I. Introduction and Overview

Since the turn of the century, there has been a huge increase in the number of class action lawsuits  filed in state courts alleging violations of California’s overtime laws or other Labor Code statutes  and wage and hour regulations.  Currently, several such class actions are filed every day in  California. The reasons for this trend are essentially fourfold.  First, California’s wage and hour law differs from  federal law in subtle yet important ways.  This means that an employer might be compliant with  federal law, but not California law.  Second, California procedural rules make it easier to file a class  action or collective action.  In contrast, the federal Fair Labor Standards Act requires an “opt-in”  procedure that tends to restrict the size of classes as compared to the “opt-out” class action  procedure used in California.  Third, California’s unfair competition law allows claimants to borrow  violations of other laws and extend the statute of limitations to four years, which tends to make  class actions more lucrative.  Fourth, many California Labor Code provisions allow for the recovery  of attorney’s fees to a prevailing plaintiff, creating additional incentives to pursue litigation. California Labor Code class actions come in various shapes and sizes.  Essentially, however, any  Labor Code violation that can be tied to a corporate policy could support a class action.  For that  reason, plaintiffs in California continue to come up with new theories as to how wage and hour  violations may support class litigation.  This publication reviews the most commonly filed wage and  hour and Labor Code class claims and the development of the law over the last several years.  It  does not, however, attempt to provide a comprehensive overview of California wage and hour law. Sections II through X of this paper address some of the most common types of class claims in  California, such as claims for exempt classification, meal period violations, and denial of expense  reimbursement.  Sections XI and XII then address some peculiar provisions in California law that  tend to expand potential damages recoverable in California class actions such as the Labor Code  Private Attorneys General Act, and the Unfair Competition Law (“UCL”).  Lastly, Sections XIII through XVIII address various aspects of class action procedure in California—the rules governing  class certification, class discovery, class settlement, class arbitration, and individual liability. II. Common Exempt Misclassification  Claims The first wave of class claims filed against large California employers challenged the exempt  status of groups of employees holding the same job.  In short, the plaintiffs’ counsel argued that the  employer had engaged in a common practice of misclassifying a group of employees as exempt  from overtime, thus entitling all employees in the group to back overtime pay, interest, and Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 6 associated statutory penalties. 1   The following discussion addresses some of the issues that have  arisen concerning the misclassification of employees under the various available exemptions. A. Overview of State Overtime Law Before January 1, 2000, the California Industrial Welfare Commission (“IWC”) was the body  authorized by statute to set overtime requirements.  It acted in a quasi-legislative capacity,  promulgating a series of “Wage Orders” that set rules for wages, hours, and working  conditions that differed slightly from one industry to another.  The IWC eliminated daily  overtime from the Wage Orders in 1997. 2   In response, in 1998 the Legislature passed AB  60 which amended the Labor Code to provide for daily overtime and to enshrine various  employee protections into the Labor Code so that they could not be altered by the IWC. 3    The Wage Orders are still in effect, but the IWC is precluded from promulgating rules within  the Wage Orders that are inconsistent with the Labor Code itself. 4 Under Labor Code Section 510, employees are entitled to one and one-half times their  regular rate when they work more than eight hours in a single day, more than forty hours in  a workweek, or during the first eight hours of the seventh straight day of a single  workweek. 5   Employees are entitled to double time when they work more than twelve hours  in a single day or beyond the eighth hour of the seventh straight day of a single workweek.   These rules apply to non-exempt employees in California in every industry. 6   These rules                                                        1 Punitive damages are not recoverable when liability is premised solely on Labor Code wage and hour violations.   Brewer v. Premier Golf Properties, 168 Cal. App. 4th 1243, 1252 (2008). 2 Collins v. Overnite Transp. Co., 105 Cal. App. 4th 171, 176 (2003).  3 See, e.g., Lab. Code § 510 (daily overtime requirement) and Lab. Code § 226.7 (meal and rest period requirements).   Note that Labor Code section 510 does not apply to employees covered by a valid collective bargaining agreement if  “the agreement expressly provides for the wages, hours of work, and working conditions of the employees” and  “provides premium wage rates for all overtime hours worked and a regular hourly rate of pay for those employees of not  less than 30 percent more than the state minimum wage.”  Lab. Code § 514; see also Vranish v. Exxon Mobil Corp.,  166 Cal. Rptr. 3d 845 (2014) (affirming trial court ruling that employer: (1) properly paid overtime under the terms of a  collective bargaining agreement; and (2) was exempted from Labor Code section 510 pursuant to Labor Code section  514). 4 Collins, 105 Cal. App. 4th at 178-80 (Wage Orders and Labor Code should be read together to understand scope of  wage and hour regulation of California employees).  5 Note that employers may assign employees to work schedules that differ from company’s designated  workweek/workday and base overtime calculations on the designated workweek/workday as long as the schedule is not  established for the purpose of evading lawful overtime requirements.  Seymore v. Metson Marine, 194 Cal.App. 4th 361  (2011). 6 However, employees and employers may specifically agree in advance to a “specific mutual wage agreement”  that  provides a guaranteed salary covering both base hours and a specific number of overtime hours.  The required elements of such an agreement are: “(1) the days that [employee] would work each week; (2) the number of hours  [employee] would work each day; (3) that [employee] would be paid a guaranteed salary of a specific amount; (4) that  [employee] was told the basic hourly rate upon which his salary was based; (5) that [employee] was told his salary  covered both his regular and overtime hours;  and (6) the agreement must have been reached before the work was  performed.”  Archiega v. Dolores Press, Inc., 192 Cal. App. 4th 567, 571 (2011) quoting Ghory v. Al-Lanham, 209 Cal.  App. 3d 1487, 1491 (1989).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 7 also apply to non-resident employees who perform work in California for California  employers. 7 Individual employees have a private right of action for unpaid overtime.  Typically, a plaintiff  invokes a private right of action by alleging violation of Labor Code Section 510 or a  provision of the governing IWC order.  Such a claim does not depend on the Fair Labor  Standards Act (“FLSA”) or other federal law.  A prevailing plaintiff may recover attorney’s  fees for an overtime claim, 8 but California law, unlike the FLSA, does not provide a remedy  of double damages for willful overtime violations. 9   In a private action for unpaid overtime  compensation under the Labor Code, the statute of limitations reaches back to three years  before the date the lawsuit is filed in court. 10 B. The Executive (Managerial) Exemption One issue frequently raised in misclassification class actions is that a proposed class of  exempt managers—most often “working managers” in a retail establishment—do not  qualify for the “executive” (aka “managerial”) exemption.  The FLSA and California law  contain similar executive exemptions, but California’s is more restrictive in key respects. California requires that an “executive” employee be paid a higher level of compensation  than required under the FLSA. 11   The salary must be set at a level at least twice the  minimum wage, which, as of July 1, 2014, is $9.00 per hour in the State of California. 12                                                          7 The California Supreme Court in Sullivan v. Oracle, 51 Cal. 4th 1191 (2011), held that California overtime laws apply to  out-of-state employees who perform work within the state.  Further, the Court held that overtime work performed by outof-state employees within California can serve as the basis for a claim under California’s unfair competition law.  Cal.  Bus. & Prof. Code § 17200 (“UCL”).  However, the Court also held that FLSA violations as to out-of-state employees  outside California cannot serve as the basis for a California UCL claim.  Although the Sullivan court explicitly limited its  decision to “the circumstances of this case,” the plaintiff’s bar may argue its reasoning suggests that similar conclusions  may result for non-California-based employers.  The Sullivan court declined to opine on the different burdens that a  non-California-based employer may face in applying California overtime laws to nonresident employees working in  California, but the plaintiff’s bar will undoubtedly seek to obtain judicial rulings that the California Supreme Court’s  conflict of laws analysis suggests no reason for why a different conclusion would result for non-California-based  employers.  8 The California Court of Appeal has held that only the prevailing employee, and not the prevailing employer, may recover  attorney’s fees in an action for overtime pay or for unpaid minimum wages.  Early v. Superior Court, 79 Cal. App. 4th  1420 (2000). 9 But see Lab. Code § 1194.2 (providing double damages for minimum wage violations). 10 As explained infra, this statute of limitations can be extended to four years through the pleading of a companion claim  under the state Unfair Competition Law, Bus. & Prof. Code § 17200, et seq. 11 The revised FLSA regulations that went into effect on August 23, 2004, increased the minimum salary from $250 per  week to $455 per week.  Even under this revised minimum, California’s minimum remains higher than the FLSA’s  minimum.  12 The minimum wage in California was $8.00 per hour prior to July 1, 2014, and will increase to $10,00 per hour on  January 1, 2016.  The federal minimum wage is currently $7.25;  employees working within California are generally  subject to the higher state minimum wage.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 8 Accordingly, to qualify for the exemption, a manager must now be paid $37,480 per year.   A manager who does not meet the threshold compensation test is automatically disqualified  from the exemption. The other requirements are that the manager (1) must have the power to hire and fire, or  make recommendations on those topics that are given particular weight; (2) must supervise  at least two full-time equivalent positions; (3) must “primarily” be engaged in managerial  duties; and (4) must “customarily and regularly” exercise discretion and independent  judgment. 13 Most litigation in California arises out of element (3) above, because the California  Supreme Court in Ramirez v. Yosemite Water Co. 14 held that an employee meets element  (3) only when the employee spends more than half of the work time on exempt duties.  By  contrast, under the FLSA’s executive exemption, the employer need only establish that  management is the employee’s “primary duty,” which focuses on the relative importance of  the duty rather than just the amount of time devoted to the duty. 15 Aside from its emphasis on the percentage of work time devoted to exempt duties, there  has been little California case law explaining precisely which duties qualify as exempt  “managerial work.”  Since July of 2000, however, the Wage Order has expressly  incorporated by reference the then-existing FLSA regulations defining “managerial”  duties. 16   Accordingly, federal authority construing those specific regulations is highly  relevant in interpreting the California executive exemption. 17 Some examples of exempt work set forth in the federal regulation are interviewing,  selecting and training employees, setting and adjusting pay rates and work hours, directing                                                        13 See IWC Wage Order 1-2001(1)(A)(1); Nordquist v. McGraw-Hill Broad. Co., 32 Cal. App. 4th 555, 573 (1995)  (“‘Discretion and independent judgment’ within the meaning of IWC Order No. 11-80 involves the comparison of  possible courses of conduct, and acting after considering various possibilities.  It implies that the employee has the  power to make an independent choice free from immediate supervision and with respect to matters of significance . . .  [meaning matters] of substantial significance to the policies or general operations of the business of the employer.”). 14 20 Cal. 4th 785 (1999). 15 Id. at 797; see also Baldwin v. Trailer Inns, Inc., 266 F.3d 1104, 1113-16 (9th Cir. 2001) (although store managers  spent less than one-half their time on duties that met the federal executive exemption, they still qualified as exempt  because management was found to be their “primary” or most important duty). 16 See Whiteway v. FedEx Kinko’s Office & Print Servs., Inc., 2007 U.S. Dist. LEXIS 61239; 12 Wage & Hour Cas. 2d  (BNA) 1503 (N.D. Cal. Aug. 21, 2007) (citing IWC Wage Order 7-2001 § (1)(A)(1)(e) and noting that it incorporates the  federal definition of management as set forth in 29 C.F.R. § 541.102). 17 See Whiteway, 2007 U.S. Dist. LEXIS 61239, at *22 (relying on federal cases construing 29 C.F.R. § 541.202 to  interpret California executive exemption); see also Bldg. Material & Constr. Teamsters Union v. Farrell, 41 Cal. 3d 651,  658 (1986) (“[f]ederal decisions have frequently guided our interpretation of state labor provisions the language of which  parallels that of federal statutes”); Alcala v. Western Agric. Enters., 182 Cal. App. 3d 546, 550 (1986) (“It has been held  that when California’s laws are patterned on federal statutes, federal cases construing those federal statutes may be  looked to for persuasive guidance”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 9 work, keeping production records for subordinates, evaluating employees’ efficiency and  productivity, handling employee complaints, disciplining employees, planning work,  determining techniques to be used, distributing work, deciding on types of materials,  supplies, machinery and tools to be used or merchandise to be bought, stocked, and sold,  controlling the flow and distribution of merchandise and supplies, and providing for  employee safety. 18 Seyfarth Shaw has successfully defended many cases where liability turned on whether a  particular job duty qualifies as exempt or non-exempt.  From our experience in such cases,  it is important to carefully analyze cases that have addressed similar duties under the FLSA  regulations that are expressly incorporated into the Wage Orders.  For example, we  defended a case for a large HMO that turned on whether working pharmacy managers  were misclassified as exempt executives.  One of the main duties of the managers was to  check the work of other pharmacy employees for medication errors in filling prescriptions— a duty also performed by licensed pharmacists who were not managers.  We obtained  summary judgment by relying on numerous cases holding that (1) a manager checking  another employee’s work for compliance with a standard qualifies as exempt “supervision” 19 and (2) it does not alter the analysis that non-managers also perform the same task. 20 Another federal regulation expressly incorporated into the IWC Wage Orders is (former) 29  CFR Section 541.108, which includes in the definition of exempt work all work that is  “directly and closely related to exempt work.”  The FLSA regulation explains that this  concept allows seemingly non-exempt duties to be treated as exempt duties: [It] brings within the category of exempt work not only the actual  management of the department and the supervision of the  employees therein, but also activities which are closely associated  with the performance of the duties involved in such managerial and  supervisory functions or responsibilities.  The supervision of  employees and the management of a department include a great  many directly and closely related tasks which are different from the                                                        18 29 C.F.R. § 541.102.  Although the FLSA regulations were updated in 2004, the definition of exempt “executive” work  has remained substantially the same for decades. 19 See Sturm v. Toc Retail, Inc., 864 F. Supp. 1346, 1351 (M.D. Ga. 1994) (convenience store manager checking for  employees compliance with “Majik Market dos and don’ts”  was exempt supervision even though often performed by  senior clerks as well as the manager); see also Baldwin, 266 F.3d at 1117 (trailer park managers’ duty of ensuring that  park employees followed company policy was supervisory and, therefore, exempt work); Beauchamp v. Flex-N-Gate LLC, 357 F. Supp. 2d 1010, 1015-17 (E.D. Mich. 2005) (supervisory duty for a plant manager to “ensure that employees  in their charge actually meet [company] standards in their daily work”). 20 Sturm, 864 F. Supp. 1346; see also Baldwin, 266 F.3d at 1115 (“[Having non-exempt employees perform] managerial  tasks does not render the tasks non-exempt.”); Sepulveda v. Wal-Mart Stores, Inc., 237 F.R.D. 229, 239 (C.D. Cal.  2006) (“[T]he (assistant managers) seem to consider any task performed by an hourly employee to be a non-exempt  task.  That is not the law.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 10 work performed by subordinates and are commonly performed by  supervisors because they are helpful in supervising the employees  or contribute to the smooth functioning of the department for which  they are responsible.  Frequently such exempt work is of a kind  which in establishments that are organized differently or which are  larger and have greater specialization of function, may be performed  by a non-exempt employee hired especially for that purpose. 21 In other words, non-discretionary work can be “directly and closely related” to exempt  work—and hence itself considered exempt work—even if it is not strictly speaking essential  to the exempt work, 22 and even if it is work that need not be performed by managers. 23   As  long as the work is related to a management function, it is considered to be exempt.  These  amendments raise substantial arguments that activities, which when viewed in the abstract  seem non-exempt, may be considered exempt if they are undertaken with the purpose of  effectuating exempt functions of a manager’s job.   Another important issue in these cases that Ramirez does not resolve is how one applies  the purely quantitative approach to time spent simultaneously performing exempt and nonexempt tasks: Is this time exempt, non-exempt, or some combination of the two?  Under  federal law, a manager might concurrently be engaged in hands-on, non-exempt type work  and be monitoring the operation of a business for managerial purposes (e.g., pouring  coffee at a restaurant while directing work). 24 Employers received a different answer under California law when, in 2005, the First District  Court of Appeal in Murphy v. Kenneth Cole Productions, Inc. 25 rejected an employer’s  argument that time spent simultaneously managing and engaged in non-exempt work  counts entirely as “exempt time.”  The California Supreme Court, by granting review of the                                                        21 Former 29 C.F.R. § 541.108(a). 22 Harrison v. Preston Trucking Co., 201 F. Supp. 654, 658-59 (D. Md. 1962) (“[T]he test is not whether the work is  essential to the proper performance of the more important work, but whether it is related. Thus, notemaking, by a  consultant when standing alone or separated from his primary duties, would be routine and, hence, not directly and  closely related within the meaning of the regulations, but at the same time such work is necessary to the proper  performance of his primary duties and thus is considered to be ‘directly and closely related’ when performed by the  consultant.”). 23 Adams v. United States, 36 Fed. Cl. 91, 98 (1996) (“A supervisor does not become non-exempt merely by doing tasks  which are incidental to his main work, even if non-supervisory workers might perform them as well. The question is  whether a supervisor engages in those tasks because he is a supervisor.”). 24 See Donovan v. Burger King Corp., 672 F.2d 221, 225-26 (1st Cir. 1982).  The 2004 FLSA regulations added a new  regulation entitled “concurrent duties,” 29 C.F.R. § 541.106, explaining that a manager is engaged in exempt  managerial work when he is engaged simultaneously in exempt and non-exempt work.  This new regulation has not  been incorporated into the IWC regulations, however. 25 134 Cal. App. 4th 728 (2005), revd. on other grounds in Murphy v. Kenneth Cole Products, Inc., 40 Cal. 4th 1094  (2007). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 11 meal period issues within Murphy but not the concurrent duties issue, effectively rendered  the Murphy discussion of concurrent duties unciteable.  Nonetheless, the appellate court’s  analysis is instructive as to how other courts might address the issue of concurrently  exempt and non-exempt duties going forward. The Murphy appellate court held that a manager could not satisfy the executive exemption  where he spent 90 percent of the time working in non-exempt tasks even though he was  continually keeping an eye on other employees and otherwise “managing” throughout the  day while his hands engaged in the same kind of work his non-exempt subordinates  performed.  The court reasoned that a manager is non-exempt when he is “a nominal  coxswain who performed most of the time as an oarsman alongside the rest of the crew.” 26    The court did not state, however, that time spent simultaneously directing other employees  and engaged in non-exempt tasks counts purely as non-exempt time.  Rather, the court  suggested that the time spent in such a dual capacity may need somehow to be allocated  between exempt and non-exempt time. 27   As such, time engaged simultaneously in exempt  and non-exempt work might generate at least partial credit towards the 50 percent exempt  threshold to qualify for the exemption.  Further development in the case law is required to  clarify this concept. C. The Administrative Exemption 1. General Overview Like the FLSA, California wage and hour law recognizes an administrative overtime  exemption. 28   To qualify for the exemption in the most common circumstances, 29 the  employer must establish four elements: 1) More than one-half the employee’s work time involves the performance of  office or non-manual work directly related to the employer’s management  policies or general business operations; 2) The employee customarily and regularly exercises discretion and independent  judgment in carrying out job duties as to matters of significance to the  business. 30                                                       26 Id. at 744. 27 Id. at 744 n.8. 28 See, e.g., Wage Order 7-2001 § 1(A)(2). 29 There are alternative bases to qualify for the administrative exemption such as through regularly and directly assisting a  proprietor or performing administrative function in a school system, but those alternative bases rarely come up in class  litigation. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 12 3) The employee performs his or her job only under general supervision and  works along specialized or technical lines in work requiring special training,  experience, or knowledge; and 4) The employee is paid a salary equivalent to at least twice the state minimum  wage. 31 As with the executive exemption, the IWC Wage Order provision on the  administrative exemption has since 2001 incorporated several FLSA regulations by  reference.  As a result, decisions interpreting the federal administrative exemption  often provide persuasive guidance to California courts interpreting the California  administrative exemption. 32   Nonetheless, as explained below, California’s  interpretation of the administrative exemption in some ways departs from the way the  administrative exemption has been interpreted in most other jurisdictions. 2. California Develops a Unique Interpretation of the  Administrative/Production Dichotomy An issue of substantial dispute under the administrative exemption is whether the  employees at issue are working in an “administrative” capacity or in a “production”  capacity.  Generally speaking, only employees in the former group are eligible for the  exemption.  This distinction between production and administrative workers is  sometimes referred to as the “administrative/production dichotomy.”   One of the few class actions that actually went to trial in California, Bell v. Farmers  Insurance Exchange, 33 was a case challenging whether certain insurance adjusters  of the defendant qualified for the administrative exemption.  The plaintiffs prevailed  on the basis that the insurance adjusters at issue were found, on a classwide basis,  not to qualify for the administrative exemption.  Following the plaintiffs’ success in  Bell, numerous other cases have been filed to challenge the exempt status of  insurance adjusters.                                                                                                                                                                                      30 Some courts mistakenly hold that employees must exercise discretion and independent judgment more than fifty  percent of the time.  In fact, the term “customarily and regularly” is defined in the FLSA regulations that are incorporated  in the Wage Orders and “more than occasionally but less than constantly.”  It is generally established by showing that a  duty is carried out on a recurrent, non-sporadic basis.  See Baca v. United States, 1 Wage & Hour Cas. 2d (BNA) 1066  (U.S. Fed. Cl. 1993) (doing exempt duties only one-third of the total work time, but on a regular recurring basis, qualified  as performing the task “customarily and regularly”). 31 Wage Order 7-2001 § 1(A)(2)(f). 32 Combs v. Skyriver Communications, LLC, 159 Cal. App. 4th 1242, 1254-55 (2007) (recognizing that the incorporation of  FLSA regulations was intended to make the California exemption “closely parallel the federal regulatory definition of the  same exemption”). 33 87 Cal. App. 4th 805 (2001).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 13 In Bell, the California Court of Appeal addressed the requirement that an  administratively exempt employee work in an administrative job rather than a  production role—a concept referred to as the “administrative/production dichotomy.” 34    In doing so, the court examined FLSA regulations and case law that draw a  distinction between “administrative work” which can qualify as exempt work under the  exemption and “production work” which cannot qualify. 35 Because Farmers Insurance Exchange was the claims subsidiary of Farmers Group,  performing adjusting services for a variety of underwriting entities within the group,  and because Farmers Group provided administrative support to Farmers Insurance  Exchange, the court held that the work of adjusters was inherently production of  Farmers’ product (insurance adjusting), which rendered them ineligible for the  exemption regardless of their duties. 36   In a more recent published decision from the  same Bell case, the court declined to reconsider its earlier holding on this point. 37    Both these decisions left open the possibility that an insurance adjuster that did not  work for a special claims adjusting subsidiary insurance company might still qualify  for the exemption. Bell was decided under the pre-2000 version of the Wage Orders, which did not  expressly incorporate the FLSA’s regulations on its administrative exemption.  Given  that the current version of the IWC regulations expressly incorporates the federal  administrative exemption regulations, and given that numerous federal decisions  have refused to apply Bell’s reasoning to FLSA insurance adjuster cases, 38 employers have at least a colorable argument that Bell is not good law for cases  arising since 2001.  Moreover, the 2004 amendments to the FLSA regulations, which  purport merely to clarify and to update what the FLSA has always required, state that  insurance adjusters can be covered by the administrative exemption “whether they                                                        34 Id. at 811-12. 35 See, e.g., Dalheim v. KDFW-TV, 918 F.2d 1220, 1230 (5th Cir. 1990) (“The distinction § 541.205(a) draws is between  those employees whose primary duty is administering the business affairs of the enterprise from those whose primary  duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce and  market.”). 36 Bell, 87 Cal. App. 4th at 823-28.  Although the court specifically held that it did not need to look at the duties test, it  noted that the undisputed evidence showed that the adjusters at issue simply acted as claims processors with little  authority or discretion. 37 Bell v. Farmers Ins. Exch. (Bell III), 115 Cal. App. 4th 715 (2004). 38 See, e.g., Miller v. Farmers Ins. Exch., 481 F.3d 1119 (9th Cir. 2007) (criticizing Bell’s interpretation of the  administrative/professional dichotomy and finding insurance adjusters categorically to qualify as exempt employees); In  re Farmers Ins. Exch., 336 F. Supp. 2d 1077, 1087-88, 1091 (D. Or. 2004) (rejecting notion that Farmers’ adjusters  were non-exempt “production” workers regardless of whether they met the other requirements of the administrative  exemption; refusing to apply Bell to a case under the FLSA).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 14 work for an insurance company or another type of company.” 39   Several federal  decisions have concluded that under the FLSA, insurance adjusters are not entitled  to overtime. 40 Employers hoped that subsequent developments in case law would limit Bell to its  facts.  Their hopes were bolstered with the Ninth Circuit’s 2007 issuance of Miller v.  Farmers Insurance Exchange. 41   In this opinion, the Ninth Circuit held that insurance  adjusters, as a rule, qualify for the administrative exemption, and it criticized the Bell decisions’ overbroad construction of the meaning of “production work.” 42 More recently, the Fourth District Court of Appeal provided some additional  ammunition to employers trying to demonstrate that workers fit within the  administrative exemption.  In Combs v. Skyriver Communications, Inc., 43 the  appellate court affirmed the trial court’s decision not to apply the  administrative/production dichotomy at all in connection with evaluating the exempt  status of an information technology (“IT”) professional. The Combs opinion distinguished Bell on multiple grounds.  First, the court noted that  Bell was legally distinguishable because it was decided before Wage Order Number  4 was revised to expressly incorporate the applicable federal regulations. 44   The court  also found Bell to be factually distinguishable because the insurance adjusters at  issue in Bell were found to have job responsibilities that were restricted to “handling  of the routine and unimportant.” 45   In contrast, the plaintiff in Combs was found to  have more specialized job duties that “cannot be readily categorized in terms of the  administrative/production worker dichotomy.” 46                                                       39 29 C.F.R. § 541.203(a).  The current regulations still require an adjuster to meet the duties test to qualify as exempt,  which requires the adjuster to perform such activities as “interviewing insureds, witnesses and physicians; inspecting  property damage; reviewing factual information to prepare damages estimates; evaluating and making  recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements;  and making recommendations regarding litigation.”  See also former 29 C.F.R. § 541.205(c)(5) (identifying insurance  adjusters within the universe of employees often covered by the administrative exemption). 40 See, e.g., Munizza v. State Farm Mut. Auto. Ins. Co., 103 F.3d 139 (9th Cir. 1996) (memorandum); Blinston v. Hartford  Accident & Indemn. Co., 20 Wage & Hour Cas. (BNA) 6 (W.D. Mo. 1970). 41 481 F.3d 1119 (9th Cir. 2007). 42 481 F.3d at 1124, 1132. 43 159 Cal. App. 4th 1242, 1260-62 (2008), review denied (May 14, 2008).  44 Id. at 1259-60. 45 Id. at 1259. 46 Id. at 1261.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 15 Some thought that Combs signaled a backlash against the Bell decision, which many  believe went too far in emphasizing the administrative/production dichotomy over  other aspects of the test for the administrative exemption.  Although Combs has  some pro-exemption language in its discussions distinguishing Bell, its application  may be somewhat limited because the plaintiff held a fairly high-level, atypical IT  position.  This makes it more difficult to apply Combs to other situations involving  lower level IT jobs or other sorts of mid-level administrative positions. 47 3. The Administrative/Production Dichotomy Test Survives—Harris v.  Superior Court On December 29, 2011, the California Supreme Court issued its decision in Harris v.  Superior Court, 48 holding that the Court of Appeal mistakenly concluded that claims  adjusters, as a matter of law, do not qualify for the administrative exemption.  The  Supreme Court did not provide definitive guidance on this topic in its opinion.  Rather,  the Court simply held that the Court of Appeal had improperly applied the  “administrative/production worker dichotomy” as a dispositive test.  Liberty Mutual claims adjusters had filed a class action alleging that Liberty Mutual  misclassified them as exempt administrative employees.  The trial court denied  plaintiffs’ motion for summary adjudication on Liberty Mutual’s administrative  exemption affirmative defense, but the Court of Appeal reversed the trial court and  held that as a matter of law, the administrative exemption did not apply to the claims  adjusters.  The Court of Appeal strictly applied the “administrative/production worker  dichotomy” test set forth in the Bell v. Farmers Insurance Exchange cases and held  that adjusting claims was part of the “product” that their employer sold and therefore  not an administrative duty.  While the administrative exemption analysis depends on multiple factors, the Harris decision focused on only one—whether the employees’ work qualified as  administrative.  The California Supreme Court broke this analysis down into two  components, one “qualitative” (i.e., whether the work is administrative in nature) and  the other “quantitative” (i.e. whether it is of “substantial importance” to the employer’s  management policies or general business operations).                                                          47 In Heffelfinger v. Electronic Data Systems, 580 F. Supp. 2d 933, 961-62 (C.D. Cal. 2008), affirmed in part, reversed in  part, 492 Fed. Appx. 710 (9th Cir. 2012) , a federal district court surveyed various cases that analyzed whether IT  workers were exempt, and found there to be a “clear demarcation point,”  with employees who “were tasked to install,  maintain, and troubleshoot software” falling on the non-exempt side, and those “charged with writing code,  programming, or ‘administering’ databases or networks” falling on the exempt side. 48 53 Cal. 4th 170 (2011).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 16 In reversing the Court of Appeal, the California Supreme Court distinguished Bell.   First, the Court noted that the Bell opinions limited their holding to the specific facts of  that case (including defendants’ stipulation that the work performed by all plaintiffs was ‘routine and unimportant’).  Second, the Court noted that the analysis in Bell relied on the applicable Wage Order at that time (Wage Order 4-1998).  That order  did not provide a sufficient definition of the administrative exemption, thereby  requiring the Bell court to look beyond the Wage Order’s language.  In contrast,  Wage Order 4-2001 (the current Wage Order, applied in Harris) incorporates specific  federal regulations and contains “detailed guidance” concerning the administrative  exemption. The Court of Appeal in Harris erred by focusing too heavily on the  administrative/production dichotomy rather than applying the language of the relevant  wage order and regulations.  The Supreme Court ultimately declined to adopt a rule precluding the use of the  dichotomy as an analytical tool.  Instead, the Court held that, in determining whether  work is administrative, courts must consider the particular facts and apply the  language of the statutes and wage orders at issue. 49   If the statutes and wage orders  fail to provide adequate guidance, the Court held, then it would be appropriate to  consider other sources, including, presumably, the administrative/production  dichotomy. The only concrete guidance from the California Supreme Court in Harris is that the  administrative/production dichotomy is not a dispositive test for the administrative  exemption.  The Court left open the possibility that the dichotomy may still apply in  future cases.  Employers who were looking for more specific guidance from the Court  on the administrative exemption were disappointed, as, even after Harris,  determining whether an employee satisfies the administrative exemption remains a  highly fact-specific venture. D. The Outside Sales Exemption The outside sales exemption is the broadest of all in that it exempts the employees from all provisions in the Wage Orders, even minimum wage protections. 50   To qualify as an outside  salesperson, an employee must “customarily and regularly work more than half the working  time away from the employer’s place of business selling tangible or intangible items or                                                        49 The Court specifically noted that to properly interpret California’s administrative exemption, courts should only consider  the FLSA regulations effective as of 2001.  See also Heffelfinger v. Electronic Data Systems Corp., 2012 WL 2045960  (9th Cir. June 7, 2012) (applying Harris rule in determining administrative exemption for computer professionals).   50 IWC Wage Order 1-2001(1)(c) (“the provisions of this wage order shall not apply to outside salespersons”).  By  contrast, the white collar exemptions exempt employees only from Section 3 through 12 of the Wage Orders and other  exemptions exempt employees only from Section 3 (governing hours of work).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 17 obtaining orders or contracts for products, services or use of facilities.” 51   This definition is  slightly different from the definition of an outside salesperson under the FLSA, which  provides that an employee is an outside salesperson if (1) the employee’s primary duty is making sales (as defined in the FLSA), or obtaining orders or contracts for services or for  the use of facilities for which a consideration will be paid by the client or customer; and (2)  the employee is customarily and regularly engaged away from the employer’s place or  places of business. 52 In 1999, in Ramirez, 53 the California Supreme Court held that the difference in the wording  of the federal and state outside sales exemptions was intentional and that California  therefore has an exemption narrower than the FLSA’s.  In particular, the inclusion of the  phrase “more than half the employee’s working time” in the California definition of an  outside salesperson indicated that employees could not qualify for the California exemption  if they consistently spent more than one-half their time on work other than “outside sales”  work. 54   The Supreme Court also noted that there was no reference in the California  definition to work “incidental to or in conjunction” with an employee’s sales work, which the  court interpreted as excluding any such “incidental” work from the 50 percent standard. 55    Nonetheless, the Supreme Court held that if the employer could show that it reasonably expected that its employees would spend the majority of their time engaged in outside  sales, but the employee violated those expectations by not doing so, then the employer  could still take advantage of the exemption. 56 The facts of the Ramirez case were relatively straightforward and thus did not provide the  Supreme Court with the opportunity to address more nuanced situations.  The job at issue  in Ramirez had employees spending virtually all their work time away from the employer’s  place of business and doing essentially the same small set of tasks every day—i.e., driving  to the homes of customers to deliver bottled water and attempting, where possible, to sell  them additional water products.  The job duties were easily divided into “sales” and  “delivery,” and the court merely held that more time had to be devoted to sales than to  delivery for the delivery salespersons to qualify as outside salespersons. 57                                                       51 IWC Wage Order 1-2001(2)(j) (defining “outside salesperson”). 52     29 C.F.R. § 541.500. 53 20 Cal. 4th 785 (1999).  This decision was discussed, supra, in the context of the executive exemption. 54 Id. at 797-98. 55 Id. at 797. 56 Id. at 802. 57 Id. at 801.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 18 Ramirez left open the following questions:  What does it mean to “customarily and regularly” spend more than one-half of the  work time on outside sales?  “Customarily and regularly” is defined in the FLSA  regulations as “more than occasionally but less than constantly.” 58   If an employee  has a habit of often spending two or three days working away from the employer’s  place of business, but spends the overall majority of all work time at the employer’s  place of business, would that qualify as “customarily and regularly” spending more  than one-half the work time outside?  How does one attribute time spent before a sale preparing to make a sales call or  time spent after a sale completing the paper work?  The Ramirez decision  mentions that the employer argued it would be absurd to exclude those tasks from  the “outside sales” calculation, but the California Supreme Court did not explain  how those duties should be analyzed under the exemption.  What constitutes “away from the employer’s place of business”?  Clearly delivering  water to a customer’s home qualifies, but what if the employee is in a job where he  is making customer contact by telephone?  Is any time selling outside the  employee’s designated “office” considered time “away from the employer’s place of  business”?  How does an employer enforce reasonable expectations that its employees spend  the majority of their time outside selling?  Where the employer encourages selling,  but allows the employees to make sales any way they want without tracking their  movements, what is the employer’s reasonable expectation as to “outside sales”  activity? Because all these questions remain open, there is still a great deal of litigation over the  outside sales exemption. Separate from the substantive issue of whether a particular employee meets the outside  sales exemption, there has been significant litigation over whether outside sales exempt  status can be decided collectively on a class basis.  Courts have been more willing to deny  class certification in these cases where the only question is whether employees who  undisputedly focus on sales spend enough of their time “outside” to meet the exemption.                                                         58 See Baca v. United States, 1 Wage & Hour Cas. 2d (BNA) 1066 (U.S. Fed. Cl. 1993) (doing exempt duties only onethird of the total work time, but on a regular recurring basis, qualified as performing the task “customarily and regularly”);  Shriner v. Smurfit-Stone Container, 2006 Mont. Dist. LEXIS 606 (D. Mont. Aug. 30, 2006) (employee who spent less  than half of his total work time supervising employees still “customarily and regularly” supervised employees because  “his role as a relief supervisor was expected, relied upon and regularly performed” and was his role “on more than  isolated or occasional incidents”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 19 Most notably, in a case in which Seyfarth Shaw represented the prevailing defendant, the  Ninth Circuit, in Vinole v. Countrywide Home Loans, Inc., 59 affirmed a district court order  that the outside sales exempt status of branch loan originators could not be litigated on a  collective basis.  There was no evidence that Countrywide required its employees to spend  a certain amount of time inside, and there was great variation in the testimony as to how  different loan originators actually spent their time.  The Ninth Circuit explained how this  made class certification inappropriate: “Plaintiffs seek to minimize the district court’s main concern--that although there are  common issues, including uniform classification, the inquiry into each HLC’s exempt status  would burden the court.” 