Today, the United States Supreme Court issued an order denying review of the California Supreme Court’s decision in Iskanian v. CLS Transportation. CLS Transportation had petitioned for review of the California Supreme Court’s recent ruling that a PAGA representative action waiver in an employment arbitration agreement is unenforceable. Although most legal commentators seem to agree that the California Supreme Court’s ruling runs afoul of the Federal Arbitration Act and is inconsistent with United States Supreme Court precedent in AT&T Mobility v. Concepcion, the high Court has chosen not to review the case. As a result, the California Supreme Court’s decision remains good law and is binding on all California state courts.
What This Means for California Employers
California employers using employment arbitration agreements need to ensure that their agreements are carefully drafted in order to withstand a legal challenge to enforceability. Because arbitration agreements remain an important tool for preventing class action employment litigation, it remains worthwhile to include language in the agreement stating that any arbitration will be on an individual basis only and that the arbitrator shall not have any authority to preside over or to resolve claims on a “class” or collective basis. What about on a “representative” basis (i.e. a PAGA claim)? In light of the denial of review of Iskanian, any waiver of the right to bring a representative PAGA claim in any forum (arbitration or court) is going to be deemed unenforceable by a California state court. On the other hand, federal district courts in California generally have refused to follow the California Supreme Court’s Iskanian ruling (federal courts are not bound by the California state court ruling) and have instead held that PAGA representative action waivers are enforceable just like class action waivers are enforceable. See, e.g., Lucero v. Sears Holding Mgmnt. Corp. (S.D. Cal. 2014); Mill v. Kmart Corp. (N.D. Cal. 2014); Ortiz v. Hobby Lobby (E.D. Cal. 2014); Chico v. Hilton Worldwide (C.D. Cal. 2014); Langston v. 20/20 Companies (C.D. Cal.); Fardig v. Hobby Lobby (C.D. Cal. 2014). This means that the enforceability of a PAGA representative action waiver largely will depend on whether a federal or state court (or arbitrator) is deciding the issue. This divide in enforceability promotes forum shopping, with federal court being the preferable forum for employers and state court being the preferable forum for employees.
What Should Employers Do Now?
Because PAGA representative action waivers are not categorically unenforceable (federal courts generally enforce the waivers), this counsels against removing PAGA representative action waiver language from employment arbitration agreements. However, because employers must be mindful that a California state court will find such language unenforceable, employers need to ensure that their agreements contain severability clauses providing that if any portion of the agreement (including but not limited to the class/representative action waiver) is deemed unenforceable, the remainder of the agreement shall still be enforced to the full extent permitted by law. Employers should also include provision for what happens in the event some claims are found to be arbitrable and others are not (e.g. the employee has individual wage and hour claims that will be arbitrated but a representative PAGA claim that is exempt from arbitration). Generally, employers will want to provide that arbitrable claims will be resolved first and any non-arbitrable claims will be stayed pending resolution of the arbitrable claims. Finally, employers may also want to include specific language in the agreement providing for who decides gateway issues pertaining to the enforceability of the agreement – a court or an arbitrator? There are arguments in both directions, but employers are cautioned that there is very limited judicial review of an arbitrator’s interpretations and rulings and, as a result, if you get an arbitrator who decides not only that the representative action waiver is unenforceable but also that the PAGA representative action can proceed in arbitration (as opposed to court), that could be a very undesirable result. If a court adversely decides the issue, there is at least some avenue for independent judicial review.
Today the California Supreme Court issued its decision in Mendiola v. CPS Security Solutions, Inc., addressing the issue of whether security guards working 24-hour shifts have to be paid for all 24 hours or whether 8 hours of sleeping time (during which the security guards are simply on-call) may be uncompensated. The Court held that the entire 24-hour shift was compensable hours worked.
