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.
Last week the California Supreme Court continued its trend of issuing employee-friendly decisions, this time in a case involving the commissioned salesperson exemption. In Peabody v. Time Warner Cable, the plaintiff was a commissioned salesperson who sold advertising spots for Time Warner Cable. She was classified as exempt from overtime under California's commissioned salesperson exemption, which applies to a sales employee whose earnings exceed at least one and one-half times the minimum wage if more than half of those earnings represent commissions. Time Warner paid plaintiff her regular wages on a biweekly basis, but only paid her commission wages once per month. Thus, at least one paycheck per month was comprised only of base hourly pay and did not reflect earnings exceeding more than one and one-half times the minimum wage. However, the monthly commission check, which represented commissions earned for a monthly period (not just for a bi-weekly period), brought the employee's wages for the month to more than one and one-half times the minimum wage.
Plaintiff sued, arguing that she was not properly paid overtime wages for hours worked in excess of eight per day or forty per week. The trial court granted summary judgment for Time Warner, agreeing with Time Warner that it properly paid plaintiff under the commissioned salesperson exemption and that plaintiff was not entitled to additional overtime compensation. Plaintiff appealed to the Ninth Circuit, which certified a question to the California Supreme Court concerning whether an employer could properly allocate commission wages over the pay periods in which they were "earned," or whether the commission wages could only be attributed to the pay period in which they were actually paid. The California Supreme Court said the latter.
In so holding, the California Supreme Court reasoned that California overtime exemptions are narrowly construed and must be interpreted in favor of the employee and against the employer. The Court's holding certainly accomplishes that. The Court acknowledged that California law permits commission wages to be paid less frequently than regular wages and that monthly, or even less frequent, payment of commission wages is permissible (given that commission wages often are not "earned" until certain conditions are satisifed and are not calculable with the same frequency as the regular payroll schedule). However, the Court reasoned that just because California law allows less frequent payment of commission wages that aren't "earned" every pay period does not mean that an employer can use a monthly or less frequent schedule to pay commission wages that are earned. The Court reasoned that California law requires that all wages earned for work performed generally be paid no less frequently than twice per month. Time Warner was arguing that it could allocate commission wages to the pay periods in which they were "earned," but the Court said that permitting this would be tantamount to authorizing monthly pay periods for wages earned. Because monthly pay periods are not authorized by the California Labor Code, the Court held that Time Warner had not properly paid the plaintiff and she did not qualify for the commissioned salesperson exemption.
The Court acknowledged that Time Warner's pay system was proper under the federal commissioned salesperson exemption, but declined to find it proper under California law because California law, unlike federal law, requires at least semi-monthly pay periods.
The California Supreme Court's decision makes it much more difficult for employers to satisfy the commissioned salesperson exemption under California law. Employers that look back and allocate commission wages over the pay periods in which they were "earned" as a means of ensuring that the employee's pay is at least one and one-half times the minimum wage, should revise their practices in light of this decision.
Yesterday the California Supreme Court issued its decision in Ayala v. Antelope Valley Newspapers, holding that the trial court erred in denying class certification to a group of newspaper carriers who worked as independent contractors for Antelope Valley Newspapers and later sued the newspaper for wage and hour violations on the basis that they should have been classified as employees. The Court held that the trial court focused on the wrong legal criteria in denying class certification and that the matter had to be remanded for the trial court to re-assess class certification using proper criteria. In denying class certification, the trial court held that the issue of whether the carriers were employees or independent contractors could not be decided in one stroke as to the entire class because the evidence showed substantial variation in the degree of control the newspaper exercised over its carriers’ work, and the issue of degree of control is the primary factor in assessing whether a worker is an independent contractor or an employee.
The California Supreme Court held that the trial court erroneously focused on variation in the level of control actually exercised by the newspaper, rather than on whether the newspaper uniformly retained the right to control the carriers’ work. The Court emphasized that the key issue is whether the hirer has the right to control the work, not whether the hirer actually exercises that right. The Court explained that evidence of whether the hirer retains the right of control typically is found in the contract between the hirer and the worker. In this case, the newspaper used largely the same form independent contractor agreement for all of its carriers. The Court stated that the trial court “afforded only cursory attention” to the parties’ agreement, when it should have focused on the agreement as the starting point for its analysis. Rather than outright saying that if a hirer uniformly uses the same agreement for all of its workers, the issue of right to control can always be decided on a class wide basis, the Court reserved some room for trial courts to look to the parties’ “course of conduct” (and beyond just the agreement).
