United States: Litigating California Wage & Hour And Labor Code Class Actions

Introduction and Overview

Since the turn of the century, there has been a huge increase in the number of class action lawsuits alleging violations of California's overtime laws or other Labor Code statutes and wage and hour regulations. Currently, several such class actions are filed every day in California courts.

The reasons for this trend are essentially fourfold. First, California's wage and hour law differs from federal law in various important ways. This means that an employer might be compliant with federal law, but not California law. Second, California procedural rules make it easier to file a class action or collective action. And the number of representative actions filed under the California Private Attorneys General Act, which are not required to meet class action certification standards, has greatly increased. In contrast, the federal Fair Labor Standards Act requires an "opt-in" procedure that tends to restrict the size of classes as compared to the "opt-out" class action procedure used in California. Third, California's unfair competition law allows claimants to borrow violations of other laws and extend the statute of limitations to four years, making class actions more lucrative. Fourth, many California Labor Code provisions allow for the recovery of attorney's fees to a prevailing plaintiff, creating additional incentives to pursue litigation.

California Labor Code class actions come in various shapes and sizes. Essentially, however, any Labor Code violation that can be tied to a corporate policy could support a class action. For that reason, plaintiffs in California continue to come up with new theories as to how wage and hour violations may support class litigation. This publication reviews the most commonly filed wage and hour and Labor Code class and representative claims and the development of the law over the last sixteen years. It does not, however, attempt to provide a comprehensive overview of California wage and hour law.

Sections II through X of this edition address some of the most common types of class claims in California, such as claims for exempt classification, meal period violations, and denial of expense reimbursement. Sections XI and XII then address some peculiar provisions in California law that tend to expand potential damages recoverable in California class actions, such as the Labor Code Private Attorneys General Act and the Unfair Competition Law ("UCL"). Lastly, Sections XIII through XVIII address various aspects of class action procedure in California—the rules governing class certification, class discovery, class settlement, class arbitration, and individual liability.

II. Common Exempt Misclassification Claims

The first wave of class claims filed against large California employers challenged the exempt status of groups of employees holding the same job. In short, the plaintiffs' counsel argued that the employer had engaged in a common practice of misclassifying a group of employees as exempt from overtime, thus entitling all employees in the group to back overtime pay, interest, and associated statutory penalties.1 The following discussion addresses some of the issues that have arisen concerning the misclassification of employees under the various available exemptions.

A. Overview of State Overtime Law

Before January 1, 2000, the California Industrial Welfare Commission ("IWC") was the body authorized by statute to set overtime requirements. It acted in a quasi-legislative capacity, promulgating a series of "Wage Orders" that set rules for wages, hours, and working conditions that differed slightly from one industry to another. The IWC eliminated daily overtime from the Wage Orders in 1997.2 In response, in 1998 the Legislature passed AB 60 which amended the Labor Code to provide for daily overtime and to enshrine various employee protections into the Labor Code so that they could not be altered by the IWC.3 The Wage Orders are still in effect, but the IWC is precluded from promulgating rules within the Wage Orders that are inconsistent with the Labor Code itself.4

Under Labor Code Section 510, employees are entitled to one and one-half times their regular rate when they work more than eight hours in a single day, more than forty hours in a workweek, or during the first eight hours of the seventh straight day of a single workweek.5 Employees are entitled to double time when they work more than twelve hours in a single day or beyond the eighth hour of the seventh straight day of a single workweek. These rules apply to non-exempt employees in California in every industry.6 These rules also apply to non-resident employees who perform work in California for California employers.7

Individual employees have a private right of action for unpaid overtime. Typically, a plaintiff invokes a private right of action by alleging violation of Labor Code Section 510 or a provision of the governing IWC order. Such a claim does not depend on the Fair Labor Standards Act ("FLSA") or other federal law. A prevailing plaintiff may recover attorney's fees for an overtime claim,8 but California law, unlike the FLSA, does not provide a remedy of double damages for willful overtime violations.9 In a private action for unpaid overtime compensation under the Labor Code, the statute of limitations reaches back to three years before the date the lawsuit is filed in court.10

B. The Executive (Managerial) Exemption

One issue frequently raised in misclassification class actions is that a proposed class of exempt managers—most often "working managers" in a retail establishment—do not qualify for the "executive" (aka "managerial") exemption. The FLSA and California law contain similar executive exemptions, but California's is more restrictive in key respects. California requires that an "executive" employee be paid a higher level of compensation than required under the FLSA.11 The salary must be set at a level at least twice the minimum wage, which is currently $10.00 per hour in the State of California.12 Accordingly, to qualify for the exemption, a manager must now be paid $37,440 per year. A manager who does not meet the threshold compensation test is automatically disqualified from the exemption.

