Getting the Bad Guys to Pay

How the California Supreme Court’s Martinez v. Combs Decision Might Affect Which “Employers” Can Be Liable Under the State’s Overtime Laws

Crafty employers have long sought clever ways of avoiding the broad protections the California Labor Code provides to workers with regard to minimum wage and overtime payment requirements. California, which has some of the nation’s most protective employee rights laws, has enacted minimum wage and overtime requirements through its system of Wage Orders issued through the Industrial Welfare Commission (IWC).

The minimum wage and overtime protections afforded to employees have long been limited to traditional “employer/employee” relationships. However, California’s law and courts have sometimes provided employees and their lawyers with muddied guidance as to the meaning of the critical term “employer.” Because of this, employers and individual managers have been able to avoid legal liability for violating minimum wage and overtime laws by setting up elaborate employment systems with third party contractors and other intermediaries acting as straw men and protecting the true employer. For example, garment workers have long worked for nearly insolvent subcontractors who are, for all intents and purposes, controlled by large corporations. The corporations dictate the terms of employment, the subcontractors pay the workers, and should the subcontractors violate wage and hour laws, they would incur liability leaving the large, solvent corporations off-the-hook. Such examples permeate many employment sectors in California, but particularly those with the lowest paid and most vulnerable workers. However, the California Supreme Court has recently taken steps to provide lawyers with guidance as to who may be considered an employer in the context of California wage and hour laws.

The court in Martinez v. Combs, 2010 WL 2000511 (Cal. S.Ct. May 20, 2010), faced the question of how to define which persons may be held liable as employers under California Labor Code Section 1194 (relating to payment of minimum wage and overtime compensation). Plaintiffs in Martinez were seasonal agricultural workers who sued their employer, two produce merchants with whom their employer contracted, and a field representative for one of the produce merchants, seeking to recover unpaid minimum wages. Though the Court found ultimately that the two produce merchants and the field representative were not the Plaintiffs’ employers, the Court broke new ground elaborating the definition of “employer” for the purposes of California wage and hour law. As the Court noted, this is an issue which has only been examined once since the Legislature created the IWC in 1913.

Here is what the Court held, and what it may mean to an employee:

The IWC Reigns Supreme

In a bow to the California Legislature’s intent, the Court held that “an examination of section 1194 in its full historical and statutory context shows unmistakably that the Legislature intended to defer to the IWC’s definitions of the employment relationship in actions under the statute.” Martinez at *16. The court thus acknowledged the IWC’s definition of “employer,” found within its various Wage Orders, to be dispositive in any dispute as to the presence of an employer/employee relationship.

The IWC defines an employer as: Any person who, directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person.

The court further noted that within the context of this definition, the term “employ” carries significant legal meaning. As such, the court adopted the IWC’s definition of “employ” as: To engage, suffer, or permit to work.

By adopting these definitions, the court arguably broadened the scope of who can be deemed an “employer” under California wage and hour laws that had been defined by prior Supreme Court decisions, Reynolds v. Bement 36 Cal.4th 1075, Bradstreet v. Wong 161 Cal App.4th 1440 (holding that the common law definition of “employer” was controlling in California wage and hour cases thereby finding that individual corporate officers could not be held liable as employers), thereby arguably providing legal recourse to individuals in non-traditional employer/employee relationships.

In analyzing the significance of adopting the IWC’s definition of “employer” for the purposes of Labor Code Section 1194 lawsuits, the court noted that the “language consistently used by the IWC to define the employment relationship…was commonly understood to reach irregular working arrangements that fell outside the scope of the common law.” Martinez 2010 WL 2000511 at *17. Given this analysis, the court stepped away from prior holdings in Reynolds v. Bement and Bradstreet v. Wong by finding that the common law definition of “employer” was not controlling in Section 1194 cases. Instead, the court held that “the IWC’s definition of employment incorporates the common law definition as one alternative.” Martinez at *16.

To make sense of the potentially broadening effect of the Court’s analysis in Martinez v. Combs, let us examine the different scenarios where a party can be found to be an employer.

When an agent or person engages a person to work:

The definition of “engage” is rooted in the common law’s treatment of an employment relationship. The common law’s definition of an employment relationship was premised on a traditional master/servant relationship. However, the Court gave limited treatment of this term, only noting that “'to engage’ has no other apparent meaning in the present context than its plain, ordinary sense of ‘to employ,’ that is to create a common law employment relationship.” Martinez at *16.

When an agent or person suffers or permits a person to work:

A person suffers or permits an employee to work when he or she has the right to hire and fire the workers, the right to set the wages and hours of the workers, and tell the workers when and where to report to work. However, if a person does not have the power to stop an employee from working, he or she cannot suffer or permit a person to work. As the Court indicated, the basis of liability under the “suffer or permit to work” standard is “the defendant’s knowledge of and failure to prevent the work from occurring.” Martinez at *20. Consider a situation where you were hired and receive your paychecks from company X, but you work in a factory owned by company Y, are told when to work and how to complete your work by supervisors of company Y, and can be fired by the supervisors of company Y. Under the holding in Martinez, both company X and Y could be your employers and you would be entitled to sue both or either for any violations of California minimum wage and overtime laws.

When an agent or person has control over the wages, hours, or working conditions of a person:

This condition is related to that previously described under the “suffer or permit” standard. An individual or entity may be deemed your employer for the purposes of California wage and hour law if that individual or entity: controls the wages you earn, including but not limited to setting your wage rate and paying your checks; controls the hours you work; or controls your working conditions. Your working conditions are situations such as where you work and how you are to perform work. When an individual or entity controls any of these aspects of your work, he/she/it may be considered your employer.

Remnants of Reynolds

Though the court seemingly moved away from its prior decision in Reynolds by finding that the IWC’s definition of “employer,” as opposed to the common law’s definition, is controlling in Section 1194 wage and hour cases, the Supreme Court notably upheld the holding in Reynolds that “the IWC’s definition of ‘employer’ does not impose liability on individual corporate agents acting within the scope of their agency.” Martinez at *18. However, one can arguably read this holding to mean that the Supreme Court is attempting to limit the holding of Reynolds to its facts. In Reynolds, the Plaintiff, a “shop manager” for a chain automobile painting business, sued his corporation and individual shareholders and corporate officers for violations of Labor Code Section 1194. The court held that common law clearly establishes that “corporate agents acting within the scope of their agency are not personally liable for the corporate employer’s failure to pay its employee’s wages.” Reynolds 36 Cal.4th at 1087.

The Martinez court’s decision to uphold this vestige of Reynolds created an inconsistency left to be resolved by the Court in future decisions or by the Legislature through a clear statement of its intent. However, until that is done, we are left with mixed messages: the Court, through its adoption of the IWC’s definition of “employer,” held that an employer can be “any person,” yet on the other hand the Court, through its refusal to fully overturn Reynolds, held that the IWC’s definition of employer does not impose liability on individuals in their capacity as corporate agents.

What It All Means

The court explicitly opens the door to create liability in instances where multiple employers control various factors of an employee’s work. So for instance, if one company signs your paychecks and tells you where to work but another company determines your wages, retains the right to hire and fire you, and controls how you are to complete your work, the second company may now be considered an employer and be held liable for any violations of California wage and hour laws.

However, because the Court declined to completely overturn Reynolds, there is some uncertainty as to how future courts will decide cases where individuals, as well as corporate bodies, are defendants under wage and hour claims in California. Because the Court in Martinez was clear to hold that the critical elements necessary to find an employment relationship are the ability to supervise, hire and fire, set the wages, and control the working hours and conditions of the employee, plaintiffs’ attorneys have an opportunity to plead that such individuals who control these aspects of an employment relationship are indeed employers and hence liable.

Because employers often find ways to evade liability through new and creative employment structures, it is up to brave employees to challenge practices they deem unfair. Warning signs may include situations such as being hired and paid by one company but being directed at your worksite by agents of another company. By challenging such practices, employees can help further define this area of the law in light of Martinez v. Combs.

If you question why you are not receiving compensation to which you believe you are entitled, and you want advice from an attorney, please contact Bryan Schwartz.

Wage-and-hour class actions: The sky is falling (or is it?) After Brinker and Duran, what lies ahead?

This article by Bryan Schwartz Law principal, Bryan Schwartz, is the cover feature in the current edition of Plaintiff Magazine.

September 2012
By Bryan Schwartz

In the dark days of 2011 – and as recently as six months ago – it seemed like all might be lost. The industry of wage and hour class litigation had exploded after workers and their lawyers caught wind of early-21st century cases like Bell v. Farmers Ins. Exchange (over $90 million for misclassified claims adjusters), Savaglio v. Wal-Mart ($172 million for missed meal breaks), and SavOn Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 333 (class action is favored mechanism for resolving wage disputes). Now, it seemed on the brink of collapse.

With the end of wage/hour class suits, many of us would need to diversify into other areas of litigation. I saw employment class-action litigators expand into consumer law, begin taking more individual workers’ cases, and try their hands practicing in bankruptcy.

Much worse, workers who count on us in the plaintiffs’ bar to vindicate their rights to fair and lawful wages would be out in the cold, because few of us can afford to offer contingency representation on wage cases worth a few hundred or few thousand dollars, with full fee-shifting on smaller cases uncertain after Chavez v. City of Los Angeles (2010) 47 Cal.4th 970; hourly workers cheated of their pay certainly cannot pay us for services out-of-pocket; and, as California officially recognized with the passage of the Private Attorney General Act of 2004 (PAGA), government agencies are too overburdened to enforce wage and hour laws comprehensively without our help.

During this bleak period, decisions in both the United States Supreme Court and in the California Courts of Appeal seemed to point to one conclusion: judges were getting tired of hearing wage/hour class actions (notwithstanding the extraordinary relief obtained for workers during the last decade of robust private enforcement of wage laws).

In the U.S. Supreme Court, the one-two punch of Stolt-Nielsen v. AnimalFeeds (2010) 130 S.Ct. 1758, and ATT Mobility v. Concepcion (2011) 131 S.Ct. 1740, seemingly reconstituted a 1925 statute, the Federal Arbitration Act (FAA), to empower corporations to sweep away concerted actions by workers asserting wage claims, simply by requiring employees (or applicants) to sign agreements to arbitrate, long before the signers know they will be deprived of lawful wages. Of course, Wal-Mart v. Dukes (2011) 131 S.Ct.2541, considering the merits of claims at the class certification stage and harping on managers’ discretion as anathema to class litigation, sent a chill down most of our spines.

