The Ninth Circuit Rules That Employers Cannot Rely On Prior Pay To Justify A Pay Differential Between Men And Women
On Monday, the Ninth Circuit issued an en banc opinion in Rizo v. Yovino, holding that an employer may not rely on prior pay as a defense to a gender pay equity claim under the federal Equal Pay Act (“EPA”). This is a significant decision as it reverses Ninth Circuit law established over 35 years ago and creates a split between federal circuits on this issue, which opens the door to review by the United States Supreme Court. The practical impact of the decision is immediate: Employers defending gender pay equity claims cannot rely on prior pay as even part of the justification for a pay differential between men and women.
Aileen Rizo was hired by the Fresno County Office of Education in 2009. The County set Rizo’s starting salary based on its policy of placing new employees within the County’s salary schedule at a step corresponding to their prior salary plus 5%. Rizo filed an equal pay claim in 2012 after learning she was earning less than male colleagues performing the same work. The County sought summary judgment on the ground that prior salary fell under the EPA’s “any factor other than sex” defense and as such, was a permissible basis for setting compensation under the EPA. The County’s summary judgment motion was denied, and the County obtained permission to file an immediate appeal. On appeal, a three-judge panel of the Ninth Circuit reversed the trial court’s denial of summary judgment, concluding that under a 1982 Ninth Circuit decision, Kouba v. Allstate Insurance Co., prior salary constitutes a “factor other than sex” under the EPA, as long as the employer’s consideration of prior salary was reasonable and effectuated some business policy.
The Ninth Circuit then granted Rizo’s petition to rehear the appeal en banc. On rehearing, an 11 judge en banc panel of the Ninth Circuit reversed course, overturned Kouba v. Allstate, and held that prior salary is not a “factor other than sex,” and therefore cannot be used to justify a pay differential between the sexes, independently or as one of several factors.
The Court’s en banc opinion was authored by Stephen Reinhardt, known as “the liberal lion of the Ninth Circuit,” who passed away on March 29, 2018 at the age of 87. In the majority opinion, Judge Reinhardt concluded “unhesitatingly, that ‘any other factor other than sex’ is limited to legitimate, job-related factors such as a prospective employee’s experience, educational background, ability, or prior job performance.” He observed that since the 1963 EPA was intended to eliminate long-existing, endemic sex-based pay disparities, it was “inconceivable” that Congress would create an exception for basing new hires’ salaries on those very disparities. Accordingly, the Court held: “Prior salary, whether considered alone or with other factors, is not job related and thus does not fall within an exception to the [Equal Pay] Act that allows employers to pay disparate wages.”
In response to an argument made in a concurring opinion, the Court noted that its decision expressed a general rule, and did not resolve its application under all circumstances. The Court specifically stated that it was not deciding whether or under what circumstances past salary might play a role in the course of an individualized salary negotiation, and expressly reserved questions relating to individualized negotiations to future cases.
What This Means
This is a significant development for all California employers. First, the case was decided under the EPA, which applies to employers nationwide. However, California’s Fair Pay Act, which took effect on January 1, 2016, was designed to be substantially tougher than the EPA. To accomplish this, the California legislature expanded coverage to employees performing “substantially similar work” instead of “equal work,” and also narrowed the “catch-all defense.” In contrast to the “any factor other than sex” language under the EPA, the defense under California law is limited to “a bona fide factor other than sex.” Under California’s formulation of this defense, an employer must prove the “factor other than sex” is job-related, consistent with business necessity, and not based on or derived from a sex-based factor. Given these more stringent requirements, it is not hard to see how a California court would adopt the Ninth Circuit’s reasoning and conclude that prior pay cannot constitute a “bona fide factor other than sex.”
Second, the Ninth Circuit did not just prohibit the use of prior pay as the sole justification for a challenged pay disparity. (California law already prohibits an employer’s reliance solely on prior pay.) The Court went one step further and held that prior pay, “whether considered alone or with other factors” could not be used to justify a pay differential. This could mean that an employer who uses prior salary along with valid job-related factors such as education, past performance, experience and training, could lose an equal pay claim because it failed to justify the entire pay disparity based on legitimate factors. In this regard, the Ninth Circuit’s interpretation of the EPA is more restrictive than other circuit courts that have addressed this issue.
