This week, the Seventh Circuit issued a decision in Schaffer-Larose v. Eli Lily & Company, in which it held that pharmaceutical reps are exempt under the FLSA's administrative exemption.  This is separate from the issue pending before the United States Supreme Court in Christopher v. SmithKline Beecham of whether these types of employees are exempt under the outside sales exemption.  This decision is contrary to the Second Circuit's 2010 Novartis decision and could, in theory, create a separate Supreme Court decision to address the discrete exemption issue. 

As discussed below, the most notable aspects of the opinion are that it (1) takes a narrow view of the (non-exempt) production side of the "administrative/production" dichotomy, (2) rejects the interpretation that the DOL advanced in amicus briefing in the Novartis case, implicitly finding the DOL brief was entitled to minimal deference, and (3) gives a broad interpretation of what qualifies as "discretion and independent judgment" for purposes of the exemption.

Before analyzing the case, for those who have not read any of the pharmaceutical rep cases, some background facts are necessary.  Pharmaceutical reps are non-physicians who receive sales training and training on the pharmaceutical products their employers produce.  They visit doctors within a geographic territory and try to persuade the doctors to prescribe their employer's medication to patients who could benefit from the drugs. 

While there are extensive regulatory limits on what they can say, they are free to decide how much time they'll spend with each doctor, how they will approach doctor's to demonstrate the benefits of a particular drug, and how to respond to any questions and concerns the doctor may have.  They also are a conduit back to the employer of complaints the doctors raise about the drugs. 

They get paid a base salary plus incentive pay based on the volume of the prescription drug sales within their geographic territory.  Most of the litigation in this area has focused on whether their duties qualify as "sales" work for the outside sales exemption.  If it doesn't, then the alternative argument is that they engage in "promotion" or "marketing" work that qualifies for the administrative exemption. 

The Analysis

With that in mind, here are three interesting takeaways from the case.

(1)  Whether the work qualified as administrative rather than production work.

The Seventh Circuit began by looking to the language of the governing regulations (consistent with what the California Supreme Court said should be the proper analysis in Harris v. Superior Court).  It quoted from the regulations the language that underpins the "administrative/production dichotomy":

"To meet [the requirement of performing work directly related to management or business operations], an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment."  

The court interpreted this standard as holding that an employee is not administrative if he is "engaged in the core function of a business," which in the case of pharmaceuticals is the "development and production of pharmaceutical products."  The plaintiffs did not develop or produce pharmaceuticals, but instead performed work that "supports that function, but is distinct from it." (p. 32; emphasis added).  By contrast, in Martin v. Cooper Electric (the 3rd Circuit case plaintiffs always cite for a broad view of "production work"), a salesman for an electrical wholesaler was a production worker because the entire business of the employer was wholesale sales, and the employee engaged primarily in that sales function.  Sales there could not be construed as "supporting but distinct from" the core business of the employer. 

The Seventh Circuit bolstered its conclusion by reference to the preamble of the 2004 update to the FLSA regulations, which noted that administrative work includes "representing the company" and "promoting sales," two tasks that fairly describe the pharmaceutical rep's function within Eli Lilly.  The court also noted that the regulations themselves, 29 C.F.R. 541.201(b), state that employees in "advertising, marketing and public relations" typically qualify as administrative, which again is a fair analog to a pharmaceutical rep's role within the company.  (p. 33).

Finally, the Seventh Circuit rejected the argument that the exemption was unavailable merely because the reps' work was directed at a "limited, select group of physicians" as opposed to "promotional and marketing of the company overall," finding that limitation not to be supported by the governing regulations.  (p. 31)

(2) Whether the DOL amicus brief was entitled to any deference. 

In what has to be one of the most disingenuous footnotes ever, at footnote 20, the Seventh Circuit summarily dismisses the DOL's amicus brief that had argued that pharmaceutical reps do not qualify for the administrative exemption.  The court explained in footnote 20, that the DOL was not entitled to deference because nothing about the administrative exemption regulations is ambiguous:

"The parties address extensively the degree of deference owed to the Secretary’s position. Most of this argument addresses the appropriate deference owed to the Secretary’s interpretation of an ambiguous  regulation. Cf. Christensen v. Harris Cnty., 529 U.S. 576, 588 (2000) (declining to defer to an agency’s interpretation, contained in an opinion letter, of an unambiguous regulation); Auer v. Robbins, 519 U.S. 452, 461-62 (1997) (deferring to an agency’s interpretation of its own regulation stated in an amicus brief). Although this question might deserve significant attention if an interpretation of the regulations were in question, as it perhaps is with respect to the outside sales exemption, it does not apply here. In this case, we are simply tasked with the application of an unambiguous regulation to the particular facts." (p. 28) 

I have been litigating the administrative exemption for more than a decade now, and I cannot think of an area of wage and hour law that is more fraught with ambiguity, conflicting opinions, and unsettled standards.  Nonetheless, I think it is the right call not to defer to the DOL when, due to political considerations, it weighs in on a particular case rather than issue regulations pursuant to the normal administrative processes.

(3) Whether the reps exercised sufficient discretion and independent judgment. 

The Seventh Circuit held that the discretion the pharmaceutical reps had in how they communicated with doctors and responded to their inquiries was enough to qualify as "discretion and independent judgment on matters of significance."  As the court explained it, the reps "are sent into physicians’ offices with minimal supervision to engage in conversation with the prescribing physicians who, as a practical matter, are in the most direct position to determine whether their companies’ products have a viable market" and "[i]n speaking to individual physicians, the representatives must tailor their messages to respond to the circumstances, whether those be the time or attention constraints from the physician or the concerns and objections that are voiced during a particular or previous visit." (pp. 48-49).  

The court noted that this function was similar to certain descriptions of exercising discretion and judgment from the preamble to the 2004 regulations, including the reference to employees who are "free from direct supervision" and "use personalized communication techniques" with "responsibility for assessing customer needs" and a "duty to anticipate competitive products and distinguish them from competitor's products."  (p. 51).

Interestingly, the Seventh Circuit agreed that answering a doctor's questions did involve some degree of "skill" but rejected the notion that a job "requiring skill" is necessarily inconsistent with it also entailing the exercise of discretion and independent judgment:

"The records clearly demonstrate that the representatives receive extensive skills training, particularly on sales techniques. They most  certainly employ this skill, and, indeed, many others in the course of their daily duties. Nevertheless, applying these skills entails a great deal of judgment. The job requires far more than “applying well-established techniques, procedures or specific standards described in manuals.” (p. 53).

 Overall, this case has a lot an employer can use in arguing that other types of jobs are exempt under the administrative exemption.  For the practitioners reading this blog post, I encourage you to read it and try to work it into your defense.

On April 25, 2012, the United States Equal Employment Opportunity Commission (“EEOC”) issued updated enforcement guidance on employers’ use of arrest and conviction records when making employment decisions under Title VII of the Civil Rights Act of 1964 (“Title VII”). The EEOC’s guidance (the “Guidance”) is intended to codify and build on its prior policies concerning employers’ use of criminal records. Nevertheless, the Guidance, which is effective immediately, supersedes the EEOC’s prior policies on this issue.