As of early 2012, in the California Courts of Appeal, the eternally-pending review Brinker Restaurant Corp. v. Superior Court (2008) 80 Cal.Rptr.3d 781, created the possibility that meal and rest period claims would be, almost as a matter of law, inherently too individualized (turning on whether workers voluntarily forego breaks) to permit class-wide adjudication. And anyhow, according to Kirby v. Immoos Fire Protection Svcs (2010) 113 Cal.Rptr.3d 370, employers could recover their attorneys’ fees against our clients if we lost any meal/rest period claim – or even lost a class-certification motion on a meal/rest claim. No reasonable plaintiffs’ lawyer could advise a humble, low-wage client to take such a risk.

Then last winter, sounding what seemed to be the final death knell, the Court of Appeal in Duran v. US Bank (2012) 137 Cal.Rptr.3d 391, sought to eradicate virtually any form of class-wide proof in a wage/hour case, essentially stretching the holding of Wal-Mart v. Dukes to mean that relying on statistical or representative proof in a class action impermissibly denies employers of their due process right to defend each employee’s wage claims separately.

There’s always tomorrow

I remember well April 12, 2012, because it was the day the sun broke through again on wage/hour class litigation: The long-awaited day the California Supreme Court ruled in Brinker (2012) 53 Cal.4th at 1004. Sure, the Court did not hand us strict liability for premiums where workers work during meal or rest breaks. Ironically, the employer-side spin doctors used this one holding, that employers cannot be liable for premiums by simply failing to police workers to ensure every break is taken, to paint Brinker as a great victory for their team. But those of us in the trenches of wage/hour class litigation – on both sides – immediately knew differently: That the chief result of Brinker would be to again empower employee advocates in claims where employers, with policies and common practices, refuse to relinquish all control over meal and rest periods owed to workers.

And the sun grew brighter still. In rapid succession: Kirby was decided for employees – holding that employers cannot be entitled to fee-shifting merely based on workers’ unsuccessful litigation of meal/rest period claims; then, the California Supreme Court granted the workers’ petition for review in Duran. In the meantime, during this evolving springtime for wage/hour-class plaintiffs, we began to see that courts were allaying our worst fear – i.e., that Concepcion, Stolt-Nielsen, and Wal-Mart v. Dukes would successfully preclude class litigation of employees’ claims. By April 2012, both the U.S. and California Supreme Courts had denied review of Brown v. Ralphs Grocery Co. (2011) 197 Cal.App.4th 489, which held post-Concepcion that class waivers in arbitration agreements remain inapplicable to PAGA claims and which did not extend Concepcion to undermine Gentry v. Superior Court (2007) 42 Cal.4th 443 (arbitration class waivers unconscionable in employment context). The Court of Appeal’s April 2012 decision in Samaniego v. Empire Today, LLC (2012) 205 Cal.App.4th 1138, review denied (July 11, 2012), described a virtual laundry list of ways in which arbitration agreements might still be found unconscionable under California law, even after Concepcion, applying Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83. Likewise, Federal Circuit and District Courts repeatedly upheld class certification or reversed certification denial orders, or denied motions to stay court actions and compel individual arbitration of claims, defeating companies’ hope that Concepcion, Stolt-Nielsen and/or Wal-Mart v. Dukes would doom employees’ concerted activity.

On top of these developments, the National Labor Relations Board’s (NLRB’s) progressive D.R. Horton, Inc., 357 N.L.R.B. No. 184 (2012 WL 36274), decision from January 2012 reinvigorates a couple other old statutes – the National Labor Relations Act (NLRA) of 1935, long ignored by all but the pure union lawyers, and the Norris-LaGuardia Act of 1932, 29 U.S.C. §§ 102, et seq., articulating a public policy to protect unorganized workers’ right of association. The NLRB reminded workers’ rights advocates that the protections for employees engaged in concerted activities under Section 7 of the NLRA and association covered by the Norris-LaGuardia Act are valuable outside the union context.

California’s Legislature also enacted new workers’ rights bills, with the “Wage Theft Prevention Act of 2011” (AB 469) (effective January 1, 2012), adding Labor Code section 2810.5, requiring that employers provide non-exempt workers with notice at the time of hire containing extensive information affecting their wages and working conditions, with a host of new civil and criminal penalties for wage violations or any failure to pay a Labor Commissioner judgment (Lab.Code, §§ 200.5, 1197.1, and 1197.2). Moreover, effective January 1, 2013, employees’ commission agreements must be transparent, written contracts.

Now, in the fall of 2012, the once-bleak outlook for wage/hour class-action litigators seems not only more hopeful, but presents a host of new opportunities for plaintiffs’ attorneys.

* * * 

With the remainder of this article, I will discuss in more detail five particularly hot battlegrounds in the refreshed struggle for workers’ wages: 1) arbitration class waiver issues post-Concepcion and Stolt-Nielsen; 2) how Wal-Mart v. Dukes is affecting class certification; 3) new challenges and opportunities in misclassification cases where employers claim administrative, professional, and outside sales exemptions; 4) what is the next likely “shoe to drop” from the U.S. Supreme Court’s march to stomp out wage/hour class litigation; and, 5) the implications of Brinker and our battle yet to be won in Duran, to continue allowing courts to be flexible in determining fair and efficient means to hear class-wide proof, through statistical and representative evidence, as has long been permitted under Sav-On.

* * * 

Arbitration class waiver issues post-Concepcion and Stolt-Nielsen

In Stolt-Nielsen, the Supreme Court held that employers could not be required to engage in class arbitration where the arbitration agreement was silent regarding whether such was permitted and where no evidence proved the parties’ intent to agree to class arbitration. Plaintiffs’ advocates feared the Court had created the default position that where an employer forgot to prohibit class prosecution of claims against it in its arbitration provision, the employer would remain immune to class suit or arbitration, since it had not overtly agreed to be subject to class claims. Then, the Court sought to finish the job in Concepcion, using the FAA to preempt California’s Discover Bank v. Superior Court (2005) 36 Cal.4th 148, with its presumption that a class waiver in an adhesion contract is unconscionable, as discriminatory against arbitration. In other words, we worried that companies after Concepcion and Stolt-Nielsen would feel free to prohibit wage/hour class litigation against themselves, explicitly, or by default.

Not so fast, said a host of federal and state courts and administrative agencies. Because Concepcion did not go so far as to eliminate the unconscionability defense (just California’s presumption of unconscionability for class waivers), courts are still finding arbitration agreements unconscionable, applying Armendariz. In Trompeter v. Ally Financial, Inc., 2012 WL 1980894 (N.D. Cal. June 01, 2012), Judge Claudia Wilken found an arbitration agreement procedurally and substantively unconscionable under California law, applying Armendariz, and found the unconscionable provisions not severable, rejecting the defendant’s Concepcion argument in support of a motion to compel arbitration and motion to stay.

In Samaniego, a wage/hour class action, the Court of Appeal affirmed the trial court, finding a host of flaws in the arbitration agreement, applying Armendariz and ultimately rejecting the agreement entirely. No-no’s included: that the take-it-or-leave-it arbitration agreement was only in English, a language the worker could not read; that the agreement was part of a lengthy, single-spaced document in small-font print, “riddled with complex legal terminology,” and with the arbitration provision buried in the 36th of 37 sections; a shortened statute of limitations for claims; unilateral fee-shifting against workers; and the invocation of the American Arbitration Association (AAA) commercial rules, without attaching the rules or providing them otherwise.

In another wage/hour class action, Laughlin v. VMWare, Inc., 2012 WL 298230 (N.D. Cal. Feb. 1, 2012) (Davila, J.), the District Court likewise addressed a Concepcion motion to compel arbitration, applied Armendariz, rejecting several unconscionable provisions (including one that would have made the employee split arbitration fees), but found the unconscionable provisions severable, and referred the entire matter to arbitration. Most notably, the Laughlin court held that it was for the arbitrator to decide the permissibility of class arbitration. (Id. at *8.) On August 27, 2012, the American Arbitration Association issued a Partial Final Award on Clause Construction in the Laughlin matter, finding that the parties' arbitration agreement permits class arbitration.

The latter confronts employers with a “be careful what you wish for” scenario. Wage/hour class arbitration – with costs to be borne by employers – is awfully expensive, i.e., profitable for arbitrators. Indeed, since Concepcion, numerous arbitrators from JAMS, AAA, and other major arbitration services have – like in Laughlin – construed arbitration clauses/agreements to permit class-wide arbitration. Courts are mostly saying that arbitrators have this prerogative. (See, e.g., Sutter v. Oxford Health Plans LLC (3rd Cir. 2012) 675 F.3d 215 (upholding arbitrator decision to construe arbitration agreement to authorize class arbitration); Jock v. Sterling Jewelers Inc. (2nd Cir. 2011) 646 F.3d 113 (same); Fantastic Sam’s Franchise Corp. v. FSRO Ass’n Ltd. (1st Cir. 2012) 683 F.3d 18, 26 (arbitrator decides permissibility of class arbitration). But, see Reed v. Florida Metropolitan University, Inc. (5th Cir. 2012) 681 F.3d 630.)

Also this year, the NLRB decided D.R. Horton, holding that – though the FAA prohibits discrimination against arbitration agreements, preempting state law, the NLRA prohibits barriers to employees (union or non-) engaging in concerted activities for their mutual aid and protection, and the Norris-LaGuardia Act restricts the power of federal courts to issue injunctions to prohibit certain associational activities. These are not preempted by the FAA. Thus, federal law under D.R. Horton prohibits class-action waivers, according to the NLRB, and Concepcion has nothing to say about it. Courts have divided on how, if at all, D.R. Horton must guide their decision-making. Compare Herrington v. Waterstone Mort. Corp., 2012 WL 1242318 (W.D. Wisc. Mar. 16, 2012) (D.R. Horton guides District Court) and Owen v. Bristol Care, Inc., 2012 WL 1192005 (W.D. Mo. Feb. 28, 2012) (same), with Morvant v. P.F. Chang’s China Bistro, Inc., 2012 WL 1604851 (N.D.Cal. May 7, 2012) (Gonzalez Rogers, J.) (Concepcion trumps D.R. Horton and requires compelling arbitration with class waiver) and Nelsen v. Legacy Partners Residential, Inc. (2012) 207 Cal.App.4th 1115 (declining to follow D.R. Horton).