The other requirements are that the manager (1) must have the power to hire and fire, or make recommendations on those topics that are given particular weight; (2) must supervise at least two full-time equivalent positions; (3) must "primarily" be engaged in managerial duties; and (4) must "customarily and regularly" exercise discretion and independent judgment.13

Most litigation in California arises out of element (3) above, because the California Supreme Court in Ramirez v. Yosemite Water Co.14 held that an employee meets element (3) only when the employee spends more than half of the work time on exempt duties. By contrast, under the FLSA's executive exemption, the employer need only establish that management is the employee's "primary duty," which focuses on the relative importance of the duty rather than just the amount of time devoted to the duty.15

Aside from its emphasis on the percentage of work time devoted to exempt duties, there has been little California case law explaining precisely which duties qualify as exempt "managerial work." Since July of 2000, however, the Wage Order has expressly incorporated by reference the then-existing FLSA regulations defining "managerial" duties.16 Accordingly, federal authority construing those specific regulations is highly relevant in interpreting the California executive exemption.17

Some examples of exempt work set forth in the federal regulation are interviewing, selecting and training employees, setting and adjusting pay rates and work hours, directing work, keeping production records for subordinates, evaluating employees' efficiency and productivity, handling employee complaints, disciplining employees, planning work, determining techniques to be used, distributing work, deciding on types of materials, supplies, machinery and tools to be used or merchandise to be bought, stocked, and sold, controlling the flow and distribution of merchandise and supplies, and providing for employee safety.18

Seyfarth Shaw has successfully defended many cases where liability turned on whether a particular job duty qualifies as exempt or non-exempt. From our experience in such cases, it is important to carefully analyze those that have addressed similar duties under the FLSA regulations that are expressly incorporated into the Wage Orders. For example, we defended a case for a large HMO that turned on whether working pharmacy managers were misclassified as exempt executives. One of the main duties of the managers was to check the work of other pharmacy employees for medication errors in filling prescriptions— a duty also performed by licensed pharmacists who were not managers. We obtained summary judgment by relying on numerous cases holding that (1) a manager checking another employee's work for compliance with a standard qualifies as exempt "supervision"19 and (2) it does not alter the analysis that non-managers also perform the same task.20 Another federal regulation expressly incorporated into the IWC Wage Orders is (former) 29 CFR Section 541.108, which includes in the definition of exempt work all work that is "directly and closely related to exempt work." The FLSA regulation explains that this concept allows seemingly non-exempt duties to be treated as exempt duties:

[It] brings within the category of exempt work not only the actual management of the department and the supervision of the employees therein, but also activities which are closely associated with the performance of the duties involved in such managerial and supervisory functions or responsibilities. The supervision of employees and the management of a department include a great many directly and closely related tasks which are different from the work performed by subordinates and are commonly performed by supervisors because they are helpful in supervising the employees or contribute to the smooth functioning of the department for which they are responsible. Frequently such exempt work is of a kind which in establishments that are organized differently or which are larger and have greater specialization of function, may be performed by a non-exempt employee hired especially for that purpose.21

In other words, non-discretionary work can be "directly and closely related" to exempt work—and hence itself considered exempt work—even if it is not strictly speaking essential to the exempt work,22 and even if it is work that need not be performed by managers.23 As long as the work is related to a management function, it is considered to be exempt. These amendments raise substantial arguments that activities, which when viewed in the abstract seem non-exempt, may be considered exempt if they are undertaken with the purpose of effectuating exempt functions of a manager's job.

Another important issue in these cases that Ramirez does not resolve is how one applies the purely quantitative approach to time spent simultaneously performing exempt and nonexempt tasks: Is this time exempt, non-exempt, or some combination of the two? Under federal law, a manager might concurrently be engaged in hands-on, non-exempt type work and be monitoring the operation of a business for managerial purposes (e.g., pouring coffee at a restaurant while directing work).24

Employers received a different answer under California law when, in 2005, the First District Court of Appeal in Murphy v. Kenneth Cole Productions, Inc.25 rejected an employer's argument that time spent simultaneously managing and engaged in non-exempt work counts entirely as "exempt time." The California Supreme Court, by granting review of the meal period issues within Murphy but not the concurrent duties issue, effectively rendered the Murphy discussion of concurrent duties unciteable. Nonetheless, the appellate court's analysis is instructive as to how other courts might address the issue of concurrently exempt and non-exempt duties going forward.