Use of prior pay as a factor in setting compensation is already under attack. California is one of several states that prohibit an employer from even inquiring about an applicant’s prior pay. With the Ninth Circuit’s decision in Rizo and California’s nascent Fair Pay Act, employers are well-advised to avoid using prior pay in setting compensation, and to review the pay of existing employees whose starting pay was set based on prior pay, preferably as part of a broader, privileged audit of pay practices.
Employers That Prevail in Discrimination Cases Are No Longer Automatically Entitled to Recover Costs
It has long been the rule in California that the prevailing party in a discrimination or harassment claim under the Fair Employment and Housing Act is entitled to recover costs. A prevailing plaintiff is also entitled to automatically receive an attorneys’ fee award, while a prevailing defendant needed to prove that the plaintiff’s claim was frivolous or otherwise unreasonably brought or pursued. Although fee awards are difficult to obtain for prevailing employers, the ability to recover costs has served as a useful deterrent against marginal claims.
However, in a disappointing ruling for California employers, on May 4, 2015, the California Supreme Court ruled in Williams v. Chino Valley Independent Fire District that an employer’s ability to recover its costs after prevailing in a discrimination or harassment case is subject to the same “objectively without foundation” standard that applies to attorneys’ fee awards. The Court concluded the legislature intended for the Fair Employment and Housing Act to provide an exception to the general rule that a prevailing defendant is automatically entitled to recover costs, and imposing the higher standard of proof on a prevailing defendant’s cost application was consistent with California’s policy not to chill the vindication of employees’ rights under the FEHA.
What This Means
An employer will no longer be able to automatically recover costs in a FEHA case, even if it proves a plaintiff’s case has no merit. This further reduces the downside risk for employees and their attorneys who file baseless claims, and removes an important tool for employers to resolve unmeritorious claims.
California Supreme Court on Arbitration Agreements: Class-Action Waivers OK, but PAGA Claims Unwaivable
This week, the California Supreme Court issued its highly anticipated opinion in Iskanian v. CLS Transportation Los Angeles, LLC. The decision was a partial victory for employers: the Court clarified that class-action waivers in arbitration agreements may be enforced, but it also held that employers cannot obtain the waiver of an employee’s right to bring a “representative” claim under California’s Private Attorney General Act of 2004 (PAGA).
Iskanian resolved a split amongst California courts as to whether the U.S. Supreme Court’s 2011 ruling in Concepcion v. AT&T Mobility overruled an earlier California case – Gentry v. Superior Court – that said courts could evaluate class-action waivers on a case-by-case basis. The Iskanian Court addressed whether the Federal Arbitration Act (FAA) allowed state courts to refuse to enforce arbitration agreements in order to promote important state interests, such as California’s wage-and-hour laws. The plaintiff in Iskanian argued wage claims were cost-prohibitive for an individual to bring, so class actions were needed to enforce California’s unwaivable labor rights.
The California Supreme Court concluded that the FAA trumps these state-law interests. Because the FAA mandates the enforcement of legal arbitration agreements, California labor laws cannot require procedures that are “incompatible with arbitration.” Therefore, California courts are not free to rely on public policy to reject class action waivers. The Court also rejected the argument that class action waivers violated employees’ rights to engage in “concerted activity” under National Labor Relations Act.
The case was not a total win for employers, however, as the Court determined that employees cannot waive the right to bring claims under the PAGA. Iskanian held that the FAA’s purpose is to preserve arbitration’s “efficient forum for the resolution of private suits.” PAGA “deputizes” employees so they can assert claims for civil penalties on behalf of the state of California. Since PAGA claims are not “private suits” but state enforcement claims, the Court reasoned, the FAA does not apply and an employee’s waiver of rights to pursue PAGA claims on behalf of other employees is not enforceable.
What This Means
Iskanian allows employers to include class action waivers in arbitration agreements. To be enforceable, these agreements still must comply with existing legal standards including mutuality, allocation of costs, and preservation of statutory rights to attorneys’ fees.