Despite the significant good news for plaintiffs’ advocates in the aftermath of Concepcion and Stolt-Nielsen, the vote is still out on how, ultimately, the cases will impact wage/hour class litigation in California. In Iskanian v. CLS Transportation Los Angeles, LLC (2012) 206 Cal.App.4th 949, the Court of Appeal compelled arbitration with a class waiver, and in so doing, rejected Brown v. Ralphs (carving out PAGA and leaving untouched Gentry’s holding that arbitration class waivers are unconscionable in the employment context), holding that Concepcion effectively overruled Gentry. Iskanian petitioned for review of the Court of Appeal’s decision, and as of the time of this writing, the Supreme Court has not yet decided on the petition. If the Supreme Court takes up Iskanian, it may be the defining case about the effect of Concepcion and Stolt-Nielsen on California laws protecting workers. If the Supreme Court does not grant review, then we will be left scratching our heads about the state of California law on class-action waivers in arbitration agreements, with Court of Appeal authority heading in every direction.

How Wal-Mart v. Dukes is affecting class certification

The intensive merits analysis in Wal-Mart v. Dukes at the certification stage worried many plaintiffs’ advocates that the first law of class certification – that Rule 23 and California Code of Civil Procedure section 382 elements are decided, but merits are not – had lost currency. But the California Supreme Court and numerous federal courts have largely restored order in this regard. The Brinker court, acknowledging that some “peek” at the merits would be necessary at certification to ensure the predominance of common questions, reinforced that – even post-Wal-Mart v. Dukes – such merits-based inquiries are “closely circumscribed” and “limited to those aspects of the merits that affect the decisions essential to class certification.” (Brinker, 53 Cal.4th at 1024 (citations omitted).) In rejecting the Brinker Court of Appeal’s notion that courts must first decide upon the applicable law and resolve legal issues surrounding each element of a proposed class claim before deciding on certification, the Supreme Court expressly condemned a “free-floating merits inquiry” and eschewed resolution of most factual and legal issues at the certification stage. (Id. at 1025.)

Post-Wal-Mart v. Dukes, Federal courts have likewise held that, as the Seventh Circuit put it, “the court should not turn the class certification proceedings into a dress rehearsal for the trial on the merits.” (Messner v. Northshore University Health System (7th Cir. 2012) 669 F.3d 802, 811. See also Sullivan v. DB Investments, Inc (3rd Cir. 2011) 667 F.3d 273, 305-306 (en banc) (merits inquiries very limited); In re Whirlpool Corp. Front Loading Washer Products Liability Litig. (6th Cir. 2012) 678 F.3d 409, 417 (underlying merits no impact on propriety of class action).

Likewise, federal courts have continued to uphold class certification or reverse certification denial under Rule 23. In McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (7th Cir. 2012) 672 F.3d 482, the noted conservative Judge Posner reversed a class certification denial in a disparate impact discrimination case, explaining that the exercise of subjectivity by managers with respect to company policies did not defeat certification, but resulted in a disparate impact. (See also Sullivan, 667 F.3d at 338 (common factual issues predominated among 184 million purchasers, despite variation between state laws at issue); In re Whirlpool, 678 F.3d at 420 (finding predominance and superiority where there were common alleged design flaws, and where small individual recovery would discourage vindication on individual basis); Chen-Oster v. Goldman, Sachs & Co., 2012 WL 2912741 (S.D.N.Y. July 17, 2012) (alleged “common mode of exercising discretion” warranted denial of motion to strike class allegations, distinguishing Wal-Mart v. Dukes).) Meanwhile, in Sanchez v. Sephora USA, Inc., 2012 WL 2945753(N.D. Cal. July 18, 2012) (Armstrong, J.), the Northern District of California held that Wal-Mart v. Dukes reasoning is inapplicable to Fair Labor Standards Act (FLSA) collective action certification under 29 U.S.C. sec. 216(b).1

Misclassification of exempt workers

Class wage claims based upon misapplication of exemption defenses to discrete groups of employees are surviving, but the universe of employees who might assert such misclassification claims is narrower after several recent decisions. For example, the professional exemption became more robust after the Ninth Circuit’s decision in Campbell v. PriceWaterhouseCoopers, LLP (9th Cir. 2011) 642 F.3d 820 and the parallel state decision in Zelasko-Barrett v. Brayton-Purcell, LLP (2011) 198 Cal.App.4th 582, which held that non-licensed individuals practicing in the Wage Order’s recognized professions (e.g., law clerks and junior non-licensed accounting employees) could still be exempt from overtime.

Likewise, the outside sales exemption has become more powerful after Christopher v. SmithKline Beecham Corp. (2012) 132 S.Ct. 2156 (pharmaceutical sales representatives subject to outside sales exemption) and the Ninth Circuit’s In re Wells Fargo Home Mortg. Overtime Pay Litig. (2009) 571 F.3d 953 (outside sales calculus in loan officer case too individualized to permit class action) decision from several years ago.

On the other hand, the administrative exemption has remained a fruitful battleground for wage/hour class-action plaintiffs’ counsel both in California and federal courts. One should still consider arguing the “administrative/production dichotomy” (first embraced in Bell v. Farmers Ins. Exchange (2001) 87 Cal.App.4th 805 (often called “Bell II”)) – i.e., whether the group of employees are primarily administering policies directly related to and of substantial importance to the management or operations of the overall business (exempt) or whether they are principally engaged in helping generate the businesses’ end product (non-exempt). (See Harris v. Superior Court (Liberty Mutual Insurance) (2011) 53 Cal.4th 170, 181.) In Harris, the Supreme Court did not toss out the Bell II framework, but held that the administrative/production worker dichotomy was not a dispositive test as it had been applied in that case, requiring the Court of Appeal on remand to undergo a qualitative and quantitative review under the current Wage Order. (Id. at 190.) However, on remand, re-granting summary adjudication on the administrative exemption defense and rejecting a decertification motion, the Harris Court of Appeal reiterated that the class members (claims adjusters) were not “primarily engaged in work that is directly related to management policies or general business operations” and as such, were not administrative employees under the Wage Order’s exemption. (Harris v. Superior Court (2012) 207 Cal.App.4th 1225. See also adopting the administrative/production dichotomy federally, Davis v. J.P. Morgan Chase & Co., 587 F.3d 529 (2nd Cir. 2009) (mortgage loan underwriters were production employees).)

Anticipating the Supreme Court’s next blow

On June 25, 2012, the U.S. Supreme Court granted certiorari in Symczyk v. Genesis HealthCare Corp. (3rd Cir. 2011) 656 F.3d 189, which stands for the fairly obvious premise that an employer cannot moot an FLSA collective action simply by making an offer of full relief under Fed.R.Civ.P. 68 to the lone named plaintiff. Citing the Supreme Court’s seminal FLSA decision in Hoffmann-La Roche, Inc. v. Sperling (1989) 493 U.S. 165, 170-171, the Third Circuit held:

When a defendant’s Rule 68 offer arrives before the court has had an opportunity to determine whether a named plaintiff has satisfied his burden at this threshold stage [of first-tier FLSA conditional certification], and the court has therefore refrained from overseeing the provision of notice to potential party plaintiffs, it is not surprising to find the offer has also preceded the arrival of any consent forms from prospective opt-ins. If our mootness inquiry in the §216(b) context were predicated inflexibly on whether any employee has opted in to an action at the moment a named plaintiff receives a Rule 68 offer, employers would have little difficulty preventing FLSA plaintiffs from attaining the “representative” status necessary to render an action justiciable notwithstanding the mooting of their individual claims. (Symczyk, 656 F.3d at 198-199.)

Unfortunately, the Supreme Court’s grant of cert. does not bode well for the future of FLSA actions, except in cases where plaintiffs and their counsel are fortunate enough to have a group of plaintiffs and opt-ins willing to step forward from the outset. Clearly, assuming the Supreme Court decides to undermine its prior Hoffman-LaRoche precedent (why else would it have granted cert.?), savvy employers will offer several thousand dollars as soon as a suit is filed to knock off any solo named plaintiff with an offer of full, individual relief, and avoid notice to a class of those similarly-situated.

Brinker, Duran and the future

Last but not least, we return to Brinker and Duran. In Brinker, the Supreme Court reversed and remanded in large part the Court of Appeal, in a unanimous opinion by Justice Werdegar holding that employers must comply with stringent obligations to provide both meal and rest periods to employees or face paying premiums under California Labor Code section 226.7.

The Court of Appeal in Brinker had held that because an employer’s duty was merely to provide” meal periods to employees, employers could avoid class liability with a compliant published policy. The Court of Appeal wrote, in language that would have been devastating to wage and hour class actions had it been upheld by the Supreme Court: “The evidence in this case indicated that some employees took meal breaks and others did not. For those who did not, the reasons they declined to take a meal period require individualized adjudication. Further, plaintiffs’ statistical and survey evidence does not render the meal break claims one in which common issues predominate. While time cards might show when meal breaks were taken and when there were not, they cannot show why.” (80 Cal.Rptr.3d at 810.) The Court of Appeal had engaged in similar reasoning to reject rest break claims.

If that reasoning had prevailed, plaintiffs would seldom, if ever, have been able to show that personal motivations for missing meal and rest periods were sufficiently common to justify class certification. The Court remanded on meal periods. Its holding that the “employer need not ensure that no work is done” during meal periods is really an employee victory, because of the reasoning behind it: “[T]he obligation to ensure employees do no work may in some instances be inconsistent with the fundamental employer obligations associated with a meal break: to relieve the employee of all duty and relinquish any employer control over the employee and how he or she spends the time.” (Brinker, 53 Cal.4th at 1038-1039.)

In other words, Brinker reasoned that employers cannot police employees to make sure that no work is performed because employers may exercise no control over employees during their meal periods. If an employer has a policy restricting employees’ activities during meal periods, that may now clearly be the basis for a meal period class action.

On rest periods, the Supreme Court outright reversed the Fourth District Court of Appeal, explaining: “An employer is required to authorize and permit the amount of rest break time called for under the wage order for its industry. If it does not – if, for example, it adopts a uniform policy authorizing and permitting only one rest break for employees working a seven-hour shift when two are required – it has violated the wage order and is liable.” (Id. at 1033.)

As to the latter, rest break claims can no longer be considered throwaway claims after Brinker – and the proof is in the pudding. In July 2012, Los Angeles County Superior Court Judge John Shepherd Wiley awarded $90 million to security guards for ABM in connection with rest breaks during which they were required to remain on-call. Brinker Restaurant Corporation’s own rest break liability will likely reach the eight-figure range.

