Last November, a California federal court rejected Wal-Mart’s effort to decertify a class of employees who took late meal breaks or missed their meal breaks and were not paid adequately by Wal-Mart. Magadia v. Wal-Mart Associates, Inc., No. 17-CV-00062-LHK (N.D. Cal. Nov. 13, 2018) (slip op. available here). The court refused to disturb the prior certification order because the employer’s records, which included codes it generated after its investigation of a missed or late meal period, enabled the court to evaluate Wal-Mart’s liability on a class-wide basis. Slip op. at 8. Plaintiff employees should note that, following this example, certain employer records can be effectively used to answer the question of why meal periods were missed and avoid the need for an individualized, factual inquiry into the violations.

Earlier, the district court had certified three classes: a meal period class, an overtime/wage statement class, and a final wage statement class. Wal-Mart sought to decertify solely the meal period class. Under California law, employers may not employ employees for a work period of more than five hours per day without providing a 30-minute meal period. Cal. Lab. Code § 512(a). Pursuant to the Labor Code, when an employer fails to provide a meal period to an employee in accordance with state law, it must pay the employee one additional hour of pay at the employee’s regular rate of compensation—a meal period premium. Cal. Lab. Code § 226.7(c). The plaintiff alleged that, while Wal-Mart pays meal period premiums for non-compliant meal periods, the premiums are inadequate because they are paid at a straight hourly rate rather than at a higher, regular rate. The district court had certified the meal period class because it found that common questions predominated over individualized inquiries with respect to Wal-Mart’s liability to class members “because Wal-Mart’s own records ‘document why each meal exception [i.e., a late or missed meal period] happened.’” Slip op. at 8. In other words, “because Wal-Mart investigates and documents why each meal exception happened, ‘it would not be difficult to determine [Wal-Mart’s] liability to individual plaintiffs.’” Slip op. at 9.

Indeed, Wal-Mart’s practice included conducting an investigation, where its managers or human resource officials met with employees to determine why the meal period exception occurred, and then issuing Exception Management System (“EMS”) codes that Wal-Mart used to categorize the meal period exceptions. For certification, the district court found that such records could be used to extrapolate “whether each meal period premium that was paid to a class member was prompted by an actual failure by Wal-Mart to provide a compliant meal period.” Slip op. at 7.

In moving for decertification, Wal-Mart claimed that its investigations of meal period exceptions focused on documenting associate allegations rather than whether a meal premium was legally required. Wal-Mart contended that its own investigation worksheets were not reliable for determining whether or not Wal-Mart prevented a proper meal period; therefore, individual inquiries would predominate. The plaintiff argued that Wal-Mart’s own testimony demonstrated that it conducted significant and detailed investigations of meal period exceptions, logging the results, and it could not discredit its own documents. Ultimately, the district court denied Wal-Mart’s motion for decertification, finding that “[t]he evidence submitted . . . continues to demonstrate that Wal-Mart’s own records—specifically, the EMS codes generated after a meal period exception investigation—enable the Court to evaluate Wal-Mart’s liability to class members ‘on a class-wide basis,’ which warrants certification.” Slip op. at 8. Wal-Mart’s records appear to answer the question of why meal periods were missed and obviate the need for any heavily factual inquiry into the particular circumstances of each class member. Slip op. at 11.

Although decertification was improper, the district court nonetheless concluded that the question of the significance of Wal-Mart’s records could be revisited at the merits stage. For now, however, the certification order stands and the class’s “claims will ‘prevail or fail in unison,’ as required by Rule 23(b)(3).’” Id. Thus, a large class of Wal-Mart employees was able to utilize the employer’s records to support their theory of liability and could continue to proceed with their claims that the employer underpaid them for non-compliant meal breaks.

Authored By:
Liana Carter, Senior Counsel
CAPSTONE LAW APC

California appellate courts are beginning to make sense of Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), which promulgated a new “ABC” test for determining whether independent contractors are misclassified for claims arising from wage orders. In one recent case, the Fourth Appellate District examined the C-prong of the ABC test, concluding that the plaintiff-appellant Garcia, a taxi driver, was improperly classified as an independent contractor under the ABC test. See Garcia v. Border Transportation Group, LLC, No. D072521 (4th District, Div. 1, Oct. 22, 2018) (slip op. available here).

