Last week the California Court of Appeal issued a decision holding that employers must separately compensate commissioned (“inside sales”) employees for legally required rest breaks.
Under California law most employees are entitled to a paid 10-minute rest break for every work period of four hours, or major fraction thereof. California law also provides an overtime exemption for commissioned salespeople, but this “inside sales” exemption does not exempt those employees from minimum wage or meal and rest break requirements. (So-called “outside” salespeople are not subject to minimum wage, overtime, or meal/rest break requirements.)
Stoneledge Furniture compensated its retail sales associates according to a standard commission agreement. The agreement provided for sales associates to be compensated on a commission-only basis, but also guaranteed the associates a minimum income of $12.01 per hour. The minimum income was paid to sales associates as a “draw” against future commissions. If an associate earned commissions that met or exceeded the draw, the associate would be paid the commissions actually earned. But if an associate’s earned commissions were less than the draw, the associate would receive the minimum draw. The agreement did not provide separate compensation for any non-selling time, such as time spent for meetings, training, or rest breaks.
Two sales associates filed a class action against Stoneledge alleging the company failed to provide paid rest breaks. The trial court certified a class but later granted summary judgment to Stoneledge, finding that by guaranteeing sales associates a minimum income of $12.01 per hour, Stoneledge ensured they would be paid for all hours worked, including rest breaks.
The Court of Appeal reversed, holding that Stoneledge violated California law by not separately compensating sales associates for rest breaks. The court relied on the applicable wage order, which provides, “authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages.” The court reasoned that since the minimum pay guarantee was a draw against commissions, it was simply an advance subject to clawback, or deduction, from future commissions. As a result, when a sales associate earned commissions that exceeded the draw, the only pay the associate received consisted of commissions, which did not account for rest breaks. The court held that to comply with California law, commission-based compensation plans must provide for separate pay for legally required rest breaks. In reaching its conclusion, the court relied on previous cases holding that piece-rate employees must be separately compensated for rest breaks, a requirement the state legislature later codified at California Labor Code section 226.2, which took effect in 2016.
Although this decision focused on rest breaks, its reasoning applies equally to other compensable yet “non-productive” time that is not accounted for and compensated under commission or piece-rate compensation plans. Employers with California-based commissioned (inside) salespeople, or employees paid on a piece-rate basis, should review their compensation plans to ensure those employees are separately paid at least the minimum wage for rest breaks and other non-productive yet compensable time, and that this pay does not operate as a “draw” subject to deduction. In other words, pay for all non-productive compensable time must be guaranteed and independent from compensation tied to sales commissions or piece-rate production.
On April 17, 2015, Judge James Donato of the U.S. District Court for the Northern District of California held that Integrity Staffing Solutions, Inc. v. Busk, 136 S.Ct. 513 (2014), in which the U.S. Supreme Court held the FLSA does not require employees to be compensated for time undergoing post-shift security screenings, does not apply to wage claims brought under California law. The case is Miranda v. Coach, Inc., No. 14-cv-02031-JD, 2015 U.S. Dist. LEXIS 51768 (Apr. 17, 2015).
Eve Miranda and Mary Lou Ayala filed a class action complaint against Coach, Inc., alleging they and other Coach sales associates were required to submit to “bag checks” each time they left the store. They alleged that waiting for and undergoing the bag check process, for which they were not paid, lasted anywhere from 5 to 30 minutes, and sought damages and penalties under California law for “off-the-clock” time. Coach moved to dismiss, arguing the bag check time was non-compensable under Integrity Staffing Solutions.
Judge Donato denied the motion to dismiss, explaining that while the decision in Integrity Staffing Solutions was premised on how the federal Portal-to-Portal Act of 1947 exempts employers from FLSA liability for certain categories of work-related activities, Coach was being sued under California law, which contains no similar exemption and defines “hours worked” differently. The opinion cited Morillion v. Royal Packing Co., 22 Cal.4th 575, 582 (2000), in which the California Supreme Court explained that California defines “hours worked” as including not only “time the employee is suffered or permitted to work,” but also “time during which an employee is subject to the control of an employer.” Given all this, Judge Donato denied the motion to dismiss, holding the plaintiffs’ claims for uncompensated time under California law “are viable and will go forward.”