The Supreme Court leaned heavily on Sav-On, and cited other key employee-friendly decisions: Dilts v Penske Logistics, LLC, 267 F.R.D. 625 (S.D. Cal. 2010); Bono Enterprises, Inc. v Bradshaw (1995) 32 Cal.App.4th 968; Ghazaryan v Diva Limousine, Ltd., (2008) 169 Cal.App.4th 1524; Bufil v Dollar Financial Group, Inc. (2008) 162 Cal.App.4th 1193; and Jaimez v. Daiohs USA, Inc. (2010) 181 Cal.App.4th 1286. These decisions now provide a roadmap to certification of meal/rest class actions, post-Brinker. Moreover, over the next year or two, the eight decisions granted review and held pending Brinker, 2 which have all now been remanded to Courts of Appeal, will be decided, fleshing out the meal and rest period standards in the post-Brinker era.

Perhaps most significantly going forward, the Brinker court held: “Claims alleging that a uniform policy consistently applied to a group of employees is in violation of the wage and hour laws are of the sort routinely, and properly, found suitable for class treatment.” (53 Cal.4th at 1033.) Where there is a policy at issue, wage/hour class actions are still available.

The Brinker concurrence, authored also by Justice Werdegar, rejects the Fourth District’s notion that “the question why a meal period was missed renders meal period claims categorically uncertifiable” (Id. at 1052), and goes on to cite Sav-On and Bell, 115 Cal.App.4th 715 (“Bell III”) and embrace “a variety of methods” of proof of class certification, liability, and damages, including “[r]epresentative testimony, surveys, and statistical analysis….” (Id. at 1054.)

Duran’s thrust was the opposite: “that when liability for unpaid overtime depends on an employee’s individual circumstances, employer defendants retain the right to assert the exemption defense as to every potential class member,” precluding the use of such methods of class-wide proof as were embraced in Sav-On, Bell III, and the Brinker concurrence. (Duran, 137 Cal.Rptr.3d at 426.)

In Duran, the trial court allowed selection of 20 representative class members (out of 260) to provide trial testimony and determined class-wide liability on the basis of such. (137 Cal.Rptr.3d at 428.) Whether or not this particular trial plan was optimal, it remains to be seen to what degree if any Duran’s sweeping rejection of sampling and representative testimony will prevail on review. Certainly, the Brinker concurrence gives reason for optimism in the plaintiffs’ Bar. (See also Romero v. Florida Power & Light Co., 2012 WL 1970125 (M.D. Fla., June 1, 2012) (affirming use of representative testimony).)

In sum, paraphrasing Mark Twain, reports of the death of wage/hour class litigation were greatly exaggerated. The wage and hour class-action war wages on.

Bryan Schwartz has an Oakland-based firm representing workers in class, collective, and individual actions in wage/hour, discrimination, whistleblower, and unique federal and public employee claims. He practices in state and federal trial and appeals courts, in arbitration, and before a variety of administrative agencies. Schwartz is a member of the State Bar of California’s Labor & Employment Law Section Executive Committee, and recently chaired the Bar’s Second Annual Advanced Wage & Hour Seminar. He is a leader and amicus writer in the California Employment Lawyers Association (CELA), and authored CELA’s amicus briefs in Brinker and Kirby. He can be contacted at Bryan@BryanSchwartzLaw.com.

Endnotes

1. This year also saw the final demise of the defense argument circulating for several years asserting that FLSA and state wage law class claims are “inherently incompatible” in the same action because of the different procedural mechanisms (opt-in FLSA collective actions and opt-out class actions) – an argument that had been roundly rejected by all but a few District Courts (the latter mostly within the Third Circuit). Now, the Third Circuit itself finally rejected “inherent incompatibility.” (See Knepper v. Rite Aid Corp. (3rd Cir. 2012) 675 F.3d 249, 262 (“We join the Second, Seventh, Ninth, and D.C. Circuits in ruling that this purported ‘inherent incompatibility’ does not defeat otherwise available federal jurisdiction.”).)
2. Brinkley v. Public Storage (Supreme Court Case No. S168806); Bradley v. Networkers International LLC (S171257); Faulkinbury v. Boyd & Associates (S184995); Brookler v. Radioshack Corporation (S186357); Tien v. Tenet Healthcare (S191756). Shortly before this edition went to press, Hernandez v. Chipotle Mexican Grill (S188755), Lamps Plus Overtime Cases (S194064), and Muldrow v. Surrex (S200557), on remand, were all decided against the employees by California Courts of Appeal. Each can be distinguished on its facts, if you have a case involving a policy or practice restricting meal and rest period usage. See Lamps Plus, 2012 WL 3587610, at **8, 11 (Cal.App. 2 Dist. August 20, 2012) (citing “overwhelming evidence that Lamps Plus’s policies allowed and encouraged meal periods,” “that Lamps Plus had a meal and rest period policy conforming to the applicable laws and wage orders, and that Lamps Plus disciplined its employees for failing to comply with the policy”); Hernandez, 2012 WL 3579567 (Cal.App. 2 Dist. Aug. 21, 2012) (“The only evidence of a company-wide policy and practice was Chipotle’s evidence that it provided employees with meal and rest breaks as required by law.” (emph. in orig.)). In Muldrow, 2012 WL 3711553, *11 n.17 (Cal.App. 4 Dist. Aug. 29, 2012), the employees conceded that the Brinker court “answered [their claim on appeal] in the negative,” so that case is readily distinguishable, too, where you will not so concede. 

Copyright © 2012 by the author
For reprint permission, contact the publisher: www.plaintiffmagazine.com

A Post-Brinker Victory for Employees: Bradley v. Networkers International, LLC

In the aftermath of the California Supreme Court’s landmark decision in Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004 (Brinker), employers and non-exempt employees are still hashing out the implications of the clarified meal and rest period requirements.  In April, Bryan Schwartz Law discussed the implications of that case on this blog, which can be found here: California Supreme Court's Long-Awaited Brinker Decision.

Last week, in Bradley v. Networkers International, LLC (December 12, 2012)  ---Cal. Rptr.3d ---, 2012 WL 6182473, the California Court of Appeal in San Diego addressed a common problem in meal and rest period cases: where an employer has no compliant meal and rest period policies that are distributed to employees. This case makes clear that a lack of a meal or rest period policy can provide sufficient commonality for class certification, which is a significant victory for plaintiffs.

Background
While the Brinker case was pending, a number of cases appealed to the Supreme Court were granted review and held, pending the decision in Brinker.  Among the cases relegated to judicial limbo was Bradley v. Networkers International, Inc. (Feb. 5, 2009, D052365). In Bradley, three plaintiffs filed a class action complaint against Networkers International, LLC, alleging violations of California’s wage and hour laws including nonpayment of overtime and failure to provide rest breaks and meal periods. The plaintiffs moved to certify the class, which requires that they “demonstrate the existence of an ascertainable and sufficiently numerous class, a well-defined community of interest, and substantial benefits from certification that render proceeding as a class superior to the alternatives.” Brinker, 53 Cal.4th at 1021. The court determined that the plaintiffs did not demonstrate that common factual and legal questions would predominate over the individual issues and denied class certification. The plaintiffs appealed, but the decision was upheld by the California Court of Appeal.

Plaintiffs appealed to the California Supreme Court, which granted petition for review but held the case for over three years until Brinker was resolved. After issuing their decision in Brinker, the California Supreme Court remanded Bradley to the California Court of Appeal, Fourth Appellate District, with directions to vacate its decision on class certification and reconsider the case in light of the Brinker decision.

Before getting to the recent decision from the Fourth Appellate District, a little background is useful. A common fight between employers and employees arises when an employer classifies its employees as “independent contractors,” as opposed to employees. True independent contractors have control over the terms and conditions of their employment and are not subject to California wage and hour protections including overtime and meal and rest periods. Employees, on the other hand, remain under their employer’s control during their working hours and are protected by California’s wage and hour laws. The employee versus independent contractor issue has been a battleground for years in the employment law arena and California courts have developed numerous criteria to assess whether an individual is truly an independent contractor or an employee.

In the recent Bradley case, the three plaintiffs alleged that they were misclassified as independent contractors, and should instead have been treated as employees. All three of the plaintiffs worked for Networkers. Each of the plaintiffs was required to sign an “independent contractor agreement,” which stated that each was an independent contractor rather than an employee. As such, plaintiffs did not receive overtime pay or meal or rest periods. However, contrary to the terms of the agreement, the plaintiffs alleged that they were treated as employees and were subject to the same employment policies.

Networkers argued that plaintiffs’ motion to certify the class should be denied because the case did not involve common questions of fact or law, and therefore, resolution of the case would require mini-trials for each plaintiff. Although the court agreed with Networkers on the first go-around, after the Brinker decision, the court agreed with plaintiffs on all but one cause of action.

The Court of Appeal’s Decision on Remand

Because Networkers applied consistent companywide policies applicable to all employees regarding scheduling, payments, and work requirements, those policies could be analyzed on a class-wide basis. The court would not need to assess them with respect to each potential class member. In analyzing whether class certification was appropriate the court noted that, “[t]he critical fact is that the evidence likely to be relied upon by the parties would be largely uniform throughout the class.” The court held that the factual and legal issues related to the independent contractor issue would be the same among the plaintiff class members, and therefore appropriate for class treatment.

Moreover, in Bradley, as in many workplaces, the employer did not have a policy actually distributed to employees that provides for meal and rest periods. Networkers argued that Brinker was not controlling, in its guidance about meal and rest requirements, because in Brinker the plaintiffs challenged an express meal and rest break policy whereas in Bradley, the plaintiffs were arguing that the employer’s lack of policy violated the law. The Court rejected this argument, holding: “This is not a material distinction on the record before us. Under Brinker, and under the facts here, the employer engaged in uniform companywide conduct that allegedly violated state law.” Bradley, 2012 WL 6182473 *13. The Court noted that plaintiffs had presented evidence on Networkers’ uniform practice and that Networkers acknowledged that it did not have a policy and did not know if employees took meal or rest breaks. In assessing the lack of evidence presented by Networkers and relying on Brinker, the Bradley Court held: “Here, plaintiffs’ theory of recovery is based on Networkers’ (uniform)  lack of a rest and meal break policy and its (uniform) failure to authorize employees to take statutorily required rest and meal breaks. The lack of a meal/rest break policy and the uniform failure to authorize such breaks are matters of common proof.” Bradley, 2012 WL 6182473 *13.

The Bradley decision disposes of a significant hurdle in wage and hour cases by holding that this type of scheme – where no policy is distributed to provide for meal and rest periods- can meet the commonality requirement for class certification. For example, Bryan Schwartz Law is currently representing a group of restaurant workers who were not aware of a meal/rest period policy, and who were not provided with meal or rest periods. In the Bryan Schwartz Law case, there was no policy that provided the workers with coverage to enable them to take their breaks. Under Bradley, certification is appropriate to test, class-wide, whether the employer’s lack of a well-defined policy or practice of providing meal/rest periods violated the Labor Code.