CPS Security Solutions employed security guards to provide services at various construction sites. The guards were designated as “trailer guards” who effectively lived on site in CPS-provided residential trailers. The trailers were equipped to live in, with heating and air-conditioning, kitchens and bathrooms, furniture, etc. The trailer guards were permitted to keep their personal belongings in the trailers and the trailers were equipped with locks. During the week, the security guards were scheduled for 16 hour shifts, 8 hours of which was considered an active patrol shift and the other 8 hours was “on-call” time. On the weekends, the security guards were scheduled for 24 hour shifts, 16 hours of which was active patrol and 8 hours of which (from 9:00 p.m. to 5:00 a.m.) was on-call time. Pursuant to the employer’s on-call agreement signed by the security guards, the security guards were not paid for on-call hours unless they were actually required to perform work during those hours, in which case the security guards were paid for the actual work time. However, if during their on-call hours the security guards did not get at least five hours of uninterrupted (sleep) time, they would be paid for the entire 8-hour on-call shift.
CPS placed certain restrictions on the security guards’ activities during on-call hours. Specifically, the security guards were not permitted to have children, pets, and alcohol were not permitted on the premises, and adult visitors were allowed only with the permission of the CPS client. Additionally, if the guard wanted to leave the job site, he or she could do so only by first notifying dispatch and providing information on where the guard would be and for how long and then was required to wait for a reliever to arrive before actually leaving the job site. Then, the guard had to remain within a 30-minute radius of the job site and be available via pager or radio telephone to respond to any calls and return to the job site as needed. While on the job site during on-call hours, the trailer guards were permitted to use their on-call time to read, watch television, eat, sleep, talk on the phone, and/or engage in myriad other personal activities.
Some of the security guards filed a class action against CPS, alleging CPS violated California law by not paying them for their full on-call hours. CPS defended their pay practice as compliant with California law, arguing that California law does not require payment for on-call time in these circumstances.
The trial court certified a class action and ultimately ruled that the class was entitled to pay for all on-call hours, both during weekdays and on weekends.
Court of Appeal Decision
CPS appealed the trial court’s ruling to the court of appeal. That court agreed with the trial court that the weekday on-call hours were compensable hours worked, but held that the on-call hours on the weekends were properly excluded from compensable hours worked. In holding that the weekday on-call hours had to be compensated, the court applied established California caselaw holding that on-call hours must be compensated if the employee is substantially restricted in the ability to use the time for personal pursuits. In this case, the court held that the trailer guards’ personal activities were substantially restricted because the guards generally were required to remain on-site, were not allowed to have children, pets, or alcohol on the premises, and were also limited in their ability to have adult visitors. Additionally, the guards could not leave the premises unless they were able to secure a relief worker and even then, they had to wait for the relief worked to arrive. Once off premises, the guards had to remain within a 30-minute radius of the job site and carry a pager or telephone and remain available to respond and return to the job site immediately in the event of a page. For all of these reasons, the court held that the on-call time was primarily used for the benefit of the employer and not for the guards. As such, the on-call time had to be compensated.
Although the same restrictions on on-call time that applied to the weekday shifts also applied to the weekend on-call hours, the court reached a different conclusion about whether the weekend on-call time was compensable. This is because the court applied a federal regulation, 29 CFR 785.22, which permits employees who are required to be on duty for 24-hours to enter into agreements to exclude up eight hours of regularly scheduled sleep time from hours worked. This regulation was previously followed and applied by a California Court of Appeal in Seymore v. Metson Marine, 194 Cal.App.4th 361 (2011), where that court held that ship crewmembers lawfully agreed that 8 hours of sleep time during their 24-hour shifts would not be compensated. Based on these authorities, the CPS court held that CPS’ on-call policy of excluding 8 hours of sleep time on the 24-hour weekend shifts was lawful.
California Supreme Court Reversal
Today the California Supreme Court reversed the Court of Appeal’s decision and held that CPS’ policy of not compensating security guards for on-call time on the weekends was unlawful and that there is no “sleeping time” exclusion under the applicable wage order. The Court expressly “disapproved” the Seymore case for its contrary holding (though that holding has been good law for the past 3 years). The Court also rejected the applicability of the federal regulation allowing sleep time to be excluded from compensable hours worked. The Court held that there was no reason to import that federal regulation into the applicable wage order (Wage Order 4) and emphasized that California law has a more expansive definition of “hours worked” than under federal law. California law, unlike federal law, focuses on the extent of employer control over an employee to determine whether the employee’s time must be compensated. As such, the Court held that under Wage Order 4 and California law, the on-call time on the weekends had to be analyzed the same as the on-call time during the weekdays, producing the same result – i.e. because the trailer guards are substantially restricted in their use of the on-call time for personal pursuits, they are under sufficient employer control to make all of the time compensable as hours worked. The fact that the trailer guards were working a 24-hour shift and could sleep part of the time was basically irrelevant.
