United States: The California Supreme Court Declines to Hold Back The Tide of Overtime Class Actions

On August 26, 2004, the California Supreme Court released its eagerly awaited opinion in Sav-On Drug Stores, Inc. v. Superior Court, — Cal.4th —, 2004 WL 1902370 (2004). For several years now, California has been the battleground over a uniquely costly form of employment litigation—one that combines the state’s unusually employee-friendly overtime laws with Federal Rule of Civil Procedure 23-type "opt out" class litigation. Sav-On is the first such class action to make its way to the California Supreme Court.

Employers hoping that the Court would use Sav-On as a vehicle for restricting overtime class actions will be disappointed. Rather than making a sweeping statement endorsing overtime class actions, or condemning them, the Court steered a middle course that emphasized the trial court’s discretion in fashioning class certification rulings, and the limited scope of appellate review.

Because the Supreme Court’s opinion avoids making any grand, doctrinal pronouncements about how overtime law "fits" into the class action framework, it is essential to understand the history of the Sav-On litigation and how it fits into broader litigation trends.

Class Action Principles. Although it employs a slightly different nomenclature, class certifications standards under California law are not significantly different from Rule 23 standards. To certify a case as a class action, plaintiff must show "the existence of an ascertainable class and a well-defined community of interest among the class members. The community of interest requirement consists of three factors: (1) the predominance of common questions of law or fact; (2) a showing that plaintiff’s claim is typical of the class; and (3) that plaintiff can adequately represent the class." Richmond v. Dart Industries, Inc., 29 Cal.3d 462, 470 (1981). Likewise, there must also be a sufficient number of class members in order to make the class action mechanism a preferable method of resolving the dispute. These elements are referred to as, respectively, ascertainability, commonality, predominance, typicality, adequacy, and numerosity. Class certification is most often defeated on commonality or predominance grounds, and less often (in decreasing order of frequency) defeated on the grounds of typicality, adequacy, ascertainability, and numerosity.

In an overtime classification case, the plaintiffs inevitably argue that the common policies, practices, and procedures imposed by an employer provide a sufficient basis for class certification. Defendants argue that because their managers have the discretion to define their own mix of job tasks, what managers do on a day-to-day basis will depend on the manager’s own preference and management style, as well as the particular demands of the season, configuration of the store, local client base, etc. For plaintiffs, predominance becomes a numbers game: They will argue that because there are more common issues than inherently variable ones, common questions predominate. Defendants will want to argue that despite the many common issues, a few critical issues that cannot be tried on a common basis destroy the predominance of the proposed class.

The Trial Court Grants Class Certification. In Sav-On, the plaintiffs filed a class action alleging that Sav-On Drug Stores improperly classified from 600 to 1,400 operating managers ("OMs") and assistant managers ("AMs") as exempt employees and, thus, failed to pay overtime wages. Plaintiff based his class certification motion on three arguments: First, that the managers at issue were uniformly classified as exempt based on title and job description, without taking into account their actual work. Second, that Sav-On’s store operations were "standardized" and did not vary significantly from store to store. And third, that the managers were, in fact, not exempt from overtime requirements.

In an attempt to defeat class certification, Sav-On demonstrated that the proposed class action involved operations at more than 300 different stores and that there was a wide variation between each manager’s daily activities, creating individual questions of fact as to class members. It argued that since the question of whether any member of the class was exempt depended on the amount of time each member devoted to particular job tasks, which varied significantly from class member to class member, and store to store, the overtime issue could not be resolved on a class basis.

Although Sav-On presented evidence from 51 current assistant and operating managers to substantiate its claim, the trial court gave greater weight to the testimony presented by plaintiff of four such managers, two general managers, and the undisputed evidence about Sav-On’s uniform job descriptions and HR policies and certified the class.

The Court of Appeals Reverses the Trial Court. The Second District of the California Court of Appeals granted discretionary review and reversed the trial court. Sav-On Drug Stores, Inc. v. Superior Ct., 118 Cal.Rptr.2d 792 (2002). The Court of Appeals reasoned that in determining whether class certification was proper, the trial court would need to conduct individualized factual investigations because each manager’s work-related activities would depend on factors such as the manager’s level of experience, the number of employees that he or she supervised, his or her general manager’s level of experience, as well as the store location, type, operating hours, size, and sales volume. The court further reasoned that there was no community of interest among the class members because individualized factual investigations would need to be conducted to determine whether each manager spent more than half of his or her work week on exempt work tasks, thus disqualifying them from overtime:

The California Supreme Court granted review of the Second District’s ruling. However, the pendency of review in Sav-On did not deter the Court of Appeals from applying the same analysis. In a trio of unpublished opinions—Cummings v. The Automobile Club of California, 2002 WL 31082807 (Cal. App.), Salaam v. Public Storage, 2003 WL 22810482 (Cal. App.), and Duran v. Robinson’s May, 2003 WL 1901216 (Cal. App.)—the Second, Third, and Fourth Districts of the Court of Appeal affirmed trial court orders denying class certification based on evidence that the individualized aspects of the jobs in question destroyed predominance, even in the face of substantial common questions.