60   “The principal factor in determining whether common issues of  fact predominate is whether the uniform classification, right or wrong, eases the burden of  the individual inquiry. But this is a legitimate concern. Plaintiffs’ claims will require inquiries  into how much time each individual HLC spent in or out of the office and how the HLC  performed his or her job; all of this where the HLC was granted almost unfettered autonomy  to do his or her job. This must be considered along with the lack of issues subject to  common proof that would actually ameliorate the need to hold several hundred mini-trials  with respect to each HLC’s actual work performance.” 61 III. Unlawful Deductions from Wages A. Generally A second allegation commonly made in Labor Code class actions is that the employer  unlawfully deducted from the employee’s wages.  Plaintiffs have used these allegations to  challenge policies designed to hold employees liable for cash shortages or theft, to pay  bonuses based on net profits, and to advance commissions subject to recoupment or  “chargeback.” Under California law, an employer cannot deduct from an employee’s wages to account for  losses to the business that occurred as a result of simple negligence or through no fault of  the employee.  Courts have held that such losses are part of the cost of doing business  and, therefore, should be borne by the enterprise rather than the individual employees.   This principle is codified specifically in Section 8 of the Wage Orders:                                                       59 571 F.3d 935 (9th Cir. 2009). 60 Id. at 946. 61 Id. at 947 (emphasis added); see also Mevorah v. Wells Fargo Home Mortgage, Inc., 268 F.R.D. 604 (N.D. Cal. Jan.  12, 2010) (on remand after reversal of certification decision for reconsideration, district court denied certification as to  class of Wells Fargo home loan consultants); Maddock v. KB Homes, Inc., 248 F.R.D. 229 (C.D. Cal. 2007) (denying  class certification as to putative class of commissioned home salespersons).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 20 No employer shall make any deduction from the wage or require any  reimbursement from an employee for any cash shortage, breakage, or loss of  equipment, unless it can be shown that the shortage, breakage, or loss is caused  by a dishonest or willful act, or by the gross negligence of the employee. In dicta, several California cases have indicated the rule codified in Section 8 extends  beyond deductions for cash shortage, breakage, or loss of equipment.  The seminal case  on this issue, Kerr’s Catering Service v. Dep’t of Industrial Relations, 62 held only that the  IWC had the authority to promulgate Section 8.  In explaining its reasoning, however, the  California Supreme Court used sweeping language and invoked several provisions from  the California Labor Code, such as Section 221 (which precludes an employer from  demanding an employee pay back wages once the wages are earned), and Sections 400- 410 (which limit employers’ rights to seek cash bonds from employees).  The court did not hold that those Labor Code provisions barred deductions for cash shortages, but rather  held that the public policies that underlie those Labor Code Sections gave the IWC  authority to enact Section 8. Later cases read Kerr’s Catering to say that the Labor Code itself barred deductions for  “unanticipated losses” or “business losses that may result from the employee’s simple  negligence.” 63   By locating this anti-deduction rule in the Labor Code rather than the Wage  Orders, these decisions effectively nullified Section 1(A) of the Wage Orders, which  provides that the anti-deduction rules within Section 8 do not apply to exempt  administrators, professionals, or executives. 64   If the anti-deduction rule stems from the  Labor Code rather than Section 8, then it applies to exempt and non-exempt employees. B. Unlawful Bonus Plans Based on the broad anti-deduction dicta in cases that cited Kerr’s Catering, some class  actions were filed alleging that certain bonus plans violated Labor Code Section 221 and  Sections 400-410 when the size of the bonus was determined in any part by the level of net  profits of the business.  Although an appellate court adopted much of the plaintiffs’  reasoning in the 2003 opinion Ralphs Grocery Co. v. Superior Court (Ralphs I), 65 the                                                        62 57 Cal. 2d 319, 329 (1962). 63 Hudgins v. Neiman Marcus Group, Inc., 34 Cal. App. 4th 1109, 1118 (1995) (discussed infra); see also Quillian v. Lion  Oil Co., 96 Cal. App. 3d 156, 162-63 (1979) (citing Kerr’s Catering for the principle that the Labor Code itself bars  unexpected deductions for losses not the result of an employee’s willful misconduct). 64 Section 1(A) provides that “[p]rovisions of Sections 3 through 12 shall not apply to persons employed in administrative,  executive, or professional capacities.” 65 112 Cal. App. 4th 1090 (2003).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 21 California Supreme Court in Prachasaisoradej v. Ralphs Grocery Co. (Ralphs II) 66 rejected  much of that decision and instead held that net-profit based bonus systems are lawful. The plaintiffs had reasoned that net profits were reduced when merchandise in the store  was lost or broken or when cash went missing from the cash register.  Accordingly, they  argued, reducing an employee’s bonus when net profits decreased was tantamount to  holding the employee personally liable for “business losses” that were not the employee’s  fault.  Furthermore, these plaintiffs also turned to Labor Code Section 3751, which forbids  employers, “directly or indirectly,” to “exact or receive from any employee any contribution,  or make or take any deduction from the earnings of any employee” to pay for workers’  compensation expenses.  The plaintiffs argued that if these workers’ compensation  expenses were factored into the net profit calculation, then any reduction in bonus to  account for increased workers’ compensation expenses plainly violated Section 3751, just  as a bonus taking cash shortages into account violated Section 8 of the Wage Orders, as  interpreted by Kerr’s Catering.  At least one appellate decision agreed that net profits based  calculations ran afoul of Section 3751. 67 After several years in which many bonus plan class actions were filed, the California  Supreme Court effectively put an end to them in 2007 with the issuance of Ralphs II. 68 There, the Court held that traditional net-profits-based bonus systems are lawful in  California and are not the functional equivalent of a scheme to deduct from employee’s  wages on improper bases. The California Supreme court distinguished earlier cases that invalidated bonus plans that  tied a bonus or commission to an employee’s individual sales effort, but which then  reduced the bonus amount to cover employer costs.  Under those types of bonus plans,  employers used the bonus as an artifice to hide the fact that they were charging employees  on a dollar-for-dollar basis for losses to the company and merely hid the deduction in the  calculation of the so-called “bonus.” 69 By contrast, “the [Ralphs plan] did not create an expectation or entitlement in a specified  wage, then take deductions or contributions from that wage to reimburse Ralphs for its  business costs.”  Each Ralphs store employee received a guaranteed dollar wage, which  was paid regardless of a store’s profit or loss for a specified period.  Under the Ralphs  bonus plan, employees were entitled to a supplementary incentive compensation payment                                                        66 42 Cal. 4th 217 (2007). 67 Ralphs I, 112 Cal. App. 4th at 1104-5. 68 42 Cal. 4th 217 (2007). 69 See, e.g., Quillian, 96 Cal. App. 3d 156 (1970) (manager received bonus calculated as a percentage of store sales  minus the dollar value of any cash shortages during the bonus period). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 22 “only after the store had completed the relevant period of operation” and the resulting profit  or loss figure was calculated.  This final figure “was the amount offered or promised as  compensation for labor performed by eligible employees, and it thus represented their  supplemental ‘wages’ or ‘earnings.’”  Therefore, the amount “offered or promised as  compensation for labor performed” already accounted for the deductions about which the  plaintiff complained. 70 Accordingly, the Ralphs plan did not illegally shift business losses to employees.  Rather, it  provided supplemental compensation the company used to “encourage and reward certain employees’ cooperative and collective contributions to the profitable performance of their  stores” by providing them a portion of their store profits that “Ralphs would otherwise be  entitled to retain itself.” 71 Ralphs represents a victory for employers because its holding permits a business to have a  bonus plan that distributes sums based on the level of the company’s net profits.  Although  Ralphs addressed and reconciled a significant question of California wage law, it remains  to be seen how the lower courts will treat bonus plans that depart from the standard netprofit-based bonus system at issue in Ralphs. C. Unlawful Commission Chargebacks 1. Nature of the Violation Another Labor Code class action that was once common, but has become less so, is  one alleging that commission chargebacks constitute illegal deductions.  Companies  often employ commissioned salespeople who receive a commission immediately  upon the completion of a sale, subject to the occurrence of some future event.  For  example, a salesperson might sell a product on day one and immediately receive a  commission that is subject to “chargeback” if the customer fails to pay within sixty  days. Plaintiffs attack chargebacks primarily by citing Labor Code Section 221, which  makes it unlawful for an employer to “collect or receive from an employee any part of  wages theretofore paid” to the employee.  In addition, where the chargeback occurs  for reasons beyond the control of the sales employee (such as the customer’s failure  to pay for the item), plaintiffs have invoked Section 8 of the Wage Orders and the  Kerr’s Catering line of cases for the argument that a chargeback constitutes an  “unlawful deduction” from an employee’s wage not attributable to the employee’s  willful misconduct.                                                       70 42 Cal. 4th at 229. 71 Id. at 228.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 23 In particular, plaintiffs have attempted to derive a “no-chargebacks” rule from Hudgins  v. Neiman Marcus, 72 a case involving commission chargebacks for retail sales  employees on certain returns of merchandise.  Plaintiffs read the case as generally  prohibiting chargebacks where the employee was not at fault for the return.   Defendants respond that the case’s holding is more limited, addressing only the  situation where Neiman Marcus held its employees collectively responsible for the  return of any item that could not be traced back to the particular salesperson who  sold it.  The court never suggested that charging back the commission was unlawful  where the sale can, in fact, be traced back to the person who received the  commission and only that employee experiences the chargeback when the item is  returned.  In fact, the state Division of Labor Standards Enforcement (“DLSE”) has  construed Hudgins as approving a commission chargeback for such an identified return. 73   Moreover, multiple cases have since echoed that interpretation of Hudgins. 74 As discussed below, guidelines have now emerged that should allow employers to  craft compensation systems that include a chargeback element without running afoul  of California law. 2. The Steinhebel Case Approves Certain Chargeback Plans In February 2005, in Steinhebel v. Los Angeles Times Communications, LLC, 75 the  Second District Court of Appeal rejected the broad reading of Section 221 that the  plaintiffs advanced.  The court expressly held that California’s various “antideduction” provisions do not preclude an employer from advancing a commission to  an employee subject to chargeback if a condition for “earning” the chargeback is not  satisfied. More specifically, the court upheld a pay system that advanced newspaper telesales  employees a commission the day they sold a newspaper subscription, but wherein                                                        72 34 Cal. App. 4th 1109 (1995). 73 DLSE Opinion Letter 1999.01.09.  The DLSE has also opined that chargebacks of commissions are acceptable when a  customer fails to pay for an item so long as the sales contract makes clear that the commission is not earned until  payment is received.  DLSE Opinion Letter 1999.01.09 (“A commission is ‘earned’ when the employee has perfected  the right to payment; that is, when all of the legal conditions precedent have been met.  Such conditions precedent are  a matter of contract between the employer and the employee, subject to various limitations imposed by common law or  statute.”); see also DLSE Opinion Letter 2002.12.09-2 (“Commissions are earned only after the reasonable conditions  precedent of the employment agreement have been met and commissions can be calculated.”). 74 See Steinhebel v. Los Angeles Times Communications, LLC, 126 Cal. App. 4th 696, 711 (2005); Harris v. Investor’s  Bus. Daily 138 Cal. App. 4th 28, 41, modified, 138 Cal. App. 4th 871 (2006) (discussed below, each interpreting  Hudgins as allowing chargebacks for identified returns). 75 126 Cal. App. 4th 696 (2005).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 24 the subscription was not “earned” until the customer kept the subscription for twentyeight days without canceling.  If the customer canceled sooner for any reason, then  the commission was “charged back” by being deducted from the employee’s next  commission advance.  The court held that the contract was consistent with the Labor  Code and public policy because the contract plainly defined the “earning” of the  commission as the customer keeping the newspaper for twenty-eight days without  canceling, and the overall pay system inured to the benefit of the employees by  allowing them to be paid sooner than the “earning” date. 76   Indeed, given the  widespread nature of commission chargeback systems, the court was reluctant to  declare such a system illegal without some express language in the Labor Code  requiring such a result: Compensating employees in part with advances on commissions is a  longstanding practice.  No prior case has held the practice to violate the  California Labor Code, and we are pointed to no statute that expressly  bars such a practice.  In view of its widespread nature, we are loathe to  hold the Labor Code bars such a practice by implication. 77 3. Further Development of the Law Since Steinhebel Steinhebel remains good law, and an employer setting up a chargeback system may  use the Steinhebel system as a safe template.  It is important to note, however, that  Steinhebel involved ideal facts for the defendant: the chargeback agreement was in a  writing signed by the employees; the agreement referred to the initial payment as an  “advance”; the conditions to earn the commissions were spelled out in the  compensation plan; and those conditions did not seem particularly onerous.  But  what if some of the ideal elements are missing? The first word on chargebacks following Steinhebel suggested that if an employer did  not document the chargeback agreement properly, it could violate California law.  In  Harris v. Investor’s Business Daily, 78 another panel of the Second District Court of  Appeal held that the lack of a written chargeback agreement precluded summary  judgment for the employer.  As in Steinhebel, the plaintiffs sold newspaper  subscriptions, and the money they initially received was subject to chargeback if the  customer canceled the subscription without holding it a certain period of time.  Unlike  Steinhebel, however, there was no written agreement that described the initial  payment as an advance or otherwise suggested that it was not “earned” upon the                                                        76 Id. at 708-09. 77 Id. at 709. 78 138 Cal. App. 4th 28, modified, 138 Cal. App. 4th 871 (2006).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 25 completion of the sale.  Given that the plaintiffs testified that they understood they  earned the money when their sale was completed, the court held that there was a  triable issue of fact whether the chargeback system violated Labor Code Section  221. 79 Later, the First District Court of Appeal issued a far more favorable chargeback  opinion in Koehl v. Verio, Inc., 80 a case involving chargebacks against salespersons  who sold internet services.  As in Steinhebel, the chargeback plan in Koehl was in a  writing acknowledged by each employee.  Unlike Steinhebel, however, the  compensation plan did not refer to the original payment as an “advance,” although it  did state expressly that the commission was not “earned” until the customer made  three months of payments on the contract.  The Koehl court held that, as long as the  plan made clear that the commission was not earned until a later condition was  satisfied, it made no difference whether the payment was labeled a “commission” or  an “advance.” 81   The court further noted that this conclusion was entirely consistent  with Harris, which merely held that, in the absence of a writing memorializing the  parties’ agreement, a material dispute between the employer and employee as to  when the commission was “earned” made summary judgment of the Section 221  claim inappropriate. 82 Koehl actually went further than Steinhebel in two respects.  Steinhebel ended the  chargeback inquiry at whether the chargebacks at issue violated Section 221.  Koehl went further by affirming the judgment in the defendant’s favor on a separate,  alternative basis—i.e., that even if the chargeback violated Section 221, it was  nonetheless saved by an exception to Section 221 set forth in Labor Code Section  224. 83   Koehl also went beyond Steinhebel in holding that the doctrine of  unconscionability did not invalidate the chargeback system. 84 Section 224 provides, in relevant part, that Section 221 “shall in no way make it  unlawful for an employer to withhold or divert any portion of an employee’s wages  when . . . a deduction is expressly authorized in writing by the employee to cover . . .  deductions not amounting to a rebate or deduction from the standard wage.”   Although Steinhebel took note of Labor Code Section 224, it did not rely on it to                                                        79 Id. at 41. 80 142 Cal. App. 4th 1313 (2006). 81 Id. at 1334. 82 Id. 83 Id. at 1337-38. 84 Id. at 1338-40.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 26 support the holding that the chargeback there was lawful. 85   By contrast, Koehl held  that Section 224 rendered the chargeback system at issue lawful even if it otherwise  violated Section 221. 86 To support that conclusion, the court interpreted Section 224 as saving a chargeback  system where (1) the chargeback is authorized in writing; and (2) the compensation  system includes base pay (i.e., a “standard wage”) that is not subject to the  chargeback. 87   If that is indeed the proper meaning of “standard wage,” then  employers should be able to defend existing chargeback systems as long as the  employees have acknowledged the system in writing and the chargeback is taken  only from incentive pay that is paid over and above a base wage. The Koehl court also held that the chargeback at issue was not unconscionable.  The  court noted that there was no element of unfair surprise given that the chargeback  system was common in the industry and was clearly disclosed to the employees.   Furthermore, given that the employees had a continuing duty to service the  customers, there was a valid basis for the employer to hold them responsible for  customers canceling internet service in the first three months. 88 Although the California Supreme Court denied review to both the Steinhebel and  Koehl decisions, it implicitly approved of those decisions in its Ralphs II opinion.  In  discussing the limited scope of Section 221, the California Supreme Court cited  Steinhebel and Koehl with approval, effectively strengthening them as precedents. 89 In 2012, the California Court of Appeal went even further than Steinhebel with its  decision in Deleon v. Verizon Wireless, LLC. 90   In Deleon, the court ruled that a  commission advance is not a wage, because all conditions for performance have not  been satisfied; accordingly, Verizon’s chargeback provisions did not violate Section  221. 91   The Deleon court also held that an employee does not have to sign an  acknowledgement of a compensation plan in order to be bound by its terms, as in                                                        85 Steinhebel, 126 Cal. App. 4th at 707. 86 Koehl, 142 Cal. App. 4th at 1337-38. 87 Id. 88 Id. 89 Ralphs II, 42 Cal. 4th at 220. 90 207 Cal. App. 4th 800 (2012). 91 Deleon, 207 Cal. App. 4th at 809-10.  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 27 Steinhebel: rather an employee’s continued employment can constitute acceptance  of those terms. 92            IV. Reimbursement of Employee Expenses A. The Duty to Reimburse Expenses Under Labor Code Section  2802 Labor Code Section 2802 requires an employer to “indemnify” its employees for “all  necessary expenditures incurred” in the course of their employment.  This provision has  been in effect since 1937, and over the next sixty-plus years, litigation over Section 2802  focused almost exclusively on seeking “indemnification” from the employer in the narrow  insurance-context sense of the word—”to reimburse (another) for a loss suffered because  of a third party’s act or default.” 93 Plaintiffs have attempted to use Section 2802 as a vehicle to obtain reimbursement of  routine business expenses that employees incur in the course of their duties—such as  driving a car or talking on a cell phone.  Before 2005, all the published cases under Section  2802 involved circumstances where an employee sought to have the employer pay the cost  of tools or equipment lost or damaged on the job, 94 or to indemnify the employee for the  cost of legal counsel the employee incurred in defending a claim based on the employee’s  performance of job duties. 95   But in November 2007, the California Supreme Court in  Gattuso v. Harte-Hanks Shoppers, Inc. 96 assumed (without deciding) that Section 2802  does indeed require the reimbursement of necessary business expenses.                                                       92 Id. at 812 (“[A] signed acknowledgement that the employee read, understood and agreed to the compensation plan as  was the case in Steinhebel and Koehl, is not the only form of assent under contract law.”).  93 BLACK’S LAW DICTIONARY, 342 (2d pocket ed. 2001). 94 See, e.g., Machinists Auto. Trades v. Utility Trailers Sales, 141 Cal. App. 3d 80 (1983) (mechanic entitled to  indemnification for loss of his tools from employer’s premises in a burglary when employer required that employee have  tools and leave them on employer’s premises); Earll v. McCoy, 116 Cal. App. 2d 44 (1953) (employee not entitled to  reimbursement under Section 2802 for tools lost in a fire on employer’s premises when employee was not required to  leave tools at the place of employment). 95 See, e.g., Jacobus v. Krambo Corp., 78 Cal. App. 4th 1096 (2000) (expenses employee incurred in successful defense  against sex harassment allegations); Devereaux v. Latham & Watkins, 32 Cal. App. 4th 1571 (1995) (expenses incurred  by employee in connection with her depositions in two actions brought by third parties against her employer); Grissom  v. Vons Companies, Inc., 1 Cal. App. 4th 52 (1991) (expenses incurred by employee in defending third party lawsuit  arising out of auto accident that occurred during course and scope of employee’s employment; employee who retained  his own counsel after employer provided counsel is due reimbursement for attorney’s fees incurred because retention of  separate counsel was deemed necessary); Douglas v. Los Angeles Herald-Examiner, 50 Cal. App. 3d 449 (1975)  (expenses incurred by employee in defending lawsuit filed as a result of services rendered by employee in course and  scope of employment). 96 42 Cal. 4th 554 (2007) (noting the issue was not before the Court).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 28 The most common targets for Section 2802 class actions are businesses employing large  numbers of outside salespersons who are paid on straight commission.  Many such  businesses encourage their salespeople to make sales calls and to entertain clients to  generate business.  In addition, many such salespeople are constantly using cell phones  because they are on the road often and lack an office.  Many businesses believe that these  expenses are self-reimbursing in that employees incur expenses to generate more sales,  which generate more commissions, thereby covering those higher expenses. Before Gattuso, the law was unclear on how the employer could satisfy its duty to  reimburse necessary expenses.  The plaintiff in Gattuso argued that with respect to  business mileage, the employer had to allow employees to submit expense reports and  then reimburse the employees at the IRS mileage rate.  By contrast, the defendant argued  that Section 2802 allows any method to reimburse employee expenses so long as the  employer does, in fact, reimburse the employee for the full value of all expenses  necessarily incurred on the job. The California Supreme Court largely sided with the defendant.  The Court agreed that an  employer could choose among various alternative methods to reimburse employee  mileage, including (1) tracking the actual costs to the employee for necessary fuel,  insurance, depreciation, and service, and reimbursing that amount; (2) paying the  employee a lump sum payment each month so long as the lump sum actually covered all  necessary mileage expenses; (3) paying a per-mile rate, such as the IRS mileage rate; or  (4) increasing the salespersons’ commission rate with the extra commissions being  devoted to cover the employees’ expenses. 97 The California Supreme Court did set some limits, however.  For one, the Court held that, pursuant to Labor Code Section 2804, the employer and employee could not agree to  waive the right to reimbursement, so the employee was entitled to reimbursement of all  necessary expenses.  As such, if an employer offered a fixed expense allowance or an  enhanced commission rate, the employer would violate Section 2802 to the extent that  payment did not, in fact, cover all the employee’s necessary expenses. 98 The Court also established a requirement that the employer must communicate to the  employees to the extent any portion of the employees’ wages is intended to be devoted to expense reimbursement.  For example, if two percentage points of a 10 percent  commission is intended to cover expenses, the Court suggested that the employer would  have to make this fact known to employees to comply with Section 2802.  The Court also  stated that, going forward, the employer would be required to identify the portion of the                                                        97 Gattuso, 42 Cal. 4th at 568-71, 574. 98 Id. at 570-71.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 29 wage payments that was allocated to expenses on the employees’ itemized wage  statements (required under Labor Code Section 226(a)). 99 Although the Court clarified that only necessary expenses require reimbursement—as  opposed to any expense that is incurred in the course of performing work—the Court did  not provide much detailed guidance on how to distinguish a necessary expense from an  unnecessary one.  In discussing how an employer and employee would decide whether  mileage expenses were truly necessary, however, the Court suggested that it would be an  individualized inquiry that could vary markedly from one employee to another: In calculating the reimbursement amount due under Section 2802, the employer  may consider not only the actual expenses that the employee incurred, but also  whether each of those expenses was “necessary,” which in turn depends on the  reasonableness of the employee’s choices. For example, an employee’s choice of automobile will significantly affect the costs incurred.   An employee who chooses an expensive model and replaces it frequently will incur  substantially greater depreciation costs than an employee who chooses a lower priced  model and replaces it less frequently.  Similarly, some vehicles use substantially more fuel  or require more frequent or more costly maintenance and repairs than others.  The choice  of vehicle will also affect insurance costs.  Other employee choices, such as the brand and  grade of gasoline or tires and the shop performing maintenance and repairs, will also affect  the actual costs. 100 Separate from Gattuso, another decision issued in 2007 held that the employer has a duty  to reimburse for employee business expenses.  In Estrada v. FedEx Ground Package  System, Inc., 101 three drivers brought a class action against FedEx, contending that for the  limited purpose of their entitlement to reimbursement for work-related expenses, they were  employees, not independent contractors, and thus were entitled to reimbursement of  business expenses under Section 2802.  Although FedEx maintained that payments it  made as part of its operating agreement with the drivers provided reasonable  compensation for expenses, the trial court disagreed and ordered FedEx to pay $5.3 million  for under-reimbursed expenses. The Court of Appeal affirmed in part and reversed in part.  The court affirmed the trial  court’s central finding that the drivers were employees for purposes of Section 2802 and  that FedEx had failed to indemnify the drivers fully for their business expenses as required                                                        99 Id. at 574 n.6, 575-76. 100 Gattuso, 42 Cal. 4th at 568. 101 154 Cal. App. 4th 1 (2007).  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 30 by Section 2802.  The Court of Appeal held that although the drivers were entitled to  recover their out-of-pocket expenses and work accident insurance premiums, they were not  entitled to reimbursement for the cost of purchasing trucks to perform the job.  In essence,  the court held that an employer may require employees to furnish their own cars to perform  a job without indemnifying the employees for the cost of such purchases.  The court’s  reasoning also suggested that employers may be allowed to require employees to  purchase other items as a pre-condition of employment, such as cell phones or computers,  and that the requirement to furnish such items as a condition of employment does not  violate the reimbursement requirements of Section 2802. 102 B. Reimbursement for Uniforms Under the Wage Orders Separate from Section 2802, several Wage Orders state that when uniforms, tools, or  equipment are required by the employer, or necessary to perform the job duties, they must  be provided by the employer. 103   For example, employees may be required to wear a  company’s logo shirt while on duty.  The Wage Orders define “uniform” to include “apparel  or accessories of distinctive design or color.” 104   The IWC has explained, however, that the  employer’s obligation to pay for uniforms does not require the employer to pay for an  employee’s work clothes when the employee has only a broadly-defined dress code, such  as a dark suit and a tie for lawyers. 105 Due to the ambiguity in the meaning of “uniform,” class actions have been brought alleging  that employers must purchase clothing that arguably constitutes de facto “uniforms.”  In one  case, the DLSE instituted an action (and obtained a sizeable settlement) based on  allegations that a dress code consisting of a blue shirt and tan or khaki pants constituted a  uniform. 106   Also, some retailers have been sued for requiring sales associates to purchase  and wear the employer’s clothing products. 107                                                       102 DLSE Bulletin 84-7 states that “an applicant for employment may be required, as a condition of employment, to furnish  his [ ] own automobile or truck to be used in the course of employment, regardless of the amount of wages paid.”   Under Section 2802, “an employer who requires an employee to furnish his [ ] own car or truck to be used in the course  of employment would be obligated to reimburse the employee for the costs necessarily incurred by the employee in  using the car or truck in the course of employment.”   103 See, e.g., Wage Order 7-2001 § 9. 104 See, e.g., Wage Order 7-2001 § 9(A). 105 See IWC Order No. 4-98, Statement as to Basis (stating that employers may “specify basic wardrobe items which are  usual and generally usable in the occupation, such as white shirts, dark pants and black shoes and belts” and may  require the employees to bear the expense of such items”); DLSE Enforcement Policies and Interpretations Manual  (2002 Update) (“DLSE Manual”) § 45.5.2. (stating same). 106 Dep’t of Indus. Relations v. UI Video, 55 Cal. App. 4th 1084, 1088 (1997) (Blockbuster Video settled action brought by  DLSE alleging that dress code requirements for its 1,914 employees violated Section 9(A) of Wage Order 7). 107 Such a policy might also violate Labor Code Section 450, which precludes an employer from forcing an employee to  patronize the employer or to purchase a thing of value from a particular vendor.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 31 Certain Wage Orders provide that work uniforms must also be “maintained” by  employers. 108 In O’Connor v. Starbucks Corp., 109 the plaintiff brought a putative class action  on behalf of Starbucks employees to recover the cost of cleaning aprons issued by the  company.  Starbucks provided that workers were responsible for maintaining and  laundering their own aprons.  The plaintiff had taken his apron to a laundry service where,  pursuant to the recommendation of the owner, the apron had been dry cleaned in order to  avoid bleeding of the color.  The district court, relying on the IWC’s written statements  interpreting the Wage Orders, found the relevant question to be whether the aprons  required only “minimal care” or if they required “special laundering because of heavy soil or  color.”  If only minimal care of the aprons was necessary, Starbucks could legitimately have  placed this obligation on its employees.  The district court granted summary judgment in  favor of Starbucks, finding that there was no evidence that the aprons required special  laundering.  The court found that the opinion of the proprietor of the one laundry service to  which the plaintiff had taken his apron was insufficient to establish his claim. V. Meal and Rest Period Claims A. Nature of Claims Since January 1, 2001, the Labor Code has imposed on employers a duty to provide employees one additional hour of pay for each daily violation of the meal and rest period  requirements of the Wage Orders.  The enactment of this rule triggered a massive wave of  class actions against hundreds of employers in California.  Most notably, in December 2005  a jury in Alameda County awarded a class $172 million in a meal period lawsuit against  Wal-Mart. 110 Labor Code Section 512 requires employers to “provide” an employee with a thirty-minute  off-duty meal period on every day in which the employee works more than five hours. 111    The IWC Wage Order does not use the word “provide,” but states that an employer is not to  employ a person for a work period exceeding five hours without a meal period.  An  employee who works no more than six hours in one day may waive the thirty-minute unpaid  meal period, with the mutual consent of the employer. 112   An employee who works more  than ten hours in one day must be provided a second thirty-minute meal period, although  that second meal period can be waived if the employee works no more than twelve hours in                                                        108 See, e.g., IWC Wage Order 7-2001 § 9(A). 109 2008 U.S. Dist. LEXIS 53877 (N.D. Cal. Jul. 14, 2008) 110 Savaglio v. Wal-Mart Stores, No. S152827, 2007 Cal. LEXIS 7293 (Cal. Jul. 11, 2007) (Dec. 22, 2005 verdict).  The  verdict included an award of $115 million in punitive damages.   111 See, e.g., Wage Order 7-2001 § 11(A). 112 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 32 a day and has not waived the first meal period. 113   During a break that qualifies as a meal  period, the employee must be relieved of all work duties. 114    The Wage Orders also require an employer to allow employees to take paid rest breaks.   This requirement is somewhat different than the meal period requirement in that nothing in  the Wage Orders or the Labor Code restricts employees from voluntarily waiving their rights  to rest periods.  Waiver issues aside, Section 12(A) of the Wage Orders requires employers  to allow employees a paid, ten-minute rest period for every four hours worked, or major  portion thereof.   No rest break is required unless an employee works three and one-half hours in a  workday. 115   Employees are entitled to 10 minutes rest for shifts from three and one-half to  six hours in length, 20 minutes for shifts of more than six hours up to 10 hours, and 30  minutes for shifts of more than 10 hours up to 14 hours. 116   Employers normally must  provide rest breaks near the middle of each four hour work period, but need not provide a  rest period before the first meal period. 117   Rest breaks, unlike meal periods, are not subject  to any requirement that the employer keeps records. For each workday the employer fails to provide an employee with a required thirty-minute  meal period or ten-minute rest break, the employee is entitled to recover one hour of pay at  the employee’s regular rate. 118   Although the statute is unclear on how failure to provide  multiple required meal or rest periods in a single day is punished, the DLSE has taken the  position that one penalty for missed meal periods and one penalty for denied rest periods  may be imposed per workday. 119   In 2009, a federal district court in Marlo v. United Parcel  Service 120 analyzed the issue and agreed that an employee could recover both a meal  period and a rest period penalty in the same workday. 121 However, the court determined that an employee can recover penalty pay for only one meal and only one rest period  violation per day, even if the employee were to miss two meal periods or two rest  periods. 122   This decision runs counter to an earlier district court decision that had                                                        113 Lab. Code § 512(a). 114 Wage Order 7-2001 § 11(A). 115 See, e.g., Wage Order 7-2001 § 12(A). 116 Brinker Restaurant Corp. v. Superior Court, 53 Cal. 4th 1004, 1029 (2012). 117 Id. at 1031-32. 118 Lab. Code § 226.7.  See, e.g., Wage Order 7-2001 §§ 11(D) and 12(B). 119 DLSE Manual § 45.2.8 and 45.3.7. 120 2009 WL 1258491 (C.D. Cal 2009). 121 Id. at *7. 122 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 33 decided—in a less detailed analysis—that an employee could recover penalty pay for only  one violation per day, even if the employee were denied both meal and rest periods in the  same workday. 123 In 2011, the California Court of Appeal agreed with Marlo in deciding United Parcel Service,  Inc. v. Superior Court. 124   There, the court noted that the legislative history demonstrated  that Section 226.7 was specifically drafted to conform to the IWC wage orders. 125   Because  the wage orders “provide[] a separate remedy for violations of meal period requirements  and violations of rest period requirements . . . up to two premium payments are allowed per  work day.” 126   Therefore, it appears that this issue has finally been settled. Many employers fail to maintain records that comprehensively establish that employees in  fact took their meal and rest periods.  This is especially the case when an employer has  mistakenly classified a position as exempt, because employers are not required to keep  time records for employees covered by the most common exemptions (administrative,  executive, and professional).  Section 7 of the Wage Orders requires employers to record  meal periods of non-exempt employees, and the DLSE generally takes the position that in  the absence of records proving that meal periods were taken, the employees are presumed  not to have taken them (although the presumption is rebuttable).  In addition, employees  may deny they took meal breaks that they actually took if the employer has not enforced a  requirement that they document such breaks. Accordingly, when recordkeeping has been poor, these cases have been more difficult to  defend, and numerous meal period class actions have been filed.  With respect to rest  breaks, by contrast, employers need only authorize such breaks; the law is clear that employee may waive them or that employers need not record the ones they take.  For  these reasons, successful rest break class actions are less common. 127 B. Debate over Whether One-Hour Payment Is a “Penalty” Labor Code Section 226.7, which went into effect January 1, 2001, requires any employer  who fails to provide meal or rest periods, as required by the governing Wage Order, to pay  the employee one hour of pay at the employee’s regular rate.  From the enactment of                                                        123 Corder v. Houston’s Restaurants, Inc., 424 F. Supp. 2d 1205, 1207 n.2 (C.D. Cal. 2006) (“Section 226.7(b) states that  the employer is liable ‘for each work day’ that a break is not provided. Thus, the plain wording of the statute is clear that an employer is liable per work day, rather than per break not provided.”). 124 196 Cal. App. 4th 57 (2011). 125 Id. at 67-8. 126 Id. at 68. 127 Such actions also may require individualized inquiries into whether given employees understood they could take a rest  break and why they failed to do so.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 34 Section 226.7 until the California Supreme Court resolved the issue against employers on  April 16, 2007, the most hotly disputed issue within the meal and rest period cases was  whether the one hour of pay required by Section 226.7 is a penalty or a compensatory  wage. Although the question of whether the payment constitutes a penalty or a wage may seem  arcane, construing the payment as a penalty would drastically reduce the employer’s  exposure for a meal period class action—sometimes by more than 75 percent—for the  following reasons:  The statute of limitations would be reduced to one year only. 128  The penalties could not be recovered under the Unfair Competition Law, thus  precluding using the UCL to extend the statute of limitations to four years. 129  Waiting time penalty liability could not arise from meal period violations, as such  penalties only arise from failures to pay wages. 130  Arguably, no additional $100-per-pay-period penalty would be recoverable under  the Labor Code Private Attorney General Act of 2004 (“PAGA”). 131  A prevailing plaintiff would not be entitled to attorney’s fees under Labor Code  Section 218.5. 132  The employee would not be entitled to prejudgment interest under Labor Code  Section 218.6. 133 In 2007, in a decision that surprised many in the wage and hour community, the California  Supreme Court held unanimously that Section 226.7 provides for “a wage or premium pay”                                                        128 Compare Code Civ. Proc. § 340 (one-year statute for penalty claims) with Code Civ. Proc. § 338(a) (three-year statute  for an action upon a claim of liability created by a statute other than a penalty or forfeiture).  129 See Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 179 (1999) (plaintiff may not recover  penalty of “treble damages” through UCL action); Bus. & Prof. Code § 17206 (penalties recoverable only in action  brought by the actual attorney general).  130 Lab. Code § 203 (penalties recovered for failure to pay promptly all wages owed to employees who quit or are  discharged). 131 Lab. Code § 2698, et seq., discussed infra in Section X.  But see Caliber Bodyworks v. Superior Court, 134 Cal. App.  4th 365, 377 (2005) (suggesting that penalties recoverable by individuals independent of PAGA are not civil penalties,  which would allow recovery of a separate civil penalty for violations of Labor Code Section 226.7 even if the one-hourof-pay requirement is a penalty). 132 Lab. Code § 218.5 (attorney’s fees available for actions to recover wages). 133 Cf. Lab. Code § 218.6 (statutory pre-judgment interest recoverable in action for wages).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 35 rather than a penalty. 134   Although the decision definitively decided that the statute of  limitations on a Section 226.7 claim is three years, the decision left open several other  issues of meal period law:  Whether the meal must be provided within the first five hours of an employee’s shift  and after any additional stint when an employee is required to work for more than  five hours; and  Whether an employer who gives an employee an opportunity to take an off-duty  meal period is nonetheless liable for “premium pay” when the employee voluntarily  opts not to take the meal period. C. Meaning of “Provide” a Meal Period Following the Supreme Court’s ruling in Murphy v. Kenneth Cole, the most hotly debated  issue in meal period law has been whether the employer complies with its duty to “provide”  a meal period by making the meal period available for employees to take, or whether the  employer is liable whenever it fails to mandate its employees to go off duty for an  uninterrupted thirty-minute meal break. The implications are significant for class actions because it is much more difficult for  plaintiffs to argue that common issues predominate in a case if the employer can defend  itself merely by establishing that individual employees have had a bona fide opportunity to  take a meal break.  