The Court acknowledged that different wage orders, such as the wage order applicable to ambulance drivers and attendants (Wage Order 9), contain different language than Wage Order 4, and allow for employers to exclude 8 hours of sleep time from compensable hours worked in a 24-hour shift in certain circumstances. However, the Court held that Wage Order 4 contains no such exception and that Wage Order 4 controlled in this case.
Notably, prior to this lawsuit being filed against CPS, CPS actually sought and obtained the California Labor Commissioner’s guidance on the legality of their on-call policy and pay practice, and the Labor Commissioner endorsed the policy as lawful in 1999. A couple of years later, a newly appointed Labor Commissioner reversed the prior Labor Commissioner’s endorsement and opined that CPS’ policy was not lawful. The reversal prompted CPS to file an action in court for declaratory relief to have its policy deemed lawful. Prior to trial, the Labor Commissioner and CPS settled and entered into a Memorandum of Understanding effectively agreeing (again) that CPS’ policy was lawful. In these circumstances, it is obviously outrageous for CPS to retroactively be held liable for back pay. This is particularly true given that prior to today’s “disapproval” of the Seymore case, California courts endorsed the federal regulation allowing sleep time during a 24-hour shift to be excluded from compensable hours. However, the California Supreme Court didn’t see it this way and refused to limit its holding to apply prospectively only. The Court held that the Labor Commissioner’s view was not entitled to deference [of course, other employee-friendly Labor Commissioner interpretations conveniently were somehow entitled to deference] and suggested that the confusion in this area may have stemmed from unclear wording of Wage Orders, defunding of the Industrial Welfare Commission, and inadequate funding of DLSE enforcement. The Court stated that these problems are the province of the Legislature to fix, not the courts. [Apparently, it’s okay for California employers to pay the price for legislative and agency shortcomings in the meantime.]
Employers that have employees working 24-hour shifts should carefully review their pay practices in light of the CPS decision, paying particular attention to the Wage Order specifically applicable to their industry to determine whether there is any lawful basis for excluding sleep time from compensable hours worked. Employers that have employees who are on-call (regardless of whether or not a 24-hour shift contemplating sleep time) should similarly review their pay practices and the level of restrictions placed on employees during on-call time to ensure that employees are being paid properly for on-call time, where necessary.
Today the U.S. Supreme Court issued its decision in Busk v. Integrity Staffing Solutions, Inc., unanimously holding that time warehouse employees spent waiting to go through security checks and undergoing those checks at the end of their shift was not compensable time. The decision overrules a contrary conclusion that the Ninth Circuit Court of Appeals reached earlier in the case.
The employees at issue in Busk were hourly warehouse employees whose job was to retrieve products off shelves and package them for Amazon customers. Their employer required them to undergo an anti-theft security check at the end of their shifts before allowing them to leave for the day. During this process, employees had to remove items such as belts, keys, and phones from their persons and go through a metal detector. The employees were not compensated for the time they spent waiting in line for the security checks and undergoing the checks, which they alleged took up to 25 minutes each day. The employees filed a class action lawsuit seeking to recover unpaid wages for this time. The trial court dismissed the employees’ claim, holding that the security check time was not compensable time under the Fair Labor Standards Act. The employees appealed to the Ninth Circuit, which reversed the district court’s ruling and held that the employees could proceed with their claim because the security checks were required by the employer and if they actually took as much as 25 minutes per day, that time would not be de minimis but instead would be compensable under the FLSA. The U.S. Supreme Court granted Integrity Staffing Solutions’ petition for review.