The EEOC’s previous guidance explained that excluding individuals from employment on the basis of their conviction records has a disparate impact on race and national origin. Under Title VII, employers may not maintain a policy that results in a disparate impact unless they can demonstrate that such a policy is “job related and consistent with business necessity.” Accordingly, it has been the EEOC’s long-held position that a criminal record exclusion is unlawful under Title VII unless an employer can show that the exclusion, for the position in question, satisfies the “business necessity” defense. The EEOC’s prior guidance indicated that an employer can establish the business necessity defense by showing that it considered the following three factors: (1) the nature and gravity of the offense; (2) the amount of time elapsed since the offense and/or completion of the sentence; and (3) the nature of the position being sought in relation to the offense.

However, the Guidance now provides a new explanation of how an employer “may” be able to justify a criminal record exclusion based solely on the factors previously identified. Specifically, the employer potentially can satisfy the requisite standards when the employer implements a targeted screen that is “narrowly tailored to identify criminal conduct with a demonstrably tight nexus to the position in question.” The Guidance identifies two situations in which employers will “consistently” meet the business necessity defense: (a) the exclusion policy has been validated in accordance with the Uniform Guidelines on Employee Selection Procedures; or (b) the exclusion policy is based on the factors listed above and the employer provides an “individualized assessment” for those people who were excluded by the screen.

With respect to validation, the Guidance explains that while there may be social science studies demonstrating a link between convictions and future job performance that could assist in validating some employment exclusions, “such studies are rare.” The Guidance thus indicates that the necessary data to perform a validation study would be difficult to obtain.

Accordingly, employers are counseled to apply the other situation and perform an individualized assessment in conjunction with the factors outlined above in order to satisfy the business necessity defense. Pursuant to the Guidance, an individualized assessment would generally include a meeting with the individual to provide him/her with an opportunity to explain the circumstances of the conviction. Once an individual provides the employer with additional information, the employer then must consider whether or not the exclusion, as applied to that individual person, is still job related and consistent with business necessity.

Arrest Records

The Guidance distinguishes between an employer’s reliance on arrest records as opposed to conviction records. Specifically, while convictions constitute reliable evidence that the underlying criminal conduct occurred, arrest records are not proof of criminal conduct. Thus, employers cannot deny an employment opportunity exclusively on the basis of an arrest record.

Blanket Exclusions

The Guidance prohibits blanket policies that exclude everyone with a criminal record from employment. According to the Guidance, such policies will not be job related and consistent with business necessity, and therefore, on their face, will violate Title VII, unless the policy is required by federal law.

Significantly, while employers’ compliance with federal laws and regulations that restrict the employment of individuals with certain criminal backgrounds will shield them from Title VII liability, compliance with state and local laws does not provide the same protection. The Guidance explains that employers who take an adverse employment action required by state or local laws that is inconsistent with Title VII will be required to show that such action is job related and consistent with business necessity.

Recommendations

Employers should review their job applications and their policies concerning the use of arrest and conviction records with counsel, and in conjunction with the “Employer Best Practices” that are generally discussed in the Guidance. In that regard, employers should keep in mind the following best practices to avoid Title VII disparate impact liability in their hiring/promotion practices:

• Eliminate policies that completely exclude applicants from employment based on criminal records or arrest records;
• Develop a written policy for screening applicants and employees for criminal conduct. This policy should:
  • Identify the essential functions of the employers’ positions and the circumstances under which they are performed;
  • Determine specific criminal offenses that may demonstrate unfitness for those positions and how those offenses might demonstrate that an individual is unfit to perform the essential functions of those positions;
  • Determine the duration of the exclusions for criminal conduct (including an opportunity for individualized assessment);
  • Record the justification for your policy, including making a record of the consultations and research performed when creating this policy;
• When asking questions about criminal records, limit any inquiries to only those questions that are job-related and consistent with business necessity;
• Ensure that all information about applicants’ and employees’ criminal records is kept confidential;
• Train managers on this new EEOC guidance and any new employment policies that are adopted for its implementation;

The EEOC’s guidance, “Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act of 1964,” is available here. The EEOC also has issued a Q&A, which is available here.

In what is reported to be a landmark decision, the United States Equal Employment Opportunity Commission (“EEOC”), in Macy v. Bureau of Alcohol, Tobacco, Firearms and Explosives, found for the first time that discrimination against transgender individuals constitutes sex discrimination in violation of Title VII. While not the first case to explore the notion that Title VII prohibits discrimination based upon gender identity and stereotypes, it is the first decision by the EEOC addressing the subject of transgender discrimination.

In reaching its conclusion, the EEOC relied on federal court decisions from throughout the nation that have addressed Title VII’s impact on gender identity. In particular, the EEOC cited the United States Supreme Court’s decision in Price Waterhouse v. Hopkins, 490 U.S. 228, 239 (1989), in which the High Court held that Title VII prohibits discrimination based upon gender, and thus, gender stereotypes; as well as decisions from the Ninth, Sixth, and Eleventh Circuits, all of which directly addressed the issue of whether discrimination on the basis of one’s gender identity or gender-related appearance are viable claims under Title VII. See Schwenk v. Hartford, 204 F.3d 1187 (9th Cir. 2000); Smith v. City of Salem, 378 F. 3d 566 (6th Cir. 2004) (recognizing that discrimination against transgender person because of gender nonconformity is gender stereotyping barred by Title VII); and Glenn v. Brumbly, 663 F.3d 1312 (11th Cir. 2011) (explaining that discrimination against individuals because they do not conform to socially prescribed gender roles is barred by Title VII, after finding that termination of employee because of intended transition from male to female was sex discrimination and violated employee’s constitutional rights under the 14th Amendment).

While the EEOC decision is not precedential and is not controlling on any courts, EEOC decisions generally are afforded significant deference by federal courts. Thus, the EEOC’s holding in this case should be taken seriously by all employers. Simply put, companies cannot and should not consider gender, in any form, when making employment decisions.

As a result of this decision, it is recommended that all employers review, and where appropriate, revise their EEO/non-discrimination policies, dress code and appearance standards, policies for revising personnel records, and use of restrooms, locker rooms and other gender-specific facilities policies and protocols.

On April 30, 2012, the California Supreme Court handed down Kirby v. Immoos Fire Protection, Inc., a case that addresses the alleged right of an employer to recover attorney's fees when it prevails in an actions for meal or rest periods asserted under Labor Code Section 226.7. 

The employer prevailed in an action that asserted both a claim for unpaid overtime and a claim for failure to provide rest periods.  The employer was awarded attorney's fees attributable to the rest period claim under Labor Code Section 218.5, which allows a prevailing party to recover attorney's fees in an action "for nonpayment of wages."  By contrast, under Labor Code Section 1194, attorney's fees are available only to the prevailing plaintiff in an action for failure to pay "the legal minimum wage or the legal overtime compensation."  Section 218.5 expressly states that it does not apply "to any action for which attorney's fees are recoverable under Section 1194."  The plaintiff appealed the award of attorney's fees under Section 218.5, arguing that the employer could not recover under that section, and the case ultimately made its way to the California Supreme Court.