“While any written contract is a necessary starting point, [ ] the rights spelled out in a contract may not be conclusive if other evidence demonstrates a practical allocation of rights at odds with the written terms. In deciding whether claims that hinge on common law employee status are certifiable, then, a court appropriately may consider what control is ‘necessary’ given the nature of the work, whether evidence of the parties’ course of conduct will be required to evaluate whether such control was retained, and whether that course of conduct is susceptible to common proof – i.e. whether evidence of the parties’ conduct indicates similar retained rights vis-à-vis each hiree, or suggests variable rights, such that individual proof would need to be managed.”
The Court directed that on remand, the trial court would need to assess whether the newspaper, notwithstanding the form contract it entered with all carriers, actually had different rights with respect to each that would necessitate mini-trials. The Court briefly addressed the fact that the test for determining whether a worker is an independent contractor or an employee depends not only on the right of control, but also on numerous secondary factors (method of payment, who supplies the tools and equipment, place of work, etc.). The Court minimized the significance of the secondary factors and of evidence of individualized variation bearing on those factors, reasoning that variation in one or more secondary factors may not impact class certification if the factor is not a heavy one in the analysis compared to the other factors.
The Court’s decision and reasoning makes class certification more likely in independent contractor misclassification cases is likely to fuel more of this litigation. This is because many companies use form independent contractor agreements and these agreements often spell out the “right to control” retained by the company. The full decision is available here.
Today the United States Supreme Court issued its decision in NLRB v. Noel Canning, voiding President Obama’s 2012 recess appointments to the NLRB on the ground that the appointments exceeded the President’s constitutional authority. In so holding, the Court affirmed the D.C. Circuit Court of Appeal’s decision last year in the case. However, the Court did not agree with the D.C. Circuit Court’s reasoning. The D.C. Circuit Court had held that the recess appointments were invalid because the Senate was not actually in “recess” at the time and that the recess appointment power only applies to inter-session recesses, and then, only to vacancies that arise during such a recess (as opposed to vacancies existing at the time the recess commences). By contrast, the Supreme Court held that the recess appointment power applies both to inter-session and intra-session recesses and is not limited to vacancies that arise during a recess. However, the Court held that the recess must be of a sufficient length to trigger the recess appointment power. The Court held that the break in the legislative session must be at least 10 or more days in order for recess appointments to be authorized. In the case of the 2012 NLRB recess appointments, the appointments were made during a period when the Senate was convening every three days for pro forma sessions when no business was actually conducted. The Court held: “Three days is too short a time to bring a recess within the scope of the clause. Thus we conclude that the president lacked the power to make the recess appointments here at issue.”
The Court’s voiding of the NLRB appointments invalidates many NLRB decisions and actions in which the 2012 recess appointees participated. It is unclear how the NLRB with proceed as to the many affected matters. However, NLRB Chairman Mark Gaston Pearce issued the following statement today:
“The Supreme Court has today decided the Noel Canning case. We are analyzing the impact that the Court’s decision has on Board cases in which the January 2012 recess appointees participated. Today, the National Labor Relations Board has a full contingent of five Senate-confirmed members who are prepared to fulfill our responsibility to enforce the National Labor Relations Act. The Agency is committed to resolving any cases affected by today’s decision as expeditiously as possible.”
The Court’s full opinion in Noel Canning is available here.
Today the California Supreme Court issued its decision in Salas v. Sierra Chemical Co., holding that an employee who fraudulently obtained employment through use of someone else’s social security number, may still pursue employment discrimination claims stemming from termination and recover damages against the employer, including post-termination back pay for the period when the employee was not authorized to work and did not actually perform work. The Court held that federal immigration law does not preempt this result.