Judge Donato’s opinion is not binding on any other court, but there is no reason to believe other courts presented with the same issue will reach a different conclusion. This does not mean—and Judge Donato did not hold—that time spent by employees undergoing bag checks is compensable under California law; it merely means the time may be compensable. For example, in certain situations there may be a viable argument that the time is so minimal as to be de minimis and therefore non-compensable. In class actions, certification might be defeated by showing that even where an employer requires bag checks, the employer’s policy affects employees differently, with the result that individualized inquiries will be needed to establish liability.
This case is another reminder that California’s wage and hour laws differ from their federal counterparts in important respects. As a result, decisions construing the FLSA and other federal laws cannot be relied on as indicators of what may allowed under California law. This presents challenges to all California employers, and especially to employers that are based outside California, but have employees working in the state. Employers should consult counsel before relying on any judicial decisions.
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 Fifth Circuit Court of Appeals held that the National Labor Relations Act (NLRA) does not prohibit arbitration agreements waiving the right of employees to pursue employment claims on a class or collective basis. The court’s decision rejected last year’s ruling by the National Labor Relations Board (NLRB) that home builder D.R. Horton violated the NLRA by requiring its employees to sign such agreements. The case is D.R. Horton, Inc. v. NLRB, 5th Cir., No. 12-60031, 12/3/13.
The underlying NLRB decision invalidating class and collective action waivers was issued on January 3, 2012. The NLRB held that class actions qualify as “concerted activities for the purpose of collective bargaining or other mutual aid or protection….” The NLRB reasoned that because the NLRA protects the right of employees to engage in such “concerted activities,” D.R. Horton violated by NLRA by requiring employees to waive their right to bring class actions.
In rejecting the NLRB’s analysis, the Fifth Circuit noted that while the NLRA protects concerted activity, there is nothing in the NLRA explicitly guaranteeing the right of employees to bring class actions. Further, the court found no evidence that Congress intended the NLRA to override the Federal Arbitration Act (FAA), which generally mandates that arbitration agreements be enforced according to their terms.
Although many courts throughout the country have refused to follow the NLRB’s D.R. Horton analysis, the Fifth Circuit’s reversal of the actual D.R. Horton decision should seriously undermine the argument that the NLRA prohibits class action waivers in arbitration agreements. The NLRB may no longer follow its own D.R. Horton analysis within the Fifth Circuit (Louisiana, Mississippi and Texas), and federal courts in other circuits have already displayed disfavor towards it. The NLRB may simply abandon its D.R. Horton analysis, or it could petition the United States Supreme Court to review the Fifth Circuit’s decision. Recent United States Supreme Court decisions, including AT&T Mobility v. Concepcion, have championed the FAA’s strong policy in favor of arbitration agreements—including agreements with class action waivers—so the NLRB is unlikely to find relief there.
Although this decision seriously undermines one argument against class action waivers, there are others that remain unsettled. Employers considering whether to implement an arbitration program that includes class and collective action waivers should proceed with caution.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
By: Tracey Holmes Donesky and Christina Sans
On August 9, 2013, the Second Circuit applied the Supreme Court’s recent decision in American Express Co. v. Italian Colors Restaurant to hold that an employee cannot invalidate a class-action waiver in an arbitration agreement when the waiver removes the financial incentive to pursue a claim under the FLSA. The decision-Sutherland v. Ernst & Young LLP-is an important victory for employers because it confirms that the American Express holding applies to wage-and-hour claims, and held that there is no statutory “right” under the FLSA to collective action claims.
In American Express, the agreement between the credit card company and merchants included an arbitration clause, and provided that “[t]here shall be no right or authority for any claims to be arbitrated on a class action basis.” The merchants brought a putative class action alleging antitrust violations, and submitted evidence that the expert analysis necessary to prove their antitrust claims would cost at least several hundred thousand dollars, while the maximum recovery for an individual plaintiff would be $12,850, and under $40,000 even if trebeled.
The Supreme Court held that “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim,” nor do such laws “evince an intention to preclude a waiver of class-action procedure.” The Court also explained that federal law does not secure a “nonwaivable opportunity to vindicate federal policies by satisfying the procedural strictures of Rule 23” or by invoking a class mechanism in arbitration. The merchants argued that the class waiver barred “effective vindication” of their federal statutory rights, because they had no economic incentive to pursue their claims individually. The Court recognized its prior decisions indicating that arbitration agreements could be struck down if they prevented effective vindication of statutory rights, but explained that this exception applied only when parties’ right to pursue a claim was affected. For example, the exception would apply if an agreement prohibited the assertion of certain claims, or if filing and administrative fees attached to arbitration made access to the forum impracticable. But financial impediments to proving a claim did not meet this exception.