The California Supreme Court addressed three separate arguments directed to the question of whether the employer could recover attorney's fees:  (1) is a claim for rest periods a claim for "the legal minimum wage," which would bring it within Section 1194? (2) if no, is a claim for rest periods a claim "for nonpayment of wages," which would bring it within Section 218.5?; and (3) if yes, may the employer recover attorney's fees for a rest period claim when the action also includes an overtime claim that unquestionably is covered by Section 1194? As explained below, the court undertook a rather counter-intuitive analysis of the statutes to conclude that no party can recover attorney's fees for meal and rest period claims, regardless of who prevails.

The issue of whether a rest period claim falls under Section 1194 was a very straightforward analysis.  The Court interpreted  a claim for "legal minimum wage" as a claim asserting that the employer failed to pay at least the legal minimum wage for an hour worked (i.e., $8 per hour).  The Court rejected the plaintiff's proffered interpretation that a claim for the "legal minimum wage" meant any claim seeking a "minimum payment amount" as an "obligation on employers . . . based on important public policy."  The Court rejected this broad interpretation as unsupported by the text of the statute, legislative history, case law, or common sense.  Indeed, such a broad definition of "legal minimum wage" would sweep the requirement to pay overtime pay within its scope, thus rendering the reference to claims for "overtime pay" within Section 1194 superfluous.

The analysis of the scope of Section 218.5 was more creative, and seemed to border on sophistry. The court reconciled two premises that seem to be at odds: (1) that the "premium pay" an employer owes for rest period violations is a "wage" (as the Court had previously held in Murphy v. Kenneth Cole Prods.) and (2) that an action to recover such premium pay is not an action for "nonpayment of wages" as would bring the claim within the scope of Section 218.5.

Justice Liu explained for the unanimous Court that an action for rest periods is really an action for nonprovision of rest periods, to be contrasted with an action where an employer has refused to pay employee his wages for the hours the employee worked.  The remedy for the non-provision of rest periods just happens to be a wage (at least for purposes of calculating the statute of limitations), but the action is still not an action for "nonpayment of wages" even if it is, in effect, an action for recovery of wages.  In other words the Court held that the recovery of wages is just a remedy, but the action is not for the "nonpayment of wages" much in the manner that a personal injury tort action is not an action for the "nonpayment of damages."

I doubt too many employers are greatly concerned about their ability to chase around employee plaintiffs, who are usually judgment proof, for attorney's fees (although that right might provide some leverage in settlement talks), so this case may not be of great significance to most employers. 

The Court's logical gymnastics yielded an interesting nugget, however, that Justice Liu probably did not intend.  The extension of his reasoning could be useful to employers opposing class certification in a meal period class action.  In explaining how an action for failure to provide meal and rest periods is not an action for nonpayment of wages, the Court explained that Labor Code Section 226.7 does not require payment of wages and paying the wages for a missed meal period does not constitute compliance with the statute.  As the Court explained it

"The 'additional hour of pay' provided for in subdivision (b) is the legal remedy for a violation of subdivision (a), but whether or not it has been paid is irrelevant to whether section 226.7 was violated. . . . An employer's failure to provide an additional hour of pay does not form part of a section 226.7 violation, and an employer's provision of an additional hour of pay does not excuse a section 226.7 violation."  (emphasis added)

If that is true and non-payment of the premium pay does not form part of a section 226.7 violation, then it should be irrelevant for purposes of class certification whether an employer lacks a policy to pay the hour of pay voluntarily when it detects a missed meal period or rest period. Plaintiffs try to use the lack of any such policy as a "common issue" that could support class certification of a meal period claim.  But if the issue of whether an employer pays the premium voluntarily is wholly distinct from whether it complies with the statute, then the whole issue should become irrelevant for class certification.  After all, a common issue has to be one that would support resolution of a central issue in "one stroke."  How can an issue irrelevant to liability meet that test?

Which leads me to question again, how is it that plaintiffs intend to get meal period cases certified now in the absence of a policy prohibiting the taking of meal periods?  If you would like guidance on that issue, please do not hesitate to call Sheppard Mullin for assistance.

As anticipated, today the California Supreme Court in Brinker v. Superior Court issued a far ranging decision that clarifies the standards for meal and rest period claims both substantively and with respect to class certification. The Court set forth fairly easy-to-follow guidelines for compliance with the law that most employers are already utilizing. The question that seemed to pose the greatest interest to the business community—whether an employer meets its obligation to "provide" a meal period by simply making one available for employees to take—was decided in the employer's favor.

The Court also further clarified the standards trial courts should utilize in considering class certification in wage and hour cases.  As a practical matter, the guidelines the Court set forth favor employers much more than employee plaintiffs. Probably the most encouraging aspect of the decision was the fact the California Supreme Court appeared to adopt much of the U.S Supreme Court's Wal-Mart v. Dukes interpretation of the "commonality" requirement for class certification. 

The only dark lining in this otherwise silver cloud was the determination that the class rest period claim below was properly certified. Even there, however, the decision turned on a unique company policy that is not likely to be replicated in other cases. 

Class Certification Generally

In the introduction to the opinion, the Court seemed to indicate that it was ruling that a trial court need not look at the merits or elements of a claim when deciding whether to certify a case. I thought to myself, "that can't possibly be right," and it turns out that it was not right. The Court did not set forth any such rule. Rather, the Court agreed with the dominant line of precedent that a trial court must consider the merits insofar as it needs to determine whether the essential elements of a claim can be resolved using collective proof. It may be that the answer is "yes" even though the defendant is entitled to summary judgment on the merits, but the trial court has to consider the essential elements to determine whether they can be proved with common evidence.

Most promising about the decision, was the Court's citation of Professor Richard Nagareda's commentary on class certification, which is the same scholarly authority the United States Supreme Court relied upon in Dukes to hold that commonality requires common issues whose resolution will resolve key issues of liability. To this end, the Brinker Court stated that

"[a] court must examine the allegations of the complaint and supporting declarations and consider whether the legal and factual issues they present are such that their resolution in a single class proceeding would be both desirable and feasible." (pp. 8-9) 

Footnote 5, which immediately follows this quote, approvingly cites Prof. Nagareda:

"'[W]hat really matters to class certification' is 'not similarity at some unspecified level of generality but, rather, dissimilarity that has the capacity to undercut the prospects for joint resolution of class members' claims through a unified proceeding. (Nagareda, Class Certification in the Age of Aggregate Proof (2009) 84 N.Y.U. L.Rev. 97, 131.)"

This is important because it sets forth a standard where an employer can defeat class certification by coming forth with declarations or other individualized evidence that reveals that essential elements of liability can be resolved only through individualized testimony. Such a rule is entirely consistent with every other holding the California Supreme Court set forth in this opinion.  