Salas applied for employment with Sierra Chemical in 2003 and was hired. In compliance with its legal obligations, Sierra Chemical required Salas to complete an I-9 form as well as a W-4. Salas completed these forms by providing a resident alien card and a social security card. From 2003 to 2005, Salas was subject to seasonal layoffs on a few occasions, but was later recalled to work. Each time he was recalled to work, Salas provided the same social security number he had provided upon hire. In 2006, Salas injured his back in the course of his work. He sought medical treatment and returned to work with temporary modified work restrictions, with Sierra Chemical accommodated. A few months later, Salas was released to full duty.
Later the same year, Salas injured his back again and filed a workers’ compensation claim. He performed modified duties, which Sierra Chemical accommodated, until the winter of 2006, when he was subject to another seasonal layoff along with Sierra Chemical’s other production workers. In May 2007, Sierra Chemical notified Salas and other production workers that it was recalling them for work and directing them to make arrangements to return to work. Salas’ supervisor told Salas to also bring a doctor’s note indicating he was released to return to work. Salas contacted his supervisor and told him that he had not been released to return to full duty but that he had an appointment in June to obtain the release. Salas’ supervisor agreed to hold his job open for him until that time. Salas’ supervisor never heard from him again.
In August 2007, Salas sued Sierra Chemical, alleging claims for failure to accommodate a disability in violation of FEHA, and for unlawful refusal to rehire him in retaliation for filing a workers’ compensation claim. Salas sought lost wages, emotional distress damages, punitive damages, and attorneys’ fees. Two years into the litigation, Sierra Chemical learned that Salas had falsified his employment eligibility documentation and that he was not authorized to work in the United States. Sierra Chemical filed a motion for summary judgment, arguing that it was entitled to judgment as a matter of law on Salas’ claims based on the doctrines of after-acquired evidence and unclean hands. The trial court denied Sierra Chemical’s motion, but was then directed by the court of appeal (by writ of mandate) to grant the motion. After judgment was entered for Sierra Chemical, Salas appealed. The court of appeal again held that Salas’ claims were barred by the doctrines of after-acquired evidence and unclean hands and affirmed the judgment in favor of Sierra Chemical. The California Supreme Court granted review and reversed the judgment in favor of Sierra Chemical, holding that the doctrines of after-acquired evidence and unclean hands did not operate to completely bar Salas’ claims.
The Court (in an opinion authored by Justice Kennard and joined by Justices Cantil-Sakauye, Werdegar, Corrigan, and Liu) held that the doctrines of after-acquired evidence and unclean hands may operate to reduce an employee’s damages and/or preclude reinstatement, but that they are not a complete defense to an employee’s claims. The court held that where lost wage damages are at issue, these doctrines generally preclude recovery of lost wage damages from the point of the employer’s discovery of the employee’s misconduct forward, but that the doctrines do not bar recovery of damages for the period of time prior to the employer’s discovery of the information. In the case of an employee who is fired and later sues, and during the litigation the employer discovers that the employee fraudulently obtained employment through use of someone else’s social security number, the employee would still be entitled to recover lost wages for the time period from termination until the employer discovered the fraud (typically years later during the litigation process). In other words, the employee who wasn’t even authorized to hold employment in the first instance and did not perform any work for the employer during the post-termination time period could still recover lost wages for being denied employment during that time period. Really?
Employers shaking their heads have good reason to do so. The United States Supreme Court does not seem to agree with the result reached today by the California Supreme Court. Indeed, in 2002, in Hoffman Plastic Compounds, Inc. v. NLRB, 535 U.S. 137, the United States Supreme Court held that a worker who fraudulently obtained employment in violation of immigration laws was not entitled to backpay from the period of time from termination through the employer’s discovery of the fraud. Reversing an award of backpay to an employee for a four and one-half period of time from his termination through his employer’s discovery of his undocumented status, the Court held that “awarding backpay to illegal aliens runs counter to policies underlying” the Immigration Reform and Control Act of 1986, and that it was improper to “award backpay to an illegal alien for years of work not performed, for wages that could not lawfully have been earned, and for a job obtained in the first instance by criminal fraud.” Makes sense, right? The California Supreme Court apparently does not think so. In an effort to get around Hoffman Plastics, the California Supreme Court held that Hoffman Plastics did not apply because it dealt with NLRB proceedings and that somehow made it materially different. The Court held that because this case involves California law and, more specifically, discrimination claims brought under FEHA, there are different public policy considerations at issue. The Court also emphasized the fact that in 2002, the California legislature, which also did not like the Hoffman Plastics decision, enacted a state law specifically designed to render Hoffman Plastics inapplicable to state law employment claims. That 2002 California state law specifically provided that all state-provided worker protections, rights, and remedies (except reinstatement prohibited by federal law) were equally available and applicable to all individuals regardless of immigration status.