Although several meal and rest period cases have been decided adversely to workers post-Brinker, the Bradley court determined that each of those cases was distinguishable.  In distinguishing Lamps Plus Overtime Cases (2012) 209 Cal.App.4th 35, the Bradley Court of Appeal noted that it was undisputed that the Lamps Plus employer’s written meal and rest period policy was consistent with state law requirements and that the violations differed at each store and with respect to each employee. Similarly, the Bradley court held that Hernandez v. Chipotle Mexican Grill, Inc. (2012) 208 Cal.App.4th 1487 was distinguishable because the only evidence of a company-wide policy or practice was Chipotle’s evidence that it provided meal and rest breaks as required by law. Likewise, Bradley distinguished Tien v. Tenet Healthcare Corp. (2012) 209 Cal.App.4th 1077, noting that in that case there was “overwhelming” evidence that meal periods were made available and the employer’s liability with respect to each employee depended on issues specific to each employee. Brookler v. Radioshack Corp. is an undecided case that was remanded after Brinker involving wage and hour class certification, which may provide additional clarification on these issues.

The court also rejected Networkers’ argument that because each plaintiff would be owed a different amount of damages, the case should not be certified. Relying, in part, on the concurring opinion in Brinker, the court held that even where plaintiffs are required to individually prove damages, individualized damages inquiries do not bar class certification. The court also reversed its prior decision and determined that class certification on the issue of overtime was appropriate because, assuming the plaintiffs were employees, proof of damages could be determined from the common proof of the pay records.

Although the court decided to remand the off-the-clock work issue, it did so because the factual record did not show that there was a uniform policy requiring each employee to work off the clock.

If you believe you have been misclassified as an independent contractor, have meal and rest period claims, or have questions about other wage and hour violations, contact Bryan Schwartz Law.

Disclaimer: Nothing in the foregoing commentary is intended to provide legal advice in a specific case or to form an attorney-client relationship with any reader. You must have a representation agreement with Bryan Schwartz Law to be a client of this firm or author.

Get Paid What You are Owed!

You May Be Entitled to Recover Extra Money with California’s Split-Shift Premiums.

When an employer assigns you shifts in the morning and afternoon, with a large break in between, the employer is basically compromising your whole day, without paying you for it. Has your employer ever asked you to work a “split shift” like this? If so, you may be entitled to extra compensation under a sparsely-utilized provision found in most California Industrial Welfare Commission (“IWC”) Wage Orders.

A split shift is defined as a “work schedule, which is interrupted by non-paid, non-working periods established by the employer, other than bona fide meal or rest break periods.” Cal. Code Regs., tit. 8 §11010, subd. 2(M). For example, an hourly employee who has been assigned a morning shift from 8 a.m. to noon, plus an evening shift from 2 p.m. to 6 p.m., has been assigned to work a split shift, and is likely entitled to extra pay, assuming that the two-hour break between shifts is non-paid and non-working.

California frowns on employers assigning employees to work split shifts, which cause a major burden on employees and keep employers from having to hire more workers. However, many employers fail to pay the split-shift premium. We suspect this practice is rife in the promotional modeling (i.e., for promo models) and valet parking industries, for example.

Are You Entitled to a Split-Shift Premium?

The IWC has codified protections for employees who are scheduled to work split shifts in most industries. ^[1] Under most of the IWC’s Wage Orders, “[w]hen an employee works a split shift, one hour’s pay at the minimum wage shall be paid in addition to the minimum wage for that workday, except when the employee resides at the place of employment.” (e.g., Cal.Code Regs., tit.8 §11010, subd. 4(C).) This additional hour of wages granted to an employee for every day that s/he works a split shift is commonly known as a “split-shift premium.”

How Much Time Do You Have to Recover an Unpaid Premium?

California Courts have provided further guidance on the nature of these split-shift premiums and the duration of the statute of limitations that applies to these claims. In Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1111-12, the California Supreme Court explained that the purpose of the split-shift premium is to: 1) compensate employees; and 2) “‘encourage proper notice and scheduling… consistent with maximum hours and minimum pay requirements.’” Id. (citing California Manufacturers Assn. v. Industrial Welfare Com. (1980) 134 Cal.App.3d. 95, 112). The Murphy Court further clarified that “split-shift pay provisions do not become penalties for statute of limitations purposes simply because they seek to shape employer conduct in addition to compensating employees.” Murphy v. Kenneth Cole Productions, Inc. 40 Cal.4th at 1112 (citing Caliber Bodyworks Inc. v. Superior Court (2005) 134 Cal.App.4th 365, 381). Because split-shift premiums have been interpreted to be wages owed to an employee (rather than penalties), and in light of California Business & Professions Code §17200, any employee who seeks to recover unpaid split-shift premiums has a four-year statute of limitations in which to do so.

How Can You Recover Unpaid Split-Shift Premiums?

Though not a heavily litigated area of wage and hour law, at least one court has provided guidance regarding how you can recover split-shift premiums. In Kamar v. Radioshack Corporation, et al. 2008 WL 2229166, *9 (C.D. Cal. May 15, 2008), a federal judge in Los Angeles, interpreting California law, held that split-shift premiums “are enforceable to the same extent as minimum wage and overtime requirements.” The Court further clarified that “section 1194 [of the Labor Code] should be construed to include premium wages created by the IWC to reinforce basic wage and hour standards, and it is likely that the California Supreme Court would see it that way.” Id. By classifying split-shift premiums as wages recoverable in the same way as minimum wage and overtime premiums under §1194 of the California Labor Code, the Kamar court extended a private right of action for individuals to sue their employers directly for these unpaid, split-shift premiums, as well as for applicable interest, attorneys’ fees, and costs of suit.

Other Considerations

If your employer makes you travel between locations during the time between assignments on a single day, without compensation for travel time and/or reimbursement for expenses, this is also improper. Are you assigned to work one location in the morning, or early afternoon, and another later in the evening, with a trek between locations (and probably no time for breaks or meals) in between? Do something about it!

You deserve to be paid extra if you are an hourly employee (i.e., non-exempt) and your employer assigns you to work non-traditional hours – that is, something other than a standard eight-hour shift (or nine hour shift, if you have an unpaid lunch hour). If you have been assigned to work a split shift, but have not been paid extra for it, please contact Bryan Schwartz Law today.

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[1] Certain on-site occupations in the construction, drilling, logging and mining industries and miscellaneous employees not covered by the first fifteen Wage Orders may not be entitled to the split-shift premium. To determine which Wage Order is applicable to your industry, please visit http://www.dir.ca.gov/iwc/wageorderindustries.htm

Legal Trickery by Small Businesses to Avoid Compliance with Employment Laws - Bryan Schwartz Quoted in Daily Journal Exposé

The following article appeared today in the Daily Journal:

http://www.bryanschwartzlaw.com/DailyJournal10-25-12.pdf

Small businesses use prevention, legal tricks, against class action woes

By Laura Hautala
Daily Journal, Staff Writer

When small business owners Soraya and Patrick Aughney faced allegations of wage-and-hour violations from their employees last year, they opted for an unusual defense: bankruptcy. According to one of their attorneys, it was a choice between that or losing their company, the valet parking service Certified Parking Attendants LLC. "That class claim would have destroyed the business," said David N. Chandler, their Santa Rosa-based bankruptcy lawyer. The plaintiffs were parking attendants who claimed unpaid overtime and meal-and-rest breaks as well as misappropriated tips. Combined with other claims, the action could have cost the Aughneys millions of dollars in back-wages and penalties. James Robert Mortland III et al. v. Certified Parking Attendants LLC et al., CIV1000135 (Marin Super. Ct., filed Jan. 11, 2010). Chandler is up-front about the fact that he used bankruptcy to avoid the plaintiffs' class claims, which have been dismissed in state court and federal bankruptcy court. The named plaintiffs are now filing individually as creditors in the bankruptcy.

Bryan J. Schwartz, the Oakland-based lawyer for the plaintiffs, said he has seen small businesses take such a tack several times. "There's always a moment of truth: will they engage or pull the tablecloth out from underneath?" he said. 

Bankruptcy is only the most dramatic in a range of tactics small businesses use to avoid wage-and-hour lawsuits. And while class actions might seem like a problem limited to bigger, wealthier employers like Wal-Mart Stores Inc and Costco Wholesale Corp., a substantial number of small businesses face these complaints, too.

In fact, while large corporations present deeper pockets, attorneys for employees and companies alike agree that small businesses are more likely to violate labor laws, leading to debilitating penalties.

Some 1,300 employment class actions have been filed in California since 2010, according to Keith A. Jacoby of Littler Mendelson PC, who estimates that a quarter to a third of them were filed against small, private companies. Littler Mendelson tracks employment lawsuit numbers by surveying the filings recorded by Courthouse News Service and LexisNexis's Courtlink database.

Even a business with a single location can be a target, Jacoby said. If some workers decide to sue a high-turnover business such as a 60-employee restaurant, "250 [class members] might be big enough for a class action," he said.

Jacoby said he doesn't recommend the bankruptcy technique Chandler used. "You're just trading one problem for another," he said. But he did say small businesses often have to place money in escrow and enter a multi-year payment plan when they lose class actions.

To avoid such a result, small businesses rely on a variety of legal, insurance and human resource services to avoid making big employment law mistakes or to cover court costs when they do.

For companies that can afford it, such as tech startups with venture capital backing, an ounce of prevention can save millions of dollars in liability.

One such liability is misclassifying workers as independent contractors when they should be employees, which can make employers vulnerable to expensive meal-and-rest claims and IRS enforcement. For this reason, many startups contract with outside companies to handle their human resources and payroll work.

Business insurance also can help buffer companies from claims of harassment, retaliation, wrongful termination and discrimination. "[Insurance] has become more important ever since the economy took a dip, because people had to be let go," said Lou Moreno, Senior Vice President of Heffernan Insurance Brokers in Menlo Park.

But insurance will only go so far when it comes to wage-and-hour claims, which make up between 80 percent and 90 percent of California's employment class actions, according to Littler Mendelson. While employment liability policies cover attorneys fees, the company is on its own to pay back wages and penalties. Moreno said many insurers that do cover attorneys fees for wage-and-hour claims generally won't do so in California because the risk of litigation in the state is much higher.

