology requires a sample of 495 class members in order to extrapolate the results to the larger class consistent with the proper confidence interval and margin of error, then all 495 class members need to testify at trial so that the jury can determine their credibility and assess their testimony. Plaintiffs cannot simply propose that their expert will testify at trial as to the results of a survey of the sample. If this means that the trial will be unmanageable, then the case should be decertified.

Although Plaintiff argued that Tyson Foods was a “game changer,” the court found Tyson Foods to be entirely consistent with Duran. The court recognized that Tyson Foods and Duran prohibit the use of statistically inadequate evidence such as that presented by Plaintiff. Although representative proof sometimes can be used in a certified class action, statistical evidence only can be used if the proof is reliable.

This case provides employers with several important “take-aways.” Defense counsel should aggressively challenge a plaintiff’s proposed trial plan to ensure that the trial plan is statistically reliable. Additionally, neither Tyson Foods nor Duran stands for the proposition that statistical sampling and surveys can be used to prove liability in every case. Whatever the supposed benefits of a class action may be, they cannot defeat a defendant’s right to due process. Trial plans must be tailored to the specific facts of the claims alleged and an unmanageable trial plan that is not scientifically sound should be rejected.

We are thrilled to announce a special blog series, coming soon to this very blog! This series will focus on wage & hour issues specific to the Golden State and will highlight the unique problems raised by California labor laws and litigating California wage & hour cases. As many of our readers are all too well aware, California’s wage & hour laws differ from federal laws in subtle yet important ways. This series will focus on some of the key differences that are impacting employers with a California presence, as well as cover breaking California law on issues of importance to wage & hour litigation. We hope you find the series valuable, and we look forward to posting!

Authored by Kerry Friedrichs

As technology continues to expand and evolve, employers increasingly are needing the services of highly-skilled computer programmers, software engineers, systems analysts, and similar employees. Often, these employees desire flexibility and autonomy in their work schedules. Fortunately, the FLSA and California law enable employers to offer flexibility to these employees, as they both provide a complete minimum wage and overtime pay exemption for employees engaged in certain computer-related occupations.

The FLSA and California computer employee exemptions are very similar in two important respects. First, these exemptions have nearly identical duties requirements, covering the same types of high-level computer-related positions. Second, both exemptions contain compensation requirements that permit employees to be paid on a salaried or an hourly basis, provided that the employee is paid an amount that meets the required minimum salary or hourly pay levels.

The fact that the FLSA and California exemptions are so similar often enables employers with operations inside and outside of California to consistently classify their high-level computer employees. However, such employers must remember that California’s compensation minimums are significantly higher than the FLSA’s minimums, and that California’s hourly compensation minimum adjusts annually (unlike the FLSA’s hourly minimum, which is not subject to annual adjustment). Therefore, employers relying on California’s computer employee exemption must review employees’ compensation levels annually to ensure that each employee is paid at a rate that is at least the required minimum amount.

The fact that the FLSA and California exemptions are so similar often enables employers with operations inside and outside of California to consistently classify their high-level computer employees. However, such employers must remember that California’s compensation minimums are significantly higher than the FLSA’s minimums, and that California’s required compensation levels adjust annually (unlike the FLSA’s minimums, which are not subject to annual adjustment and will not be affected by DOL’s proposed regulatory amendments which would increase the salary levels for the “white collar” exemptions). Therefore, employers relying on California’s computer employee exemption must review employees’ compensation levels annually to ensure that each employee is paid at a rate that is at least the required minimum amount.

The annual compensation review also may be a good time for employers to evaluate their exempt computer employees’ work duties to ensure that they continue to meet the requirements for exempt status. Below are the duties and compensation requirements for the FLSA and California exemptions.

Duties Requirements

To qualify as an exempt computer employee under the FLSA and California law, the employee must be employed as a systems analyst, computer programmer, software engineer, or in a computer position requiring similar skills, and must have a primary duty that consists of one or more of the following:

  1. The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
  2. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
  3. The design, documentation, testing, creation or modification of computer programs related to computer operating systems.

In California, the employee must be “primarily engaged” in one or more of the above duties, meaning that the employee must spend more than 50% of the employee’s work time engaged in such duties. In addition, California law specifically provides that certain computer-related positions do not qualify as exempt. The exemption does not apply if any of the following criteria are met:

  1. The employee is a trainee or employee in an entry-level position who is learning to become proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering;
  2. The employee is in a computer-related occupation but has not attained the level of skill and expertise necessary to work independently and without close supervision;
  3. The employee is engaged in the operation of computers or in the manufacture, repair, or maintenance of computer hardware and related equipment;
  4. The employee is an engineer, drafter, machinist, or other professional whose work is highly dependent upon or facilitated by the use of computers and computer software programs and who is skilled in computer-aided design software, including CAD/CAM, but who is not engaged in computer systems analysis, programming, or any other similarly skilled computer-related occupation;
  5. The employee is a writer engaged in writing material for print or for onscreen media or who writes or provides content material intended to be read by customers, subscribers, or visitors to computer-related media; or
  6. The employee is engaged in any of the activities set forth in subdivision (a) for the purpose of creating imagery for effects used in the motion picture, television, or theatrical industry.

