Vaquero v. Stoneledge: Employers Must Separately Compensate CA Commissioned Employees for Rest Periods

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In Vaquero v. Stoneledge Furniture LLC, No. B269657, 2017 WL 770635 (Cal. Ct. App. Feb. 28, 2017) (slip op. available here), the California Court of Appeal, Second Appellate District, reaffirmed that employees paid on commission are entitled to separate compensation for rest periods mandated by state law. In Vaquero, a retail furniture company paid its sales associates exclusively on a commission basis. If the sales associates did not earn at least $12.01 an hour in commissions during any given pay period, the employer would make up the difference with a “draw” against future commissions. (Stoneledge is also known as “Ashley Furniture HomeStore” in California.) Two Ashley Furniture commissioned sales associates filed a class action lawsuit to recover separate pay for rest periods as required by California law, alleging that the employer failed to provide paid rest periods because the employer’s agreement did not provide separate compensation for time when they were not performing sales duties, such as during meetings, rest periods, or participating in training.

The trial court certified the plaintiffs’ claims for unpaid rest periods, unpaid wages upon termination, and unfair business practices for California sales associates, but subsequently granted Stoneledge’s motion for summary judgment, finding that the employer’s commission plan guaranteed that sales associates were paid for all time worked, including their rest periods. The employer argued that, under the commission agreement, sales associates were guaranteed to be paid $12.01 per hour, including their rest periods; thus, “all time during rest periods was recorded and paid as time worked identically with all other work time.” Slip op. at 3. The trial court agreed, and held that under the agreement, “there was no possibility that the employees’ rest period time would not be captured in the total amount paid each pay period” because the employer tracked all hours the sales associates worked, including rest periods. Id. at 5.

The California Court of Appeal reversed. The California Court of Appeal determined that this commission plan violated California Wage Order No. 7, which “requires employers to count ‘rest period time’ as hours worked for which there shall be no deduction from wages.” Slip op. at 11. Because Stoneledge’s commission plan did not separately compensate the sales associates for the time they worked during which they could not earn commissions, it did not “separately account and pay for rest periods to comply with California law.” Id. at 25. Indeed, the “advances or draws against future commissions were not compensation for rest periods because they were not compensation at all. At best[,] they were interest-free loans.” Id. at 23. “[T]aking back money paid to the employee effectively reduces either rest period compensation or the contractual commission rate, both of which violate California law.” Id.

The Vaquero decision establishes that California employers using incentive-based pay systems must compensate those employees separately for time when they were not performing sales duties, such as during rest breaks. Moreover, employers may need to modify wage statements provided to employees to comply with California Labor Code section 226(a) to account for both the commissioned pay and the hourly pay during rest periods.

Authored By:
Bevin Allen Pike, Senior Counsel

McGill v. Citibank: Businesses Cannot Force CA Consumers to Waive Right to Seek Public Injunctive Relief

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On April 6, 2017, in a unanimous decision, the California Supreme Court held that a provision in Citibank’s mandatory cardholder arbitration agreement that waives the statutory right to seek public injunctive relief is contrary to California public policy and is thus unenforceable under California law. McGill v. Citibank, N.A., No. S224086 (Cal. Sup. Ct. April 6, 2017) (slip op. available here). The court rejected Citibank’s “overbroad view” of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., and concluded that the FAA does not preempt California law on this issue or otherwise require enforcement of the waiver provision. Slip op. at 1, 15. The court also found that public injunctive relief remains a remedy available to private plaintiffs with standing under California’s consumer protection statutes, and is not restricted to the class action context. Id. at 11-13.