In reversing the Ninth Circuit’s decision and holding that the security check time was not compensable, the U.S. Supreme Court held that the claim was governed by the standards set forth in the Portal to Portal Act and the reasons that the Act was initially enacted. The Portal to Portal Act was enacted after several court decisions came out interpreting the FLSA to broadly require payment for preliminary and postliminary activities (including a plaintiffs’ counsel fave – Anderson v. Mt. Clemens Pottery), which in turn resulted in a flood of litigation by employees seeking pay for such activities. In response to these decisions expansively interpreting the FLSA, Congress enacted the Portal to Portal Act to define “work” that is compensable and activities that are not compensable under the FLSA. The Portal to Portal Act thus expressly excludes the following activities from compensable time:
- Time spent walking, riding or traveling to and from the actual place of performance of the principal activity or activities which such employee is employed to perform; and
- Activities which are preliminary to or postliminary to said principal activity or activities which occur either prior to the time on any particular workday at which such employee commences, or subsequent to the time on any particular workday at which he ceases, such principal activity or activities.
The term “principal activity or activities” means activities that are an “integral and indispensable” part of the principal activities the employee is hired to perform. Based on these definitions, the Court held that time Integrity Staffing’s employees spent undergoing security checks was non-compensable postliminary work. The Court reasoned that end of shift security checks were not the employees’ principal activity because the employees were not employed to undergo security checks; rather, they were employed to retrieve products in the warehouse and package them for customers. Furthermore, the security checks were not an “integral” or “indispensable” part of the employees’ packaging activities. The security checks were not necessary in order for the employees to perform their packaging duties, and the mere fact that the employer required the screenings does not change the nature of the screenings as being separate from the employees’ principal activities. Indeed, the employer hypothetically could eliminate the security check requirement and this would have no impact on the employees' ability to perform their principal activities, thus demonstrating that the security checks were not an integral or indispensable part of the employees' duties. The Court contrasted this type of activity from different types of preliminary or postliminary activity that would be compensable under the FLSA, such as time an employee spent donning required protective gear needed to perform job duties or removing contaminated clothing at the end of a shift in order to safely leave the worksite. Finally, the Court held that the Ninth Circuit erred in focusing on whether the time was de minimis or not in assessing whether it was compensable under the FLSA. The Court held that the Portal to Portal Act definitions focus on the nature of the activity and its relation to the employees’ principal activities – not on how much time the activity takes the employee to complete.
The Busk v. Integrity Staffing Solutions decision is a great one for employers fighting wage and hour lawsuits based on unpaid preliminary and postliminary activities brought under the FLSA. California employers are cautioned, however, that the Busk decision is based solely on the FLSA/Portal to Portal Act and is not an interpretation of California law. California courts interpreting California’s Labor Code and Wage Orders have applied a much broader definition of compensable work time to include all time that an employee is subject to the control of the employer. Thus, even though an employer may be able to defeat a claim for compensation for preliminary/postliminary work under the FLSA, the result may not be the same under California law. Employers seeking guidance on whether preliminary or postliminary activities performed by California employees are compensable should consult California employment law counsel.
The Busk decision is available in full here.
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.
On September 22, after a court trial before the Honorable Gerrit W. Wood of the Superior Court of Sacramento County, the court, in an unpublished opinion, found that a class of newspaper carriers working for the Sacramento Bee from 2005 through 2009 were improperly classified as independent contractors. Utilizing the standards articulated by the California Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Ind. Relations, 48 Cal. 3d 341 (1989,) and more recently in Ayala v. Antelope Valley Newspapers, Inc., 59 Cal. 4th 522 (2014), Judge Wood held that the Bee’s parent company, McClatchy, maintained such control over the means in which the newspapers were delivered that it could not properly classify the carriers as independent contractors. The individual class action plaintiffs are now demanding that McClatchy reimburse them all of their mileage expenses in accordance with section 2802 of the California Labor Code, which requires that employees be reimbursed all reasonable expenses incurred in the course of their employment. It remains to be seen if McClatchy will appeal the decision.
Although this decision is not a precedential one, it is important nonetheless as it illustrates the increased focus and scrutiny by plaintiffs’ attorneys and certain government agencies on individuals who are working as independent contractors. California businesses who utilize independent contractors are cautioned to carefully review the circumstances of these workers to make sure that they can make a strong legal argument, under both federal and California law, that the classification is an accurate one. The consequences for misclassification can be broad and include such items as tax liability, liability for unpaid workers’ compensation premiums, liability for stock options and benefits and other entitlements that similarly situated employees receive but independent contractors do not, and liability for unreimbursed expenses.
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.