Small businesses without venture backing, like Certified Parking Attendants, do not typically carry these insurance policies. And without human resource departments or legal advice, they try to avoid class actions with any information available.

"They will rely on free Chamber of Commerce materials, and those are very good, but wage-and-hour law is about technical compliance," said Jacoby, who represents both small and large employers.

Schwartz puts it more strongly, saying these businesses often operate in a "lawless environment," relying on their workers' ignorance of the law to avoid paying legally mandated wages.

For the Aughneys, filing for Chapter 11 bankruptcy protection for their business and Chapter 13 bankruptcy protection to shield their personal assets has allowed them to stay in business.

The legal trick was to keep the employees from filing their claims in bankruptcy court until 180 days after they stopped working for the valet service, thus eliminating the special consideration given in bankruptcy court to wages owed to recent employees.

"You've got to stall them on class certification until the 180-day priority period runs out, and then you drop them into bankruptcy," Chandler said, "and then you're driving the bus."

laura_hautala@dailyjournal.com

California Workers' Rights Survive Duran v. US Bank

This morning, the California Supreme Court upheld a Court of Appeal decision reversing a multi-million dollar plaintiffs' verdict in a wage/hour class action against US Bank, in Duran v. US Bank. On March 4, 2014, the Court heard oral argument, which I discussed in this blog in detail here, including a background on the case and what was at stake. In a 51-page majority opinion by Justice Corrigan, with a lengthy concurrence by Justice Liu, the Court detailed how trial courts hearing would-be class claims must determine whether the claims are manageable on a class-wide basis.

Duran's Key Holdings

Though the Duran decision is not an outright victory for workers - or for the plaintiffs in that case - the decision also does not foreclose wage/hour class actions, and most significantly, recognizes that "statistical sampling may provide an appropriate means of proving liability and damages in some wage and hour class actions." Slip Op. at 2. Because the reason for a class action in  this context is to create a more efficient means of proving a commonly held wage claim, class actions would not survive without the possibility of using common proof of liability and damages. If each person had to prove his or her own case entirely separately, there would be no reason for a class action. Duran, while remanding for a new trial, did not kill the plaintiffs' class claims in that case, as had the Court of Appeal, and the plaintiffs may yet prove class-wide liability, following the decision's guidance, and particularly that of the concurrence.

The Supreme Court stopped short of holding that a defendant has a due process right to litigate an affirmative defense as to each individual class member. Slip Op. at 35. However, if "trial proceeds with a statistical model of proof, a defendant accused of misclassification [as in the Duran case] must be given a chance to impeach that model or otherwise show that its liability is reduced because some plaintiffs were properly classified as exempt." Id.

The issue in Duran was whether a group of employees, Business Banking Officers (BBOs), were improperly classified as exempt from overtime based upon the notion that they were outside salespeople. Plaintiffs proved at trial that they predominantly worked inside bank branches - not outside. However, the Supreme Court criticized the trial court's refusal to allow defendant's "sworn declarations from 75 class members stating that they worked more than half their time outside the office" - which would negate any claims by these individuals. Slip Op. at 31. The trial court also refused to admit or allow experts to consider as part of their statistical sampling "live testimony from witnesses about their work outside the office as BBOs." Id. "Instead, extrapolating findings from its small sample [21 BBOs out of 260] and ignoring all evidence proffered to impeach these findings, the court found that the entire class was misclassified. The injustice of this result is manifest." Id.

As such, the trial plan in Duran, rejected by the Supreme Court, will be readily distinguishable by workers and their advocates when seeking to certify a class action and to propose a trial plan. If individuals disclaim any entitlement to unpaid wages, and defendants want to put forth such evidence limiting their liability, they must be able to do so. As the Supreme Court explained, "While representative testimony and sampling may sometimes be appropriate tools for managing individual issues in a class action, these statistical methods cannot so completely undermine a defendant's right to present relevant evidence." Slip Op. at 31-32.

Importantly, Duran also did not categorically reject common forms of class proof of liability or damages, like surveys and statistics. Slip Op. at 38. "Procedural innovation" is encouraged, but "must conform to the substantive rights of the parties." Slip Op. at 29, 38. Neither did the Supreme Court categorically reject the ability to prove misclassification on a classwide basis, where an employer has a "consistently applied policy or uniform job requirements and expectations contrary to a Labor Code exemption, or if it knowingly encouraged a uniform de facto practice inconsistent with the exemption." Slip Op. at 34-35.

Duran Reinforced Sav-On, Bell, and the Brinker Concurrence

Repeatedly in the decision, Duran reinforced Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, and Bell v. Farmers Ins. Exchange (2004) 115 Cal.App.4th 715.  Sav-On and Bell have provided - and will continue to provide, along with Duran - a roadmap to all workers' advocates in how to certify a wage and hour class action and prove class claims. Notably, the Court seemed to encourage what happened in Bell - summary judgment on liability, followed by a damages trial involving sampling - as a means for adjudicating wage/hour class actions. "Once the issue of liability had been decided, both sides benefited from a fair, cost-effective approach to determining damages. By agreeing on a sampling approach, both sides could expedite resolution while preserving their competing interests in calculating damages." Slip Op. at 37 n. 34.

Similarly, Duran's repeated invocation of Justice Werdegar's concurrence in Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1054 (see, e.g., Duran slip op. at 23, 25) reaffirms that individualized liability and damages questions do not bar use of the class action mechanism or class-wide relief - but rather, that trial courts must act carefully in such situations, when fashioning a "procedurally innovative" and efficient trial plan, to ensure fairness. Slip Op. at 29; Slip Op., conc. at 2 (citing Sav-On and City of San Jose v. Superior Court (1974) 12 Cal.3d 447, 459). Before Duran, advocates on both sides were uncertain as to what weight to accord the Brinker concurrence - authored by the same justice as the majority opinion - but now, the answer is clear: a great deal of weight.

Justice Liu's Concurrence Shows the Way

Justice Liu's concurrence illuminates the path forward for employee advocates confronting unlawful misclassification of groups of employees as exempt from overtime and meal/rest period requirements. Building on Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, the concurrence explains that the relevant consideration in deciding on a misclassification allegation is whether the employer's realistic requirements of the job would lead to more exempt, or more non-exempt work, being performed. Slip Op., conc. at 4-5. Thus, "it is not difficult to contemplate that employees in a given job classification will often be either wholly exempt or wholly nonexempt, since a job classification often entails a common set of employer expectations or requirements for performance of the job." Slip Op., conc. at 5. Both before and after Duran, an employer cannot evade liability based solely on a seemingly exempt job description; conversely, certification of a misclassification claim will not be appropriate based solely on a seemingly non-exempt job description. "How employees actually spend their time obviously matters." Id. But, as the Supreme Court discussed in Sav-On, "[v]ariability in such hours does not necessarily prove that the employer's realistic expectations or the realistic requirements of the job were not the same for all employees in a given job classification." Id.

As Justice Liu explained, providing guidance to the trial court on remand in Duran, employer-side declarations cannot be ignored, and "must be assessed for [their] weight and credibility together with all other evidence bearing on the ultimate issue." Slip Op., conc. at 8. But "the need to manage individual issues does not foreclose the use of sampling, representative testimony, or other statistical methods to obtain relevant evidence in a class action trial on employee misclassification." Id. A valid sampling plan will "capture heterogeneity within the class" - and a defendant may "raise individual issues that challenge the results of the plan as implemented." Id. Ultimately, a court (and the court in the Duran v. US Bank case) "might find that the individualized evidence lacks credibility and that the sampling evidence is reliably probative of the employer's realistic expecations" or that "the individualized evidence, while credible, does not show variability in the class but rather provides strong, consistent evidence of the employer's realistic expectations for the job at issue." Slip Op., conc. at 9. Both individualized and aggregate forms of proof as to the realistic requirements of the job must be weighed and considered along with the job description, company policies, industry customs, and the testimony of those who set expectations for the employees in the class. Slip Op., conc. at 10.

The Take-Away from Duran

While the defense bar sought a total victory in Duran, to undermine all possibility of wage/hour class action certification and trial, they did not get it. Though some language in Duran will undoubtedly be canonized by employer advocates seeking to erect major roadblocks to class actions, the overall impact of the decision is not to dismantle class litigation. Rather, Duran stands for the proposition that all of us who litigate wage/hour class claims must work carefully to craft trial plans that will be fair to both sides - apparently, unlike what occurred in that case. When we are able to do so, proceeding with a class action will be appropriate.

Veteran practitioners of wage/hour law will recall that the employers' spin doctors' original take on Brinker in 2012 was that it was a major victory for employers and would doom meal and rest period class actions. Though several of the grant-and-hold decisions, on remand, had this knee-jerk response, they were ultimately depublished. See Hernandez v. Chipotle Mexican Grill, 146 Cal.Rptr.3d 424 (2012) (depublished 12/12/2012); Lamps Plus Overtime Cases, 146 Cal.Rptr.3d 691 (2012) (depublished 12/12/2012); and Tien v. Tenet Healthcare Corp., 147 Cal.Rptr.3d 620 (2012) (depublished 1/16/2013). Instead, the test of time has shown that Brinker set the stage for a major advance by workers' rights advocates seeking to certify wage/hour class actions, employing the Brinker guidance. See, e.g., Bradley v. Networkers Int’l, LLC, 211 Cal.App.4th 1129 (2012) (review denied 3/20/13); Faulkinbury v. Boyd & Assoc., Inc., 216 Cal.App.4th 220 (2013) (review denied 7/24/13); Benton v. Telecom Network Specialists, Inc., 220 Cal. App. 4th 701 (2013) (review denied 1/29/14); Bluford v. Safeway Stores, Inc., 216 Cal.App.4th 864, 871 (2013) (review denied 8/28/13); Jones v. Farmers Insurance Exchange, 221 Cal.App.4th 986 (2013) (review denied 3/12/14); Williams v. Superior Court (Allstate Ins. Co.), 221 Cal.App.4th 1353 (2013) (review denied 3/19/14); Hall v. Rite Aid Corp. (Cal.App. May 2, 2014) 2014 WL 1989384.

Duran may prove likewise to be an aid to employees seeking class certification.

It is a good thing Duran did not kill class actions. Without the ability to prove wage/hour violations by employers using class actions, workers would have little recourse for addressing wage theft by employers. Wage practices tend not to be individualized, but tend to be pursuant to employers' policies - and employers engaged in Labor Code violations will receive a massive windfall if they can force workers to prosecute wage theft individually. Few will have the courage to do so, and even fewer will have any viable representation, because the economics of wage claims do not support individual wage actions. If 1,000 low-wage workers were cheated of $20,000 each in wages, the employer stole $20 million from workers. But attorneys will not undertake representation of each $20,000 claim for wages, when trying such a case to verdict would accrue hundreds of thousands of dollars in fees and costs. Class action is often the only means of rectifying wrongdoing by Labor Code violators- and will remain so, after today's decision in Duran.

