A decision earlier this month by a California Court of Appeal in Dynamex v. Superior Court greatly (and unnecessarily) complicates the determination of whether an employee is an independent contractor or an employee, and in some instances makes it extremely difficult for an employer to defeat class certification of an independent contractor misclassification claim.
The plaintiff in the case was a delivery driver for Dynamex, a nationwide courier and delivery service. Dynamex used to classify its drivers as employees, but in 2004 Dynamex converted its drivers to independent contractor status. One driver thanked Dynamex with a lawsuit alleging that the reclassification to independent contractor status violated California law. The plaintiff, who sought to represent a class of about 1,800 Dynamex drivers, alleged that due to their improper independent contractor classification, they were unlawfully denied overtime compensation and expense reimbursement. The trial court ultimately certified a class. Dynamex later sought to have the class decertified, arguing that the trial court applied the wrong legal standard for determining whether common issues predominated on liability. The trial court applied the definitions of “employ” and “employer” found in the applicable IWC wage order (Wage Order No. 9, applicable to the transportation industry). That wage order defines “employ” as “to engage, suffer, or permit to work,” and 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.” Applying these definitions, the trial court concluded that determining whether the drivers were “employees” (as opposed to independent contractors) within the meaning of the wage order could be determined based on common proof and would not require numerous individualized inquiries. As such, the trial court concluded that class certification was proper.
Dynamex sought to have the court of appeal decertify the class, arguing that the trial court applied the wrong test for determining whether a worker is an employee or an independent contractor. Dynamex argued that the multi-factor test set forth by the California Supreme Court in S.G. Borello & Sons v. Dep’t of Indus. Relations, 48 Cal.3d 341 (1989), applied and that under this test, liability could not be established based on common proof, but instead would require individualized inquiries concerning the degree of control Dynamex exercised over any individual driver, along with other individualized inquiries relevant to the Borello factors.
The court of appeal agreed with Dynamex – well, sort of. With highly questionable reasoning, the court essentially held that the test for independent contractor vs. employee status varies, depending on what wage and hour violation is being alleged. Thus, if a worker is alleging that the employer violated a provision of an applicable wage order, then the wage order definitions of “employer” and “employ” apply to determine whether the worker is an employee. However, if the worker is alleging wage and hour violations that are not based on violation of a wage order but rather on some other provision of law (e.g. a Labor Code requirement that is not also set forth in the wage order), then Borello’s multi-factor common law test for employee/independent contractor status applies. Thus, the court looked at the claims alleged by the drivers against Dynamex and held that to the extent the claims were based on violations of the wage order (e.g. the overtime claim), the trial court had properly applied the definitions of “employ” and “employer” set forth in the wage order to grant class certification. However, the court held that to the extent the drivers’ other claims did not fall under the wage order, the trial court would need to reconsider whether class certification was appropriate based on application of the Borello test. More specifically, the court explained that the wage order expressly covers expense reimbursement of certain types of expenses (e.g. tools, uniforms), but may not cover all of the types of expenses for which the driver class was seeking reimbursement (e.g. rental or purchase of personal vehicles). On remand, the trial court will have to consider which of the expense claims are for expenses covered by the wage order and which are not, and for claims that fall outside the wage order the trial court will have to re-assess the propriety of class certification using the multi-factor Borello test.
The Dynamex decision is a bad one for employers defending class claims for independent contractor misclassification for two important reasons. First, as a practical matter, application of the wage order definitions of “employ” and “employer” makes it virtually impossible for an employer to prevail in establishing that a worker is an independent contractor because all workers are "engaged" and "permitted to work" which makes the hiring entity an "employer" under the wage order, as interpreted by the Dynamex court. Second, the Dynamex decision makes it much easier for a class to be certified in an independent contractor misclassification case because the wage order definitions of "employ" and "employer" are much more susceptible to common proof than the Borello factors. For these reasons, the decision magnifies the risk of classifying workers as independent contractors in California. In this author’s opinion, the Dynamex decision is questionable because it relies predominantly on caselaw applying the wage order definitions to determine whether an third party could be held liable for wage and hour violations as a “joint employer.” Joint employer analysis has nothing to do with independent contractor classification analysis. It seems likely that this issue will end up before the California Supreme Court. In the meantime, however, California employers should tread cautiously and carefully in classifying workers as independent contractors because the court decision trend in this area has been largely unfavorable for employers -- with several recently publicized cases finding employers liable for misclassification of workers as independent contractors and now the Dynamex court holding that an "employee" includes any worker "engaged" or "suffered or permitted" to work.
