California Supreme Court Clarifies Rules for Trying Wage and Hour Class Actions

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In a long-awaited decision, California’s highest court on May 29, 2014, affirmed a 2012 state court of appeals decision vacating a $15 million judgment in a misclassification class action brought under state law. In the lawsuit, which was brought against U.S. Bank (USB) by 260 current and former employees who marketed loans to business customers, the high court unanimously ruled that the trial court abused its discretion in finding liability and calculating overtime pay due to the entire class based on testimony from 20 randomly selected class members and one of the two named plaintiffs—without allowing the bank to present its affirmative defense of the outside sales exemption based on declarations from employees outside the representative group

(Duran v. U.S. Bank N.A., Cal., No. S200923 [May 29, 2014]).

“This result cannot stand,” Justice Carol A. Corrigan wrote. “Although courts enjoy great latitude in structuring trials, and we have encouraged the use of innovative procedures, any trial must allow for the litigation of affirmative defenses, even in a class action case where the defense touches upon individual issues.”

Viable Trial Plan Necessary

“Everyone recognizes that this is an important case. But it’s not so easy to understand its impact on business or HR,” Enzo Der Boghossian, an attorney in management-side law firm Proskauer’s Los Angeles office, told SHRM Online.

“The decision is a response by the court to plaintiffs’ increased reliance on statistical models to prove liability for a group of similarly situated people,” noted Der Boghossian. “What types of statistics should be allowed? How can courts manage individual defenses?”

Before a class can be certified, the court must come up with a viable trial plan. The practical impact is that we will see fewer cases getting certified as class actions, Der Boghossian said.

“This will present less of a strain on employers and allow more of a chance for HR to work hand-in-hand with outside counsel to attack wage and hour cases at the class certification stage.”

Did Outside Salesperson Exemption Apply?
The lawsuit claimed that USB had misclassified the employees as exempt under the outside salesperson exemption and had denied them overtime pay. Under California law, the outside salesperson exemption applies to employees who spend more than 50 percent of their workday engaged in sales activities outside the office.

After certifying the class, the court implemented a trial management plan that allowed the plaintiffs to use a sampling of 20 employees to testify at trial (in addition to testimony from one of the named plaintiffs). Over the bank’s repeated objections, the trial court refused to admit into evidence the declarations of 75 absent class members who claimed that they spent more than 50 percent of their workday engaged in outside sales. Instead, the court only allowed the employer to present evidence or arguments related to the 21 class members who were included in the sample. Following a bench trial, the trial court awarded $15 million in restitution and $18 million in attorneys’ fees to the class members.

USB appealed the decision. The California Court of Appeal found that the lower court’s trial plan was “fatally flawed” because it deprived the employer of its constitutional right of due process by preventing the employer from defending against the individual claims of 90 percent of the class members. The appellate court reversed the judgment, and the employees appealed the decision to the California Supreme Court.

On appeal, the California Supreme Court agreed with the appellate court that the trial court’s implementation of a representative sampling was flawed. In addition, the state’s highest court agreed that such use of the sampling prevented USB from presenting evidence to show that some of the class members were properly classified as exempt and were not entitled to a recovery. The court emphasized the importance of managing individual issues in a class action, stating, “In certifying a class action, the court must also conclude that litigation of individual issues, including those arising from affirmative defenses, can be managed fairly and efficiently.” The California Supreme Court returned the case to the lower court for a new trial.

Fairer Playing Field

Duran's effect will be far-reaching,” according to Kevin Lilly, an attorney in management-side law firm Littler’s Los Angeles office. The court's analysis “requires trial courts to conduct a far more thorough analysis at the time of class certification concerning the practical means by which individual defenses to class claims can be resolved, including a realistic trial plan that permits employers to litigate individual liability defenses.”  The result of the decision “will likely be a fairer playing field for employers in litigation over certification of employee class actions,” Lilly concluded.

Joanne Deschenaux, J.D., is SHRM’s senior legal editor.

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