The Murphy appellate court held that a manager could not satisfy the executive exemption where he spent 90 percent of the time working in non-exempt tasks even though he was continually keeping an eye on other employees and otherwise "managing" throughout the day while his hands were engaged in the same kind of work his non-exempt subordinates performed. The court reasoned that a manager is non-exempt when he is "a nominal coxswain who performed most of the time as an oarsman alongside the rest of the crew."26 The court did not state, however, that time spent simultaneously directing other employees and engaged in non-exempt tasks counts purely as non-exempt time. Rather, the court suggested that the time spent in such a dual capacity may need somehow to be allocated between exempt and non-exempt time.27 As such, time engaged simultaneously in exempt and non-exempt work might generate at least partial credit towards the 50 percent exempt threshold to qualify for the exemption. Further development in the case law is required to clarify this concept.

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1 Punitive damages are not recoverable when liability is premised solely on Labor Code wage and hour violations. Brewer v. Premier Golf Props., 168 Cal. App. 4th 1243, 1252 (2008).

2 Collins v. Overnite Transp. Co., 105 Cal. App. 4th 171, 176 (2003).

3 See, e.g., Lab. Code § 510 (daily overtime requirement) and Lab. Code § 226.7 (meal and rest period requirements). Note that Labor Code section 510 does not apply to employees covered by a valid collective bargaining agreement if "the agreement expressly provides for the wages, hours of work, and working conditions of the employees" and "provides premium wage rates for all overtime hours worked and a regular hourly rate of pay for those employees of not less than 30 percent more than the state minimum wage." Lab. Code § 514; see also Vranish v. Exxon Mobil Corp., 223 Cal. App. 4th 103 (2014) (affirming trial court ruling that employer: (1) properly paid overtime under the terms of a collective bargaining agreement; and (2) was exempted from Labor Code section 510 pursuant to Labor Code section 514).

4 Collins, 105 Cal. App. 4th at 178-80 (Wage Orders and Labor Code should be read together to understand scope of wage and hour regulation of California employees).

5 Note that employers may assign employees to work schedules that differ from company's designated workweek/workday and base overtime calculations on the designated workweek/workday as long as the schedule is not established for the purpose of evading lawful overtime requirements. Seymore v. Metson Marine, 194 Cal. App. 4th 361 (2011).

6 However, employees and employers may specifically agree in advance to a "specific mutual wage agreement" that provides a guaranteed salary covering both base hours and a specific number of overtime hours. The required elements of such an agreement are: "(1) the days that [employee] would work each week; (2) the number of hours [employee] would work each day; (3) that [employee] would be paid a guaranteed salary of a specific amount; (4) that [employee] was told the basic hourly rate upon which his salary was based; (5) that [employee] was told his salary covered both his regular and overtime hours; and (6) the agreement must have been reached before the work was performed." Archiega v. Dolores Press, Inc., 192 Cal. App. 4th 567, 571 (2011) (quoting Ghory v. Al-Lanham, 209 Cal. App. 3d 1487, 1491 (1989)).

7 The California Supreme Court in Sullivan v. Oracle, 51 Cal. 4th 1191 (2011), held that California overtime laws apply to out-of-state employees who perform work within the state. Further, the Sullivan court held that overtime work performed by out-of-state employees within California can serve as the basis for a claim under California's unfair competition law. Cal. Bus. & Prof. Code § 17200 ("UCL"). But the Sullivan court also held that FLSA violations as to out-of-state employees outside California cannot serve as the basis for a California UCL claim. Although the Sullivan court explicitly limited its decision to "the circumstances of this case," the plaintiff's bar may argue its reasoning suggests that similar conclusions may result for non-California-based employers. The Sullivan court declined to opine on the different burdens that a non-California-based employer may face in applying California overtime laws to nonresident employees working in California, but the plaintiff's bar will undoubtedly seek to obtain judicial rulings that the Sullivan court's conflict of laws analysis suggests no reason why a different conclusion would result for non-California-based employers.

8 The California Court of Appeal has held that only the prevailing employee, and not the prevailing employer, may recover attorney's fees in an action for overtime pay or for unpaid minimum wages. Earley v. Superior Court, 79 Cal. App. 4th 1420 (2000).

9 But see Lab. Code § 1194.2 (providing double damages for minimum wage violations).

10 As explained infra, this statute of limitations can be extended to four years through the pleading of a companion claim under the state Unfair Competition Law, Bus. & Prof. Code § 17200, et seq.

11 The revised FLSA regulations that went into effect on August 23, 2004, increased the minimum salary from $250 per week to $455 per week. Even under this revised minimum, California's minimum remains higher than the FLSA's minimum.

12 The California minimum wage rose to $10.00 per hour on January 1, 2016, and will rise to $10.50 per hour on January 1, 2017, for employers with more than 25 employees. The federal minimum wage is currently $7.25; employees working within California are generally subject to the higher state minimum wage.