The Brinker Court's statement in its introduction that a trial court need not always decide the elements of a claim before class certification simply addressed the case where, regardless of whether the trial court adopted the plaintiff or defendant's view of the substantive law, the case would still be resolvable through common proof. Such a situation is certainly the exception rather than the rule in most Labor Code class action litigation.

The Court summed up its holding on the need to resolve threshold legal issues as follows:

"Presented with a class certification motion, a trial court must examine the plaintiff's theory of recovery, assess the nature of the legal and factual disputes likely to be presented, and decide whether individual or common issues predominate. To the extent the propriety of certification depends upon disputed threshold legal or factual questions, a court may, and indeed must, resolve them. Out of respect for the problems arising from one-way intervention, however, a court generally should eschew resolution of such issues unless necessary. Consequently, a trial court does not abuse its discretion if it certifies (or denies certification of) a class without deciding one or more issues affecting the nature of a given element if resolution of such issues would not affect the ultimate certification decision." (pp. 13-14; emphasis added).

Rest periods

Number of Rest Periods Owed

The Court answered three questions about rest periods: (1) how many rest periods must be provided in a shift of a particular length, (2) whether the rest periods must occur at certain specific times within the workday, and (3) whether the trial court was correct to certify the rest period claim below. The answers to these questions are mostly helpful to employers.

First, on the number of rest periods, the Court adopted a rule that the number of work hours in a shift should be divided by 4 and rounded to the nearest whole number, and the employee is entitled to that number of rest periods, except that no rest period at all is required if the shift is less than 3-1/2 hours. So, the rule now is: (1) for a shift under 3-1/2 hours, the employee gets no rest period; (2) for a shift between 3-1/2 and 6 hours, the employee gets 1 rest period; (3) for a shift between 6 and 10 hours, the employee gets 2 rest periods, (4) for a shift between 10-14 hours, the employee gets 3 rest periods. That seems fairly simple to implement, and the employee always has the option to skip a rest period that he or she has been authorized to take.

Timing of Rest Periods

The Court held that, as a general matter, the employer should set these rest periods near the middle of a 4-hour block of time, but the employer "may deviate from that preferred course where practical considerations render it infeasible." There is no particular rule, however, that the rest period must come before the meal period. As to the showing an employer would need to make to justify permitting rest periods only at times away from the middle of the 4-hour blocks of time, the Brinker Court declined to announce a bright line rule: "At the certification stage, we have no occasion to decide, and express no opinion on, what considerations might be legally sufficient to justify such a departure." The only hint they gave was to say that with a normal eight-hour shift: "[a]s a general matter, one rest break should fall on either side of the meal break." In the next breath, however, the Court hedged this statement: " Shorter or longer shifts and other factors that render such scheduling impracticable may alter this general rule." (p. 23).

As a practical matter, to the extent employees are free to take breaks as they see fit, this will all be an academic discussion with no practical impact. This rule primarily applies to industries where rest periods are actually scheduled for set times, and not where employees are free to take their breaks at their discretion.

 Certification of Rest Period Claim

It appears from the record presented that Brinker Corp. controlled the timing of rest breaks. The Court affirmed the granting of certification of the rest period class because Brinker's policy allegedly allowed only one break for each four hours worked. Hence, as a matter of policy, employees who worked shifts between 6 and 8 hours in length allegedly were deprived of the right to take a second rest period required by law. Although rest periods are waivable, the Brinker Court confirmed that the employee has to be given permission to take a rest period before the employee can be said to lawfully have waived the rest period:

"No issue of waiver ever arises for a rest break that was required by law but never authorized; if a break is not authorized, an employee has no opportunity to decline to take it." (p. 26).

Because the theory of class certification in this case was that the company policy was facially unlawful and actually applied as it was written ("facts" that California Supreme Court had to accept as true for purposes of this decision), the record presented the limited type of case where class certification is appropriate: 

"Claims alleging that a uniform policy consistently applied to a group of employees is in violation of the wage and hour laws are of the sort routinely, and properly, found suitable for class treatment." (p. 25).

Although this aspect of the ruling is certainly a disappointment for Brinker Corp., it is ultimately consistent with the narrow, defense-view of class certification—i.e., that certification is proper only where there is a single policy or practice that can be judged collectively lawful or unlawful. This ruling on rest period certification does not have widespread application to most of the cases employers face.

Meal periods

This part of the decision has to be read as a huge victory for employers.

Requirement to "Provide" a Meal Period

There was concern that the "provide" standard would be defined in some muddled way that would just create more litigation. The California Supreme Court actually set forth a fairly clear standard, however. To provide an off-duty meal period consistent with California law means to give the employee 30-minutes where he or she is free to do what he or she wants, whether or not the employee chooses to use that time for work: 

"[The] meal period requirement is satisfied if the employee (1) has at least 30 minutes uninterrupted, (2) is free to leave the premises, and (3) is relieved of all duty for the entire period. . . Employers must afford employees uninterrupted half-hour periods in which they are relieved of any duty or employer control and are free to come and go as they please." (p. 31).

The only limitation placed, is not really a limitation at all, but a factual issue. The employer cannot coerce or pressure employees to skip their meal breaks:

"[The] employer may not undermine a formal policy of providing meal breaks by pressuring employees to perform their duties in ways that omit breaks." (p. 36). 

This does not appear to mean that employees who feel that they shouldn't take breaks because they have a lot of work to get done have a valid claim for meal breaks. Rather, this appears to means that you cannot have a nominal policy to give breaks coupled with an actual practice where you pressure employees not to take them. If individual employees claim they were given too much work to allow them to take breaks, that would seem to create individualized issues not suitable for certification.

Timing of Meal Period

After oral argument in November, there was a great concern that the California Supreme Court was going to announce a rule that if an employee took a meal period early in the shift, he or she would have to be granted a second meal period five hours later, even if the total hours of work in the day were less than ten. Fortunately, the California Supreme Court rejected that holding entirely and announced that the only timing requirements are that (1) a first meal break must be provided after no more than five hours of work, and (2) a second meal break must be provided after no more than 10 hours of work. The final word of the unanimous Court was as follows:

"Wage Order No. 5 imposes no meal timing requirements beyond those in section 512. Under the wage order, as under the statute, an employer's obligation is to provide a first meal period after no more than five hours of work and a second meal period after no more than 10 hours of work." (p. 50).

Certification of Meal Period Claims

The Court declined to adopt the holding of the appellate court that, on the record, individualized issues necessarily predominated because the question of whether any given employee was not "provided" a meal period would turn on facts individual to each employee. The Court held that it did not need to reach that issue because, as an analytical matter, the trial court had certified a class based on an assumption that an employee who takes a meal period early in a shift must get a second meal period within the next five hours of work, even where the employee worked fewer than ten hours in the day. Because that interpretation was wrong as a matter of law, the Court remanded the case to the trial court to decide class certification of the meal period claim anew: 

"At a minimum, our ruling has rendered the class definition adopted by the trial court overinclusive: The definition on its face embraces individuals who now have no claim against Brinker. In light of our substantive rulings, we consider it the prudent course to remand the question of meal subclass certification to the trial court for reconsideration in light of the clarification of the law we have provided." (p. 51).