American Express addressed antitrust claims, but the Court did suggest that its holding would apply equally to employment arbitration agreements. In reaching its decision, the Court noted that in Gilmer—a 1991 case under the Age Discrimination in Employment Act—the Court “had no qualms enforcing a class waiver in an arbitration agreement even though the federal statute at issue, the [ADEA], expressly permitted collective actions.”
The Second Circuit followed the Supreme Court’s directive. In Sutherland, the plaintiff-employee entered into an arbitration agreement with a class-action waiver at the time of hire. She subsequently brought a putative class action against her employer under the FLSA and New York Labor Law seeking to recover unpaid overtime wages. The employer filed a motion to compel individual arbitration. The employee argued that the costs and fees associated with prosecuting her claims individually would “dwarf her potential recovery of less than $2,000.” The district court was persuaded by her arguments and denied the employer’s motion.
The Second Circuit reversed. The court determined that the FLSA does not contain a “contrary congressional command” preventing class waiver. Although the FLSA specifically authorizes collective actions, the court noted that individual class members must affirmatively opt-in, and therefore an employee has the power to waive participation as well. The court noted that the FLSA collective action provision was akin to the collective action provision of the ADEA in Gilmer, and that the Third, Fourth, Fifth, Eighth and Ninth Circuits had all previously concluded that the FLSA does not preclude the waiver of collective claims. The Second Circuit determined that the employee’s “effective vindication” argument was precluded by American Express—the fact that individual arbitration would be prohibitively expensive does not permit a court to invalidate a class waiver. The court—like other courts to have addressed the issue—refused to follow D.R. Horton, Inc., in which the National Labor Relations Board (NLRB) held that a waiver of the right to pursue FLSA claims collectively in any forum violates the National Labor Relations Act (NLRA). The Second Circuit determined it owed no deference to the D.R. Horton opinion because the opinion trenched upon a federal statute and policy unrelated to the NLRA (the FAA).
The Southerland decision reaffirms the increasing body of caselaw upholding enforceability of class waivers in employment arbitration agreements. Importantly, class waivers can be enforced even if plaintiffs can establish that their costs would greatly exceed any recovery. Of course, employers and counsel should take care when drafting arbitration agreements to ensure enforceability. For instance, agreements may not be upheld if fees or other requirements make access to the forum impracticable. In Southerland, the court noted that the applicable arbitration agreement authorized the arbitrator to award a prevailing employee attorneys’ fees, as provided by applicable law or in the interests of justice. Such balancing provisions may also help ensure enforceability.
In two recent decisions, the Ninth Circuit Court of Appeals reversed district court remand orders and held that class actions were properly removed under the Class Action Fairness Act (CAFA).
In Roth v. CHA Hollywood Medical Center, which can be downloaded here, the plaintiffs filed a state law wage and hour class action in California state court in 2011. They later filed an amended complaint in May of 2012, naming CHA Hollywood Medical Center as a defendant for the first time. CHA and the other defendants removed the case to federal district court in September of 2012, based on a declaration from one class member establishing diverse citizenship (she lived in Nevada), along with CHA’s allegation that the amount in controversy exceeded $5 million.
The district court granted the plaintiffs’ motion to remand, rejecting the defendants’ argument that they could remove based on information they discovered from their own investigation. The district court held that the defendants could only remove based on information received from the plaintiffs, citing the two 30-day periods specified in 28 U.S.C. section 1446(b)(1) and (b)(3). Those provisions specify that a defendant must remove a case within 30 days of receiving from the plaintiff either an initial pleading, or some other document, showing that the case is removable.
The Ninth Circuit reversed, holding that the two 30-day removal periods cited by the district court are not the only bases for CAFA removal. The Ninth Circuit noted that 28 U.S.C. section 1441(a) allows removal of any case that could have been originally filed in federal district court. Reading sections 1441 and 1446 together, the court concluded that they “permit a defendant to remove outside the two thirty-day periods on the basis of its own information, provided that it has not run afoul of either of the two thirty-day deadlines.” The court held that CHA had not violated either of the 30-day time limits, because the plaintiffs had not provided any information to CHA from which it could determine that the case was removable. Further, CHA had “promptly” removed once it independently discovered grounds for removal (in this case a class member who satisfied CAFA diversity requirements).