However, it is now established that such class action waivers cannot include a waiver of an employees’ right to bring PAGA claims. Therefore, employees with valid arbitration agreements can still seek civil penalties for Labor Code violations, and they can do so on behalf of themselves and all other allegedly aggrieved employees. As a result, employers with valid class action waivers in arbitration agreements could find themselves litigating wage claims in two separate forums.
The potential of parallel wage claims is a new wrinkle in this area. Employers should consider this along with all the other pros and cons of arbitration agreements, and ensure that their agreements do not otherwise violate California law against unconscionable contracts.
by Matthew R. Jedreski and Fred M. Plevin.
Last week, the National Labor Relations Board (NLRB) ruled that an arbitration agreement signed as a condition of employment, which prohibited the filing of joint, class, or collective actions in arbitration or in court, violated the National Labor Relations Act (NLRA), and thus was unenforceable. This decision casts substantial uncertainty on the viability of class action waivers in arbitration agreements between employers and employees.
In D.R. Horton, Inc. and Michael Cuda, 357 NLRB No. 184 (Jan. 3, 2012), a construction superintendent attempted to initiate a nationwide class arbitration on behalf of similarly situated superintendents, alleging that his employer was misclassifying its superintendents as exempt from overtime under the Fair Labor Standards Act. The employer sought to avoid the arbitration because the arbitration agreement between the parties barred collective claims. In response, the employee filed a claim with the NLRB alleging that the arbitration agreement violated his rights under the NLRA, which protects employees’ rights to engage in concerted action for mutual aid and protection. An administrative law judge agreed with the employer and dismissed the claim. However, the NLRB reversed the dismissal, holding that the mandatory waiver of any class actions violated the National Labor Relations Act.
The key determination underlying the NLRB’s holding was that employees’ ability to engage in collective and class actions qualifies as “concerted activity” under Section 7 of the NLRA. It was important in this case that the arbitration agreement did not simply bar class arbitration, but went so far as to prohibit class actions of any sort, in any forum. It is also important to note that even employees of non-unionized employers enjoy the protections of Section 7 of the NLRA.
By defining class actions as concerted activity, the NLRB was able to distinguish this case from recent federal case law that seems to compel the opposite result (and which was cited in the original decision to dismiss the complaint). Specifically, the NLRB went to great lengths to distinguish the United States Supreme Court’s recent decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), in which the Court ruled that a California law barring class-action waivers in arbitration agreements conflicted with the Federal Arbitration Act. (See related E-Update here.) In D.R. Horton, the NLRB declared that its ruling did not conflict with the Concepcion decision for several independent reasons. For example, the NLRB reasoned that a requirement that employees’ work-related claims must be resolved through arbitration solely on an individual basis amounts to a requirement that employees forgo a right guaranteed by the NLRA, which protects employees’ rights to “engage in… concerted activities for the purpose of collective bargaining or other mutual aid or protection….” The NLRB also opined that an arbitration agreement that violates employees’ rights under the NLRA is against public policy and therefore, unenforceable. In addition, the Board swept aside the argument that the Federal Arbitration Act permitted class waivers in arbitration agreements, by observing that the Norris-LaGuardia Act, which is the federal law that renders unenforceable any private agreement prohibiting someone from lawfully assisting in a lawsuit arising out of a labor dispute, was passed seven years after the Federal Arbitration Act.
What This Means
This decision is an unexpected and serious complication in the law regarding the enforceability of class action waivers in arbitration agreements. After Concepcion, employers felt empowered to include class action waivers in arbitration agreements. It is now an open question whether class action waivers can be enforced, and employers considering whether to implement an arbitration program including a class action waiver must do so very carefully. Several important issues still must be resolved either through judicial review of the D.R. Horton decision itself, or through continued development of these issues in other cases. Among other things, it will be important for a federal court to consider the conflict of laws issues addressed by the NLRB, and for a court to consider whether the potential violation of the National Labor Relations Act identified in this decision can be addressed by a court in response to an attempt to compel an individual arbitration, as opposed to in an unfair labor practice proceeding brought before the NLRB. Until these and other open issues are resolved, employers should proceed with caution in either seeking to enforce existing class arbitration limitations, or implementing a program involving arbitration agreements containing class action waivers.
