Tuesday, September 29, 2009

Reading the Crystal Ball: Plaintiffs’ Class Action Attorneys Weigh in on Top 5 Evolving Areas of Wage/Hour Law in California

Copyright Bryan Schwartz 2009, for the 2009 State Bar Labor and Employment Law Conference


Plaintiffs’ lawyers can be a trendy lot. We need to know what issues are hot, what issues are not, who is bringing what – otherwise, we might find ourselves a step behind in the footrace for good cases. And no one is shooting for that 11th Place ribbon, after all.

Having conducted an entirely non-scientific, non-comprehensive survey of leaders in plaintiffs’-side wage/hour litigation around California, and bringing in my admitted biases based on the matters that happen to be sitting on my desk now, I have developed a Top 5 watch list of areas which might show significant movement in 2010.

#5: Independent Contractor-Franchisee Abuse

With the economy faltering, plaintiffs’ lawyers perceive that employers are more likely than ever to push the envelope on independent contractor classification, even going so far as to label some employees “franchisees.” By using the independent contractor designation, employers ostensibly avoid overtime and other wage/hour concerns, unemployment liability, federal and state tax deductions, workers’ compensation, wrongful termination hazards, etc. – in one fell swoop, drastically improving their bottom line by slashing the number of “employees.” Independent contractors can be terminated at a moment’s notice. Rather than having employees and all the burdens associated with such, by taking the next step and creating franchisees instead of employees, employers might even hope to generate income to improve their financial outlook, e.g., by charging franchise fees. Janitorial and transportation services are industries where such practices are rife.

However, employers should remain wary of overstepping into the independent contractor/franchise arrangement. Plaintiffs’ attorneys – and the government – are watching this area closely. Philip Monrad of Oakland, whose firm Leonard Carder has litigated regarding independent contractor designations for many years against FedEx, has other major independent contractor cases (with co-counsel) presently in litigation against UPS Supply Chain Solutions, Carey Limousine, and SuperShuttle. Mr. Monrad reports that because of the surge in unemployment claims (probably the biggest growth area in 2009) – and employers attempting to disclaim unemployment liability by claiming independent contractor designation – EDD has created a task force to crack down on independent contractor misclassification. Recall Air Couriers Intern. v. Employment Development Dept. (2007) 150 Cal.App.4th 923 (citing S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341), in which the employer wound up in litigation with EDD over its independent contractor classification – and lost. SuperShuttle is litigating now with EDD, and plaintiffs’ attorneys hope for a similar result. We may learn in 2010 to what extent plaintiffs’ attorneys and their clients can benefit from the fruits of EDD’s battles over independent contractor issues.

Independent contractor cases will still make good class actions in 2010. Earlier this year, Mr. Monrad’s firm obtained FLSA conditional certification of a class of “independent contractor” drivers alleging that they were misclassified, in Labrie v. UPS Supply Chain Solutions, Inc., 2009 WL 723599 (N.D.Cal. March 18, 2009) (Hamilton, J.). Providing first-tier FLSA notification under Hoffman-LaRoche to the class, the Court found most persuasive plaintiffs’ undisputed averments supporting certification that: (1) drivers were uniformly classified by defendant as “independent contractors;” (2) drivers were required to sign the same or similar contracts, setting forth the relationship between defendant and the drivers; (3) drivers performed pick-up and delivery services for defendant and its customers at the direction of the company’s dispatchers; (4) drivers regularly and consistently worked more than 8 hours per day and 40 hours per week, and were not compensated for overtime, time waiting for assignments, or return travel time; (5) drivers were paid according to a standard formula devised by defendant; and (7) drivers were subject to a nationwide policy with respect to rules for dispatchers in dealing with drivers. Labrie, 2009 WL 723599, at *7. Where plaintiffs can provide declarations from a group uniformly classified as independent contractors whose job performance is in fact controlled day-to-day by the employer, and who work extensive overtime, Labrie is a good model to obtain class certification. See also Khairy, et al v. SuperShuttle (N.D. Cal. May 21, 2009), Case No. 3:08-cv-02993 (White, J.), Docket #124 (“Order Granting Motion to Facilitate Collective Action Notice”).