In McGill, the plaintiff was a Citibank cardholder who paid a monthly premium for its “credit protector” plan, a type of credit insurance that deferred or credited certain amounts to her account upon a qualifying event, such as unemployment. She brought a class action based on Citibank’s deceptive marketing of this plan and handling of her claim when she became unemployed, alleging claims under California’s Unfair Competition and False Advertising laws (the “UCL” and “FAL,” respectively), the Consumers Legal Remedies Act (the “CLRA”), and the Insurance Code. McGill sought public injunctive relief, along with other remedies, against Citibank’s unlawful business practices. Relying on arbitration provisions imposed against the plaintiff through a unilateral “Notice of Change in Terms” to her Citibank card, Citibank filed a petition to compel arbitration on an individual basis. The trial court ordered all claims to arbitration except those for injunctive relief under the UCL, FAL, and CLRA based on the Broughton-Cruz rule, which provides that claims for public injunctive relief under these consumer protection statutes are not arbitrable under California law. Slip op. at 3. The Court of Appeal reversed, holding that the Broughton-Cruz rule is preempted by the FAA, and instructing the trial court to order all claims to arbitration, including the injunction claims.

In an opinion authored by Justice Ming Chin, the California Supreme Court reversed. The court found that the Broughton-Cruz rule was not at issue, as the parties agreed that the arbitration agreement purported to preclude McGill from seeking public injunctive relief in any forum, arbitral or judicial, whereas the Broughton-Cruz rule applies only when parties have agreed to arbitrate requests for such public injunctive relief. Slip op. at 8. The court addressed whether such an arbitration provision, which completely waives the right to seek public injunctive relief under the UCL, FAL, and CLRA, was unenforceable under California law. Applicable California law under Civil Code section 3513 provides that “a law established for a public reason cannot be contravened by a private agreement.” Noting that the public injunctive relief available under the UCL, CLRA, and FAL is primarily for the benefit of the general public and to remedy a public wrong rather than resolve a private dispute, the supreme court found that such a waiver under these statutes “would seriously compromise the public purposes the statutes were intended to serve.” Slip op. at 14. As such, Citibank’s arbitration provision that purports to waive the right to such public injunctive relief in all fora is invalid and unenforceable under California law. Id.

The court further found that the FAA, as construed in Concepcion, did not preempt this rule of California law, and rejected Citibank’s views to the contrary. Slip op. at 14-15. Under the FAA’s “savings clause” and U.S. Supreme Court precedent, arbitration agreements are only “as enforceable as other contracts, but not more so,” and may be invalidated by generally applicable contract defenses. Id. at 15. The court held that the contract defense at issue here, Civil Code section 3513’s proscription that a law established for a public reason cannot be contravened by a private agreement, is grounds under state law for revoking any contract, not just arbitration agreements, and thus a generally applicable contract defense. Id. at 15-16. The court concluded that the FAA does not require enforcement of a provision that, in violation of generally applicable California contract law, waives the right to seek in any forum public injunctive relief under the UCL, FAL, or CLRA. Id. at 17. The FAA does not require such enforcement “merely because the provision has been inserted into an arbitration agreement. To conclude otherwise would [be] contrary to Congress’s intent.” Id. at 16. The court specified that this holding is in line with recent U.S. Supreme Court precedent indicating that the FAA does not require enforcement of arbitration provisions that forbid the assertion of certain statutory rights or eliminate the right to pursue a statutory remedy. Id. Significantly, the court rejected Citibank’s contention that this principle only applies to the forfeiture of a federal statutory right, as opposed to a state statutory right. Id. at 17.

The court also held that the 2004 amendments to the UCL and FAL ushered in by voters under Proposition 64 do not preclude a private plaintiff, who has standing to file a private action (e.g., “suffered injury in fact and has lost money or property as a result of” a violation of the UCL or FAL), from requesting public injunctive relief in connection with that action, even if the plaintiff does not allege class claims, answering a question that had been left unanswered since 2004. Slip op. at 11-13.

Requesting a broad injunction to require businesses to change their unlawful acts is often the primary form of relief for consumers challenging unfair and deceptive business practices. As such, McGill provides broad protections to consumers who cannot be forced by businesses like Citibank into contractually waiving their right to public injunctive relief under California’s consumer protection statutes.