By contrast, under the “mandatory” interpretations, the employer is very  limited in its ability to raise individualized issues as to why the employees failed to take their  meal breaks.  If they failed to do so a jury could assess on a collective basis whether the  employer made sufficient efforts to force them to take the meal period and enter a verdict  for the class if the employer’s efforts were inadequate. Aside from the issue of class action liability, a “mandatory” interpretation would also require  employers to overhaul oversight of employee meal breaks.  In order to comply with the law,  employers would have to implement systems to ensure employees take full thirty-minute  breaks.  Employers would need to upgrade timekeeping systems and even discipline  employees for not taking full meal periods.  Without oversight, opportunistic employees  might take short breaks and then later claim an hour’s worth of pay, because the breaks did  not last the mandated thirty minutes. For years, the only published California decision to address the issue was Cicairos v.  Summit Logistics, Inc. 135   The Cicairos decision held that an employer has an “affirmative                                                        134 Murphy v. Kenneth Cole Prods., 40 Cal. 4th 1094 (2007). 135 133 Cal. App. 4th 949 (2005).  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 36 obligation to ensure that workers are actually relieved of all duty” by taking a meal break.   The Cicairos court further held that an employer cannot simply “assum[e] that the meal  periods are taken.” 136   The court suggested that the standard for meal periods was akin to  the standard of when an employer must pay overtime—i.e., when it either suffered or  permitted the employee to work.  The court found that the defendant did not “provide” meal  breaks, because the plaintiff-truckers were deprived of a meaningful ability to elect to take  breaks due to pressure from management to maximize deliveries, the lack of a  companywide policy on meal periods, and the fact that the plaintiffs would be penalized for  taking meal breaks as the timekeeping system was unable to record meal breaks. 137 The Cicairos court did not define the scope of “relieving employees of all duty” and the term  is subject to multiple possible interpretations.  What if the employer scheduled a period  each day within which the employee was told that he or she had no duty to perform any  work?  That sounds like it amounts to “relieving” the employee of duty, and an employee  who chooses to work in that situation would have no claim for meal period penalty pay.  What if the employee worked without supervision, the employer instructed the employee to  take meal periods, and the employee failed to notify the employer that he had skipped meal  breaks?  These facts would seem to indicate that the employer neither “suffered nor  permitted” the employee to work through the missed meal break, which could plausibly  exonerate the employer. 138   On the other hand, “relieving of duty” could mean actually  forcing the employee not to do any work.  Unfortunately, Cicairos did not clarify this  confusion and the facts of the case did not involve a situation where the employees were  given a genuine opportunity to take a meal break but voluntarily declined to do so.  Rather,  the employees argued that they were not informed they were permitted to take meal breaks  and, moreover, they had no way to record time as a break on the timekeeping system. Employers breathed a sigh of relief when, in July 2008, the Fourth District Court of Appeal  issued its decision in Brinker Restaurant Corporation v. Superior Court, 139 which concerned  a putative class of hourly restaurant employees who contended they had not been provided  with meal and rest periods. 140 The plaintiffs claimed that employers were required to ensure  that employees took their meal breaks, to provide meal breaks as close as possible to the  middle of each shift, and to provide a meal break for each five-hour block of time on a  “rolling” basis.  The trial court had certified a class on these claims, without first deciding                                                        136 Id. at 962. 137 Id. at 964. 138 Forrester v. Roth’s I.G.A. Foodliner, Inc., 646 F.2d 413, 414-14 (9th Cir. 1981) (“where the acts of an employee prevent  an employer from acquiring knowledge, here of alleged uncompensated overtime hours, the employer cannot be said to  have suffered or permitted the employee to work”). 139 Previously published at 165 Cal. App. 4th 25 (2008). 140 The complaint also alleged a claim for working “off the clock.”Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 37 any relevant legal issue, such as whether employers were required to mandate meal  breaks.  Instead, the trial court stated that this was a common legal issue to be decided on  a classwide basis following certification. The court of appeal reversed the trial court, holding that it was an abuse of discretion for  the trial court to fail to determine the legal elements of the plaintiffs’ claims in ruling on class  certification.  The court held that employers need only make meal periods available to  employees, which rendered the plaintiffs’ claims unsuitable for class adjudication because it  would be necessary to determine on a case-by-case basis whether each employee was  actually denied meal breaks (company policy clearly provided for meal periods). 141   The  court of appeal also distinguished Cicairos, essentially limiting that case to its peculiar facts. Fresh on the heels of the Brinker decision, employers seemed to score another victory  when the Second District Court of Appeal issued its decision in Brinkley v. Public Storage,  Inc. 142 In Brinkley, the plaintiff brought claims on behalf of a putative class of property  managers, alleging, among other things, 143 that Public Storage violated Labor Code Section  226.7 by failing to provide meal periods within the first five hours of each shift, and by  failing to ensure that its employees actually took meal breaks.  The trial court granted  summary adjudication as to the meal period claim, and the plaintiff appealed. The appellate court upheld the trial court’s grant of summary adjudication.  As to the meal  period claim, the court held that employers need only provide employees with an  opportunity to take meal breaks; they are not obligated to mandate such breaks.  The court  distinguished Cicairos by noting that the employer in that case “managed and scheduled  the [employees] in such a way that prevented [them] from taking their meal periods,” which  amounted to an active denial of the employees’ right to such breaks.  The court also held  that employers need not provide meal periods within the first five hours of work, but rather  after five hours. 144                                                       141 The court also determined that:  (1) employers are not required to provide a meal period during every block of five  consecutive hours worked, and therefore the defendant’s policy of sometimes providing meal periods early in  employees’ shifts was not improper; (2) employers need only provide rest breaks, not mandate them; (3) employers are  only required to provide one rest period per four hours worked or “major fraction thereof,” with the “major fraction  thereof” meaning between three and one-half to four hours; (4) rest breaks are not required to be in the middle of each  four-hour work period where that would be impracticable; and (5) employers may be liable for employees working  “off  the clock”  only where the employer knew or should have known about such work being performed.  142 Previously published at 167 Cal. App. 4th 1278 (2008). 143 The plaintiff also brought claims for pay stub and rest period violations. 144 The court of appeal also affirmed summary adjudication as to the itemized wage statement and rest break claims, but  those portions of the decision were vacated upon the grant of review.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 38 These victories were short-lived, as the California Supreme Court granted review of both  Brinker and Brinkley in 2008.  For nearly four years thereafter, the law was unsettled as the  Supreme Court wrestled with these two cases. Rather than wait for those decisions, the California Court of Appeal decided to tell  employers its view of the applicable legal standard.  In October 2010, the court affirmed the  trial court’s decision in Hernandez v. Chipotle Mexican Grill, Inc. and held that Labor Code  § 226.7(a) states that employers must make meal and rest periods available, not ensure  that they are taken. 145   The court stressed that “provide” means “to supply or make  available” and that enforcement of meal breaks would place undue burden on large  employers and create perverse incentives for employees to receive extra compensation  under the wage & hour laws. 146   The court also distinguished Cicairos, on the ground that  there the employer effectively precluded its employees from taking their meal and rest  periods. 147   However, the California Supreme Court also granted review in Hernandez pending its decision in Brinker, making Hernandez unciteable. 148   However, around this  time at least seven federal decisions were issued that also held that an employer’s duty to  “provide” a meal period is to make it available and that meal period claims based on a mere  failure to ensure employees took meal periods are unsuitable for class certification. 149 Finally, on April 12, 2012, the Supreme Court issued its decision in Brinker. 150   The opinion  was mostly favorable to employers, holding—as expected—that employees need not be  forcibly prevented from working through their lunch breaks in order to be properly  “provided” with a meal period.  The Court stated that “an employer must relieve the                                                        145 Hernandez v. Chipotle Mexican Grill, Inc., 118 Cal. Rptr. 3d 110 (2010), transferred following review, 208 Cal. App. 4th  1487 (2012), rev. denied, depublished; see also In re Lamps Plus Overtime Cases, 195 Cal. App. 4th 389 (2011),   (holding employers need not ensure meal periods be taken), transferred following review, 209 Cal. App. 4th 35 (2012),  rev. denied, depublished. 146 Hernandez, 118 Cal. Rptr. 3d at 118-19. 147 Id. at 119. 148 The Court of Appeal reached the same conclusion in Tien v. Tenet Healthcare, 192 Cal. App. 4th 1055 (2011),  transferred following review, 209 Cal. App. 4th 1077 (2012), Rev. denied, depublished. 149 See White v. Starbucks Corp., 497 F. Supp. 2d 1080 (N.D. Cal. 2007) (cited in Brinker; first published decision to hold  “provide” means “make available.”); Brown v. Federal Express Corp., 249 F.R.D. 580, 585-86 (C.D. Cal. 2008)  (“Requiring enforcement of meal breaks would place an undue burden on employers whose employees are numerous  or who . . .do not appear to remain in contact with the employer during the day.”); Kenny v. Supercuts, Inc., 252 F.R.D.  641, 645-46 (N.D. Cal. Jun. 2, 2008) (“[The Labor Code] does not require an employer to ensure that an employee take  a meal break.”); Salazar v. Avis Budget Group, Inc., 251 F.R.D. 529, 533 (S.D. Cal. 2008) (“The Court agrees with the  compelling reasons advanced by the White, Brown, and Kenny decisions for interpreting ‘provide’ to mean ‘make  available’ rather than ‘ensure taken.’”); Kohler v. Hyatt Corp., No. EDCV 07-782-VAP (CWx), 2008 U.S. Dist. LEXIS  63392, at *18 (C.D. Cal. Jul 23, 2008) (“An employee must show that he was forced to forego his meal breaks, as  opposed to merely showing that he did not take them regardless of the reason.”); Nguyen v. Baxter Healthcare Corp.,  2011 WL 6018284 (C.D. Cal., Nov. 28, 2011) (noting that employers only need to make meal periods available to  employees and that posting a copy of the Wage Order was sufficient to advise employees of that right). 150 Brinker Restaurant Corp., 53 Cal.4th 1004 (2012).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 39 employee of all duty for the designated period, but need not ensure that the employee does  no work.” 151    “Indeed, the obligation to ensure employees do no work may in some  instances be inconsistent with the fundamental employer obligations associated with a  meal break:  to relieve the employee of all duty and relinquish any employer control over  the employee and how he or she spends the time.” 152   Furthermore, if an employee who is  properly relieved of all duty decides to continue working anyway, the employer will not be  liable for payment of one hour of penalty pay, and will be liable to pay straight-time pay only  if it “knew or reasonably should have known that the worker was working through the  authorized meal period.” 153 The Court did find, however, that employers must provide meal periods “after no more than  five hours of work, and a second meal period after no more than 10 hours of work.” 154   This  would mean that, for example, an employee who starts work at 9 a.m. would need to be  provided a lunch break beginning by no later than 2 p.m., or else the employer would be  liable for one hour of premium wages.  However, it would also seem that the employee  could voluntarily decide to take meal breaks later on in the work day, as long as they were  made available in a timely manner.  The Court rejected the plaintiffs’ contention that a meal  break must be provided during every “rolling” 5-hour block of work time, and thus held that  employers can provide meal breaks quite early in the work day. 155 Following the issuance of its decision in Brinker, the Supreme Court remanded to the Court  of Appeals three other meal break class actions for which it had granted review pending  issuance of a ruling in Brinker: Flores v. Lamps Plus, 156 Tien v. Tenet Healthcare 157 and  Hernandez v. Chipotle Mexican Grill. 158   Employers rejoiced when the Court of Appeal,  Second District, Division Eight, quickly issued opinions in each of these cases affirming  denial of certification, citing to Brinker. 159   This jubilation was short-lived, however.  The                                                        151 Id. at 1034.  The Court of Appeal in Brinkley reached the same conclusion in an unpublished decision issued after  Brinker.  Brinkley v. Public Storage, Inc., 2012 WL 3126606,  at *5 (Aug. 2, 2012) (“[An employer’s obligation is to  relieve its employee of all duty, with the employee thereafter at liberty to use the meal period for whatever purpose he  or she desires, but the employer need not ensure that no work is done.”).  The Brinkley court also held that an employer  not need not ensure that an employee take rest periods.  Id. at *6 (“California law does not require an employer to  ensure that employees take rest periods.”).   152 Id. at 1038-39  (citing Morillion v. Royal Packing Co., 22 Cal 4th 575, 584-585 (2000)). 153 Id. at 1039-40 n.19 (quoting DLSE Opinion Letter No. 1991.06.03). 154 Id. at 1049. 155 Id. at 1048. 156    195 Cal. App. 4th 389 (2011). 157    192 Cal. App. 4th 1055  (2011). 158 118 Cal. Rptr. 3d 110 (2010). 159    Tien,  209 Cal. App. 4th 1077 (2012); Lamps Plus, 209 Cal. App. 4th 35 (2012); Hernandez, 208 Cal. App. 4th 1487  (2012).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 40 plaintiffs in these cases all petitioned the Supreme Court for review, and while these  petitions were all denied, the Supreme Court took the unusual step of depublishing each of  these opinions. The Supreme Court did not provide any reason for its decision to depublish these cases,  and employers are nervous that this may be a signal that the Court is reconsidering its  holding in Brinker, or that it intends Brinker to have a very narrow application.  Clues to the  Court’s reasoning may lie within the petitions for review filed by the plaintiffs in these cases.   Among other arguments, in each petition the plaintiffs argued that the Court of Appeal had  simply tacked on some language paying lip-service to Brinker to the earlier opinion, while  leaving intact discussion that the plaintiffs argued ran contrary to Brinker. 160   Specifically,  each petition asserted that the Court of Appeal had erred in supposedly stating that an  employer could “provide” lawful meal periods by having a policy making lawful meal periods  available to employees, while the Court in Brinker had stated that employees must  affirmatively be “relieved of all duty” and that practices that discouraged or prevented  employees from taking meal periods were improper. 161   In any event, the fact that the Court  declined review of these cases indicates that it likely agreed with the end result, but may  have felt that some of the reasoning did not completely fit with Brinker. 162   Employers  should therefore continue to assert that Brinker precludes certification of meal period claims  except in the most clear-cut cases where workers are uniformly prevented from taking their  meal breaks. D. Limits on IWC’s Power to Alter Labor Code Meal Period Rules Effective September 19, 2000, before Labor Code Section 226.7 went into effect, the  California Legislature amended Labor Code Section 516.  As amended, the statute  provides that the IWC may adopt or amend Wage Orders with respect to break periods and  meal periods “except as provided in Section 512.”  On its face, this language would seem  to limit the IWC’s authority to adopt or to amend Wage Orders in such a way as to be  inconsistent with the specific provisions of Labor Code Section 512. In 2006, in Bearden v. U.S. Borax, Inc., 163 the Second District Court of Appeal held that  Section 516 invalidated provisions of IWC Wage Order No. 16 on the ground that the Wage                                                        160    Tien petition, 2012 WL 6608787;  Lamps Plus petition, 2012 WL 5868726; Hernandez petition, 2012 WL 5392867. 161    Id., Tien petition at *16-18; Lamps Plus petition at *9-11; Hernandez petition at * 162    The plaintiffs in Tien, Lamps Plus and Hernandez also argued that Justice Werdegar’s concurring opinion in Brinker gave rise to a rule that records showing missed meal periods could establish a rebuttable presumption that these meal  periods were unlawfully denied.  Because the Supreme Court declined to grant review and consider this issue, thereby  leaving the rulings on these cases intact, it seems likely that this argument was not the reason for the depublication.   Rather, it seems likely that the Supreme Court felt these decisions reached the correct result, but depublished them due  to some concern that the language used by the Court of Appeal did not completely comport with Brinker in all respects.  163 128 Cal. App. 4th 429 (2006).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 41 Order was inconsistent with specific meal period regulations within Labor Code Section  512. By way of background, Section 512 specifies these regulations on meal periods:  An employer may not employ an employee for a work period of more than five  hours per day without providing a meal period of not less than thirty minutes,  except the meal period can be waived by mutual consent if the total work period is  no more than six hours [§ 512(a)].  The IWC is empowered to adopt a Wage Order permitting a meal period to  commence after six hours of work [§ 512(b)].  The general rule in Section 512(a) does not apply to certain employees in the  wholesale baking industry [§ 512(c)].  The general rule in Section 512(a) does not apply to certain employees in the  broadcasting industry covered by a collective bargaining agreement. Effective January 1, 2001, the IWC adopted Wage Order 16-2001 covering employees in  the construction, drilling, logging, and mining industries.  Unlike other Wage Orders, Wage  Order 16-2001 includes a collective bargaining exemption to the meal period requirements,  which provides that meal period requirements do not apply to employees covered by a  collective bargaining agreement that provides for wages, hours of work and working  conditions, a regular pay rate at least 30 percent above minimum wage, and premium pay  for all overtime hours worked.  The defendants argued that this provision exempted them  from the normal requirement to provide meal periods. The Bearden court held that this collective bargaining exemption from meal period  requirements was invalid because it created a new exemption not recognized in  Section 512. 164   The court noted that Section 512 contains specific exemptions from the  normal meal period requirement—i.e., when an employee working no more than six hours  in a day waives the meal period and under other specified conditions for employees  working in the wholesale baking and broadcasting industries. 165   The court reasoned that  where the Legislature has set forth specific exemptions in a statute, those exemptions are  generally assumed to be exclusive.  Proceeding on that premise, the court reasoned that  Section 516 forbade the IWC to adopt exemptions beyond those set forth in Section 512. 166    Despite the invalidity of the collective bargaining exemption, the court held that the                                                        164 Id. at 486-88. 165 Id. at 487. 166 Id. at 487-88.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 42 employer could not be held liable for any penalties because Section 226.7 allows for such  penalties only when the employer violates an IWC Wage Order, and U.S. Borax had  complied with Wage Order 16-2001. 167 VI. Tip-pooling Labor Code Section 351 makes it unlawful for an “employer or agent” to “collect, take, or receive  any gratuity or a part thereof that is paid, given to, or left for an employee by a patron.”  In the past,  this statute led to two distinct types of class actions on behalf of employees who claim their tips  were unlawfully taken.  The first type of action alleged that the employees unlawfully were required  to share tips with co-workers for whom the patrons did not leave the tips.  The second type of action  alleged that “agents” of the employer unlawfully took employees’ tips.  In 2010, the California  Supreme Court held in Lu v. Hawaiian Gardens Casino, Inc. 168 that Section 351 does not authorize  a private right to sue.  Although this decision was certainly a victory for employers, it does not  necessarily mean the end of tip-pooling actions. A. Actions Alleging Tips Were Diverted to Co-Workers Who Did Not  Earn Them In 2006, some twenty separate class action lawsuits were filed in quick succession alleging  a claim for “tip-pooling violations” against various restaurants and restaurant chains in  California.  The underlying theory in the cases was that when a customer leaves a tip for a  server at a restaurant table, the employer may not require the server to share the tip with  bartenders who do not provide “direct table service” to the customer who left the tip.  This  alleged prohibition on certain tip-pooling arrangements is purportedly derived from Labor  Code Section 351, which bars an employer from “tak[ing], collect[ing] or receiv[ing] any  gratuity or a part thereof” left for a server, or from using such tips as a credit against the  state minimum wage. This wave of lawsuits was unexpected, given that a published case from 1990, Leighton v.  Old Heidelberg, Ltd., 169 expressly held that Section 351 does not preclude tip-pooling among restaurant employees.  Moreover, the tip-pooling arrangement approved in Leighton required that servers share tips left at the table with both the busboy and the bartender, and there was no suggestion anywhere in the case that the bartender had provided “direct table  service.”  Nonetheless, the “direct table service” notion derives from one rationale for  finding tip-pooling lawful and consistent with public policy:                                                       167 Id. at 493. 168 50 Cal. 4th 592 (2010). 169 219 Cal. App. 3d 1062 (1990) (emphasis added).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 43 [T]he restaurant business has long accommodated this practice which, through  custom and usage, has become an industry policy or standard, a ‘house rule and  is with nearly all restaurants,’ by which the restaurant employer, as part of the  operation of his business and to ensure peace and harmony in employee  relations, pools and distributes among those employees, who directly provide  table service to a patron, the gratuity left by him, and enforces that policy as a  condition of employment. 170 The plaintiffs in these tip-pooling cases contended this language meant that only those  who provide direct table service may share in the tip pool.  Employers responded by  pointing to the fact that Leighton approved a pool that included bartenders, and that this  gloss on Leighton ignores other statements by the court that suggest that its holding was  much broader, such as the court’s reasoning that (1) the legislative history shows that  Section 351 was not intended to address tip-pooling at all, but rather was intended to  prevent employers from using tips as a method of paying employees sub-minimum wages;  (2) Section 351 makes no mention of tip-pooling among co-workers; and (3) tip-pooling has  been around a long time, so the presumption should be that the California Legislature  would have been explicit if it had wanted to outlaw the practice. 171 A DLSE opinion letter did once suggest that it is inappropriate for an employer to include in  the tip pool those employees who do not provide “direct table service.” 172   But even that  opinion places “bartenders” in the category of employees who provide “direct table service,”  and notes only dishwashers, cooks, and chefs as examples of employees who should not  be included in the tip pool.  Moreover, the DLSE has apparently retreated from that  position.  A more recent DLSE opinion letter states that tip pools may include anyone in the  “chain of service,” which is an undefined term that presumably would include anyone who  provides any service to clients (e.g., bartenders making their drinks). 173 The sudden tide of tip-pooling cases was stemmed by the issuance of a lengthy and  persuasive district court opinion, Louie v. McCormick & Schmick Restaurant Corp. 174   The  court in Louie held that Section 351 allows management to force servers to share tips with  other employees who provide any service to customers at all (whether or not at the patron’s  table).  Following this federal decision, the trial courts handling the other cases filed at the  same time all reached the same conclusions and dismissed their tip-pooling cases.                                                       170 Leighton, 219 Cal. App. 3d at 1067. 171 Id. at 1067-68. 172 DLSE Opinion Letter 1998-12-28-1 at 2. 173 DLSE Opinion Letter 2005-09-08 at 2. 174 460 F. Supp. 2d 1153 (C.D. Cal. 2006) (Seyfarth Shaw case).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 44 Post-Louie California appellate courts appear to have slain this species of tip-pooling action  altogether.  Three decisions in early 2009 – Lu v. Hawaiian Gardens Casino, Inc., 175 Budrow v. Dave & Buster’s of California, Inc., 176 and Grodensky v. Artichoke Joe’s  Casino 177 – confirmed that Section 351 does not preclude forced sharing of tips with other  non-management employees.  Meanwhile, in Etheridge v. Reins International, the Court of  Appeal resolved the remaining issues in the employer’s favor when it held that  management can mandate that tips be shared with any employee who “contributes” to a  patron’s service, which arguably could include cooks and kitchen staff as well as bartenders. 178   Accordingly, it appears that tip-pooling cases may have been extinguished  except in the unusual circumstance where an employer forces employees to share tips with  their managers. B. Actions Alleging “Agents” of Management Wrongfully Took Tips The Leighton line of cases all permitted the sharing of tips among non-management employees.  Employers have fared much worse, however, in cases where employees with  supervisory power have shared in tip pools.  Several courts have held that such tip-pooling arrangements violate the prohibition in Section 351 against “agents” of the employer  sharing in the tip pools.  Perhaps the highest profile of these cases was a now-overturned  trial court decision in March 2008 that held Starbucks Corporation liable for $105 million in  restitution to a class of approximately 120,000 baristas for the share of tips Starbucks  allocated to its shift supervisors. 179 These cases spring from a 2003 decision, Jameson v. Five Feet Restaurant, 180 in which the  court of appeal held that it violated Section 351 for a “floor manager” to receive 10% of the  tips left for servers.  The court noted that Section 350 defines “agent” as any person who  has “authority to hire or discharge any employee or supervise, direct, or control the acts of  employees.”  Because the floor manager’s duties included “scheduling servers’ stations,  disciplining servers, hiring employees, and recommending the discharge of employees,” the  court found that there was a sufficient basis in the record to support the jury’s finding that  they qualified as agents.                                                       175 170 Cal. App. 4th 466, 479 (2009) (“In its analysis of Labor Code Section 351, the legislative history, and related  statutes, Leighton’s statements were not restricted to restaurants”). 176 171 Cal. App. 4th 875, 878 (2009) (Seyfarth Shaw case; noting that “section 351 does not distinguish between the  various functions that restaurant employees perform”). 177 171 Cal. App. 4th 1399 (2009), disagreed with by Lu v. Hawaiian Gardens Casino, Inc., 50 Cal. 4th 502 (2010) (holding  § 351 does not authorize a private right to sue, contrary to the holding in Grodensky) . 178 172 Cal. App. 4th 908 (2009). 179 Chau v. Starbucks Corp., San Diego County Case No. GIC836925, rev’d, 174 Cal. App. 4th 688 (2009). 180 107 Cal. App. 4th 538 (2003).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 45 Several cases have reaffirmed Jameson and held other types of supervisory employees to  be agents who may not participate in tip pools. 181 In the Grodensky case, however, the  court of appeal affirmed the trial court’s finding that “floor managers” were not agents  because they lacked the power to hire and fire and had a power to supervise, direct, or  control the acts of the dealers that was limited to resolving disputes between customers  and the dealers. 182 In the appeal of Chau, the appellate court held that “shift supervisors” at Starbucks – who  performed the same work as regular employees 90 percent of the time, lacked any  authority to discipline, and were not considered by the company to be part of  “management” – could get a share of the tips. 183   It should be noted that the decision  distinguished itself from “tip-pooling” cases because the tips in question were left in  collective tip jars, making this instead a “tip apportionment” case because the tips are  already “pooled.” 184   The court held that in this kind of case it is presumed the patron  intends for the tip to be shared by the entire service “team,” particularly in light of the fact  that it is probably difficult for the average patron to distinguish between those who are “shift  supervisors” and those who are not. 185   While this decision was a significant victory for  employers, the specific circumstances of the case mean that it should not be interpreted to  suggest that supervisors with the powers normally attributed to managers (power to  discipline, hire and fire, and give commands, etc.) may share in a traditional “tip pool.”  It is  unclear whether Section 351 was intended to preclude the supervisor from receiving tips in  the situation where the tips were actually left for the supervisors. C. The Future of Tip-pooling Cases Under California Law Although it has now been clarified that certain types of tip-pooling arrangements are  permissible under California law, there remained a dispute about whether Section 351  contained a  private right of action that allowed plaintiffs to sue under the statute at all.  This  dispute was finally put to rest in 2010 when the California Supreme Court decided Lu v.  Hawaiian Gardens, Inc.  There, the Court held that no private right of action to sue exists  under Section 351, foreclosing any future tip-pooling cases under that statute. 186   What the                                                        181 Hawaiian Gardens, 170 Cal. App. 4th at 485-86 (triable issue of fact whether customer service representatives qualified  as agents because they had responsibility to write reports about and evaluations of tipped dealers); Grodensky, 171  Cal. App. 4th at 1409-10 (shift managers who assigned work, had power to discipline and were responsible for  operation of casino in card room manager’s absence were agents not permitted to share in tip pool) . 182 Grodensky, 171 Cal. App. 4th at 1452-53. 183 174 Cal. App. 4th 688 (2009). 184 Id. at 700. 185 Id. at 705. 186 50 Cal. 4th 592 (“there is no clear indication that the Legislature intended to create a private cause of action under the  statute”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 46 Court did not do, however, is foreclose the possibility of tip-pooling cases altogether.  The  Lu Court specifically found that if an employee is entitled to misappropriated gratuities, the  employee could collect them under other legal theories, e.g., conversion. 187   A plaintiff could  also, most likely, recover such monies as restitution under California’s Unfair Competition  Law or recover penalties for the violation under Labor Code Section 203, Section 226, or  PAGA. VII. Vacation/Paid Time Off Forfeiture Another type of wage and hour class action prevalent in California is one seeking payment of  forfeited vacation or other paid time off (“PTO”).  California law does not require that employers  provide employees with vacation or PTO. 188   Furthermore, an employer can lawfully require that  employees work for a certain period of time without any vacation benefit, and then begin to accrue  vacation only after the waiting period has ended. 189 If the employer provides a vacation benefit, however, it may not create a plan whereby the  employee “forfeits” vested vacation or PTO time.  Under California law, accrued vacation or PTO  constitutes “wages,” which is payable to the employee at termination. 190   As such, employers may  not have a “use it or lose it” provision in their vacation or PTO policy.  A policy that places a  reasonable cap on accrual of vacation or PTO generally is acceptable. 191   The DLSE has taken the  position, however, that an accrual cap that is set near one year’s allotment of vacation is a de facto use it or lose it policy since many employees will earn no additional vacation in a year if they do not  take the vacation that year. 192 “Use it or lose it” policies are lawful in most other states.  Therefore, many out-of-state employers  doing business in California are unaware of this requirement.  Needless to say, where an action is  filed challenging a written corporate vacation policy containing a “use it or lose it” provision, class  certification and liability likely will follow. A vacation decision that came down in 2006, Church v. Jamison, 193 has made vacation class claims  more attractive because it creates the possibility that they may reach back much further than the                                                        187 Id. at 603-04 (“holding that section 351 does not provide a private cause of action does not necessarily foreclose the  availability of other remedies”). 188 DLSE Manual 15.1.2. 189 Owen v. Macy’s, Inc., 175 Cal. App. 4th 462 (2009) (employer’s policy of delaying onset of accrual of vacation benefits  for first six months was lawful). 190 Suastez v. Plastic Dress-up Co., 31 Cal. 3d 774 (1982). 191 DLSE Manual 15.1.4. 192 DLSE Manual 15.1.5. 193 143 Cal. App. 4th 1568 (2006).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 47 four-year period of a typical wage and hour class action.  The decision was not actually a class  action decision, but rather addressed the appropriate statute of limitations on any claim for unpaid  vacation.  Vacation differs from regular wages in that an employee has no entitlement to be paid for  accrued but unused vacation until the employee quits or is discharged.  That leaves open the  question of whether an employee may sue only for vacation accrued but unpaid during the four  years before the lawsuit, or for any vacation that accrued that was unpaid during the employment  (assuming the employee brings suit within four years of leaving his employment). 194 The Church court reasoned that the statute of limitations begins to run only when a cause of action  accrues, and that no cause of action for unpaid vacation accrues until termination of employment. 195    Accordingly, the court held that an employee who sues within the limitations period can sue for any  unpaid vacation that accrued at any time throughout the entire tenure of employment. 196 The Church decision is squarely at odds with an older decision, Sequeira v. Rincon-Vitova  Insectaries, Inc., 197 which had adopted the DLSE position that an employee suing for unpaid  vacation may sue only for vacation accrued within the limitations period (which is four years for  claims based on a written contract such as a written vacation policy).  The DLSE reasoned that  although an employee cannot demand payment of unused vacation until termination, the employee  is entitled to take vacation upon earning the vacation.  The DLSE also noted that allowing an  employee to reach back throughout the entire employment would create serious recordkeeping  problems for employers who may not save such records for periods that exceed the typical  limitations period (e.g., three or four years).  Accordingly, Sequeira held that the statute of  limitations on a claim for vacation pay begins running as soon as the vacation is earned. 198 The Church court declined to follow Sequeira because the Church court thought that the Sequeira  decision improperly deferred to a DLSE interpretative bulletin. 199   The Church court noted that  intervening California Supreme Court precedent in Tidewater Marine Western, Inc. v. Bradshaw 200 had held that such a bulletin is an invalid underground regulation that is not entitled to any  deference.  Re-evaluating the issue anew, the Church court thought that the more persuasive  reasoning was that a cause of action for unpaid vacation pay does not accrue until the termination                                                        194 Church suggested, without deciding, that the statute of limitations on a vacation claim may be either two years (if based  on oral promises) or four years (if based on a written contract).  Id. at 1577.  Given a plaintiff’s ability to recover unpaid  vacation through a claim under the UCL, Bus. & Prof. Code § 17200, et seq., which has its own four-year statute of  limitations, the discussion in Church of the appropriate statute of limitations is primarily academic. 195 Id. at 1576-77, 1582-83. 196 Id. at 1578-79. 197 32 Cal. App. 4th 632 (1995). 198 Id. at 635-36. 199 Church, 143 Cal. App. 4th at 1578. 200 14 Cal. 4th 557 (1996).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 48 of employment and, therefore, chose not to follow Sequeira. 201   Despite this clear conflict in  appellate decisions, the California Supreme Court declined to review the Church decision.   Accordingly, the law remains uncertain in this area. Another employer policy fomenting class actions, has been a “floating holiday” policy that allows  employees to take a paid day off at the employee’s discretion but does not treat the floating holiday  as vacation–i.e., the employee who does not use the floating holiday is not credited with a day of  vested vacation time, but instead simply loses the opportunity for a paid day off.  The DLSE has  opined that an employer may have a use-it-or-lose-it policy with bona fide “holidays,” but only when  the holiday is tethered closely to a specific event.  For example, an employer may give employees  Martin Luther King, Jr. Day as a paid day off, on a use-it-or-lose-it basis.  But where “holiday” pay  can be claimed on any day, at an employee’s discretion, the DLSE views it as disguised “vacation”  pay, and has opined that an employer must treat any such holiday pay as vested vacation time. 202 Based on this announced interpretation of the law, numerous class actions have been filed against  employers who have a use-it-or-lose-it policy with respect to floating holidays.  To date, no court  decision has adopted or rejected the DLSE’s interpretation. VIII. Waiting Time Penalties A. Generally Many class actions assert, on behalf of class members who are former employees, claims  for “waiting time penalties” under Labor Code Section 203. 203 Under California law, all wages due must be paid at the time of termination, unless the  employee quits without notice, and then within seventy-two hours of termination. 204   When  wages of a terminated employee are not timely paid, the employee’s wages continue, as a  penalty, until paid or up to thirty days, whichever is shorter.  Thirty days of penalties means  thirty consecutive calendar days, including Saturdays, Sundays and holidays (typically  equivalent to six weeks of pay), rather than simply one month’s pay.  Each calendar day  that passes before the employer pays all wages owed triggers an additional day of                                                        201 Church, 143 Cal. App. 4th at 1582-83. 202 DLSE Enforcement Manual § 15.1.12, et seq. (“there must be an objective standard by which it can be established that  the leave time is attributable to holidays, sick leave, bereavement leave or other specified leave.”) 203 The statute of limitations period on Lab. Code § 203 claims is three years, regardless of whether only penalties are  sought or whether underlying wages are also sought in same action.  Pineda v. Bank of America, 50 Cal. 4th 1389,  1401 (2010), overruling McCoy v. Sup. Ct., 157 Cal. App. 4th 225, 233 (2008). 204 Lab. Code § 203.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 49 penalties at the employee’s regular daily rate, even if the employee is not normally  scheduled to work on all of these days. 205 On its face, the waiting time penalty provision reads as though it were designed to apply  when an employer fails to give a terminating employee the employee’s final paycheck.  The  Labor Commissioner, despite regulations providing that a good faith dispute precludes the  imposition of penalties, 206 routinely applies the penalty provision when the employer has  failed to pay any wage claim over the entire course of employment and continues not to  pay it at the time of termination.  As a result, an employer who shorts an employee $1 of  owed vacation pay could be required to pay the employee the equivalent of six weeks’ pay  in penalties. Courts have ruled that good faith, or lack of willfulness, is a defense to waiting time  penalties. 207   As the California Supreme Court explained:  “A good faith dispute that any  wages are due will preclude imposition of waiting time penalties under Section 203.” 208    Simple ignorance of the law, as opposed to a reasonable, good faith belief that the law  provided a defense to payment of wages, generally is insufficient to avoid waiting time  penalties. 209 Unvested stock that an employee chose to receive in lieu of full wages is not viewed as  wages that must be paid to an employee if the employee resigns prior to the vesting date of  the stock, though the wages not paid due to the receipt of the stock must be paid (without  interest) to an employee who is involuntarily terminated prior to the vesting date. 210                                                       205 Mamika v. Barka, 68 Cal. App. 4th 487 (1998). 206 8 C.C.R. § 13520 (“[A] good faith dispute that any wages are due will preclude imposition of waiting time penalties  under Section 203.”). 207 Road Sprinkler Fitters Local Union No. 669 v. G&G Fire Sprinklers, Inc., 102 Cal. App. 4th 765 (2002); Davis v. Morris,  37 Cal. App. 2d 269 (1940). 208 Smith v. Rae-Ventner Law Group, 29 Cal. 4th 345, 354 n.3 (2002), superseded on other grounds by statute, Code Civ.  Proc. § 98.2(c) as recognized in Eicher v. Advanced Business Integrators, Inc., 151 Cal. App. 4th 1363 (2007); Amaral  v. Cintas Corp., 163 Cal. App. 4th 1157, 1201-03 (2008)(defendant’s failure to pay wages according to “living wage”  clause in contract did not constitute a willful violation of the Labor Code where the defendant’s position raised  “complicated issues of first-impression”); see also Nordstrom Com’n Cases, 186 Cal. App. 4th 576, 584 (2010) (holding  that the trial court did not abuse its discretion in discounting the penalties on a Section 203 claim because the  defendant could avoid the penalties by showing that a “good faith dispute” existed regarding the claimed wages). 209 Barnhill v. Robert & Saunders Co., 125 Cal. App. 3d 1, 7 (1981). 210 Schacter v. Citigroup, Inc., 47 Cal. 4th 610 (2009).  This decision did not foreclose the possibility of a different outcome  if the employee were fired rather than voluntarily resigned.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 50 B. Application to Fixed-Term and Temporary Employment 1. Assignments for a Fixed Term By Section 203’s terms, waiting time penalties are recoverable only by an employee  “who is discharged or who quits.” 211   But what happens when the assignment simply  comes to an end by its own terms, either because a fixed term has expired, or a fixed  project is completed?  