Authored by Fred Plevin and Matthew Jedreski of Paul, Plevin, Sullivan & Connaughton LLP
California Adopts “Wage Theft Prevention Act” Imposing New Notice Requirements and Penalties on Employers
Last week California Governor Jerry Brown signed into law the “Wage Theft Prevention Act of 2011” (AB 469). The new law, which takes effect January 1, 2012, is modeled on a similar New York law that took effect earlier this year.
The new law amends the California Labor Code in several important respects. Of immediate interest to employers is the new Labor Code Section 2810.5, which requires an employer to provide each new nonexempt employee with a written notice at the time of hire containing all the following information:
(A) The rate or rates of pay and basis thereof, whether paid by the hour, shift, day, week, salary, piece, commission, or otherwise, including any rates for overtime, as applicable.
(B) Allowances, if any, claimed as part of the minimum wage, including meal or lodging allowances.
(C) The regular payday designated by the employer in accordance with the requirements of the Labor Code.
(D) The name of the employer, including any “doing business as” names used by the employer.
(E) The physical address of the employer’s main office or principal place of business, and a mailing address, if different.
(F) The telephone number of the employer.
(G) The name, address, and telephone number of the employer’s workers’ compensation insurance carrier
(H) Any other information the Labor Commissioner deems material and necessary.
The law requires the Labor Commissioner to prepare a template and make it available to employers who can use it to comply with the notice requirements. If an employer changes any of the required information, the employer must notify its employees of the changes within seven days, either by providing a new notice or by including the new information on a timely issued wage statement.
Although the notice requirements apply only to nonexempt employees, employers should consider providing the notice to all employees to avoid disputes over whether the notice was due in the event that employees who were classified as exempt later claim they were misclassified.
The notice requirements do not apply to public employees or to employees covered by valid collective bargaining agreements who earn at least 30% more than the state minimum wage.
In addition to the new notice requirements, the new law also contains several provisions that increase existing penalties and/or create new penalties. These include the following:
● A new Section 200.5 is added to the Labor Code increasing from one to three years the time in which the Division of Labor Standards Enforcement may commence an action for civil penalties.
● Section 1197.1 of the Labor Code is amended to provide that in addition to being subject to a civil penalty, an employer “or other person acting either individually or as an officer, agent, or employee” who causes less than the minimum wage or statutorily required overtime wages to be paid to any employee shall also be subject to paying restitution of wages to the employee.
● Section 1197.2 is added to the Labor Code making it a misdemeanor for any employer who has the ability to pay, but willfully fails to pay, a final court judgment or final order issued by the Labor Commissioner for all wages due to an employee who has been discharged or who has quit, within 90 days of the date that the judgment was entered or the order became final. Upon conviction the employer can be fined up $20,000 and imprisoned for up to one year for each offense.
Employers should take immediate steps to implement the new notice requirements for all new hires beginning January 1, 2012. In addition, employers who have not recently audited their wage and hour practices should consider whether this might be a good time to do so. Employers based outside of California that have employees working in California are reminded that California has a host of wage and hour statutes and regulations that go above and beyond the requirements of the Fair Labor Standards Act (FLSA).
Aaron Buckley and Fred Plevin – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Ninth Circuit Holds a Defendant Cannot Moot a Putative Class Action by “Picking Off” the Named Plaintiff with a Rule 68 Offer
Last week the Ninth Circuit Court of Appeals held that a named plaintiff’s rejection of a settlement offer for the full amount of the named plaintiff’s individual claim does not moot a class action complaint where the offer precedes the filing of a motion for class certification. Pitts v. Terrible Herbst, No. 10-15965 (9th Cir. August 9, 2011).
Plaintiff Gareth Pitts filed a class action complaint in Nevada state court against his employer, Terrible Herbst, Inc., a Las Vegas-based convenience store chain, seeking damages for alleged minimum wage and overtime violations. Pitts’ complaint contained causes of action under both Nevada state law and the federal Fair Labor Standards Act (FLSA). Terrible removed the case to federal court.
