California Court Places Limits On Labor Commissioner´s Wage Claim Hearings

In Corrales v. Bradstreet,—Cal.Rptr.3d—(Cal. App. 3^rd Dist. July 10, 2007), a California Court of Appeal ruled that the California Labor Commissioner had no authority to issue its 2005 precedential decision in Hartwig v. Orchard Commercial, Inc., in which it held that the extra pay for missed meal and rest periods under Labor Code Section 226.7 was a penalty and not a wage. While the ultimate holding in Corrales may have very little impact on employers, the court made various rulings leading to its decision that should be helpful to employers, particularly in the area of wage and hour hearings that are heard by the Labor Commissioner (i.e., "Berman Hearings").

Those rulings included: (1) the Labor Commissioner has express statutory authority to reject an employee’s wage claim and to refuse to conduct a Berman Hearing; (2) the Labor Commissioner does not deprive employers of money through a Berman Hearing; (3) employers need not post a bond with the Superior Court when seeking a trial de novo after a Berman Hearing; and (4) attorney fees may not be awarded in connection with a Berman Hearing.

In 2003, plaintiffs Fausto Corrales and Ramiro Estrada filed claims with the California Division of Labor Standards Enforcement ("DLSE") alleging that, as agriculture workers, they had not received their required meal and rest periods. By 2005, neither had received a determination from the DLSE. That is because from approximately March 2004 to April 26, 2005, the California Labor Commissioner issued an internal policy directing the DLSE to hold in abeyance all matters and wage claims regarding meal and rest periods.

Corrales and Estrada then filed a lawsuit on April 14, 2005, seeking a writ of mandate and declaratory relief against the Labor Commissioner. They were joined by additional plaintiffs, including a labor organization, the Northern California Carpenters Regional Council. The plaintiffs sought a ruling that the abeyance policy was an unlawful delay in processing employee claims in violation of Labor Code Section 98, which required Berman hearings to be scheduled within 90 days after a determination is made to hold a hearing, and which required decisions to be issued within 15 days after the hearing. They also objected to the DLSE’s 2005 precedent decision in Hartwig v. Orchard Commercial, Inc. (DLSE, May 11, 005, No. 12-56901RB), in which the DLSE held that the extra hour of pay under Section 226.7 was a penalty and not a wage. The plaintiffs argued that the DLSE had no authority to issue precedent decisions that were binding on all Deputy Labor Commissioners and Hearing Officers because Berman Hearings do not come within the Administrative Procedure Act’s ("APA") administrative adjudication provisions.

The trial court disagreed with the plaintiffs and entered judgment in favor of the Labor Commissioner on October 3, 2005. The plaintiffs appealed.

The Corrales Decision

The appellate court in Corrales affirmed in part and reversed in part the trial court’s ruling. As to the Labor Commissioner’s policy of holding certain claims in abeyance, the court held that the issue was moot because the Labor Commissioner had discontinued the abeyance policy shortly after the lawsuit was filed, and the Labor Commissioner represented that it would not violate the law again by resuming such a policy.

The court, however, reversed the trial court on the issue of whether the Labor Commissioner was authorized under Government Code Section 11425.60 of the APA to issue a precedent decision. Precedent decisions are authorized by the APA only if "an evidentiary hearing for determination of facts is required for formulation and issuance of the decision" by the administrative agency. Cal. Gov. Code Sec. 11410.10 (emphasis added). In rejecting the Labor Commissioner’s arguments, the court made a number of rulings pertaining to the nature and scope of Berman Hearings.

First, the court concluded that Section 98 of the Labor Code does not require an evidentiary hearing before the DLSE makes a decision in a wage claim dispute. No hearing is required because subdivision (a) of Section 98 expressly authorizes the Labor Commissioner to summarily reject an employee’s wage claim without having to conduct any type of hearing. Cal. Labor Code Sec. 98(a) (Labor Commissioner must notify parties "whether a hearing will be held," "whether action will be taken," or "whether no further action will be taken on the complaint").

The court then addressed the Labor Commissioner’s argument that Berman Hearings were constitutionally compelled by due process because the state deprives employers of important property interests (i.e., money) through Berman Hearings. The court disagreed with this constitutional assertion for several reasons.

