Peabody v. Time Warner Cable: Employer May Not Average Commission Wages Across a Monthly Pay Period and Must Apply Such Wages to the Pay Period in Which They Are Actually Paid

Susan Peabody filed suit against Time Warner Cable (TWC), alleging, in part: As an account executive for TWC, she worked an average of 45 hours per week and earned salary plus commissions based on her monthly sales; TWC paid her salary biweekly and paid commissions monthly; in those pay periods that included a commission payment, TWC paid Ms. Peabody more than one and one-half times the minimum wage; in those pay periods that did not include a commission payment, TWC paid Ms. Peabody less than one and one-half times the minimum wage, such that she did not qualify for the commissioned sales exemption.

The district court granted summary judgment for TWC, and Ms. Peabody appealed. The Ninth Circuit affirmed in part (as to a question not at issue here) and asked the California Supreme Court to decide the following question: whether an employer can average an employee’s commission payments over certain pay periods to satisfy the compensation requirements of California commission sales exemption. 

In its decision yesterday, the Supreme Court answered the question in the negative, holding as follows: 

Labor Code section 204 requires employers to pay wages no less than semimonthly, and Time Warner could not apply commission wages to a monthly, rather than semimonthly, pay period. Slip op. at 5-7. 

The commission sales exemption depends on the amount of wages actually paid in a given pay period, and Time Warner could not attribute the commission wages paid in one pay period to an earlier pay period. Slip op. at 7-9. 

The federal Fair Labor Standards Act's exemption for commissioned employees is not analogous to California law because the FLSA does not require employers to pay employees no less than semimonthly. Slip op. at 9. 

Peabody v. Time Warner Cable (7/14/14) --- Cal.4th ---, is available here. 

Muldrow v. Surrex: On Remand Following Brinker, Court of Appeal Again Affirms Judgment for Employer, and Supreme Court Denies Depublication Request

The California Supreme Court meets each week to act on cases and publishes its actions on its web site (here) on Thursday mornings. This week, the Court denied a request for depublication in Muldrow v. Surrex Corporation (8/29/12) 208 Cal. App. 4th 1381. I did not catch the Court of Appeal decision when it came down, so here it is:  

In Muldrow v. Surrex Solutions Corporation (1/24/12) 202 Cal.App.4th 1232 (discussed here), a recruiter sued his employer for failure to pay overtime and meal period compensation. The trial court certified the class and, after a bench trial, found: (1) the class members were subject to the commissioned employees exemption from the overtime requirements; (2) the employer provided meal periods to them, and (3) it was not obligated to ensure that they took their meal periods. The Court of Appeal affirmed, and the Supreme Court issued a grant-and-hold order pending Brinker.  On remand after Brinker, the Court of Appeal once again affirmed the judgment, holding: 

1. Brinker had no impact on the Court's analysis of the overtime exemption for commissioned employees, and the trial court correctly held that the employees were subject to the exemption. 
2. The trial court did not err “in ruling that [the employer] was not obligated to ensure that meal period[s] were taken." Citing Brinker, 53 Cal.4th at p. 1040. 

The opinion is available here. 

As I mentioned above, the California Supreme Court on January 3 denied a request for depublication filed by the Brinker plaintiffs. The Muldrow plaintiffs apparently did not file a petition for review. 

Peabody v. Time Warner Cable: California Supreme Court Accepts Review of Commission Sales Exemption Question

In Peabody v. Time Warner Cable (discussed here), the Ninth Circuit Court of Appeals asked the California Supreme Court to decide whether an employer can average an employee’s commission payments over certain pay periods to satisfy the compensation requirements of California commission sales exemption.

Last week, the Supreme Court granted the Ninth Circuit's request. The Court has restated the issue on review as follows:

May an employer, consistent with California's compensation requirements, allocate an employee's commission payments to the pay periods for which they were earned?

Here are the facts: Susan Peabody worked for Time Warner Cable (TWC) as an account executive, working an average of 45 hours per week and earning salary plus commissions based on her monthly sales. TWC paid Ms. Peabody her salary biweekly and paid commissions monthly. In those pay periods that included a commission payment, TWC paid Ms. Peabody more than one and one-half times the minimum wage, so that she qualified for the commission sales exemption. In those pay periods that did not include a commission payment, TWC paid Ms. Peabody less than one and one-half times the minimum wage, so that she did not qualify for the commission sales exemption.

The Court's web page for Peabody (Case No. S204804) is here. I have added Peabody to our Watch List of pending cases. 

Muldrow v. Surrex: On Remand After Brinker, Court of Appeal Affirms Holding that Class Members Were Commissioned Sales Exempt and Employer Provided Meal Periods

In Muldrow v. Surrex Solutions Corporation (1/24/12) 202 Cal.App.4th 1232 (blogged here), a recruiter sued his employer for failure to pay overtime and meal period compensation. The trial court (San Diego Superior, Judge Nugent) certified the class, and the parties tried the case to the court. The trial court found that the class members were subject to the commissioned sales exemption from the overtime requirements, that the employer provided meal periods to them, and that it was not obligated to ensure that they took their meal periods. The Court of Appeal affirmed, but the California Supreme Court granted review pending its decision in Brinker v. Superior Court (4/12/12) 53 Cal.4th 1004.  

On remand, the Court of Appeal affirmed its prior decision -- not impacted by Brinker -- that the recruiters were subject to the commissioned sales exemption because: 

1. The class members were engaged principally in selling services (slip op. at 12-15); 
2. The class members' commissions were sufficiently related to the price of those services (slip op. at 16-22); and 
3. The employer's payment of draws against commissions constituted a bona fide commission system (slip op. at 22-24). 

The Court also affirmed its prior decision that the employer had provided the required meal periods to the class members and was under no obligation to ensure that they took their meal periods.  Slip op. at 24-25.  

The opinion is available here. 

