Respondent-Employer Enjoined From Requiring Current Employee Putative Class Members From Waiving Right to Participate in Class/Collective Action, Once Putative Class/Collective Action Pending
Herrington v. Waterstone Mortgage Corp.
In this case, the claimant-employees had initially filed their case as a class/collective action in federal court. Pursuant to arbitration agreements that the plaintiffs had signed during their employment, the defendant successfully moved to compel the plaintiffs to pursue their claims in arbitration. Because the arbitration agreement at issue called for arbitration pursuant to the American Arbitration Association’s (AAA) rules governing arbitration, the plaintiffs successfully argued that a Rule 23 type opt-out mechanism rather than 216(b)’s opt-in governed as the appropriate class mechanism. Twelve (12) days after the arbitrator’s holding that an opt-out class procedure would govern, the defendant began requiring all current employees to sign a new arbitration clause, which if enforced, would have precluded the current employees from participating in the putative class action, yet to be certified. Arguing that the respondent-employer’s unilateral effort to defeat putative class members’ participation in the arbitration required thorough remedial measures, the claimant-employees moved for a protective order and temporary restraining order to:
(1) Enjoin any further dissemination of the letter to current employees with the class-waiver form; (2) Enjoin any effort by the respondent-employer or its counsel to chill participation in the case, including prohibiting any further unauthorized communication with any class members concerning joining the case, except as approved by the arbitrator; (3) Enjoin retaliation by [Waterstone] against any individual participating in the case; (4) Direct that [Waterstone] (in a form and manner supervised by the Arbitrator or on consent of claimants’ counsel) promptly notify all class members who received Exhibits A and B of the impropriety of [Waterstone’s] acts and the invalidity of the waivers it solicited; (5) Sanction [Waterstone] with monetary relief for its improper behavior [ ] so that [Waterstone] does not achieve any of the benefit of chilling individuals from participating in this case; (6) Reserve the opportunity for individuals to join the case post-judgment, should they opt-out now, given their employer’s clear statement of its desire that they not join this case; (7) Award Claimant’s costs and attorneys’ fees for the time spent on the motion; [and] (8) Award such further relief in the future, as may become necessary to remedy the ill effects of [Waterstone’s] improper behavior.
In opposition, the respondent-employer argued that the motion should be denied because: (1) the arbitrator lacked jurisdiction over the issue presented, because the parties had not agreed to arbitrate the issue of the permissibility of the subsequent class-waivers; (2) it was procedurally improper, because a class or collective action had yet to be certified; and (3) the employees had not demonstrated the requisite irreparable harm to warrant the relief sought.
Initially, the arbitrator rejected the respondent-employer’s jurisdictional argument:
It is true that a class has not yet been certified. Indeed, the clause-construction award that contemplates a class arbitration may itself be vacated by the District Court. However, even if the motion to certify a class should be denied, or if the Court should vacate the clause-construction award, the arbitration may continue as a collective proceeding (opt in) as a result of Judge Crabb’s direction that Herrington “must be allowed to join other employees to her case.” (D. Ct. Decn. at 18).
The arbitrator similarly rejected the argument that the relief sought was premature:
Whether a proceeding continues as a class procedure or a collective procedure, it must be protected from coercive or misleading communications that are designed to, or have the effect of, persuading or intimidating potential claimants to withhold their participations. The law realistically recognizes that such improper communications may be just as effective pre-certification as post-certification. Therefore, it is within the jurisdiction – indeed, it is the duty – of the judge or arbitrator before whom such a proceeding is pending to protect the integrity of the proceeding and to require that all information conveyed by the parties to potential class members about the proceeding be accurate, not coercive, and not misleading.
Waterstone’s argument that control over communications cannot arise until a class is certified is simply wrong. The power (jurisdiction) to control the parties’ communications to class members or putative class members can arise at least as early as when the initial pleading is filed. See, e.g. Hoffman-LaRoche at 487 (“[I]t lies within the discretion of a district court to begin its involvement early at the point of the initial notice.”).