It is hard to see how a class can be certified in this case consistent with the rest of the Court's decision, however.

Off-the Clock Claim

Tucked at the end of the decision is a discussion of the plaintiff's class off-the-clock claim. This section is an important part of the decision because it is (again) consistent with the narrow view of class certification advanced in Wal-Mart v. Dukes. 

The plaintiff's theory was that employees were being forced falsely to clock out when they actually kept working. The Court held that the Court of Appeal was correct to order that this claim should not have been certified.

First, the Court reaffirmed that an employer is required to pay an employee only for work that the employer knows or should have known the employee was working. Furthermore, where an employee clocks out, "it creates a presumption they are doing no work, a presumption [plaintiff] and the putative class members have the burden to rebut." (p. 52). That is a useful tidbit to cite as a matter of substantive law.

Second, class certification was improper here because the company's policy was to preclude off-the-clock work, and the only evidence to the contrary that plaintiffs presented was " anecdotal evidence of a handful of individual instances in which employees worked off the clock, with or without knowledge or awareness by Brinker supervisors." (p. 53). Class certification is inappropriate when it is based on anecdotes contrary to the company policy:

"where no substantial evidence points to a uniform, companywide policy, proof of off-the-clock liability would have had to continue in an employee-by-employee fashion, demonstrating who worked off the clock, how long they worked, and whether Brinker knew or should have known of their work." (p. 53).

Implicit in this ruling is a determination that the case could not have been tried using a "Trial by Formula" approach of sampling a subset of the class, determining how much they worked off the clock, and extrapolating the results to the broader class. Furthermore, the focus on a lawful policy means that, in most cases where an employer's policy is for employees to record all of their time and never work when clocked out, class certification of an off-the-clock claim will be impossible. Again, this is a win for employers.

Miscellaneous

Contrary to numerous other opinions where the California Supreme Court disregarded DLSE opinion letters as unlawful underground regulations, this decision cites DLSE opinions favorably and suggests they are entitled to serious consideration: "The DLSE's opinion letters . . . while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance." (p. 19). This just proves what I have always said that courts cite the DLSE when they agree with it, and claim that its pronouncements are unlawful underground regulations where they disagree. Nothing in this case said that DLSE pronouncements are binding.

Finally, Justice Werdegar, who wrote the majority opinion, also writes a concurrence (joined only by Justice Liu) where she reaffirms that class actions are important and this case should not be read as categorically ruling them inappropriate for meal period claims.  As a preliminary matter, this section is not part of the opinion of the Court, so it is not binding precedent in the way the majority opinion is.  Furthermore, Justice Werdegar admits that class certification is generally inappropriate where individualized issues exist as to each class members liability, as opposed to the amount of damages they might recover:

"For purposes of class action manageability, a defense that hinges liability vel non on consideration of numerous intricately detailed factual questions, as is sometimes the case in misclassification suits,is different from a defense that raises only one or a few questions and that operates not to extinguish the defendant's liability but only to diminish the amount of a given plaintiff's recovery." (Concurrence, p. 3)

If you have further questions, please do not hesitate to contact a Sheppard Mullin attorney for guidance.

The lawyers of Sheppard Mullin have established a task force to closely study the Brinker decision and then provide analysis to interested clients and potential clients about what it all means. Speakers Richard Simmons, Thomas Kaufman and Matthew Sonne, will explain what the decision holds, identify the questions that are still left open, and give some practical guidance on what impact the decision should have on businesses going forward.

Click here for more information: http://www.sheppardmullin.com/events-492.html

The job market appears to be on an upswing, and with this upswing, and the advent of new technology, comes new challenges for employers and applicants alike. Potential employees may have online identities that many employers deem useful when investigating a job applicant. However, privacy settings on many social media sites allow an applicant to hide his/her online persona from these potential employers. As a result, a new trend in applicant background investigating has surfaced: asking an applicant for his/her username and password to social media sites during the interview process.

We will continue to monitor these developments and provide updates as these draft amendments work their way through the legislative process, and as new proposed amendments are introduced.

Employers with sales teams in California need to get ready. California has a new commission contract law, AB 1396, which takes effect January 1, 2013. Under AB 1396, which amends California Labor Code section 2751, employers who pay commissions to their employees are required to enter into written commission contracts with employees. The contract must describe the method by which commissions are computed and paid. Employers must also provide a copy of the signed contract to each employee, and get a signed receipt from each employee. That's the easy part. Here's the tricky part. Going forward, when a contract governing commissions expires without being replaced but the employee continues work, the terms of the “expired” contract will apply to commissions until the parties sign a new agreement or until the employment is terminated. As a result, it will be important to get new commission contracts in place before or when the old ones expire.

For employers who do not currently use commission contracts, it is not too early to start thinking about the terms and conditions that you would like to include in them. For employers that already use commissions contracts, you will want to review them and make sure that they comply with AB 1396 and detail how commissions are earned and paid. Employers with existing commissions contracts expire after January 1, 2013 need to be ready with superseding written agreements once the current contract expires.

Employers that have multiple commissions plans that apply to an individual employee will need to consider how they will implement, track, and end multiple commissions contracts for these employees.

California employers are not alone. The Legislature sought to follow the lead of Georgia, Louisiana, Maryland, and Tennessee in requiring that all employers put commission-based employment contracts in writing. The Legislature believes AB 1396 will protect employees from fraud and abuse and employers from unnecessary litigation resulting from vague oral contracts.

All employers are familiar with race, gender, age, disability and many other protected classifications under the myriad of Federal and state fair employment practices acts. It now appears that there is a growing trend to add “unemployed” to that list. While unemployment rates appear to be on the decline, 8.3 percent of the population remains unemployed, up more than 3 percent from where it was less than four years ago. When unemployment rates are high, employers invariably become inundated with candidates for the limited openings that may become open and available. So much so that some employers have taken to disqualifying potential applicants by advertising that “the unemployed” need not apply. In light of this recent development in job advertisements, Congress and several state legislative bodies have started to amend their anti-discrimination laws to add “unemployed status” as a protected class.

While similar actions are pending in several states, on March 29, 2011, New Jersey became the first state to adopt a law concerning discrimination on the basis of an applicant’s employment status. Specifically, New Jersey now prohibits employers and employment agencies, from advertising job vacancies that include “currently employed” as a job qualification, or indicate that applications will be accepted only from currently employed people or that applications from the unemployed will not be accepted.

No less than eighteen other states have taken action to join New Jersey and are currently considering similar amendments – in some cases more far reaching amendments to their fair employment practices laws. In fact, several states are currently considering amendments to classify “unemployed status” as a protected class, thereby seeking to prohibit discrimination in hiring on the basis of an applicant’s unemployed status.

While we will continue to monitor these developments and provide updates as these proposed amendments work their way through the various state legislatures, below are links to the pending state legislation: 

California
Connecticut
District of Columbia
Florida
Iowa
Illinois
Maryland
Michigan
Minnesota
Missouri
Nebraska
New York
Ohio
Oregon
Pennsylvania
South Dakota*
Tennessee
West Virginia

*No link available at the time of publication.