Howard Entertainment v. Lisa Kudrow: Court Erred In Excluding Expert Witness Evidence of Custom and Usage in Personal Management Dispute

In 1991, Scott Howard and actress Lisa Kudrow entered into an oral agreement for Howard to act as Kudrow's personal manager. Kudrow agreed to pay Howard 10% of her earnings. In 1994, Kudrow landed the role of "Phoebe" on the television show "Friends." She earned up to $1 million per episode, plus 1 1/4 % of the show's "backend" earnings. 

Kudrow terminated Howard in 2007, and Howard made a demand for commissions on income Kudrow earned following the termination of their relationship for work she performed during the relationship. Kudrow rejected the demand, and Howard filed suit. On summary judgment, Howard presented the declaration of an expert, who stated that custom and practice in the entertainment industry required clients to pay their personal managers post-termination commissions on the services that they rendered, and on engagements that they entered into, when the personal managers were representing them.

Kudrow objected to the expert's declaration, and Howard sought an extension of time to supplement it. The trial court (Los Angeles Superior Court, Judge Cesar Sarmiento) denied the request for continuance, sustained Kudrow's objections to the expert's declaration, and granted summary judgment. Howard appealed, and the Court of Appeal remanded to the trial court with directions to exercise its discretion to determine if Howard was entitled to a continuance to file a supplemental expert declaration.

On remand, the trial court granted Howard's request to file a supplemental expert witness declaration. The trial court then held that the declaration lacked foundation and again granted summary judgment. Howard again appealed, and the Court of Appeal reversed, holding:

Howard's expert was qualified as an expert witness (slip op. at 15-17); 

The expert's declaration provided adequate foundation for the opinions expressed, despite a "lack of specific details in portions of the ... declaration" (slip op. at 17-23); and 

Because the expert declaration was admissible, Howard raised triable issues of material fact as to the proper interpretation of the parties' agreement, and the trial court erred in granting summary judgment (slip op. at 23).

The opinion is available here.

Peabody v. Time Warner Cable: Ninth Circuit Certifies Commission Questions to California Supreme Court

The last time that the Ninth Circuit Court of Appeals asked the California Supreme Court to clarify an issue of California wage law was Sullivan v. Oracle Corp. (2011) 51 Cal.4th 1191 (discussed here) in which the Court held that the California Labor Code and Unfair Competition Law apply to overtime work performed in California for a California-based employer by out-of-state plaintiffs.

In Peabody v. Time Warner Cable, the Ninth Circuit has asked the California Supreme Court to decide the following issue:

To satisfy California’s compensation requirements, whether an employer can average an employee’s commission payments over certain pay periods when it is equitable and reasonable for the employer to do so.  

The facts are as follows: Susan Peabody worked for Time Warner Cable (TWC) as  an account executive, working an average of 45 hours per week and earning salary plus commissions based on her monthly sales.  TWC paid Ms. Peabody her salary biweekly and paid commissions monthly.  In those pay periods that included a commission payment, TWC paid Ms. Peabody more than one and one-half times the minimum wage; in those pay periods that did not include a commission payment, TWC paid Ms. Peabody less than one and one-half times the minimum wage.  

Ms. Peabody filed a putative class action alleging that TWC failed to pay her  less than one and one-half times the minimum wage, such that she did not qualify for the commissioned sales exemption.  To qualify for the commissioned sales exemption, one must earn wages in excess of one and one-half times the minimum wage, one-half of which must be commissions.  

The central question is whether Ms. Peabody's commissions should be averaged over the month in which they were earned or applied only to the pay periods in which they were paid.  

The Ninth Circuit's certification order is available here.  I have added Peabody v. Time Warner Cable to our Watch List of pending cases.  

Deleon v. Verizon Wireless: Court of Appeal Holds that Employer Can Recover Advances on Commissions when Conditions of Sale Are Not Met

Deleon v. Verizon Wireless, LLC (7/10/12) --- Cal.App.4th --- is the latest in a line of decisions dealing with what are called chargebacks: when employers can or can't recover from employees amounts that have been paid either as commissions or as advances on commissions. Generally speaking, courts have held that an employer can recover an advance paid on a commission if the conditions precedent for earning the commission have not occurred, but cannot recover commissions already paid for completed sales.

The Court's introduction to the opinion is pretty clear and concise (my two main criteria for good legal writing):

Plaintiff Saul Deleon, on behalf of himself and other aggrieved employees, appeals from the judgment following the trial court's order granting summary judgment in favor of defendant AirTouch Cellular doing business as Verizon Wireless (Verizon Wireless). Deleon was a former retail sales representative for Verizon Wireless and filed a complaint seeking civil penalties under the Labor Code Private Attorneys General Act of 2004 (PAGA) (Lab. Code, § 2698) for a violation of section 223, which prohibits the secret underpayment of wages. Deleon's compensation plan included commission payments, which Verizon Wireless could recover, or charge back against future commissions, if certain conditions were not met. We must determine whether the chargeback provision violates section 223 by “secretly pay[ing] a lower wage while purporting to pay the wage designated by statute or by contract.” Based upon the undisputed facts, we conclude the commission payments were advances, not wages, and the chargeback provision did not violate the Labor Code because Verizon Wireless may legally advance commission payments to its retail sales representatives before completion of all conditions for payment, and charge back any excess advance over commissions earned against future advances should the conditions not be satisfied. Thus, we affirm.

Slip op. at 2.

The compensation plan at issue provided that commissions would be paid in advance, but not earned until the expiration of a chargeback period during which the customer could cancel the service. If the customer canceled the service during this period, the employer would recoup the advance from the employee.

The Court held that the employee's right to commissions was subject to certain conditions precedent set forth in the compensation plans. Slip op. at 9. Not surprisingly, the Court held that payments made before these conditions were satisfied were not earned commissions, but merely advances, and were subject to chargeback. Ibid. See Steinhebel v. Los Angeles Times Communications, LLC (2005) 126 Cal.App.4th 696.

The Court distinguished Harris v. Investor’s Business Daily, Inc. (2006) 138 Cal.App.4th 28
on grounds that the compensation plan at issue there did not clearly state that payments were advances, but appeared to be payment of fully earned commissions. Slip op. at 9-10.

