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Employment Class Action Litigation in California Makes New Law Tackling Old Issues

December 31, 2003

Class action employment litigation in California expanded in 2003 to cover significant new ground. As in years past, California employers continued in 2003 to be the target of class action lawsuits alleging that employees were improperly classified as exempt from the overtime requirements of state and federal law, and/or had otherwise been deprived unlawfully of overtime pay they allegedly earned. This year California employers have also been hit with a significant number of lawsuits challenging long-established business practices such as tip pools and commission structures. Moreover, class actions using indirect methods of statistical proof (sometimes called "discriminatory impact" cases) are becoming increasingly common. Finally, two California courts recently debated the scope of the qualified right to engage in pre-certification communication with potential class members. See Parris v. Superior Court, 109 Cal. App. 4th 285 (2d Dist. May 29, 2003) and Koo v. Rubio's Restaurants, Inc., 109 Cal. App. 4th 719 (4th Dist. June 11, 2003). As explained below, an employer's ability to engage in such communication may have significant impact upon the litigation.

Tip Pooling Class Actions

Tip pooling refers to a system whereby gratuities accepted by certain employees are pooled together and then equitably distributed among a certain set of employees. Such pools may be either voluntary or employer mandated, and are very common in establishments such as restaurants, bars, hotels and casinos. A familiar example is the sharing of tips by a food server with a busboy.

Section 351 of the California Labor Code places a specific limit upon tip pools:

No employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer.

In other words, mandatory tip pools are permissible so long as an "agent" of the employer does not "collect, take, or receive" any pool money. Thus, while the food server/busboy tip pool is generally acceptable, pools which require employees to "kick up" money (e.g., either to managers or to the house itself) are suspect.

Using this statute as a springboard, and taking advantage of the relatively scarce case law interpreting Labor Code § 351, the plaintiffs' class action bar has begun filing class action lawsuits under § 351 against employers in a variety of industries. To avoid becoming the target of such a class action lawsuit, California employers with tip pools should analyze carefully the job classifications of any employee sharing in a tip pool to ensure there are no impermissible kick ups, and should consider adopting a work rule prohibiting even the "voluntary" sharing of tips with "agents" of the employer.

Commission Chargeback Class Actions

Another newly-fertile area in the class action arena relates to commission chargebacks—i.e., after-the-fact deductions by employers from commissions paid to employees. An employer's ability to impose chargebacks on paid commissions is limited both by the terms of the incentive plan at issue and by § 221 of the California Labor Code. Section 221 provides, "It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee." In other words, if, under the terms of the applicable commission agreement, a commission has been earned at the time it is paid, an employer cannot lawfully recover any portion of the commission via a chargeback.

Notwithstanding § 221's prohibition on chargebacks, an employer is permitted to recoup commissions that were considered an advance against earnings at the time they were paid. The legal issue is not merely one of definition, however; an employer cannot avoid liability under § 221 merely by defining the deduction as an "advance" instead of as a "chargeback." Rather, California courts will analyze the manner in which the employer administers its commission plan vis-à-vis the employee's reasonable expectations. If, for example, the employee must discharge any duties regarding the sale after the money at issue is advanced or paid, courts are not likely to view as a violation of § 221 the employer's subsequent chargeback with respect to that advance or payment.

Disparate Impact Class Actions

In 2003, California experienced a resurgence of the "disparate impact" type class action. Perhaps the most publicized of these lawsuits is pending against the country's largest private retailer, Wal-Mart. In Betty Dukes v. Wal-Mart Stores, Inc., which is pending before the United States District Court for the Northern District of California (and where the issue of class certification is presently under consideration), the named plaintiffs' contentions include the following:

that although women comprise 78 percent of all the department managers at Wal-Mart, they hold only one-third of the salaried management positions;

that the vast majority of regional managers, and all of the divisional managers and senior vice-presidents of Wal-Mart, are male;

that female retail store employees, hourly and salaried, separate or together, are paid less than men in every year since 1996, and in every region of Wal-Mart;

and that female employees, on average, are paid less than male employees in virtually every major job position in the retail stores.