The arbitrator added:
Waterstone’s contention that it has “has never consented to arbitrate its management decisions as to the nature and form of employment agreements with employees who are not parties to this case” (Jurisd. Memo at 1) assumes that this arbitration is about what kind of dispute resolution provision going forward Waterstone may provide in its form employment agreement. The assumption is false. Herrington brought this arbitration to recover past minimum wages and overtime compensation allegedly due to her and to her fellow employees. Jurisdiction over that claim was established with the filing of the demand for arbitration, and it is the duty of the arbitrator to preserve and protect the integrity of the proceedings with respect to that claim. The entire dispute that is subject to this arbitration is therefore to be resolved under the dispute resolution provisions of the pre-Amendment employment agreement that governs Herrington’s claims.
Instead, the arbitrator held that once the proceeding had commenced, the employer-respondent could not require the potential class members to waive their rights to participate in the case, as members of the class:
However, whatever may be the legality or enforceability of either Option A or Option B in future disputes that might arise between Waterstone and its mortgage-loan employees, those amendments can have no impact on this Herrington arbitration or on the employee class’s rights or choices in it. Once Herrington commenced her arbitration under the original arbitration clause in the employment agreement, Waterstone could not change the nature or course of this pending arbitration by requiring the putative claimants in this proceeding to agree to an entirely different dispute-resolution regime. This arbitration must, therefore, continue under the Agreement that governed when it was commenced, the Agreement that Waterstone, itself, argued successfully to the District Court requires Herrington’s dispute to be arbitrated.
Thus, the arbitrator granted the claimant-employees’ their requested relief.
Click Herrington v. Waterstone Mortgage Corp. to read the entire Decision and Order on Claimant’s Application for Protective Order, Temporary Restraining Order and Preliminary Injunction.
E.D.Cal.: Plaintiff Could Simultaneously Be Part-Owner of Closely-Held S-Corp. and Its FLSA-Covered Employee
Hess v. Madera Honda Suzuki
This case was before the Court on the defendant’s motion for summary judgment regarding all of plaintiffs’ claims. As discussed here, one of the issues the court was asked to resolve was whether someone can simultaneously be a part-owner of a closely held s-corporation and an employee thereof. The court distinguished the case from one concerning a business structured as a partnership, and held indeed the plaintiff could simultaneously be a part-owner of the defendant and its employee. Thus, the court denied defendant’s motion for summary judgment with regard to her FLSA claim for unpaid wages on this ground.
As relevant to this discussion, the court recited the following facts (following a period of employment where the plaintiff was solely defendant’s employee):
As support for the contention Plaintiff was not their employee, Defendants point to evidence in the record, primarily from Plaintiff’s deposition testimony, establishing the following. After investing $100,000 ($50,000 allocated to stock and $50,000 as a business loan) with her husband, Terry Hess, Plaintiff became a co-owner of Madera Honda Suzuki, controlling 24 percent of the 100,000 shares of common stock originally issued by Harry D. Wilson, Inc. (Terry controlled 25 percent; defendant Robert Wilson controlled 26 percent while his wife, Lisa, controlled 25 percent.) Plaintiff was then elected as a director and chief financial officer of the corporation. Pursuant to their investment, it appears Plaintiff and her husband provided personal guarantees to Central Valley Bank for money presumably borrowed by the company. Plaintiff further stated she and her husband provided personal guarantees to American Honda and Suzuki, presumably to cover debts and obligations that might be incurred by the company through its sale of Honda and Suzuki motorcycles. Plaintiff understood it was possible she might lose some or all of her investment, and that even if the business were successful, it would take some time before it would start showing a profit. Plaintiff further understood that although the shares of stock were split 51 percent/49 percent between the Wilsons and the Hesses, everything else—including profits—would be divided equally (i.e., 50/50 between the Wilsons and the Hesses). According to Plaintiff, the business never made a profit.
Plaintiff testified it was her responsibility to pay bills and that she had authority to pay certain expenses, such as rent and dealership insurance, without consulting the other officers. Plaintiff was authorized to issue payroll checks to herself and others if the company had sufficient funds, and it appears Plaintiff issued a check to herself at least once during her tenure as CFO. At his deposition, Wilson testified he and Plaintiff interviewed prospective employees together and that Plaintiff “had a say in everybody [the company] hired.” Wilson further testified Plaintiff handled employee disciplinary matters “95 percent of the time” and that she was not required to consult with him before terminating an employee. It also appears Plaintiff was afforded special benefits. Plaintiff testified “if [she or Wilson] took days off, since [they] were on salary, [they] would be paid the days.” Other employees also had paid vacation, but only for a limited number of days. The company paid for vehicles and fuel for the Wilsons and the Hesses, whereas other employees did not have a vehicle allowance. Per Wilson, the company paid the cost of health insurance for shareholders, including Plaintiff, whereas it covered only part of the premiums for employees, who had to contribute the rest. All of this evidence, Defendants contend, shows Plaintiff was a co-owner, not an employee.