The appellate court held that neither of those circumstances  was a “discharge” triggering application of Section 203, but the California Supreme  Court reversed. In Smith v. Superior Court, 212 the plaintiff worked a one-day assignment as a hair  model for L’Oreal, for which she earned $500.  The employer, pursuant to its regular  practice, did not pay her until sixty days after the model shoot ended. 213   If the  delayed payments violated Labor Code Section 203 as to every hair model L’Oreal  paid in a similar fashion in California, potential liability would have amounted to  $15,000 per model per assignment (thirty working days of penalty pay times $500 per  day), which could quickly add up to millions of dollars.  If the end of the assignment  was not a “discharge,” however, then the employee would be limited solely to suing  for payment of the wages, interest, and any attorney’s fees accrued in bringing the  suit. 214 The California Supreme Court ruled that the end of the one-day assignment resulted  in a “discharge” of the employee.  The court explained that the term “discharge” was  ambiguous: it could mean either “fire” or “release from one’s obligations.”  When  someone has an assignment of a fixed term or performs a fixed task, the employer  “discharges” (i.e., releases) the employee at the end of the term or completion of the  task.  The California Supreme Court analyzed the legislative history and concluded  that this interpretation—”discharge” as synonymous with “release from one’s  obligations”—was more consistent with the overall purpose of the statute and the  strong public policy for immediate payment underlying Section 203.  Accordingly, the  end of a fixed-term assignment that ends the employment relationship between the  employer and employee triggers the obligation for immediate payment under Labor  Code Sections 201-203.                                                       211 Lab. Code § 203.  In addition, the penalties for employees who quit are limited to employees “not having a written  contract for a definite period.”  Lab. Code § 202. 212 123 Cal. App. 4th 128 (2004) (single-plaintiff case). 213 The employer erroneously treated its models as independent contractors.  If the employer lacked a reasonable basis for  that position, that could qualify as a “willful” violation sufficient to trigger waiting time penalties. 214 Lab. Code § 218.5 (attorney’s fees recoverable); Lab. Code § 218.6 (pre-judgment interest recoverable from the date  payment was owed).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 51 2. Temporary Employment Agencies In 2006, a slew of class actions were filed against temporary agencies, arguing that  the end of every temporary assignment is a “discharge” that triggers the right to  immediate payment and the application of waiting time penalties.  Temporary  agencies typically do not pay wages on the date a given assignment ends, but rather  send paychecks in regular one or two-week intervals (except in the rare case where  the agency “fires” the temporary employee by giving notice that the temp will not be  considered for further work). In one such class action, Elliot v. Spherion Pacific Work, LLC, 215 Seyfarth Shaw  obtained summary judgment for the defendant temporary agency.  The plaintiff was  employed by Spherion as a temporary worker for over a year, during which time she  completed 15 temporary assignments of varying length.  Plaintiff submitted time  sheets for work performed each Friday, and was paid by Spherion on the following  Friday via direct deposit.  Following what turned out to be her last assignment with  Spherion, the plaintiff was paid pursuant to the normal pay schedule, and continued  to seek assignments through Spherion for over a month thereafter.  The district court  held that the plaintiff was not “discharged” each time one of her temporary  assignments ended, noting that she remained employed by Spherion and she  understood that assignments would be intermittent.  Therefore, the plaintiff was not  entitled to waiting time penalties under the Labor Code. 216   The Ninth Circuit affirmed  the decision in early 2010. Effective January 1, 2009, Labor Code Section 201.3 resolved this issue, providing  that: If an employee of a temporary services employer is assigned to work for a  client, that employee’s wages are due and payable no less frequently than  weekly, regardless of when the assignment ends, and wages for work  performed during any calendar week shall be due and payable not later  than the regular payday of the following calendar week.  A temporary  services employer shall be deemed to have timely paid wages upon  completion of an assignment if wages are paid in accordance with this  subdivision.                                                       215 572 F. Supp. 2d 1169 (C.D. Cal. 2008), aff’d, 368 Fed. Appx. 761 (9th Cir. Feb. 26, 2010) (unpublished).  216 See also Sullivan v. Kelly Services, Inc., No. C 07-2784 CW,  2008 U.S. Dist. LEXIS 91608 (N.D. Cal Nov. 12, 2008)  (granting summary judgment in favor of defendant temporary agency on Labor Code Section 201 claim on grounds that  plaintiff was not “dismissed” by the agency at the conclusion of a temporary work assignment).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 52 The legislative history of Section 201.3 provides that its enactment effects a  clarification of existing law, rather than a change in the law. 217 Because of this, courts  have applied it retroactively to claims arising before the Section’s effective date. 218 IX. Itemized Wage Statement Claims Labor Code Section 226 has for many years required that employers include certain specific  information in an itemized wage statement provided to employees with every paycheck.   Section 226(a) requires that each wage statement of non-exempt employees show (1) gross wages  earned; (2) total hours worked by the employee; (3) the number of piece-rate units earned (for  piece-rate workers); (4) all deductions taken; (5) net wages earned; 219 (6) the inclusive dates of the  period for which the employee is paid; (7) the name of the employee and either the last four digits of  the employee’s social security number or the employee ID number; 220 (8) the name and address of  the employer; and (9) all applicable hourly rates in effect during the pay period and the  corresponding number of hours worked at each hourly rate. 221   Any departure from these rules  arguably could violate Section 226(a). 222 The primary remedy for violations of Labor Code Section 226(a) is a penalty set forth in  Section 226(e).  Section 226(e) provides that when an employer “knowingly and intentionally”  violates Section 226(a) any employee “suffering injury” may sue and collect actual damages or a  penalty of $50 or $100 (for repeat offenders), whichever is greater, up to a maximum of $4,000 per  employee. 223    Before 2003, the statute required only that employers furnish a wage statement.  There was no  requirement that the information in the wage statement be accurate.  With the amendments in  2003, however, the statute required that all information be accurate.  As a result of this change,                                                        217 See Senate Bill Analysis, SB 940 at p. 5. 218 Elliott v. Spherion, 572 F. Supp. 2d 1169 (C.D. Cal. 2008); Sullivan v. Kelly Services, Inc., Case No. C 07-2784 CW,  2008 U.S. Dist. LEXIS 91608 (N.D. Cal 2008). 219 Seyfarth Shaw convinced a federal district court that a wage statement claim premised on a failure to pay for missed  breaks under labor Code section 226.7 did not constitute a failure to identify wages earned pursuant to Labor Code  section 226.  Jones v. Spherion Staffing LLC, 2012 WL 3624081 at *9 (C.D. Cal., Aug. 7, 2012) (“Because the  underlying violation that gives rise to a section 226.7 claim is not the nonpayment of wages, other claims premised on  nonpayment of wages do not arise.”).   220 Until January 2008, the wage statement was allowed to contain the employee’s entire social security number.  Now, an  employee ID or the last four digits of the Social Security Number must be substituted. 221 Lab. Code § 226(a). 222 See, e.g., Zavala v. Scott Bros. Dairy, Inc., 143 Cal. App. 4th 585 (2006) (“The failure to list the precise number of hours  worked during the pay period conflicts with the express language of the statute and stands in the way of the statutory  purpose.”); Cicairos, 133 Cal. App. 4th at 954, 961 (“[T]he wage statements and driver trip summaries do not list the  defendant employer’s name and address and thus are not adequate itemized wage statements.”). 223 Lab. Code § 226(e); as with other Labor Code penalty provisions, the limitations period is one year.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 53 plaintiffs’ lawyers began including wage statement claims in class actions alleging exempt  misclassification or failure to properly calculate overtime.  Their theory was that all those  employees’ wage statements were “inaccurate” because they failed to set forth the proper amount  of overtime owed.  The plaintiffs would then seek penalties for each employee receiving an  inaccurate wage statement. Plaintiffs have generally used wage statement claims as bargaining chips in mediation, without  placing much settlement value on them.  Two primary aspects of Section 226 claims have been  hotly disputed. First, there was substantial dispute whether the language in subsection (e) that an employee must  “suffer injury” to recover the penalties means that only employees suffering actual harm from a  wage statement violation can recover.  Defendants, arguing that there must be actual harm to  “suffer injury,” relied on the definition of “injury” as used in other aspects of California law. 224    Defendants also supported their position by pointing out that employees who did not suffer actual  injuries could obtain injunctive relief pursuant to Labor Code Section 226(g), which does not contain  language about “suffering injury.” Plaintiffs, by contrast, argued that the term “injury” is simply the violation of one’s legal rights. 225    Plaintiffs contended  that Section 226 created a right for employees to receive an accurate wage  statement, and that right is violated when the employer knowingly provides a defective wage  statement.  By this logic, any violation of Section 226(a) causes an injury sufficient to trigger  penalties under Section 226(e). In a blow to employers, effective January 1, 2013, the Legislature amended Labor Code section  226 to adopt a pro-plaintiff definition of “injury” for purposes of certain violations of the statute. An  employee now is deemed to suffer injury if (A) the employer fails to provide a wage statement or (B) fails to provide accurate and complete information and the employee cannot promptly, without  reference to other documents or information, determine the following from the wage statement  alone: (1) gross or net wages paid during the pay period, (2) total hours worked, (3) piece rate units  earned and rate, (4) deductions, (5) pay period, (6) hourly rates and corresponding hours worked at  each rates, (7) the employer’s name and address, (8) the employee’s name, and (9) the employee’s  last 4 digits (only) of his or her social security number or employee identification number.  Following                                                        224 See, e.g., Steketee v. Lintz, Williams & Rothberg, 38 Cal. 3d 46, 55 (1985) (“The word ‘injury’ signifies both the  negligent cause and the damaging effect of the alleged wrongful act and not the act itself.”); Lueter v. State of Cal., 94  Cal. App 4th 1285, 1303 (2002) (“‘Injury’ refers to the fact of harm suffered by the plaintiff due to the defendant’s  conduct.”); San Fran. Unified Sch. Dist. v. W.R. Grace & Co., 37 Cal. App. 4th 1318, 1330 (1995) (“[W]hen injury or  damage is the last element of a tort cause of action to occur, the cause of action accrues once any actual and  appreciable harm has occurred.”). 225 See, e.g., BLACK’S LAW DICTIONARY 466 (4th ed. 1968) (“the injury is the violation of the legally protected interest . . . and  not necessarily the resulting harm”); Migliori v. Boeing N. Am., Inc., 97 F. Supp. 2d 1001, 1007 (C.D. Cal. 2000)  (distinguishing “injury” from “damages” for purposes of res judicata analysis).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 54 this amendment, an employer can no longer argue that employees must individually demonstrate  that they suffered actual injury resulting from a violation of Labor Code section 226(a), which  previously was a very potent weapon when opposing certification of such claims.  It is anticipated  that the plaintiffs’ bar may now more aggressively pursue such claims.  The remaining dispute over the construction of Section 226 concerns the meaning of the phrase  “knowing and intentional.”  This standard appears, on its face, to differ from the standard for  awarding waiting time penalties under Labor Code Section 203, which is mere “willfulness.”   Normally, if an employer is conscious that it committed an act, and if the employer lacks a  reasonable basis for believing the act is lawful, then the act is “willful” for purposes of Section 203  even where the employer lacked bad faith or an intention to break the law. 226   Although this  statutory interpretation departs from the common-sense understanding of the term “willful violation,”  it furthers a strong public policy favoring payment of final wages to an employee (who may depend  on such wages for survival), so there is a colorable reason to use a broad interpretation of  “willful.” 227 With wage statement violations, by contrast, any true injury to the employee is often purely  theoretical.  Employers contend there is no strong public policy reason to hold them liable for  penalties totaling thousands (or even millions) of dollars merely because they were ignorant of a  technical requirement as to what should appear on an itemized wage statement.  Accordingly, they  believe there is no strong reason to assume the Legislature intended to equate “knowing and  intentional” with “willful.”  Several district court decisions have now granted summary adjudication  against a claim for penalties on the ground that while the wage statements violated Section 226(a),  there was no evidence that the employer knew of Section 226 and intended to violate it. 228 Recent court decisions have begun to flesh out the meaning of the phrase “knowing and intentional”  in the context of Section 226.  These cases, however, do not provide clear guidance as to the lower  threshold for the “knowing and intentional” standard, because the defendants in these cases were  alleged to have been aware that their wage statements were not in compliance and to have done  nothing to fix them.  In any event, the January 2013 amendment to the statute clarified that a                                                        226 Barnhill v. Robert & Saunders Co., 125 Cal. App. 3d 1, 7 (1981). 227 See id. at 7-8 (explaining public policy underlying Section 203). 228 See Harris v. Vector Marketing Corp., 656 F. Supp. 2d 1128, 1145-46 (N.D. Cal. 2009) (summary adjudication  warranted on plaintiff’s § 226(e) claim where dispute existed as to whether plaintiff was independent contractor or  employee and record lacked evidence that conduct was knowing or willful); Reber v. AIMCO/Bethesda Holdings, Inc.,  No. SA CV07-0607 DOC (RZx), 2008 WL 4384147 (C.D. Cal. Aug. 25, 2008) (summary adjudication appropriate on  plaintiff’s § 226 claim because of a good faith dispute as to whether employees are exempt precludes finding  defendant’s conduct was knowing and intentional);  Mutec v. Huntington Mem’l Hosp., LASC Case No. BC 288727 (LA  Superior Court, Mar. 10, 2006) (Hon. Tricia Ann Bigelow) (granting summary adjudication against claim for penalties  where employer did not know that its pay stubs violated Section 226(a)).  But see Heritage Residential Care, Inc. v  Division of Labor Standards Enforcement, 192 Cal. App. 4th 75, 88 (2011) (defendant’s “good faith mistake of law”  that  employees who lacked Social Security numbers were not required to be provided with wage statements was not an  “inadvertent” mistake, such as a clerical error would be).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 55 "knowing and intentional failure" will not include an isolated and unintentional payroll error due to a  clerical or inadvertent mistake. The fact finder can consider whether the employer, prior to an  alleged violation, has adopted and complied with a set of policies, procedures, and practices that  fully comply with section 226. X. California Minimum Wage Claims A. Wage Averaging Improper Under California Law In Armenta v. Osmose, Inc., 229 the Second District Court of Appeal held that employees who  alleged that their employer had failed to pay them for certain hours they worked off the clock had  violated the state minimum wage laws with respect to every hour they worked but were not paid.   The employer defended the claim with the argument that the employees’ average hourly pay for the  workweek was greater than the minimum wage, which defeated any claim for minimum wage under  the federal “averaging method” for determining minimum wages. 230   The Armenta court, however,  rejected the averaging method and instead adopted the position set forth in a DLSE Opinion Letter  that California requires that the minimum wage be paid for each and every hour worked.   Accordingly, regardless of the total compensation an employee earns during a week, or even during  a single day, if there are hours the employee has worked for which the employee was paid less  than the minimum wage, then the employer has violated Labor Code Section 1194 by failing, for the  hours in question, to pay minimum wage. 231 Interestingly, a federal district court in California previously had expressly rejected the DLSE’s  position, holding that the FLSA’s averaging method applied to claims under California minimum  wage law as well. 232   The Armenta court rejected the federal court’s conclusion, reasoning that  California intended its minimum wage law to be more protective than that under the FLSA, and that  part of this greater protection is a requirement to pay minimum wage for “all hours worked,” which is  language absent from the FLSA. 233   The Armenta court also noted that Labor Code Sections 221- 223, which have no counterparts under the FLSA, make it illegal to secretly pay employees less  than the amount designated by statute or contract. 234   The court failed to explain, however, why the  violation of these particular Labor Code statutes signaled an intent to treat those violations as  minimum wage violations.                                                       229 135 Cal. App. 4th 314 (2006). 230 Armenta, 135 Cal. App. 4th at 319. 231 Id. at 324-25. 232 Medrano v. D’Arrigo Bros. Co., 336 F. Supp. 2d 1053 (N.D. Cal. 2004). 233 Armenta, 135 Cal. App. 4th at 323-24. 234 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 56 The Armenta decision affects California law in several ways.  First, allowing a minimum wage claim  whenever there are some uncompensated work hours will allow employees who could not state a  claim for unpaid overtime an alternative basis upon which to sue.  For example, unionized  employees whose overtime claims are preempted by Section 301 of the Labor Management  Relations Act may still be able to sue under California law for unpaid minimum wages.  Indeed, the  plaintiffs in Armenta were members of a union who had pleaded claims for overtime, but later  abandoned them because they recognized that those claims were preempted. 235   Minimum wage  law claims, by contrast, are generally not preempted given that they can be resolved entirely  independently of a collective bargaining agreement. 236 Second, employees who sue for minimum wage violations can recover liquidated damages under  Labor Code Section 1194.1, which are not available for other sorts of wage violations.  If liquidated  damages are awarded, then employees will recover twice the minimum wage (which would  currently amount to $18 per hour) for each hour they can show they worked but received no pay. Third, plaintiffs will be able to plead minimum wage claims in any case where they allege some  work time was unpaid.  For example, in meal period cases where the employer is alleged to have  recorded meal periods automatically whether or not the employees actually took them, employees  may argue that they worked through the meal period, but were not paid for that work time.  Those  facts might trigger minimum wage claims now.  Similarly, a claim that an employee worked  controlled standby time that the employer erroneously treated as unpaid will now trigger a minimum  wage claim. The ruling in Armenta may not apply, however, in certain situations where the state minimum wage  law is preempted by federal law.  In Fitzgerald v. Skywest Airlines, Inc., 237 the plaintiff was a flight  attendant.  Her governing contract called for her to receive $1.60 an hour for “block time” while her aircraft was readied for flight, while passengers boarded and disembarked, and for flight standbys.   On the whole, however, only a fraction of her hours were block time, the remainder of her hours  was paid at a rate of $20 to $30 per hour, and there was no evidence that wages paid to the  employee averaged less than minimum wage for even one day.  Nonetheless, the plaintiff argued,  under Armenta, that paying only $1.60 for each hour of “block time” was a violation of the minimum  wage law. The court affirmed summary judgment for the defendant based primarily on the doctrine of federal  preemption under the Railway Labor Act. 238   In addition, however, the court suggested that Armenta                                                       235 Id. at 318.  Unionized employees’ overtime claims often fail because those employees generally work under a collective  bargaining agreement that provides premium pay for all hours worked, which then brings the employees within the  Labor Code Section 514 “collective bargaining exemption.”   236 Id. 237 155 Cal. App. 4th 411 (2007). 238 Fitzgerald, 155 Cal. App. 4th at 421-22.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 57 might not apply where, as in Fitzgerald, the employment contract specifies that certain hours are to  be paid at less than the minimum wage, but the employee always receives an average wage for  hours worked each day above minimum wage: In Armenta, the employer violated its own CBA and written employment policies which  required that employees be paid for time spent driving company vehicles to and from job  sites. . . . Unlike Armenta, here there is no evidence that SkyWest pays [attendants] less  than what was collectively bargained for.  As discussed in Armenta, Labor Code  “[s]ections 221, 222, and 223 articulate the principle that all hours must be paid at the  statutory or agreed rate. . . .”  Here the agreed rate is set forth in the SkyWest CBA which  was voted on and approved by SkyWest [attendants]. 239 As a result of this language in Fitzgerald, in some circumstances employers may be able to argue that Armenta applies only where employees are forced to work hours without any pay, as long as  there was a clear agreement in place regarding varying rates of pay, and average pay does not  amount to less than the minimum wage. 240 B. The Conflict Between Piece Rate Formulas And The  Requirement To Pay Minimum Wages Several recent cases have raised questions regarding the ability of employers to pay workers on a  piece rate basis.  In Bluford v. Safeway Stores, Inc., 241 the Court of Appeal held that rest breaks  must be separately compensated under a piece rate system because the breaks are considered to  be work time.  There, the plaintiff was a truck driver who was compensated based on the miles he                                                        239 Fitzgerald, 155 Cal. App. 4th at 417. 240 Employers may also face both contractual liability and Labor Code penalties for failing to pay workers in accordance  with a city “living wage” ordinance that sets minimum pay above the statutory minimum wage rate.  Amaral v. Cintas  Corp., 163 Cal. App. 4th 1157 (2008) (employee class could bring claims to recover contract damages for unpaid  wages, as well as Labor Code penalties for failure to pay wages and accrued vacation on termination, and for improper  wage statements, pursuant to living wage clause in laundry services contract between the City of Hayward and Cintas);  see also McKenzie v. Fed. Express Corp., 765 F. Supp. 2d 1222 (C.D. Cal. Apr. 14, 2011) (judgment entered against  defendant for PAGA penalties where violation under Section 226 is established; injury need not be shown). But see  Balasanyan v. Nordstrom, Inc., Nos. 3:11-cv-2609-JM (WMC), 3:10-cv-2671-JM (W<C), 2012 WL 6675169, at *1-2  (S.D. Cal. Dec. 12, 2012), the district court denied Nordstrom’s motion for summary judgment with respect to plaintiff’s  claims under Labor Code sections 1194 and 1197.  Plaintiffs contended that Nordstrom underpaid its sales people by  compensating them only through commissions earned for time spent on stocking assignments, pre-opening, and postclosing periods.  Id. at *1.  Plaintiffs contended  they worked at least 1.5 hours per work shift without compensation.  Id. Nordstrom contended that its commission plan did not violate Sections 1194 and 1197, because “California law permits  employers to pay commissions for all hours worked and does not impose any restrictions on the type of work employers  can pay with commissions.”  Id. at *2.  Furthermore, Nordstrom argued that commissions may be used to compensate  employees for “non-sell time” work as it is part of the services provided in connection with sales, and that the  employment contracts, which comply with  minimum wage laws, should govern.  Id. at *2-3.  Plaintiffs argued that  averaging is impermissible under Armenta, supra, and Nordstrom countered that here, unlike Armenta, the  commissions Nordstrom paid for selling time here always exceeded minimum wage. Id. at *4.  The court denied  Nordstrom’s motion for summary judgment with respect to the Section 1194 and 1197 claims.  Id. at *6. It remains to be  seen whether this type of commission plan will be held to be lawful when it is evaluated on its merits 241 216 Cal. App. 4th 864 (2013). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 58 drove and for the performance of specific tasks.  The plaintiff argued that because his employer did  not separately pay him for the time he spent on rest breaks, this constituted a violation of the  California minimum wage law.  The Court of Appeal agreed, holding that a piece rate compensation  formula that does not provide separate wages for time spent on rest breaks is improper. Piece rate compensation systems were dealt another significant blow in Gonzalez v. Downtown LA  Motors, LP. 242   In Gonzalez, the plaintiffs were automobile service technicians who were paid a flat  rate based on a formula for each repair job satisfactorily completed.  Although the employer kept time records for the employees and maintained a “minimum wage floor” to ensure that workers  were always paid at least the minimum wage times the total number of hours worked in a pay  period, the plaintiffs complained that they were not separately paid an additional hourly rate for  downtime or time spent on non-repair tasks. The Court of Appeal ruled in favor of the plaintiffs, holding that “averaging all hours worked ‘in any work week’ to compute an employer’s minimum  wage obligation under California law is inappropriate.” 243    The Bluford and Gonzales decisions have negative implications for California employers who use  piece rate compensation formulas.  The core purpose of paying employees a piece rate is to  incentivize them to be productive.  This incentive is counteracted when employers are required to  also pay employees for non-productive time. 244 These recent decisions are especially alarming  because the Wage Orders specifically permit paying employees piece rates, and the types of piece  rate plans used by the employers in these cases had been widely utilized without incident for  decades.  It is anticipated that the plaintiffs’ bar will initiate a new wave of class action litigation  attacking piece rate compensation plans, so employers utilizing such plans should ensure that they  comply with the latest legal developments. C. Neutral Time-Rounding Practices Are Lawful Federal law allows employers to use a neutral practice of rounding reported time, up or down, as  long as the overall effect is not to underpay employees for their time. 245   Under one such policy, for  example, employees who work between 1 and 7 minutes during a quarter-hour segment of time                                                        242 215 Cal. App. 4th 36 (2013), review denied July 17, 2013. 243 Id. at 48. 244   Employers paying piece rates compensation formulas may wish to consider utilizing a hybrid compensation system that  pays employees a base rate for each hour and an additional piece rate or “bonus” for each completed item.  This would  ensure compliance with the minimum wage law as well as incentivizing employees to be productive.  Note, though, that  the production bonus would still be subject to rules governing overtime premium pay. 245    See 29 C.F.R. §  785.48(b); see also Alonzo v. Maximus, Inc., 832 F. Supp. 2d 1122, 1127-29 (C.D. Cal. 2011)(facially  neutral policy rounding time to the nearest quarter hour was proper).  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 59 would have their time rounded down, while those who work between 8 and 14 minutes would be  paid for a full 15 minutes. 246 Until the recent Court of Appeal holding in See’s Candy Shops, Inc. v. Superior Court, 247 California  law did not expressly permit this employer practice, thus giving rise to lawsuits contending that  employees were not being compensated at the minimum wage for all hours worked, as required  under Labor Code Section 1194.  In See’s Candy, the employer used a timekeeping software  system that required employees to punch in at the beginning and out at the end of their shifts. 248    Two company policies provided for adjustments to the timecards: a “rounding” policy and a “grace  period” policy. 249   Under the “rounding” policy, punches in and out were rounded up or down to the  nearest tenth of an hour. 250 Under the “grace period” policy, an employee could voluntarily punch in  up to 10 minutes before the scheduled start time and punch out 10 minutes after the scheduled end  time, but was prohibited from working during these periods. 251   If an employee punched into the  system during the grace period, the employee was paid based on the scheduled start/stop time,  rather than the punch time. 252     Plaintiff, a former retail sales employee, sued See’s on behalf of herself and others, claiming that  the company’s time-rounding and “grace period” practices failed to compensate employees for all  hours worked. 253   The company alleged that any unpaid amounts were de minimis, and that the  rounding policy and grace period policy complied with federal and state law.  The trial court granted  summary judgment for the plaintiff and the company appealed. 254 The Court of Appeal reversed, finding both policies to be lawful. 255 Citing the federal rounding  standard, the court held that a rounding policy is permissible under California law if it is “fair and  neutral” on its face and is “used in such a manner that it will not result, over a period of time, in  failure to compensate the employees properly for all the time they have actually worked.” 256 With  respect to the grace period policy, the court concluded that the plaintiff failed to produce any                                                        246   All timekeeping systems employ rounding at some point, whether to the minute, second, or tenth of a second.  The  discussion of rounding here generally applies to situations where rounding is done in increments greater than the  nearest minute. 247    210 Cal.App.4th 889 (2012). 248   Id. at 892.   249   Id. 250 Id. 251 Id. at 892-93. 252   Id. at 893. 253 Id.  254   Id. at 899. 255   Id. at 907.   256   Id.  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 60 evidence showing that class members who clocked in during the grace period were working or were  under the employer’s control, and the parties agreed that under California law a grace period is  permitted if the employee is not working or is not under the employer’s control. 257    As a result of the See’s decision, California employers should be able to employ neutral rounding  policies in their timekeeping systems.  Rounding policies that round only in favor of the employer,  however, are improper.  Furthermore, even properly implemented, facially-neutral rounding policies  may still be subject to claims that they tend to result in underpayment to employees over a period of  time, and thus result in litigation. XI. California Labor Code Private Attorneys  General Act A. General Scope of the Law Effective January 1, 2004, California law greatly expanded the prospect of litigation under  the Labor Code.  Labor Code Section 2698, et seq., the Labor Code Private Attorneys  General Act (“PAGA”), provides employees with added financial incentives to sue and  creates new penalties for Labor Code violations.  Previously, many of the Labor Code  provisions carried no civil penalty at all, and others had a civil penalty but provided no  private right of action.  Civil penalties could generally be obtained only if the DLSE actually  brought an enforcement action against the employer. PAGA drastically altered Labor Code enforcement by creating (1) new civil penalties for  every provision of the Labor Code that affects employees and that did not previously have  a civil penalty 258 and (2) a private right of action to recover civil penalties. 259   Where no  specific civil penalty is previously attached to a Labor Code violation, the new penalty is  $100 for each aggrieved employee per pay period for an initial violation, and $200 for every  further violation. 260   The law requires the successful plaintiff to give three-fourths of any civil  penalties recovered to the Labor and Workforce Development Agency.  The aggrieved employees are allowed to keep only the remaining one-quarter of the penalties awarded. 261                                                       257 Id. at 909. 258 Lab. Code § 2699(f). 259 Lab. Code § 2699(a). 260 Lab. Code § 2699(f)(2). In Amaral v. Cintas Corp., 163 Cal. App. 4th 1157, 1209 (2008), the California Court of Appeal  held that an “initial” violation encompassed violations covering multiple employees for multiple pay periods, up until  such time as “the employer has learned that its conduct violates the Labor Code,” at which point “the employer is on  notice that any future violations will be punished just the same as violations that are willful or intentional,” meaning the  penalty rate will be doubled.  261 Lab. Code § 2699(i).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 61 An aggrieved employee suing pursuant to this statute sues on behalf of himself or herself,  or on behalf of any other current or former employees. 262   A union may not bring a PAGA  claim on behalf of “aggrieved employees.” 263   The California Supreme Court has held that  PAGA claims may proceed as collective actions without satisfying class certification  requirements. 264   In so holding, the Court stated that because a PAGA suit is analogous to  a suit brought by a government agency on behalf of the public interest, there is no need to  satisfy class certification requirements. 265   Furthermore, as initially drafted, the statute  contained no requirement that the employee exhaust administrative remedies by first filing  a claim with the Labor Commissioner (or even that the employee notify the Labor  Commissioner of the lawsuit). Seyfarth Shaw has estimated that this statute created a new right to recover penalties on  more than 100 Labor Code provisions, several of which are quite obscure.  Even though  the limitations period for a penalty claim would be only one year, 266 the effect of these  penalty provisions can be significant.  Suppose, for example, that an employer of 150  employees is sued for a repeated violation of some obscure Labor Code section, and the  violation affected each employee over the course of one year—during each of 26 biweekly  pay periods.  In this example the employer could be subject to penalties in the amount of  more than $700,000. 267   Because penalties are cumulative for distinct Labor Code  violations, that figure could be doubled or tripled if there were multiple, recurrent Labor  Code violations (or if one act of misconduct violated multiple Labor Code provisions).   Attorney’s fees to the prevailing plaintiff would augment that total. 268 When Arnold Schwarzenegger became governor in 2004, one of his first initiatives was an attempt to repeal PAGA.  Although he did not succeed in obtaining total repeal, he and the                                                        262 At least one court has held that the employee does not sue on behalf of the state.  Waisbein v. UBS Financial Services  Inc., No. C-07-2328 MMC, 2008 U.S. Dist. LEXIS 21727 (N.D. Cal. Mar. 19, 2008).  It appears  this holding was  overruled by Arias v. Superior Court, 46 Cal. 4th 969 (2009).  Furthermore, in Reyes v. Macy’s, Inc., 202 Cal. App. 4th  1119, 1123 (2011), the Court of Appeal held that a plaintiff “may not . . . bring the PAGA claim as an individual claim,  but ‘as the proxy or agent of the state’s labor law enforcement agencies’” (quoting Arias,  46 Cal. 4th at 986). 263 Amalgamated Transit Union v. Superior Court, 46 Cal. 4th 993 (2009). 264 Arias v. Superior Court, 46 Cal. 4th 969 (2009).  265 Id. at 987. 266 Code Civ. Proc. § 340(a) (one-year statute of limitations on statutes to recover a penalty); Moreno v. Autozone, Inc.,  No. C05-04432-MJJ, 2007 U.S. Dist. LEXIS 43873, at *4-10 (N.D. Cal. June 5, 2007) (analyzing PAGA and holding that  a one-year statute of limitations applies); Thomas v. Home Depot USA Inc., 527 F. Supp. 2d 1003 (N.D. Cal. 2007)  (same). 267 $15,000 ($100 x 150 employees) for the first violation and then $30,000 for each of the 25 further violations, if the $200  penalty is found to apply for all later pay periods.  An employer may be able to demonstrate that it should only be fined  for one continuous violation, in which case the proper penalty might be $100 for each violation, but under that scenario  the employer would still be liable for $390,000 ($15,000 x 26 pay periods) see Amaral v. Cintas Corp., 163 Cal. App. 4th  1157, 1209 (2008). 268 Lab. Code § 2699(g).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 62 Legislature did scale back a few of the most controversial provisions and to insert some  additional procedural protections.  SB 1809, signed into law in August 2004, effected the  following changes to PAGA:  The bill repealed the requirement (formerly in Labor Code Section 431) that  employers file a copy of their job application forms with the Division of Labor  Standards Enforcement.  Violations of Labor Code provisions that merely require notice, posting, agency  reporting, or filing of documents with a state agency are now exempt from  prosecution by aggrieved employees.  An exception to this exemption was carved  out for “mandatory payroll or workplace injury reporting.” 269  All settlements in which penalties are paid must now be judicially approved.  The court now may reduce the amount of civil penalty if, under the circumstances,  the penalty otherwise would be “unjust, arbitrary and oppressive, or confiscatory.” 270  Before suing, an aggrieved employee now must exhaust an administrative  procedure that involves providing written notice of the particular Labor Code  violation to the employer and the Labor Commissioner, for possible investigation  before filing suit. 271 Failure to exhaust this administrative remedy within one year of  the violation bars the suit. 272  The Labor Commissioner now has authority to promulgate regulations to  implement the statute (although they have yet to attempt to do so). Although the 2004 reforms to PAGA may seem modest, they appear to have had the effect  of substantially reducing the attractiveness of these kind of lawsuits.   PAGA claims are not  typically asserted by themselves, but rather are added to standard wage and hour class  actions, typically for bargaining leverage.                                                       269 Lab. Code § 2699(g)(2). 270 Lab. Code § 2699(e)(2). 271 Lab. Code §§ 2699(a), 2699(g)(1), and 2699.3. 272 Moreno, No. C05-04432-MJJ, 2007 U.S. Dist. LEXIS 43873, at *4-10 (N.D. Cal. June 5, 2007) (employee who filed  lawsuit within one year, but failed to exhaust administrative remedies until more than one year after leaving employment  was time-barred from asserting PAGA claims).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 63 B. Scope of the “Civil Penalty” Provisions With the creation of the administrative remedy requirement before an employee could seek  penalties under PAGA, the question arose whether this administrative requirement applied  to all statutes covered by PAGA.  More specifically, Section 2699.3 sets forth a long list of  particular statutes that are purportedly subject to the administrative remedy.  Included on  this list are several statutes that provided for penalties recoverable by individual employees  even before the passage of PAGA (e.g., Labor Code Section 203, which provides for  waiting time penalties where employers willfully fail to pay terminating employees all wages  owed to them).  Defendants began to argue that no employee could sue to recover  penalties under any statute listed in Section 2699.3 without first exhausting administrative  remedies. In November 2004, the Second District Court of Appeal issued Caliber Bodyworks v.  Superior Court, 273 which clarified the scope of the administrative remedy exhaustion  requirement in PAGA.  The court held that the administrative remedy requirement applied  only to actions seeking to recover a “civil penalty,” which the court distinguished from  actions that could be advanced by individuals to recover “statutory penalties,” such as  Labor Code Section 203.  In short, the court held that if a plaintiff seeks to recover penalties  that were available under a statute and recoverable by an individual prior to PAGA’s  passage, then the employee could still recover such statutory penalties without complying  with the administrative prerequisites of PAGA. 274 Although not at issue in the Caliber Bodyworks decision, the court’s holding that statutory  penalties differ from “civil penalties” arguably expanded the scope of PAGA beyond what  had broadly been understood.  PAGA created a new civil penalty for every section of the  Labor Code that did not previously provide for a “civil penalty.” 275   If statutes that always  provided for a statutory penalty (e.g., Labor Code Section 203) are not statutes that provide  for a “civil penalty,” then an employee arguably can recover civil penalties in addition to  the penalties already available under those statutes. On the other hand, the Caliber Bodyworks decision leaves open the possibility that no new  civil penalty is created for those Labor Code provisions that do not themselves provide for a  civil penalty, but for which civil penalties may be recovered under a separate Labor Code  provision. 276   Furthermore, even if it is theoretically possible to obtain an award of civil                                                        273 134 Cal. App. 4th 365 (2005). 274 Id. at 377-78.  The Second Appellate District reached the same result again in Dunlap v. Superior Court, 142 Cal. App.  4th 330 (2006). 275 Lab. Code § 2699(f). 276 See, e.g., Lab. Code § 256 (providing a separate civil penalty previously recoverable only by the DLSE for violations of  Labor Code Section 203); Lab. Code § 210 (providing a separate civil penalty recoverable only by the DLSE for  violations of Labor Code Sections 204, 204b, 204.1, 204.2, 205, 205.5, and 1197.5).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 64 penalties on top of statutory penalties for the same violation, courts may exercise discretion  not to award double penalties pursuant to Labor Code Section 2699(e)(2), which allows a  court not to award a penalty where doing so would be “unjust, arbitrary and oppressive, or  confiscatory.” C. Pursuing PAGA Claims Collectively Without Class Certification PAGA provides very little procedural guidance as to how an “aggrieved employee” is to  seek penalties on behalf of other aggrieved parties.  Given that the statute does not ever  require that the other “aggrieved parties” consent to a suit being brought on their behalf, a  dispute arose whether a party seeking to use PAGA to sue on behalf of aggrieved parties  who did not actively join the action as parties would need to satisfy the requirements for  class certification under Code of Civil Procedure Section 382. In Arias v. Superior Court, 277 the California Supreme Court held that there is no requirement  that a party seeking to sue on behalf of other aggrieved parties under PAGA must first  obtain class certification. 278   Rather, the employee bringing the issue stands in the shoes of  the Labor Commissioner and may seek to recover penalties in essentially the same manner  as the Labor Workforce Development Agency (“LWDA”).  The LWDA may pursue penalties  against an employer on behalf of employees who do not expressly consent to the LWDA’s  efforts.  