The appellate court reversed summary judgment as to the wage order claims only (Garcia’s claims for unpaid wages, minimum wages, meal and rest periods, itemized wage statements, and unfair competition law claims derived from the foregoing). Slip op. at 3, and 22-23. The panel first considered how courts had differentiated employees and independent contractors at common law, turning to the “seminal California decision on this subject”—S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989). The state Supreme Court in Borello held that “‘[t]he principal test of an employment relationship is whether the person to whom the service is rendered has the right to control the manner and means of accomplishing the result desired. . . .’” Slip op. at 15 (citing Borello, 48 Cal.3d at 350). Borello also found that the right to discharge at will without cause is strong evidence of an employment relationship and identified several “secondary indicia” that bear on employment status. Slip op. at 15-16.

Turning from the common law “control” test, the appellate court then considered the California Supreme Court’s discussion of “employ” as set forth in Martinez v. Combs, 49 Cal.4th 35, 64 (2010), which found that the wage orders encompass three alternative definitions, the broadest of which is “to suffer, or permit to work.” Slip op. at 18 (citing Cal. Code Regs., tit. 8, § 11090, subd. 2(D); Martinez, at 57–58). The appellate court noted Martinez’s finding that “[a] proprietor who knows that persons are working in his or her business without having been formally hired, or while being paid less than the minimum wage, clearly suffers or permits that work by failing to prevent it, while having the power to do so.” Id. (citing Martinez, at 69).

The appellate court then reaffirmed the California Supreme Court’s adoption of its own three-part ABC test to decide whether a worker is a covered employee or an independent contractor. Slip op. at 19 (citing Dynamex, at 956–957). Unlike a multifactor test, the ABC test “‘allows courts to look beyond labels and evaluate whether workers are truly engaged in a separate business or whether the business is being used by the employer to evade wage, tax, and other obligations.’” Id. (citing Dynamex, at 958 n.26). The ABC test presumes that a worker is an employee unless the hiring entity establishes each of the following:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Id. (citing Dynamex, 4 Cal.5th at 957).

The appellate court concluded that there was a triable issue as to whether Garcia was an employee since he was “presumed” to be such and since Border Transportation failed to show that Garcia fit the common conception of an independent contractor (Part C)—“an individual who independently has made the decision to go into business for himself or herself” and “generally takes the usual steps to establish and promote his or her independent business—for example, through incorporation, licensure, advertisements, routine offerings to provide services of the independent business to the public or to a number of potential customers, and the like.” Slip op. at 24-25 (citing Dynamex, at 962). As the appellate court explained, the question in part C is not whether the hiring entity prohibited or prevented the employee from engaging in an independently-established business, but whether it established that the employee actually had an existing, not potential, independent business operation. Id. at 26 (citing Dynamex, at 962 n.30).

Here, because the regulations in the plaintiff’s municipality tied each taxi driver’s permit to their employment at a specified taxi company, Garcia would have been required to obtain another permit with any new taxi company he drove for. The panel stated, “there is at best limited evidence he was even capable of providing services to a different taxi company under the regulations.” Slip op. at 27 (emphasis in original). Applying Dynamex’s ABC test, the appeals court reversed and remanded with instructions to enter a new order denying summary adjudication of Garcia’s wage order claims, allowing these claims to live on.

Authored By:
Molly DeSario, Senior Counsel
CAPSTONE LAW APC

In May of 2018, a California appellate court handed down an important decision clarifying employers’ liability for waiting time penalties. In Diaz v. Grill Concepts Services, Inc., No. B280846 (2d District, May 24, 2018) (slip op. available here), the Second Appellate District affirmed a judgment in favor of a certified class of employees, finding that an employer’s failure to investigate a suspected increase in the locally mandated “living wage” rendered its failure to pay that wage willful. Invoking the maxim that “ignorance of the law is no excuse,” Diaz found that an employer’s failure to investigate a change in the local wage scale constituted a “willful” failure to pay, exposing it to waiting time penalties under the California Labor Code. Id. at 10. Diaz also held that courts do not have discretion to relieve the employer from such penalties on equitable grounds. Id. at 18-21.

The California Labor Code “waiting time” provision requires that an employer that fails to pay a former employee any required wages is liable for wage underpayment. If the failure to pay was “willful,” the Labor Code imposes on the employer an additional penalty equal to up to 30 days’ of the employee’s wages. See Cal. Lab. Code §§ 203(a), 1194(a). The “waiting time” penalty punishes employers for forcing the employee to wait for his or her final paycheck. Prior to Diaz, an employer could be assessed waiting time penalties if it was aware it was underpaying wages and intended to do so, satisfying the “willful” requirement of California Labor Code section 203. See Kao v. Holiday, 12 Cal. App. 5th 947, 963 (2017); Barnhill v. Robert Saunders & Co., 125 Cal. App. 3d 1, 7 (1981); Cal. Lab. Code § 203(a).  This meant that employers could avoid penalties if the failure to pay was a result of uncertainty in the law or a mistaken belief, under good faith, that the wages were not owed. See Amaral v. Cintas Corp. No. 2, 163 Cal. App. 4th 1157, 1202 (2008); Road Sprinkler Fitters Local Union No. 669 v. G & G Fire Sprinklers, Inc., 102 Cal. App. 4th 765, 782 (2002).