Because Verizon paid only advances on commissions, its chargebacks of those advances did not violate Labor Code section 223. Slip op. at 12. Although Deleon did not sign a commission agreement, he accepted Verizon's commission plan by performing work for Verizon under the terms of the plan. Ibid. "Section 223 does not state that the compensation or wage contract must be a written contract signed by the parties." Slip op. at 13.

The Court rejected Deleon's argument that triable issues of fact barred summary judgment because he and others did not understand that the payments were merely advances.

Mutual consent necessary to the formation of a contract “is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts, and not their unexpressed intentions or understandings.

***

Deleon received copies of the compensation plans, received training on how the chargeback provision operated, and received commission statements setting forth his commission advances and chargebacks. These undisputed facts objectively establish that Deleon understood that he would be compensated under the terms of the compensation plans.

Slip op. at 15.

Finally, the Court rejected the argument that the chargeback policy was unconscionable.

Verizon Wireless offered to consumers a cell phone service plan, and paid its retail sales representatives commission on sales. The company's choice of the relevant chargeback period does not “shock the conscience.” The net compensation a retail sales representative earns bears a direct relation to the product (cell phone service contract) he or she sold.

Slip op. at 16.

The opinion is available here.

Sciborski v. Pacific Bell: Court of Appeal Rejects LMRA Preemption Defense in Wage Deduction Action

In Sciborski v. Pacific Bell Direct. (5/8/12) --- Cal.App.4th ----, the plaintiff sued her former employer, Pacific Bell Directory ("Pac. Bell"), challenging Pacific Bell's actions in deducting approximately $19,000 from her wages to recover a $36,000 sales commission paid to her. A jury found Pac. Bell's wage deductions violated Labor Code section 221 and resulted in Sciborski's constructive discharge in violation of public policy. It awarded her $36,000 in lost earnings, but found she did not prove her claimed future economic loss and emotional distress damages. The court awarded her attorney fees based on her prevailing on the section 221 claim.

Pac. Bell appealed, arguing that Sciborski's claims were preempted by section 301 of the Labor Management Relations Act ("LMRA") because she was a union member governed by a collective bargaining agreement and her claims required the court to interpret the CBA.  The Court rejected this argument and held that Sciborski's claims were not preempted because they arose from independent state law and did not require the interpretation of the CBA.  

I am not going to discuss LMRA preemption at any length, but here is the basic law, as stated by the Court: 

Under section 301 preemption analysis, it is helpful to apply a two-part test to determine whether a claim is preempted.  First, the court should evaluate whether the claim arises from independent state law or from the collective bargaining agreement.  If the claim arises from the collective bargaining agreement, the claim is preempted as a matter of law.  However, if the claim arises from independent state law, the court must then proceed to the second step.  In this step, the court determines whether the claim requires "interpretation or construction of a labor agreement," or whether a collective bargaining agreement will merely be "reference[d]" in the litigation.  A state law claim is preempted if a court must interpret a disputed provision of the collective bargaining agreement to determine whether the plaintiff's state law claim has merit.  

The term "interpret" in this context "is defined narrowly — it means something more than 'consider,' 'refer to,' or 'apply.'"  Although the plaintiff cannot avoid preemption by "artfully pleading" the claim , the claim must "require interpretation" of the collective bargaining agreement.  Preemption does not arise when interpretation is required only by a defense.  Preemption occurs when a claim cannot be resolved on the merits without choosing among competing interpretations of a collective bargaining agreement and its application to the claim.  The determination of whether a claim is preempted depends on the particular facts of each case.  

Slip op. at 14-15.  The Court rejected Pac. Bell's argument that Sciborski's section 221 claim required interpretation of the CBA: 

We agree that the CBA (and incorporated documents) contain detailed and complicated rules for assigning employees to particular customer accounts, and that disputes regarding the meaning of these provisions require interpretation of the CBA.  However, the fundamental issue for the jury's determination in this case was not the nature of these assignment rules, i.e., whether Sciborski was a "loaner" representative or whether the new-connect account was properly assigned to her....  Instead, she argued that the misassignment based on Pacific Bell's admitted clerical error was not a proper basis for concluding that she did not earn the commission.  

No interpretation of the CBA was necessary to resolve this claim.  There were provisions in the CBA and the incorporated Market Selection document supporting Pacific Bell's position that the assignment of the new-connect account to Sciborski was inconsistent with her status as a "loaner" representative in the Metro account area.  However, there was nothing in these documents stating this inconsistency was a basis for finding a commission was not earned if the employee performed all of the other work to earn the commission.  And there was nothing in these documents providing that Pacific Bell was permitted to deduct amounts from an employee's wages based on the employer's clerical error in the account assignment process.  

Absent an express provision to this effect, Pacific Bell was not entitled to unilaterally declare that the commission was not earned and use self-help measures to deduct funds from Sciborski's wages that had already been paid to her.  Under California law, employers and employees may agree that an employee must satisfy certain conditions before earning a sales commission and an employer may recoup an advance if these conditions are not satisfied.  However, to rely on those conditions as a basis for recouping an advance paid for a commission, the condition must be clearly expressed and generally must be set forth in writing.  Additionally, the conditions must relate to the sale and cannot merely serve as a basis to shift the employer's cost of doing business to the employee.   

Under these principles, Pacific Bell's argument that the jury was required to interpret implied provisions in the CBA to determine whether Pacific Bell had a legal right to recoup Sciborski's commission is unsupported by California law.  Because the claimed disputed provisions of the CBA were irrelevant to Sciborski's right to recover on her state law claim, they did not support section 301 preemption.  

Slip op. at 23-25. The Court held that Sciborski's wrongful discharge claims were not preempted for the same reasons.

The trial court (San Diego County, Judge Frederic L. Link) awarded Sciborski $291,155 in attorney fees based on her prevailing on the Labor Code section 221 claim. The Court rejected Pac. Bell's argument that the award was excessive, holding that the award fell within the trial court's discretion, even though it seemed large in comparison to the $36,000 damage award. Slip op. at 34-35. The Court also rejected Sciborski's argument that the trial court abused its discretion in rejecting her request for a multiplier. Slip op. at 36.