During pre-certification discovery, Terrible made an offer of judgment to Pitts under Federal Rule of Civil Procedure 68. Although Pitts claimed individual damages of only $88.00, in its Rule 68 offer Terrible agreed to allow judgment to be taken against it in the total amount of $900.00. Pitts declined the offer. Terrible then filed a motion to dismiss the action for lack of subject matter jurisdiction, arguing that its offer of judgment to Pitts for more than the value of his individual claim rendered the entire case moot. In its ruling on the motion, the district court held that a Rule 68 offer of judgment in an amount that satisfies the named plaintiff’s individual claim does not moot a putative class action so long as the class representative can still file a timely motion for class certification.
The Ninth Circuit agreed, citing a line of cases addressing whether a class action becomes moot, and therefore not a live case or controversy required for federal court jurisdiction under Article III of the Constitution, when the named plaintiff loses his personal stake in the litigation. Those cases, which include Sosna v. Iowa, 419 U.S. 393 (1975), Gerstein v. Pugh, 420 U.S. 103 (1975), Deposit Guaranty Nat’l Bank v. Roper, 445 U.S. 326 (1980), U.S. Parole Comm’n v. Geraghty, 445 U.S. 388 (1980), and County of Riverside v. McLaughlin, 500 U.S. 44 (1991), together establish the principle that the termination of a named plaintiff’s individual claim does not moot a certified class action.
The Ninth Circuit acknowledged that those cases did not address the specific question of whether an uncertified class action becomes moot when the named plaintiff loses his personal stake in the litigation. The court nevertheless found that those cases provide “several principles” to support its decision. First, if the district court has certified a class, mooting the named plaintiff’s individual claim does not moot the class action, because upon certification a class acquires a legal status separate from the class representative. After certification, a defendant can moot a class action only by settling with the entire class. Second, if the district court denies certification, mooting the putative class representative’s claim will not necessarily moot the class action because the putative class representative may appeal the denial of class certification, and therefore retains an interest in obtaining a final decision on class certification. Third, even if the district court has not yet addressed class certification, mooting the putative class representative’s claim will not necessarily moot the class action because some claims are so “inherently transitory” that the court will not have an opportunity to rule on class certification before the proposed representative’s individual interest expires. In such cases, the named plaintiff’s claim is “capable of repetition, yet evading review” and the “relation back” doctrine is properly invoked to preserve the merits of the case for judicial resolution.
Applying these principles, the Ninth Circuit concluded that “Terrible’s unaccepted offer of judgment did not moot Pitts’s case because his claim is transitory in nature and may otherwise evade review.” The court further explained that there is “no reason to restrict application of the relation-back doctrine to cases involving inherently transitory claims. Where, as here, a defendant seeks to “buy off” the small individual claims of the named plaintiffs, the analogous claims of the class—though not inherently transitory—become no less transitory than inherently transitory claims.” Although a named plaintiff’s claims are not inherently transitory as a result of being time sensitive, they are nevertheless “acutely susceptible to mootness” in light of a defendant’s tactic of “picking off” the named plaintiff with a Rule 68 offer to avoid a class action. To allow defendants to employ this tactic to moot class actions before the district court can rule on class certification “would thus contravene Rule 23’s core concern: the aggregation of similar, small, but otherwise doomed claims.”
With this decision, the Ninth Circuit joins the Third, Fifth, and Tenth Circuits which previously have held that a pre-certification Rule 68 offer in an amount sufficient to satisfy the named plaintiff’s individual claim does not moot a putative class action.
Aaron Buckley and Fred Plevin – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
In April of this year the United States Supreme Court decided AT&T Mobility LLC v. Concepcion et ux. (2011) 131 S.Ct. 1740, in which the Court held that California case law invalidating class action waivers in consumer arbitration agreements is preempted by the Federal Arbitration Act. Based on the Concepcion decision, California employers reasonably assumed that contractual arbitration provisions will now be enforced with respect to not only individual claims, but also class and representative claims brought by employees.
