In 2012, the California Supreme Court issued its decision in Brinker Restaurant Corp. v. Superior Court, holding that a wage-and-hour case alleging missed meal and rest breaks could be brought as a class action. Since that decision, a number of lower appellate and trial courts have stretched the Brinker ruling to (or beyond) its breaking point, certifying wage claims as class actions even when factual questions specific to individual class members predominated over common issues of fact. Indeed, courts have almost routinely granted certification in wage and hour actions, causing employers to pay billions of dollars in settlement to avoid expensive class action litigation and the risk of ruinous judgments, including staggering attorneys’ fees to plaintiffs’ counsel.

Now, in one of the most anticipated wage and hour decisions in recent years, the California Supreme Court issued its opinion in Duran v. U.S. Bank National Association, directing trial courts to take a far more rigorous approach to determining whether wage claims may be fairly and manageably brought as class actions.

Background

The class members in Duran were 260 current and former banking officers who claimed USB misclassified them as exempt from California’s overtime pay requirements under the “outside salesperson” exemption. That exemption applies to employees who spend more than 50 percent of their workday engaged in sales activities outside the office.

During the first phase of the trial, the trial court devised a plan to determine USB’s liability to all 260 class members by extrapolating from a supposedly “random” sample of only 21 plaintiffs (including the two named class plaintiffs). Only those employees were allowed to testify about their work habits, and they all claimed they spent less than 50 percent of their time outside the office. The court did not allow USB to introduce any evidence about the work habits of any other class members, even though USB offered declarations or deposition testimony from 79 plaintiffs (or more than a third of the class) stating that they spent more than 50 percent of their workday engaged in outside sales, and were therefore properly classified as exempt. Based only on the sample group’s testimony, the trial court concluded USB misclassified the entire class.

In the second phase of the trial, the trial court relied on testimony from statisticians to determine damages. From that testimony, the court extrapolated the average amount of overtime worked by the sample group to all 260 class members. The result: a $15 million judgment against USB, representing an average overtime award of $57,000 to each class member – including those who were not due any overtime.

USB appealed. The Court of Appeal reversed the trial court’s judgment and ordered the class decertified. Plaintiffs then sought review from the California Supreme Court.

The Supreme Court Decision

In a unanimous opinion, the high court affirmed the Court of Appeal’s judgment and remanded the case to the trial court. The Court first noted that Labor Code exemptions “frequently depend on how individual employees perform their jobs.” Thus, depending on the nature of the exemption and the facts of the case, “a misclassification claim has the potential to raise numerous individual questions that may be difficult, or even impossible, to litigate on a class-wide basis.” In determining whether to certify a class, “manageability of individual issues is just as important as the existence of common questions uniting the proposed class,” and the court must establish a trial management plan whereby individual issues can be determined “fairly and efficiently.” The trial management plan must permit defendants to litigate affirmative defenses, such as an applicable exemption, even when those defenses turn on individual questions, such as the work habits of individual plaintiffs.

Applying these principles to the case before it, the Supreme Court held that the trial court’s methodology was “profoundly flawed.” Although the Court did not completely reject the use of sampling, representative testimony or statistical models, it held that the 21-plaintiff sample was too small to be statistically significant and improperly selected – and therefore not representative of the class as a whole. In the Court’s view, extrapolating class-wide liability and damages from a flawed sample was obviously unreliable and had an unacceptably high margin of error. Furthermore, the trial court did not allow USB to challenge the model or present evidence that many plaintiffs were properly classified as exempt, which resulted in a denial of due process to USB. I

In short, the Court found that the trial court abused its discretion and sent the case back for further proceedings.

Now What?

Interestingly, both sides in Duran declared victory after the Supreme Court’s decision. While the defense bar hailed the opinion as soundly rejecting “trial by formula,” lawyers who represent employees touted the decision as confirming that misclassification cases may still be tried as class actions.

There is no doubt that misclassification class actions still pose enormous risks for employers. (After all, USB has been litigating Duran case since 2001 and still faces further proceedings in the trial court; even if USB ultimately prevails, it will have spent untold millions on defense costs.) To minimize such risks, employers should exercise caution in classifying jobs as exempt. Employers may want to undertake job studies to determine whether their exempt employees are actually performing the necessary percentage of exempt job duties and, if not, consider restructuring or reclassifying the position. Employers should also consider auditing job descriptions and work rules to ensure that they realistically reflect how employees spend their time.

In addition, employers may consider requiring employees to sign a binding arbitration agreement that contains a class action waiver, as a condition of employment. Before doing so, however, employers should take note that the California Supreme Court will soon issue a decision regarding the validity of such waivers under state law (Iskanian v. CLS Transportation). Until the Supreme Court decides this issue, including class action waivers in these agreements is not without risk.

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