And while on the subject of federal court – recall that the definition of “employer” under the FLSA is essentially broader than under any other statute,[1] such that it is certainly “legally possible to be an employee for purposes of the FLSA and an independent contractor under most other statutes.” Hopkins v. Cornerstone Am., 545 F.3d 338, 347 (5th Cir. 2008).

On the other hand, the recent cases of Ali v. U.S.A. Cab Ltd. (2009) 176 Cal.App.4th 1333, 98 Cal.Rptr.3d 568, and Cristler v. Express Messenger Systems, Inc. (2009) 171 Cal. App.4th 72, stand for the proposition that plaintiffs with independent contractor cases – like all other putative class actions – should stay as far as possible away from California’s Court of Appeal in San Diego.

In Ali, the Court of Appeal upheld a certification denial, relying upon differences in declarations from the cab drivers at issue, showing divergent levels of the drivers’ usage of the services of the company’s dispatcher. Ali¸ 98 Cal.Rptr.3d at 581. The Court weighed and credited evidence that the drivers assumed “entrepreneurial risk” and provided “tools or instrumentalities of their own in connection with the services they render[ed]” in finding that individualized considerations would predominate and that the group lacked commonality. Id.

In Cristler, the Court of Appeal was unmoved by plaintiffs’ argument that the trial court's instruction that the plaintiff had “the obligation to prove that [the class members] were [defendant’s] employees” was improper – holding that the instruction did not improperly shift the burden of proof on the question of independent contractor status to the plaintiff. Cristler, 171 Cal.App.4th at 84. Employers might be tempted to believe that plaintiffs’ rebuttable presumption on the question of “employer” status is weakened after Christler, but even San Diego’s Court of Appeal acknowledged that the rebuttable presumption is intact, as long as plaintiffs present some evidence linking themselves to the employer. Id. at 84. See also id. at 83 (citing Lujan v. Minagar (2004) 124 Cal.App.4th 1040, 1048 [“There is a rebuttable presumption that one who furnishes services for an employer is an employee. (§ 3357.)”].)

Defendants may attempt to test – and plaintiffs may be fighting them in 2010 – regarding how far companies can push the “entrepreneurial risk” argument, like in Ali. We may expect to see cases where employers cross the line in arguing that their operational controls over employees are in fact just proper enforcement by a franchisor seeking to protect its trademark and the goodwill of its brand against abuse by franchisees. Mr. Monrad imagines that case law may develop in 2010 where employers try to argue that their controls over employees are merely just the company communicating to its contractors the details of the government’s regulations over the industry in question – as opposed to the controls of the employer over an employee. See, e.g., Southwest Research Institute v. Unemployment Ins. Appeals Bd. (2000) 81 Cal.App.4th 705 (methods the plaintiff was required to follow were dictated by health and safety regulations imposed by government agencies, so the putative employer did not exercise the requisite level of control over the plaintiffs’ work to categorize the plaintiff as an “employee”). Regardless, 2010 promises to be an interesting year in independent contractor/franchisee misclassification cases.

#4: Efforts to Undermine Class Litigation Through Individual Releases

In Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796, the company attempted settlement with individual putative class members after settlement of the lawsuit in mediation failed. Id. at 798. When many putative class members accepted the settlement offers, they executed general releases benefiting the company. Id. The releases required admissions that undermined the allegations in the lawsuit concerning the executive exemption, and a release of all overtime liability and any other Labor Code violations, agreeing not to participate in a class regarding the released claims. Id. Several of those who accepted the settlement offers and signed the general releases subsequently joined the putative class action, claiming the releases violated Labor Code sections 206 and 206.5 (providing that an employer shall not require the execution of a release of a claim or right on account of wages due), and the company cross-complained against them, alleging breach of contract. Id. The trial court held that the Labor Code did not prohibit the releases because a bona fide dispute existed as to the classification of the employees, and the Court of Appeal affirmed. Id. at 798-799, 803-804. See also Watkins v. Wachovia Corp. (2009) 172 Cal.App.4th 1576, 1587 (following Chindarah).