If an employee can establish a violation affects a group of aggrieved employees,  then he may prove his case, recover the penalties, and the result of the case will be res  judicata (i.e., precluding litigation of the claim) as to the Labor Commissioner and the  “aggrieved employees” on whose behalf the action was brought. 279   The Court also stated  that while PAGA actions need not be brought as class actions, they can be. 280 The Arias decision raised many questions.  For example, if a plaintiff were to pursue a meal  period class action as well as a derivative PAGA action for penalties, and a court denied  certification of the case on the ground that individualized issues predominate as to whether  different employees experienced meal period violations, could the case proceed  nonetheless on a collective basis?  Presumably, this would require that the plaintiff  individually prove each employee’s claim to meal period violations, but if that could be done  in a manageable manner, the court likely would have certified a class. If it required each  aggrieved employee individually to prove a violation, would each of possibly hundreds of                                                        277 46 Cal. 4th 969 (2009). 278     Id. at 985; see also Henderson v. JP Morgan Chase Bank, No. CV 11-3428 PSG, at *8-9 (C.D. Cal. July 10, 2013)  (affirming reasoning in Arias and denying motion to strike PAGA claims even though class certification was denied with  respect to the same claims). 279 Id. at 985-86.  280 Id. at 981 n.5 (“Actions under the Labor Code Private Attorneys General Act of 2004 may be brought as class actions.”). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 65 such employees be required to appear and testify?  And if they failed to do so, would that  provide a basis for the court to rule against them on the merits? The most sensible reading of Arias was not that it endorsed the notion that every action for  Labor Code civil penalties could proceed collectively without class certification, but rather that it was not always necessary to use class action procedures.  In cases where the  violation can be proven through records or some other collective mechanism (e.g., a  minimum wage violation that could be proven by reference to payroll records), an employee  could prove it on behalf of a group of aggrieved employees without the need to obtain class  certification.  Of course, if it were that simple, a plaintiff presumably could obtain class  certification, and likely would want to do so.  It remains to be seen if appellate courts  interpret Arias more broadly and if it will lead to a wave of PAGA-only non-class group  actions.  Thus far, this wave has not materialized. D. Release of PAGA Claims Through Class Settlement Plaintiffs’ lawyers generally try to avoid characterizing any money from a settlement as  being attributed to PAGA claims, 281 as three-quarters of any such money must be paid to  the state. 282   Indeed, it is fairly common for plaintiffs’ counsel not to assert PAGA claims at  all, but rather simply to proceed with Labor Code claims.  If the case settles, however, the  defendant generally insists that the release cover all claims arising out of the same  underlying facts, including any claims for PAGA penalties.  Otherwise, the defendant would  face the risk of another lawsuit on the same issues. A dispute may arise if a member of the settlement class later seeks to bring his own PAGA  action.  The plaintiff will argue that the previous class representative had not exhausted the  administrative remedy under PAGA and thus never had a right to release PAGA claims.   Rather, until that administrative remedy is exhausted, the plaintiff argues, the PAGA claim  is the property of the state.  In short, the plaintiff argues that a prerequisite to a release of  PAGA claims is the exhaustion of the administrative remedy and the receipt of notice from  the state that it is opting not to pursue the claim. The court of appeal addressed this issue in Villacres v. ABM Industries Inc., 283 and held that  the class members could indeed waive their right to pursue PAGA claims and that a  judgment entered on such a class settlement creates a res judicata bar to those class  members pursuing PAGA claims in a separate action.  The court explained that the party in                                                        281 See Nordstrom Com’n Cases, 186 Cal. App. 4th 576, 589 (2010) (affirming trial court’s approval of a class wide  settlement that apportioned zero dollars to PAGA claims). 282 It is unclear in a class settlement whether the attorney may recover a percentage of the gross on a common fund basis  or whether the state is entitled to three-quarters of the gross sum, with the lawyer being limited to recovering a separate  sum on a lodestar basis (reasonable number of hours times a reasonable hourly rate). 283 189 Cal. App. 4th 562 (2010). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 66 a PAGA action is the aggrieved employee, rejecting the plaintiff’s argument that the State  of California is the real party in interest in a PAGA action. Separate from the res judicata argument, however, an employer may argue that where the  class release includes language that the class members are releasing PAGA claims based  on the same underlying facts as the Labor Code claims, the doctrine of release precludes  any class member from pursuing PAGA relief.  In other words, while there is no sort of res  judicata bar, basic contract principles of release prevent someone who agreed to the  release from going ahead and suing on the released claim.  This argument was approved  in a federal decision, Waisbein v. UBS Financial Services Inc., 284 which is not binding on  California courts but is persuasive authority. 285   Accordingly, while it remains unsettled  whether PAGA claims can be released other than through a settlement of a class action  that asserted PAGA claims, the law that exists suggests that such settlements are  proper. 286 E. Wage Order Claims California’s Industrial Welfare Commission sets forth minimum work standards for  California employees in Wage Orders.  These Wage Orders contain a variety of provisions  that employers must follow, including everything from overtime and minimum wage  requirements to the timing of meal and rest breaks.  The Wage Orders, however, also  contain more obscure sections, with no corresponding Labor Code provision, regulating  things such as the location of clocks and, in some cases, bathroom temperature.  These  obscure sections have inspired claims that their violation constituted a violation of California  Labor Code section 1198, 287 and therefore give rise to PAGA penalties. The first case to reach the California Court of Appeal asserting this theory was Bright v. 99¢  Only Stores. 288   There, Bright filed a putative class action alleging that her employer                                                        284 2007 U.S. Dist. LEXIS 92051, at *8-9 (Dec. 5, 2007) (“[T]he question is whether the Bowman class members voluntarily  entered into an agreement in which they accepted a monetary benefit from UBS in exchange for not pursuing their  claims under PAGA. The indisputable answer to that question is ‘yes.’”) 285 Harris v. Investor’s Business Daily, Inc., 138 Cal. App. 4th 28, 34 (2006) (“even unpublished federal opinions have  persuasive value in [the superior] court”). 286 In any event, the best practice for settling PAGA claims in connection with an action where they were not alleged is to  require the plaintiffs’ counsel to amend the complaint to include a PAGA claim and also to provide the required notice to  the State. 287 California Labor Code section 1198 states: The maximum hours of work and the standard conditions of labor fixed by the commission shall  be the maximum hours of work and the standard conditions of labor for employees. The  employment of any employee for longer hours than those fixed by the order or under conditions  of labor prohibited by the order is unlawful. 288 189 Cal. App. 4th 1472 (2010).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 67 violated a requirement in Wage Order 7-2001 289 to provide employees with “suitable seats”  where the nature of the work reasonably permits their use.  Bright argued that 99¢ Only  Stores, by violating the Wage Order, also violated California Labor Code section 1198,  entitling her to PAGA penalties under Section 2699(f). 290 In response to the complaint, 99¢ Only Stores demurred on two grounds: (1) that the  violation of the Wage Order’s seating provision is not a violation of Section 1198, because it  is not a “prohibited” condition of labor; and (2) that even if a violation of the seating  provision was a violation of Section 1198, civil penalties under PAGA are not available  because the Wage Order has its own penalty provision. 291   The trial court sustained the  demurrer. 292   Bright appealed and the appellate court, in a case of first impression, found in  her favor, holding that the seating requirement in Wage Order 7-2001 is a condition of labor  under Section 1198 and that the use of the word “prohibited” in the statute did not mean  that the conduct had to be prohibited by the Wage Order for it to come within the statute’s  protections. 293   Moreover, the court found that the penalties provided for in Wage Order 7- 2001 section 20 are, by the Wage Order’s own terms, nonexclusive.  And because Section  1198 does not contain its own penalty provision, the penalty provision contained within  PAGA applies. 294 Shortly thereafter, another Division of the Court of Appeal for the Second District reached  the same result.  In Home Depot U.S.A., Inc. v. Superior Court, 295 the appellate agreed with  the Bright ruling and held that PAGA provides employees with a private right of action to  recover civil penalties for violations of the “suitable seats” requirement in Wage Order 7- 2001. 296                                                       289 Wage Order 7-2001 applies to retail employers. 290 189 Cal. App. 4th. at 1475. 291 See id. at 1476. 292 See id. 293 See id. at 1478-79. 294 See id. at 1481. 295 191 Cal. App. 4th 210 (2010). 296 Id.; see also Thurman v. Bayshore Transit Management, Inc., 203 Cal. App. 4th 1112 (2012) (Fourth District Court of  Appeal affirmed a trial court’s award of underpaid “wages”–i.e. premium payments for violations of California’s meal and  rest period laws and regulations–as a penalty under Cal. Labor Code section 558; underpaid wages may also be  recoverable under PAGA).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 68 In another appellate decision validating an action for “suitable seats,” the Ninth Circuit  recently held that an employee need not actually request a seat to be entitled to one. 297 These cases represent a new breed of class action lawsuit in California. 298   Though they refer to the “suitable seats” requirement in Wage Order 7-2001, it is likely that plaintiffs’  counsel will attempt to use the rulings to create private causes of action for similar Wage  Order provisions. Courts have differed on whether seating claims are good candidates for  class treatment. 299 XII. Unfair Competition Claims, Business &  Professions Code Section 17200 A. Former Law—Pre-Proposition 64 Beginning in the late 1990s, many plaintiffs in wage and hour cases also filed companion  claims under California’s Unfair Competition Law (“UCL”), Business & Professions Code  Section 17200, et seq.  Before the UCL was amended in 2004, it was an extremely potent  weapon because it had no traditional standing requirement.  Rather, it literally authorized  “any person acting for the interests of itself . . . or the general public” to bring an action to  enjoin unfair competition.  Court decisions gave a generous reading to the term “general  public.” 300   Moreover, unfair competition was defined as any “unlawful, unfair or fraudulent  business practice.”  The California Supreme Court construed this language in the  disjunctive, so that the UCL was turned into an omnibus consumer protection law, reaching  such issues as the sale of whale meat, 301 the filing of small claims court lawsuits by a                                                        297    Green v. Bank of America, 2013 U.S. App. LEXIS 2988, No. 11-56365 (9th Cir. Feb. 13, 2013).  The court also held that  it would be premature at an early stage of the litigation—when no facts of the case had been developed—to determine  whether an award under PAGA was unjust. 298     See also Garvey v. Kmart Corp., No. C 11-02575 WHA, 2012 U.S. Dist. LEXIS 178920 (N.D. Cal. Dec. 18, 2012), the  first of the “seating” cases to go to trial, plaintiff alleged that Kmart Corp. failed to provide suitable seating for checkout  cashiers in violation of Labor Code § 1198 and Section 14(A) of Industrial Welfare Commission Wage Order 7-2001.   The court summarized its holding: “’All working employees shall be provided with suitable seats when the nature of the  work reasonably permits the use of seats,’ according to the law in California.  In this civil action, class counsel have  failed to prove that the nature of the work reasonably permits the seating modification urged by counsel at trial.   Possibly a different modification involving a lean-stool would be provable but this record does not support it.”  Id. at *2. 299   In Hall v. Rite Aid Corp., San Diego Superior Court Case No. 37-2009-00087938-CU-OE-CTL (Oct. 11, 2012), the trial  court granted Rite Aid Corp.’s motion to decertify a class of cashiers and clerks, concluding that individualized issues  predominated as to whether the “nature of the work” of a cashier reasonably permitted the use of a suitable seat.  The  court concluded that the Rite Aid cashier job must be viewed as a whole, but the evidence demonstrated that an  improper individual-by-individual analysis was required.  However, in Garvey v. Kmart Corp., supra, the federal district  court found a seating claim by cashiers to be a good fit for class treatment, at least as to a single store. 300 A UCL representative action cannot, however, be brought on behalf of sophisticated business entities in their capacities  as “consumers” of goods or services.  Rosenbluth Int’l, Inc. v. Superior Court, 101 Cal. App. 4th 1073 (2002). 301 People v. Sakai, 56 Cal. App. 3d 531 (1976).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 69 collection agency in counties distant from where the defendants live, 302 the use of the “Joe  Camel” caricature to advertise cigarettes, 303 marketing sugar coated breakfast cereals as  something other than candy, 304 and the sale of cigarettes to minors.  The statute has never,  however, permitted damage awards. 305   It has authorized only injunctive relief, including,  significantly, any order that “may be necessary to restore to any person in interest any  money or property . . . which may have been acquired by means of such unfair  competition”—i.e., restitution. The California Supreme Court held that restitution included ordering an employer who  failed to pay premium overtime pay required by statute to disgorge the premium pay to the  affected employees, 306 an exercise functionally equivalent to paying damages for a  statutory overtime claim under the Labor Code.  California courts have subsequently  clarified, however, that equitable relief does not include forcing the defendant to go beyond  returning money wrongfully withheld from the plaintiff by disgorging additional profits the  employer earned as a result of its unfair practices. 307 There were three primary advantages a plaintiff would gain by joining a UCL claim to a  wage and hour suit.  First, because the restitutionary remedy under the UCL was similar to  a damages remedy for a wage law violation, a companion UCL claim effectively expanded  the statute of limitations on a Labor Code wage claim 308 from three years to four years, the  length of the UCL’s statute of limitations. 309   Second, a UCL claim provided a potential  vehicle for plaintiffs to secure class relief without satisfying the procedural burdens of class  certification. 310   Third, a plaintiff who lacked traditional standing to sue because he or she  was never impacted by an alleged wage and hour or Labor Code violation could                                                        302 Barquis v. Merchants Collection Ass’n, 7 Cal. 3d 94 (1972). 303 Mangini v. R. J. Reynolds Tobacco Co., 7 Cal. 4th 1057 (1994). 304 Comm. on Children’s Television, Inc. v. Gen. Foods Corp., 35 Cal. 3d 197 (1983). 305 The UCL cannot be used, for instance, to recover waiting time penalties, precisely because the damage awards are  penalties and not compensation.  Pineda v. Bank of America, N.A., 170 Cal. App. 4th 388 (2009), review granted, 207  P.3d 1 (2009).  The UCL also cannot be used to recover attorneys’ fees; these may be recovered only in cases where  the UCL is used to “borrow” other laws that specifically provide for recovery of attorneys’ fees.  People ex rel. City of  Santa Monica v. Gabriel, 186 Cal. App. 4th 882 (2010). 306 Cortez v. Purolator Air Filtration Prods. Co., 23 Cal. 4th 163, 177-78 (2000). 307 Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1152 (2003); see also Feitelberg v. Credit Suisse First  Boston, LLC, 134 Cal. App. 4th 997 (2005) (non-restitutionary disgorgement of profits unavailable under UCL even  where case has been certified as a class action). 308 Labor Code penalties, however, are not recoverable under the UCL, because they do not constitute restitution.  See,  e.g., Pineda v. Bank of America, 50 Cal. 4th 1389, 1401-2 (2010) (Labor Code section 203 waiting time penalties are  not recoverable under the UCL). 309 Cortez, 23 Cal. 4th at 179. 310 Kraus v. Trinity Mgmt. Servs., Inc., 23 Cal. 4th 116 (2000).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 70 nonetheless sue as a “private attorney general” on behalf of those employees who were  impacted by the violation. 311 B. Reform of the Law—Passage of Proposition 64 On November 2, 2004, California voters passed Proposition 64 (“Prop 64”), which amended  two of the three broadest aspects of the UCL—i.e., the near-universal standing requirement  and the ability to bring a collective action without obtaining class certification.  Prop 64 had  no impact on the governing statute of limitations for UCL claims, however. With respect to standing, Prop 64 revised Business & Professions Code Section 17203 and  17204 to impose real standing requirements on individuals seeking to bring UCL claims.   The statute previously gave standing to sue to any person suing on behalf of the “general  public.”  Individual standing under the UCL is now limited to a person “who has suffered  injury in fact and has lost money or property as a result of . . . unfair competition.” 312   The  proponents of the law argued that this change was intended to stop “shakedown lawyers”  who “appoint themselves to act like the Attorney General and file lawsuits on behalf of the  people of the State of California.” 313   The proponents also argued that voters should support  Prop 64 because it “[p]rotects your right to file a lawsuit if you have been damaged” while it  “[a]llows only the Attorney General, district attorneys, and other public officials to file  lawsuits on behalf of the People of the State of California to enforce California’s unfair  competition laws.” 314 As for class certification requirements, Prop 64 amended Business & Professions Code  Section 17203 to include an express requirement that individuals seeking to bring collective  actions under the UCL must satisfy the requirements for class certification set forth in  Section 382 of the Code of Civil Procedure, including (1) a community of interest among  the class members; (2) common questions of law or fact which predominate over  individualized issues; (3) a claim that is typical of the class; and (4) the plaintiff must be  able to adequately represent the interests of the class. 315                                                       311 Stop Youth Addiction v. Lucky Stores, Inc., 17 Cal. 4th 553 (1998) (purported anti-smoking public interest advocacy  organization had standing under UCL to sue Lucky Stores for allegedly selling cigarettes to minors). 312 Bus. & Prof. Code § 17204. 313 Official Voter Information Guide, Arguments and Rebuttals, Proposition 64,  www.voterguide.ss.ca.gov/propositions/prop64-arguments.htm (accessed November 17, 2004). 314 Official Voter Information Guide, Arguments and Rebuttals, Proposition 64,  www.voterguide.ss.ca.gov/propositions/prop64-arguments.htm (accessed November 17, 2004). 315 Lockheed Martin Corp. v. Superior Court, 29 Cal. 4th 1096, 1103-04 (2003).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 71 C. Proposition 64’s Restrictions on UCL Class Actions An issue raised by Prop 64 was whether, in a UCL-based class action, the Prop 64  standing requirement applies to all members of the proposed class, or just to the class  representatives.  Initially, it appeared that courts were tending toward requiring all class  members to have standing. 316   However, in 2009, the California Supreme Court handed  down In re Tobacco Cases II, 317 which held that Prop 64’s standing requirement applied  only to the class representative and not to each and every person within the proposed  class.  More specifically, the California Supreme Court held that: imposing this unprecedented requirement would undermine the guarantee made  by Proposition 64’s proponents that the initiative would not undermine efficacy of  the UCL as a means of protecting consumer rights, because requiring all  unnamed members of a class action to individually establish standing would  effectively eliminate the class action lawsuit as a vehicle for the vindication of  such rights. 318 The ramifications of Tobacco II are substantial.  In many wage and hour class actions, the  plaintiffs use a UCL claim to extend the statute of limitations on their statutory claims to four  years.  In most of these cases, however, a significant portion of the certified class did not  lose any money or property as a result of the violation, but plaintiffs argue that the mere  fact that some class members have no damages does not preclude certification.  For  example, significant numbers of managers may not have worked any overtime, or  significant numbers of a meal period class may have actually taken all their meal periods.   After Tobacco II, trial courts may still certify classes despite the existence of members of  the class without any grounds for recovery. 319   While this is largely the way the courts had  handled class actions traditionally, if the California Supreme Court had adopted the position  of the dissent in Tobacco II, it might have substantially undercut the ability to use the UCL  as a vehicle for advancing Labor Code class actions. 320 321                                                       316 See, e.g., Pfizer, Inc. v. Superior Court, 141 Cal. App. 4th 290  (2006). 317 46 Cal. 4th 298 (2009). 318 Id. at 321. 319 See Sav-On, 34 Cal. 4th at 333 (explaining that “a class action is not inappropriate simply because each member of the  class may at some point be required to make an individual showing as to his or her eligibility for recovery or as to the  amount of his or her damages”). 320 Nevertheless, the reforms instituted by Proposition 64 still do apply where the class representatives themselves lack  any basis for recovery.  See, e.g., Birdsong v. Apple, 590 F.3d 955, 959-62 (9th Cir. 2009) (dismissing putative class  action where plaintiffs alleged that injury was possible, but failed to allege that they themselves suffered any actual  harm). 321 Another key development in regard to the application of the UCL was the decision of the California Supreme Court in  Sullivan v. Oracle, 51 Cal. 4th 1191 (2011).  There, the Court held that overtime work performed by out-of-state  employees within California can serve as the basis for a claim under California’s FLSA claims by competition law.  Cal. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 72 XIII. Class Action Fairness Act of 2005 A. The Purpose of the Act The Class Action Fairness Act of 2005 (“CAFA”) amended the federal diversity jurisdiction  statute, 28 U.S.C.A. § 1332, to broaden the basis for federal diversity jurisdiction.  In  enacting the CAFA, Congress’s intent was to shift class action litigation from state courts to  the federal courts. 322   The most significant increase in filings of class actions has been in  labor class actions. 323   Most of these class actions are brought under either F.R.C.P.  23 or  the Fair Labor Standards Act (FLSA). 324 B. General Requirements The CAFA grants the federal court jurisdiction over any class action in which: 1) the  proposed class consists of at least 100 members, 2) the total amount in controversy  exceeds $5 million after combining claims, exclusive of interest and costs, and 3) there is  diversity between at least one plaintiff class member and one defendant. 325    The CAFA expands the jurisdiction of the federal courts to hear class action lawsuits and  replaces the strict complete diversity requirement with a more lenient rule, thereby granting  jurisdiction where any diversity exists between plaintiffs and defendants. 326 CAFA diversity  exists when at least one plaintiff is a citizen of one state and one defendant is a citizen of a  different state, or when one plaintiff is a citizen of a foreign country and one defendant is a  U.S. citizen, or when one plaintiff is a U.S. citizen and one defendant is a citizen of a  foreign country. 327                                                                                                                                                                                      Bus. & Prof. Code § 17200 (“UCL”).  However, the Court also held that out-of-state employees working outside  California cannot serve as the basis for a California UCL claim.  Although the Sullivan Court explicitly limited its decision  to “the circumstances of this case,” it is anticipated that the plaintiff’s bar will argue that a logical extension of its  reasoning suggests that similar conclusions may result for non-California-based employers.  The Sullivan Court  declined to opine on the different burdens that a non-California-based employer may face in applying California  overtime laws to nonresident employees working in California, but the plaintiff’s bar will undoubtedly seek to obtain  judicial rulings that the California Supreme Court’s conflict of laws analysis suggests no reason for why a different  conclusion would result for non-California-based employers.  322 Federal Judicial Center, Impact of CAFA on the Federal Courts: Fourth Interim Report, at 1-2, Apr. 2008 (reporting a  72% increase in class action cases filed in the 88 district courts from January to June 2007 compared with July to  December 2001). 323 Id. at 7. 324 Id. (reporting a 228 percent increase when comparing the first six-month period to the last six-month period). 325 28 U.S.C. § 1332(d)(2).  CAFA does not confer federal subject matter jurisdiction when the primary defendants are  states, state officials, or other governmental entities against whom the district court may be foreclosed from ordering  relief.  Id. § 1332(d)(5). 326 Natale v. Pfizer, Inc., 379 F. Supp. 2d 161, 167 (D. Mass. 2005), aff’d, 424 F.3d 43 (1st Cir. 2005). 327 Id. § 1332(d)(2); Bush v. Cheaptickets, Inc., 425 F.3d 683, 684 (9th Cir. 2005).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 73 The CAFA defines class actions as any civil action filed under Federal Rule of Civil  Procedure 23 or similar state law. 328   Also included within this definition, for removal  purposes, are mass actions, i.e., actions in which monetary claims by 100 or more plaintiffs  are proposed to be tried jointly because they involve common questions of law or fact. 329 The CAFA is not retroactive and does not apply to class actions filed in state court before  its enactment on February 18, 2005, and removed to federal court after that date. 330 C. Removal Under CAFA The burden of establishing removal jurisdiction remains on the proponent of federal  jurisdiction. 331   Removal must be timely and must be done during one of two thirty-day  periods for removing the case.  The first thirty-day removal period is triggered “if the case  stated by the initial pleading is removable on its face.” 332   The second thirty-day removal  period is triggered if the initial pleading does not indicate that the case is removable, and  the defendant receives “a copy of an amended pleading, motion, order or other paper” from  which removability may first be ascertained. 333 If a complaint alleges damages in excess of $5 million, then the amount in controversy is  ”presumptively satisfied” unless it appears to a legal certainty that the claim is actually for  less than the jurisdictional minimum. 334    If the complaint fails to specify any amount in damages, the removal papers must provide  the court with facts to support the jurisdictional amount.  Moreover, the Ninth Circuit has  held that the defendant seeking removal must prove by a “preponderance of the evidence”  that the amount in controversy has been met. 335 The third scenario is when the complaint affirmatively states that the amount in controversy  is less than $5 million.  The Ninth Circuit addressed this situation in Lowdermilk v. United  States Bank, holding that the removing defendant must prove to a “legal certainty” that the                                                        328 28 U.S.C. § 1332(d)(1)(B).  At least one district court has held that representative actions under PAGA are not “class  actions” and therefore are not removable pursuant to CAFA.  Sample v. Big Lots Stores, Inc., 2010 WL 4939992 (N.D. Cal.) 329 Id. § 1332 (d) (11)(B)(i). 330 See Bush v. Cheaptickets, Inc., 425 F.3d 683 (9th Cir. 2005). 331 See Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345 (2013); Rodriguez v. AT&T Mobility Services LLC, 728 F.3d 975  (9th Cir. 2013). 332 Harris v. Bankers Life & Cas. Co., 425 F.3d 689, 694 (9th Cir. 2005). 333 Carvalho v. Equifax Info. Serv., LLC, 629 F.3d 876, 885 (9th Cir. 2010). 334 Abrego Abrego v. Dow Chem. Co., 443 F.3d 676 n.8 (9th Cir. 2006). 335 Id. at 683; Sanchez v. Monumental Life Ins. Co., 102 F.3d 398, 404 (9th Cir.1996).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 74 CAFA amount in controversy has been met. 336   The Ninth Circuit noted that federal courts  are courts of “limited jurisdiction” and therefore should strictly construe subject matter  jurisdiction. 337   Second, the court noted that the plaintiff is “master of her complaint” and can  plead to avoid federal jurisdiction. 338   Moreover, the court raised the bar in cases where  there is no evidence of bad faith, requiring the defendant to not only contradict the plaintiff’s  own assessment of damages, but also overcome the presumption against federal  jurisdiction. 339 The Lowdermilk rule threatened to eviscerate CAFA by making it easy for plaintiffs to avoid  removal by disingenuously stating that the amount in controversy was less than $5 million.   Plaintiffs could then later amend their complaints or otherwise contend that they had  discovered additional evidence supporting greater damages than they had initially alleged,  and there was no way to bind class members to the initial amount-in-controversy estimate. Lowdermilk was dealt an initial blow in 2013 when the United States Supreme Court  restored CAFA’s integrity in Standard Fire Insurance Co. v. Knowles. 340   There, the named  plaintiff, Knowles, claimed that his homeowners insurer had shorted him and “hundreds [or]  possibly thousands” of other policyholders in the putative class that he sought to represent  by failing to include certain benefits when paying out claims.  Knowles sued in Arkansas  state court and attempted to avoid removal to federal court by stating in his complaint that  he was seeking less than $5 million in damages on behalf of the class. 341     The defendant nonetheless removed the case to federal court, invoking CAFA. In analyzing  jurisdiction, the district court concluded that the total potential damages put in controversy by the class action claim exceeded the threshold amount.  But  the court concluded that the  plaintiff’s statements that he would not seek more than $5,000,000 on behalf of the class  served to limit the amount in controversy to less than the jurisdictional minimum, making  CAFA inapplicable. 342                                                       336 Lowdermilk v. United States Bank, 479 F.3d 994, 1000 (9th Cir. 2007);  see also CiFuentes v. Red Robin Int’l, Inc., No.  C-11-5635-EMC, 2012 WL  693930 (N.D. Cal. 2012) (holding that defendants failed to provide “concrete evidence” to  estimate the amount in controversy to a “legal certainty” as required under Lowdermilk —“a very high, although not  insurmountable, threshold for defendants.”).   337 Id. at 998. 338 Id. at 999. 339 Id. 340    133 S. Ct. 1345 (2013). 341    Id. at 1347. 342    Id. at 1348.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 75 After the Eighth Circuit declined the insurer’s interlocutory appeal, the Supreme Court  granted certiorari. 343   The Court overturned the trial court's holding and found that the  plaintiff’s supposed “stipulation” did not limit the amount in controversy in the case.  Writing  for a unanimous Court, Justice Breyer noted that while the plaintiff could agree to limit his  own request for damages, he could not do so on behalf of absent members of a class that  no court had yet empowered him to represent. 344   These individuals thus might seek more  damages if, for example, Knowles was replaced as the named plaintiff or another class  member intervened in the case.  Because the named plaintiffs’ stipulation was thus not  effective, the district court’s original finding that the total potential damages in the case  exceeded $5,000,000 was controlling and the requirements for CAFA jurisdiction were  met. 345    Although Standard Fire is incompatible with Lowdermilk, it did not expressly overrule it.   Because of this, some courts in California clung to the notion that removing defendants must prove to a “legal certainty” that the CAFA amount in controversy has been met. The  Ninth Circuit corrected this situation in Rodriguez v. AT&T Mobility Inc., 346 holding that the  Supreme Court’s ruling in Standard Fire effectively overturned Lowdermilk. In Rodriguez, the Ninth Circuit found that the lead plaintiff’s asserted waiver of any claim in excess of the  $5 million amount-in-controversy requirement was ineffective in light of Standard Fire. 347    Accordingly, the court held that the proper burden of proof imposed upon a defendant to  establish the jurisdictional amount is the “preponderance of the evidence” standard, and not  the “legal certainty” standard set forth in Lowdermilk. 348 1. “Other Paper” Requirement Defendants should be aware that mere verbal statements that opposing counsel or  the plaintiff make regarding the amount in damages may not qualify as the “other  paper” that can trigger removal. 349   The published decisions have considered only  oral statements made in the context of mediation and settlement communications, so                                                       343    Id. 344 Id. at *1348-49. 345    Id. at 1350. 346    728 F.3d 975 (9th Cir. 2013).  347   Id. at 982.  348   Id. at 981. 349 See Molina v. Lexmark Int’l, Inc., 2008 U.S. Dist. LEXIS 22031, at *4 (C.D. Cal. 2008) (holding that oral communications  during settlement do not constitute “other papers for the purposes of § 1446(b)”); see also Jiminez v. Sears, Roebuck &  Co., 2010 U.S. Dist. LEXIS 22031, at *4 (C.D. Cal. 2010); see also Mendoza v. OM Fin. Life Ins. Co., 2009 U.S. Dist.  LEXIS 59008 (N.D. Cal. 2009).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 76 it is unclear whether oral statements made in other contexts can be used to satisfy  the “other paper” requirement. The Ninth Circuit has established the framework for determining whether the amount  in controversy meets the jurisdictional threshold.  A district court “may consider  whether it is ‘facially apparent’ from the complaint that the jurisdictional amount is in  controversy.  If not, the court may consider facts in the removal petition, and may  ‘require parties to submit summary-judgment-type evidence relevant to the amount in  controversy at the time of removal’.” 350    2. Premature Removal and Sanctions The Ninth Circuit has made clear that it disfavors premature removal.  The seminal  case, Abrego Abrego v. The Dow Chemical Co., reaffirmed the principle of  “guard[ing] against premature and protective removals and minimiz[ing] the potential  for a cottage industry of removal litigation.” 351 The court reminded the parties that  CAFA’s legislative history agreed with such a conclusion, citing to a portion of the  Senate Judiciary Committee Report:  The Committee understands that in assessing the various criteria  established in all these new jurisdictional provisions, a federal court may  have to engage in some fact-finding, not unlike what is necessitated by  the existing jurisdictional statutes. The Committee further understands  that in some instances, limited discovery may be necessary to make  these determinations. However, the Committee cautions that these  jurisdictional determinations should be made largely on the basis of  readily available information. Allowing substantial, burdensome discovery  on jurisdictional issues would be contrary to the intent of these provisions  to encourage the exercise of federal jurisdiction over class actions. 352 Defendants eager to remove a case should also consider the possibility of sanctions  in the event their removal petition is deemed unreasonable.  The Supreme Court has  noted that an award of costs and fees is permissible under Section 1447(c), when  “such an award is just” and “the removing party lacked an objectively reasonable  basis for removal.” 353   The Ninth Circuit has also previously stated that an award of                                                        350 Singer v. State Farm Mutual Auto. Ins. Co., 116 F.3d 373, 377 (9th Cir. 1997) (citing Allen v. R&H Oil & Gas Co., 63  F.3d 1326 (5th Cir. 1995)). 351 Abrego Abrego, 443 F.3d at 691. 352 Id. at 692 (citing S. Rep. No. 109-14, at 44, 2005 U.S.C.C.A.N. at 42 (emphasis added)). 353 Martin v. Franklin Capital Corp., 546 U.S. 132 (2005); see also Mosaic Sys., Inc. v. Bechtolsheim, No. C 07-3892-SI,  2007 WL 3022581, at *5 (N.D. Cal. Oct. 15, 2007) (denying request for fees and costs given “objectively reasonable”  basis for removal); Gardner v. UICI, 508 F.3d 559, 561-62 (9th Cir. 2007) (reversing award of fees and costs where Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 77 attorney fees is permitted even when defendant’s removal was “fairly supportable,”  but wrong as a matter of law. 354   But, a California federal district court has previously  held that all a defendant may need to support the removal is an argument “that is not  irrational or implausible.” 355 D. Exceptions to CAFA Jurisdiction There are narrow exceptions to CAFA jurisdiction. 356   The party that is seeking remand  back to the state court bears the burden of proof in establishing any exceptions to CAFA  jurisdiction. 357 1. Local Controversy Exception Under the local controversy exception, a federal court must decline jurisdiction  where: (1) greater than 2/3 of the proposed class members are citizens of the forum  state, (2) at least one “significant” defendant (i.e., from whom significant relief is  sought and whose alleged conduct forms a significant basis for the claims asserted  by the class) is a citizen of the forum state, (3) the principal injuries caused by the  alleged conduct or any related conduct of each defendant were incurred in the forum  state, and (4) no other class action was filed within the past three years asserting the  same or similar factual allegations against any of the defendants on behalf of the  same or other persons. 358 Some circuits, including the Eleventh Circuit, have made it clear that the CAFA’s  language favors federal jurisdiction over class actions and that its legislative history  suggests that Congress intended the local controversy exception to be a narrow one,  “with all doubts resolved ‘in favor of exercising jurisdiction over the case.’” 359    Consistent with this notion, several circuits agree that the party seeking remand back  to the state court bears the burden to demonstrate that the court lacks jurisdiction  under the “local controversy” exception. 360                                                                                                                                                                                      removing party had “an objectively reasonable basis for removal;” if a “reasonable litigant . . . could have concluded that  federal court was the proper forum,” a request for fees and costs must be denied). 354 Balcorta v. Twentieth Century-Fox Film Corp., 208 F.3d 1102, 1106 n.6 (9th Cir. 2000). 355 Hornung v. City of Oakland, No. C-05-4825 EMC, 2006 WL 279337, at *4 (N.D. Cal. Feb. 3, 2006).   356 28 U.S.C. § 1332(d)(4)(A)-(B). 357 Serrano v. 180 Connect, Inc., 478 F.3d 1018, 1024 (9th Cir. 2007). 358 28 U.S.C. § 1332(d)(4). 359 Evans v. Walter Indus., Inc., 449 F.3d 1159 (11th Cir. 2006). 360 See Serrano, 478 F.3d at 1019 (noting agreement with other circuits that party seeking remand must demonstrate  applicability of “local controversy” exception); Frazier v. Pioneer Americas LLC, 455 F.3d 542, 546 (5th Cir. 2006); Hart  v. FedEx Ground Package Sys. Inc., 457 F.3d 675, 680-81 (7th Cir. 2006); see also S. Rep. No. 109-14, at 44 (“It is the Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 78 The Ninth Circuit finally addressed this issue on January 25, 2011, in Coleman v.  Estes Express Lines, holding that a “district court cannot look beyond the complaint  in determining whether the criteria of subsections (aa) [“significant relief”] and (bb)  [“significant basis”] have been satisfied.” 361   Thus, extrinsic evidence will not be  considered in evaluating this exception.  The court explained that this conclusion was  required not only by the plain language of these subparts, but also because any  contrary holding would result in an expansive “mini-trial,” contrary to congressional  intent that jurisdiction determinations be made quickly under CAFA. 362 2. Home State Exception Under the home state exception, a federal court must decline jurisdiction where: (1)  2/3 or more of the proposed class members are citizens of the forum state and (2)  the primary defendants are citizens of the forum state. 363   Unlike the local controversy  exception, this exception does not require the court to consider other lawsuits.  The  party moving to remand the class action to state court must prove that the home state  exception applies. 364 E. Waiver A defendant may be considered to have waived the right to remove to federal court when,  after it is apparent that the case is removable, it takes actions in state court that manifest  an intent to have the matter adjudicated there. 365    The Ninth Circuit has held that “a waiver of the right of removal must be clear and  unequivocal.” 366   In Carvalho v. Equifax Info. Serv., LLC, the plaintiffs argued that  defendant’s removal was untimely because defendant filed a demurrer in state court and  then waited a year after the complaint was filed to remove. 367   The district court held that  because the complaint did not specify an amount of damages, the defendant’s filing of a  demurrer did not waive its right to remove. 368   The court stressed that the defendant did not                                                                                                                                                                                       Committee’s intention with regard to each of these exceptions that the party opposing federal jurisdiction shall have the  burden of demonstrating the applicability of an exemption.”).   361 Coleman v. Estes Express Lines, 631 F.3d 1010, 1015 (9th Cir. 2011). 362 Id. at 1017. 363 28 U.S.C. § 1332(d)(4)(B). 364 Serrano, 478 F.3d at 1024. 365 Resolution Trust Corp. v. Bayside Developers, 43 F.3d 1230, 1240 (9th Cir. 1995). 366 Id. 367 Carvalho v. Equifax Info. Serv. LLC., 2008 WL 2693625, at *4 (N.D. Cal. 2008). 368 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 79 engage in “any conduct that  manifested its intent to stay in state court” after removability  was first ascertained, and therefore did not waive its right. 369 F. After Removal and Effect of Denial of Class Certification A long-standing rule set out by the United States Supreme Court (the “Red Cab rule”) is  that “events occurring subsequent to removal which reduce the amount recoverable,  whether beyond the plaintiff’s control or the result of his volition, do not oust the district  court’s jurisdiction once it has attached.” 370   Although courts have disagreed over whether  denial of class certification affects federal jurisdiction, the trend is to apply the Red Cab rule  in this context as well. A number of courts have held that denial of class certification eliminates CAFA jurisdiction  as to that federal court, especially if it is not “reasonably foreseeable” that a class will be  certified in the future. 371   Other courts have held that denial of class certification does not destroy CAFA jurisdiction, because jurisdiction is determined at the moment the case was  removed and thus any subsequent changes do not affect the court’s continued  jurisdiction. 372 Initially, the decisions were split on this issue among the various California district courts.   In In re HP Inkjet Printer Litigation, a court in the Northern District extended the Red Cab rule to apply to CAFA jurisdiction.  