In light of the above undisputed facts, the defendant argued “that Plaintiff [could not] be considered an employee because Plaintiff assumed significant business risk, had involvement and discretion in the corporate decision-making process and was entitled to benefits not available to Madera Honda Suzuki’s other employees, none of which was consistent with employee status.” However, the court disagreed.
The court distinguished case law that has held that partners of a partnership cannot simultaneously be FLSA employees, in part discussing a case previously discussed here, from the situation before it where the alleged employee had a part-ownership interest in an s-corp. The court explained:
Defendants have provided no authority—and the Court’s research reveals no authority—stating categorically that a co-owner and shareholder of a closely held corporation who works for the corporation in another capacity, as was apparently the case here, cannot also be the corporation’s employee for the purpose of the FLSA. Indeed, case law seems to suggest otherwise. See Goldberg v. Whitaker House Co-op, Inc., 366 U.S. 28, 32, 81 S.Ct. 933, 6 L.Ed.2d 100 (1961) (“There is nothing inherently inconsistent between the coexistence of a proprietary and an employment relationship. If members of a trade union bought stock in their corporate employer, they would not cease to be employees within the conception of [the FLSA]. For the corporation would ‘suffer or permit’ them to work whether or not they owned one share of stock or none or many”).
While the court noted similarities between the structures of a partnership and the closely-held s-corp. at issue here, ultimately it reasoned that the differences permitted a co-owner who lacked the ability to use the corporate assets as her own and lacked the ability to use the corporate assets as she thought fit. Further, contrary to the relationship partners have in a partnership where they are primarily investors, the court noted that shareholders such a plaintiff remain economically dependent on the s-corporation and their primary source of income is typically wages earned from the s-corporation:
The fact the company is a closely held corporation is key because shareholders view closely held corporations precisely as a means of acquiring corporate assets through employment: “Unlike the typical shareholder in a publicly held corporation, who may be simply an investor or a speculator and does not desire to assume the responsibilities of management, the shareholder in a close corporation considers himself or herself as a co-owner of the business and wants the privileges and powers that go with ownership. Employment by the corporation is often the shareholder’s principal or sole source of income. Providing employment may have been the principal reason why the shareholder participated in organizing the corporation. Even if shareholders in a close corporation anticipate an ultimate profit from the sale of shares, they usually expect (or perhaps should expect) to receive an immediate return in the form of salaries as officers or employees of the corporation, rather than in the form of dividends on their stock. Earnings of a close corporation are distributed in major part in salaries, bonuses and retirement benefits[.]” Hollis v. Hill, 232 F.3d 460, 467 (5th Cir.2000).
Having determined that part-ownership of an s-corporation does not preclude a finding of an employer-employee relationship under the FLSA, the court held that—taking the facts most favorably for plaintiff, the non-movant—plaintiff could meet the economic reality test and demonstrate that she was an employee subject to FLSA coverage. Thus, the court denied defendant’s motion for summary judgment on this ground.
Click Hess v. Madera Honda Suzuki to read the entire Order re: Motion for Summary Judgment or Summary Adjudication.
Mootness and the FLSA: Where Are We Now?
With the Supreme Court set to weigh in on the issue next term, decisions continue to widely diverge on the issue of whether on employer may moot a collective action by paying damages to a plaintiff-employee or plaintiff-employees after they have filed suit seeking their wages pursuant to the FLSA. Recent weeks have brought more confusion to the issue. As discussed below, the Eleventh Circuit held in a non-FLSA claim that absent an actual judgment full tender of money damages alone is insufficient to render a case moot. Within days however, a different court sitting within the Ninth Circuit held that an employer properly mooted an entire collective action when it made payments to the entire class in amounts all parties agreed represented all money damages for a 2 year statute of limitations period, plus liquidated damages. In yet another decision a court within the Third Circuit held that an employer could not moot a collective action by tendering class damages calculated at a “half-time” rate, because an issue of fact existed as to whether that was the appropriate methodology for calculating such damages.