Earlier this summer, the California Supreme Court ruled in Iskanian v. CLS that while class action waivers in employment arbitration agreements are enforceable, similar waivers of the right to bring a representative action under PAGA are not enforceable. The Court reasoned that preventing a representative action under PAGA is contrary to California public policy because it undermines the state’s interest in fully penalizing employers who violate labor laws. The Iskanian Court ruled that California’s public policy was not preempted by the Federal Arbitration Act (“FAA”) because the FAA only applies to arbitration of private disputes and a PAGA plaintiff represents the interests of the state, not himself, such that the claim isn’t really a private dispute between an employee and his employer but rather a dispute between the state of California and a private employer. The Court held that the FAA does not apply to disputes between a state agency and a private employer. This reasoning is a stretch in this author’s opinion. At least one (so far) federal district court in California apparently agrees, having chosen not to follow Iskanian. In Fardig v. Hobby Lobby, a wage and hour putative class action, a Central District judge granted the employer’s motion to compel arbitration, rejecting the plaintiffs’ argument that a PAGA representative action waiver in the arbitration agreement was unenforceable. The court held that FAA preemption is an issue of federal law and that federal courts are not bound by the California Supreme Court’s opinion that the FAA does not preempt California public policy with respect to PAGA representative action waivers. The court went on to hold that it disagreed with Iskanian and that a PAGA claim filed by an employee is a dispute between the employee and his employer, not between the state of California and the employer. As such, the district court held that the FAA applied and preempted any California public policy weighing against enforceability of a PAGA representative action waiver. This means that the individual plaintiffs will now have to litigate their individual wage claims in private arbitration and do not have the right to pursue any class or representative PAGA claims in any forum.
The Fardig v. Hobby Lobby decision (August 11, 2014, Central District Case No. SACV 14-00561 JVS) is a favorable development for California employers as it demonstrates that there is some continued viability of PAGA representative action waivers in employment arbitration agreements, notwithstanding Iskanian. Employers should also note that the parties is Iskanian have until late September to petition for review of the decision by the United States Supreme Court. If that happens, it is quite possible that the Supreme Court will reverse the PAGA portion of the Iskanian opinion. Even if review is not sought (or is sought but denied), employers facing the issue of enforceability of a PAGA representative action waiver should remove California state court cases to federal court wherever possible.
Last week a California Court of Appeal held that class certification was appropriate in a case alleging that the employer failed to reimburse employees for expenses associated with using their personal cell phones for work calls. At the trial court level, the employer successfully opposed class certification, arguing that liability could not be established on a class wide basis because it required individualized inquiry regarding whether an employee purchased a plan over and above what he normally would have had for purely personal use, and/or whether the employee incurred charges over and above his personal plan. The employer also argued that if someone other than the employee paid the employee’s cell phone bill, the employee would not have standing to pursue a claim for relief and this also created individualized issues. In addition to the individualized issues bearing on liability under Labor Code section 2802, the employer also successfully argued that damages would be highly individualized. The trial court denied class certification based on the predominance of individualized issues.
The Court of Appeal reversed, holding that the trial court abused its discretion in denying class certification. The Court of Appeal held that the trial court relied on the wrong standard for liability for a reimbursement claim under Labor Code section 2802. According to the Court of Appeal, all that is required to prove liability under Labor Code section 2802 is that the employee necessarily incurred expenses in the course of his job duties. The employee does not need to prove that he incurred expenses over and above what he would have incurred absent the job, nor does he have to prove that he actually paid his cell phone bill. The court held that if the rule were otherwise, the employer would receive a windfall by being able to pass on some of its operating expenses to employees. Thus, the court held that to be in compliance with Labor Code section 2802, “the employer must pay some reasonable percentage of the employee’s cell phone bill” if the employee uses a personal cell phone for work purposes. In other words, "reimbursement is always required." The court did not define what a “reasonable percentage” is, but instead held that “the calculation of reimbursement must be left to the parties and the court in each particular case.”
Based on its interpretation of the standard for liability under Labor Code section 2802, the Court of Appeal held that a class should have been certified because liability could be determined on a class wide basis and did not depend on adjudication of numerous individualized issues. The court acknowledged that damages issues were “more complicated” (i.e. individualized) but held that individualized damage issues do not defeat class certification and that the trial court could employ statistical sampling to calculate damages under the standards set forth by the California Supreme Court in Duran v. U.S. Bank.
The case is Cochran v. Schwan Home Service, Inc. and is available here. Employers that have employees using personal cell phones for business calls should review their expense reimbursement policies to ensure that these employees are reasonably compensated for the expense of making business calls on their personal devices.