Following a trend by the Federal government to liberalize anti-discrimination laws in favor of employees, the Department of Labor Office of Federal Contract Compliance Programs ("OFCCP") has proposed regulations that would require employers who wish to keep their contracts (and subcontracts) with the Federal government to attempt to maintain a workforce where 7% of employees are individuals with disabilities. The public comment period for this proposal has just closed, and the OFCCP is now in the process of reviewing respondents' reactions.

The 7% goal would apply only to contractors that have 50 or more employees and a contract of $50,000 or more. It would not be satisfied by a single, whole-workforce comparison. This is because a contractor could satisfy such a goal and still conceal discrimination by segregating all employees with disabilities into one or two low-paying jobs. Instead, the goal would be applied to and measured by each job group. The OFCCP is also considering applying a 2% sub-goal for individuals with certain severe disabilities, such as total blindness or missing extremities. Failure to attain a goal would be neither a finding or admission of discrimination, nor would any goal be a ceiling limiting job opportunities for individuals with disabilities or an absolute quota. Nevertheless, failure to reach the goal could result in cancellation of a government contract or inability to win future contracts with the government.

One tricky aspect of the goal is that employers are prohibited under the Americans with Disabilities Act ("ADA") from making disability-related inquiries prior to employment, with limited exceptions, and are limited in the disability-related inquiries they may make after an offer of employment has been made. The proposal reconciles this by adding a requirement that the contractor invite applicants to self-identify as individuals with disabilities on a voluntary basis, consistent with the ADA. It would retain the requirement that contractors invite self-identification after an offer of employment has been made and before the individual assumes her job responsibilities, and it would also prescribe for the first time the language a contractor should use in its invitation. It further would add a requirement that contractors survey their workforce annually on an anonymous basis regarding disability status.

The annual survey would likely be the best measure of compliance with the goal, as people who are already employed and are assured of anonymity are more likely to identify themselves as having a disability than those seeking a job. However, the voluntary nature of all of these inquiries creates the possibility that contractors would have insufficient data to demonstrate they are complying with the target. On the other hand, mandating responses by employees and applicants (which is not in the proposal) would likely violate the ADA and other privacy laws.

The proposed rule includes a number of other changes that would increase contractors' logistical responsibilities. It would require that contractors develop and implement written procedures for processing requests for reasonable accommodation. It would also require contractors to maintain records on the number of individuals with disabilities applying for positions and the number of individuals with disabilities hired. The proposed rule would also impose additional requirements to facilitate the hiring of individuals with disabilities, including (1) a requirement that contractors engage in at least three types of outreach to recruit individuals with disabilities, (2) a requirement that contractors list job openings in appropriate employment delivery systems, and (3) a requirement that contractors must review personnel processes and job qualifications annually.

The proposal also makes changes to conform to the ADA Amendments Act of 2008 ("ADAAA"). For example, the definition of "disability" conforms with the ADAAA definitions. The proposed rule also clarifies that contractors are not required to provide reasonable accommodations to individuals who are only regarded as having a disability, consistent with the ADAAA.

The sweeping changes in Section 503, if implemented, would require the creation of significant new procedures for Federal contractors who do not want to risk loss of their government contracts. Although it is uncertain which of the proposed changes will come to fruition, the proposal reflects a broader trend by the government to fortify the protections and support provided to employees and applicants with disabilities. Employers should therefore examine their accommodation and affirmative action procedures to ensure they are robust and flexible so that possible transitions will create a minimum of disruption.

These seminars are approved for 2.0 hour of Minimum Continuing Legal Education (MCLE) credit. Sheppard Mullin is a State Bar of California approved MCLE provider. This program is pending approval for 2 (California) recertification credit hours toward PHR, SPHR and GPHR recertification through the HR Certification Institute. Sheppard, Mullin, Richter & Hampton LLP is an HRCI Approved Provider (valid through December 2012).

ORANGE COUNTY
March 28, 2012
Westin South Coast Plaza
686 Anton Boulevard, Costa Mesa, CA 92626
Speakers: Greg Labate and Matthew Sonne
Click here for more information on the Orange County seminar:
http://www.sheppardmullin.com/events-470.html

LOS ANGELES
April 19, 2012
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 47th Floor, Los Angeles, CA 90071
Speakers: Ronda Jamgotchian and Jason Kearnaghan
Click here for more information on the Los Angeles seminar:
http://www.sheppardmullin.com/events-471.html

SAN DIEGO
April 26, 2012
Hyatt Regency La Jolla
3777 La Jolla Village Drive, San Diego, CA 92122
Speakers: David Chidlaw, Samantha Hardy and Carole Ross
Click here for more information on the San Diego seminar:
http://www.sheppardmullin.com/events-472.html

SANTA BARBARA
May 1, 2012
The Canary Hotel
31 West Carrillo Street, Santa Barbara, CA 93101
Speakers: Jeffrey Dinkin
Click here for more information on the Santa Barbara seminar:
http://www.sheppardmullin.com/events-473.html

The employers of Lawson and Zang were each private companies that provided advising or management services by contract to the Fidelity family of mutual funds. Lawson’s and Zang’s employers each moved to dismiss the claims arguing, in part, that the plaintiffs were not “covered employees” within the meaning of Section 806. The United States District Court for the District of Massachusetts denied the motions, ruling that the SOX whistleblower protection of Section 806 extended to employees of private agents, contractors and subcontractors to public companies. Defendants moved for an interlocutory appeal and the district court certified a “controlling question of law” to the First Circuit.

On appeal, the First Circuit limited its review to the question certified by the district court: “Does the whistleblower protection afforded by Section 806(a) of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, apply to an employee of a contractor or subcontractor of a public company, when that employee reports activity which he or she reasonably believes may constitute a violation of 18 U.S.C. §§ 1341, 1343, 1344, or 1348.” Upon reviewing the language and legislative history of the statute, the First Circuit concluded that the whistleblower protections of Section 806(a) do not extend to an employee of a contractor or subcontractor and, accordingly, reversed the holding of the district court.

In reaching its conclusion, the First Circuit scrutinized the language and legislative history of the statute to determine the true intent of Congress. Initially, the First Circuit looked to the plain language of the statute. Given the language of the statute, the Court held that the “more natural reading” of the statute is that “only employees of the defined public companies are covered by this whistleblower provision . . . [because] the clause officer, employee, contractor, subcontractor or agent of such company goes to who is prohibited from retaliating or discriminating, not who is a covered employee . . . .”

Next, the First Circuit held that the title and caption of Section 806 also supported its finding. The caption of Section 806 is titled “Protection for Employees of Publicly Traded Companies who Provide Evidence of Fraud” while the caption of Section 806(a) is titled “Whistleblower protection for employees of publicly traded companies.” Based upon the plain language of these captions, the First Circuit held that only employees of publicly traded companies are protected by the whistleblower provision in the statute. Similarly, the First Circuit also noted that Congress enacted other whistleblower protections in SOX which are broader than the provisions included in Section 806(a), thereby evidencing an intent to keep the scope of the statute narrow. For instance, 18 U.S.C. § 1513, which concerns retaliation against informants, “requires neither a public company, nor an employment relationship, nor a securities law violation to trigger coverage . . . [whereas] [t]he scope of § 1514A is, by contrast, conspicuously narrow.”