Zinni v. ER Solutions, Inc.
These three consolidated cases were before the Eleventh Circuit on the plaintiff-employee’s appeal of an order granting the defendant’s motion to dismiss for lack of subject matter jurisdiction. In each of the consolidated cases, at the court below the defendant had tendered the full monetary damages available to the plaintiff, but had not served an offer of judgment (OJ) or offered a stipulated judgment to the plaintiff. The trial court dismissed the plaintiff’s claim on mootness grounds. Summarizing the issue before the court, the Eleventh Circuit explained:
This consolidated appeal presents the issue of whether a settlement offer for the full amount of statutory damages requested under the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, et seq., moots a claim brought pursuant to the FDCPA. Appellants Anthony W. Zinni, Blanche Dellapietro, and Naomi Desty appeal the district court’s dismissal of their complaints for lack of subject matter jurisdiction. In each case, an Appellee sent an e-mail offering to settle an Appellant’s FDCPA case for $1,001—an amount exceeding by $1 the maximum statutory damages available for an individual plaintiff under the FDCPA. Appellees also offered attorneys’ fees and costs in each case, but did not specify the amount of fees and costs to be paid. Appellants did not accept the settlement offers. The district court subsequently granted Appellees’ motions to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), holding that the offers left Appellants with “no remaining stake” in the litigation. The district court then dismissed Appellants’ complaints with prejudice. We conclude the settlement offers did not divest the district court of subject matter jurisdiction.
After distinguishing a settlement from an accepted offer of judgment and discussing case law pertaining to each distinct situation, the Eleventh Circuit held that absent an actual judgment a mere offer of settlement cannot moot a claim:
The district court erred in finding Appellees’ settlement offers rendered moot Appellants’ FDCPA claims because the settlement offers did not offer full relief. See id. Each of the Appellants requested that the district court enter judgment in his or her favor and against an Appellee as part of the prayer for relief in the complaint. Appellees’ settlement offers, however, did not offer to have judgment entered against them. Because the settlement offers were not for the full relief requested, a live controversy remained over the issue of a judgment, and the cases were not moot. See Friends of Everglades, 570 F.3d at 1216.
Although the case concerned claims under the Fair Debt Collection Practices Act (FDCPA) the reasoning of the court is equally applicable to cases under the FLSA. In fact to a large extent the court relied on FLSA jurisprudence in reaching its decision. At least within the Eleventh Circuit, this case seems to put to bed the short-lived argument fueled by the same court’s decision less than two years ago in the Dionne opinions.
Click Zinni v. ER Solutions, Inc. to read the entire Opinion.
Orozco v. Borenstein
Amazingly, before the ink could even dry on the Zinni opinion, 2 days later, a court in the District of Arizona was faced with a virtually identical issue. However, unlike the Eleventh Circuit (and like the Order reversed in Zinni) the court ruled that an FLSA defendant could moot an entire class’ claims simply by tendering the maximum money damages due. Thus, the Orozco court granted the defendant’s motion to dismiss on mootness grounds, for lack of subject matter jurisdiction, following a tender.
Describing the issue before it, the court explained:
Plaintiff brings this putative class action pursuant to the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201, et seq., the Arizona Wage Act, A.R.S. § 23–350, et seq., and the Arizona Minimum Wage Act, A.R.S. § 23–363, et seq. Plaintiff worked as an oven operator in the bagel baking operations of defendant Bada Bing Baking, LLC, doing business as Chompie’s Wholesale Bakery (defendants collectively referred to as the “Bakery”). Plaintiff contends that the Bakery violated the FLSA, as well as Arizona’s wage statutes, by failing to pay plaintiff and other similarly situated employees the required federal and state minimum wages for covered nonexempt employees. Plaintiff contends that, although the employees are paid slightly more than the minimum wage required by federal and state law, 29 U.S.C. § 206(a), A.R.S. § 23–363(A), the Bakery has implemented a policy of deducting certain work-related expenses from the employee’s paychecks, leaving their net pay below minimum wage. Specifically, plaintiff alleges that the Bakery deducts $12.50 per paycheck for uniform laundering, $10.00 for initial and lost electronic keys, $5.00 for initial and lost time cards, and $24.00 for “food handlers” health cards from Maricopa County.