In a case that CDF has been handling since its inception in 2001, we are pleased to report that yesterday the California Supreme Court issued its opinion in Duran v. U.S. Bank National Association, affirming in full a Court of Appeal decision overturning a $15 million judgment in favor of a class of Business Banking Officers (“BBOs”) who alleged that they were misclassified as exempt outside salespersons and owed overtime wages. The California Supreme Court agreed with the Court of Appeal that the trial plan resulting in the judgment was fundamentally flawed and violated U.S. Bank’s due process rights. The flawed trial plan involved the use of sampling and “representative” testimony of just 21 class members to determine class-wide liability and restitution to the entire class of 260 BBOs. The plan precluded U.S. Bank from presenting evidence or testimony bearing on liability or damages as to any class member outside the 21-person sample. Thus, U.S. Bank was precluded from, among other things, presenting evidence that 1/3 of the class members had executed declarations under oath establishing that spent the majority of their time on sales duties outside the Bank and, therefore, were properly classified. U.S. Bank was also precluded from presenting evidence that the four prior named Plaintiffs in the case also all testified under oath that they spent the majority of their time on sales duties outside the Bank. Based instead only on the limited evidence surrounding the small sample, the trial court found that the entire class was misclassified. The trial court then allowed the overtime hours reported by the sample group to be extrapolated to the entire class (with a 43% margin of error), resulting in a verdict of $15 million and an average recovery of over $57,000 per person. U.S. Bank appealed.
The Court of Appeal reversed the judgment, holding that the trial plan violated U.S. Bank’s constitutional due process rights by preventing U.S. Bank from presenting its affirmative defenses. The Court of Appeal also held that the trial court should have decertified the class based on the demonstrated unmanageability of individual issues at trial. Our post on the Court of Appeal decision is available here. The California Supreme Court granted review and issued its opinion affirming the Court of Appeal’s decision in full.
The Trial Court’s Use of Sampling Was “Profoundly Flawed”
In upholding the reversal of the judgment, the California Supreme Court explained that “the judgment must be reversed because the trial court’s flawed implementation of sampling prevented USB from showing that some class members were exempt and entitled to no recovery.” The Court explained that misclassification cases, and particularly cases involving the outside salesperson exemption, have the “obvious potential” to generate individual issues “because the primary considerations are how and where the employee actually spends his or her workday.” In such cases, “a defense in which liability itself is predicated on factual questions specific to individual claimants poses a much greater challenge to manageability.” The Court acknowledged that trial courts may employ various procedural tools to manage individual issues at trial, including statistical sampling, but emphasized that any such trial plan "must allow for the litigation of affirmative defenses, even in a class action case where the defense touches upon individual issues." Additionally, the trial plan must be statistically sound. "[W]hen a trial plan incorporates representative testimony and random sampling, a preliminary assessment should be done to determine the level of variability in the class. If the variability is too great, individual issues are more likely to swamp common ones and render the class action unmanageable." Against this backdrop, the Court held that the trial plan in this case was a "flawed statistical plan that did not manage but instead ignored individual issues." The Court explained that the parties' evidence revealed great variation among class members in the amount of time they spent outside the Bank and that such variation signaled that the exemption question could not be resolved by a simple "yes" or "no" answer as to the entire class. However, the trial plan ignored this variation by limiting the evidence from which liability would be determined to a small, unrepresentative sample of class members. The Court criticized the trial court's arbitrary determination of the size of the sample, which was done without any expert input or validation, and further attacked the trial court's method of determining which class members would comprise the purportedly "random" sample. This is because, among other things, the trial court allowed the named plaintiffs to be in the "representative" sample and also allowed BBOs to choose to opt-out of the trial sample (even though there was evidence that several class members with testimony favorable to the Bank opted out on the urging of Plaintiffs' counsel). The Court also heavily criticized that the plan precluded U.S. Bank from presenting relevant evidence relating to BBOs outside the sample group:
"The court's decision to extrapolate classwide liability from a small sample, and its refusal to permit any inquiries or evidence about the work habits of BBOs outside the sample group, deprived USB of the opportunity to litigate its exemption defense. USB repeatedly submitted sworn declarations from 75 class members stating that they worked more than half their time outside the office. This evidence suggested that work habits among BBOs were not uniform and that nearly one-third of the class may have been properly classified as exempt and lacking any valid claim against USB. USB also sought to introduce live testimony from witnesses about their work outside the office as BBOs. Yet the court refused to admit any of this evidence or allow it to be considered by experts as part of a statistical sampling model. Instead, extrapolating findings from its small sample 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. 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."