According to David Lowe, of San Francisco’s Rudy Exelrod Zieff & Lowe, Chindarah and Watkins will not be last word on releases – more litigation on this issue can be expected around the state throughout 2010, as California employers are now emboldened to try to undermine class litigation through individual releases, and California employees’ attorneys are ready for a fight.

As Chindarah recognized, the federal law under the FLSA is opposite to the Chindarah holding, providing that statutory rights to overtime, etc., are unwaivable. Chindarah, 171 Cal.App.4th at 804 (citing Lynn’s Food Stores, Inc., v. United States (11th Cir. 1982) 679 F.2d 1350, 1352-1353). See also Barrentine v. Arkansas-Best Freight System (1981) 450 U.S. 728, 739, 101 S.Ct. 1437, 67 L.Ed.2d 641 (unwaivable statutory rights). As Chindarah also recognized (171 Cal.App.4th at 803), the California Supreme Court’s holding in Gentry v. Superior Court (2007) 42 Cal.4th 443, 456, aligns California law with Barrentine, holding that the right to overtime is unwaivable, and generally extolling the class action mechanism as the best means of enforcing wage/hour laws in most cases. See Gentry, 42 Cal.4th 459-464. The Chindarah decision minces words, holding that, notwithstanding Gentry, “there is no statute providing that an employee cannot release his claim to past overtime wages as part of a settlement of a bona fide dispute over wages.” Chindarah, 171 Cal.App.4th at 803.

The California Supreme Court denied review of Chindarah on June 10, 2009, and Chindarah’s holdings have since been repeated by Watkins, but other Courts of Appeal may well split with this line of cases, or effectively distinguish them. Chindarah, for example, did not deal with Cal. Labor Code §206.5’s provision that neither a right nor a “claim” on wages can be waived in a release – which some courts might hold does not permit a release even of claims that are disputed. Other plaintiffs and courts might seek to clarify the undefined “bona fide dispute” holding, defining a “bona fide” dispute essentially as one in which the employer would ultimately prevail on liability.

In the meantime, plaintiffs’ attorneys will likely more often file in Federal court, pleading FLSA claims – where such damaging waivers are patently ineffective. Defendants, for their part, are likely to try to have Chindarah elevated to the status of Sacred Legal Doctrine and try to have it spill over into the FLSA context – arguing, for example, that similar reasoning should allow them to obtain waivers of (for example) certain rights in FLSA cases (e.g., the right to pursue collective action).

Regardless, it seems evident that in many class actions in California, the Chindarah release approach will be hotly litigated in 2010, and the ramifications of this decision so frustrating to plaintiffs’ counsel will be further defined.

#3: Where to Go With Tip Pooling/Allocation Cases

In 2008, Plaintiffs attorneys were jubilant when Rudy Exelrod and Oakland’s Goldstein Demchak Baller Borgen & Dardarian won a B.P.C. §17200 verdict worth over $100 million from Starbucks on behalf of baristas, whose tips in the tip box on the register counter were shared with Starbucks’ shift supervisors, in violation of Labor Code §351. Apparently, those nickels and dimes add up to $1.71/hour per barista, times over 100,000 baristas working a lot of hours = a lot of tip money.

Section 351 provides that no employer or employer’s agent shall collect, take or receive any gratuity paid, given to, or left for an employee by a patron, and the trial court found that Starbucks’ shift supervisors were the employer’s “agents,” under §350(d) – a finding undisturbed by the Court of Appeal. However, the Court of Appeal in San Diego reversed the trial verdict based on the notion that the tips left in the tip box were not actually given to baristas, but given to both baristas and the shift supervisors who also serve customers. Chau v. Starbucks Corp. (2009) 174 Cal.App.4th 688, 691. The Court of Appeal held that nothing prohibits supervisors from sharing in proceeds placed in collective tip boxes, coining the term “tip allocation” to distinguish Chau from prior cases prohibiting agents from partaking in line employees’ tip pools. Id. at 691, 695-696, 703-706 (distinguishing Leighton v. Old Heidelberg, Ltd. (1990) 219 Cal.App.3d 1062, and Jameson v. Five Feet Restaurant, Inc. (2003) 107 Cal.App.4th 138). For example, in Jameson, the Court of Appeal held that under §351, tip pooling is only permitted among employees who are neither employers nor agents under §350. Id. at 144-145.

