Ninth Circuit: Everyone's an Employer under FLSA

So, the FLSA's wage and hour provisions receive little attention in California. But with the bad economy and companies going bankrupt, the Ninth Circuit Court of Appeals may have just given plaintiffs a reason to heart federal court.

Boucher and a couple of others worked for the Castaways Hotel in Nevada. The Castaways filed for Bankruptcy protection. Later, it fired the plaintiffs. Undeterred by their former employer's insolvency, they sued the CEO, CFO and a senior manager responsible for labor relations (hi, HR managers!).

The defendants asked the district court to dismiss the case because they were not the plaintiffs' employer - that was the Castaways' role. The district court obliged. But the Ninth Circuit reversed as to the federal claims. As to claims brought under Nevada's wage and hour laws, the Court of Appeals, relying on the Nevada Supreme Court's opinion, held that individuals cannot be held liable.

As to the FLSA claims, however, the Court decided that the individuals could be held liable as employers. They got no help from the defendants, who did not argue the point apparently. Here is the money quote:

In the case at bar, Ballard has alleged that Defendant Villamor was responsible for handling labor and employment matters at the Castaways; Defendant Shaw was chairman and chief executive officer of the Castaways; and Defendant Van Woerkom was the Castaways’ chief financial officer and had responsibility for supervision and oversight of the Castaways’ cash management. The plaintiff also alleges that Shaw held a 70 percent ownership interest in the Castaways, Villemor held a 30 percent ownership interest and all three defendants had “control and custody of the plaintiff class, their employment, and their place of employment.” (See Complaint ¶¶ 9-11.)
Accepting these allegations of material fact as true, Ballard’s claim withstands a motion to dismiss. . . .

The individuals spent their brief arguing that the bankruptcy proceedings by the Castaways insulated them from liability. Logically, if the individuals stand in the shoes as employers under FLSA, then they should be covered by the Castaways' bankruptcy too, right? Nope.

We have never addressed the question whether a company’s bankruptcy affects the
liability of its individual managers under the FLSA. But our case law regarding guarantors, sureties and other non-debtor parties who are liable for thedebts of the debtor leaves no doubt about the answer: the Castaways bankruptcy has no effect on the claims against the individual managers at issue here.

So, the plaintiffs could proceed against these senior managers who owned The Castaways by suing under the FLSA, even though the Castaways went bankrupt and eventually liquidated.

The case is Boucher v. Shaw and the opinion is here.

Ninth Circuit: Walmart Has No Obligation to Foreign Suppliers' Workers

Walmart contracts with a number of companies in foreign countries to supply Walmart with the goods it sells in the U.S. Walmart's contracts with these suppliers include a code of conduct, imposing requirements that the suppliers comply with local workplace laws and standards regarding workplace law issues such as child labor, discrimination, etc. The code also permits Walmart to inspect the suppliers' operations. The suppliers' failure to adhere to the standards, including permitting inspections, could result in cancellation of the contract.

Employees of a number of foreign suppliers sued Walmart, claiming that Walmart was liable under these provisions for their employers' alleged violations of law. They claimed Walmart tells the public it is improving the workers' lives, and that Walmart's inspection program was flawed. They sought damages as third party beneficiaries of the supplier contracts, and on a variety of negligence theories, as well as unjust enrichment.

Upon dismissal of their complaint in district court, the employees appealed to the Ninth Circuit. The Ninth Circuit affirmed. The primary rationale was that the employees had no employment relationship with Walmart merely because of Walmart's right to inspect the workplace. Walmart exercised no day-to-day control over the workers.

The case is Doe v. Walmart and the opinion is here.

Ninth Circuit OKs Preemptive Decertification

Remember Countrywide? They had external home loan consultants, or HLCs, whom they classified as "outside sales" exempt. A couple of HLCs filed a class action. Countrywide filed a motion to decertify the class before plaintiffs moved for certification. The trial court granted Countrywide's motion, essentially refusing to certify the class. The Ninth Circuit affirmed:

We first address Plaintiffs’ argument that a defense motion to deny class certification “brought outside the context of a plaintiff’s motion actually seeking certification is procedurally improper per se.” Although we have not previously addressed this argument directly, we conclude that Rule 23 does not preclude a defendant from bringing a “preemptive” motion to deny certification.