Hmmm. Doesn’t federal immigration law preempt state laws to the contrary? Not so, according to today’s California Supreme Court ruling. The Court held that there was no direct conflict between federal immigration law and California law permitting unauthorized workers to recover lost wages for a period of time when the employer did not know of the employee’s fraud and unauthorized status. The Court also held that California law was not in conflict with the policy and purpose of federal immigration law. According to the Court:
“Even if permitting [unauthorized aliens who have used false documents to secure employment] to obtain state remedies for violations of the state labor and employment laws provides an incentive for such federal law violations, the practical effect of such incentive is minimal because the typical unauthorized alien wage earner is not familiar with the state law remedies available for unlawful termination and because job seekers rarely contemplate being terminated in violation of the law. Thus, it is highly unlikely that an unauthorized alien’s decision to seek employment in this country would be based in any significant part on the availability of lost wages as a remedy for unlawful discharge. . . . Furthermore, not allowing unauthorized workers to obtain state remedies for unlawful discharge, including prediscovery period lost wages, would effectively immunize employers that, in violation of fundamental state policy, discriminate against their workers on grounds such as disability or race, retaliate against workers who seek compensation for disabling workplace injuries, or fail to pay the wages that state law requires.”
Based on this and other reasoning, the California Supreme Court held that California’s 2002 law and its holding were not preempted by federal immigration law.
In sum, the California Supreme Court held that a worker who fraudulently obtains employment through false immigration documents and is later terminated for reasons unrelated to the employee’s fraud may pursue claims for employment discrimination and that those claims are not completely barred by the employee’s fraudulent conduct. The employee loses the right to reinstatement as a remedy if the employee was not actually authorized to work in the United States in the first place and also loses the right to recover lost wages for any time AFTER the employer discovers the employee’s fraud. However, the employee can still recover lost wages from the time of termination until the time the employer discovers the fraud, even though the employee was not authorized to work and did not actually perform any work for the employer during that time period. Of course, the employee can also still seek emotional distress damages, punitive damages, and attorneys’ fees as well.
Justice Baxter, joined by Justice Chin, dissented from the majority’s holding, stating that in their view, Hoffman Plastics and federal immigration law preempt and preclude a state law award of back pay during the time period from an employee’s termination through the employer’s discovery of the fraudulent conduct. Perhaps Sierra Chemical will seek review by the United States Supreme Court. Stay tuned. Today’s decision is available in full here.
The California Supreme Court wasn’t the only court focused on arbitration agreements today. The Ninth Circuit also issued a pair of decisions relating to the enforceability of class waiver provisions in employment arbitration agreements. In both instances, the Ninth Circuit upheld the enforceability of the agreements.
In the first case, Johnmohammadi v. Bloomingdale’s, the Ninth Circuit considered whether a class waiver provision was enforceable to bar court litigation of wage and hour claims brought on behalf of a putative class of employees. The narrow issue before the court was whether the class waiver violated the Norris-LaGuardia Act and/or the National Labor Relations Act, both of which protect employees’ rights to engage in concerted activities for mutual aid and protection and prohibit employers from restraining or interfering with these rights. The court held that the class waiver provision did not violate either Act because the arbitration agreement allowed employees 30 days to elect to opt-out of the agreement. Had the plaintiff opted out, she would have been free to pursue her class claims in court. By not opting out, she elected to proceed with any claims individually in arbitration. The court held that this opt-out right effectively precluded a finding that the plaintiff was coerced into waiving class claims or otherwise restrained from pursuing them. The plaintiff admitted she was aware of the arbitration agreement and the right to opt-out and that she did not elect to do so. There was no evidence that the plaintiff was coerced into not opting out. On these facts, the Ninth Circuit held that the class waiver provision in the agreement was enforceable and not in violation of the NLRA or Norris-LaGuardia Act.