David Borgen, co-chair of the National Employment Lawyers’ Association wage and hour committee, whose firm co-counseled the Chau case on plaintiffs’ behalf, believes that when employers overreach relying on the Starbucks case, they will still get slapped down in 2010. Though the Supreme Court denied review of Chau on September 9, 2009, Jameson is still good law. Employers’ agents who do not provide customers service the majority of the time, but still take a portion of their employees’ tips, or agents who engage in traditional tip pooling with their employees – taking a portion of tips given directly to first-line servers at tables, for example – will still be vulnerable to class action litigation. On the flip side, now perhaps low-level supervisors who have not been provided a tip allocation (like Starbucks shift supervisors received) but who did provide customer service can argue that they should have been receiving a portion of the tips – the opposite of the Chau plaintiffs’ argument, but a possibility in light of the Court of Appeal’s holdings.

Finally, the Supreme Court did grant review in Grodensky v. Artichoke Joe's Casino (2009) 91 Cal.Rptr.3d 732 (S172237) and Lu v. Hawaiian Gardens Casino, Inc. (2009) 88 Cal.Rptr.3d 345 (S171442) to determine whether there is a private right of action under §351. While the issue may have little consequence to plaintiffs’ lawyers accustomed to using B.P.C. §17200 in any event (e.g., Chau was brought strictly under §17200), the Supreme Court may use the occasion to further define the scope of permissible tip pooling in 2010 (which had been raised in both the Grodensky and Lu review petitions), laying out the battle grounds in tipping cases for years to come.

#2: Certification Wars in Misclassification Cases

Of course, the defining moment of most wage/hour cases is the class certification motion, when we learn whether we are dealing with a big case, or little or no case at all. The often-friendly 9th Circuit dealt plaintiffs’ attorneys a body blow recently in deciding the companion cases of In re Wells Fargo Home Mortg. Overtime Pay Litigation, 571 F.3d 953 (9th Cir. 2009) and Vinole v. Countrywide Home Loans, Inc., 571 F.3d 935 (9th Cir. 2009), in which the 9th Circuit rejected Northern District of California Judge Marilyn Hall Patel’s holding in In re Wells Fargo that:
"[I]t is manifestly disingenuous for a company to treat a class of employees as a homogenous group for the purposes of internal policies and compensation, and then assert that the same group is too diverse for class treatment in overtime litigation. This is particularly true in a situation such as this, where the difficulty of proving hours worked and compensation received is exacerbated by defendants' complete failure to maintain pertinent records. Accordingly, plaintiffs have satisfied their burden and demonstrated that common issues predominate."
In re Wells Fargo, 571 F.3d at 956. See also Wang v. Chinese Daily News, Inc., 231 F.R.D. 602, 612-13 (C.D.Cal. 2005) (predominance based on policy of treating employees in a certain position as uniformly exempt). Essentially, the Court of Appeal held that plaintiffs cannot establish predominance under the Fed.R.Civ.P. 23(b)(3) requirement in a wage/hour misclassification case just by establishing that the entire class was classified in the same manner by the employer. Discussing the outside sales requirement, the 9th Circuit explained, “Often, this exemption will militate against certification because, as the district court noted, it requires ‘a fact-intensive inquiry into each potential plaintiff's employment situation....’” In re Wells Fargo, 571 F.3d at 959. In Vinole, the 9th Circuit held that an employer may preemptively move to deny class certification – before plaintiffs have even filed their Rule 23 motion. Id., 571 F.3d at 948.