The court then upheld the trial court's decision not to certify the class. For the second time in one day (see my post on Wells Fargo here), the court rejected the notion that a uniform policy of classifying certain employees as exempt was enough to certify the class.

The case is Vinole v. Countrywide Home Loans and the opinion is here.

Ninth Circuit Vacates Class Certification

Wells Fargo treated a class of loan specialists as exempt from overtime. The district court certified the class action. Although there were a number of factors requiring the court to make an individual inquiry regarding the employees' duties, the court decided that Wells' policy of classifying as exempt all employees performing the given job was enough to justify certification of the class.

The Ninth Circuit disagreed:

Whether a [uniform exemption] policy is in place or not, courts must still ask where the individual employees actually spent their time. As one court succinctly explained, “[t]he fact that an employer classifies all or most of a particular class of employees as exempt does not eliminate the need to make a factual determination as to whether class members are actually performing similar duties.” Campbell, 253 F.R.D. at 603. In short, Wells Fargo’s uniform exemption policy says little about the main concern in the predominance inquiry: the balance between individual and common issues. As such, we hold that the district court abused its discretion in relying on that policy to the near exclusion of other factors relevant to the predominance inquiry.

The case is Mevorah v. Wells Fargo Home Mtg. and the opinion is here.

Court of Appeal Kills Class Action Settlement

The Court of Appeal was not impressed with a $2 million wage and hour class action settlement. So, it vacated the judgment and sent it back to the trial court for further evaluation.

During a wage and hour class action, the parties conducted discovery, including production of thousands of pages of documents and the depositions of the class members. Then, they attended a mediation for a full day and reached a settlement. As is typical, the parties developed a comprehensive settlement agreement, and the plaintiffs filed a motion for approval of the settlement. About 20 of 2340 class members objected to the settlement. But the trial court found the settlement was reasonable and approved the settlement. The objectors appealed.

On review, the Court of Appeal concluded:

the order approving the settlement must be vacated because the trial court lacked sufficient information to make an informed evaluation of the fairness of the settlement. This was due to the court‟s apparent reliance on counsel‟s evaluation of the class‟s overtime claim as having “absolutely no” value, without regard to the objectors‟ claim that counsel‟s evaluation was based on an allegedly “staggering mistake of law.” While the court need not determine the ultimate legal merit of a claim, it is obliged to determine, at a minimum, whether a legitimate controversy exists on a legal point, so that it has some basis for assessing whether the parties‟ evaluation of the case is within the “ballpark” of reasonableness. We further conclude that the court abused its discretion in finding that the $25,000 enhancements for Clark and Gaines were fair and reasonable, and that it erred in awarding costs greater than the maximum amount specified in the notice given to the class.

The interesting aspect of this case is that the parties appeared to have made significant efforts to detail their justification for the settlement. The opinion explains the law regarding how courts should evaluate class action settlements, and what the parties are required to do to obtain the court's approval.

The case is Clark v. American Residential Services and the opinion is here.

FLSA - Federal Minimum Wage Going Up 7/24/09

Happy July 4!
The California state minimum wage is $8.00 (even higher for some employers subject to "living wage" ordinances, and in some localities like San Francisco). So, you may not care that the federal minimum wage is going up to $7.25 per hour on July 24, 2009. U.S. DOL's minimum wage page is here. Multi-state employers, heads up!