The court held that it continued to have subject matter  jurisdiction even after denying the motion to certify a nationwide class. 373   But in Arabian v.  Sony Electronics, a Southern District court held otherwise, dismissing the case for lack of  subject matter jurisdiction because a class could not be certified, nor was certification likely  in the foreseeable future. 374   And in Darneal v. Allied Waste Transp., Inc., a defendant  employer attempted to obtain remand to state court because it realized it had erroneously  calculated the number of potential class members when it originally removed the case. 375                                                          369 Id. 370 St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 293 (1938). 371 McGaughey v. Treistman, 2007 WL 24935, at *3-4 (S.D.N.Y. 2007); Gonzalez v. Pepsico, Inc., 2007 WL 1100204, at *4  (D. Kan. 2007). 372 Vega v. T-Mobile, USA, Inc., 564 F.3d 1256, 1268 at n. 12 (11th Cir. 2009); Cunningham Charter Corp. v. Learjet, Inc.,  592 F.3d 805, 806 (7th Cir. 2010); Falcon v. Phillips Electronics N.A., Corp., 489 F. Supp. 2d 367 (S.D.N.Y. 2007);  In  re HP Inkjet Printer Litig., 2009 U.S. Dist. LEXIS 12271 (N.D. Cal. Feb. 5, 2009); Giannini v. Schering-Plough Corp.,  2007 U.S. Dist. LEXIS 48392, at *7-8 (N.D. Cal. June 26, 2007) (holding that jurisdiction was not necessarily divested  upon post-removal action and that supplemental jurisdiction provided the basis for retaining subject matter jurisdiction of  the claim at hand). 373 In re HP Inkjet Printer Litig., 2009 U.S. Dist. LEXIS 12271, at *7.  374 Arabian v. Sony Elecs. Inc., 2007 WL 2701340 (S.D. Cal. 2007). 375 Darneal v. Allied Waste Transp., Inc., 2010 WL 5292341 (E.D. Cal. 2010).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 80 The court refused to remand, holding that the question of the number of potential class  members is a factual inquiry that is likely to be resolved through continued litigation.   The Ninth Circuit Court of Appeal resolved this split in United Steel, Paper & Forestry,  Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union v.  Shell Oil Co. 376   In that case, the defendant, represented by Seyfarth Shaw, defeated  plaintiffs’ motion for class certification, and plaintiffs thereafter obtained remand to state  court on the grounds that there was “no reasonably foreseeable possibility” that a class  would be certified, and that therefore CAFA’s jurisdictional requirements could not be  satisfied. 377   The Ninth Circuit disagreed, and held that, in the context of CAFA jurisdiction,  the Red Cab rule applies “because no one suggests that a class action must be certified  before it can be removed to federal court under the Act.” 378 G. Settlement Process The enactment of CAFA has also brought changes to class action settlement  procedures. 379   In contingency fee cases, if a proposed settlement of a class action  provides for provision of coupons to class members, the portion of any attorney’s fee award  that is attributable to the coupons is based on the value to class members of the coupons  that are actually redeemed. 380   Alternatively, the fee award may be based on the lodestar  method which considers the amount of time the class counsel reasonably expended  working on the action. 381 In any event, in connection with any proposed coupon settlement, the court may approve  the settlement only after a hearing and “a written finding” that the settlement is “fair,  reasonable, and adequate for class members.” 382 In True v. American Honda Motor Company, the district court reiterated that heightened  scrutiny is necessary in reviewing coupon settlements, which are generally disfavored. 383    The court gave three reasons why such settlements are generally disfavored: “they often  do not provide meaningful compensation to class members; they often fail to disgorge illgotten gains from defendant; and they often require class members to do future business                                                        376     602 F.3d 1087, 1091-2 (9th Cir. 2010) 377 Id. at 1090. 378 Id. at 1091. 379 28 U.S.C. § 1711. 380 See id. § 1712(a). 381 See id. § 1712(b)(1). 382 See id. § 1712(e). 383 True v. Amer. Honda Motor Co., 749 F. Supp. 2d 1052, 1069 (C.D. Cal. 2010).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 81 with the defendant in order to receive compensation.” 384   Nonetheless, coupon settlements  can be approved if the value of the specific coupon settlement is “reasonable in relation to  the value of the claim surrendered.” 385 Settling parties must also be careful to avoid conditioning incentive awards to class  representatives on their acceptance of the settlement.  In Radcliffe v. Experian Info  Solutions, the Ninth Circuit determined that class counsel and class representatives were  inadequate where a settlement conditioned the provision of incentive awards to class  representatives on the representatives’ approval of the settlement. 386   The Ninth Circuit  reasoned that this condition “corrupted” the settlement by motivating the class  representatives to support a possibly unfair settlement in exchange for the award, as  opposed to seeking a fair settlement for the entire class. 387 Settlements may also not be approved if any class member is forced to pay an amount to  class counsel that would result in a net loss to the class member, unless the court makes a  written finding that the benefits substantially outweigh the loss. 388   Finally, the court will not  approve a settlement that provides for a payment to some class member that is more than  the payment to others solely due to their geographic proximity to the court. 389 The CAFA also contains specific requirements regarding the issuance of class settlement  notifications. 390   The CAFA requires defendants to serve a notice on (1) the “appropriate  federal official” and (2) the “appropriate state official.” 391   The notice must include several  things, including copies of the complaint, notices of scheduled judicial hearings, proposed  or final notification to class members of rights to request for exclusion, any proposed or  final class action settlement, among other papers. 392                                                       384 Id. (citing Figueroa v. Sharper Image Corp., 517 F. Supp. 2d 1292, 1302 (S.D. Fla. 2007)). 385 Id. 386 Radcliffe v. Experian Info. Solutions, 715 F.3d 1157 (9th Cir. 2013). 387 Id. at 1164.  The Court went on to explain that a large disparity between the incentive award and the payments to the rest  of the class members “exacerbated the conflict.”  Id. at 1165. 388 See 28 U.S.C. § 1713. 389 See 28 U.S.C. § 1714. 390 See 28 U.S.C. § 1715. 391 See id. § 1715(a). 392 See id. § 1715(b).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 82 XIV. Class Certification A. General Requirements In order to certify a class action, plaintiffs must show “the existence of an ascertainable  class and a well-defined community of interest among the class members.”  The community  of interest requirement embodies three factors: (1) predominant common questions of law  or fact, (2) class representatives with claims or defenses typical of the class, and (3) class  representatives who can adequately represent the class.” 393   There must also be enough  class members to make the effort worthwhile.  These elements are referred to as  ascertainability, commonality or predominance, typicality, adequacy, and numerosity.   Class certification is most often defeated on commonality or predominance grounds, and  less often on the grounds of typicality, adequacy, ascertainability, and numerosity. In the past, some defendants resisted class certification by arguing that plaintiffs would not  be able to establish liability on the merits.  In 2000, the California Supreme Court formally  rejected such a practice, holding that a trial court could not consider the factual or legal  merits in deciding class certification, except to the (limited) extent that the merits affected  the ascertainability of the class. 394   In other words, while it is appropriate for the trial court to  examine the evidence closely to determine if the relevant class action factors have been  met (e.g., predominance of common issues), the court may not deny class certification on  the ground that the class claims ultimately lack substantive merit. 395    However, as discussed in more detail below, courts must make necessary factual and legal  inquiries regardless of whether they overlap with the merits, in order to ascertain whether  the claims alleged are amenable to resolution on a class-wide basis. 396   Recent                                                        393 Richmond v. Dart Indus., Inc., 29 Cal. 3d 462, 470 (1981). 394 Linder v. Thrifty Oil, 23 Cal. 4th 429 (2000).  The procedure disallowed in Linder should be distinguished from a precertification motion for summary judgment as to the individual’s claims.  Such a motion, if granted as to all named  plaintiffs, effectively would defeat class certification because it would remove all adequate representatives.  Allen v.  Pacific Bell, 348 F.3d 1113, 1115 (9th Cir. 2003).  Such a pre-certification summary judgment would not bind the class,  however. 395 See Brinker Restaurant Corp. v. Superior Court, 53 Cal.4th 1004, 1025 (2012)  (“Presented with a class certification  motion, a trial court must examine the plaintiff’s theory of recovery assess the nature of the legal and factual disputes  likely to be presented, and decide whether individual or common issues predominate.  To the extent the propriety of  certification depends upon disputed threshold legal or factual questions, a court may, and indeed must, resolve them”);  Bartold v. Glendale Fed. Bank, 81 Cal. App. 4th 816, 829 (2000) (“when the merits of the claim are enmeshed with  class action requirements, the trial court must consider evidence bearing on the factual elements necessary to  determine whether to certify the class”). 396    Wal-mart Stores, Inc. v. Dukes , 131 S. Ct. 2541, 2551-52 (2011) (citing Gen. Telephone Co. of S.W. v. Falcon, 457  U.S. 147, 102 S. Ct. 2364, 72 L. Ed. 2d 740 (1982)); see also Ellis v. Costco Wholesale Corp., 657 F.3d 970, 984 (9th  Cir. 2011) (holding the district court erred by failing to conduct a “rigorous analysis” of the merits to determine whether  the plaintiffs had established commonality under Rule 23);  In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 318  (3d Cir. 2008) (class certification requires “thorough examination” of factual and legal allegations; “rigorous analysis  may include a preliminary inquiry into the merits” and consideration of “the substantive elements of the plaintiffs’ case in Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 83 developments in this aspect of the law concerning class action certification procedures  have significantly bolstered defendants’ ability to defeat class certification. 397 B. Class Certification in Exempt Misclassification Cases It is well established that “class actions will not be permitted where there are diverse factual  issues to be resolved, despite the existence of common questions.” 398 In the 2003 decision  Lockheed Martin Corp. v. Superior Court, 399 the California Supreme Court explained the  plaintiffs’ burden in moving for class certification: Plaintiffs’ burden on moving for class certification, however, is not merely to show  that some common issues exist, but, rather, to place substantial evidence in the  record that common issues predominate. As we previously have explained, this  means “each member must not be required to individually litigate numerous and  substantial questions to determine his [or her] right to recover following the class  judgment; and the issues which may be jointly tried, when compared to those  requiring separate adjudication, must be sufficiently numerous and substantial to  make the class action advantageous to the judicial process and to the  litigants.” 400 The executive exemption has the potential to raise inherently individualized issues that are  not consistent with class treatment as outlined in the Lockheed case. 401   The Wage Orders  caution that:                                                                                                                                                                                      order to envision the form that a trial on those issues would take”); In re Coordinated Pretrial Proceedings in Petroleum  Prods. Antitrust Litig., 691 F.2d 1335, 1342 (9th Cir. 1982) (affirming denial of class certification, where “any theory on  which [plaintiffs] might rely [to prove the allegations of the complaint] would raise predominantly individual questions”). 397     In Morgan v. Wet Seal, Inc., 210 Cal.App.4th 1341, 1371 (2012), the Court of Appeal affirmed the denial of class  certification with respect to two wage and hour claims: (1) that Wet Seal unlawfully required employees to buy Wet Seal  clothing and merchandise, and (2) that Wet Seal failed to reimburse employees for work-related travel.  The court  determined that assessing whether common issues predominated over individualized issues necessitated an evaluation  of the merits of the legal claims.  Id. at 1354.  The court then evaluated the policies at issue, and determined that  because Wet Seal did not have a facially unlawful dress code policy, the employees failed to show that liability could  “rest on proof of a company-wide policy” and individualized inquiries would be required.  Id. at 1365.  Similarly, proving  the travel expense reimbursement claim would require individualize inquiries because the policy itself was not facially  unlawful.  Id. at 1358. 398 Clausing v. San Francisco Unified Sch. Dist., 221 Cal. App. 3d 1224, 1233 (1990). 399 29 Cal. 4th 1096 (2003). 400 Id. at 1108 (2003); see also Newell v. State Farm Gen. Ins. Co., 118 Cal. App. 4th 1094 (2004) (class certification  inappropriate even though insurer had uniform policy for evaluating earthquake claims, because individual liability for  each policy holder would require examination of numerous individualized factors); Frieman v. San Rafael Rock Quarry,  116 Cal. App. 4th 29, 40-41 (2004) (class certification denied for nuisance claims against a quarry arising from blasting  noise where liability varied from one homeowner to another based on a “myriad of different factors”). 401 In Lockheed, a medical monitoring case, the California Supreme Court ultimately reversed the trial court’s ruling  granting class certification because “[t]he questions respecting each individual class member’s right to recover that  would remain following any class judgment appear so numerous and substantial as to render any efficiencies attainable Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 84 The work actually performed by the employee during the course of the work  week must, first and foremost, be examined and the amount of time the  employee spends on such work, together with the employer’s realistic  expectations and the realistic requirements of the job, shall be considered in  determining whether the employee satisfies this requirement. 402 Given California’s complete rejection of any form of qualitative test for exempt status, it  would be possible for one manager to spend only 45 percent of his or her time performing  exempt tasks (or closely and directly related tasks), and for another manager in the same  position to spend 55 percent.  The first manager would not be exempt, while the second  manager would be exempt.  In Nordquist v. McGraw-Hill Broadcasting Co., 403 this is  precisely what happened: the court of appeal refused to rely on another court’s ruling that  the plaintiff’s own successor was exempt because the inquiry was too “fact specific.”  While  Nordquist was not a class action, its reasoning seemed inconsistent with the notion that  exempt misclassification cases would be good candidates for class litigation. In light of the various pronouncements about the individualized inquiry necessary to  determine an employee’s exempt status, the defense bar was hopeful that courts would  disapprove of a plaintiff obtaining class certification on the ground that a class of managers  was uniformly misclassified as exempt.  If an employer could bring forth some declarations  from managers attesting that they spend more than half their time on exempt tasks, the  best a plaintiff could argue was that many managers at other stores spent the majority of  their time on non-exempt tasks.  In any case, the finder of fact would need to examine each  store and each manager individually to determine if the managers there were misclassified  as exempt—an inquiry inconsistent with class litigation. Employers were disappointed when the California Supreme Court issued Sav-On Drug  Stores, Inc. v. Superior Court, 404 which indicated that exempt misclassification cases may  often be appropriate for certification.  In Sav-On, the trial court certified a class of store  managers notwithstanding evidence that exempt status of individual managers varied  from store manager to store manager based on differences in how they divided their time  between exempt and non-exempt tasks.  The court of appeal held that individualized issues  necessarily predominated over common issues because the fact finder would need to  examine each store manager’s work habits to see whether that manager spent the majority  of his or her time on exempt tasks.                                                                                                                                                                                      through joint trial of common issues insufficient, as a matter of law, to make a class action certified on such a basis  advantageous to the judicial process and the litigants.”  Lockheed, 29 Cal. 4th at 1111. 402 See, e.g., Wage Order 7-2001 § 2(K). 403 32 Cal. App. 4th 555, 569 (1995). 404 34 Cal. 4th 319 (2004).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 85 In reversing, the California Supreme Court emphasized that the appellate court had given  insufficient deference to the trial court’s determination that common issues predominated.   The court clarified that if a reasonable person might conclude from the record that common  issues predominated over individualized ones, then a trial court’s certification order should  not be disturbed on appeal. 405   The court also suggested that the reverse would be true, in  that a trial court’s order denying certification was entitled to similar deference: “We need not  conclude that plaintiffs’ evidence is compelling, or even that the trial court would have  abused its discretion if it had credited defendant’s evidence instead.” 406   Accordingly, the  same types of arguments that the defendant in Sav-On raised—that individualized issues  will predominate over common ones—still have potential to persuade a trial court to deny  certification; the trial court simply has the discretion to accept or reject the argument based  on its assessment of the facts before it. While the California Supreme Court’s decision does not mandate certification in  misclassification cases, the court specifically identified several issues that are commonly  present in many manager misclassification cases that the court indicated could be  established through collective proof:  whether, as the plaintiff argued, the defendant had a deliberate policy to misclassify  non-exempt employees as exempt;  whether the defendant implicitly conceded all the employees were non-exempt  when it reclassified all the employees at issue as non-exempt in 1999;  whether any given task within the limited universe of tasks that managers  performed qualifies as exempt or non-exempt; and  whether a manager following the defendant’s reasonable expectation for  performing the job would spend the majority of the work time on exempt duties. 407 The court held that a trial court could rationally conclude that those common issues  predominated over the individualized issues concerning how individual managers spent  their time.  Dismissing concerns that these cases could prove unmanageable, the court  further noted that the trial court had broad discretion as to how to handle individualized  issues once the class issues were resolved.  The court said little more about those                                                        405 Id. at 331; but see Aguiar v. Cintas Corp. No. 2, 144 Cal. App. 4th 121 (2006) (reversing court’s decision to deny  certification because the court did not consider the use of subclasses, but affirmatively ruling that certification was  required rather than remanding with instructions for trial court to exercise its discretion using proper standard). 406 Id. 407 Id. at 327. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 86 proceedings other than to encourage trial courts to be “procedurally innovative” in  fashioning procedures to resolve remaining individualized issues efficiently. 408 In the immediate wake of Sav-On, there appeared to be a trend among trial courts to certify  more exemption misclassification cases.  That trend was offset somewhat in 2006 by the  issuance of a published appellate decision that expressly made the point that Sav-On had  implied—i.e., that a trial court’s decision to deny certification is entitled to the same  deference as a decision to certify a class.  In two post-Sav-On cases, Dunbar v. Albertson’s Inc., 409 and Keller v. Tuesday Morning, Inc., 410 the Court of Appeal held that the trial court  did not abuse its discretion when it determined that differences in how specific managers  allocated their time between exempt and non-exempt duties was a predominant issue in  the case, and an issue that supported denial of class certification or decertification. In the years that have passed since Sav-On, a body of federal district court cases (removed  on diversity jurisdiction grounds) has emerged deciding class certification in a variety of  different exemption contexts.  It is notable how two cases with closely similar facts often  result in one being certified while the other is not.  Certification decisions appear to vary  depending on the policy preferences of the particular judge assigned to the case.  Several  cases have come down issued by judges with a more pro-certification bent that suggest  that exemption cases should commonly be certified if all the employees were uniformly  classified as exempt without the employer engaging in a person-by-person audit of the  employees’ job duties (something that almost never occurs in real life). 411   On the flip side,  numerous cases from judges more skeptical of class certification have denied class  certification notwithstanding a common job description and an absence of an employer’s  exemption audit of each person in the proposed class. 412                                                       408 Id. at 339. 409 141 Cal. App. 4th 1422 (2006). 410 179 Cal. App. 4th 1389 (2009). 411 See, e.g., Wells Fargo Home Mortg. Overtime Pay Litig., 527 F. Supp. 2d 1053 (N.D. Cal. 2007) (Judge Patel certified  class of loan originators because employer had a common policy of treating all such employees as exempt without  conducting an individual inquiry into their job duties), rev’d, 571 F.3d 953 (9th Cir. 2009); Alba v. Papa John’s USA,  2007 U.S. Dist. LEXIS 28079, 12 Wage & Hour Cas. 2d (BNA) 710 (C.D. Cal. Feb. 7, 2007) (Judge Feess certified  class of restaurant managers on the ground of common job description and evidence that employer encouraged  uniform practices among stores); Wang v. Chinese Daily News, Inc., 231 F.R.D. 602 (C.D. Cal. 2005) (Judge Marshall  found that predominant common issue was defendant’s “policy of classifying all reporters and account executives as  ‘exempt’”); Tierno v. Rite-Aid Corp., 2006 U.S. Dist. LEXIS 66436 (N.D. Cal. 2006) (Judge Henderson granted  certification based on common job description and casting doubt on credibility of surveys obtained by employer postlitigation). 412 See, e.g., In re Wells Fargo Home Mortgage Overtime Pay Litigation, 571 F.3d 953 (9th Cir. 2009) (overturning grant of  class certification for loan originators because a uniform exemption policy cannot be the sole basis for a class  certification, but is only one factor to be looked at); Vinole v. Countrywide Home Loans, Inc., 246 F.R.D. 637 (S.D. Cal.  2007) (Judge Sabraw denied certification of proposed class of loan originators on ground individualized issues  predominated as to whether any originator spent enough time outside to qualify for outside sales exemption), aff’d, 571 Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 87 The most practical lesson to draw from these cases is to pay very close attention to the  assigned judge’s history with respect to class certification.  An employer can usually learn  more about whether to settle the case or fight through class certification based upon the  judge’s general views on class certification than from any facts in the case. C. Subclasses In Sav-On, the California Supreme Court suggested that one way to handle individualized  issues without denying class certification altogether would be to divide the class into  subclasses.  For example, if a key individualized factor that would affect a manager’s  exempt status is the size of the store managed, the trial court might divide the class into  multiple subclasses based on store size.  When a court is considering whether to divide a  class into subclasses, the employer should be prepared to assert defenses that could  defeat certification as to those particular subclasses. Employers may have typicality and adequacy arguments as to the subclass that do not  apply to a broader class.  For example, if none of the named plaintiffs is a member of a  particular subclass, then the court may not certify the subclass because the plaintiff’s  claims would not typify those of the subclass.  In addition, under federal class action law  that likely applies to California law as well, numerosity must be met as to each subclass.                                                                                                                                                                                        F.3d 935 (9th Cir. 2009); Jimenez v. Domino’s Pizza, 238 F.R.D. 241 (C.D. Cal. 2006) (Judge Selna denied class  certification of store manager class based on predominance of individualized issues as to how store managers divide  their time between exempt and non-exempt work); Sepulveda v. Wal-Mart Stores, Inc., 237 F.R.D. 229 (C.D. Cal. 2006)  (Judge Fischer denied class certification of assistant manager class based on predominance of individualized issues as  to how employees divided time between exempt and non-exempt work); Campbell v. PricewaterhouseCoopers, 253  F.R.D. 586 (E.D. Cal. 2008) (certification denied as to categories of employees holding the same jobs as the class  representatives, but in different departments; “The fact that an employer classifies all or most of a particular class of  employees as exempt does not eliminate the need to make a factual determination as to whether class members are  actually performing similar duties”); see also Marlo v. United Parcel Service, 453 Fed. Appx. 682 (9th Cir. 2011)  (affirming Judge Pregerson’s denial of class certification as to store managers because plaintiff could not devise a trial  plan by which classwide misclassification could be established by use of collective proof); Mora v. Big Lots Store, Inc.,  194 Cal. App. 4th 496 (2011) (affirming trial court’s denial of class certification as to store managers due to insufficient  evidence of a uniform corporate policy requiring store managers to engage primarily in non-managerial duties); Weigele  v. Fedex, 267 F.R.D. 614 (S.D. Cal. 2010) (Judge Sammartino decertified class of Dock Service Managers, holding that the fact the managers were all uniformly trained and classified as exempt was insufficient to overcome individualized  issues concerning widespread differences in the manner in which the employees chose to manage, which affected the  actual duties they performed); Cruz v. Dollar Tree Stores, 2011 WL 2682967 (N.D. Cal. July 8, 2011) (Judge Conti  decertified a class of store managers, holding that the “glue” that gave rise to a common resolution was now missing  given that the majority of the class members testified that verification forms did not accurately reflect how class  members spent their time and therefore individual testimony would be required); Gales v. Winco Foods, 2011 WL  3794887, at *10-11 (N.D. Cal. Aug. 26, 2011) (Judge Breyer denied class certification based on predominance of  individualized issues as to whether assistant store managers spent their time performing primarily exempt or nonexempt tasks); Wang v. Chinese Daily News, 709 F.3d 829, 835-836 (9th Cir. 2013) (remanding for reconsideration of  certification of wage and hour class where class was certified on the basis of a uniform exemption policy; the Ninth  Circuit disapproved “the district court’s conclusion that common questions predominate in this case … on the fact,  considered largely in isolation, that plaintiffs are challenging CDN’s uniform policy of classifying all reporters and  account executives as exempt employees”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 88 Thus, “carving up the class” may result in certain subclasses being too small to warrant  certification. 413 Similarly, employers may argue that the “commonality” element is missing, thereby  potentially avoiding the creation of a sub-class.  Seyfarth Shaw successfully defeated class  certification in Hughes v. WinCo Foods by advancing such an argument. 414   In WinCo,  plaintiff brought a class action alleging that defendant failed to comply with California law  with respect to providing meal and rest breaks.  Plaintiff asserted that the commonality  requirement was satisfied due to the store-wide policy of requiring employees to obtain  management approval before going on a meal break.  The court rejected that argument,  explaining that the decision-making as to when employees took breaks varied from store to  store and department to department.  The court also concluded that the wide variation  among employees even within each department would require “hundreds or thousands of  ‘mini trials.’” 415 D. Opt-In Classes Because of the broad language in Sav-On suggesting that trial courts should be innovative  in fashioning class action procedures, 416 some commentators opined that Sav-On was  approving the trial court’s ability to certify an “opt-in” class action, modeled after the  procedure employed in FLSA and Age Discrimination in Employment Act (“ADEA”)  collective actions.  In 2005, however, the First District California Court of Appeal in  Hypertouch, Inc. v. Superior Court 417 barred trial courts from certifying opt-in classes. In an “opt-in” class action, employees participate in the action only if they “opt in” by signing  a form.  Any judgment obtained in the decision binds only those individuals who opted in.   Although this procedure limits the number of class members bound by a decision,  employers generally like it because it reduces the number of employees offered a recovery,                                                        413 See Betts v. Reliable Collection Agency, 659 F.2d 1000, 1005 (9th Cir. 1981) (“Each subclass must independently meet  the requirements of Rule 23 for the maintenance of a class action, . . . [and as] a practical matter, the litigation as to  each subclass is treated as a separate lawsuit.”); Andrews v. Bechtel Power Corp., 780 F.2d 124, 132 (1st Cir. 1985)  (denying certification of a subclass of three people because it had too few members); see also Carabini v. Superior  Court, 26 Cal. App. 4th 239, 242-43 (1994) (California courts should look to precedent arising under federal class action  law for guidance as to unsettled areas of California law). 414 2012 WL 34483 (C.D. Cal. Jan. 4, 2012) 415 See also Sotelo v. Medianews Group, Inc., 207 Cal. App. 4th 639, 650-51 (2012) (affirming trial court’s denial of  certification for class of newspaper carriers and finding no error for refusing to certify subclass, where proposed  subclass failed to meet other class certification requirements of predominance of common issues of law and fact);  Hadjavi v. CVS Pharmacy, Inc., 2011 WL 3240763  (C.D. Cal. Jul 25, 2011) (denying class certification of overtime,  meal and rest period claims of nonexempt pharmacy employees and holding that the allegation that workload prohibited  breaks was not enough to justify certification). 416 Sav-On, 34 Cal. 4th at 339. 417 128 Cal. App. 4th 1527 (2005) (modified without change in judgment, 129 Cal. App. 4th 1348 (2005)).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 89 and because those employees who elect not to opt in usually lack interest in the litigation  and are unlikely to sue later. Although opt-in classes were rare in California, nothing before Sav-On expressly forbade  them (in contrast to Federal Rule of Civil Procedure 23, which forbids opt-in classes except  where, as in the FLSA and ADEA, Congress provides that an opt-in class is the only kind  permitted). 418   In barring opt-in classes under state law, the Hypertouch court reasoned that  Code of Civil Procedure Section 382 should be interpreted as parallel to Rule 23, which  does not allow for opt-in class actions. 419   The court also criticized the opt-in procedure as a  device that improperly is used by the defendant to “chip away at the size of the class.” 420   In  addition, the court attempted to construe its decision as beneficial to class defendants  because an opt-out class binds more potential plaintiffs in those cases where the employer  prevails on the merits. 421   Whatever the merits of this reasoning, the fact remains that trial  courts throughout California are now barred from certifying cases as opt-in class actions. In 2007, however, another appellate court narrowed Hypertouch.  In Estrada v. FedEx  Ground Package System, Inc., 422 the trial court certified an independent contractor misclassification class but only of certain drivers of certain trucks on certain routes.  The  only way to determine who qualified as a class member under the particular class definition  the court adopted was to ask the class members, because no records existed that would  reveal class membership.  Accordingly, the trial court authorized the sending of a  questionnaire for drivers to answer under oath to determine whether they qualified as class  members.  Those who failed to respond were ultimately deemed not to be class members  and were dismissed from the case without prejudice. The plaintiffs argued that this was tantamount to having certified a class on an opt-in basis,  in violation of Hypertouch.  The Court of Appeal rejected the comparison, noting that the  questionnaire mechanism was not used to opt in to the class action, but merely to identify  drivers as class members. 423   In essence, the questionnaire was used to ascertain class  membership, not to determine whether someone, once identified as a class member,  wished to participate in the class action.  In cases where a trial court certified a class that  requires gathering information from putative class members to determine class  membership, Estrada may provide a hook for the defendant to argue that the potential                                                        418 Id. at 1547-48. 419 Id. at 1542-43. 420 Id. at 1542. 421 Id. 422 154 Cal. App. 4th 1 (2007).   423 Id. at 26 (“discovery was necessary to determine whether in fact there was an ascertainable class”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 90 class must be surveyed to determine who are class members, with all non-respondents to  the survey being dismissed from the case. E. Wal-Mart Stores, Inc. v. Dukes - The Supreme Court Shifts The  Landscape Of Class Certification In June 2011, the U.S. Supreme Court issued its long-awaited decision in Wal-Mart Stores,  Inc. v. Dukes. 424   This opinion transformed Rule 23 law and dramatically changed how  workplace class actions are structured and defended and, in doing so, will also assist  employers in defeating certification in wage and hour cases. The Supreme Court reversed the Ninth Circuit and held that class action certification should  not have been granted as to the element of commonality.  Dukes is because it holds  requires plaintiffs to establish commonality among all putative class members as to the  reason for a particular employment decision – the “glue” that holds the alleged unlawful  conduct together.  The Court ruled that the proof of commonality required by Rule 23(a) will  frequently overlap with the merits of the case.  This holding repudiates plaintiffs’ usual  argument that it is inappropriate to consider the merits of claims at the certification stage of  class litigation.  In addition to commonality, the Court severely limited the use of Rule  23(b)(2), pertaining to class-wide injunctive and declaratory relief, in cases seeking back  pay, ruling that such money damages may be awarded under this rule only when they are  truly incidental to the requested equitable relief. 425    Dukes thus contains two core holdings.  First, the Court held unanimously that certification  of a class of female Wal-Mart workers was inappropriate under Rule 23(b)(2), which  permits certification where “the party opposing the class has acted or refused to act on  grounds that apply generally to the class, so that final injunctive relief or corresponding  declaratory relief is appropriate respecting the class as a whole.”  Second, the Court ruled, 5-4, that the plaintiffs failed to satisfy the “commonality” requirement of Rule 23(a)(2).  Each  of these holdings will reverberate in important ways in wage and hour litigation. Class Members Must All Suffer A Common Injury Capable Of Class-Wide Resolution Dukes reiterates that, because class actions are “an exception to the usual rule,” a class  representative “must ‘possess the same interest and suffer the same injury’ as the class  members.”  One gauge for measuring whether that requirement has been met is the  “commonality” test of Rule 23(a).  According to Justice Scalia’s majority opinion,  commonality requires class members to have suffered the same injury as each other, not                                                        424      -- U.S. --, 131 S.Ct. 2541 (2011). 425 See Sepulveda v. Wal-Mart Stores, 2011 WL 6882918 (9th Cir. 2011) (affirming that the non-incidental test should be  applied when determining class certification under Rule 23(b)(2)).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 91 just a violation of the same provision of law.  Moreover, the common injury must be  “capable of classwide resolution – which means that determination of its truth or falsity will  resolve an issue that is central to the validity of each one of the claims in one stroke.” Although Dukes was a discrimination case brought under Title VII, the Court’s discussion of  the “commonality” prong of Rule 23(a) should serve as important authority in wage and  hour cases. 426 First, many wage claims are brought under state law, either in state court under Rule 23  analogues or in federal court via removal, supplemental jurisdiction, or diversity.  In those  cases, the Dukes discussion of commonality, and its tightening of the requirements to  establish that prong of the Rule 23 test, will be directly applicable. Second, Dukes should lead courts to narrow their application of the “similarly situated”  requirement in collective actions under FLSA section 216(b).  Most courts faced with  §216(b) collective actions now use a two-stage approach to certification. In the first stage,  plaintiffs are required to show that the named plaintiffs and other potential party plaintiffs  are “similarly situated.”  Courts have struggled with the meaning of “similarly situated” for  almost 65 years because the statute does not define the phrase, and the courts have not  settled on a uniform definition.  However, courts have consistently approached this  question by examining whether common factors are present, such as the geographic scope  and job duties of the potential party plaintiffs, as well as whether the individuals were  subject to similar practices or policies.  The Similarly Situated And Commonality Standards Are Not So Different Most courts have set a very low bar for plaintiffs to clear at this stage in order to obtain  “conditional” class certification.  However, inquiries under the similarly situated standard are  comparable to those that the Dukes Court said must be tightened under the commonality  standard of Rule 23(a)(2).  In fact, a number of courts have equated “similarly situated” to  the commonality requirement of Rule 23(a)(2).  Dukes should thus compel lower courts to  pay closer attention to the disparities that often exist among members of a putative FLSA  collective action – such as variations in supervisors, departments, facilities, divisions, and  regions – because the Court held that the “dissimilarities” in the proposed class, not the  common questions raised, have the most potential to determine whether classwide  resolution of a matter is permissible.                                                         426 See, e.g., Wang v. Chinese Daily News, 709 F.3d 829, 834 (9th Cir. 2013) (remanding wage and hour class action case  in light of Dukes in order to determine whether claims of class of roughly 200 employees depended “upon a common  contention … of such a nature that it is capable of classwide resolution”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 92 The final certification stage of a § 216(b) action requires a more stringent judicial analysis  than the first, and typically comes after discovery has been largely completed.  At this  stage, courts assess whether the differences among the party plaintiffs (all of whom will  have opted in by this point following issuance of court-approved notice) outweigh their  similarities.  If so, the action should be decertified.  This “differences” inquiry runs hand-inhand with the Supreme Court’s emphasis in Dukes on dissimilarities in the Rule 23 class  context.     The Dukes Effect Could Create An Early Evidentiary Hurdle For Plaintiffs The effects of Dukes will likely be seen in all types of wage-and-hour litigation, whether the  alleged violation relates to minimum wages, overtime or other legal protections, and  whether the claim alleges exempt status misclassification, off-the-clock work, a violation of  technical pay practice requirements under state law, or independent contractor  misclassification.  For example, while differences in the application of pay policies from one  facility to the next, or variations in the independent judgment and discretion exercised by  employees subject to the “administrative” exemption,” have sometimes been relegated to  the “decertification” stage of a Section 216(b) case, after Dukes these or similar inquiries  may be critical very early, at the first, conditional certification stage.   Likewise, in cases raising the “executive” exemption, plaintiffs often contend that they were  improperly classified because they did not have the authority to make employment  decisions with respect to their subordinates, performed non-managerial tasks as their  primary duty, or otherwise.  Courts’ resolution of certification issues based on these  assertions could be based less on anecdotal evidence about the named plaintiffs and more  on an analysis of whether there is a common thread tying those occurrences together on a  collective basis. The Dukes Court also dispelled the notion that the merits of a case may not be considered  during the “rigorous analysis” required to determine if class certification is appropriate.  This  could lead to challenges at the conditional certification stage about how much evidence is  enough to extrapolate to the group.  In practice, this may mean that the critical merits  question of whether putative class members actually worked off the clock, actually failed to  take meal and rest periods, or otherwise were subjected to a violation of wage and hour  law, gets addressed far earlier in the litigation than was previously the case. 427                                                          427    See, e.g., Gonzalez v. Millard Mall Services, Inc., 281 F.R.D. 455 (S.D. Cal. 2012) (denying class certification as to  claims regarding meal and rest breaks, split-shift pay, and failure to timely pay wages upon termination, because  plaintiffs failed to establish the commonality prerequisite under Dukes; however, the court reasoned that class  certification was not necessary for PAGA claim because PAGA relief is mainly ”for the benefit of the general public  rather than the party bringing the action” and PAGA “provides no specific class certification requirements.”).   Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 93 Following Dukes, plaintiffs should now be pressed earlier in litigation to put forth actual  evidence, beyond mere allegations, that issues common to all class or collective action  members exist.  From a due process perspective, this requirement could limit much of the  additional burden and expense of conducting broad discovery and litigating decertification  where there is no evidence of issues common to all class or collective action members.   Indeed, this broad discovery is often so costly as to leave employers with little choice but to  settle the case.  Show Me [You Are Owed] The Money In the less controversial section of its decision, the Dukes Court held that Rule 23(b)(2)  applies only when “a single injunction or declaratory judgment would provide relief to each  member of the class,” not when individuals seek an individual award of monetary damages.   By its very nature, the recovery of money is central to wage and hour litigation.  