13 See IWC Wage Order 1-2001(1)(A)(1); Nordquist v. McGraw-Hill Broad. Co., 32 Cal. App. 4th 555, 573 (1995) ("'Discretion and independent judgment' within the meaning of IWC Order No. 11-80 involves the comparison of possible courses of conduct, and acting after considering various possibilities. It implies that the employee has the power to make an independent choice free from immediate supervision and with respect to matters of significance . . . [meaning matters] of substantial significance to the policies or general operations of the business of the employer.").

14 20 Cal. 4th 785 (1999).

15 Id. at 797; see also Baldwin v. Trailer Inns, Inc., 266 F.3d 1104, 1113-16 (9th Cir. 2001) (although store managers spent less than one-half their time on duties that met the federal executive exemption, they still qualified as exempt because management was found to be their "primary" or most important duty).

16 See Whiteway v. FedEx Kinko's Office & Print Servs., Inc., 2007 U.S. Dist. LEXIS 61239; 12 Wage & Hour Cas. 2d (BNA) 1503 (N.D. Cal. Aug. 21, 2007) (citing IWC Wage Order 7-2001 § (1)(A)(1)(e) and noting that it incorporates the federal definition of management as set forth in 29 C.F.R. § 541.102).

17 See Whiteway, 2007 U.S. Dist. LEXIS 61239, at *22 (relying on federal cases construing 29 C.F.R. § 541.202 to interpret California executive exemption); see also Bldg. Material & Constr. Teamsters Union v. Farrell, 41 Cal. 3d 651, 658 (1986) ("Federal decisions have frequently guided our interpretation of state labor provisions the language of which parallels that of federal statutes."); Alcala v. Western Agric. Enters., 182 Cal. App. 3d 546, 550 (1986) ("It has been held that when California's laws are patterned on federal statutes, federal cases construing those federal statutes may be looked to for persuasive guidance.").

18 29 C.F.R. § 541.102. Although the FLSA regulations were updated in 2004, the definition of exempt "executive" work has remained substantially the same for decades.

19 See Sturm v. Toc Retail, Inc., 864 F. Supp. 1346, 1351 (M.D. Ga. 1994) (convenience store manager checking for employees' compliance with "Majik Market dos and don'ts" was exempt supervision even though often performed by senior clerks as well as the manager); see also Baldwin, 266 F.3d at 1117 (trailer park managers' duty of ensuring that park employees followed company policy was supervisory and, therefore, exempt work); Beauchamp v. Flex-N-Gate LLC, 357 F. Supp. 2d 1010, 1015-17 (E.D. Mich. 2005) (supervisory duty for a plant manager to "ensur[e] that employees in their charge actually meet [company] standards in their daily work").

20 Sturm, 864 F. Supp. 1346; see also Baldwin, 266 F.3d at 1115 ("[Having non-exempt employees perform] managerial tasks does not render the tasks non-exempt."); Sepulveda v. Wal-Mart Stores, Inc., 237 F.R.D. 229, 239 (C.D. Cal. 2006) ("[T]he (assistant managers) seem to consider any task performed by an hourly employee to be a non-exempt task. That is not the law.").

21 Former 29 C.F.R. § 541.108(a).

22 Harrison v. Preston Trucking Co., 201 F. Supp. 654, 658-59 (D. Md. 1962) ("[T]he test is not whether the work is essential to the proper performance of the more important work, but whether it is related. Thus, notemaking, by a consultant when standing alone or separated from his primary duties, would be routine and, hence, not directly and closely related within the meaning of the regulations, but at the same time such work is necessary to the proper performance of his primary duties and thus is considered to be 'directly and closely related' when performed by the consultant.").

23 Adams v. United States, 36 Fed. Cl. 91, 98 (1996) ("A supervisor does not become non-exempt merely by doing tasks which are incidental to his main work, even if non-supervisory workers might perform them as well. The question is whether a supervisor engages in those tasks because he is a supervisor.").

24 See Donovan v. Burger King Corp., 672 F.2d 221, 225-26 (1st Cir. 1982). The 2004 FLSA regulations added a new regulation entitled "concurrent duties," 29 C.F.R. § 541.106, explaining that a manager is engaged in exempt managerial work when he is engaged simultaneously in exempt and non-exempt work. But this regulation has not been incorporated into the IWC regulations.

25 134 Cal. App. 4th 728 (2005), revd. on other grounds in Murphy v. Kenneth Cole Products, Inc., 40 Cal. 4th 1094 (2007).

26 Id. at 744.

27 Id. at 744 n.8.

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