Joint Employer Bosses: California Appellate Ruling Reinforces Personal Liability for Perpetrators’ Violations of State Wage Laws

by Rachel Terp and Bryan Schwartz (This article, under a slightly different title, first appeared in the February 2018 edition of Plaintiff Magazine, in substantially similar form)

While grim efforts to narrow joint employer liability under federal employment and labor law have captured national headlines in 2017, [1] the year also ended with a California Court of Appeal decision on individual joint employer liability that reaffirms workers’ robust wage theft protections under California law. 

In Turman v. Superior Court (2017) 17 Cal.App.5th 969,  California’s Fourth District Court of Appeal, Division Three (in Orange County), held that a sole shareholder and president of a closely-held corporation may be personally liable in a lawsuit to recover overtime, meal and rest period premiums, tip compensation, and minimum wages under California law. Turman provides the first published interpretation of California Supreme Court’s marquee decision on the definition of an “employer” in California, Martinez v. Combs (2010) 49 Cal.4th 35, as it applies to personal, rather than corporate, liability. [2]

Federal and state laws have long recognized that more than one defendant may be liable as an employer of the same workforce. [3] Joint employer liability aims to protect workers from those that would exercise control over workers’ labor, but attempt to shirk responsibility for workplace violations by foisting sole liability elsewhere. By holding responsible all persons (individual and corporate) that control working conditions, each is incentivized to comply with labor and employment laws.

The availability of joint employer liability is a practical necessity in many wage and hour cases. When a plaintiff-side wage-and-hour attorney assesses whether to accept a case, after determining the alleged workplace violations are meritorious, the next question the attorney typically asks is, “Who’s the boss?” If no solvent party exists to pay damages and penalties, then obtaining a large verdict in even the most righteous case will not result in payment of the client’s judgment, and will do little to deter bad actors.

All too often in California, workers who bring legal claims for wage theft are unable to collect from the company that employed them [4] - even when one or more individuals responsible for the wage violations could afford to make the workers whole. Plaintiffs may name these individuals as defendants, but individual defendants historically relied on lack of specificity in the state’s jurisprudence to argue that they should not be personally liable. State and federal courts have been reluctant to find individuals personally liable for unpaid wages under California law.

I. Historic Statutory and Regulatory Authorities

California’s wage statutes have provided causes of action for a broad range of wage theft practices, largely without specifying who may be liable. [5] The Industrial Welfare Commission (“IWC”) has been defunded for years, but previously had been delegated authority over wage and hour practices in California, and its Wage Orders (regarding a host of industries) continue to have regulatory force. [6] The Wage Orders provide broad definitions of employer. [7] Each defines “Employer” as “any person . . . who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person.” [8] Under the orders,“Employ” means “to engage, suffer, or permit to work.” [9]

The Unfair Competition Law (“UCL”), Business & Professions Code section 17200, et seq., at section 17201, has expressly included “natural persons” unjustly enriched (e.g., because they stole workers’ wages) among those who are liable for restitution. [10]

The Private Attorneys General Act (PAGA), Labor Code section 2698, et seq., has permitted recovery for civil penalties for wage violations, under Labor Code section 558, with liability extending to “[a]ny employer or other person acting on behalf of an employer.” See Thurman v. Bayshore Transit Mgmt., Inc. (2012) 203 Cal.App.4th 1112, 1148; see also Labor Code § 2699(b) (incorporating Labor Code § 18: “‘Person’ means any person, association, organization, partnership, business trust, limited liability company, or corporation.”). [11]

II. Reynolds Set Forth a Common Law Test

In Reynolds v. Bement (2005) 36 Cal.4th 1075 (later abrogated by Martinez, 49 Cal.4th 35), the Supreme Court considered whether, as a matter of first impression, individuals may be liable under section 1194. Plaintiff brought a class action against parent and subsidiary corporations as well as officers, directors, and shareholders of the companies, alleging all were joint employers. [12] The trial court sustained defendants’ demurrer regarding the individual defendants. The higher courts affirmed.

The California Supreme Court held that while a corporate defendant’s employer status is defined by the IWC wage order, individuals are subject to the common law definition of employer. [13] The Court observed that while the relevant IWC order’s definition of employer controlled, [14] the IWC order did “not expressly impose liability under section 1194 on individual corporate agents.” [15] The Court reasoned that absent a clear statutory directive, a common law definition of employer should apply. [16] Under “common law, corporate agents acting within the scope of their agency are not personally liable for the corporate employer’s failure to pay its employees’ wages.” [17]

Following Reynolds, many state and federal courts applying California law precluded wage relief against owners, officers and directors as a matter of course. [18]

III. Martinez Abrogated Reynolds with a Three Part Test Under the IWC Wage Orders

In Martinez, the Supreme Court abrogated Reynolds, redefining joint employer liability under the Labor Code. The Supreme Court held that the applicable IWC wage order, not the common law, defines the employment relationship. [19] The Court explained the legislature had delegated authority to the IWC over wages, hours, and working conditions. [20] The Court reasoned: “Were we to define employment exclusively according to the common law in civil actions for unpaid wages, we would render the commission’s definitions effectively meaningless.” [21]

Instead, the Supreme Court interpreted the IWC wage orders as incorporating the common law test into the IWC’s three-prong, disjunctive test for joint employment. To “employ” means: “[a] to exercise control over the wages, hours or working conditions, or [b] to suffer or permit to work, or [c] to engage, thereby creating a common law employment relationship." [22]

The Supreme Court in Martinez, concluded: “In sum, we hold that the applicable wage order’s definitions of the employment relationship do apply in actions under [Labor Code] section 1194 [concerning overtime and minimum wage claims]. The opinion in Reynolds [citation], properly holds that the IWC’s definition of ‘employer’ does not impose liability on individual corporate agents acting within the scope of their agency. [Citation.] The opinion should not be read more broadly than that.” [23]

Despite Martinez setting a new course on the definition of “employer” in California wage law, with rare exceptions, [24] courts remained reluctant to find liability against an individual, harkening back to Reynolds [25] - until now.

IV. Turman Clarifies Martinez’s Application to Individual Defendants

The Turman decision finally provides clarity regarding who may be personally liable as an employer.

A. Trial Court Decision

The underlying case, originally filed in 2010, sub. nom. Quiles, et. al. v. Koji’s Japan, Inc. et al. (Orange Cnty. Sup. Ct.) Case No. 30-2010-00425532, was filed on behalf of low-wage restaurant workers at two restaurants. [26] Plaintiffs brought a class action lawsuit alleging wage theft against the closely-held corporation that owned the restaurants. [27] The restaurant’s sole shareholder, president, and director, Mr. Parent, closed the restaurants after the case was filed. [28] Though the restaurant-corporation’s bank accounts were drained of funds, Mr. Parent stipulated to a net-worth of over $10 million. [29] After the closures, the litigation focused on whether workers could recover their unpaid wages from Mr. Parent as a joint employer, or alternatively, from him and his other business entity as the restaurant-corporation’s alter egos. [30]

In 2015, after a bench trial on joint employer and alter ego liability, the trial court ruled that although Mr. Parent had “absolute control” over his restaurant business, and could be personally liable under the FLSA’s “economic reality test,” [31] Mr. Parent could not be a joint employer under California law, based on the Supreme Court’s ruling in Reynolds, which (the trial court held) survived Martinez. [32] The trial court reasoned that Reynolds was binding because it dealt with the application of joint-employer liability for officers, directors, and managers of a closely-held corporation, whereas Martinez dealt with corporate joint-employers. [33]

The trial court expressed concern that if it found Mr. Parent liable by virtue of his control as a sole shareholder and president of the restaurants, then all owners of closely-held corporations would be liable for wage violations. [34]

B. Appellate Decision

On November 7, 2017, the California Court of Appeal ordered the trial court to vacate its ruling on Mr. Parent’s joint employer liability (among other vacated rulings). The Court of Appeal held that a Mr. Parent’s status as a sole shareholder and president of a company cannot insulate him from wage and hour liability, if his actions meet any one of the three definitions of an employer as set out in Martinez. [35] The Court was careful to note that the IWC’s three-part test “incorporates the common law definition definition as one [of the three] alternative” definitions. [36]

The Court’s reasoning demonstrates that the joint employer inquiry for Mr. Parent should be no different than for a parent corporation. In reaching its’ decision, the Court analogized to two recent rulings involving corporate joint employers. See Castaneda v. Ensign Group, Inc. (2014) 229 Cal.App.4th 1015, 1017-1018 (“A corporation with no employees owns a corporation with employees. If the corporation with no employees exercises some control over the corporation with employees, it also may be the employer of the employees of the corporation it owns.”); Guerrero v. Superior Court (2013) 213 Cal.App.4th 912, 950 (“an entity that controls the business enterprise may be an employer even if it did not “directly hire, fire or supervise” the employees.”). [37]

The Court of Appeal found that Mr. Parent was not a removed sole shareholder and president who kept his hands off of the Koji’s restaurants’ operations. The Court pointed to trial court findings that Mr. Parent: “‘dominated and controlled’ Koji’s;’” “was the ‘big boss’ to Koji’s employees;” “‘had the ability to control [Koji’s], whether he chose to delegate that authority to managers or not;’” and exerted “‘actual control over the employees of Koji’s” when he “‘hired and fired’” non-exempt managers; instructed his managers to “get rid of” the original named plaintiff after she filed the lawsuit, resulting in her swift termination; and chose to lay off all employees by closing the restaurants. [38]

The Court of Appeal appropriately expressed the flip-side of the trial court’s concern - in light of courts’ duty to enforce the wage laws robustly, and the difficulty workers have collecting against closely-held companies. If Mr. Parent “was immune from [joint employer] liability liability, notwithstanding such activity, because he was simply a corporate agent acting within the scope of his agency,” then “no sole shareholder and officer of a closely-held corporation would ever be liable as a joint employer for wage violations, even if he or she suffered or permitted another to work, controlled wages hours and working conditions, or engaged employees.” [39]

Finally, the Court rejected the trial court’s holding that the FLSA’s “employer” definition is broader than California’s, noting that analysis of joint employer liability under the FLSA and the Labor Code “ordinarily involves the consideration of similar factors.” [40] Indeed, as Martinez made clear, California’s definition of employer is broader than the FLSA’s. [41] The Court observed that the trial court’s ruling that Mr. Parent was a federal joint employer cast serious doubt upon its state joint employer analysis. 