Thus, while the Court did not go so far as to say that statistical sampling may never be used to prove liability in a wage and hour class action, the Court strongly emphasized that any such use must, as a matter of constitutional due process, still allow the defendant to present its affirmative defenses.
The Court acknowledged that the use of statistical methods to prove damages in a class action is more acceptable than to prove liability, but that the statistical methods still must be scientifically sound and expert-endorsed. Here, the trial court's extrapolation of overtime from the sample group to the entire class had an astounding 43% margin of error, which the Court held was unacceptably high, in addition to having been linked to an invalid finding of classwide liability. For these reasons, the Court held that the judgment could not stand.
The Class Properly Was Decertified
In addition to holding that the trial plan was unconstitutional and required reversal of the judgment, the Court also held that the class properly was decertified due to the lack of manageability of individual issues surrounding U.S. Bank's exemption defense. The Court emphasized that the presence of common issues does not necessarily mean that class certification is appropriate, if there are still individual issues that cannot be effectively managed at trial, as was the case here. The Court instructed that the time to consider manageability issues is at the class certification stage, not at trial. "In considering whether a class action is a superior device for resolving a controversy, the manageability of individual issues is just as important as the existence of common questions uniting the proposed class." The Court held that while statistical methods possibly may be used to manage individual issues, such "methods cannot entirely substitute for common proof." "There must be some glue that binds class members together apart from statistical evidence." If statistical evidence will comprise a part of the proof on a class action claim, trial courts should consider at the class certification stage how such methods will be used and whether they will effectively and fairly manage individual issues. "Rather than accepting assurances that a statistical plan will eventually be developed, trial courts would be well advised to obtain such a plan before deciding to certify a class action. In any event, decertification must be ordered whenever a trial plan proves unworkable."
Because the trial court had "no evidence establishing uniformity in how BBOs spent their time" and the trial plan wholly failed to manage individual issues bearing on U.S. Bank's exemption defense, class certification could not stand.
The Court's decision is clearly favorable for California employers defending wage and hour class actions, both on certification principles and on the use of statistical methods to prove liability and damages in such cases. The decision confirms a class action defendant's right to present its affirmative defenses, even where those defenses hinge on individualized issues, and also underscores that manageability issues must be at the forefront of the initial decision to certify a class. CDF has represented U.S. Bank throughout this litigation and is very pleased to report this outstanding result.
Yesterday the Ninth Circuit issued its decision in Rea v. Michaels Stores, reversing a remand order and finding that the defendant employer’s removal of the case to federal court under the Class Action Fairness Act (CAFA) was proper. In line with its decision last year in Roth v. CHA Hollywood Medical Center, the Ninth Circuit reaffirmed that a defendant’s removal options are not limited to the two 30-day windows specified in the federal removal statute. As long as the defendant has not run afoul of either 30-day removal window (meaning that no pleading or other paper revealed on its face that the action was removable), the defendant may remove at any time based on its own information and investigation. The Ninth Circuit also reaffirmed its holding last year in Rodriguez v. AT&T Mobility Services, that the preponderance of evidence standard (and not the legal certainty standard) applies to CAFA removals and that allegations in a complaint purporting to limit the amount in controversy to under $5 million are not binding and do not prevent removal under CAFA.
Applying these principles to the Michaels Stores case, a wage and hour class action alleging misclassification of store managers, the Ninth Circuit held that the employer’s removal was timely, even though it was filed years into the litigation and not within 30 days of any initial or subsequent pleading. The court also held that Michaels had sufficiently demonstrated that the amount in controversy “could exceed $5 million” based on evidence that Michaels expected its managers to work 45 hours per week, along with deposition testimony of putative class members stating that they in fact regularly worked 45 or more hours per week. Extrapolating these overtime hours to the number of employees in the putative class resulted in alleged overtime damages exceeding $5 million. The court held that this evidence (particularly in the absence of any contrary evidence) was sufficient to meet the employer’s burden of proving by a preponderance of the evidence that the amount in controversy requirement was met. For these reasons, the Ninth Circuit held that the district court’s order remanding the case to state court was erroneous.
Notably, while the plaintiff’s petition for review of the remand order was pending before the Ninth Circuit, the litigation proceeded on remand in the state court, resulting in a class being certified. The plaintiff argued before the Ninth Circuit that this grant of class certification turned the Complaint’s non-binding allegation limiting recovery to under $5 million into a binding allegation, thereby precluding CAFA jurisdiction. The Ninth Circuit rejected this argument, reasoning that post-removal developments are not relevant to assessing whether removal was proper at the time the removal was filed and that such subsequent developments do not defeat an otherwise proper removal.