Finally, the First Circuit held that the legislative history of Section 806(a) confirms that it does not apply to employees of private companies. Specifically, the First Circuit noted that the statute was amended in 2010 to explicitly extend whistleblower coverage to employees of public companies’ subsidiaries and nothing in the reports of the Senate committee indicates that Congress intended to extend the protections of the statute to employees of contractors and subcontractors of publicly traded companies.

In light of the First Circuit’s ruling, the definition of the term “covered employee” has been clarified and the group of persons potentially covered by the protections of Section 806(a) have been significantly narrowed to include only employees of publicly traded companies — not employees of contractors and subcontractors who provide services to the publicly traded companies.

For further information, please contact John Stigi at (310) 228-3717 or Sean Kirby at (212) 634-3023.

Duran v. U.S. Bank, is notable because it is the first decision to analyze thoroughly the defendant's due process rights as they were handled in one of the "innovative" class trial procedures that Sav-On v. Superior Court encouraged trial courts to formulate.  Before this case, the only case that significantly addressed class trial procedure was Bell v. Farmers Insurance. Bell, however, involved only a trial on damages after a court held that the defendant had misclassified all of its insurance adjusters as exempt.  Because liability was already decided classwide, the only issue was how much of a recovery each class member was entitled to receive.  What is worse, the Bell defense counsel waived several defenses by attempting to be "cooperative" with opposing counsel and thereby could not assert several good arguments on appeal.  Much mischief has been made by courts since Bell applying it as some sort of a template on how to conduct a class trial on liability.

Duran is strikingly different because U.S. Bank was effectively dragged kicking and screaming to trial, and it repeatedly objected to the many "innovative" procedures the trial court implemented.  Accordingly, the case presented the court of appeal with numerous, solid examples of a trial court running roughshod over the defendant's due process rights in the spirit of attempting to formulate a "streamlined" trial procedure.  The case thus provides binding authority (assuming the California Supreme Court does not grant review) that employers can cite when arguing that the plaintiff's trial plan improperly deprives the defendant of due process. In fact, if the guidance of this decision is followed, it is hard to see how many wage hour class actions that are routinely certified could actually proceed to trial.

U.S. Bank employed roughly 260 Business Banking Officers (BBOs) in California during the relevant class period.  The evidence appeared to be largely undisputed that BBO was a sales job in which the employees follow leads for small business banking customers to whom they would attempt to sell financial services products such as credit, deposit, cash management, and other bank products and services.  Although U.S. Bank argued that the commission sales exemption, administrative exemption, and outside sales exemption applied to this job, the court granted summary adjudication to the plaintiff on the commission sales and administrative exemption, leaving only the outside sales exemption in dispute.  The dispute over the outside sales exemption appeared to be limited to whether the BBOs spent the majority of their time outside as opposed to working on U.S. Bank property. 

At class certification, each party submitted a substantial number of declarations in which competing groups of BBOs attested that they either worked inside or outside (similar to Vinole v. Countrywide, which is cited favorably in the case).  Rather than conclude that whether BBOs spent sufficient time outside to meet the outside sales exemption was a predominant individualized issue, Judge Robert Freedman of the Alameda complex court instead certified the class and order a class "Trial by Formula" where a small, purportedly "representative sample" of the class would present their claims to the finder of fact, and the determination of whether that sample was exempt would be extrapolated to the larger class. 

The plaintiffs waived jury so the case was presented as a bench trial.  Using his own brand of statistical analysis, Judge Freedman decided that 20 class members would be selected at random from the class list (opt outs would not be considered) and that they and the two plaintiffs would serve as the test group to evaluate the exemption.  To make matters worse, after the 20 people were selected, they were given a chance to opt out of the case in which case they would be excused from testifying and "alternates" would take their place.  According to the defendant, this simply caused the people selected to be in the sample who believed they were exempt to opt out of the case and skewed the sample further to the plaintiff.  Furthermore, at trial, Judge Freedman refused to consider testimony from any BBOs except those in the final "sample," going so far as to bar any testimony from other BBOs showing that they spent the majority of their time outside, and thus were exempt.  Defendant proffered 70 BBOs who would testify that they spent the majority of their time outside, but they were barred from testifying at all.

Judge Freedman then conducted the trial and concluded that U.S. Bank could not prevail as to any of the BBOs in the sample because the evidence was that these BBOs were free to spend their time working inside or outside with U.S. Bank caring only about their productivity and not about whether they worked outside enough to meet the exemption.  From that premise, Judge Freedman found that the entire class was misclassified.  Judge Freedman also incorporated the plaintiffs' statistics expert's conclusion that the average class member worked 11.87 overtime hours per week.  The expert plaintiff used was Richard Drogin, the same expert the plaintiffs used in Bell v. Farmers Insurance.

Once liability was determined, Judge Freedman held a second phase of the trial where Drogin testified that, with a 95% confidence level, the overtime worked by the average class member was within 5.14 hours of the 11.87 hour figure adopted in phase 1, a margin of error of 43%.  Plaintiffs then had an accounting expert testify that total damages were approximately $14 million if the overtime estimate provided by Drogin was accepted.  The defense put on an expert who opined that using a different methodology, overtime could be calculated at only 6.73 hours per week.  U.S. Bank also put on an expert who challenged the scientific basis for the "sampling" methodology the court had utilized.  The trial court sided with the plaintiffs and awarded approximately $14 million in damages, inclusive of prejudgment interest.  U.S. Bank appealed.

The Many Good Holdings in the Decision

The court of appeal went through every aspect of how Judge Freedman had handled the trial and rejected every significant decision he had made.  The court rejected Judge Freedman's application of the outside sales exemption, his unscientific sampling methodology, and his utter disregard for U.S. Bank's right to defend itself as to individual class members.  Here is a list of just the most notable holdings in the case:

(1) The court of appeal provided a definition of due process that a defendant can invoke whenever the class procedure short circuits its right to defend itself:

"Due process principles are designed to ensure a party is afforded his or her right  to be heard during adversarial proceedings.  As the rubric itself implies, procedural due process is simply a guarantee of fair procedure.  Hence we review cases involving adversarial hearings to determine whether, under the specific facts and circumstances of a given situation, the affected individual has a fundamentally fair chance to present his or her side of the story." 

The court of appeal also noted that, even when the California Supreme Court in Sav-On encouraged courts to be innovative with class trial procedures, it stated that the innovative procedures still must "protect[] the rights of all the parties."  As the court later put it: "[W]e have never advocated that the expediency afforded by class action litigation should take precedence over a defendant‘s right to substantive and procedural due process."