V. California Fair Day’s Pay Act Placed “Other Persons” on the Hook

After extensive negotiations in drafting and intense lobbying by the California Employment Lawyers Association, Wage Justice, and others, on January 1, 2016, the California Fair Day’s Pay Act [42] took effect, which specifies that owners, directors, officers, and managing agents may be liable for violations of overtime and minimum wages (Cal. Lab. Code. §§ 1193.6, 1194), meal and rest breaks (Cal. Lab. Code § 226.7), waiting time penalties (Cal. Lab. Code § 203), itemized wage statements (Cal. Lab. Code § 226), and indemnification (Cal. Lab. Code § 2802) statutes. [43] Labor Code section 558.1, provides that an “employer,” and any “other person acting on behalf of an employer, who violates, or causes to be violated” any of those wage statutes may share liability. [44] “Other person” is defined as “a natural person who is an owner, director, officer, or managing agent.” [45]

Section 558.1 clarified the scope of personal liability for common wage violations occurring after January 1, 2016. [46] It will take time for meaningful case authority on section 558.1 to develop, but thus far, defense counsels’ attempts to dramatically limit its application have failed. [47] Regardless of how section 558.1 jurisprudence develops, employees and advocates may now rely on Turman to hold bad business owners, officers, and directors accountable, applying the three-part Martinez v. Combs test. 

Footnotes

[1] See, e.g., Noam Scheiber, “Labor Board Reverses Ruling That Helped Workers Fight Chains,” NYTimes (Dec. 14, 2017), available at https://nyti.ms/2jTDOIQ; Christine Owens (Op-Ed), “Don’t Let Congress Cheat Workers Out of Basic Rights,” NYTimes (Nov. 8, 2017), available at https://nyti.ms/2hmQDNP.

[2] This article focuses on direct, statutory liability under California wage laws and the Business and Professions Code - not alter ego liability, an equitable doctrine which has always remained an option - albeit, typically an uphill battle for workers to invoke. Generally, alter ego is available to cure an inequitable result - focusing on corporate formalities, overlapping finances, etc. - rather than wages, hours, and working conditions. Turman emphasizes that for alter ego liability to attach, a worker need not show fraud in the inception as to a business entity, but must only show that maintaining the corporate shield would perpetuate an inequitable result. See Turman, 17 Cal.App.5th at 980-981.

[3] See e.g., 29 C.F.R. § 791.2 (regulation defining joint employment under Fair Labor Standards Act (“FLSA”)); Pruitt v. Industrial Acc. Commission of Cal. (1922) 189 Cal. 459, 461 (recognizing joint employer liability in workers’ compensation context).  

[4] A 2013 empirical study by the UCLA Labor Center and the National Employment Law Project examined data from the Labor Commissioner’s wage claim cases between 2008 and 2011 and determined that in 60% of cases where the employer was held liable, the employer was found to be non-active, e.g. having a status of suspended, forfeited, cancelled, or dissolved with the California Franchise Tax Board or the California Secretary of State. Eunice Hyunhye Cho, et al., Nat’l Emp’t Law Project & UCLA Lab. Ctr., Hollow Victories: The Crisis in Collecting Unpaid Wages for California’s Workers (2013) 1, 10-14. The study also found that only 17% of workers who prevailed before the Labor Commissioner ever recovered money from the judgment awarded. Id. at 2, 13-14.

[5] Martinez, 49 Cal.4th at 49 (describing the overtime and minimum wage statute, Labor Code § 1194). There are some wage claims where the “employer” definition is further defined, for example - as to unlawful tip pooling, Labor Code § 350 defines “employer” to include every “person” “irrespective of whether the person is the owner of the business” and a liable employer’s “agent” as one “having the authority to hire or discharge any employee or supervise, direct, or control the acts of employees.”

[6]  Id. at 50, 52; Kilby v. CVS Pharmacy, Inc. (2016) 63 Cal.4th 1, 9 n.3 (“Although the Legislature defunded the IWC in 2014, its wage orders remain in effect.”).

[7] See IWC wage orders Nos. 1-2001 through 16-2001, Cal. Code. Regs., tit. 8, §§ 11010-11160.

[8] Id. at subd. 2(H).

[9] Id. at subd. 2(E).

[10] See Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1338 (discussing scope of UCL protections); County of Solano v. Vallejo Redevelopment Agency (1999) 75 Cal. App.4th 1262 (citing Rest. of Restitution, § 1: “A person who has been unjustly enriched at the expense of another is required to make restitution to the other.”). Turman is the first case to expressly hold that courts have the obligation to assess whether an individual is liable for wage violations under the UCL standard separately from whether he/she is liable under the Labor Code.

[11] Federal courts enforcing PAGA have held individual owners liable for wage violations for  years. McDonald v. Ricardo’s on the Beach, Inc. (C.D. Cal. Jan. 15, 2013) 2013 WL 153860, at *4; Ontiveros v. Zamora (E.D.Cal. Feb. 20, 2009) 2009 WL 425962, at *6. As with the UCL, Turman expressly held that a Court must consider the PAGA standard separately, in determining an individual’s liability for wage violations.

[12] Reynolds, 36 Cal.4th at 1081.

[13] Id. at 1085-1089.

[14] Martinez, 49 Cal.4th at 63 (citing Reynolds, 36 Cal.4th at 1086).

[15] Reynolds, 36 Cal.4th at 1086 (ital. added).

[16] Id. at 1087-1088. The Reynolds concurrence by Justice Carlos Moreno did acknowledge, “The exploitation of such vulnerable workers by unscrupulous individuals hiding behind the corporate form takes place against a backdrop of diminished public resources for the enforcement of the state's labor laws . . . . [PAGA], in time, may provide workers with a mechanism for recovering unpaid overtime wages [from] corporate officers and agents in some cases. (§ 558, subd. (a)).” Id. at 1094.

[17] Id.

[18] See, e.g., Bradstreet v. Wong (2008) 161 Cal.App.4th 1440, 1449-1455 abrogated by Martinez, 49 Cal.4th 3 (shareholders, officers, managing agents not liable under Reynolds); Jones v. Gregory (2006) 137 Cal.App.4th 798, 800, 803-806, 810 abrogated by Martinez, 49 Cal.4th 35 (sole corporate owner not liable under Reynolds); Martinez v. Antique & Salvage Liquidators (N.D. Cal. Feb. 8, 2011) 2011 WL 500029, at *5 (relying on Reynolds).

[19] Martinez, 49 Cal.4th at 62, 66.

[20] Id. at 59 (citing to Cal. Lab. Code §§ 1173, 1178.5; see Stats. 1913, ch. 324, §§ 3, 5 & 6, pp. 633–635).

[21] Id. at 62.

[22] Id. at 64.

[23] Id. at 66.

[24] See, e.g., Garcia v. Bana (N.D. Cal. Feb 19, 2013, No. C 111-02047 LB) 2013 WL 621793, at **1, 8-9, aff’d (9th Cir. 2015) 597 Fed.Appx. 415 (after a bench trial, the court found individual-owner defendant was a joint employer under California and federal wage laws, where he “had the power to hire and fire [plaintiff], supervised and exercised control over [plaintiff]’s wages, hours, and working conditions, determined the method of payment of Mr. Garcia’s wages, and maintained [the business’s] employment records”).

[25] See, e.g., Bain v. Tax Reducers, Inc. (2013) 161 Cal.Rptr.3d 535, 564-567 (depublished Dec. 11, 2013) (holding that Martinez affirmed Reynolds); Guifu Li v A Perfect Day (N.D. Cal. 2012) 281 F.R.D. 373, 402 n.28 (Martinez notwithstanding, Reynolds “forecloses Plaintiffs’ ability to hold a corporation’s directors, officers, and shareholders personally liable for the corporation’s state law wage and hour violations”).

[26] Turman, 17 Cal.App.5th at 972, 974.

[27] Id. at 974-975.

[28] Id. at 974.

[29] Parent made the stipulation in a related proceeding. The original named plaintiff, Amanda Quiles, obtained a jury verdict that Parent retaliated against her in violation of the federal FLSA for filing the wage and hour class action, saying “get rid of her” after learning of her lawsuit. Though her wage loss was only $3,000 and her emotional distress was just $27,500, the jury awarded $350,000 in punitive damages, based upon Parent’s stipulated $10 million net worth.

[30] See Turman, 17 Cal.App.5th at 974-978.

[31] Id. at 978, 987; Statement of Decision on Trial of Issues of Alter Ego and Joint Employer, Quiles (Apr. 2, 2015) Case No. 30-2010-00425532, at p. 10:22-23.

[32] Id. at 978, 983-984.

[33] Id. at 983-984.

[34] Id. at 986.

[35] Id.

[36] Id. at 985.

[37] Id. at 986.

[38] Id.

[39] Id.at 986-987.

[40] Id. at 987 (citing Martinez, 49 Cal.4th at 59-60).

[41] See Guerrero, 213 Cal.App.4th at 945; Torres v. Air to Ground Servs., Inc. (C.D. Cal. 2014) 300 F.R.D. 386, 394 (citing Martinez for the proposition that “the IWC’s definition of ‘employer’ is designed to afford greater protection to employees than the FLSA’s definition of that term”); Carrillo v. Schneider Logistics Trans-Loading & Distribution, Inc. (C.D. Cal. Jan. 14, 2014) 2014 WL 183956, at *15 n. 5 (California joint employer standard broader than FLSA’s). See also generally Mendiola v. CPS Sec. Solutions, Inc. (2015) 60 Cal. 4th 833, 843 (“Federal regulations provide a level of employee protection that a state may not derogate. Nevertheless, California is free to offer greater protection.”).

[42] Stats. 2015, Ch. 803, Sec. 10. (SB 588), codified as Cal. Lab. Code § 558.1.

[43] Cal. Lab. Code § 558.1 subd. (a).

[44] Id.

[45] Cal. Lab. Code § 558.1 subd. (b).

[46] Cal. Lab. Code § 558.1 subd. (c) (“Nothing in this section shall be not construed to limit the definition of employer under existing law.”).

[47] See, e.g., Carter v. Rasier-CA, LLC (N.D. Cal., Sept. 15, 2017) 2017 WL 4098858, at *5 n.1 (“Defendants’ attempt to limit California’s ‘A Fair Day’s Pay Act’ to enforcement actions by the Labor Commissioner is belied by the language of the provision itself”).