The full opinion is here.  Sorry for the long block quotes on this one.  I promise to do better next time.  

Muldrow v. Surrex Solutions: Court of Appeal Holds That Recruiters Are Subject to Commissioned Sales Overtime Exemption

I failed to pick up this case when it was published. In Muldrow v. Surrex Solutions Corporation (1/24/12) 202 Cal.App.4th 1232, a recruiter sued his employer for failure to pay overtime and meal period compensation. The trial court (San Diego Superior, Judge Nugent) certified the class, and the case was tried to the court. The court found that the class members were subject to the commissioned employees exemption from the overtime requirements, that the employer provided meal periods to them, and it was not obligated to insure that they took their meal periods.

The Court of Appeal affirmed. First, it reviewed the relevant cases: Keyes Motors, Inc. v. DLSE (1987) 197 Cal.App.3d 557, Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, Harris v. Investor's Business Daily, Inc. (2006) 138 Cal.App.4th 28, and Areso v. CarMax, Inc. (2011) 195 Cal.App.4th 996 (blogged here).

The Court held that the class members were engaged principally in sales. In essence, the Court found that recruiters have to sell an employer and an applicant on each other. "Appellants would then attempt to convince both the candidate and the client that the placement of the candidate with the client was a proper fit." Slip op. at 12.

The Court then held that the class members were paid on a commission basis. "Some candidates were hired directly by employer clients. For these so called "direct hire" placements, appellants received a commission equal to a percentage of the placement fee that Surrex received from the client." The plaintiff conceded that this compensation constituted a commission. Slip op. at 15.

"Surrex placed other candidates by hiring them as consultants. The candidate-turned-consultant would then perform work for the client, and Surrex would in turn bill the client at an hourly rate for the consultant's services." Slip op. at 15. The class members would earn a percentage of the compensation thus earned by Surrex. Distinguishing Keyes Motors and Ramirez, the Court held that this arrangement constituted a commission:

Appellants' contention that the term "commissions" in the relevant regulation should be interpreted to include only those commissions that are based strictly, and solely, on a percentage of the price of the product or service rendered constitutes an excessively narrow and wooden application of Keyes Motors and Ramirez. Such a limited definition would not comport with the contemporary legal sense of the word "commission." On the contrary, the relevant Black's Law Dictionary's definition of "commission" expressly includes payments derived from profits. Moreover, a commission based on profits is hardly a concept foreign to California law.

Slip op. at 18 (citations omitted).

Finally, the Court held that Surrex's system constituted a "bona fide" commission system "as a matter of law." Noting that the DLSE Enforcement Policies and Interpretations Manual states, "Consistent commission earnings below, at or near the draw are indicative of a commission plan that is not bona fide," the Court cited evidence in the record that certain class members were paid commissions in excess of their draws. Slip op. at 22-23. 

The last part of the opinion addresses the plaintiffs' meal period claim. The plaintiffs raised the issue to preserve their right to petition the Supreme Court in the event that it reverses the Court of Appeal's decision in Brinker. Accordingly, the Court of Appeal found no error in the trial court's decision, which was consistent with Brinker. 

The opinion is available here. 

Areso v. CarMax, Inc.: Court of Appeal Issues Surprising Commission Decision

In Areso v. CarMax (5/20/11) --- Cal.App.4th ----, 2011 WL 1902200, plaintiff sold cars for defendant. Defendant classified plaintiff as an exempt commissioned salesperson. Defendant paid plaintiff a minimum guaranteed base, plus approximately $150 for each vehicle sold, but did not pay her overtime compensation. Plaintiff filed a class action, challenging defendant's pay practices. The trial court (Los Angeles Superior, Judge Highberger), granted summary judgment for defendant, holding that plaintiff was properly classified as exempt. The Court of Appeal affirmed.

First, it held that, although the order granting summary judgment did not dispose of all causes of action, plaintiff could appeal because the remaining causes of action (waiting time penalties, unfair competition, and PAGA penalties) were "purely ancillary" in that they "all depend entirely upon Areso's overtime claim, and therefore all became moot once the trial court granted summary adjudication on that claim." Slip op. at 5.

Second, it held that defendant's payments to plaintiff of $150 per vehicle constitute commission wages "based proportionately on the amount or value" of defendant's property or services sold, making plaintiff an exempt employee. Slip op. at 6-7.

The Court distinguished Keyes Motors, Inc. v. DLSE (1987) 197 Cal.App.3d 557, which held:

Labor Code section 204.1 sets up two requirements, both of which must be met before a compensation scheme is deemed to constitute commission wages. 'First, the employees must be involved principally in selling a product or service, not making the product or rendering the service. Second, the amount of their compensation must be a percent of the price of the product or service.'

Keyes at 563; see also Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 804 (adopting Keyes). Contrary to Keyes and Ramirez, the Court held that "commission wages may be based proportionately on the amount (number) of property or services sold by the employee." Slip op. at 11. In other words, defendant's compensation structure of $150 per car was based on the amount of product sold and constituted a commission.  

The opinion is available here.

Christopher v. SmithKline Beecham: 9th Circuit Upholds Order that Pharma Sales Reps Are Exempt

In Christopher v. SmithKline Beecham Corp., --- F.3d ----, 2011 WL 489708 (9th Cir. 2/14/11), the Ninth Circuit has upheld a district court's finding that pharmaceutical sales representatives (PSRs) are exempt employees under the Fair Labor Standards Act (FLSA).

The plaintiffs sued GlaxoSmithKline ("Glaxo") for overtime under the FLSA. The parties cross-moved for summary judgment, and plaintiffs moved to certify a conditional class. Glaxo contended that plaintiffs were exempt under the “outside salesman” provision in FLSA or, alternatively, under the “administrative” exemption. 29 U.S.C. § 213(a)(1). The trial court (D. AZ, Judge Martone) granted summary judgment for Glaxo, finding that the PSRs were outside salesmen.