Plaintiffs  often argue that damages may be readily quantifiable based on a sample of the employer’s  pay records or that backpay calculations for a random group of class or collective members  can be utilized to extrapolate the damages on a classwide basis. Although the setting was different, the Court’s rejection in Dukes of a “Trial By Formula”  approach to class litigation should undermine this formulaic approach to the viability of trials  in which the evidence is limited to groups of opt-ins providing representative testimony.   The Court held that such an approach not only conflicts with Rule 23(b)(2), but also  prevents the employer from litigating statutory defenses to individual claims, thereby  violating its right to due process.   In Cruz v. Dollar Tree Stores, Inc. (N.D. Cal. July 8, 2011), the court decertified a class in  part for this reason.  The judge stated, “In light of the Supreme Court’s rejection of [the “trial  by formula”] approach, it is not clear to the Court how, even if class-wide liability were  established, a week-by-week analysis of every class member’s damages could be feasibly  conducted.”  Similarly, in Aburto v. Verizon, another federal district court cited Dukes in  denying class certification of misclassification claims, holding that whether Verizon  unlawfully classified its managers as exempt is an individualized inquiry involving facts  unique to each potential plaintiff. 428   Thus, it will be more important than ever for employers  to argue that class treatment is inappropriate because the necessary individualized inquiry  into each individual’s claims could result in a series of mini-trials that would undermine the  efficiency benefits that class treatment is meant to offer.                                                        428 Aburto v. Verizon, 2012 WL 10381, at *5 (C.D. Cal. Jan. 3, 2012) (“The court simply cannot conclude that all FLMs  performed the same job duties, that the job duties were all clerical, or that Verizon’s restrictions on FLMs precluded ‘any  exercise of independent judgment or discretion.’”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 94 This point also applies to FLSA cases.  In particular, when courts examine whether a  conditionally certified case should be decertified, typically after extensive discovery, they  often require that plaintiffs set forth a trial plan explaining how the claims of the opt-in  plaintiffs can be tried by collective proof.  Following Dukes, the use of representative  testimony to establish such proof simply may not suffice. In addition to rejecting the “trial by formula” approach, Dukes held that employers are  entitled to present individual defenses to each employee’s specific claim for damages, even  if a violation of the statute is found.  Following this holding, employers should now have a  strong due process argument in wage-and-hour cases that even if a statutory violation is  found, they are entitled to present individual defenses to each class or collective action  member’s entitlement to the back wages sought in the litigation.  The argument is even  stronger in FLSA collective actions because an individual must affirmatively consent to be a  member of the case, at which point he becomes a party plaintiff for purposes of  adjudicating his individual claims. While the full impact of Dukes will not be known for years, the decision has undoubtedly  created an environment that will prove more friendly to employers defending against wageand-hour claims.  As always, the strongest defense to potential wage-and-hour claims is  vigilant attention to compliance efforts before litigation arises, including the adoption,  distribution, and effective enforcement of internal policies mandating compliance with  federal and state labor laws.  Such policies remain the most important weapon in the  employer’s defense arsenal, and their importance will only be magnified after Dukes, since  their existence and enforcement on a company-wide basis will underscore the atypical,  “one off” nature of any alleged violations that may have occurred. F. In Comcast v. Behrend, The Supreme Court Emphasizes That It  Meant What It Said In Dukes On March 27, 2013, the Supreme Court issued its opinion in Comcast Corp. v. Behrend. 429 The Court, in a 5-4 decision, reaffirmed its holding in Wal-Mart v. Dukes that district courts  must conduct a “rigorous analysis” to ensure that Rule 23 requirements have been  satisfied, even if doing so would require consideration of the merits of the plaintiffs’  claims. 430 The decision held that the trial court had improperly certified a class in this antitrust action.   The Court said the plaintiffs failed to establish a sufficient connection between their alleged  theory of liability and their claimed damages.                                                       429 133 S. Ct. 1426 (2013). 430 Id. at 1433.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 95 THE SUPREME COURT HOLDING The Court held that the class action was improperly certified under Rule 23(b)(3). The Rule  "does not set forth a mere pleading standard." 431 Rather, a party must not only "be  prepared to prove that there are in fact sufficiently numerous parties, common questions of  law or fact," typicality of claims or defenses, and adequacy of representation, as required  by Rule 23(a). The party must also satisfy through evidentiary proof at least one provision of Rule 23(b). The provision at issue here was Rule 23(b)(3), which requires a court to find  that "the questions of law or fact common to class members predominate over any  questions affecting only individual members." 432 A court considering that issue may need to  “probe behind the pleadings before coming to rest on the certification question," an analysis  that "will frequently overlap with the merits of the plaintiff's underlying claim." 433 THE ANTITRUST CLAIM According to the plaintiffs, Comcast had engaged in “clustering” cable television operations  in the Philadelphia region. Comcast acquired competitor providers and swapped their own  systems outside a particular region for competitor systems in the region. By 2007,  Comcast's dominance of the Philadelphia Designated Market Area ("DMA"), which includes  sixteen counties in Delaware, Pennsylvania, and New Jersey, had increased substantially,  reaching 69% from only 24% in 1998. Based on the company's increased market share,  customers in the Philadelphia DMA filed a class action suit in federal district court, alleging  that Comcast had violated the Sherman Act through unlawful swapping agreements and  attempted monopolization. 434 THE DISTRICT COURT OPINION The district court held that the plaintiffs, to meet the predominance requirement, had to  show (1) that the existence of individual injury resulting from the alleged antitrust violation  (referred to as "antitrust impact") was "capable of proof at trial through evidence that [was]  common to the class rather than individual to its members," and (2) that the damages  resulting from that injury were measurable "on a class-wide basis" through use of a  "common methodology." 435   The plaintiffs presented four distinct theories of antitrust impact.  First, plaintiffs alleged Comcast reduced the benchmark levels of competition in the  Philadelphia DMA. Second, Comcast's activities allegedly reduced the level of competition                                                        431    Id. at 1432. 432 Id. 433 Id. 434 Id.  at 1430. 435 264 F. R. D., at 154.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 96 from overbuilders, companies that build competing networks in areas where an incumbent  cable company already operates. Third, the clustering technique allegedly decreased  market penetration by satellite providers, as it made it profitable for Comcast to withhold  local sports programming from its competitors. Finally, the plaintiffs alleged Comcast's  clustering technique increased Comcast's bargaining power relative to content providers. Although the district court accepted only one of the plaintiffs' theories of antitrust impact— that Comcast's activities reduced the level of competition from overbuilders— the Court  found that plaintiffs could still prevail under Rule 23(b)(3), and certified the class under this  theory. Furthermore, the court found that damages resulting from such deterrence could  still be calculated on a class-wide basis, even though the plaintiffs' expert had calculated  overall damages based on the combination of all four theories of impact, not just the  overbuilder theory. 436 THE THIRD CIRCUIT DECISION Comcast appealed to the Third Circuit, arguing that plaintiffs' alleged damages were based  on all four theories of antitrust impact and, thus, did not adequately measure the harm  attributable only to the overbuilder theory. According to Comcast, since it was not clear  which plaintiffs' damages were based on which theory, the plaintiffs could not satisfy the  commonality required under Rule 23(b). On appeal, however, a divided Third Circuit panel  affirmed the trial court's certification, finding "an attack on the merits of the methodology  had no place in the class certification inquiry," and plaintiffs merely had to show they were  able to prove damages of some sort. 437 THE SUPREME COURT APPLIES ITS HOLDING TO THE FACTS The Supreme Court rejected the Third Circuit’s reasoning: "in light of the [damages]  model's inability to bridge the differences between supra-competitive prices in general and  supracompetitive prices attributable to the deterrence of overbuilding, Rule 23(b)(3) cannot  authorize treating subscribers within the Philadelphia cluster as members of a single  class. 438 The Court reasoned that it was not clear whether every plaintiff was necessarily  damaged by each of the four alleged theories of antitrust impact, and it was distinctly  possible that some plaintiffs in the Philadelphia DMA were damaged by one type of  conduct, while others were injured by another. As such, the Court held that the damages  model the plaintiffs presented failed to show that individual damages calculations would not  overwhelm questions common to the class. For the customers to prevail, they would have                                                        436 133 S.Ct. at 1430-31. 437 Id. at 1431. 438 Id. at 1435.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 97 had to measure damages attributable only to the overbuilder theory of competition. In this  case, it was not clear which damages resulted from which type of antitrust impact, leading  to uncertainty about whether damages could be measured class wide, rather than on an  individual basis." According to the majority, adopting the Third Circuit’s position would  render any method of measurement acceptable, "no matter how arbitrary," and would  reduce Rule 23(b)(3)'s predominance requirement to a nullity. 439 With its decision in Comcast, the Supreme Court left no doubt that district courts must  conduct a “rigorous analysis” at the class certification stage to ensure that the requirements  of Rule 23 are satisfied, even if doing so would require an inquiry into the merits of the  plaintiffs’ claims.  The Court also clarified that the method of proving classwide damages  must be tied to the theory of liability on which plaintiffs will be proceeding at trial.  In the wage and hour context, this ruling should provide further ammunition to employers in  opposing class certification.  Many wage and hour cases require significant individualized  proof of damages—for example, determining whether and why each class member worked  off the clock.  After Dukes and Comcast, it is clear that plaintiffs’ counsel cannot simply  offer a few examples and ask the court to just assume that all other employees had  identical experiences. G. The California Supreme Court Enforces Due Process In Duran v.  U.S. Bank On May 29, 2014, the California Supreme Court issued its much-anticipated opinion in  Duran v. U.S. Bank, vacating a $15 million judgment in a wage and hour class action on the  ground that the judgment resulted from a flawed statistical sampling methodology. While  the Court did not foreclose the possibility of using statistical sampling to establish classwide liability, the Court’s unanimous opinion makes clear that (1) a trial plan that proposes statistical sampling must be presented to the trial court before class certification, (2) the  proposed sampling must be statistically reliable, and (3) the trial plan must not deprive the  defendants of its due process right to present affirmative defenses.  Duran is significant because it recognizes the due process concerns raised by the use of  representative evidence, and it requires trial courts to meaningfully address those concerns  early in litigation. These points provide welcome ammunition for employers in opposing  class certification.                                                       439 Id. at 1433.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 98 Lower Court Proceedings Plaintiffs filed a class action alleging that their employer, U.S. Bank, misclassified its  Business Banking Officers (“BBO”) as exempt outside sales employees. After certification,  the parties submitted their respective trial plans, crafted with the aid of their experts. Over  U.S. Bank’s objections, the trial court adopted its own trial plan, under which a purportedly  random sample of twenty class members—plus two of the named plaintiffs—would testify  at trial, and the liability and damages findings based on the sample group would be  extrapolated to the entire class.  After the trial court denied U.S. Bank’s decertification motion, it held a bench trial on U.S.  Bank’s exemption defense. During the liability phase, the trial court excluded all evidence  concerning BBOs who were not part of the sample group, including U.S. Bank’s evidence  showing some class members were properly classified as exempt. Based primarily on the  sample group’s testimony, the court found the entire class of 260 BBOs had been  misclassified.  During the damages phase, the trial court adopted the determination of plaintiffs’ expert  that class members worked on average 11.87 hours of overtime per week, subject to a  43% margin of error—meaning the actual amount of overtime worked by each BBO could  range from 6.7 hours to almost 17 hours per week. Based on that extrapolation, the court  entered judgment against U.S. Bank in the amount of approximately $15 million. The Court of Appeal reversed, holding that the trial court’s reliance on flawed and  unreliable statistical sampling to extrapolate class-wide liability denied U.S. Bank its right to  litigate affirmative defenses, and that the high margin of error underlying the damages  calculations implicated due process concerns. Additionally, the Court of Appeal held, the  trial court abused its discretion in denying U.S. Bank’s decertification motion and ordered  the class decertified. The Supreme Court Decision The California Supreme Court, in a unanimous decision, affirmed the Court of Appeal’s  judgment in its entirety and ordered a new trial. In so doing, the Supreme Court articulated  several principles that are likely to have a significant impact on certification and trial  proceedings in all class actions, particularly those in the wage and hour arena. First, and perhaps most significantly, the Supreme Court recognized a defendant’s due  process right to “litigate its statutory defenses to individual claims,” a proposition on which  lower courts had disagreed. Thus, “any trial must allow for the litigation of affirmative  defenses, even in a class action case where the defense touches upon individual issues.”  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 99 Second, while the Supreme Court was careful not to reach a sweeping conclusion  regarding whether or when statistical sampling should be available as a tool for proving  liability in a class action, it did set forth some concrete guidelines. As an initial matter, any  trial plan involving statistical proof must allow the defendant to litigate relevant affirmative  defenses, even when they turn on individualized questions, and if the trial plan fails to do  so, then the statistical proof may not be appropriate. Moreover, the trial plan must employ  valid statistical methodology, which means, among other things: (a) the sample size must  be “sufficiently large to provide reliable information about the larger group,” (b) the sample  must be random and free of selection bias, and (c) analysis of the sample must yield results  within a reasonable margin of error. Further, the defendant “must be given a chance to  impeach that [statistical] model or otherwise show that its liability is reduced because some  plaintiffs were properly classified as exempt.”  Third, the Supreme Court instructed lower courts to consider at the certification stage whether a trial plan has been developed to address the use of statistical evidence, rather  than “accepting assurances that [one] will eventually be developed.” That plan must show  how individual issues can be managed at trial, and if the plan proves “unworkable,” then the  class must be decertified.     Turning to the facts before it, the Supreme Court held that the lower court’s trial plan met  none of these basic requirements. Among other things, the plan deprived U.S. Bank of its  right to litigate its affirmative defenses by excluding relevant evidence relating to BBOs  outside the sample group, and by extrapolating liability based on a flawed statistical model.  That model, the Supreme Court held, was fatally flawed because the 22-member sample  group was too small relative to the 260-member class, and because the supposed  randomness of the sample group was undermined by the inclusion of the named plaintiffs  and the later exclusion of others who had opted out, were replaced, or were unavailable. As  a result, the sample was “biased in plaintiffs’ favor.”  The Court also found the 43% margin  of error to be “intolerably high,” potentially yielding a judgment twice the size of U.S. Bank’s  actual liability. What Duran Means For Employers While the Supreme Court stopped short of establishing a bright-line rule that statistical  sampling cannot be used to prove class-wide liability, Duran nonetheless makes it clear  that class counsel face an uphill battle if they wish to rely on statistical evidence.  Any  proposed statistical methodology must allow a defendant to litigate its affirmative defenses.  And, in cases involving questions unique to each class member, statistical evidence cannot  create commonality where it does not otherwise exist. Nor can liability be extrapolated  where commonality is absent. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 100 Duran is also significant because it requires trial courts to consider—at the class  certification stage—whether a workable trial plan involving statistical evidence can be  developed. When opposing class certification, therefore, employers should be prepared to  challenge the class counsel’s proposed trial plan, or their failure to identify one, based on  the principles set forth in Duran. Finally, Duran is particularly useful to employers defending misclassification cases, as it  affirms that such claims—unless they turn on standardized job duties or policies that  compel employees to uniformly spend their time on nonexempt work—have “the potential  to raise numerous individual questions that may be difficult, or even impossible to litigate on  a class-wide basis.”  H. Easing of Class Certification Standards Post-Brinker In 2012, the California Supreme Court issued its long-awaited decision in Brinker  Restaurant Corp. v. Superior Court, addressing employers' obligations to "provide" meal  and rest breaks. 440 Brinker was a landmark ruling in the context of meal break litigation,  and was widely heralded as a key victory for employers.  However, the Brinker decision  also contained unfortunate language suggesting that class-wide liability may be established  by demonstrating that employees were subject to an unlawful written policy, regardless of  how that policy was actually applied to individual employees. 441    A number of cases post-Brinker have certified classes based on the existence of an unlawful policy or based on the allegations that the employer had no policy, even where the  employer demonstrated that many employees were, in fact, being provided lawful meal and  rest breaks.  For example, in Faulkinbury v. Boyd & Associates, Inc., 442 the Court of Appeal concluded that the defendant’s liability would attach “upon a determination that [the  employer’s] uniform on-duty meal break policy was unlawful.” 443   It reached a similar  conclusion concerning rest breaks, based solely on the plaintiff’s allegations that the  employer did not have a written policy for rest breaks, despite the fact that there is no legal  requirement that employers adopt their own written meal and rest break policies (as  opposed to posting the Wage Orders that set forth meal period and rest break  requirements).  Citing to Brinker, the Court of Appeal in Faulkenbury held that “the  lawfulness of [defendant's] lack of a rest break policy and requirement that all security                                                        440    See discussion of Brinker’s impact on meal break claims in Section V(C). 441    Brinker Rest. Corp. v. Super. Ct., 53 Cal. 4th 1004, 1033 (2012) (“An employer is required to authorize and permit the  amount of rest break time called for under the wage order for its industry.  If it does not—if, for example, it adopts a  uniform policy authorizing and permitting only one rest break for employees working a seven-hour shift when two are  required—it has violated the wage order and is liable.”).   442     Faulkinbury v. Boyd & Associates, Inc., 216 Cal. App. 4th 220 (2013).   443    Id. at 235.  See also Bradley v. Networkers Int'l, LLC, 211 Cal. App. 4th 1129, 1150 (2012) (“The lack of a meal/rest  break policy and the uniform failure to authorize such breaks are matters of common proof.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 101 guard employees remain at their posts can be determined on a class-wide basis,” despite  evidence provided by the defendant showing that, regardless of the policies (or lack  thereof), employees were being provided proper breaks. 444   The court dismissed this  evidence by stating that “the employer’s liability arises by adopting a uniform policy that  violates the wage and hour laws.  Whether or not the employee was able to take the  required break goes to damages.” 445   The court did not explain how such “damages” could  be ascertained on a class-wide basis where the facts demonstrated that individualized  factors determined whether or not a specific employee was actually provided meal breaks,  despite the uniform written policy. In another pro-certification case, Benton v. Telecom Network Specialists, Inc., telecommunications technicians filed a wage and hour class action lawsuit alleging  violations of meal and rest break laws and overtime requirements. 446   The plaintiffs' theory  was that the defendant violated the law by failing to adopt a policy authorizing and  permitting its technicians to take meal periods or rest breaks.  Citing Brinker, the Court of  Appeal explained that “for purposes of certification, the proper inquiry is ‘whether the theory  of recovery advanced by the plaintiff is likely to prove amenable to class treatment.’” 447   The  Court of Appeal therefore held that the class should be certified, even though the defendant  had demonstrated that the experiences of individual employees varied widely, and that  some employees were subcontracted out to other employers who did have lawful written  meal and rest break policies. 448 These unwelcome decisions potentially lower the certification bar for plaintiffs pursuing  class claims based on an allegation that an employer instituted an unlawful policy.   Employers have often defeated class certification by demonstrating that an alleged unlawful                                                       444    Id. at 237.  See also Abdullah v. U.S. Sec. Associates, Inc., 731 F.3d 952, 962 (9th Cir. 2013) (following Faulkinbury and Brinker in certifying an action brought under Rule 23 on the basis of the employer’s uniform policy of requiring  security guards to sign on-duty meal period agreements). 445    Faulkinbury v. Boyd & Associates, Inc., 216 Cal. App. 4th at 234. 446    Benton v. Telecom Network Specialists, Inc., 220 Cal. App. 4th 701, 705 (2013). 447    Id. at 726;  see also Williams v. Superior Court, 221 Cal. App. 4th 1353, 1364 (2013) (holding that plaintiffs’ allegation that the defendant had an unwritten policy to deny overtime pay was an appropriate issue for class-wide resolution, and  that the fact that the evidence demonstrated that many putative class members did not work off the clock was merely a  “damages” issue);  Jones v. Farmers Insurance Exchange, 221 Cal. App. 4th 986, 997 (2013) (holding that the plaintiffs’  theory that Farmers required unpaid pre-shift work was amenable to class-wide resolution;  the trial court erred in  denying certification by focusing on the fact that this only affected some employees and then only on certain days  depending on a number of varying factors; all of these variables only went to “the right to recover damages” and  therefore did not preclude class treatment). 448 Id. at 727;  see also Martinez v. Joe’s Crab Shack, 221 Cal. App. 4th 1148, 1164-65 (2013) (holding that class could  properly be certified based on the plaintiffs’ claims that managers were not properly classified as exempt, despite job  description that set forth exempt duties and evidence that many putative class members performed exempt duties most  of the time.  The court stated “we understand from Brinker . . . a renewed direction that class-wide relief remains the  preferred method of resolving wage and hour claims, even those in which the facts appear to present difficult issues of  proof.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 102 policy was applied so variably that individualized questions predominated over the common  fact that the same policy applied to all employees. This new wave of cases now holds that  class certification may be granted solely upon the basis that an employer's written policy violates the law, regardless of whether or not the unlawful policy was actually uniformly  applied to the class.  Indeed, plaintiffs’ mere allegations that a policy did not exist may now  be enough to show that there is commonality sufficient to proceed with class treatment of  their claims.  It remains to be seen how courts will handle these cases when they actually  go to trial and it becomes apparent that individualized application of the policies makes  them extraordinarily difficult, if not impossible to adjudicate on a class-wide basis, while at  the same time respecting the defendant’s right to due process. I. Relitigation of Class Certification Denials Litigation through class certification can be tremendously expensive for employers.  The  primary justification for the expenditure of litigating class certification is that if the employer  persuades a court to deny class certification, it is therefore established that employees in  the putative class must come forward and litigate their claims individually (or through a  joinder action).  But, what if another attorney finds another class representative, and  asserts the same class action claims in a different lawsuit?  Given the broad discretion that  trial courts have to decide certification, class action plaintiffs’ lawyers have an incentive to  try their luck again in a different jurisdiction. In Alvarez v. May Department Stores, 449 the court of appeal limited an attorney’s ability to  continually relitigate class certification of the same proposed class. 450   The plaintiffs’  counsel first filed an action in Los Angeles in 1997.  In 1998, counsel moved for class  certification for a putative class of store managers and the motion was denied.  In 1999, he  refiled with another class representative alleging the same class claims.  The trial court  considered class certification anew, but ultimately also decided to deny class certification.   That denial was affirmed on appeal in 2003.  Undeterred, the plaintiffs’ counsel filed  another action in Los Angeles County asserting the same claims on behalf of essentially  the same putative class.  This time the defendant demurred to the complaint on the ground  that the class allegations were barred by principles of collateral estoppel.  The trial court  agreed and sustained the demurrer. The court of appeal affirmed the sustaining of the demurrer.  The court did not go so far as  to state a per se rule that a class certification denial always bars another class member  from coming forward and seeking class certification of the same claims.  The court did,  however, hold that if, after class certification is denied, the same attorney brings essentially                                                        449 143 Cal. App. 4th 1223 (2006). 450 A similar conclusion was drawn by the Seventh Circuit in Bridgestone/Firestone, Inc., Tires Products, 333 F.3d 763 (7th  Cir. 2003). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 103 the same claims on behalf of essentially the same putative class, principles of collateral  estoppel would preclude certification of the second action. 451   Although the court did not  address how it would have ruled if a different attorney had represented the new class  representative seeking to sue on behalf of the same class, it implied that collateral estoppel  would apply unless the new attorney came forth with evidence that the first attorney’s  efforts had been incompetent or otherwise inadequate to fairly protect the putative class’s  interests: It is manifestly unfair to subject respondent to a revolving door of endless  litigation.  In cases, such as this one, where a party had a full opportunity to  present his or her claim and adequately represented the interests of a second  party who seeks the same relief, principles of equity, “[p]ublic policy and the  interest of litigants alike require that there be an end to litigation.” 452 The plaintiffs’ bar has been unwilling to accept the notion that one lawyer losing class  certification means that no other lawyer can try to get a class certified against that  employer.  Plaintiffs’ counsel were aided in this regard when, in Bufil v. Dollar Financial, 453 the court of appeal held that collateral estoppel did not preclude certification of meal and  rest period claims for a sub-class of a broader proposed class for which certification had  previously been denied.  Previously, in Chin v. Dollar Financial Group, 454 the court had  denied class certification of meal and rest break claims for clerks working alone in the  defendant’s check-cashing stores.  In the middle of the class period, the defendant adopted  a policy of requesting that the clerks execute an on-duty meal period agreement, which the  plaintiffs contended they were forced to sign.  The Chin court held that the question of  whether each individual clerk was pressured to sign the meal period agreement was an  individualized inquiry not suitable for class treatment.  Furthermore, the court found that,  prior to the institution of the meal period agreement, defendant did not have a uniform meal  period policy, therefore requiring individualized inquiry as to whether each class member  was denied meal breaks during this time. The Court of Appeal in Bufil held that this previous denial of certification did not create a res  judicata bar to certification of the class proposed by Bufil because both the proposed class  and the rationale for certification were different.  The class in Bufil was a smaller subset of  the class alleged in Chin, including only clerks who worked for the defendant after the  institution of the meal period agreement.  Furthermore, Bufil did not allege that the clerks  had been forced to sign the meal period agreements, which was one of the individualized                                                        451 Id. at 1238-40. 452 Id. at 1240. 453 162 Cal. App. 4th 1193 (2008). 454 2006 WL 1351491 (unpublished, unavailable on LEXIS).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 104 inquiries that had doomed plaintiffs’ claims in Chin.  Rather, Bufil contended that the  employees did not work in a situation where an on-duty meal period would be permissible  even with the consent of the employees, which was a legal question that could be decided  on a class-wide basis. 455 While Bufil can be harmonized with Alvarez as addressing a case where the plaintiff truly is  seeking certification of a different class using a different theory of collective proof, a fullblown split in authority developed when the Second District decided Bridgeford v. Pacific  Health Corporation. 456   The Bridgeford court, relying on the U.S. Supreme Court’s ruling in  Smith v. Bayer Corp., 457 held that collateral estoppel did not apply; therefore a denial of  class certification in one case would still leave unnamed putative class members free to file a second suit alleging identical claims. 458 In Bridgeford, a wage and hour class action, the trial court had granted defendants’  demurrer on the grounds that the named plaintiffs had been members of the putative class  in an earlier action wherein class certification had been denied on the same claims, and so  collateral estoppel precluded them from seeking class certification in the second action. 459    The Court of Appeal reversed, stating that even if the minimum requirements for applying  collateral estoppel had been met, if a party had not had a full and fair opportunity to litigate  the issue in the prior proceeding, then collateral estoppel should not apply. 460   The court  concluded: [U]nder California law . . . the denial of class certification cannot establish  collateral estopped against unnamed putative class members on any issue  because unnamed putative class members were neither parties to the prior proceeding nor represented by a party to the prior proceeding so as to be  considered in privity with such a party for purposes of collateral estoppel. 461                                                       455 See also Johnson v. GlaxoSmithKline, Inc., 166 Cal. App. 4th 1497, 1513-15 (2008) (reversing trial court’s application  of Alvarez collateral estoppel where enactment of Prop 64 after first court denied certification ran counter to the  rationale the first court had given for denying class certification; also considering (without deciding) whether Alvarez was overruled sub silentio by the United States Supreme Court’s discussion of virtual representation in Taylor v.  Sturgell, 553 U.S. 880 (2008)). 456    202 Cal. App. 4th 1034, 1043 (2012). 457    131 S. Ct. 2368 (2011). 458    Id. at 1044.   459   Id.  at 1039-40.   460   Id. at 1042. 461   Id. at 1044Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 105 If the reasoning in Bridgeford is widely adopted, serial class claims could result:   even if an employer is successful in defeating class certification, courts may  allow attorneys to forum-shop by recruiting new plaintiffs to file a case with  similar allegations and seek class certification again and again from different  judges. J. Defense Motions to Deny Class Certification (“Vinole Motions”) It is often to the employer’s tactical advantage to file the motion that triggers the resolution  of the question of whether a class should be certified.  By filing first, the employer can time  the briefing to its advantage.  If the employer can quickly assemble the evidence it needs to  defeat class certification, then filing such a motion may put pressure on the plaintiffs’  lawyers (who often take on many cases) to oppose such a motion with less preparation  than they would have if they could delay discovery for months and months until they felt  prepared to file a motion for certification.  Furthermore, filing first gives the employer the  opportunity to file a reply brief, which it usually may not file if the plaintiff moves for class  certification first. The plaintiffs’ bar does not agree that employers should be permitted move to deny class  certification before the plaintiffs file their own certification motion.  Plaintiffs’ lawyers often  contend that such a motion robs the plaintiff of the right to define the class it wants certified  and establish that such a class is possible.  The plaintiffs also contend that such motions  are not allowed under California procedure (or under federal procedure if the case has  been removed to federal court). 462   A problem the plaintiffs face with this argument is that  the California Supreme Court rejected it more than thirty years ago in City of San Jose v.  Superior Court. 463   There, the court stated in no uncertain terms that either party can move  for class certification and that such determinations should take place as soon in the  litigation as practicable: [W]e have directed [lower courts] to rule 23 of the Federal Rules of Civil  Procedure, which provides:  “As soon as practicable after the commencement of  an action brought as a class action, the court shall determine by order whether it  is to be so maintained.”  This determination may be made on motion of either  plaintiff or defendant – or on the court’s own motion. 464                                                       462 However, California Rules of Court, Rule 3.764(a) appears to contemplate such motions (“A party may file a motion to: .  . . Decertify a class”).  463 12 Cal. 3d 447 (1974); accord Chevron USA, Inc. v. Vermilion Parish Sch. Bd., 364 F.3d 607 (5th Cir. 2004) (upholding  trial court’s grant of defendants’ motion to deny class certification); Sipper v. Capital One Bank, 2002 U.S. Dist LEXIS  3881 (C.D. Cal. Feb. 28, 2002) (granting “motion to deny class certification”); Lightfoot v. Gallo Sales Co., 15 Fair Empl.  Prac. Cas. (BNA) 615, 616 (N.D. Cal. 1977) (granting “Motion That Class Be Denied Certification Pursuant to Rule  23(c)(1)”). 464 City of San Jose, 12 Cal. 3d at 453-54.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 106 Because the City of San Jose case is from the 1970s, plaintiffs’ counsel often argue that its  statement did not survive the later enactment of the complex rules within the California  Rules of Court, which set a special briefing schedule for motions to “certify a class;  determine the existence of and certify subclasses; amend or modify an order certifying a  class; or decertify a class.” 465   Plaintiffs argue that the absence from this list of “motion to  deny certification” was a deliberate decision to preclude such a motion.   The employer’s cause to allow such motions was aided by Seyfarth Shaw’s victory in  Vinole v. Countrywide Home Loans. 466   There, the Ninth Circuit upheld the grant of a motion  to deny class certification and rejected the plaintiffs’ argument that such motions were  inappropriate, especially when they were not decided simultaneously with a plaintiffs’  motion for class certification. 467   The court rejected the plaintiffs’ argument, noting that Rule  23 of the Federal Rules of Civil Procedure places no limitations on which party may move  for a determination whether a case should proceed as a class action.  The court also noted  that it is at the discretion of the trial court to decide when to rule on a certification or  decertification motion and that there is no rule that the court must wait for the discovery  period to end. 468 Following the issuance of the district court decision in Vinole, the Second District Court of  Appeal held that the same rules apply under California civil procedure. In In re BCBG  Overtime Cases, 469 the court held that “under both California and federal law, either party  may initiate the class certification process.”  Relying on Carabini v. Superior Court, 470 the  court held that plaintiffs could file a motion for class certification, or defendants could move  for a determination that the case should not proceed as a class action.  As in Vinole, a key  element in the court’s analysis was whether the plaintiffs had sufficient opportunity to  conduct relevant discovery.  The court determined that the plaintiffs before it had plenty of  time (more than two years) to conduct discovery relevant to class certification issues, and  therefore the trial court acted within its discretion when it granted the defendant’s motion to  deny class certification rather than wait for the plaintiffs to file a motion for certification. 471                                                       465 California Rules of Court, Rule 3.764. 466 571 F.3d 935 (9th Cir. 2009). 467 Most cases approving defense motions to deny certification involve the filing of cross-motions by the defendant and the  plaintiff.  See, e.g., Maddock v. KB Homes, Inc., 248 F.R.D. 229 (C.D. Cal. 2007) (motion for class certification and  motion to deny certification filed simultaneously; court granted defendant’s motion and denied plaintiffs’ motion). 468 571 F.3d at 943. 469 163 Cal. App. 4th 1293, 1299 (2008). 470 26 Cal. App. 4th 239, 242 (1994). 471 BCBG, 163 Cal. App. 4th at 262-63.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 107 XV. Discovery Issues in Class Actions A. Disclosure of Class Member Names and Addresses to Allow  Access to Potential Witnesses An ongoing dispute in Labor Code class actions revolves around the disclosure of the  names, addresses, and telephone numbers for potential class members prior to class  certification.  Plaintiffs typically argue they need this information to assist them in  prosecuting their case, and to alleviate any inherent advantage the defendant has in  contacting potential class members.  In cases reaching back to Atari v. Superior Court, 472 California courts have recognized the principle that both sides in litigation should have  equal access to potential class members, as they are often key witnesses. Plaintiffs typically seek names and addresses of potential class members in order to send  them some sort of communication describing the plaintiffs’ case or to invite them to assist  the plaintiffs’ counsel in investigating the claims asserted.  Of course, a defendant employer  has a duty to maintain the confidentiality of the personal information of its current and  former employees.  Courts must strike a balance between these interests. In 2003, the Second District Court of Appeal weighed these considerations in Parris v.  Superior Court. 473   In Parris, the plaintiffs filed a putative class action alleging that they were  misclassified as exempt employees. 474   The plaintiffs moved to compel the disclosure of  potential class member names and addresses, and for leave to communicate with potential  class members.  The trial court denied the motions. The appellate court held that plaintiffs have a constitutional right to free speech, which  includes the right to communicate with potential class members. 475   Requiring court  approval of such communications would constitute an impermissible prior restraint on free  speech. 476   Therefore, the court held the trial court should have dismissed the plaintiffs’  motion for leave to communicate with the class because no such motion was required. 477 Regarding the disclosure of potential class member names and addresses, the Parris court  held that it was “appropriate for the court to consider ‘the possibility of abuses in classaction litigation’” in determining whether to order disclosure of potential class member                                                        472 166 Cal. App. 3d 867 (1985). 473 109 Cal. App. 4th 285 (2003). 474 Id. at 290. 475 Id. at 296-99. 476 Id. 477 Id. at 299-300.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 108 information. 478   Without expressing any opinion on the propriety of ordering disclosure in the  case before it, the court remanded the case to the trial court to make that determination.   Although this decision plainly restricted a trial court’s ability to stop plaintiffs’ counsel from  communicating with class members once plaintiffs’ counsel located them, it did not address  whether plaintiffs may typically obtain discovery of the putative class members’ names and  personal contact information. The California Supreme Court directly addressed this issue, albeit within the consumer  class action context, in Pioneer Electronics (USA), Inc. v. Superior Court. 479   The plaintiff in  Pioneer filed a discovery motion seeking to compel the defendant to disclose the names  and addresses of customers who complained about a defective DVD player.  Ruling for the  plaintiff, the Court instructed Pioneer to send a notice of the suit to all potential class  members allowing them to object to the release of their names and contact information to  the plaintiff.  The Court ordered the defendant to release the names of those who did not  respond to the notice and affirmatively object to disclosure. The first published appellate decision to apply Pioneer to the wage and hour context was  Belaire-West Landscape, Inc. v. Superior Court. 480   In that case, the appellate court went  even further than Pioneer, requiring the defendant to release the addresses and personal  telephone numbers of all current and former employees who did not affirmatively opt out in  response to a pre-certification class notice.  Moreover, in contrast to the plaintiff in Pioneer,  who sought information only on those putative class members who had affirmatively  complained about the product at issue, the Belaire-West plaintiff sought personal  information of all current and former employees within the putative class. Two decisions that followed in the wake of Belaire-West have extended its holding to  broaden the plaintiffs’ rights to contact information.  