In the second case decided by the Ninth Circuit today, Davis v. Nordstrom, the court considered whether a class action waiver provision that the employer added to its arbitration policy (set forth in an employee handbook, not a free-standing agreement) was enforceable to preclude an employee from litigating wage and hour claims on behalf of a putative class in court. The court held that the handbook provision was an enforceable agreement and that the class waiver provision was enforceable.
Nordstrom had a long-standing arbitration policy in its employee handbook, but the policy did not include class waiver language. The handbook did include language indicating that Nordstrom would provide employees with 30 days written notice of any substantive changes to the arbitration provision in the handbook to allow employees to consider the changes and decide whether or not to continue employment subject to those changes. In July and August 2011, Nordstrom revised its arbitration policy to require that employees arbitrate any employment claims individually and to preclude the filing of class claims. Nordstrom sent letters to its employees in June 2011 advising them that the arbitration policy had been modified and provided a copy of the new policy. In August 2011, the plaintiff filed a putative class action alleging wage and hour violations against Nordstrom.
Nordstrom moved to compel arbitration of the plaintiff’s individual claims, but the district court denied the motion. The district court held that no “agreement” was ever reached because Nordstrom did not provide clear notice to employees of the change, that it would go into effect in 30 days, and that by continuing employment employees would be bound by the change. The Ninth Circuit reversed the district court’s ruling and held that the plaintiff had entered into an enforceable agreement by continuing her employment after notice of the change to the arbitration policy, thereby agreeing to the change. “While the communications with its employees were not the model of clarity, we find that Nordstrom satisfied the minimal requirements under California law for providing employees with reasonable notice of a change to its employee handbook by sending a letter to [the employees] informing them of the modification, and not seeking to enforce the arbitration provision during the 30 day notice period.”
As for Nordstrom’s failure to expressly alert employees that by continuing employment for 30 days they would be agreeing to the change to the arbitration policy, the Ninth Circuit held that California law does not require employers to expressly inform employees that continued employment constitutes acceptance of policy modifications. As such, this was not a basis for invalidating the class waiver or for finding that no agreement was reached.
The Ninth Circuit’s decisions in these two cases are here and here. While today's Ninth Circuit opinions are favorable for California employers, employers are cautioned that best practice is still to have any arbitration agreement be a separate agreement rather than simply a part of an employee handbook. Additionally, it is a good idea to specifically advise employees not only that their employment is at-will, but also that this means the employer has the right to modify the terms and conditions of employment at any time and that continued employment constitutes the employee's acceptance of any such modifications.
Today the California Supreme Court issued its much-anticipated opinion in Iskanian v. CLS Transportation, addressing the post-AT&T Mobility v. Concepcion enforceability of class and representative action waivers in employment arbitration agreements under California law. The decision is a mixed bag for California employers. On the positive side, the Court held, consistent with Concepcion, that class action waivers are enforceable. The Court also held that class and collective action waivers do not categorically violate the National Labor Relations Act (“NLRA”) (rejecting the NLRB’s D.R. Horton analysis). That’s the good news. The bad news is that the Court held that PAGA representative action waivers in arbitration agreements are not enforceable. Thus, through properly drafted arbitration agreements, employers effectively can prevent class claims alleging wage and hour violations, but cannot prevent piggy-back “representative” claims brought under PAGA and, under the Court’s reasoning, the employee must be permitted to pursue his or her representative PAGA claim in some forum.
Class Waiver Provisions Are Enforceable
Prior to today’s decision in Iskanian, the California Supreme Court took the position that class waivers in employment arbitration agreements are “sometimes” enforceable. The test for determining enforceability was set forth by the Court in 2007 in Gentry v. Superior Court, 42 Cal.4th 443, 463-64:
“When it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider the [following] factors [ ]: the modest size of the potential recovery, the potential for retaliation against members of the class, the fact that absent class members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration. If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘vindicate [their] unwaivable rights in an arbitration forum.’”