The Court of Appeal affirmed, breaking with the DOL and the Second District. In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010), blogged here.

After reviewing the outside sales exemption, the Court held that it owes "no deference to the Secretary's current interpretation of the regulations" (slip op. at 7) because the regulations themselves do nothing more than repeat the terms of the FLSA. Slip op. at 10. "Furthermore ... deference is not warranted because the Secretary's position is both plainly erroneous and inconsistent with her own regulations and practices, as demonstrated in the analysis that follows." Ibid.

The Court then held that the PSRs are exempt outside salespeople:

Plaintiffs' contention that they do not “sell” to doctors ignores the structure and realities of the heavily regulated pharmaceutical industry. It is undisputed that federal law prohibits pharmaceutical manufacturers from directly selling prescription medications to patients. Plaintiffs suggest that despite being hired for their sales experience, being trained in sales methods, encouraging physicians to prescribe their products, and receiving commission-based compensation tied to sales, their job cannot “in some sense” be called selling. This view ignores the reality of the nature of the work of detailers, as it has been carried out for decades. Plaintiffs' argument also fails to account for the fact that the relevant “purchasers” in the pharmaceutical industry, and the appropriate foci of our inquiry, are not the end-users of the drug but, rather, the prescribing physicians whom they importune frequently. Unlike conventional retail sales, the patient is not at liberty to choose personally which prescription pharmaceutical he desires. As such, he cannot be fairly characterized as the “buyer.” Instead, it is the patient's physician, who is vested with both a moral and legal duty to prescribe medication appropriately, who selects the medication and is the appropriate focus of our “sell/buy” inquiry. In this industry, the “sale” is the exchange of non-binding commitments between the PSR and physician at the end of a successful call. Through such commitments, the manufacturer will provide an effective product and the doctor will appropriately prescribe; for all practical purposes, this is a sale. Because pharmaceutical manufacturers appreciate who the “real” buyer is, they have structured their 90,000-person sales force and their marketing tactics to accommodate this unique environment.

Slip op. at 11. The Court had this to say about the DOL's current position on PSRs:

We also find that the Secretary's acquiescence in the sales practices of the drug industry for over seventy years further buttresses our decision. The outside sales exemption has existed since 1938. Detail men have practiced their craft over that same period. Generally, they have been considered salespeople. Until the Secretary's appearance in Novartis, the DOL did not challenge the conventional wisdom that detailing is the functional equivalent of selling pharmaceutical products.

Slip op. at 15. The Court concluded:

For the past seventy-plus years, selling in the pharmaceutical industry has followed this process. PSRs are driven by their own ambition and rewarded with commissions when their efforts generate new sales. They receive their commissions in lieu of overtime and enjoy a largely autonomous work-life outside of an office. The pharmaceutical industry's representatives-detail men and women-share many more similarities than differences with their colleagues in other sales fields, and we hold that they are exempt from the FLSA overtime-pay requirement.

Slip op. at 16.

I find this opinion to be a mixed bag. On the one hand, the Court seems to be saying that PSRs don't do sales the way people normally think of sales, i.e., they don't seel anything to anyone, but they're the closest thing the industry has to salespeople, so they fall under the exemption. On the other hand, I can understand the Court's reluctance to follow the DOL's current position. In that sense, the opinion reminds me of Murphy v. Kenneth Cole Productions, in which the California Supreme Court refused to follow the DLSE's then newly adopted position that missed meal period pay was a penalty, rather than a wage.

The opinion is here.

McCaskey v. CSAA: Employer May Be Bound By Oral Promise of Relaxed Performance Standards for Older Employees

McCaskey v. California State Automobile Association (October 29, 2010) --- Cal.App.4th ----, 2010 WL 4261437, presents an unusual set of facts and holding. The Court described the case as follows:

Plaintiffs ... brought these actions against [defendants] charging breach of contract and age discrimination. The gist of the claims was that defendant brought about plaintiff's discharges by breaching a promise to permit senior sales agents to continue in their employ under relaxed sales quotas. The trial court entered summary judgment for defendants primarily on the grounds that they were contractually entitled to rescind the promise, and that plaintiffs failed to raise a triable issue of fact concerning defendants' claimed nondiscriminatory reasons for eliminating the policy. We find that the record raises a triable issue of fact on the contract claim over the question whether defendants honored the policy for an agreed time, or if no agreement as to time can be inferred from the terms and circumstances of the employment contract, for a reasonable time. The record also presents triable issues of fact concerning the genuineness of defendants' claimed reasons for eliminating the policy. Accordingly, we will reverse the judgment.

Slip op. at 1.

The opinion is available here.

Court of Appeal Issues Class Settlement Decision, Including PAGA Settlement Issue

Nordstrom Commission Cases (June 10, 2010, publication ordered July 7, 2010) 186 Cal.App.4th 576, is another case dealing with class action settlement approval. To my knowledge, it is the first one dealing with settlement of PAGA claims, although it does so without much detailed discussion.

The plaintiffs alleged that Nordstrom's policy of paying net sales commissions to its commissioned sales employees violated Labor Code sections 221 and 203 of the Labor Code. The parties settled for $6.405 million in cash and $2.5 million in Nordstrom merchandise vouchers. The trial court approved the settlement, and an objector appealed. The Court of Appeal affirmed.

The objector argued that the settlement was insufficient because it did not include or "grossly undervalued" the class members' waiting time penalties under Labor Code section 203. The Court rejected this argument:

The trial court's order overruling Taylor's objections specifies that the section 203 claims were "pleaded, demands made, and then penalty issues considered throughout the lengthy settlement negotiations. It is clear from the evidence presented too, that issues of purported 'willfulness' under section 203 and the difficulty of proof of that issue in light of the 'good faith dispute' requirement were evaluated and considered."