According to the plaintiffs, this situation has resulted from "Wal-Mart's failure to meaningfully post and allow application to virtually all the management positions at issue," and from Wal-Mart's relocation policy, "which for the last ten years has required relocation as a condition of entry into management despite the fact that the company has known about the clear deterrent effect of that policy."

This case, which has a potential class of nearly 1.6 million women, highlights the fact that discrimination claims might be able to reach a jury even in the absence of any direct evidence of discriminatory intent (i.e., the intent to discriminate may be inferred from, among other things, any disparities that appear in the workforce). In light of this, employers should evaluate even those personnel policies and work rules that are neutral on their face to ensure that those policies do not have an unintended disparate impact on any protected class, such as women or members of racial minority groups. Moreover, given its factual premise, the Wal-Mart case also demonstrates the power of statistical evidence. Employers should realize that statistics can sometimes raise an inference of discrimination even in the absence of more direct forms of proof. This is all the more reason to scrutinize apparent trends in workplace demographics.

Pre-Certification Communication with Potential Class Members

Given the potential liability surrounding class action litigation, employers should take every permissible advantage in defending such claims. One area that typically will influence the disposition of a class action lawsuit is the effective use of pre-certification communication with the members of the putative class. Pre-certification communication refers to any communications between the employer and the potential class member/employees prior to the time that the court certifies the class action (i.e., authorizes the lawsuit to proceed as a class action). Once a class is certified (both during and subsequent to the opt-out phase), courts and plaintiffs' counsel usually will preclude or severely limit communications between a defendant and the class members. However, during the pre-certification period, an employer may be able to communicate its "side of the story" to employees or to gather substantive evidence informally and without the influence of opposing counsel.

Regarding such communications, the Court in Parris v. Superior Court, supra, held that "[p]recertification communication with potential class members, like pre-filing communication, is constitutionally protected speech. A blanket requirement of judicial approval for such communications would constitute an impermissible prior restraint on speech." See 109 Cal. App. 4th at 290. Rather, a court may infringe on such speech only when there exists "a showing of direct, immediate and irreparable harm." Id.

Parris stands for the proposition that, at least in the first instance, either party may communicate with potential class members prior to certification unless significant harm is shown. On its face, this ruling provides employers with a broad grant of authority to communicate truthfully with its employees even after a lawsuit is filed. But shortly after Parris was decided, another Court attempted to soften its impact. After citing to Parris for the "general rule" that parties are entitled to equal access to "persons who potentially have an interest in or relevant knowledge of the subject of the action," the Court in Koo v. Rubio's Restaurants, Inc., supra, then disallowed the speech at issue without any express finding of direct, immediate and irreparable harm. See 109 Cal. App. 4th at 737.

Taken together, Parris and Koo create an apparent conflict regarding what quantum of proof must be shown to justify pre-certification regulation, i.e., whether the standard is "direct, immediate and irreparable harm" or something less. Thus, until the issue is resolved and notwithstanding employers' ostensible rights under Parris, employers are well-advised to consider what information gathering, if any, can be conducted immediately upon learning of a potential class action. For example, it may be helpful to gather declarations from potential class members early on in the litigation. Such declarations may provide valuable substantive evidence in defending against class claims. In addition, this communication opportunity may allow an employer to explain the issue at hand and perhaps increase the number of opt-outs among the class.

Conclusion

The filing of class action litigation appears to be on the rise in California. Hence, employers must be ever-vigilant to avoid becoming the target of such a case. One important practice is to keep abreast of industry specific news. As noted, class action litigation tends to sweep through industries that share common methods or practices. The early cases challenging tip pools and chargebacks did garner attention in both legal journals and business publications. Given the benefits of pre-filing and pre-certification communication, an employer with early notice of a challenged practice may enjoy a significant litigation advantage.