The Rea v. Michaels Stores decision is helpful for employers defending wage and hour class actions in California state courts but seeking to remove those actions to federal court. The full decision is available here.
This month, a San Francisco district court denied class certification in Lou v. Ma Laboratories, ruling that class counsel was inadequate due to their simultaneous involvement in two class actions against Ma Laboratories, a global distributor of computer components. The Lou case alleged FLSA and wage and hour claims, such as failure to pay overtime, failure to provide off duty breaks, failure to timely pay final wages, failure to keep accurate wage statements, and unfair competition. Similarly, Tian v. Ma Laboratories alleged nearly identical California wage and hour violations.
Before certifying a class, courts must consider whether the attorneys representing a proposed class are adequate. In doing so, a court will analyze (a) whether there are any conflicts of interest between counsel, the named plaintiffs or other class members, and (b) whether counsel can vigorously prosecute their case on behalf of the class. In federal court, Rule 23(A)(4) requires class counsel to “fairly and adequately protect the interests of the class.”
Ultimately, the court found a conflict of interest existed due to the attorneys’ simultaneous representation of two classes against the same defendant on many of the same claims. Given this conflict, class counsel could not fairly and adequately represent the interests of the class. The Lou court noted that class counsel “wield great power” in their strategic decisions concerning litigation and settlement and the class deserved “to be championed by its counsel unencumbered by their duties to other clients.” As a result, this denial of class certification for inadequacy of class counsel can be viewed as a victory for employers defending against multiple class actions in California for similar claims.
This week, the Ninth Circuit has issued two new decisions on the enforceability of arbitration agreements post-Concepcion. In the first case, Ferguson v. Corinthian Colleges, the court issued an opinion favoring enforcement of arbitration agreements by striking down over a decade of California-based precedent holding that arbitration may not be compelled where the action is one seeking public injunctive relief. This precedent was widely known as the “Broughton-Cruz” rule (which was also adopted by the Ninth Circuit in Davis v. O’Melveny & Myers). The Ninth Circuit correctly held that, in light of the Supreme Court’s instruction in Concepcion, courts cannot carve out particular types of claims (such as claims for public injunctive relief) from arbitration. In the Corinthian Colleges case, the plaintiffs were vocational students who alleged that the college misled them through misrepresentations about future employment opportunities. The plaintiffs sought an injunction to preclude the college from continuing to make such misrepresentations to recruit future students. Corinthian sought to compel arbitration of the plaintiffs’ claims, but a federal district court refused to enforce the arbitration agreement. The Ninth Circuit reversed, holding that the claims were arbitrable regardless of the fact that they sought public injunctive relief. While not an employment case, the Corinthian Colleges case provides further federal precedent preventing California district courts from refusing to enforce arbitration simply because a specific type of claim is at issue. This principle applies equally to disputes concerning arbitration agreements in employment cases. The Corinthian Colleges case is available here.
The Ninth Circuit’s second arbitration decision this week was less arbitration-friendly. That case, Chavarria v. Ralphs Grocery, involved an employment arbitration agreement between a grocery store employee and the grocery chain. The employee filed a putative class action for alleged Labor Code violations and Ralphs sought to compel arbitration of the individual employee’s claim based on an arbitration policy the employee accepted as part of her employment application. The district court found the arbitration agreement unconscionable under California law and refused to compel arbitration. This week, the Ninth Circuit agreed with the district court’s holding that the agreement was unconscionable and unenforceable under California law (i.e. Armendariz and its progeny). The court specifically held that Concepcion and subsequent United States Supreme Court decisions do not affect the continued validity of state law unconscionability doctrine as a means for invalidating an arbitration agreement. Applying California’s unconscionability law, the court held that Ralphs’ arbitration agreement was procedurally unconscionable because it was presented to employees on a “take it or leave it” basis with no ability to negotiate, and the arbitration terms were not provided to employees until three weeks after they signed the agreement (i.e. the employment application). The court also agreed with the district court’s finding that the agreement was substantively unconscionable, meaning that it was unfairly one-sided so as to “shock the conscience.” The court focused on two provisions of the arbitration policy—the arbitrator selection provision and the costs provision. With respect to arbitrator selection, the court determined that the process would always result in the arbitrator being one proposed by Ralphs, which was unfairly one-sided. That is because the policy provided that each side could propose three arbitrators, followed by an alternating strike method allowing the party not demanding arbitration to strike first. In the court’s view, the party not demanding arbitration would always be Ralphs in any employee-initiated claim and that would always result in the last arbitrator standing being on Ralphs' list. (In this author’s view, that interpretation is a little tortured because in a typical case, the employee files a lawsuit in state court rather than “demanding” arbitration. The employee opposes arbitration and the employer has to “demand” it by making a motion to compel arbitration with the court. Ralphs also made this argument, but the Ninth Circuit rejected it.) The policy also specifically disallowed the use of AAA or JAMS arbitrators, which meant that those institutions’ rules for neutral arbitrator selection could not be used.