Id. at 584. The Court noted that Nordstrom had raised several arguments that it had acted in good faith. "[T]here was a good faith dispute regarding whether and when commission wages were due. The trial court did not abuse its discretion in determining that the class's case regarding section 203 penalties was not strong, and therefore deciding the terms of the settlement were fair, adequate, and reasonable." Id. at 587. Distinguishing Clark v. American Residential Services LLC (2010) 175 Cal.App.4th 785, the Court held that the trial court "did consider a substantiated explanation of the strengths and weaknesses of the class's claims, as well as the potential total recovery by the class under various damage theories." Id. at 588. (See our post on Clark here.)

The objector next argued that the settlement was insufficient because it did not allocate any amount to PAGA penalties. "Taylor argues the Nordstrom Commission Cases settlement 'effectively nullifies PAGA by failing to include PAGA penalties and purporting to settle all of the claims of the class members.'" Id. at 589. The Court rejected this argument. Unfortunately, its analysis is Spartan at best:

The Nordstrom Commission Cases settlement agreement identifies liability for PAGA penalties as a claim against Nordstrom and includes the following language: “The Parties allocate $0 to any Private Attorneys General Act penalty claim under Labor Code § 2699 et seq. , for penalty claims based on the Released Claims. During the Class Period, Nordstrom paid Putative Class Members' commissions pursuant to a commission plan that it contends was approved by the United States District Court in Rios, and consequently, Nordstrom contends no claim for penalties of any nature is valid.” Thus, the PAGA penalty claims were at issue, and were resolved as a part of the overall settlement of the case. We find no abuse of discretion in the trial court's approval of the settlement agreement containing these terms.

The cases Taylor cites are inapposite, at best. In Franco v. Athens Disposal Co., Inc. (2009) 171 Cal.App.4th 1277, 1300, 90 Cal.Rptr.3d 539, the appellate court held: “The Legislature has made clear that an action under the PAGA is in the nature of an enforcement action, with the aggrieved employee acting as a private attorney general to collect penalties from employers who violate labor laws. Such an action is fundamentally a law enforcement action designed to protect the public and penalize the employer for past illegal conduct.” The case did not address whether a settlement agreement could allocate zero dollars to PAGA penalties, however. The case stands only for the proposition that an individual arbitration agreement is invalid to the extent it purports to prevent an employee plaintiff from acting in a private attorney general capacity. (Franco v. Athens Disposal Co., Inc., supra, 171 Cal.App.4th at p. 1282, 90 Cal.Rptr.3d 539.)

Taylor also cites Waisbein v. UBS Fin. Servs. Inc. (N.D.Cal. Aug. 15, 2007, No. C-07-02328 MMC) 2007 WL 2348699, 2007 U.S.Dist. Lexis 62723. That United States District Court order, however, was vacated by a later order which directly contradicts Taylor's arguments on appeal. (Waisbein v. UBS Fin. Servs. Inc. (N.D.Cal. Dec. 5, 2007, No. C-07-2328 MMC) 2007 WL 4287334 at p. *3, 2007 U.S.Dist. Lexis 92051 at p. *9 [“the question is whether the Bowman class members voluntarily entered into an agreement in which they accepted a monetary benefit from UBS in exchange for not pursuing their claims under PAGA. The indisputable answer to that question is ‘yes' ”].)

Id. at 589.

Finally, the Court rejected the objector's argument that funding the settlement in part with in-store vouchers violated Labor Code section 212.

Section 212 does not apply because ... there is a good faith dispute as to whether and when commission wages were owed to the class members. “ ‘[W]ages are not “due” if there is a good faith dispute as to whether they are owed.’ ” (Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796, 802, 90 Cal.Rptr.3d 175.) Employees may release claims for disputed wages and may negotiate the consideration they are willing to accept in exchange. (Id. at pp. 802-803, 90 Cal.Rptr.3d 175.)

Ibid. The Court noted that the vouchers made up approximately 20% of the total settlement fund and were intended to compensate class members with claims of less than $20.

Unlicensed Used Car "Finder" Can Recover Unpaid Wages from Car Dealer

This case has a pretty limited scope, but it's entertaining. The plaintiff alleged that he entered into an oral contract with a used car dealer to act as a used car "finder." The used car dealer refused to pay the plaintiff his "finder's fees," and the plaintiff sued. The trial court sustained the car dealer's demurrer, holding that the plaintiff could not recover because he was not licensed as a used car dealer. The Court of Appeal reversed.

Here's the good part. The Court wrote:

Back in the 194o's, a character in a theatrical comedy flatly stated that there is no such thing as a perfect crime. To which the retort was: “Ever buy a used car?”

The exchange might be a bit out of date today. California law has not only required car dealers to be licensed since 1959 (see Veh. Code, § 117002; added by Stats. 1959, ch. 3), but has subjected car dealers to specific statutes against fraud (see generally § 11711) since that date as well. And a relatively recent statute, section 11711.3 (added by Stats. 2002, ch. 407, § 2) goes so far as to completely preclude any recovery by a dealer of the price of a car if the dealer is not licensed. The “dominant purpose” of California‟s statutory car dealer licensing scheme is, of course, the protection of car buyers from irresponsible or unscrupulous dealers. (Valiyee v. Department of Motor Vehicles (1999) 74 Cal.App.4th 1026, 1032, italics added.)

The irony of the present case is that a scheme designed to protect consumers from unscrupulous dealers has, at least under the law as interpreted by the trial court on a successful demurrer, resulted in a car dealer reaping the benefit of an outright fraud on one of its salespeople, to whom it owed substantial finder‟s fees. The theory, which the trial court accepted on demurrer, was that the salesman really was himself a used car dealer, and, because he did not have a dealer‟s license, he could not complain when he was not paid his finder‟s fees for about 11 cars he obtained for the dealership.

At this stage we deal only with the facts in the complaint. That said, to affirm would be to allow the car dealership to get away with a perfect crime. We reverse.

Wald v. Truspeed Motorcars, LLC (May 3, 2010) --- Cal. App. 4th ----, 2010 WL 1744893.