The FLSA does not contain such a list of specific positions that do not qualify for the computer exemption. However, courts and the DOL have reached similar conclusions with respect to the scope of the FLSA’s computer exemption, finding, for example, that employees engaged in IT support or “help desk” positions, or the manufacture or repair of computers, do not meet the computer exemption requirements.

Compensation Requirements

The FLSA’s computer employee exemption requires that the employee be paid on a salary basis at a rate of not less than $455 per week, or on an hourly basis at a rate not less than $27.63 an hour. While California law also permits computer employees to be paid on a salary or an hourly basis, the required levels are significantly higher. Beginning January 1, 2016, computer employees must be paid on an hourly basis at $41.85 per hour, or on a salary basis at a salary of at least $7,265.43 per month (or $87,185.14 per year). These amounts are adjusted each October (to be effective at the beginning of the next calendar year) in accordance with the California Consumer Price Index for Urban Wage Earners and Clerical Workers.

Authored by Michael W. Kopp

Ordonez v. RadioShack, Part II is the end-of-summer sequel you do not want to miss. It features our protagonist, the “uniform rest break policy,” a sinister cast of declarations of similar treatment, a harrowing finding of unlawfulness, a dramatic second run by plaintiff at class certification, and the court’s emphatic second opinion denying plaintiff’s certification gambit. Sequels can be more satisfying than the original. Ordonez, Part II delivers the welcome message that identifying a uniform employer policy, even one that is likely unlawful, is not the end of the story. Where there are difficulties in proof as to the application and impact of a uniform policy on the class, Ordonez serves notice that certification should be denied.

Ordonez claimed that RadioShack’s rest break policy shorted sales associates their rest breaks when they worked between six to eight hours. In taking a second run at class certification, plaintiff offered more evidence of the uniformity of the rest break policy at issue, which provided “one paid 15-minute break for every four hours.” Nineteen employee declarations uniformly (no surprise) attested to missing second breaks for work performed between 6-8 hours.  In response, the court found that plaintiff had established that RadioShack maintained “a uniform stated policy . . . that is likely inconsistent with California law.” But plaintiff could not take that finding to the bank, because issues of individualized proof and manageability made class certification the wrong choice. The takeaway from Ordonez is so important, that we dare not dilute it with a paraphrase: “[I]n spite of the evidence that RadioShack had a uniform rest break policy that may have violated California law, substantial manageability concerns remain regarding proof of whether and how this policy was actually implemented.”

What were the manageability concerns? Chief among them was plaintiff’s inability to identify any way to prove whether any class member took or failed to take a break. There were no reliable electronic records logging actual breaks taken, and RadioShack was not required to keep such records. Not even the plaintiff’s supplemental submission of RadioShack’s electronic scheduling records could do the trick because, “at most, they reflect when RadioShack scheduled rest breaks for its employees”, and not when employees actually took rest breaks. That would require testimony from each RadioShack employee. Another key takeaway was the court’s rejection of the “this is a damages issue” argument. “Here the issue is whether classwide methods of proof exist to show that California law was actually violated.”

Ordonez also discusses recent California Appellate Court decisions certifying wage and hour classes where the underlying claims challenged uniform employer policies. Benton v. Telecom Network Specialists, Inc.; Faulkinbury v. Boyd & Assocs., Inc.; Bradley v. Networkers Int’l, LLC. But these decisions were all cases where the employer had never implemented a rest break policy. In other words, the uniform rest break policy applicable to the class was the absence of any such policy. These courts were not faced with claims that required a more individualized inquiry as to each class member’s rest break usage.

Ordonez rejects the argument that class certification is required whenever the claim challenges a uniform policy. Rather, the court noted “[i]t is an abuse of discretion for the district court to rely on uniform policies to the near exclusion of other relevant factors touching on predominance.” The court also helpfully pointed to a recent rising tide of decisions denying class certification in actions alleging rest break violations based on a stated uniform policy, with Cummings v. Starbucks Corp., and In re Taco Bell Wage and Hour Actions serving as examples.

Ordonez underscores that manageability and predominance issues do not simply vanish whenever the plaintiff takes a run at an employer’s uniform policy. These concerns must still be satisfied, particularly as to whether a method exists for establishing common proof on a classwide basis that the policy was implemented unlawfully.