Diaz, in a ruling consistent with the California state legislature’s longstanding tradition of promoting the health and welfare of its employees, replaced the “knowing and intentional” standard with a negligence standard, finding that Grill Concepts Services was subject to the payment of waiting time penalties merely because its compliance efforts fell short of what a reasonable employer should have done. See slip op. at 10 (imposing upon employers a “duty of inquiry” into relevant legislation to ensure that their wage payment policies and practices are compliant with California law). Diaz also found that the language of section 203 (“the wages of the employee shall continue as a penalty’ for up to 30 days”) precludes trial courts from exercising discretion to waive or reduce waiting time penalties properly owed. Id. at 18 (emphasis in original).

In the wake of Diaz, employers can no longer operate in blissful ignorance of California’s wage payment laws, as they will be exposed to hefty waiting time penalties—with no opportunity for discretionary reduction—for the failure to timely pay wages properly owed.

Authored by:
Ari Basser, Associate
CAPSTONE LAW APC

In early 2018, the Ninth Circuit dropped a live grenade into the already-besieged class action bar by issuing In re Hyundai and Kia Fuel Economy Litigation, 881 F.3d 679 (9th Cir. 2018) (slip op. available here) (“Hyundai”). In Hyundai, a divided panel, over Judge Nguyen’s strong dissent, threatened to obliterate nationwide class actions in the Ninth Circuit. Inventing a new predominance requirement not found anywhere in Rule 23, the Hyundai majority held that a district court may certify a nationwide class alleging violations of California law only after “apply[ing] the California governmental interest test.” Slip op. at 49. Under this test, if there are material differences in the 50 states’ consumer protection laws, then predominance is not satisfied. Id. at 50. In practice, Hyundai erected a near-insurmountable obstacle for nationwide class action settlement, as state consumer protection laws invariably differ.

Thankfully, the impending class action apocalypse has been put on hold. On July 27, 2018, the en banc court of the Ninth Circuit granted the parties’ petition for rehearing, rendering the panel decision non-precedential. Rehearing in the en banc court took place on September 27, 2018, and comes after public interest organizations, pro-business groups, and academics joined forces, forming a formidable alliance to advocate for en banc review.* As set forth in the amicus briefs and the settling parties’ petitions, the Hyundai panel flouted decades of Ninth Circuit authority, including the seminal Hanlon v. Chrysler Corp., 150 F.3d 1011 (9th Cir. 1998), which has guided lower courts on settlement approval and did not require a conflict-of-law test to satisfy predominance. Hyundai’s reasoning was also directly at odds with the influential Third Circuit en banc decision Sullivan v. DB Investments, Inc., 667 F.3d 273, 308 (3d Cir. 2011), which held that state law variations do not matter for settlements since no trial will commence.

The amici also warn that, if nationwide settlements can no longer be certified, not only will consumers be disempowered, but defendants would be unable to get their peace. Instead, defendants will be forced to defend suits in piecemeal fashion, perhaps a suit in every state. This defeats the purpose of the class device—efficiency—by multiplying litigation involving the same products and similar claims.

Although the order granting rehearing is obviously good news for the settling parties and consumers, reversal is not certain, partly due to the unusual nature of the Ninth Circuit en banc practice. While the full en banc court votes on whether to rehear the matter, the rehearing itself is handled by the Chief Judge and ten non-recused active judges who are randomly drawn. Depending on the makeup of the en banc court, the Hyundai panel decision may yet be affirmed. However, close observers expect that the en banc court will curtail, if not completely reverse, the panel’s broad holding. One possibility is that the en banc court will adopt the reasoning of Sullivan and hold that state law variations are not relevant to settlements, which would be a clear win for consumers. But, the en banc court could also hold that state law variations can only be a basis for denying approval of class action settlements if raised by an objector (and variations in state law were not raised by objectors in this case), which would be a Pyrrhic victory, benefiting professional objectors and no one else. Whatever the result, both consumers and businesses hope that the en banc court will ultimately limit the damage caused by the heedless panel decision.

*Capstone Law APC, working with Glancy Prongay and Murray LLP, submitted an amicus brief supporting rehearing en banc in this case on behalf of retired District Judge Stephen G. Larson and Professor David Rosenberg of Harvard Law School. The author of this post was the primary author of that amicus brief.

Authored By:
Ryan Wu, Partner
CAPSTONE LAW APC