After this lawsuit was filed, the Bakery reimbursed 51 current and former “minimum wage” employees for the uniform-related fees incurred in the 2 years preceding the filing of this lawsuit, along with liquidated damages as prescribed by 29 U.S.C. § 216(b). The Bakery contends that because it has tendered full payment for all claimed violations, there is no remaining live case or controversy, rendering this case moot.
For reasons known only to the plaintiff and his attorney, the plaintiff did not raise any issue regarding the defendant’s failure to allow the entry of judgment on the claims. Instead, the plaintiff contended that he had not been fully compensated for his claims because (1) he sought damages for a third year due to the Defendant’s “willful” FLSA violations, and (2) he was not reimbursed for certain other items. However, due to insufficiencies it cited in the plaintiff’s pleadings and his declaration submitted in opposition to the defendant’s motion, the court granted the defendant’s motion and dismissed the case.
Of note, the court declined to resolve the issue of whether the plaintiff was entitled to attorneys fees as the prevailing party, instead reserving on the issue until plaintiff had filed a motion for attorneys fees pursuant to the District of Arizona’s local rules.
Click Orozco v. Borenstein to read the entire Order.
Seymour v. PPG Industries, Inc.
In the final case discussed, the defendant actually did tender an offer of judgment, pursuant to FRCP 68, however it was arguably insufficient and thus, the defendant’s motion to dismiss was denied on that basis.
Interestingly, the parties in this salary misclassification collective action case had stipulated to the number of hours each of the plaintiffs had worked during the periods relevant to the claims. However, the parties disagreed as to how the plaintiffs’ damages were due to be calculated. As in many such cases, the defendant argued that the damages were to be calculated using the FWW or half-time methodology, while the plaintiffs asserted time and a half damages were due. Because the issue of how to calculate damages- and ultimately the amount of same- remained unresolved, the court held that the defendant’s offer of judgment could not be said to definitively by “full relief.” Thus, the defendant’s motion to dismiss for lack of subject matter jurisdiction was dismissed on this grounds.
Click Seymour v. PPG Industries, Inc. to read the entire Memorandum Opinion and Order.
So what’s the takeaway here? While it remains clear that a defendant cannot moot a claim where the damages themselves are in dispute, plaintiffs faced with offers that they believe provide full monetary relief, would be wise to demand a judgment as well if the goal is to avoid a dismissal on mootness grounds so that a settlement offer alone cannot moot their claim. Another extra step is to seek a declaratory judgment in the actual complaint.
D.Conn.: Time and a Half is the Proper Measure of Damages in a “Salary Misclassification” Case
Hasan v. GPM Investments, LLC
Yet another court has weighed in on the FWW (“half-time”) versus time and a half issue in so-called “salary misclassification” cases, and this time it’s a victory for employees. This case was before the court on the plaintiffs’ motion in limine regarding the methodology for calculating damages, in the event the plaintiffs prevailed on their misclassification claims at trial. Addressing all of the arguments typically proffered by plaintiff-employees and defendant-employers, the court held that the fluctuating work week methodology was inapplicable because the defendant failed to meet several of the prerequisites for its use. Thus, the court held that any damages had to be calculated using the FLSA’s default time and a half methodology.
After a lengthy discussion of the Missel case, a history of the FWW and recent salary misclassification decisions, the court discussed why the FWW could not apply to a salary misclassification case. Framing the issue, the court explained:
Plaintiffs contend that the fluctuating work week method of compensation is never appropriate in a case where an employer has misclassified an employee as exempt from the FLSA’s protections. They argue that misclassification cases only present one issue—how to reconstruct what the rate of pay would have been absent a violation. Defendants counter that in a misclassification case “a fixed salary is always meant to compensate for all hours worked,” and under Missel, a fluctuating work week calculation “provides the precise remedy.” Def. Opp. at 12. In other words, a misclassification case does not require that the court recreate a rate, but, instead, that it convert a unusual payment method into an hourly rate. Plaintiffs have the better argument and one need look no further than the DOL’s guidance to understand why.