As to the costs provision in the policy, the Ninth Circuit held that this too was unconscionable. The policy itself is somewhat unclear, but generally provides that the arbitrator is to apportion arbitration-related fees to the parties at the outset of the proceeding subject to United States Supreme Court precedent on the subject and that if such precedent requires Ralphs to pay up to all of the arbitration fees, Ralphs would do that, but if United States Supreme Court precedent did not require such a result, then the arbitrator could apportion the arbitration fees/costs equally between the parties. The Ninth Circuit interpreted this provision as requiring the arbitrator in every case to impose substantial and prohibitive fees on the employee at the outset of the arbitration, so as to effectively preclude the employee from continuing with arbitration at all. On this basis, along with the unfair arbitrator selection provision, the court held that the agreement was substantively unconscionable. Having found that the agreement was both procedurally and substantively unconscionable, the court held that the arbitration agreement as a whole was unenforceable and that the employee could proceed with her claims in court. The Ralphs Grocery decision is available here.
The Ralphs Grocery decision, coupled with last week’s California Supreme Court decision in Sonic Calabasas, confirms that California state and federal courts will continue to recognize and apply California unconscionability law to review and potentially refuse to enforce employment arbitration agreements. Thus, litigation over the enforceability of these agreements is certain to continue, even though there have been huge employer-friendly gains in the last couple of years strengthening the enforceability of these agreements. The continued validity of the unconscionability doctrine serves as an important reminder to employers to review their arbitration policies and agreements to ensure that they pass muster under these standards. Employers are also reminded that important cases are still pending before the California Supreme Court on the issue of the enforceability of class action waivers in employment arbitration agreements and whether California's "Gentry" analysis for evaluating the enforceability of these waiver provisions is still valid in the wake of Concepcion. We will keep you updated on further developments in this area.
Today the United States Supreme Court issued its opinion in American Express Co. v. Italian Colors Restaurant, holding that courts may not invalidate a contractual waiver of class arbitration simply because the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery he or she might receive. This case is not an employment case, but a case involving a merchant with a credit card contract with American Express. The merchant brought a class action against American Express, alleging violation of antitrust laws resulting in merchants being charged excessively high rates. The contract between American Express and its merchants contained an arbitration agreement whereby the merchants had to agree that any disputes would be resolved by binding arbitration and that there would be no right to have claims decided on a class basis in arbitration. Pursuant to this contractual agreement, American Express sought to compel individual arbitration of the merchant’s claim. The trial court granted the motion to compel arbitration but the court of appeal reversed, holding that the prohibitive costs the merchant would face in arbitration to prove an antitrust violation precluded effective vindication of statutory rights and rendered the class waiver unenforceable. Specifically, the individual merchant only stood to recover between $12,000-$38,000 in damages, but it would cost at least several hundred thousand dollars, and possibly more than one million dollars, to prove the violation through expert analysis. The court of appeal concluded that requiring an individual to bear such cost in arbitration while precluding class wide relief, effectively eviscerated the right to pursue the action in the first place. The United States Supreme Court granted certiorari and reversed.
In today’s decision (a 5-3 decision authored by Justice Scalia), the Supreme Court held that the Federal Arbitration Act (FAA) requires that arbitration agreements be enforced according to their contractual terms, even for claims alleging a violation of a federal statute, unless the FAA's mandate has been overridden by a contrary congressional command. The Court made clear that neither the antitrust laws nor Rule 23 of the Federal Rules of Civil Procedure contains any congressional command that individuals be permitted to pursue antitrust violations on a class basis. The court further rejected application of an "effective vindication" exception used by some courts to invalidate class waivers in arbitration agreements. Under that exception, which the Court emphasized originated from dicta in an earlier Supreme Court decision, courts sometimes invalidate arbitration agreements that operate to prospectively waive a party's rights to pursue a statutory remedy. The Court held that there was no reason to apply any such exception in this case because the arbitration agreement did not result in a waiver of the merchant's right to pursue an antitrust claim. The merchant could still pursue the claim in arbitration, even though not on a class basis. "[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy." The court further reasoned that if courts could invalidate arbitration agreements based on a principle of cost versus benefit analysis of individual versus class wide claims, this would require courts, in ruling on a motion to compel arbitration, to undertake an analysis of the legal requirements for success on the merits on a claim, the evidence necessary to meet those requirements, the cost of developing that evidence, and the damages that would be recovered in the event of success. "Such a preliminary litigating hurdle would undoubtedly destroy the prospect of speedy resolution that arbitration in general and bilateral arbitration in particular was meant to secure." The Court thus held that the arbitration agreement, including its class waiver, was enforceable as written under the FAA.