California Supreme Court Grants Review in Pellegrino I

A couple of months ago we posted on Pellegrino v. Robert Half Intern., Inc. (February 25, 2010) 182 Cal.App.4th 87, 104 Cal.Rptr.3d 790 ("Pellegrino I"), which held, inter alia, that substantial evidence supported the trial court's finding that the administrative exemption did not apply to the plaintiffs. Our post on Pellegrino I is here.

A unanimous California Supreme Court today granted the employer's petition for review:

The petition for review is granted. Further action in this matter is deferred pending consideration and disposition of a related issue in Harris v. Superior Court (Liberty Mutual), S156555 (see Cal. Rules of Court, rule 8.512(d)(2)), or pending further order of the court. Submission of additional briefing, pursuant to California Rules of Court, rule 8.520, is deferred pending further order of the court.

Harris has been on our watch list, and our post on it is here. I don't anticipate a substantive decision from the Court on Pellegrino I - since the Court has deferred briefing, I assume it will remand for reconsideration of the exemption issue when it issues Harris - and I will not add it to our Supreme Court watch list. The Supreme Court's docket is here. 

Department of Labor Wage and Hour Division Issues First Administrator Interpretation, Finds That Loan Officers Are Not Exempt under Federal Law

On March 24, 2010, the United States Department of Labor (DOL) Wage and Hour Division (WHD) announced that it would begin issuing "Administrator Interpretations" to address important issues. The WHD web site states:

In order to provide meaningful and comprehensive guidance and outreach to the broadest number of employers and employees, the Wage and Hour Administrator will issue Administrator Interpretations when determined, in the Administrator’s discretion, that further clarity regarding the proper interpretation of a statutory or regulatory issue is appropriate. Administrator Interpretations will set forth a general interpretation of the law and regulations, applicable across-the-board to all those affected by the provision in issue. Guidance in this form will be useful in clarifying the law as it relates to an entire industry, a category of employees, or to all employees. The Wage and Hour Division believes that this will be a much more efficient and productive use of resources than attempting to provide definitive opinion letters in response to fact-specific requests submitted by individuals and organizations, where a slight difference in the assumed facts may result in a different outcome. Requests for opinion letters generally will be responded to by providing references to statutes, regulations, interpretations and cases that are relevant to the specific request but without an analysis of the specific facts presented. In addition, requests for opinion letters will be retained for purposes of the Administrator’s ongoing assessment of what issues might need further interpretive guidance.

WHD also issued its first Administrative Interpretation (No. 2010-1), finding that mortgage loan officers typically do not qualify as bona fide administrative employees under the Federal Fair Labor Standards Act (FLSA) and should not be treated as exempt from the FLSA's minimum wage and overtime compensation requirements.

WHD begins by noting that the employee's job duties and compensation determine exempt status, rather than the job title. WHD then reviews the job duties typically performed by mortgage loan officers. WHD notes that minimum wage and overtime exemptions “are to be narrowly construed" against the employer and reviewed the requirements for the exemption:

1. The employee must be compensated on a salary or fee basis as defined in the regulations at a rate not less than $455 per week;
2. The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
3. The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. 29 C.F.R. § 541.200.

WHD focuses on the second of these requirements. Using the "production vs. administrative dichotomy, WHD concludes that mortgage loan officers typically "have a primary duty of making sales," which is a production function, rather than administrative. In addition, WHD notes that loan officers typically are paid commissions based on sales, are trained in sales techniques, and that "many employers defending against FLSA lawsuits brought by mortgage loan officers argue that the employees are exempt under section 13(a)(1) as outside sales employees."

WHD goes on to conclude that "because homeowners [who interact with loan officers] do not have management or general business operations, a typical mortgage loan officer’s primary duty is not related to the management or general business operations of the employer's customers."

Finally, WHD clarifies a 2006 opinion letter, FLSA2006-31 (Sept. 8, 2006), which "appears to assume that the example provided in 29 C.F.R. § 541.203(b) creates an alternative standard for the administrative exemption for employees in the financial services industry." WHD clarifies that "the administrative exemption is only applicable to employees that meet the requirements set forth in 29 C.F.R. § 541.200. The regulation at 29 C.F.R. § 541.203(b) merely provides an example to help distinguish between those employees in the financial services industry whose primary duty is related to the management or general operations of the employer’s customers and those whose primary duty is selling the employer’s financial products."

Court of Appeal Decides Attorney Fee Issues - "Pellegrino II"

On January 28, 2010, the Court of Appeal issued its second decision in Pellegrino v. Robert Half Intern., Inc., 182 Cal.App.4th 278 (January 28, 2010) ("Pellegrino II"). Six former account executives sued their former employer for failure to pay overtime compensation and commissions, failure to meal periods and itemized wage statements, and violation of the Unfair Competition Law (UCL). The trial court entered judgment in favor of the employees. In Pellegrino I (discussed here) the Court of Appeal affirmed the decision on the merits.

In Pellegrino II, the Court considered the trial court's order awarding the employees $978,000 in attorney fees. The trial court arrived at that figure by: (1) reducing the lodestar by 15% to account for the time spent on the UCL claims; and (2) multiplying the adjusted lodestar by a 1.75 multiplier.

The employer appealed, and the Court of Appeal affirmed in part and reversed in part.

First, the trial court did not err by reducing the lodestar amount by 15 percent to reflect the parties' litigation of the unfair competition claims, because the legal and factual issues presented in the UCL claims "could not be more interrelated" with the issues presented by plaintiffs' wage and hour claims (for which attorney fees of course were available). Slip op. at 5.

Second, the record supported the trial court's application of a 1.75 multiplier to the reduced lodestar amount for attorney fees generated up until plaintiffs brought their motion for attorney fees, based on the factors set forth in Ketchum v. Moses (2001) 24 Cal.4th 1122. The Court explained:

The record supports the court's finding as to the novelty and difficulty of the questions at issue in this litigation. This case was vigorously litigated. Twelve motions for summary judgment were filed, which involved separate sets of facts unique to each plaintiff. The case involved complex issues of employment law including the enforceability of a contractually shortened statute of limitations provision contained in an employment agreement and the scope of the administrative exemption for each plaintiff in the context of RHI's business. Furthermore, RHI's classification of plaintiffs as exempt employees resulted in RHI not maintaining time and wage records, creating the difficult task of reconstructing records to determine the extent of the wages, penalties, and other damages owed to each plaintiff. Although RHI argues the issues presented in this case were not novel or difficult because no expert witness testified at trial, the record shows RHI designated two “liability” experts and had also retained a damages expert, each of whom were deposed by plaintiffs' counsel.

