On May 20, 2015, the United States District Court for the Northern District of California granted final approval of a $1.5 million wage-and-hour class action settlement in Barrera v. Home Depot USA, Inc., No. 5:12-cv-5199 (N.D. Cal. May 20, 2015). See Order Granting Final Approval here, Amended Settlement Agreement here. Judge Lucy H. Koh gave her blessing to a revised settlement just over a year after denying preliminary approval of the parties’ original settlement agreement. See Order Denying Preliminary Approval here.
At the core of this case are penalties under California Labor Code § 203, which provides for the continuation of wages for terminated employees for up to 30 days when employers willfully fail to pay timely final wages. The Barrera plaintiffs contend that Home Depot delayed payments of final wages to fired workers between September 2009 and September 2014, in violation of Labor Code § 201. In her May 6, 2014 order denying preliminary approval, Judge Koh observed that, during the class period, Home Depot failed to pay 6,648 fired employees their final wages on the date of termination, as California law requires. Further, only 66% of those 6,648 employees were paid final wages within three days of their terminations, and only 75% of them were paid within seven days. The plaintiffs’ counsel calculated the average hourly wage at $10-13 per hour and the average daily wage rate at $100-$150. The plaintiffs also estimated, based on actual data provided by Home Depot, that Home Depot’s total exposure was $3,573,519. The initial settlement provided for a settlement fund of $1.4 million.
Judge Koh noted two problems with the initial settlement that prevented her from granting preliminary approval. First, although $945,000 of the settlement fund was made available to class members, the funds were to be distributed on a claims-made basis, with a provision obligating Home Depot to pay at least 50% of those funds. Judge Koh ruled that the provision was not fair and adequate to class members because it disincentivized parties from maximizing participation. In fact, because the plaintiffs’ counsel would request 25% of the total settlement fund regardless of the participation rate, the settlement’s structure set the stage for a potential conflict of interests, whereby the plaintiffs’ counsel could bargain with a defendant for a lowered minimum payment obligation in return for a higher settlement fund and—as a result—a higher potential fee award. Judge Koh pointedly ruled that “[s]uch settlement structures may artificially inflate the total settlement fund and render the total settlement fund illusory in order to justify a higher attorney’s fees award.” See Order Denying Preliminary Approval, at 3. Second, the settlement provided for a 60-day claim submission deadline that would not be extended, even if the initial class notice was returned as undeliverable. The court ruled that the provision was “not conducive to maximizing class members’ participation in the settlement.” Id.
On January 15, 2015, the parties moved for final approval of a revised settlement. The revised settlement contained four major changes: (1) it increased the gross settlement amount from $1.4 million to $1.5 million; (2) it eliminated both the claims process and the reversion provision for unclaimed funds (instead designating two cy pres recipients); (3) it extended the time frame to object or opt out from 60 to 90 days; and (4) it provided each class member with an estimate of damages and the formula used to calculate the pro rata payment with the class notice. With these adjustments, the court approved the revised settlement.
The takeaway from the case history is that judges typically look harder at claims-made settlements, and even more so when they contain a relatively low minimum payment provision coupled with a reversion to the defendant. Courts will always be concerned about whether class counsel is truly maximizing the benefit to the class or is merely settling to secure a fee award. To maximize the settlement benefits to the class members, and thereby avoid having preliminary approval denied, the optimal course of action is to negotiate a direct distribution (i.e., no claims process) to the class members with no reversion, as the parties did in their revised settlement. In the alternative, one might provide for a claims-made settlement that includes a high minimum payment amount either with or without a reversion, preferably without. In such cases, those class members who expend the time and effort to submit claim forms will be rewarded with significant benefits from the settlement.
Andrew Sokolowski, Senior Counsel
CAPSTONE LAW APC