Application of the Gentry factors resulted in many trial courts invalidating class waiver provisions in arbitration agreements in wage and hour cases. Today the California Supreme Court held that Gentry was effectively overruled by Concepcion and is preempted by the Federal Arbitration Act (“FAA”). As a result, class action waivers in employment arbitration agreements are now generally enforceable under California law.
Class Waiver Provisions Do Not Categorically Violate the NLRA
Plaintiff Iskanian alternatively argued that the class action waiver in his arbitration agreement was unenforceable because it violated his rights under the NLRA. Iskanian relied on the NLRB’s decisions in D.R. Horton and related cases, in which the NLRB reasoned that class waiver provisions prohibit employees from engaging in collective concerted activity for mutual aid and protection, and that the right to do so is guaranteed by the NLRA. The California Supreme Court (like the majority of courts that have addressed the issue) rejected the NLRB’s reasoning and held that the class waiver provision in this case did not run afoul of the NLRA. Notably, the Court carefully limited its holding to the specific arbitration agreement before it, suggesting that in some other factual contexts a class waiver might violate the NLRA:
“Notably, while upholding the class waiver in Horton II, the Fifth Circuit affirmed the Board’s determination that the arbitration agreement at issue violated section 8(a)(1) and (4) of the NLRA insofar as it contained language that would lead employees to reasonably believe they were prohibited from filing unfair labor practice charges with the Board. Moreover, the arbitration agreement in the present case, apart from the class waiver, still permits a broad range of collective activity to vindicate wage claims. CLS points out that the agreement here is less restrictive than the one considered in Horton. The arbitration agreement does not prohibit employees from filing joint claims in arbitration, does not preclude the arbitrator from consolidating the claims of multiple employees, and does not prohibit the arbitrator from awarding relief to a group of employees. The agreement does not restrict the capacity of employees to ‘discuss their claims with one another, pool their resources to hire a lawyer, seek advice and litigation support from a union, solicit support from other employees, and file similar or coordinated individual claims.”
The Court stated: “We have no occasion to decide whether an arbitration agreement that more broadly restricts collective activity would run afoul of section 7 [of the NLRA].”
PAGA Representative Action Waivers Are NOT Enforceable
The agreement at issue in Iskanian included not only a waiver of class claims in arbitration, but also a waiver of “representative” claims. The representative claim alleged by the plaintiff in Iskanian was a PAGA claim. The Court thus considered whether a waiver of representative claims under PAGA was enforceable. The Court’s answer? No. The Court reasoned that the employee’s right to bring a PAGA action is an unwaivable statutory right because that statute is intended for public benefit (collecting penalties for wage and hour violations that could otherwise be pursued by a public agency) and an individual cannot, by private agreement, waive that public benefit. “The PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state’s interests in enforcing the Labor Code an in receiving the proceeds of civil penalties used to deter violations. Of course, employees are free to choose whether or not to bring PAGA actions when they are aware of Labor Code violations. But it is contrary to public policy for an employment agreement to eliminate this choice altogether by requiring employees to waive the right to bring a PAGA action before any dispute arises.”
The employer argued that because the arbitration agreement only prohibits representative claims, not individual PAGA claims, it does not result in any improper waiver of the right to bring a PAGA action. The plaintiff argued that PAGA claims can only be brought as representative claims. Without deciding whether or not an individual claim is permissible under PAGA, the Court held that the provision was unenforceable regardless because “a prohibition of representative claims frustrates the PAGA’s objectives.” As such, the Court held that “where an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.”
The Court acknowledged that a state law rule may not be enforced if it is preempted by the FAA. However, the Court held that its rule against PAGA waivers does not frustrate the FAA’s objectives and, therefore, is not preempted by the FAA. The Court reasoned that the FAA’s objective is to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action effectively is a public dispute between the employer and the state Labor and Workforce Development Agency. “We conclude that California’s public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the Labor and Workforce Development Agency’s interest in enforcing the Labor Code, does not interfere with the FAA’s goal of promoting arbitration as a forum for private dispute resolution.”