But earlier this week a California appellate court held that the Supreme Court’s decision in Concepcion does not apply to representative actions brought under California’s Private Attorney General Act of 2004 (PAGA), and that an employee’s waiver of the right to pursue a PAGA representative action remains unenforceable under California law. Brown v. Ralphs Grocery Co. (July 12, 2011) No. B222689. In that same decision the court specifically declined to decide whether the FAA preemption rule announced in Concepcion applies to class action waivers in the employment context, suggesting that at least one California appellate court considers this an open question.
Plaintiff Terri Brown filed a complaint against her employer, Ralphs Grocery Company, asserting a class action alleging four Labor Code violations and a violation of California’s Unfair Competition Law based on the alleged Labor Code violations. Brown’s complaint also asserted a right to civil penalties under the PAGA, which authorizes an employee to bring a private civil action for certain Labor Code violations against her employer on behalf of herself and other current and former employees. The PAGA provides for an award of civil penalties, 75% of which go to the Labor and Workforce Development Agency for Enforcement of Labor Laws and Education, with the remaining 25% going to the aggrieved employees. In addition to the civil penalties, a prevailing plaintiff may be awarded reasonable attorney’s fees and costs. California courts have held that PAGA actions can proceed as “representative actions,” which means that class action certification rules are not applicable.
Ralphs petitioned the trial court to compel Brown to submit her individual claims to arbitration based on Brown’s employment agreement, in which she expressly waived her right to bring class and representative actions. The trial court denied the petition, ruling that the waiver provisions in Brown’s employment agreement were unenforceable under California case law. Ralphs appealed. While the appeal was pending, the U.S. Supreme Court issued its decision in Concepcion.
The appellate court first examined the class action waiver, and reversed the trial court’s ruling that the waiver was unenforceable on the ground that Brown had failed to establish the unconscionability of the agreement as required by applicable law. It directed the trial court to consider this issue. Because the trial court still needed to decide whether the agreement was potentially unconscionable, the court declined to decide whether Concepcion required the trial court to enforce the class action waiver based on FAA preemption. However, the court included a (seemingly unnecessary) discussion of this issue, hinting that if it were to reach the issue, the court might decide that Concepcion does not require the enforcement of class action waivers in the employer-employee context.
The court next examined the PAGA waiver and, in a 2-1 split, affirmed the trial court’s ruling that the waiver was unenforceable under California law. The majority held that Concepcion does not apply to PAGA waivers. The majority distinguished class actions, which seek to recover damages or restitution on behalf of class members, from PAGA actions, which “deputize” private individuals as deputy attorneys general to enforce the Labor Code on behalf of the public at large. The majority concluded that since Concepcion did not address the PAGA, the Concepcion decision does not apply to the PAGA and therefore previous California case law on the subject controls. The dissenting opinion found the class action vs. PAGA distinction unpersuasive in light of a series of cases going back to the 1980s in which the U.S. Supreme Court has held that the FAA preempts California statutory and decisional law impeding the enforcement of contractual arbitration agreements.
The impact of the Concepcion decision on employment litigation continues to generate much debate, and this decision does little to clarify the situation. Employers should expect the continued uncertainty in this area to generate a substantial amount of litigation in the next few years. In the meantime, this new decision will likely encourage employees to include PAGA claims in virtually all wage and hour actions in an effort to defeat arbitration provisions that seek to bar class and representative actions.
Aaron Buckley and Fred Plevin – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, California
California Supreme Court Applies Overtime Laws to Non-Resident Employees Temporarily Working in California
Last week the California Supreme Court issued an opinion holding that California’s overtime laws apply to employees of California-based employers who are based in Arizona and Colorado, but who perform work in California on a temporary basis. Sullivan, et al. v. Oracle Corporation, et al., No. S170577 (June 30, 2011). The court also held that those same employees may seek restitution for unpaid overtime under California’s Unfair Competition Law (UCL) for work performed in California. But the court declined to allow the employees to seek restitution for work performed outside of California.
Oracle Corporation is a large software company headquartered in California. The three plaintiffs were employed by Oracle in Arizona and Colorado to train Oracle’s customers in the use of the company’s products. The employees primarily worked in their home states, but regularly traveled to other states, including California, to train Oracle’s customers.