The Supreme Court Affirms the Trial Court. While review in Sav-On was pending, the Court addressed the global question lurking in Sav-On (a multiplicity of common issues and facts inherent in suing a single business operation versus a few inherently individual issues), and resolved it favorably to employers. In Lockheed-Martin v. Superior Ct., 29 Cal. 4th 1096 (2003), the Court held that single inherently individualized issues defeated predominance even in the face of multiple common issues of fact. Lockheed involved allegations that the defendant was responsible for groundwater contamination resulting in a "cancer cluster" in Redlands, California. Although there were numerous common issues relating to whether there was groundwater contamination, the source of any such contamination, and the potential health effects of exposure, the Court reversed a trial court order certifying a medical monitoring class on the grounds that any individual class member’s exposure to contamination presents an inherently individualized question that prevents common questions from predominating.

When it finally turned to Sav-On, the Supreme Court affirmed the trial court’s certification order in an opinion that stuck very close to evidence in the record. The Court started out by citing Lockheed and reaffirming its principles. Sav-On, 2004 WL 1902370 at *2. It then emphasized the narrow scope of appellate review applied in Lockheed and other decisions: As long as a class certification ruling is (1) supported by substantial evidence, (2) made under the proper certification criteria, and (3) based on correct substantive law, the ruling will not be disturbed on appeal. It also emphasized the provisional character of a class certification order. Starting with "the theory of recovery advanced by the proponents of certification" (the merits of which are not to be addressed), the trial court must determine whether plaintiff’s theory "is, as an analytical matter, likely to prove amenable to class treatment." Id. at *3. As long as the plaintiff presents substantial evidence supporting its theory of recovery, and the theory is amenable to class treatment, then an order certifying a class will not be disturbed on appeal. "Substantial" evidence means admissible evidence to which the trial court could give credence, regardless of the weight or amount of conflicting evidence. Id. at *3-4.

Although Sav-On presented evidence from a much larger cross-section of the putative class (declarations of 51 class members versus declarations of four presented by the plaintiff), the Court held that "the trial court was within its discretion to credit plaintiffs’ evidence . . . over defendant’s," id. at *6, and that it "cannot say it would be irrational for a court" to certify the class. Id. at *4.

Amici curiae representing both plaintiff and defense interests attempted to persuade the Court to use Sav-On as an opportunity to make a broader statement about the propriety of overtime classification class actions, which in recent years have been a cottage industry in the state. Amici from the plaintiffs’ bar asked the Court to hold that the employer "makes the class"—that is, if the employer classifies employees uniformly as exempt, then substantial evidence that at least some putative class members are nonexempt will support class certification. Those from the defense bar asked the Court to hold that the quantitative nature of the duties test for exempt status meant that overtime issues were not susceptible to class treatment. Both sides were disappointed.

Sav-On affirmed certification of a class that requires plaintiffs, in order to prevail at trial, to show that the uniform factors influencing the day-to-day work activities of class members determined their exempt status in all but a small handful of cases. The Court wrote:

The Court freely acknowledged that if plaintiffs succeed in proving at trial "that misclassification was the rule rather than the exception," "some individualized proof" of how individual class members spent their work day may be "required to parse class member’s claims." Id. at *8. If at this point the trial court cannot fashion a process in which "such issues may be effectively managed,"—or if plaintiffs fail to show that misclassification was the rule—the trial court will have to decertify the class. This is a far cry from the simplistic notion that an employer "creates the class" solely because it uniformly classifies its managers as exempt.

But the Court declined to hold that the legal test for exempt status relieves a defendant of the burden of demonstrating that wide variation in work activities exists. Some defense amici argued as much, relying on the Court’s stress on "how the employee actually spends his or her time" in determining exempt status in Ramirez v. Yosemite Water, Inc., 20 Cal.4th 785, 802 (1999). The Court, however, rejected any suggestion that in Ramirez it "create[d] or impl[ied] a requirement that courts assess an employer’s affirmative exemption defense against every class member’s claim before certifying an overtime class action." Sav-On, 2004 WL 1902370 at *11. Such a requirement would effectively shift the burden of proving exempt status from the defendant to the plaintiff.

It is clear from the opinion that a plaintiff seeking class certification does not have to show that a defendant can mount its exemption defense on a class basis. It seems equally clear that the trial court cannot simply ignore the possibility that the defendant’s ability to mount its affirmative defense would be so compromised by class treatment as to violate its Due Process rights. Presumably, it falls to the defendant to show that class treatment unduly burdens its right to mount an exemption defense.

The doctrinal lessons of Sav-On—to the extent there are any—will be the subject of debate and uncertainty for quite some time. But two lessons are clear right now: First, the battle over class certification is won or lost in the trenches. It is intensely fact-specific and, like many legal issues, it will turn on the attitudes and preferences of the trial judge. A defendant cannot expect relief from a bad class certification decision from the appellate courts. Second, a defendant cannot rely on the burden of proof when defending against class certification in an overtime case. Rather, it must prepare and present an affirmative case to show that it cannot mount its exemption defense on a class basis without compromising its Due Process rights. It is not enough to rest on arguments that the plaintiff cannot prove its case on a class basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.