Authored By:
Liana Carter, Senior Counsel

Syed v. M-I: 9th Cir. Finds Liability Waiver in Background Check Disclosure Form “Willful” Violation of FCRA

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On January 20, 2017, the Ninth Circuit Court of Appeals reversed a district court’s dismissal of a class action filed against an employer, holding that the inclusion of a liability release in an employment background check disclosure form violated the Fair Credit Reporting Act (FCRA). Syed v. M-I, LLC, No. 14-17186 (9th Cir. Jan. 20, 2017) (amended March 20, 2017) (slip op. available here). On a nationwide issue of first impression, a three-judge panel said that the FCRA requires that a disclosure form must “solely consist” of the disclosure and that inclusion of the liability waiver is a willful violation of the statute, entitling the plaintiff to statutory damages, punitive damages, and attorneys’ fees and costs. On March 20, 2017, the judicial panel unanimously voted to deny a petition for panel rehearing and a petition for rehearing en banc. The opinion was amended to clarify that Syed’s allegations were sufficient to establish standing under Spokeo Inc. v. Robins, 136 S. Ct. 1540 (2016).

In 2011, Syed applied for a job with M-I, LLC (“M-I”). M-I provided Syed with a document labeled “Pre-employment Disclosure Release.” In addition to the disclosure that Syed’s credit history and other information could be collected and used as a basis for the employment decision, the form contained a paragraph that authorized M-I to procure Syed’s consumer report, followed by the language:

I understand the information obtained will be used as one basis for employment or denial of employment. I hereby discharge, release and indemnify prospective employer, PreCheck, Inc., their agents, servants and employees, and all parties that rely on this release and/or the information obtained with this release from any and all liability and claims arising by reason of the use of this release and dissemination of information that is false and untrue if obtained by a third party without verification. (Emphasis added.)

Slip op., Appendix A. The document contained a single signature line, thus Syed’s signature served simultaneously as an authorization for M-I to procure his consumer report, and as a broad release of liability.

The court looked to the language of the statute to determine whether M-I violated the FCRA by including the liability waiver on the disclosure form. The court said that the relevant section, section 1681b(b)(2)(A), was unambiguous about the requirement that the form “consists solely of the disclosure” (emphasis added). M-I contended that the section was ambiguous about the term “solely” because subsection (ii) provides that a consumer authorization may appear on the same document as the disclosure. The court rejected that argument, holding that the “two clauses are consistent because the authorization clause is an express exception to the requirement that the document consist ‘solely of the disclosure.’ While the statute does not designate it as such, the authorization clause immediately follows the disclosure clause, and makes express reference to it.” Slip op. at 15. The court further explained that the purpose of the statute is to protect consumers from improper invasions of privacy, and the authorization and disclosure requirements work together to meet this purpose because the authorization to procure a consumer report would be less effective without a clear disclosure. Id. In other words, an applicant would be better informed if the authorization immediately follows the disclosure. Id. at 16.

While the court was willing to find that the authorization requirement was an exception to the “solely of the disclosure” clause, it was not willing to find an explicit or implicit exception that permitted a liability waiver on the same document. Referring back to the purpose of the FCRA as guarding the privacy rights of job applicants, the court stated:

An authorization requiring the job applicant’s signature focuses the applicant’s attention on the nature of the personal information the prospective employer may obtain, and the employer’s inability to obtain that information without his consent. But a liability waiver does just the opposite—it pulls the applicant’s attention away from his privacy rights protected by the FCRA by calling his attention to the rights he must forego if he signs the document.

Slip op. at 17.

After finding that the FCRA unambiguously requires that the disclosure “consist solely” of the disclosure language, and that the statute does not explicitly or implicitly allow a liability release in the disclosure, the court concluded the opinion finding that M-I’s interpretation of the FCRA was not objectively reasonable, and that M-I ran an “unjustifiably high risk of violating the statute.” Slip op. at 26. This “reckless disregard of the law” was therefore a willful violation of the FCRA. Id. Thus, the plaintiff could seek statutory penalties of $100 to $1,000 per willful violation, along punitive damages and attorneys’ fees and costs. As a case of first impression in the nation’s largest circuit, Syed is an important decision that protects the privacy of job applicants and that should discourage employers’ inclusion of liability waivers and other extraneous language in required FCRA disclosure forms.

Authored by: 
Anthony Castillo, Associate

Recent N.D. Cal. Decisions Provide Framework for W&H Litigation Against Commercial Airlines

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The extent to which California’s wage-and-hour protections apply to airline industry employees was recently clarified in two decisions out of the Northern District of California: first in Bernstein v. Virgin America, No. 15-cv-02277 (N.D. Cal. Jan. 5, 2017) (“Bernstein”) (slip op. available here), and second, in Oman v. Delta Airlines, No. 15-cv-00131 (N.D. Cal. Jan. 6, 2017) (“Oman”) (slip op. available here). Together, these decisions affirm that airline industry employees who work in California may be protected by the California Labor Code and provide a framework for how courts will analyze whether the Labor Code applies to employees in positions that require interstate travel.

In Bernstein, the plaintiff brought a class action lawsuit on behalf of Virgin American flight attendants who worked in California, seeking classwide relief for Virgin America’s alleged failure to pay overtime and minimum wages, failure to provide meal and rest breaks, and failure to provide accurate wage statements. After the court certified a class of California-based flight attendants and a California residents subclass, Virgin America moved for summary judgment on the plaintiffs’ claims on the basis that California labor law did not apply to their employment because of the presumption against extraterritorial application of California’s labor laws and the Dormant Commerce Clause. Slip op. at 6. Virgin America also moved for summary judgment on the plaintiffs’ meal and rest break claims based on preemption under the Federal Aviation Act and Airline Deregulation Act, but those arguments were rejected. Id.

Virgin America’s primary argument was that California labor law did not apply to the flight attendants because they did not work either exclusively or principally in California, but rather across multiple jurisdictions and in federally-regulated airspace. Slip op. at 6. The court rejected the premise of Virgin America’s argument that job situs alone was determinative. Id. at 7. Instead, the court relied on the California Supreme Court’s decision in Sullivan v. Oracle Corp., 51 Cal. 4th 1191 (2011), in adopting a “multi-faceted approach,” in which the court considers several factors, including: 1) California residency; 2) receipt of pay in California; 3) exclusive or principal “job situs” in California; 4) the employer’s residency; and 5) whether the employee’s absence from the state was temporary in nature. Slip op. at 8. Applying these factors, the court found the plaintiffs were California residents who received their pay in California and that Virgin America is a California-based airline headquartered in California. Id. at 8-9. The court further relied on evidence that Virgin received millions of dollars in state subsidies to train its flight attendants in California and that between 88 and 99 percent of Virgin America’s flights each day departed or arrived in a California airport. Id. at 9. Importantly, the court found the fact that the plaintiffs spent only about 25 percent of their total work time in California was not only not dispositive, but relatively less important where temporary out-of-state travel is an inherent part of the job. Id.

In Oman, the court distinguished Bernstein in holding that Labor Code section 226 did not apply to a class of Delta flight attendants, stating that, in contrast to Bernstein where the court recognized multiple factors supporting application of the Labor Code, the plaintiffs sought to apply section 226 “based solely on a flight attendant’s performance of a de minimis amount of work in California during any pay period.” Slip. op. at 9 (italics in original). The court stressed the plaintiffs’ failure to raise any additional facts supporting the application of section 226, noting the plaintiffs did not rely on the flight attendants’ residence, the employer’s residence or other “deep ties” to California, or the performance of a significant amount of work in California during a particular pay period. Id.

Read together, these decisions support plaintiffs’ ability to pursue California Labor Code violations against airlines and other interstate employers. Although it remains unclear just how much of an evidentiary showing is required for the Labor Code to apply, and such determinations will be made on a case-by-case basis, Oman provides that something more than a de minimis amount of work in California is required, while Bernstein provides even as little as 25% of an employees’ work in California will not preclude application of California law as long as there are other facts tying the employee and/or the employer to California. This rather flexible standard should allow plaintiffs to pursue Labor Code claims against interstate employers in industries that that had previously evaded wage-and-hour liability, like the commercial airline industry.

Authored by: 
Brandon Brouillette, Associate