Matthew Helland, of Nichols Kaster in San Francisco, a firm which is currently litigating dozens of wage/hour class actions nationwide and in California, foresees that in 2010, employers in federal court will seek to revisit certification, seeking de-cert in many previously certified misclassification cases, relying on In re Wells Fargo and Vinole. Defendants may be chomping at the bit, ready to collect hundreds of declarations giving courts ominous indicators of “thousands of mini-trials” regarding “individualized circumstances.” Defendants are further likely to try to get the In re Wells Fargo and Vinole reasoning to permeate California’s state court jurisprudence. California’s Supreme Court, in fact, is still deciding on Harris v. Superior Court (2007) 64 Cal.Rptr.3d 547 (review granted November 28, 2007), in which a class of allegedly misclassified claims adjusters was decertified by the trial court, but re-certified and held to be non-exempt as a matter of law under the administrative/production worker dichotomy by the Court of Appeal, applying the Bell v. Farmers Ins. Exchange line of cases. See Bell v. Farmers Ins. Exchange (2001) 87 Cal.App.4th 805; Bell v. Farmers Ins. Exchange (2004) 115 Cal.App.4th 715. Some worry that the Supreme Court may dispense with the entire administrative/production worker dichotomy reasoning in deciding Harris.

However, plaintiffs still have quite a few arrows left in their quiver when it comes to certification. The 9th Circuit did recognize that uniform classification remains a factor (but not the only factor) when determining predominance under Rule 23(b)(3). In re Wells Fargo, 571 F.3d at 957-958. Unfortunately for the plaintiffs, Judge Patel’s decision in In re Wells Fargo was highly vulnerable to being overturned because the court certified the class, even while finding “serious issues regarding individual variations among [class members’] job duties and experiences.” Id. at 957. Suffice it to say, plaintiffs can still win certification where they demonstrate that job duties, job descriptions, compensation schemes, and the employer’s expectations were common to the class – as the plaintiffs in In re Wells Fargo have argued in their renewed class certification motion, after the 9th Circuit’s remand to Judge Patel. See In re Wells Fargo, Case No. MDL 06-1770, Docket #305 (September 15, 2009).

Moreover, plaintiffs bringing state claims might have an opportunity to avoid the problems of certification altogether in 2010. In Arias v. Superior Court (Angelo Dairy) (2009) 46 Cal.4th 969, the Supreme Court affirmed the Court of Appeal’s holding that a plaintiff does not need to comply with class certification requirements of California Code of Civil Procedure §382 when bringing claims under the Private Attorney Generals Act (PAGA), Labor Code §2699 (id. at 988) – unlike under §17203, as amended by the voters’ Proposition 64. Id. at 980. PAGA, in subdivision (a), says that “[n]otwithstanding any other provision of law” an aggrieved employee may bring an action against the employer “on behalf of himself or herself and other current or former employees.” The Supreme Court explained that, “[i]n a lawsuit brought under the act, the employee plaintiff represents the same legal right and interest as state labor law enforcement agencies-namely, recovery of civil penalties that otherwise would have been assessed and collected by the Labor Workforce Development Agency.” Id. at 986. The Supreme Court in Arias went on to hold that, “[b]ecause an aggrieved employee's action under the Labor Code Private Attorneys General Act of 2004 functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government.”Id. The Supreme Court explained that non-party employees – who would not have received any class certification notice nor have been afforded the opportunity to be heard – could benefit from a favorable judgment by seeking other remedies in addition to civil penalties (e.g., back wages and premiums), by using collateral estoppel. Id. at 986-987. Yet, they would not be bound by any adverse judgment as to remedies other than civil penalties. Id.

How the repercussions of In re Wells Fargo, Vinole, Harris and Arias will play out in 2010 is anyone’s guess, but assuredly, employers and employees will be litigating and re-litigating class certification issues in misclassification cases across California trying to build on these precedents (or, in the case of Harris, anticipated precedents).