(2) The trial court's statistical sampling methodology was improper because the only disputed material issue was whether individual class members spent the majority of their time "outside" and the methodology deprived defendant of the right to prove that individual class members did so.  Indeed, Judge Freedman found liability as to everyone in the class even though class members themselves testified they spent the majority of their time outside.  Judge Freedman erroneously concluded that the employer did not take steps to force employees to spend the majority of the time outside which meant that it did not sufficiently set expectations that the job had to be carried out in an exempt fashion.  The court of appeal noted that Judge Freedman got this exactly backwards-- i.e., the absence of any focus on whether employees spent their time inside or outside likely meant that some BBOs met the exemption and some didn't.  That should have weighed against class certification, not for it.  (citing Spainhower v. U.S. Bank National Association (C.D.Cal. Mar. 25, 2010)).

(3) The court appeared to reject the use of statistical sampling to determine liability in almost any case where the defendant could show variation among the class as to liability.  The court cited with approval Dukes v. Wal-Mart for the proposition that a class action may not be based on Trial by Formula where a sample of the class is evaluated and liability and damages of the sample are extrapolated to the larger class.  Implicitly rejecting the argument that Dukes only applies under Title VII or in federal courts, the Duran court held that Judge Freedman's trial procedure was fatally flawed for the same reason the trial in Dukes had been flawed:

"The same type of 'Trial by Formula' that the U.S.Supreme Court disapproved of in Wal-Mart is essentially what occurred in this case. It is important to appreciate this portion of the Wal-Mart opinion was the expression of a unanimous court."

Furthermore, at footnote 72, the court appeared to issue a blanket prohibition on using sampling to prove classwide liability because doing so was inconsistent with the United States' tort system:

"[U]nder current law sampling is a practical option only at the damages stage. There is no conceptual obstacle to using sampling to measure liability, but it would require a major change in tort law. Tort liability is binary: a defendant is either liable or not, and if liable, the defendant must compensate the plaintiff in full. At best, sampling applied to liability can only provide an estimate of the probability that defendant is liable to any plaintiff in an arbitrarily chosen case. This estimate equals the number of liability verdicts divided by the total number of sample cases. Thus, sampling could be used to determine liability only if the tort law recognized probabilistic liability measures."

(4) The court of appeal held that it was a denial of due process to refuse to allow the defendant to present evidence from class members that would establish that those class members were properly classified as exempt.  The court noted that its statement in Bell that the defendant's due process right was only as to the total amount of damages owed to the class and not as to the distribution of those damages to individual class members had to be understood in the context of the fact that (a) classwide liability had already been determined in that case, (b) "the employer had acquiesced to statistical proof of damages and had waived the right to impeach the employees‘ testimony at trial."  The court seemed to accept that the defendant does have a due process right not to pay money to an employee to whom it has no liability at all.

(5) The court of appeal held that, even assuming statistical sampling were proper in some cases, Judge Freedman's use of a sample of 20 BBOs to represent 260 had no scientific basis at all.  What's more, his decision to allow the named plaintiffs to be added to the sample and to allow BBOs selected for the sample to opt out rendered his sampling methodology junk science.  If the result of using a sample large enough to be scientifically reliable is an unmanageable trial, then the court should not certify the case.

(6) The conclusion of the plaintiffs' own expert that there was a 43% margin of error in the estimate of how much overtime class members worked rendered his conclusions too imprecise to satisfy due process requirements.  The court of appeal noted that even in Bell the court of appeal reversed the double-time award when the evidence showed that there was about a 30% margin of error in its calculation. 

(7) Given the record the trial court was presented, it was error not to decertify the case.  The court of appeal does not pinpoint precisely which aspect of the record warrants decertification, but seemed to hold that if there was ever a case that should have decertified, this was it:

"At this juncture, we need not speculate as to whether a workable trial plan could have been devised to account for these individual inquiries. In view of the many courts that have considered this problem at the classification stage, it is doubtful that such a plan could be successfully implemented. Here, the trial court attempted to manage the individual issues in the first phase of this trial by resorting to an unproven statistical sampling methodology that denied USB the right to properly defend the claims against it. As we have demonstrated, the plan fell short. Accordingly, we conclude the failure to grant USB‘s second motion to decertify was an abuse of discretion."

Why The Case Is Significant

When Dukes v. Wal-Mart came down and appeared to say that Trial by Formula was a violation of constitutional due process, many thought this would render the great majority of class actions uncertifiable.  Except in the smallest cases, or in cases where a plaintiff truly does put a single common practice on trial, a plaintiff's trial plan almost always relies on some use of statistical sampling akin to what Judge Freedman attempted.  Judge Freedman's was just an extreme example of a trial procedure that seemed to go out of its way to deprive the defendant's of a fair day in court.  Other courts certifying classes have approved procedures that differ only in degree, not basic form.

Since Dukes, a number of individual courts have attempted to limit the Supreme Court's unanimous rejection of Trial by Formula to massive discrimination cases, or cases arising under Title VII, or cases arising in federal court.  Duran cogently explains why the same problems that Supreme Court identified in Dukes apply to actions in California state courts as well.  They confirm that the issues Dukes raised are due process issues, and not issues of particular federal laws.  The fact that Duran was issued by the same appellate district as decided Bell (Marchiano was on the panel that decided both Bell III and Duran) gives this decision added salience, as the Duran court appears to harmonize its decision with Bell rather than create a split of authority. 

Here's hoping the California Supreme Court declines review.

1. The written notice provided to employees must contain certain information including, but not limited to: (1) the employee’s rate or rates of pay (including the overtime rate of pay for non-exempt employees); (2) whether the employee will be paid by the hour, shift, day, week, salary, piece, commission or otherwise; (3) whether the employer will claim any allowances as part of the minimum wage (e.g., tip, meal or lodging allowances); and (4) the employer’s regular pay day.
2. The written notice must be provided to employees at the time of hire and, on or before February 1st of each subsequent year of the employee’s employment.
3. The written notice must be provided to the employee in English and in the language identified by each employee as his/her primary language.
4. The employee must sign written notice acknowledging receipt of the same.
5. The written notices provided to the employees must be preserved and maintained by the employer for six years.

The penalty for failing to comply with the WTPA is significant, if an employer fails to provide an employee with the above notice within ten business days of the employee’s first day of employment, the employee may be able to recover $50 for each work week during which the violation occurred, or continues to occur, up to a maximum of $2,500 together with attorney’s fees and costs.

To assist with your compliance of the WTPA’s requirements, please review the Notice and Acknowledgement of Pay Rate and Payday from the New York State Department of Labor, the Department of Labor Guidelines for Written Notice of Rates of Pay and Regular Payday, as well as the Wage Theft Prevention Act Frequently Asked Questions (FAQ). You do not have to use the Notices provided by the Department of Labor, so long as the notice you create contains all of the information the WTPA requires.

If you have any questions concerning your notice obligations under the WTPA or other labor and employment matters facing your organization, please contact either of the following Sheppard Mullin attorneys below:

Jonathan Stoler
212.634.3043 (Direct)
jstoler@sheppardmullin.com

James Hays
212.634.3025 (Direct)
jhays@sheppardmullin.com