Slip op. at 7. The fact that the employees' counsel risked not being paid at all if the employees did not prevail also supported the enhancement. Slip op. at 7, citing Amaral v. Cintas Corp. No. 2 (2008) 163 Cal.App.4th 1157, 1174.

Finally, the record did not support the application of a 1.75 multiplier to fees incurred in bringing the motion for attorney fees, citing Ketchum, supra, 24 Cal.4th at 1141, and Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553, 582-583 (a case most notable for its holding on the "catalyst" attorney fees). Slip op. at 9-10.

The Court reversed the amended judgment to the extent it applied a multiplier to fees incurred in bringing the attorney fees motion and otherwise affirmed.

Court of Appeal Decides Exemption and Trial Issues - "Pellegrino I"

On January 28, 2010, the Court of Appeal issued the first of two decisions in Pellegrino v. Robert Half Intern., Inc., --- Cal.Rptr.3d ----, 2010 WL 316808 (January 28, 2010) ("Pellegrino I"). Six former account executives sued their former employer for failure to pay overtime compensation and commissions, failure to meal periods and itemized wage statements, and violation of the Unfair Competition Law (UCL). The defendant, RHI, "asserted two affirmative defenses to plaintiffs' claims. First, RHI contended plaintiffs' claims were barred because a provision, entitled “Limitation on Claims,” in their employment agreements shortened the statute of limitations for such claims to six months. Second, RHI argued each plaintiff was exempt from the wage and hour laws based on the administrative exemption." Slip op. at 1.

The trial court determined the limitation on claims provision contained in the employment agreements was unenforceable and granted motions for summary adjudication on that issue accordingly. Plaintiffs' unfair competition claims were tried to the court sitting in equity and began with a trial on the merit of RHI's exemption affirmative defense. The trial court granted plaintiffs' motion for judgment under section 631.8 of the Code of Civil Procedure, having concluded the administrative exemption did not apply to plaintiffs. The parties stipulated as to the amount of damages, penalties, and interest to be awarded each plaintiff; the court entered judgment accordingly.

Ibid. The Court of Appeal affirmed.

First, the Court held that "the plaintiffs' claims were based on unwaivable and fundamental statutory rights, and the provision drastically shortening to six months the time in which an employee might vindicate such rights violates [Cal. Labor Code] section 219 and public policy, and is thus unenforceable." Slip op. at 6, citing Gentry v. Superior Court (2007) 42 Cal.4th 443, 455-456, and Franco v. Athens Disposal Co., Inc. (2009) 171 Cal.App.4th 1277, among other cases. (Gentry came down before I started the blog, but my post on Franco v. Athens is here.) The Court criticized and declined to follow the District Court decision in Perez v. Safety-Kleen Sys. (N.D.Cal., June 27, 2007) 2007 WL 1848037, a case that is better known for its discussion of meal and rest period requirements.

Second, the Court held that the trial court did not abuse its discretion by bifurcating the trial and trying the equitable issues to the court first. "It is well established that, in a case involving both legal and equitable issues, the trial court may proceed to try the equitable issues first, without a jury ... and that if the court's determination of those issues is also dispositive of the legal issues, nothing further remains to be tried by a jury." Slip op. at 15. This procedure does not deprive either party of its Seventh Amendment right to jury trial. Slip op. at 18.

Third, the Court held that substantial evidence supported the trial court's finding that the administrative exemption did not apply to the plaintiffs. The Court reviewed the five-part test of the exemption under the Wage Order, explained the narrow construction of the exemption under Ramirez v. Yosemite Water (1999) 20 Cal.4th 785, 794-795, and reviewed the federal regulations that the Wage Order incorporates. The Court then held that "substantial evidence showed plaintiffs' duties as account executives for RHI were not directly related to management policies because they instead constituted sales work." Slip op. at 22. The Court then noted that its conclusion is consistent with opinion letters written by Miles Locker when at the DLSE.

This is a decision that touches on a number of important issues. Lawyers on both sides of wage and hour are going to need to be familiar with it. Our post on Pellegrino II, in which the Court of Appeal affirmed in part and reversed in part the trial court's order on attorney fees, is here.

California Supreme Court Remands "Virtual Representation" Case

I missed this while I was out with my broken leg last fall.

On September 9, 2009, the Cal. Supreme Court remanded Deleon v. Verizon Wireless to the Second District Court of Appeal for reconsideration in light of the Court's decision in Arias v. Superior Court (Angelo Dairy). In Deleon, the Court of Appeal originally held that where the plaintiff in a class action pleads the same set of operative facts violating the same primary rights as were raised in a prior class action against the same defendant -- that employer made unlawful chargebacks against employees’ commissions -- even though parties sought different forms of relief, the primary right invaded was identical, and the latter class action was barred by res judicata to the extent that the plaintiff sought relief on behalf of class members who had settled the prior class action. The Court also held that the trial court abused its discretion in denying the plaintiff leave to amend his complaint to state claims that accrued after the settlement date of the prior action.

Our post on Deleon is here, and our post on the Supremes' decision in Arias is here.

Ninth Circuit Reverses Class Certification Order

In In re Wells Fargo Home Mortg. Overtime Pay Litigation (2009) --- F.3d ---, the Ninth Circuit Court of Appeals considered "whether the court abused its discretion in finding that the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) was satisfied, based-in large part-on an employer's internal policy of treating its employees as exempt from overtime laws." Slip op. at 1. The Court held that while "such uniform exemption policies are relevant to the Rule 23(b)(3) analysis," "it is an abuse of discretion to rely on such policies to the near exclusion of other relevant factors touching on predominance." Ibid.