Court of Appeal: Wrongful Termination Alone Insufficient for Punitive Damages Liability

Scott sued her employer, Phoenix Schools, for wrongful termination in violation of public policy. A jury awarded her damages, including punitive damages. The Court of Appeal upheld the verdict for wrongful termination and the compensatory damages, but reversed on the punitive damages claim:

Thus, in order to sustain the punitive damages award, the evidence must leave no substantial doubt that Phoenix engaged in despicable conduct, or conduct intended to cause injury to Scott. “‘Something more than the mere commission of a tort is always required for punitive damages. There must be circumstances of aggravation or outrage, such as spite or “malice,” or a fraudulent or evil motive on the part of the defendant, or such a conscious and deliberate disregard of the interests of others that his conduct may be called wilful or wanton.’ [Citation.]” (Taylor v. Superior Court (1979) 24 Cal.3d 890, 894-895, italics omitted.) The only evidence of wrongful conduct directed toward Scott was her termination for an improper reason. This evidence was insufficient to support a finding of despicable conduct, because such action is not vile, base or contemptible.

So, a wrongful termination in violation of public policy, without additional evidence of malice, is not enough to sustain an award of punitive damages.

The case is Scott v. Phoenix Schools and the opinion is here.

Classmember's Claim of Inadequate Notice Fails

One for the plaintiff's class action bar.... Ron Matorana was a class member in a wage and hour class action against Allstate. Under a settlement, he was entitled to $65,000. But he didn't file a claim form. The settlement papers were approved by the court as fair and reasonable. Matorana, though, received nothing. He claimed he was ill during the notice period and was inattentive to the deadlines in the notice of the settlement he received.

So, he sued class counsel for malpractice, as well as Allstate, for failing to remind him adequately to file a claim form. The trial court said no. Court of Appeal? No sale.

Allstate owed Matorana no duty to follow up at all, so he had no basis for suing Allstate. The malpractice claim against his lawyers was without merit too.

Matorana argued that the notice procedure was inadequate, because it did not contain a provision requiring counsel to check up on class members who did not file claims. That argument was barred because the class procedures were deemed fair and reasonable by the trial court in the class action lawsuit. As such, a challenge to that finding was barred by the doctrine of collateral estoppel.

He also claimed that class counsel had a duty to follow up when he did not submit the form, although not required under the settlement agreement. (Collective "gulp" from the plaintiff's bar).

Not to worry. The court of appeal disagreed. Although class counsel owed Matorana a duty of care, that duty did not include contacting all class members who did not file claim forms. As the court pointed out, if class counsel were required to deal with every class member individually, that would undermine the purpose of a mass-mailed settlement notice approved by the court as fair and consistent with due process. On the other hand, if counsel misrepresented the dates or interfered with filing a claim that conceivably could have given rise to some liability.

The case is Matorana v. Marlin & Saltzman and the opinion is here.

California Supreme Court Rejects Sexual Harassment and Intentional Infliction Claims

The California Supreme Court decided a non-employment case that will have employment law ripple effects.

Suzan Hughes was the divorced widow of Mark Hughes, founder of Herbalife. Mark left a trust of $350 million to his son Alex. Suzan was Alex's guardian. One of the trustees was Christopher Pair, then CEO of Herbalife. The trustees and Suzan had a tumultuous relationship and much litigation. At one point, Pair apparently indicated interest in having a sexual relationship with Hughes. He made some offensive and crude remarks to her regarding his desires. He may have suggested that if she slept with him, he would approve an expenditure of $80,000 for a month's rental on a beach house in Malibu, for Alex (natch).

So, Hughes sued Pair under Civil Code section 51.9, which prohibits sexual harassment outside the employment context by certain vendors / suppliers in various professional business relationships, such as doctors, lawyers, accountants, and trustees.

The lower courts and the Supreme Court agreed that the lewd and crude conduct was not sufficient to constitute "sexual harassment" To get there, the Supreme Court expressly held that harassment under 51.9 is analyzed exactly the same as under the Fair Employment and Housing Act (and Title VII). So, this case is relevant to employment. Of note, because harassment must be "pervasive" or "severe," it will be tough to prove a violation of section 51.9 based on occasional interactions with a covered business' employees. (Normally, one will interact in the workplace more frequently than with a third party.)

The Court also held that Hughes' claim for intentional infliction of emotional distress was barred because the alleged conduct was not sufficient extreme and outrageous, and because Hughes and not proved she suffered "severe" emotional distress.

The opinion is Hughes v. Pair and the opinion is here.