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PICKING OFF THE PLAINTIFFS -- How Chindarah v. Pick Up Stix Allows Employers To Undercut A California Wage and Hour Class Action
March 11, 2009 | Posted by mike.young@alston.com | Topic(s): ADR and ADR Agreements, Wage and Hour Litigation
You may not be able to do it with claims brought under the Federal Labor Standards Act (FLSA), but you can do it with claims brought under the California Labor Code.
Addressing the issue head-on for the first time, the California appellate court in Chindarah v. Pick Up Stix allowed an employer, when faced with a California wage and hour class action, to pick off the putative class members one employee at a time through a settlement agreement and release. Before a class certification motion could even be brought there was nary a class member left!
In Chindarah, the employer – like so many California employers these past many years – was faced with a putative class action under California law “alleging claims for unpaid overtime, penalties and interest due to the misclassification of [plaintiffs’] jobs as exempt from overtime pay.”
The parties tried an early mediation, which went nowhere. However, the employer, apparently believing that its mediation position was fair, refused to give up. Instead, the employer went right to the people. It “decided to attempt settlement with as many putative class members as possible,” offering each applicable employee and former employee an amount that had previously been offered in the mediation session.
The effort was apparently a success in that over two hundred putative class members accepted the offer and signed a settlement agreement that contained three important provisions (other than the payment amount, of course).
First, the settlement agreement had the employee acknowledge he or she had spent more than 50% of his or her time on managerial duties. The importance of this provision is explained below.
Second, the agreement included a general release of all claims, including claims for “unpaid overtime, and any other Labor Code violations during the relevant time period.”
Finally, the agreement included a representation by the employees “not to participate in any class action that may include … any of the released Claims.”
Not surprisingly, this undermining of much of the potential plaintiff class was not well received by the attorneys representing the plaintiffs, and they filed an amended complaint asserting that the settlement agreements were unlawful under the California Labor Code. They also added eight of the settled class members as new plaintiffs. The employer, not to be outdone, filed a cross-complaint against the defecting eight for breach of the settlement agreement. Dueling summary judgment motions followed soon thereafter.
The trial court upheld the settlement agreements as lawful and enforceable. The named plaintiffs appealed.
The main argument by the plaintiffs was that the California Labor Code ( Sections 206, 206.5, and 1194) requires employers to pay all wages that are due. This right of employees to receive all wages due cannot be waived or released. Accordingly, if the plaintiffs are right and the putative class members were misclassified, then they are due additional overtime wages …wages that cannot be waived or released.
Well, the plaintiffs were partly right in this argument. Labor Code Section 206.5 does nullify a release that an employee signs as a condition to getting paid wages that are due. However, what happens where the wages may – or may not – be due, depending on a disputed fact (i.e., whether the employee was misclassified)?
The Chindarah Court held that in these circumstances, where all wages “concededly due” have been “unconditionally paid,” and there remains a bona fide dispute over whether additional wages are due, this bona fide dispute can be compromised (i.e., settled), and the settlement will be enforced. Specifically, the Court noted:
“[T]here is no statute providing that an employee cannot release his clam to past overtime wages as part of a settlement of a bona fide dispute over those wages.”
Now do you see why it was so important for the defendants to have included the recitation that the employees had spent more than 50% of their time on managerial duties? If they spent more than 50% of their time doing Manager Work, then they were arguably properly classified as exempt in California. This statement provides the factual basis to create the dispute over whether the employees were misclassified, and hence entitled to overtime wages. With a bona fide dispute there can be a bona fide compromise and release.
The Court was careful to note that this strategy may not work under the federal FLSA statutory regime (thought it might, depending on the jurisdiction). However, here in California, almost all wage and hour claims are brought under California law to which Chindarah should apply.
Picking off the plaintiffs. It’s a good trick for employers to consider under the right circumstances.
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