Today's Supreme Court decision is yet another example of the Court's strong position on enforcing arbitration agreements, including class waivers, according to their terms and the parties' intentions. While this is not an employment action, the analysis and reasoning in the decision carries over to cases interpreting the enforceability of arbitration agreements and class waivers in the employment context and may well impact the California Supreme Court's upcoming analysis in important employment cases pending before it on the issue of enforceability of employment arbitration agreements in California, including on the issue of class waivers. As readers of this blog know, the California Supreme Court is expected to decide this year whether the United States Supreme Court's recent decision in AT&T Mobility v. Concepcion (and the FAA) preempt California laws relating to the enforceability of arbitration agreements and class waivers in such agreements in employment cases, particularly in wage and hour class actions and PAGA representative actions.
Last week the United States Supreme Court issued its decision in Oxford Health Plans LLC v. Sutter, refusing to vacate an arbitrator’s finding that a doctor’s arbitration agreement with a health plan permitted class-wide arbitration. Sutter, a pediatrician, had entered into a fee for service contract with Oxford Health, whereby Oxford Health agreed to pay Sutter certain rates for services he provided patients. Sutter initiated a lawsuit on behalf of himself and other doctors also under contract with Oxford Health, alleging that Oxford Health failed to pay the doctors in accordance with the contract terms. Oxford Health moved to compel arbitration, relying on the following arbitration provision in the contract with Sutter:
“No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of the American Arbitration Association before one arbitrator.”
The agreement did not expressly authorize nor expressly prohibit claims from proceeding in arbitration on a class-wide or collective basis. However, the parties agreed that the arbitrator should decide whether the agreement permitted class-wide arbitration or whether Sutter would be limited to pursuing only his individual claim in arbitration. The arbitrator thereafter concluded that the agreement permitted class-wide arbitration. The arbitrator reasoned that the agreement’s use of the term “civil action” was not limited to only certain types of civil actions, that a class action is a common type of civil action, and that by agreeing that all “civil actions” (without limitation) would be resolved by way of arbitration, the parties must have intended to include class claims in its scope.
Oxford Health petitioned to vacate the arbitrator’s decision, but its efforts were unsuccessful. While the arbitration process continued, the United States Supreme Court issued its decision in Stolt-Nielsen v. Animal Feeds International, 559 U.S. 662 (2010), holding that a party cannot be compelled to arbitrate claims on a class basis unless there is a contractual basis for concluding that the party agreed to do so. In Stolt-Nielsen, the parties (very unusually) stipulated that they had no agreement concerning the use of class-wide arbitration. Notwithstanding this fact, a panel of arbitrators ordered class-wide arbitration. In those circumstances, the Supreme Court held that the arbitration panel exceeded its authority because it did not conclude class-wide arbitration was appropriate based on interpretation of the parties’ contract. It could not have done so, given that the parties stipulated their contract did not cover the issue of class arbitration. Instead, the panel ordered class arbitration as a matter of public policy. According to the Supreme Court, this was not a proper exercise of the arbitrator’s power and as, such, the order was overturned.
Relying on Stolt-Nielsen, Oxford Health renewed its efforts to undo the arbitrator’s decision that the claims against it could proceed on a class basis in arbitration. This time the challenge made its way to the Supreme Court, which issued its decision last week, disagreeing with Oxford Health’s position and limiting the scope of Stolt-Nielsen. In its unanimous opinion, the Supreme Court held that this case was different than Stolt-Nielsen because in Stolt-Nielsen the parties had stipulated that they had no agreement concerning the use of class arbitration. Here, by contrast, the parties simply disagreed about whether or not the subject was covered by the arbitration provision in their contract. More significantly, the parties specifically agreed that the arbitrator should decide, as a matter of pure contract interpretation, whether the agreement permitted class arbitration. By giving the arbitrator this power, the parties largely forfeited any meaningful judicial review of the arbitrator’s decision. The Supreme Court explained that judicial review of an arbitrator’s rulings is extremely limited under the Federal Arbitration Act and a decision will only be vacated if clearly in excess of the arbitrator’s authority. A decision that is simply a “wrong interpretation” is not in excess of authority. The arbitrator was authorized to interpret the contract and did so. The fact that he may have gotten the result wrong is not a proper ground for reversal.