The plaintiffs sued Oracle in federal district court in California, seeking unpaid overtime under the California Labor Code for work performed in California exceeding eight hours in one day. The plaintiffs also sought restitution under the UCL for that same work. Finally, the plaintiffs sought restitution under the UCL for unpaid overtime under the federal Fair Labor Standards Act (FLSA) for work performed in states other than California.
The district court granted Oracle’s motion for summary judgment, and the plaintiffs appealed. The Ninth Circuit Court of Appeals asked the California Supreme Court to decide the underlying issues of California law, which led to last week’s opinion.
In holding that Arizona and Colorado employees of California-based companies can sue for unpaid overtime under California law, the court treated the issue as one of statutory construction, and determined that the plain language of California’s Labor Code and regulations indicate that they apply to work performed in California, regardless of where the employees live. Building on past decisions holding that the UCL applies to overtime claims, the court also held that since non-residents can sue for unpaid overtime under California law, those same non-residents can also bring UCL claims for restitution seeking the unpaid overtime. But the court declined to extend the UCL to cover claims for FLSA violations occurring outside of California, on the grounds that nothing in the UCL indicates an intent on the part of California’s legislature to apply the UCL to occurrences outside of California.
The court’s opinion leaves at least two important questions unanswered. First, while holding that California law allows non-resident employees who perform work in California for California-based employers to sue for unpaid overtime, the court specifically declined to decide whether non-resident employees who perform work in California for employers based outside California can be sued under those same laws. Second, the court declined to extend its ruling to California wage and hour laws covering issues other than overtime (for example, laws regulating pay stubs, vacation time, etc.).
The Sullivan decision requires California-based employers to comply with California’s overtime rules when their employees perform work in California. Although the decision involved employees based in Arizona and Colorado, California-based employers who send employees based in other states to work in California will be subject to the same analysis that the court applied in Sullivan. Therefore, all California-based companies should immediately review their pay practices to determine whether nonexempt employees based in other states who perform work in California must be paid overtime according to California law. In general, this requires daily overtime for hours worked in excess of eight per day, that the base rate of pay be calculated on the basis of a 40 hour workweek, and that the basic overtime rate equal 1.5 times the employee’s base rate.
Unfortunately, the court decided not to answer some important questions of interest to in-state and out-of-state employers that send employees to work in California. First, the court declined to opine on what California requirements other than overtime apply to out-of-state workers who are entitled to overtime based on its decision. For example, the court left unanswered the question of whether California’s meal break and rest period rules apply. However, given the court’s reasoning in Sullivan, it would be prudent for employers to consider whether to follow these rules for out-of-state employees who are entitled to overtime while working in California.
Second, although the court anticipated that arguments would be raised that its decision could apply to non-California-based employers, it specifically declined to express an opinion on whether employers based outside of California with employees who travel to California to perform work must comply with California overtime laws with respect to work performed in California by those employees. The plaintiffs’ employment bar will most certainly seek to apply Sullivan to out-of-state employers, and much of the reasoning behind the court’s decision to apply California overtime laws to out-of-state employees of California-based employers could be applied to out-of-state employers as well. Therefore, out-of-state employers who regularly send nonexempt workers to California should carefully consider whether to proactively change pay practices to apply California’s overtime rules to work performed by employees in California.
Aaron Buckley and Fred Plevin – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Ninth Circuit Holds Pharmaceutical Sales Representatives Fall Within FLSA Exemption for “Outside Salesmen”
The U.S. Court of Appeals for the Ninth Circuit recently affirmed summary judgment in favor of pharmaceutical company GlaxoSmithKline (“GSK”) in a case brought by former pharmaceutical sales representatives (PSRs) who claimed that GSK violated the overtime provisions of the Fair Labor Standards Act (FLSA) by failing to pay them overtime. The court determined that the plaintiffs fell within the FLSA’s overtime exemption for “outside salesmen.” Christopher v. SmithKline Beecham Corp. DBA GlaxoSmithKline, No. 10-15257 (9th Cir. Feb. 14, 2011).