Initially, the court noted that where an employer has classified an employee as exempt, logically there is never a mutual understanding that overtime will be paid at varying rates, because the parties agreement is that there will be no overtime at all.
When an employer misclassifies an employee, the resultant employment contract will never fulfill any of the requirements of section 778.114. First, parties who believe that an employee merits no overtime payment cannot simultaneously believe that any overtime will be paid at varying rates. Put another way, in a misclassification case, the parties never agreed to an essential term of a fluctuating work week arrangement—that overtime would be paid at different rates depending on the number of hours worked per week. See Perkins v. Southern New England Telephone Co., 2011 WL 4460248 at *3 (D.Conn. Sept. 27, 2011), Russell, 672 F.Supp.2d at 1013–14,Rainey v. Am. Forest & Paper Assoc., 26 F.2d 82, 100–02 (D.D.C.1998). To assume otherwise converts every salaried position into a position compensated at a fluctuating rate.
Next, the court noted the lack of contemporaneous overtime payment at the time the work in question was performed, pursuant to the parties agreement that there would be no overtime:
Second, misclassified employees will never have received any kind of bonus or premium for overtime. Indeed, parties will have explicitly agreed, as they did in this case, that employees will not earn extra money for long hours. See Def. Opp. Ex. A Job Description (listing the position as explicitly “exempt” from overtime compensation). At best, an employer could argue that the flat salary had an overtime bump embedded within it, that it was high enough so that employees remained well compensated for the hardship of working more than 40 hours per week. But this argument fails for two reasons: First, such an agreement would be illegal. An employee would have to waive her statutory right to extra compensation for overtime. Barrentine v. Arkansas–Best Freight Sys., 450 U.S. 728, 740 (1981) (noting that “FLSA rights cannot be abridged by contract” because this would “nullify the purposes of the statute”). Second, Missel explicitly rejected such an argument. The court reasoned that the contract at issue did not comply with the FLSA because “it [did not include a] provision for additional pay in the event the hours worked required minimum compensation greater than the fixed wage.” Missel, 316 U.S. at 581.
Further, here the court noted that while the plaintiffs’ hours fluctuated, the never worked fewer than 40 hours. Thus, the court concluded this was not a situation where short weeks were balanced against longer weeks and the plaintiffs were nonetheless receiving the type of steady income envisioned by the FWW as the supposed benefit for employees:
In this case, GPM also fails to meet a third criterion enunciated in the DOL’s guidance—that an employee’s hours actually fluctuate. After it lays out the requirements for a contract for a fluctuating rate, the rule warns that “typically, such salaries are paid to employees who do not customarily work a regular schedule of hours” and are “in amounts agreed on by the parties as adequate straight-time compensation for long work weeks as well as short ones .” 29 C.F.R. § 778.114(c). For a fluctuating work week arrangement to make sense to both parties, employees should offset their relative loss from a grueling work week far above forty hours with the benefit of full pay for weeks that clock-in at less than forty hours. Otherwise, employees have not bargained for anything but decreasing marginal pay as they work longer and longer hours at work. This is what the Court divined in Missel; a rate clerk would sometimes work long hours when shipments flooded in, and sometimes not at all when business dried up. Here, plaintiffs never had a short week; GPM’s job description stated that store managers were expected to work a minimum of 52 hours per week. See Def. Opp. Ex. A, Job Description. To the extent their hours fluctuated, it was because they sometimes worked almost 100 hours per week. See Plaintiff’s Motion in Limine, Ex. A, Timesheets. This variance, between weeks with a moderate amount of overtime hours, and weeks where a majority of hours worked exceeded the 40 hour threshold, is not the same as the up and down fluctuation contemplated by the DOL and by the Court in Missel.
In light of the defendant’s failure to meet any of the prerequisites for the use of the FWW, the court concluded that any damages due would be calculated using the FLSA’s default time and a half methodology. Thus, it granted the plaintiffs’ motion in limine.
Click Hasan v. GPM Investments, LLC to read the entire Ruling and Order on Motion in Limine to Preclude Use of the Fluctuating Work Week.
Overtime Law Blog 