So What Now?
The Court did not resolve how the action would proceed on remand, given that some claims were subject to arbitration while the PAGA claim was not. “This raises a number of questions [on remand]: (1) Will the parties agree on a single forum for resolving the PAGA claim and the other claims?” (2) If not, is it appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation? (3) If such bifurcation occurs, should the arbitration be stayed pursuant to Code of Civil Procedure section 1281.2? The parties have not addressed these questions and may do so on remand.”
As noted above, the Iskanian decision is mixed news for California employers. It remains to be seen whether CLS will seek review of the Court’s PAGA-related ruling before the United States Supreme Court. In the meantime, California employers should review their arbitration agreements to optimize enforceability in light of today’s decision. Among other things, employers should ensure that their agreements contain class waiver language if they do not already. The agreements should also include some language making clear that employees retain the right to file administrative charges with the NLRB and that the agreement is not intended to prohibit their exercise of rights under the NLRA. Employers should also ensure that their agreements contain a severability clause and provision for what happens in the event of bifurcated claims with some proceeding in arbitration and others in court. The full Iskanian opinion is available here.
Yesterday the Ninth Circuit issued its opinion in Ruiz v. Affinity Logistics Corp., holding that Affinity Logistics violated California law by misclassifying its home delivery drivers as independent contractors rather than employees. The full opinion is available here.
Prior to working for Affinity Logistics, Ruiz worked as a driver for Penske Logistics, a furniture delivery company that had a contract with Sears. Ruiz was classified as an employee throughout the time he worked for Penske. In 2003, Sears announced that Affinity Logistics was taking over the services that had previously been provided by Penske. Sears advised Ruiz and his fellow Penske drivers to speak to Affinity about working for Affinity. Affinity told Ruiz and the other drivers that if they wished to work for Affinity, they would have to do so as independent contractors. Affinity advised them that they would need a fictitious business name, a business license, and a commercial checking account. Affinity helped the drivers complete all necessary forms and procedures to accomplish these tasks. Affinity also required the drivers to sign an independent contractor agreement that automatically renewed from year to year but could be terminated for any reason on 60 days’ notice. Affinity’s drivers leased their trucks from Affinity and were required to leave them at Affinity during non-working hours.
Ruiz filed a class action lawsuit against Affinity, alleging that Affinity misclassified its drivers as independent contractors rather than employees and thereby deprived them of various benefits afforded employees, including sick leave, vacation, holiday, and severance wages, and improperly charged them workers’ compensation fees. The district court held a bench trial to determine whether or not the independent contractor classification was proper. Following the bench trial, the district court concluded that the drivers were properly classified as independent contractors under California law. The drivers appealed and the Ninth Circuit reversed, holding that the district court’s legal conclusion was wrong.
The Ninth Circuit applied the test set forth by the California Supreme Court in 1989 in Borello & Sons, Inc. v. Dep’t of Industrial Relations, in order to analyze whether a worker is an employee or an independent contractor. Under that test, the primary consideration is the degree to which the principal has the right to control the manner and means by which the work is accomplished. While the right of control is the most important factor, the following secondary factors are also relevant: (1) whether the worker is engaged in a distinct occupation or business; (2) as a matter of local industry custom and practice, whether the type of work performed is typically done under the direction of a principal or by a specialist without supervision; (3) the skill required in the particular occupation; (4) whether the principal or the worker supplies the tools and place of work; (5) the length of time for which services are to be rendered; (6) whether or not the work is part of the regular business of the principal; and (7) whether or not the parties believe they are creating the relationship of employer-employee.