The Supreme Court hinted that had Oxford Health not stipulated that the arbitrator should decide the issue of class arbitration, Oxford Health could have argued that the issue was an issue of arbitrability in the first instance and one that a court, not an arbitrator, must decide. If a court had issued the decision, judicial review would have been broader and the outcome quite possibly different.
The Oxford Health case is a good reminder that employers must carefully review the language of their arbitration agreements to ensure that the subject of class/collective arbitration is expressly addressed and prohibited. Employers should also consider and address in their agreements the issue of whether an arbitrator or a court will decide issues of arbitrability pertaining to the agreement. Limited judicial review is great when the decision is in your favor, but cuts the other way too—as the Oxford Health case demonstrates. The Oxford Health case is available here.
In a related development in California, yet another California has weighed in on the issue of whether a class waiver provision in an arbitration agreement precludes an employee from pursuing a representative claim under PAGA. California state and federal courts have disagreed on this issue, with some concluding that class and representative claims, including those brought under PAGA, may be barred by an arbitration agreement, and others concluding that an arbitration agreement cannot preclude an employee from pursuing a representative action under PAGA. Earlier this month, the Sixth District Court of Appeal handed down a decision in the Plaintiffs’ camp, holding that a plaintiff may pursue a representative claim under PAGA, notwithstanding an otherwise valid arbitration agreement precluding class/collective claims. The decision is Brown v. Superior Court (Morgan Tire & Auto) and the decision is here. Employers should note that the California Supreme Court is expected to resolve the issue of whether representative PAGA claims are excluded from the scope of an otherwise valid class waiver provision in an arbitration agreement sometime in the next year in Iskanian v. CLS Transportation (which reached the opposite conclusion with respect to the impact of a class waiver provision on a PAGA claim). In the meantime, employers can expect continued assertion of PAGA claims by Plaintiffs’ lawyers in an effort to circumvent applicable arbitration agreements with class waivers.
We will continue to post developments as they arise in this important area.
Two recent class action lawsuits illustrate an emerging trend in wage and hour class action litigation, namely, claims for failure to pay overtime wages based on the improper calculation of the employees’ overtime rates.
The first lawsuit, filed against clothing retailer Forever 21 by a former 13-year employee, alleges that employees were not paid all of their overtime wages due to Forever 21’s failure to take into account non-discretionary bonuses and incentive pay when calculating the employees’ overtime rates. Juana Diaz, the plaintiff in this lawsuit, seeks to represent all of Forever 21’s hourly warehouse employees in the State of California. This lawsuit was filed May 24, 2013 in the Los Angeles County Superior Court.
In the second lawsuit, plaintiff William Sullivan seeks to represent non-exempt employees of Lyon Management Group, a property management company, in a similar claim. Sullivan alleges that Lyon failed to include the employees’ commissions and bonuses when calculating their overtime rates. This lawsuit was filed May 8, 2013 in the Orange County Superior Court.
Although the outcome of these cases remains to be seen, two recent decisions finding such claims suitable for class certification confirm the viability of class certification of claims based on the improper calculation of overtime rates. In a May 10, 2013 decision in the case of Faulkinbury v. Boyd & Associates, Inc., a California appellate court ruled that the question of whether annual bonuses must be included in calculating the overtime rates of the proposed class was appropriate for class certification. On May 28, 2013, the federal Court of Appeals for the Ninth Circuit overturned a lower court decision denying class certification in Levya v. Medline Industries, Inc. The plaintiffs in that action sought to represent over 500 employees on a number of claims, including a claim that nondiscretionary bonuses had been improperly excluded from overtime rates. The federal court ordered the proposed class certified.
The calculation of an employee’s overtime rate varies from case to case. Federal and California laws state that an employee’s overtime rate is based on that employee’s “regular rate of pay,” which includes all of the compensation the employee normally receives for the work performed for the employer. In many cases, it is not enough to look only at the employee’s hourly rate. The employer must also include any other compensation normally paid to the employee for their work including salary, piecework earnings, non-discretionary bonuses, and commissions in the regular rate of pay. Conversely, discretionary bonuses, payments in the nature of gifts on special occasions, and contributions by an employer to certain welfare plans generally are not included in the calculation of the “regular rate of pay.” Whether a particular type of compensation should be included in the regular rate of pay is a very fact-specific determination. The cases above make clear that employers of all sizes should review their practices to ensure that the regular rate is being properly calculated. As cases have illustrated, this is an issue that lends to class certification, which greatly increases the risk and exposure of a potential claim.