In Watkins v. Vital Pharmaceuticals, which can be downloaded here, the plaintiffs filed a state law consumer class action in California state court, seeking damages “in the millions of dollars,” along with restitution, disgorgement and legal fees, based on allegations that Defendant Vital Pharmaceutical’s protein bars were erroneously marketed and labeled. Vital removed the case on the basis of CAFA jurisdiction. Vita’s removal papers included a declaration from outside counsel stating that in light of the allegations, there was “a legal certainty that the amount in controversy in this matter consists of an aggregate in excess of $5 million,” and another declaration from the company’s controller stating that sales of the protein bars at issue in the case “exceeded $5 million” during the relevant limitations period. The district court remanded the case sua sponte (“on its own motion”), holding that the declarations were insufficient to establish, by a preponderance of the evidence, the $5 million amount in controversy necessary for CAFA jurisdiction.
The Ninth Circuit began its analysis by confirming that the right to appellate review of remand orders in CAFA cases applies to sua sponte remand orders, and not simply to orders issued in response to a party’s motion to remand. Reaching the merits, the court agreed with Vital that the declaration from the controller stating that sales of the protein bar “exceeded $5 million” was “sufficient to establish that CAFA’s $5 million amount in controversy requirement” was met, noting that the declaration was “undisputed.” This decision indicates that the amount in controversy can be established by a simple declaration containing competent evidence, at least where the evidence is undisputed by the non-removing party.
The removal standards clarified by these two cases are applicable beyond the specific facts of each case. Roth was removed under CAFA, but the Ninth Circuit noted that its ruling addressing grounds for removal will apply to any diversity case. And while Watkins was a consumer class action, its holding addressing the evidence needed to establish the $5 million minimum amount in controversy for removal under CAFA is applicable to employment class actions as well.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
Several notable court decisions over the last few months have given rise to speculation that wage and hour class actions are likely to become more difficult to certify. Joe Tilson and Jeremy Glenn discussed some of those cases here.
But over the last couple of weeks at least two appellate decisions seem to indicate that wage and hour class actions are alive and well, at least in the Ninth Circuit and California courts.
Last week the Ninth Circuit reversed a district court’s denial of class certification and remanded the case with directions to certify the class. In Leyva v. Medline Industries, Inc., which can be viewed here, an employee challenged the employer’s time-rounding practices and also alleged that the employer failed to include nondiscretionary bonuses in the calculation of overtime pay rates. The plaintiff sought to certify a class of 538 current and former employees. But the district court denied class certification, concluding that individual questions predominated over common questions because damage calculations varied from individual to individual. The Ninth Circuit reversed, holding that the need for individual damage determinations alone cannot defeat class certification, and that in denying class certification on that basis the district court abused its discretion. In its opinion the Ninth Circuit interpreted the United States Supreme Court’s recent decision in Comcast v. Behrend as holding that a plaintiff seeking class certification need only show that damages attributable to the theory of liability in question can be calculated separately from damages attributable to other theories. Some commentators had read Behrend as supporting the proposition that class certification is inappropriate where individual damage issues are present, but the Ninth Circuit’s narrower interpretation of Behrend could make class certification less difficult in that circuit.
Earlier, an appellate court in California reversed an order denying class certification, and remanded the case to the trial court with directions to certify the class. In Bluford v. SafewayStores, Inc., which can be viewed here, truck drivers were paid based on a piece rate formula that took into account the number of miles driven, the time of day the trips were taken, and the locations where the trips began and ended; along with fixed rates for certain tasks and an hourly rate for other tasks and delays. None of the applicable rates specifically included compensation for rest periods, but Safeway had the drivers sign time cards that acknowledged they were authorized and permitted to take rest breaks. The trial court denied certification, but the appellate court reversed on the grounds that neither the piece rate, nor the fixed rate, nor the hourly rate specifically compensated drivers for rest periods, and that this fact created a common issue for determining liability. Likewise, the court also reversed the trial court’s denial of certification to a meal period class on the ground that the company’s meal period policy (which was contained in a collective bargaining agreement) did not mention that drivers were allowed a second meal period for shifts exceeding ten hours. The trial court had denied certification because there was evidence that some drivers were aware that they could take second meal periods, and did take them. But the court of appeal held that despite such evidence, the company’s non-compliant policy supported class certification.
Together, these two cases show that wage and hour class actions remain viable, and employers should be vigilant about ensuring their pay practices fully comply with state and federal law.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
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