#1: Meal/Rest Period Litigation – Explosion or Implosion

The biggest pending wage/hour case in California is Brinker Restaurant Corporation, et al. v. Superior Court (Hohnbaum) (2008) 80 Cal.Rptr.3d 781 (S166350), which San Diego’s Tracee Lorens, lead counsel for the plaintiffs, hopes and believes will be decided this coming year, after oral argument in the early months of 2010. Ms. Lorens reports that 23 amici have been filed in the case on behalf of dozens of organizations (including the undersigned’s amicus on behalf of the California Employment Lawyers Association). Virtually every workplace in the state will be affected by the Brinker decision, since none of us really knows, awaiting this decision, what we are supposed to do about meal and rest period premiums for non-exempt employees in our workplaces or in our cases.

At stake in Brinker is the viability of Cal. Labor Code §226.7 and §512, which require that employers pay one-hour premiums each time employees do not receive proper meal or rest periods. Or, is that what the Labor Code requires? Perhaps the Labor Code only requires employers to have a policy on the books officially allowing for compliant meal periods or rest periods, but leaving the rest up to employees. Or, perhaps the law requires something in-between – some level of employers ensuring that proper meal/rest periods are taken, but short of employers’ strict liability for premiums when meal/rest periods are missed. How different are the levels of obligation incumbent on employers with respect to meal periods compared to rest periods, if at all? The crux of the issue (and the reason, Ms. Lorens believes, the Supreme Court will want to decide promptly) is the vagueness of the statute requiring that employers “provide” breaks or else pay premiums. How should “provide” be interpreted? Like San Diego’s Court of Appeal decided in Brinker, or like the Court of Appeal in Sacramento, in Cicairos v. Summit Logistics, Inc. (2005) 133 Cal.App.4th 949, 962-963?

Also at stake in Brinker is the viability of survey evidence to prove class claims. Brinker’s heavy reliance on the “individualized inquiry” line of reasoning and skepticism over survey evidence could devastate class wage/hour litigation, if adopted by the Supreme Court. As employers well know, without the use of special tools like surveys and statistics, proving liability and damages will always be an uphill battle in a class action – since plaintiffs will rarely equal defendants in the declaration collection race, inasmuch as defendants have a captive audience of employees.

At stake in Brinker may be more than just meal/rest period litigation – it may be the future of class wage/hour litigation in the state. In cases like Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, and Gentry, 42 Cal.4th at 443, the California Supreme Court has established itself as a powerful force in ensuring (or at least, providing) employee-friendly workplaces in California, sympathetic to wage/hour class actions. Does the denial of review in the Cristler v. Express Messenger Systems, Chindarah v. Pick Up Stix, and Chau v. Starbucks indicate that the Supreme Court is growing impatient with wage/hour class litigation, or does Arias mean the Supreme Court remains favorably disposed to wage/hour classes, but was just too busy to hear these 2009 cases? My crystal ball says that the Brinker decision, possibly just around the corner, will answer a lot of questions for California’s employment lawyers.


[1] Section 203(d) of the FLSA defines the term “employer” very broadly, as “any person acting directly or indirectly in the interest of an employer in relation to an employee….” 29 U.S.C. §203(d). See Falk v. Brennan, 414 U.S. 190, 195, 94 S.Ct. 427, 38 L.Ed.2d 406 (1973) (noting the “expansiveness” of the FLSA’s definition of “employer”). See also Randolph v. Budget Rent-A-Car, 97 F.3d 319, 326 FN1 (9th Cir. 1996) (“The definition of the term ‘employee’ in the FLSA is extremely broad….(‘The Fair Labor Standards Act defines ‘employee’ simply as ‘any individual employed by an employer,’ and ‘employ’ as including ‘to suffer or permit to work.’ 29 U.S.C. §§ 203(e)(1), 203(g)). Thus, the term ‘employee’ is used in the broadest sense ‘ever ··· included in any one act.’”) (Emph added.); Bonnette v. California Health & Welfare Agency, 704 F.2d 1465, 1469 (9th Cir. 1983) (FLSA’s expansive employer definition).