Articles from November 2020

Does a compensation plan providing for an advance on future commissions qualify as a “salary” for purposes of the administrative exemption established in Industrial Welfare Commission Wage Order 4? In Semprini v. Wedbush Securities, Inc., Cal. Ct. App. 4th Dist., No. G067740, Nov. 5, 2020 (slip op. available here), a California court of appeals concluded that it does not.

California law requires employers to pay overtime rates to employees who work above a set number of hours, unless an exemption applies. Under the applicable wage order, an employee is exempt under the administrative exemption if that employee (1) is primarily engaged in exempt duties and (2) earns “a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment.” (Cal. Code Regs., tit. 8, § 11040, subd. 1(A)(2)(g).)

Wedbush attempted to comply with the wage order by essentially “loaning” its employees money, so that they would receive enough compensation to qualify under the exemption. Wedbush classified its financial advisors as “exempt” and paid them solely on commission; but if a financial advisor’s commission in a given month was less than double the minimum wage, it paid the financial advisor the commission plus a “draw” on future commissions to make up the difference. Financial advisors were then required to repay the “draw.”

The court ruled that this arrangement did not satisfy administrative exception’s salary basis test because “[a]n advance is not a wage.” Slip op. at 11. The court reasoned that “[t]he salary basis test requires the employers to pay their employees at least double the minimum wage, not loan them that amount.” Id. (emphases in original). The court went on to note that Wedbush’s compensation arrangement could also violate state minimum wage requirements if an employee was forced to repay advances after termination.

The matter is being remanded to the Orange County Superior Court, where the court previously granted the plaintiffs’ motion to certify a class of approximately 150 class members.

Authored by:
Robert Friedl, Senior Counsel
CAPSTONE LAW APC

In McCarthy v. Toyota Motor Corporation, C.D. Cal., Oct. 20, 2020 (slip op. available here), the district court recently held that Toyota could not compel three class action plaintiffs to arbitrate their auto defect claims based on arbitration provisions in purchase agreements and a lease that they had entered into with their Toyota dealers. Although Toyota was a non-signatory to the agreements, it argued that it had standing to enforce the agreements based on a theory of equitable estoppel and as a third party beneficiary to one of the agreements.

“The theory behind equitable estoppel is that a plaintiff may not, ‘on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a non-signatory.’” In re Henson, 869 F.3d 1052, 1060 (9th Cir. 2017) (quoting Murphy v. DirecTV, Inc., 724 F.3d 1218, 1229 (9th Cir. 2013). Toyota’s equitable estoppel theory was that “‘Plaintiffs’ claims against [it] rely upon and are intimately founded on and intertwined with Plaintiffs’ agreements’ [with the dealers] such that Toyota may enforce the arbitration provision in Plaintiffs’ agreements based on equitable estoppel.”

The Ninth Circuit rejected this argument in Kramer v. Toyota Motor Corp., 705 F.3d 1122 (9th Cir. 2013), and the district court held that Kramer controlled. As in Kramer, the district court found that the plaintiffs’ claims against Toyota (fraudulent, deceptive, and/or misleading conduct in failing to disclose the defect, and breach of manufacturer warranties) arose independently from the terms of the agreements containing the arbitration agreements. None of the plaintiffs’ claims referenced or relied on the terms of the agreements with the dealers.

Toyota also argued that under the terms of the lease agreement it was an “affiliate” of the dealer within the meaning of the arbitration provision and was therefore a “Covered Party” under that provision. Applying basic rules of contractual interpretation, the district court rejected the argument.

Among other observations, the district court noted that the term “affiliate” was not defined in the provision and there was nothing in the provision that indicated the term was meant to apply broadly to any entity with a corporate tie to the dealer. On the contrary, all of the parties listed as “Covered Parties” in the provision had a direct connection to the lease. Further, for third parties to be “Covered Parties,” they not only had to provide products and services in connection with the lease, but they also had to be sued as co-defendants with the other Covered Parties. Toyota’s position that the term “affiliate” should be read to include any corporate entity with any ties to the dealer or other listed entities (all of whom had direct connections with the lease) was “incongruously broad,” in the view of the court. The lease agreement also explicitly disclaimed any effect on the manufacturer’s warranties at issue in the action.

In sum, the automobile lease and purchase agreements in McCarthy are contracts between consumers and car dealers; they pertain to that relationship only. They are not drafted to protect the manufacturer from the consequences of its own fraud against consumers, product defects, or breach of manufacturer warranties. Consequently, they provide no road to arbitration for Toyota.

Authored by:
Robert Friedl, Senior Counsel
CAPSTONE LAW APC

In Provost v. YourMechanic, Inc., Cal. Ct. App. 4th Dist., No. D076569, Oct. 15, 2020 (slip op. available here), a California Court of Appeal again thwarted an employer’s attempt to defeat an action brought under the Private Attorneys General Act of 2004 (“PAGA”) (Cal. Lab. Code § 2699, et seq.) by seeking to compel arbitration of the plaintiff’s standing as an “aggrieved employee.” The PAGA statute defines an “aggrieved employee” as “any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed.”  Cal. Lab. Code § 2699(c).

The plaintiff’s action alleges that YourMechanic violated a myriad of Labor Code sections and that he and other “aggrieved employees” were misclassified as independent contractors. YourMechanic argued that this presents a “threshold issue” of whether Provost was an employee (as he contends) or an independent contractor. The defendant’s position was that, under its arbitration agreement with the plaintiff, “any private dispute arising out of or relating to [the plaintiff’s] relationship with the Company” was required to be arbitrated before he could proceed with his PAGA action. YourMechanic moved to compel the plaintiff to arbitrate whether he was an “aggrieved employee” within the meaning of the Labor Code.

The trial court denied the motion, and the Court of Appeal affirmed, largely based on Williams v. Superior Court, 237 Cal.App.4th 642 (2015), and its progeny. In Williams, the trial court granted the employer’s motion to compel a plaintiff’s “individual claim” that he had been subject to Labor Code violations, and was therefore an aggrieved employee. Williams held that a single representative cause of action under PAGA cannot be split into an arbitable “individual” claim and a non-arbitrable representative claim. Id. at 645. A long series of cases have followed Williams on this point. Slip op. at 11-12 (collecting cases).

Provost’s conclusion was buttressed by the recent decision in Kim v. Reins International California, Inc., 9 Cal.5th 73 (2020) (holding that employee who settles and dismisses individual claims for Labor Code violations does not lose standing to pursue a claim under PAGA). Kim cited with approval cases in which “[a]ppellate courts have rejected efforts to split PAGA claims into individual and representative components.” Id. at 88. Following Kim, Provost noted that, in PAGA-only actions, “standing . . . cannot be dependent on the maintenance of an individual claim because there is no claim for individual relief.” Slip op. at 14. In other words, “a PAGA-only representative action is not an individual action at all, but instead is one that is indivisible and belongs solely to the state.” Id. at 2 (emphasis in original).  Therefore, no part of any PAGA-only action can be compelled to arbitration. Id.

Authored by:
Robert Friedl, Senior Counsel
CAPSTONE LAW APC