Applying this test to the largely undisputed facts, the Ninth Circuit held that Affinity’s drivers clearly were employees and not independent contractors. First, the court held that Affinity substantially controlled the manner and means of its drivers’ performance of their duties. Affinity determined and controlled the flat “per stop” rate paid to the drivers for their work and the drivers could not negotiate for higher rates, as independent contractors commonly do. Affinity decided the drivers’ schedules and set their daily routes each day, with specific instruction not to deviate from the order of deliveries list on the route manifests. Affinity also controlled the drivers’ appearance by requiring that they wear specific uniforms and prohibiting them from wearing earrings, displaying tattoos, or having certain designs of facial hair. Affinity also required its drivers to comply with a detailed procedures manual and closely monitored and supervised their work. Each morning, the drivers were required to report to the warehouse for a morning meeting where supervisors and drivers would discuss customer satisfaction reviews from previous deliveries and any other issues arising out of previous deliveries. Affinity further monitored its drivers by inspecting their appearance and the loading of their trucks and monitoring their progress throughout the day, including through a requirement that the drivers call their Affinity supervisor after every two or three stops and contacting them if they were running late or off course. Based on all of these facts, the court determined that Affinity retained and exercised the right to control the drivers’ work.
The district court had found that the drivers retained sufficient control over their work, largely because their independent contractor agreements stated that the drivers could hire helpers, and the right to hire others generally is indicative of independent contractor status. However, the Ninth Circuit disagreed that the drivers had any truly independent right to hire helpers because the evidence revealed that Affinity had the right to approve or disapprove of the helpers and the only time drivers hired helpers was if Affinity suggested they do so.
The court held that the balance of the secondary factors also supported a finding that the drivers were employees, not independent contractors. Affinity’s drivers did not have distinct occupations or businesses apart from their work for Affinity, and the type of work they provided was not a specialized or unique skill commonly performed by an independent contractor. The only reason the drivers established the formality of separate businesses was because Affinity required them to. However, most only performed work for Affinity. Indeed, they were not permitted to use the trucks they leased from Affinity for any purpose other than carrying out duties for Affinity. Affinity provided the trucks and phones for their drivers’ use, and required that the trucks be kept on Affinity property when not in use. Affinity even retained the right to use the drivers’ trucks for other purposes when not in use by the driver. The district court had held that because the drivers were required to pay for the use of the trucks and phones (through a payroll deduction), the drivers “provided” their own equipment. The Ninth Circuit rejected this analysis, effectively holding that paying for the use of the equipment is not the same thing as providing it. Affinity encouraged or required the drivers to use the trucks and phones owned and provided by Affinity and this equipment was only used by the drivers to perform work for Affinity—not for any other purpose. As such, this factor was suggestive of an employment relationship rather than an independent contractor relationship.
The court also reiterated that the drivers did not perform work without supervision because Affinity closely monitored and directed their work. Furthermore, the drivers’ work was a regular part of Affinity’s business. Affinity is a provider of home delivery services and, thus, the drivers’ work was at the very core of Affinity’s business. Additionally, the contracts between Affinity and its drivers did not contemplate any set duration or end for the drivers’ work for Affinity. The contracts automatically renewed from year to year, and many drivers worked for Affinity for years. The court further stated that the fact that the contracts were terminable on 60 days’ notice was not unique to an independent contractor relationship.
The court acknowledged that the drivers were paid a flat rate per delivery, rather than by the hour, but disagreed with the district court’s conclusion that this supported a finding of independent contractor status. The Ninth Circuit reasoned that because most drivers made eight deliveries per day, their pay generally remained about the same week to week, and this was more akin to be being paid by a regular rate of pay than “per job” or “per assignment.” As such, this factor too was indicative of an employee relationship.
Finally, the Ninth Circuit acknowledged that the drivers and Affinity understood their working arrangement to be an independent contractor arrangement rather than an employment relationship. However, the court dismissed this factor, reasoning that the parties’ label is not dispositive and that the parties’ conduct in fact revealed an employment relationship.
The Ruiz v. Affinity Logistics decision serves as a reminder to employers that litigation surrounding the independent contractor/employee classification remains alive and well in California, and improper classification carries substantial risk for employers. Employers who have independent contractor arrangements should carefully review these classifications to ensure that these workers are properly classified. The fact that a worker agrees to be classified as an independent contractor, or even asks to be classified as an independent contractor, does not prevent a misclassification claim nor does it prevent liability if the worker ultimately is determined to have been misclassified.
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.