The plaintiffs claimed that their job duties, which essentially consisted of visiting doctors to persuade them to prescribe particular drugs to patients, did not qualify for the outside sales exemption because their activities did not actually involve “sales.” They argued that it was the patients who were prescribed the drugs who were the actual buyers, and not the doctors who did the prescribing. The Ninth Circuit rejected this argument, holding that the PSRs were involved in “sales” within the meaning of the FLSA, because by convincing doctors to prescribe the drugs the PSRs’ activities resulted in increased sales.
In affirming summary judgment in favor of GSK, the court declined to give deference to a brief filed by the U.S. Department of Labor supporting the PSRs’ position.
The Ninth Circuit’s decision that the outside sales exemption applies to PSRs creates a split in the circuits, because in July 2010 the Second Circuit adopted the Department of Labor’s position and held that PSRs do not fall under the FLSA exemptions for either administrative or outside sales employees. In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010). The U.S. Supreme Court recently denied petitions to review the Second Circuit’s decision on that issue. As a result, the circuit split will continue indefinitely.
The Ninth Circuit covers the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington. The Second Circuit covers the states of Connecticut, New York and Vermont.
Aaron A. Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Earlier this week the U.S. Court of Appeals for the Ninth Circuit affirmed summary judgment in favor of newspaper reporters who sued their employer for unpaid overtime, holding that the reporters did not satisfy the criteria for an overtime exemption under federal or California law. Wang v. Chinese Daily News, Nos. 08-55483 & 08-56740, 2010 WL 3733568 (9th Cir., Sept. 27, 2010).
Both the federal Fair Labor Standards Act (FLSA) and the California Industrial Welfare Commission’s wage orders exempt employees employed in a “professional” capacity from overtime pay requirements. Both the federal and California professional exemptions contain subcategories that are to be “narrowly construed.” The subcategory most commonly relied on by employers is the “learned professional” exemption, which is available to employees who meet the minimum salary requirement and whose work requires the use of advanced knowledge customarily acquired through prolonged academic instruction. The subcategory at issue in the Wang case was the less frequently invoked “creative professional” exemption, which is available to employees whose work requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor, as opposed to routine mental, manual, mechanical or physical work.
In holding that the newspaper reporters employed by the defendant Chinese Daily News (CDN) did not qualify for the exemption, the court examined a 2004 regulation of the federal Department of Labor construing the creative professional exemption as applied specifically to journalists. The regulation, 29 C.F.R. § 541.302(d), draws a distinction between work that requires “invention, imagination, originality or talent” from work that depends primarily on “intelligence, diligence and accuracy.” When the DOL promulgated the regulation, it explained that the majority of journalists are not likely to qualify for the exemption because most journalists primarily collect and organize information that is already public, and do not often contribute a unique or creative interpretation or analysis to a news product.
In addition to the DOL regulation, the court also considered previous decisions by the Third and First Circuits holding that print journalists were not exempt professionals. See Reich v. Gateway Press, Inc., 13 F.3d 685 (3d Cir. 1994) (involving reporters at a chain of nineteen local weekly newspapers); Reich v. Newspapers of New England, Inc., 44 F.3d 1060 (1st Cir. 1995) (involving a small community newspaper). The court compared these cases to Sherwood v. Washington Post, 871 F.Supp. 1471, 1482 (D.D.C. 1994), in which the district court held that a Washington Post reporter who was a prominent, high-level investigative journalist was the type of “elite journalist” whom the creative professional exemption was intended to cover.
Examining the evidence submitted in support of the parties’ respective summary judgment motions, the Ninth Circuit concluded that the reporters did not satisfy the criteria for the creative professional exemption, as their work was similar to the community newspapers described in the Reich and Sherwood cases, and lacked the sophistication of national-level newspapers such as the New York Times or the Washington Post. In the court’s view, the CDN’s reporters clearly did not fall among the “small minority” of journalists who are exempt.
Employers must be mindful that when an employee’s exempt status is challenged, the burden of proof is on the employer to prove that the employee meets all the criteria for the exemption. Given the Wang decision and the earlier decisions on which it relies, employers in general, and news organizations in particular, should exercise great caution in applying the creative professional exemption, and be prepared to prove that any employees classified as creative professionals are engaged in work that primarily requires “invention, imagination, originality or talent” and not simply “intelligence, diligence and accuracy.”
Aaron A. Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA