Articles from October 2015

Earlier this month, Judge William Alsup of the Northern District of California denied defendant Dynamex’s motion to compel arbitration of the plaintiff’s wage-and-hour putative class claims. Saravia v. Dynamex Inc., et al., No. 3:14-cv-05003 (N.D. Cal. Oct. 6, 2015) (slip op. available here). In the same order, the court also granted in part and denied in part the plaintiff’s motion for conditional class certification.

The plaintiff, a former delivery driver, who operated a business that provided delivery services for Dynamex and other shipping companies, alleged that Dynamex misclassified him and other delivery drivers as independent contractors and that they were thereby denied minimum wage and overtime pay under the Fair Labor Standards Act. Slip op. at 2. Dynamex presented to the plaintiff, and the plaintiff had signed, delivery services agreements in 2010, 2011, and 2012. Id. at 6. The defendants then jointly moved to compel arbitration, which the district court denied. In denying the motion to compel arbitration, the court made three central findings: (1) the Texas choice-of-law provisions in the two arbitration agreements (2011 and 2012) were unenforceable; (2) the “delegation clauses” by which the defendant purported to delegate to an arbitrator gateway questions of “arbitrability” were both procedurally and substantively unconscionable, and thus unenforceable; (3) and the arbitration agreements, as a whole, were both procedurally and substantively unconscionable, and thus unenforceable. 

In declining to enforce the Texas choice-of-law provisions, the court applied the three prongs of California’s choice-of-law analysis. Slip op. at 6-7. First, the chosen state’s law must have a “substantial relationship” to the parties; the plaintiff conceded, and the court agreed, that this prong is met because Dynamex is headquartered in Texas. Id. Second, the forum state must have no “fundamental policy” inconsistent with the chosen state’s law; here, the court noted several differences between California and Texas law on the enforceability of arbitration agreements, finding “Texas law conflicts with fundamental aspects of California’s substantive law pertaining to unconscionability.” Id. at 7. Finally, the court applied the third prong of the choice-of-law analysis, and found that California has a materially greater interest than Texas in adjudicating the dispute because the plaintiff is located in California and the delivery service agreements at issue were executed and performed in California, whereas Texas’ only interest stems from the fact that one of the defendants is headquartered in that state. Id.

In declining to enforce the delegation clause, the court held that, under California law, if a delegation clause is both procedurally and substantively unconscionable, it may be severed from the broader agreement and rendered unenforceable. Slip op. at 8-9. The factors supporting procedural unconscionability included: (1) the agreements were form contracts, and the plaintiff was “tersely instructed to sign” them (id. at 9); (2) the agreements were written only in English, although the plaintiff had limited English comprehension (id. at 2, 9); (3) the plaintiff first received the agreements on the day they were to be executed (id. at 9); (4) the plaintiff was given no opportunity to re-negotiate any provision (id.); and (5) the defendant never provided the plaintiff with a copy of the rules that were to govern arbitration and that formed the sole basis for delegating arbitrability determinations under the 2012 agreement (id.). The court also indicated that delegation clauses—buried in the middle of more than 10 pages of boilerplate language and otherwise unexplained by the defendant—constituted “unfair surprise” that exacerbated the procedural unconscionability. Slip op. at 10. Although the plaintiff could have requested a translation of the agreements, but did not, and the defendant claimed the plaintiff could have sought to renegotiate the terms without adversely affecting his employment, the court nevertheless found that “the circumstances of the execution of those agreements were so oppressive that any such opportunity was meaningless.” Id. at 9-10.

The court also found the delegation clauses to be substantively unconscionable (substantively unfair) because: (1) the Texas forum selection clause would have imposed prohibitive expenses on the California plaintiff, even just for an arbitrability hearing (id. at 4, 11); (2) both agreements required the plaintiff to pay half the arbitral fees, again imposing substantial fees on the plaintiff (id. at 11); and (3) the agreements imposed two-way fee shifting where, by statute, the plaintiff would be subject to one-way fee shifting rules whereby only the employee, not the employer, could recover his attorneys’ fees as the prevailing party (id.). The court noted that “[s]evering the unenforceable provisions of an arbitration clause (or as here, a delegation clause) would allow an employer to draft one-sided agreements and then whittle down to the least-offensive agreement if faced with litigation, rather than drafting fair agreements in the first instance.” Slip op. at 12. Thus, the court found the delegation clauses to be unenforceable and held that the court must decide arbitrability.

The court found the same reasons for finding the delegation clause to be procedurally and substantively unconscionable as applicable to the broader arbitration agreements. Accordingly, the court denied the motion to compel arbitration. Slip op. at 12.

Authored By:
Katherine Kehr, Senior Counsel
CAPSTONE LAW APC

Many employers require their employees to wear slip-resistant shoes to maximize safety in the workplace. While some employers fully cover or subsidize the cost of slip-resistant shoes, others pass their entire cost onto employees. In the past, plaintiff’s attorneys have sought to recover the cost of these shoes incurred by employees by bringing claims for unreimbursed business expenses. However, where the shoes are not considered a uniform (because they are not of a distinctive design or color and generally can be used at another job), employers are not required to pay for the cost of requiring employees to wear non-slip shoes. See generally Lemus v. Denny’s Inc., 2015 U.S. App. LEXIS 10284 (9th Cir. June 18, 2015) (unpublished). Plaintiff’s attorneys have also brought employee claims for unlawful deductions under Labor Code sections 221 and 224, where the employer deducts the cost of non-slip shoes from employee paychecks. Many of these claims have not gained traction in the class action context, due to some courts finding that common issues do not predominate because determining whether written authorization was obtained prior to making deductions for the shoes necessitated individualized inquiries or because courts found that the employer had obtained written employee authorizations. See Munoz v. Chipotle Mexican Grill, Inc., 238 Cal. App. 4th 291, 302-304 (1st Dist. Div. 5 Oct. 15, 2015), Lemus at *4-5.

However, in a recent case, the plaintiffs used a different legal theory to recoup the cost of the non-slip shoes, under Labor Code sections 3751 and 3752. Labor Code section 3751 subsection (a) provides that “[n]o employer shall exact or receive from any employee any contribution, or make or take any deduction from the earnings of any employee, either directly or indirectly, to cover the whole or any part of the cost of compensation under this division.” In other words, section 3751 prohibits employers from receiving contributions to workers’ compensation insurance plans.

In Lewings v. Chipotle, the plaintiff alleged that Chipotle violated Labor Code section 3751 by requiring employees to purchase slip-resistant shoes through a third-party seller, Shoes for Crews, because Shoes for Crews extended warranties to Chipotle for slip-and-fall-related workplace injuries. On July 1, 2015, in an unpublished decision, the California Court of Appeal reversed a trial court order dismissing the plaintiff’s class action case after finding Chipotle did violate section 3751. Lewings v. Chipotle Mexican Grill, Inc., No. B255443, 2015 Cal. App. Unpub. LEXIS 4673 (2nd Dist. Div. 2 July 1, 2015) (slip op. available here). The appellate court held that warranties were considered compensation under the statute because the warranties either directly covered the cost of compensation by paying medical expenses for work-related injuries or indirectly covered the cost of compensation by preventing increases in workers’ compensation insurance. Slip op. at 5. As such, the appellate court found Chipotle had violated section 3751 because its employees were contributing, whether voluntarily or involuntarily, to the cost of Chipotle’s workers’ compensation insurance. Id. at 4-7.

After the decision, it seemed that employers would now be at risk to the extent that they received warranties or other types of contributions toward the cost of workers’ compensation that were in part, funded by employees. Then, on rehearing, the appellate court reversed a portion of its decision reviving the plaintiff’s first cause of action under section 3751, though it left much of its prior decision intact. Lewings v. Chipotle Mexican Grill, Inc., No. B255443, 2015 Cal. App. Unpub. LEXIS 6770 (2nd Dist. Div. 2 Sept. 22, 2015) (slip op. available here). Specifically, after finding a violation of section 3751 had been sufficiently alleged, the court then held that section 3751 does not provide for a private right of action because neither the statute nor the legislative history clearly indicated a private right of action was intended. Slip op. at 9-10. It is not clear from the opinion whether legislative history was considered, as neither party submitted briefing on the legislative intent of section 3751. See id. However, despite the lack of a private right of action in section 3751, the court still found a violation of the statute had been sufficiently alleged, allowing the plaintiff’s claim for Business & Professions Code section 17200 (UCL) to proceed. Id. at 11. Furthermore, although section 3751 is not actionable under PAGA, the court indicated that the violations plaintiff alleged under sections 201, 202, and 226(a) were sufficient to state a claim under PAGA, because the violations were not “purely derivative” of section 3751 and were “factually distinguishable” from a section 3751 violation. Id. at 14. Additionally, the standalone claims for violations of sections 201, 202, and 226(a) were also held to be sufficiently alleged. Id. at 10-13.

As such, although Labor Code sections 3751 and 3752 do not necessarily offer a new avenue of claims when it comes to the battle over employer programs mandating slip-resistant shoes, a violation of the UCL premised on those sections is still a viable cause of action and claims for other sections of the Labor Code, such as 201 and 202, including under PAGA, can be derived from violations of 3751.

Authored by: 
Jamie Greene, Associate
CAPSTONE LAW APC

Even seasoned class action practitioners might be surprised to learn that the percentage-of-the-fund method for awarding attorneys’ fees is not settled law in California. After all, California trial courts routinely award attorneys’ fees based on a percentage of the overall recovery, and numerous California courts have endorsed this approach. [1] This common practice has been called into question by David Brennan, an objector to the $19 million wage-and-hour class action settlement in the long-running Laffitte v. Robert Half Int’l, No. S222996, rev. granted, 342 P.3d 1232 (Feb. 25, 2015). [2] Laffitte, which was initially filed in 2004, involved independent contractor misclassification claims against the staffing agency Robert Half; in 2013, the trial court approved a $19 million settlement, including an attorneys’ fee award of one-third of the gross settlement.

In Laffitte, the California Supreme Court will decide whether use of the percentage method is valid under California law. In his petition for review and opening brief (available here and here, respectively), Objector Brennan seized on a footnote from Serrano v. Priest, 20 Cal.3d 25, 48 n. 23 (1977), where the California Supreme Court stated that “the starting point of every fee award . . . must be a calculation of the attorney’s services in terms of the time he has expended on the case,” to argue that California law requires use of the lodestar method for assessing fees. The lodestar method multiplies the number of hours reasonably expended by a reasonable hourly rate, and the resulting number can be adjusted at the court’s discretion. While Brennan correctly identified a source of potential confusion, his radical position, if adopted, would unsettle the landscape, upending not just the settlement in Laffitte, where the trial court awarded attorneys’ fees representing 33 1/3% of the settlement fund, but numerous other already-approved settlements. Further, the vast majority of California class action settlements currently pending final approval would have to be renegotiated.

However, there is little doubt that the California Supreme Court will enshrine the use of the percentage method for cases where an ascertainable fund is created. As Respondent Mark Laffitte discussed in his Answering Brief (available here), every Federal Circuit has authorized use of percentage method, with two Circuits, the Eleventh Circuit and the District of Columbia Circuit, requiring use of the percentage method for common fund cases. This is because the percentage method has several significant advantages over the lodestar method: (1) it is less demanding of judicial resources; (2) it connects the fee recovery more closely to the results obtained; (3) it aligns the interests of class members and class counsel; (4) it rewards efficient prosecution; (5) it better approximates the workings of the marketplace; and (6) it leads to greater predictability in fee awards. Lafitte Answering Brief at 35-39 (internal citations omitted).

California also has a venerable tradition of utilizing the percentage method for common fund cases, as detailed in Serrano itself. See Serrano, 20 Cal.3d at 34-38 (observing that the percentage method was first approved in California in 1895 and “has since been applied by the courts of this state in numerous cases”). Serrano declined to apply the percentage method principally because the settlement there did not create an ascertainable fund. Id. at 35-38. Contrary to Brennan’s position, there is nothing in Serrano that would preclude courts from applying the percentage method in awarding attorneys’ fees.

Although Laffitte presents only one question for review—whether the percentage method is permitted under Serrano—several open questions remain even if the Court cements the use of the percentage method. Among other issues, the Court may also decide whether a benchmark percentage is appropriate, and whether to require a “lodestar cross-check” if a court applies the percentage method in awarding fees. In sum: do not expect a sea change, but class action practitioners should nonetheless keep a close watch on Laffitte to see if the Court will provide further guidance to courts on when and how to apply the percentage method.

Authored By:
Ryan Wu, Senior Counsel
CAPSTONE LAW APC

[1] See, e.g., In re Consumer Privacy Cases, 175 Cal. App. 4th 545, 558 (2009), Chavez v. Netflix, Inc., 162 Cal. App. 4th 43, 63 (2008), and Apple Computer v. Superior Ct., 126 Cal. App. 4th 1253, 1271 (2005).
[2] Capstone Law APC, on behalf of its clients, submitted a letter requesting publication that contributed to the publication of the intermediate court decision, Laffitte v. Robert Half Int’l Inc., 231 Cal. App. 4th 860 (2014), and intends to submit an amicus brief supporting Respondent Laffitte.

Recently, the National Labor Relations Board (“NLRB”) drastically expanded joint employer liability under the National Labor Relations Act (“NLRA”). In a 3-2 decision involving a Local 350 union, which had filed a representative petition that sought to represent sorters, housekeepers, and screen cleaners employed by a subcontractor Leadpoint, the NLRB modified its standard for determining joint-employer status. Browning-Ferris Industries of California, 362 NLRB No. 186 (August 27, 2015) (slip op. available here). Initially, Local 350’s petition alleged that that Browning-Ferris, a waste and recycling services company, jointly employed the workers with Leadpoint because Leadpoint had contracted with Browning-Ferris to provide temporary labor to manually sort materials, clean the screens on the sorting equipment and clear jams, and clean the recyclery. After a hearing, a decision was issued, holding that Leadpoint was the sole employer because it had sole control over recruiting, hiring, counseling, disciplining, and terminating its employees. Then, Local 350 filed a request for review of the decision that Browning-Ferris and Leadpoint were not joint employers. The Board granted the petition for review in April of 2014, and issued the present decision.

Under the new standard, two separate entities will be found to be joint employers under the NLRA if “they ‘share or codetermine those matters governing the essential terms and conditions of employment.’ . . . [T]he initial inquiry is whether there is a common-law employment relationship with the employees in question. If this common-law employment relationship exists, the inquiry then turns to whether the putative joint employer possesses sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining.” Slip op. at 2, citing NLRB v. Browning-Ferris Industries of Pennsylvania, Inc., 691 F.2d 1117, 1123 (3d Cir. 1982). In short, the NLRB may find the entities to be joint employers where (1) they are both employers within the meaning of the common law; and (2) they share or co-determine matters governing the essential terms and conditions of employment indirectly or whether they both have the authority to do so. For example, if Company A, that obtained workers from Company B, has a mere right to control elements of employment such as salary and working conditions, then both companies may qualify as employers.

This decision is likely to have profound implications for companies that rely on third-party labor providers because previously, those companies had to exercise “direct and immediate” control over workers. Slip op. at 7. The majority stated that it chose to “restate the Board’s legal standard for joint-employer determinations and make clear how that standard is to be applied going forward,” returning to the “traditional test” used by the Board. Id. at 15. Under the new regime, the courts and regulators will take a case-by-case approach in determining whether companies have the potential to affect pay and working conditions of the contracted employees. “The right to control, in the common-law sense, is probative of joint-employer status, as is the actual exercise of control, whether direct or indirect.” Id. at 16. Notably, the Board stated it would “no longer require that a joint employer not only possess the authority to control employees’ terms and conditions of employment, but must also exercise that authority, and do so directly, immediately, and not in a ‘limited and routine’ manner,” thus overruling prior Board decisions to the extent they are inconsistent with this decision. Id. at 15-16. 

Indeed, under the new approach, many companies, including franchisors or users of staffing agencies, may become wary of relying on labor services provided by third parties, because such an arrangement may substantially expand these companies’ potential liability. On the other hand, the NLRB’s approach is likely, in its own words, to avoid requirements that are “increasingly out of step with changing economic circumstances,” and “significantly and unjustifiably narrow the circumstances where a joint-employment relationship can be found.” Slip op. at 31. Labor providers frequently have little control over their employees, whose daily working conditions are determined by policies and practices of the companies that hire those employees. The new rule, therefore, ensures that companies that rely on contract or temporary employees may not shield themselves from liability merely by citing their third-party status.

Authored By:
Stan Karas, Senior Counsel
CAPSTONE LAW APC