According to the court in Corrales, Berman Hearings do not deprive employers of money at all. That is because, after a decision is issued by the DLSE, the employer may either pay the amount awarded or it may seek a trial de novo before the Superior Court. If the employer chooses the first option and pays the award, due process is not implicated because the employer has agreed or acquiesced in the DLSE’s decision. On the other hand, if the employer requests a trial de novo, it will receive an entirely new trial in which the decision of the DLSE is given no weight whatsoever, such that the Superior Court’s proceedings are truly "a trial anew in the fullest sense." Due process is therefore not implicated by Berman Hearings because any deprivation of property actually comes from the trial court and not from the Labor Commissioner.

The Labor Commissioner, however, persisted and pointed out that the DLSE does, in fact, deprive an employer of its property interest because, under subdivisions (b) and (c) of Labor Code Section 98.2, an employer who seeks a trial de novo with the Superior Court must, as a prerequisite, post a bond in the amount awarded by the DLSE, and must pay the employee’s costs and attorney’s fees if the employer loses the trial de novo. The court in Corrales disagreed on both points.

Although Labor Code Section 98.2 states that an employer "shall post an undertaking" when filing an appeal from a Berman Hearing, the court in Corrales noted that there is no penalty or other consequence for not posting the bond. If there is no consequence for not positing the bond, the bond is not required, the court reasoned. The Labor Commissioner pointed to such a consequence in Williams v. Freedomcard, Inc. (2004) 123 Cal.App.4^th 609, where the employer’s trial de novo was dismissed when the employer failed to post the bond. The court in Williams held that the trial court did not abuse its discretion in dismissing the employer’s trial de novo. The court in Corrales was not convinced. Instead, it distinguished the holding in Williams and followed the reasoning in the more recent decision in Progressive Concrete, Inc. v. Parker (2006) 136 Cal.App.4^th 540. In Progressive, the court criticized the holding in Williams and affirmed the trial court’s denial of an employee’s motion to dismiss a trial de novo where the employer had failed to post a bond. The key difference between Williams and Progressive, as noted in Corrales, was that the trial court in Williams had ordered the employer to post the bond but the employer failed to comply with the order. In Progressive, there was no order by the trial court to post the bond. The employee brought a motion to dismiss the case solely because the employer had not posted the bond when the case was initially filed. The court in Progressive found no abuse in discretion when the trial court rejected the motion to dismiss. Dismissal was not required because the requirement under Section 98.2 to post a bond is "directory, not mandatory or jurisdictional." It is therefore wholly up to the discretion of the trial court whether or not to require the posting of a bond. If the trial court requires it, the employer must comply; but if the trial court does not require the bond, no bond must be posted.

Finally, the court in Corrales rejected the Labor Commissioner’s argument that Section 98.2’s trial de novo requires the employer to pay all of the employee’s attorney fees incurred in bringing the wage claim. The court held that Section 98.2(c) authorizes only such costs and attorneys’ fees as were incurred in the trial court, and "not in the administrative hearing."

The Impact of Corrales

The Corrales decision offers important insight to employers who are confronted with wage claims filed with the DLSE. Corrales makes it clear for employers that the DLSE may reject or refuse to hear an employee’s wage claim. Accordingly, employers should remind the DLSE, when appropriate, that it is not required to conduct hearings of all wage claims, particularly of those claims that plainly have no merit. Employers also should keep in mind that, if they are dissatisfied with the DLSE’s ruling, they may seek an entirely new trial in the Superior Court, and that a bond need not be posted. If, however, the bond is later required to be paid by the trial court, the employer should pay it to preserve its trial de novo. As to possible costs and fees, employers should be cognizant of the fact that they are only potentially liable for the employee’s costs and attorneys’ fees that are directly associated with the trial de novo, and not for attorneys’ fees incurred in connection with the Berman Hearing.

Finally, employers should be mindful that the decision in Corrales, that constitutional due process does not apply to Berman Hearings, may alter the nature of Berman Hearings in the future. Without due process as a limiting force, it is conceivable that the DLSE may adopt policies or practices in Berman Hearings that are less favorable to employers by limiting the presentation of evidence and witnesses. That is because Section 98 has very few restrictions on the Labor Commissioner’s ability to dictate how Berman Hearings must be conducted.

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