Indeed, the decisions have led many  plaintiffs’ lawyers to contend that they always have the right to the putative class members’  contact information and that the court has discretion to skip the Belaire-West process  altogether. First, in Puerto v. Superior Court, 481 the Second District Court of Appeal held that it was an  abuse of discretion to withhold the personal contact information of putative class members when the defendant had responded to discovery by listing each putative class member as a  witness with information relevant to the case.  The court held that “the right to privacy in                                                        478 Id. at 300 (citing Gulf Oil Co. v. Bernard, 452 U.S. 89 (1981) and Howard Gunty Profit Sharing Plan v. Superior Court,  88 Cal. App. 4th 572 (2001)). 479 40 Cal. 4th 360 (2007). 480 149 Cal. App. 4th 554 (2007). 481 158 Cal. App. 4th 1242 (2008).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 109 contact information [does not] trump the [plaintiffs’] right to investigate their claims by  contacting witnesses.” 482   Because of the unusual fact that the defendant had listed every  putative class member by name and attested in verified discovery responses that each  person was a percipient witness, Puerto could be distinguished from the typical class  action. 483 In the second decision, Crab Addison, Inc. v. Superior Court, 484 the Second District Court of  Appeal went even further, and held that a procedure by which putative class members had  to affirmatively agree to the disclosure of their contact information was not permissible even  where (1) the employer had not listed the employees as witnesses or otherwise disclosed  their names and (2) the employees had signed a form indicating they did not wish to have  their personal information released—including specifically in connection with “class action  lawsuits.”  The court found that employees, in signing the release form, would not realize  that the form might encompass a class action aimed at vindicating their own Labor Code  rights, and that “public policy concerns weigh in favor of enforcing unwaivable statutory  wage and overtime rights through class action litigation over a right to privacy.” 485 Although neither the Puerto nor the Crab Addison decision announced a per se rule that  plaintiffs are entitled to production of all putative class member contact information without  any protections being afforded to the putative class members to protect their privacy rights  in that information, the decisions certainly indicate that a trial judge would not abuse  discretion by simply ordering all the information to be turned over without resort to a  Belaire-West opt-out privacy mailing.  We have not yet seen a trend among courts in  bypassing the Belaire-West opt-out process and none of the holdings in the Belaire-West,  Puerto, or Crab Addison cases would seem to mandate that information be disclosed  without any kind of protection for employee privacy. It would appear that the need to obtain the employees’ contact information would depend  on the nature of the class action claims.  Even the Crab Addison court recognized that  there was enough of a privacy interest in putative class members’ identities and contact  information to protect against disclosure when the information “is unnecessary to the                                                        482 Id. at 1248. 483 Puerto was followed by a federal district court in Stone v. Advance America, 2010 WL 5892501 (S.D. Cal. 2010).  In  Stone, the court had previously allowed the plaintiff to obtain class-member contact information through notice and an  opt-out procedure.  Thereafter, the plaintiff propounded interrogatories requesting the identities and contact information  for defendant’s former employees during the class period.  The court held that no notice or opt-out procedure was  required to obtain this information under Rule 26 of the F.R.C.P., because it sought only basic discovery, i.e., the  names and contact information for percipient witnesses, which the court distinguished from the names and contact  information of class members (even though there was substantial overlap between the two). 484 169 Cal. App. 4th 958, 973-74 (2008). 485 Id. at 974.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 110 prosecution of the litigation.” 486   There are class actions where the plaintiffs’ need to contact  putative class members is minimal, but the lawyers seek the contact information anyway  with the hope that they can locate some disgruntled former employees who might uncover  additional possible class claims.  For example, in a case concerning miscalculation of the  overtime rate, the case turns almost exclusively on payroll records, so there would seem to  be little need to contact class members.  Although, technically speaking, the employees are  witnesses, employers contend that they are not essential witnesses and that their right to  privacy should outweigh the plaintiffs’ right to contact them, given the ability of plaintiffs to  prosecute the case without such contact information. As explained above, the court in Parris held that a court deciding whether to allow  discovery of class member identities must weigh the danger of possible abuses of the class  action procedure against the rights of the parties under the circumstances. 487   Accordingly,  the trial court has discretion to deny disclosure of names and addresses upon a showing  that the plaintiff’s class claims are merely a pretext designed to gain access to the putative  class members’ contact information.  This will be a difficult burden to establish in most  cases, but may be successful where the need for the discovery is minimal, where facts can  be shown that the plaintiff lacks a reasonable basis for believing his or her individual claims  are common to a broader class, or where there is evidence that the lawyer is controlling the  litigation for an ulterior purpose.  We expect that the law will continue to develop to address  this situation, as we encounter it on a regular basis. B. Discovery to Facilitate Location of Substitute Class  Representatives One method to defeat class certification is to argue that the class representative is atypical  or inadequate.  The problem with this argument is that, even when it succeeds, it leaves  open the question of whether a class could properly be certified with a different member of  the putative class acting as class representative. In 1971, in La Sala v. American Savings & Loan Association, 488 the court held that, on the  facts before it, the plaintiff should have been permitted to substitute a proper class  representative for a class representative who was inadequate.  A key aspect of the  decision, however, was that the defendant had engaged in questionable conduct that  rendered the plaintiff inadequate.  More specifically, the case addressed the alleged  impropriety of a fee charged by the defendant savings & loan.  The defendant excused the                                                        486 Crab Addison, 169 Cal. App. 4th at 967. 487 109 Cal. App. 4th at 300-01. 488 5 Cal. 3d 864 (1971).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 111 plaintiff from paying the fee as a basis to argue that the plaintiff suffered no harm and, thus,  lacked standing to represent a class of injured customers. The court left open the question of whether the plaintiff’s lack of any injury rendered him  inadequate to represent the putative class as a matter of law, but it held that a defendant  should not be able to defeat a class action by simply paying off class representatives oneby-one as they come forward: In the present case, American has waived its acceleration clause only as to [the  plaintiffs].  If other borrowers bring a class action, American may again waive as  to those representative borrowers, and again move to dismiss the action.  Such a  procedure could be followed ad infinitum for each successive group of  representative plaintiffs.  If defendant is permitted to succeed with such revolving  door tactics, only members of the class who can afford to initiate or join litigation  will obtain redress; relief for even a portion of the class would compel  innumerable appearances by individual plaintiffs. 489 La Sala has been interpreted to permit a plaintiff to amend the complaint to add a new  class representative when the original plaintiff, although a bona fide member of the putative  class, has particular traits that make him an inadequate class representative. 490   Thus,  under La Sala, a plaintiff who is deemed inadequate generally can find and substitute in  another class representative. 491 La Sala left open the important question of whether the plaintiff may use the discovery  process as a mechanism to obtain contact information for other putative class members for  the express purpose of asking them if they would be willing to be a substitute class  representative.  That question was answered “yes” in Best Buy Stores, L.P. v. Superior  Court. 492 In Best Buy, a class action attorney was subjected to an allegedly illegal “restocking fee”  when he returned an item to Best Buy.  Invoking the Consumer Legal Remedies Act and  the UCL, he sought to represent a class of similarly situated consumers who were charged                                                        489 Id. at 873. 490 But see Howard Gunty Profit Sharing Plan v. Superior Court, 88 Cal. App. 4th 572, 580-81 (2001) (leave to substitute  class representative may be inappropriate where trial court determines that the class representative was a “professional  plaintiff” with a history of abusing the class action procedure). 491 See, e.g., Aguiar v. Cintas Corp. No. 2, 144 Cal. App. 4th 121, 137 (2006) (“the second amended complaint may be  amended once again on remand to add another named plaintiff should it be determined that . . . [plaintiff] needs an  additional, adequate representative”); Shappell Indus., Inc. v. Superior Court, 132 Cal. App. 4th 1101, 1109 (2005) (“[La  Sala] demonstrate[s] that California courts recognize and preserve the rights of absent class members, even before the  issue of certification has been determined”). 492 137 Cal. App. 4th 772 (2006).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 112 the fee.  The trial court ruled that he could not simultaneously be class counsel and class  representative. 493   The plaintiff requested that the court order Best Buy to disclose to a third  party administrator the names and addresses of all putative class members, so that the  administrator could advise them of the case and invite them to express interest in serving  as class representative in the lawyer’s stead.  When the trial court granted the request,  Best Buy sought a writ of mandate to reverse the decision. Although the writ petition was granted, the appellate court ultimately affirmed the crux of the  trial judge’s order. 494   The court held that it was indeed appropriate to use the discovery  process to locate a substitute class representative when the original class representative  was found inadequate. 495   It also held that facilitating “recruiting” of a class representative in  this manner was not improper “solicitation” under the Rules of Professional Conduct, because “solicitation” was limited to in-person or telephonic contact, not a mailing. 496 The result in Best Buy was understandable in that the class representative appeared to be  a proper class representative but for the fact that he also wanted to serve as class counsel.   After all, he did go to Best Buy and was charged a restocking fee, so he otherwise  appeared to have a colorable claim.  But what happens when the class representative has  no actual claim against the defendant?  For example, could a person simply pick a large  employer for whom he has never worked, sue for Labor Code violations, and, upon being  held inadequate (because he never was an employee), obtain a court order for a mailing to  assist him recruit a “proper” class representative? That question was answered “no” in First American Title Insurance Company v. Superior  Court. 497   The plaintiff, who was not a member of the class he purported to represent, and  who had no other interest in the litigation, obtained an order for precertification discovery so                                                        493 See Apple Computer, Inc. v. Superior Court , 126 Cal. App. 4th 1253 (2005) (attorney in class action may not also act  as class representative). 494 But see Best Buy, 137 Cal. App. 4th at 778 (court should not have included contact information in letter for plaintiff, but  rather should simply have disclosed to plaintiff contact information of all individuals who returned postcards stating they  were interested in serving as class representative). 495 Id. at 779; see also Rand v. American Nat’l Ins. Co., 2010 WL 2758720 (N.D. Cal. July 13, 2010) (permitting use of  class information to solicit new class representative after previous class representative died).  The Best Buy court cited  Budget Finance Plan v. Superior Court, 34 Cal. App. 3d 794, 799 (1973), to reason that a proper purpose of discovery  is to look for a substitute class representative when the original class representative is inadequate, and the Budget Finance case does state as such.  But the Budget case cited no authority for that proposition other than the conclusory  statement that the right to such discovery impliedly flows from the right of a plaintiff to substitute in a new class  representative.  See First American Title Ins. Co. v. Superior Court, 146 Cal. App. 4th 1564, 1577-78 (2007) (noting lack  of analysis in Budget Finance’s conclusion concerning right to discovery, and questioning its continuing validity as  precedent). 496 Id. at 776-77. 497 146 Cal. App. 4th 1564 (2007).  See also Cryoport Sys. v. CAN Ins. Co., 149 Cal. App. 4th 627 (2007) (“Best Buy  Stores does not stand for the proposition that a plaintiff with no interest in the action has a right to discovery to find a  substitute plaintiff to keep the action alive.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 113 that he could locate a class representative.  In holding that the order was an abuse of  discretion, the appellate court concluded, “the potential abuse of the class action  [precertification discovery] procedure greatly outweighs the rights of the parties under the  circumstances.” 498   The court noted that it would counter the public policy enshrined in Prop  64 to allow people without any injury in fact to sue and then use the discovery process to  troll for class representatives. 499   The appellate court also noted that putative class  members, if they really felt aggrieved, were free to come forward and bring their own case: Any further legal action can be pursued by members of the class, if they so  desire.  [Plaintiff] makes no argument that any future action they might pursue  would be time-barred, or offers any other reason why the class members might  be denied relief if this action is unable to proceed on their behalf.  In short, the  potential for abuse of the class action procedure is overwhelming, while the  interests of the real parties in interest are minimal.  Precertification discovery  under these circumstances would be an abuse of discretion. 500 However, in CashCall, Inc. v. Superior Court, 501 precertification discovery was permitted in  order to locate proper class representatives, even though the original representatives, as  well as the first set of replacements, were all found to not be members of the putative class. CashCall involved a suit against a lender who allegedly had illegally monitored certain of its  collection calls in violation of the California Penal Code. 502   The defendant notified the  plaintiffs that none of the three named class representatives had been subject to  monitoring.  Five new class representatives were then substituted in, but it again turned out  that none of these individuals had had their calls monitored. 503   The trial court then ordered  CashCall to disclose the identities of the 551 individuals for whom collection calls had been  monitored so that proper class representatives could be substituted in. 504 The Court of Appeal determined that the trial court had not abused its discretion in  permitting discovery of the class list for the purpose of locating proper class  representatives. 505   The court distinguished First American, noting that, in that case, “the  class members’ rights against the defendant had already been protected and enforced                                                        498 Id. at 1577. 499 Id. 500 Id. 501 159 Cal. App. 4th 273 (2008). 502 Id. at 278. 503 Id. at 280. 504 Id. at 283. 505 Id. at 292.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 114 through state agency investigations and settlements with the defendant.” 506   This was not  the case in CashCall, where the putative class had no knowledge of the alleged unlawful  conduct and the court noted that “absent precertification discovery and continuation of this  class action, it appears unlikely any of the class members will have a realistic opportunity to  assert claims, and potentially obtain relief.” 507    More recently, Safeco v. Superior Court 508 was decided similarly to CashCall, with the  appellate court emphasizing that First American “does not stand for the proposition that a  plaintiff who was never a class member in a UCL action necessarily is not entitled to  conduct precertification discovery to identify a substitute class representative.” 509    However, in Starbucks Corp. v. Superior Court, the California Court of Appeal reversed the  trial court’s order permitting plaintiffs to conduct discovery to locate a suitable class  representative. 510   There, the plaintiffs had brought a putative class action against  Starbucks, alleging that the company’s preprinted job application improperly sought  information relating to minor marijuana convictions that were over two years old. 511   But  because the named plaintiffs had never been convicted of any such crimes, they were  dismissed as class representatives on summary judgment. 512   Thereafter, class counsel  amended their complaint and obtained an order from the Superior Court permitting them to  discover the names of job applicants who had disclosed minor marijuana convictions on  their applications, in order to locate “suitable” class representatives. 513   The Court of Appeal  overturned the order, holding that the trial court had abused its discretion in allowing this  precertification discovery. 514   The court distinguished CashCall, noting that, in that case,  “the only conceivable class members were debtors who were unaware of the secret  monitoring,” and therefore unaware that they had potential claims. 515   “However, in contrast,  Starbucks’ job applicants who had marijuana convictions know about their own previous  convictions and about the fact that they had applied for a job at Starbucks,” and therefore  had a fair opportunity to file suit if they so desired. 516   Thus, the court held that the Parris                                                       506 Id. at 298. 507    Id. 508 173 Cal. App. 4th 814 (2009). 509 Id. at 829. 510 Starbucks Corp. v. Superior Court, 194 Cal. App. 4th 820 (2011). 511 Id. at 721. 512 Id. 513 Id. 514 Id. at 725. 515 Id. at 726. 516 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 115 balancing test required the requested precertification discovery to be denied because the  potential abuse of the class action procedure in this instance outweighed the rights of the  class members. 517 To the extent that any rule derives from these cases, it appears to be that the trial court has  broad discretion to deny discovery for the plaintiff to locate a new class representative  when the plaintiff is inadequate, but has more narrow discretion in the absence of a  showing that the plaintiff never was a proper putative class member or never experienced  an injury in fact.  Trial courts appear to lack any discretion to deny discovery where the  plaintiff is rendered inadequate by conduct of the defendant or as a result of some other  characteristic independent of the merits of the plaintiff’s claims. C. Discovery Issues Regarding Putative Class Member Declarations Defense counsel in class actions routinely obtain declarations from putative class members to contradict the plaintiffs’ allegations and defeat class certification.  In gathering such witness statements, it is important to consider the manner in which the interviews are  conducted, and the potential discoverability of the witness statements.  1.    Employers Must Approach Pre-Certification Communications    With Their Employees With Caution  In general, defendants in class actions are not barred from communications with putative  class members prior to class certification unless the communications are misleading,  coercive, or improper. 518   In the context of employment class actions, courts specifically  recognize the heightened potential for coercion.  For these reasons, many employers utilize  some variation of the longstanding Johnnie’s Poultry safeguards to minimize the potentially  coercive impact of attorney interviews of putative class members.  These safeguards  include: communicating the purpose of the questioning to the employee prior to the  interview; assuring the employee that no reprisal will take place; and explaining that  participation is voluntary. 519   When employers violate these safeguards, courts are likely to  disregard any declarations obtained and to limit any further pre-certification  communications with employees.                                                       517 Id. at 726 (also noting that “the excessive penalties sought by class counsel bear little relationship to any true public  interest for what, at most, appears to be a technical violation of Labor Code 432.8 by Starbucks”). 518 Following class certification, the class members are represented by plaintiffs’ counsel and should not be contacted by  defense counsel. 519   Johnnie’s Poultry Co. and District Union 99, Amalgamated Meat Cutters & Butcher Workmen of N. Am., AFL-CIO, 146  NLRB 770, 775 (1964)Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 116 Quezada v. Schneider Logistics Transloading & Distrib., Inc. 520 is a prime example.  In that  case, a wage and hour class action brought by warehouse workers, a California federal  court found that an employer’s communications with putative class members were  deceptive and coercive, struck all declarations obtained from them, and barred any further  attempts by the defendant’s attorneys to contact the class members. The facts that led to this result were as follows: shortly after the plaintiffs filed their  complaint, defense counsel began interviewing employees about the allegations.  The  meetings were held in a manager’s office during work hours and the employees were called  to the office over a loud speaker or ordered to attend by their supervisors.  Some  employees did not know why they were being ordered to the manager’s office.  Before the start of each interview, defense counsel informed the employees that the  meeting was “just an interview” and that the meetings were being conducted in connection  with the company’s attorneys’ “internal investigation about the conditions at the  warehouse.” 521   Applying some of the Johnnie’s Poultry safeguards, the attorneys further  explained that the interview and subsequent participation in drafting and signing the  declarations were voluntary and that the employee could end the interview at any time; that  if the employee decided to sign a declaration, he or she should make sure it was truthful  and accurate; that the employer could not retaliate against or reward the employee based  on the decision to participate or the information provided; that the employee was a potential  class member in a lawsuit with claims pertaining to the subject of the meeting; that defense  counsel represented the company, not the employees; and that the employees could  consult with an attorney regarding the process. 522 At the end of each interview, the employees were asked to sign a declaration.  The  attorneys did not explain, however, that the document was a sworn declaration that the  employer could use to limit the employees’ potential recovery in the class action. 523    Instead, the attorneys told the employees that the document was a “consent form”  regarding their voluntary participation in the interview process. 524   Some employees said  they felt pressure to sign and only six out of the 120 interviewees declined to sign. 525    The court determined that, despite the attorneys’ disclosures to the employees at the outset  of the interviews, the communications were deceptive because the employees were never                                                        520 No. CV 12-2188 CAS (DTBx) (C.D. March 25, 2013). 521 Id. at 3. 522 Id. at 2-3. 523 Id. at 3 524 Id. at 4.  525 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 117 told of the nature and purpose of the interviews, which was to gather evidence to use against class members in the lawsuit. 526   In addition, the court held that the interviews were  conducted in a coercive manner because the employees were essentially ordered to attend  the meetings. 527 Even though the employees were told the interviews were voluntary, the  fact that only five employees actually chose to leave and that only six refused to sign a  declaration confirmed the coercive nature of the interviews. 528   Accordingly, the court  ordered the declarations struck and barred any further communications with putative class  members, absent a court order.  2.    Protection Of Attorney Procured Witness Interviews From    Discovery  Once employers and their counsel have invested time and expense to gather witness  statements, they face yet another hurdle: resisting attempts by plaintiffs’ counsel to obtain their hard-earned declarations during discovery.  Plaintiffs’ counsel routinely request  production of such declarations, which defense counsel often prefer not to disclose prior to  filing them with the court in opposition to class certification. 529   In an employer friendly  decision, the California Supreme Court recently affirmed that attorney-directed internal  investigations and statements taken from witnesses are entitled to at least a qualified work  product protection.    For years, litigants in California had relied upon dicta in Nacht & Lewis Architects, Inc. v.  Superior Court 530 for the proposition that recorded witness statements taken by an attorney  or his agent are entitled to absolute work product protection and thus, are not discoverable.   In 2010, however, the Court of Appeal in Coito v. Superior Court 531 declined to follow Nacht and held that recorded witness statements and signed declarations were not entitled to  work product protection as a matter of law.  This meant plaintiffs could now sit back while  defense counsel expended time and effort conducting witness interviews and then freely  obtain their declarations.   In 2012, the California Supreme Court reversed the Court of Appeal, holding that attorneydirected witness interviews and statements are entitled as a matter of law to at least                                                        526 Id. at 8.  527 Id.   528 Id.  529 Note that in federal court, pursuant to Rule 26 of the Federal Rules of Civil Procedure, such declarations usually must  be disclosed shortly after they are executed.  One way to comply with this requirement is to prepare declarations that  are in final form but not signed, and then have the witnesses execute them when they are needed.  A risk inherent in this approach, of course, is that witnesses may change their minds about signing declarations. 530 47 Cal. App. 4th 214, 217 (1996). 531 182 Cal. App. 4th 758 (2010).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 118 qualified work product protection and may be entitled to absolute protection upon a proper  showing. 532 Influenced by the legislative history and policy underlying the protection of attorney work  product, the Court concluded that a default rule allowing discovery of attorney-procured  witness statements would impede the Legislature’s intent “to encourage [attorneys] to  prepare their cases thoroughly and to investigate not only the favorable but the unfavorable  aspects of their cases.” 533 There would be a chilling effect on case investigation and  preparation, which might inhibit the truth from coming out.  Moreover, it would undermine  the legislative policy of preventing an attorney from taking advantage of an adversary’s  efforts. 534 Accordingly, the Court held that where witness statements reveal an attorney’s  impressions, conclusions, opinions or legal research, the statement is entitled to absolute  protection. 535   The Court pointed out that absolute work product protection is more likely to  apply when witness statements include or evidence: (1) explicit comments or notes by the  attorney stating his or her impressions of the witness of other case issues; (2) facts that  provide a window into the attorney’s theory of the case or the attorney’s evaluation of what  issues are most important; (3) follow-up questions that reveal the attorney’s thoughts or  strategy; and (4) the selection of a specific witness from a multitude of witnesses  available. 536    Even if witness statements do not reveal an attorney’s impressions or opinions sufficient to  merit absolute protection, they will ordinarily not be discoverable unless the party seeking  disclosure establishes that that denial of such discovery will result in unfair prejudice or  injustice. 537   If a party resisting discovery alleges that a witness statement is absolutely  protected, that party must make a preliminary or foundational showing that the disclosure  would reveal the attorney’s impressions, conclusions, opinions, legal research or  theories. 538   The trial court may then determine whether and to what extent the absolute  privilege applies. 539                                                       532    Coito v. Sup. Court, 54 Cal. 4th 480, 496 (2012). 533 Id. 534 Id. at 495. 535 Id. at 496. 536 Id. at 495. 537 Id.  at 500. 538 Id.   539 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 119 The Supreme Court’s decision in Coito expanded work product protection for witness  interviews and signed declarations in California state courts. This case also highlights the  importance of involving legal counsel as early as possible in order to protect witness  interviews and declarations through the attorney work product doctrine.  Interviews should  be conducted by counsel, or at the direction of counsel, because otherwise the work  product of non-attorney investigators will be subject to discovery. XVI. Class Action Settlement A. Generally The vast majority of class actions result in a settlement.  Unlike an individual settlement of  employment law claims, a court must approve a class settlement to ensure that it is fair and  reasonable, is not the product of collusion, and does not subordinate the interests of the  broader class to those of the named plaintiffs. 540 Typically, the plaintiffs and the defendant enter into a stipulation of settlement, which a  court analyzes to determine if the agreement looks reasonable on its face.  If so, the court  will grant preliminary approval (sometimes called “conditional certification”) and then notice  of the settlement will be sent to the class.  Most commonly, class members will be given a  choice of (1) returning a claim form to receive money under the agreement; (2) returning a  request for exclusion (“opt out”) form that excludes them from the settlement and preserves  their individual right to sue; or (3) doing nothing, in which case the class members receive  nothing but still are bound by the class release.  Those class members who do not request  exclusion will also have the option of filing an objection to the settlement. 541 After a fixed period following the issuance of notice (usually 45-60 days), the claims period  will end, and class counsel will seek final approval of the settlement.  Above and beyond  the analysis the court conducted at preliminary approval, the court will examine the extent  of class participation in the settlement, will rule on any objections, and will make final  determinations as to class counsel’s request for attorney’s fees and an incentive payment  or “enhancement” for the class representative (additional money beyond that received by  other class members as a reward for taking the risk of filing the class action).                                                       540 See generally Dunk v. Ford Motor Co., 48 Cal. App. 4th 1794, 1800-01 (1996). 541 See generally Wershba v. Apple Computer, Inc., 91 Cal. App. 4th 224, 251-52 (2001) (explaining different choices class  members typically have upon receiving class notice).  Recent case law also implies that it may be permissible to settle a  certified class action through the acceptance of an offer of judgment by the class representative.  See Nelson v.  Pearson Ford Co., 186 Cal. App. 4th 983, 1024-26 (2010) (assuming without deciding that a valid California Code of  Civil Procedure § 998 offer can be made in a certified class action).  Should this process be used, after acceptance, the  parties would then provide class notice, etc., just as if a stipulation of settlement had been entered.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 120 When Labor Code class actions were relatively novel, there was little consistency between  different judges as to the scrutiny of settlements they would undertake or the rules they  would apply.  Most courts who did not have much experience with class actions typically  undertook very little scrutiny of class settlements beyond ensuring that they were not  collusive and that the notice provided clear instruction to the class.  Over the intervening years, however, a substantial body of law has developed to provide courts with better  guidance as to how to evaluate class settlements in wage and hour cases. B. Restrictions on Reversions of Settlement Funds Most class settlements result from mediation.  Unlike a court, which must protect the  interests of a class, a mediator seeks solely to broker a settlement acceptable to the parties  who hired the mediator—i.e., the lawyers for the parties.  Irrespective of their fealty to  ethical obligations, plaintiffs’ counsel—who often have near absolute control over  wage/hour class litigation—have a financial interest in maximizing the attorney’s fees they  will receive through the settlement. The employers’ financial incentive is to achieve as  broad of a release as possible for as little money as possible.  Because the plaintiff’s lawyer  typically receives an attorney’s fee that is a percentage on the gross value of the class  settlement, employers would commonly agree to a nominally larger gross settlement value  on the condition that any unclaimed settlement funds be returned to the employer.  These  sort of “reversionary” settlements have been popular because they allowed an employer  the possibility of paying substantially less in settlement than the gross settlement would  suggest, particularly in industries where the employer could predict that the claims rate  would be low. For example, in particular industries where there is a transient workforce, it is common for  only about one quarter of the class members to make claims—either because they do not  receive notice or because the value of the individual settlement amounts is too low to  attract their attention.  When a small percentage of the class submits claims in a  reversionary settlement, it may actually result in class counsel receiving significantly more  money than the class as a whole.  For example, in connection with a settlement of one  million dollars, if class counsel received thirty percent, that would leave no more than  $700,000 for the class (actually less, because settlement administration costs are typically  paid out of the gross settlement).  If the class claims only 25% of the amount set aside for  claims, then the class would receive no more than $175,000 versus the $300,000 class  counsel would be slated to receive.  While this arrangement could be defended on the  ground that class counsel secured a potential one million dollar settlement, courts have  looked unfavorably on large payouts to class counsel as compared to the payment received  by the class.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 121 One way courts can address this inequity is simply to cut the attorney’s fee and distribute  the difference to those members of the class who made claims.  In the above example, if  class counsel’s fee was reduced to 15% of the gross, then it would result in the lawyers  obtaining $150,000, and the class receiving $325,000, an effective contingency of 31%.  Of  course, this result is at odds with what class counsel negotiated, so a routine reduction in  fees would substantially reduce the willingness of plaintiff’s counsel to agree to  reversionary settlements. Courts could also take greater pains to ensure that class members understand that they  have claims and make an informed decision whether to make claims.  Courts could extend  the notice period, could order that the claims administrator send multiple reminders of the  need to return a claim form, or even that the administrator (or class counsel) actually  telephone class members and encourage them either to make claims or opt out.  While  such steps make settlement administration more expensive, they serve the goal of  minimizing the number of situations where class members unwittingly receive no money  under a settlement as a result of simple ignorance. Rather than address the problem of low claims rates through better notice or adjustment of  the attorney’s fee, many courts have simply refused to approve reversionary settlements. 542    That is, courts have been reluctant to approve a settlement by which attorney’s fees are  calculated as a percentage of the gross value, but to the extent class members fail to claim  their designated portion of the settlement fund, the money is returned to the defendant. 543    Initially, there appeared to be a valid statutory basis for this approach.  Specifically, Code of  Civil Procedure Section 384(b) provides: [P]rior to the entry of any judgment in a class action . . . the court  shall determine the total amount that will be payable to all class  members [and] shall also set a date when the parties shall report  to the court the total amount that was actually paid to the class  members. After the report is received, the court shall amend the  judgment to direct the defendant to pay the sum of the unpaid  residue, plus interest . . . to nonprofit organizations or  foundations to support projects that will benefit the class or  similarly situated persons, or that promote the law consistent  with the objectives and purposes of the underlying cause of                                                        542 See Managing Class Action Litigation, A Pocket Guide for Judges (Federal Judicial Center, 2005)  http://www.fjc.gov/public/pdf.nsf/lookup/classgde.pdf/$file/classgde.pdf. 543 This can be contrasted with a true “claims made” settlement, where the employer simply agrees to pay a sum consisting  of: (1) payments to class members who submit claims (pursuant to a formula), (2) payment to class counsel for fees  and costs that is based on the value of the money paid out in claims rather than some fictional “gross settlement value”,  and (3) payment of settlement administration costs.  In this scenario, there is no money returned to the employer.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 122 action, to child advocacy programs, or to nonprofit organizations  providing civil legal services to the indigent. Many trial courts interpreted this language as forbidding the return of any funds from a  class settlement fund to the defendant.  Instead, leftover funds either had to be distributed  to other class members, donated to charity, or escheated to the state. 544 This interpretation of Section 384 was rejected, however, in In Re Microsoft I-V Cases. 545    The court in that case faced a settlement where a portion of unclaimed funds from a  consumer class action would be returned to Microsoft.  The court analyzed the statutory  language and legislative history of Section 384 and determined that it applied only to funds  an employer has paid as a result of a judgment entered in favor of the class on the merits,  and did not apply to a stipulated settlement of class claims. 546   Accordingly, In re Microsoft makes clear that there is no absolute prohibition under California law on parties agreeing to  reversions in class settlements. Nonetheless, some trial courts have continued to exercise their general discretion to  determine fairness as a basis to refuse to approve reversionary settlements.  This tendency  became more widespread following a determination in Kakani v. Oracle Corporation, 547 in  which United States District Court Judge William Alsup sharply criticized numerous aspects  of a negotiated class settlement on the ground that they aimed to benefit class counsel and  the defendant at the expense of the class.  For example, he criticized settlement terms  providing that (1) class members were subject to a general release of all claims (not just  claims raised by the class action) if they failed to opt out of the settlement; (2) the employer  would receive back any money class members failed to claim, but the plaintiff’s attorney fee  award was to be a percentage of the gross settlement; (3) the named class members were  each to receive $15,000 incentive awards for acting as class representatives; and (4) no  one explained why class members would receive only about 11% of an amount the parties  agreed was the maximum possible recovery. 548                                                       544 Cy pres settlements should ensure that the class is benefited and the purposes of the underlying statutes sued upon  are best served.  See, e.g., Dennis v. Kellog Co., 697 F.3d 858, 865-867 (9th Cir. 2012) (reversing trial court’s approval  of settlement where cy pres fund benefited the hungry indigent rather than class of purported victims of statutory  violations—those who relied upon false advertisements); Nachshin v. AOL, LLC, 663 F.3d 1034 (9th Cir. 2011) (trial  court abused its discretion in approving cy pres settlement because the proposed distribution did not address the  objectives of the underlying statutes sued upon, did not target the nationwide plaintiff class, and did not provide a  reasonable certainty that any member of the class would be benefited). 545 135 Cal. App. 4th 706 (2006). 546 Id. at 722. 547 2007 U.S. Dist. LEXIS 47515 (N.D. Cal. Jun 19, 2007). 548 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 123 Judge Alsup’s decision, although not binding on any other court, influenced judges in the  complex courts in California who rule upon most of the class action settlements.  More  recently, the criticism of large inventive payments to class representatives was enshrined in  an appellate decision, Clark v. American Residential Services LLC, 549   which was written by  an Orange County complex trial court judge temporarily sitting by designation on the court  of appeal. C. Court Scrutiny of the Adequacy of the Settlement Amount Traditionally, if class counsel was an experienced practitioner with a good reputation and  the case was settled using an experienced class action mediator, the courts would  presume that the settlement amount was fair as the product of an arm’s-length negotiation  between sophisticated parties.  Indeed, longstanding case law for evaluating class  settlements in response to objections from class members that the settlement was  inadequate suggested that the court’s inquiry should not go beyond that level of scrutiny. 550 Furthermore, it has become a common practice with Labor Code class actions for counsel  for the parties to agree early in the action to forego formal discovery and set the action for  early mediation.  The purpose of this exercise is to minimize expense and bring the matter  to a more rapid conclusion.  Often, discovery will be informal and limited to disclosing  relevant policies, contact information for a sample of the proposed class to interview, and  enough payroll data to allow the parties to assess potential exposure under whatever  theory the plaintiffs advance. Problems may arise, however, when multiple lawyers representing distinct potential class  representatives file essentially the same class action against the same defendant and then  differ in their view of the value of the case.  They may also differ on the propriety of settling  the case.  As any one of these class representatives could enter into a settlement with the  defendant and seek to have the settlement approved, a dissenting class representative  may be placed in the position of an objector.  Because the law disfavors setting aside a  class settlement on the ground that the objector could have obtained an even better class  settlement, 551 objectors instead argue that the plaintiff failed to undertake the necessary  due diligence to properly evaluate the claim. There has never been a requirement that exhaustive formal discovery be undertaken  before a class settlement could be affirmed.  Rather, the general standard has been that “in                                                        549 175 Cal. App. 4th 785 (2009). 550 Id. at 1149.  551 See generally 7-Eleven Owners for Fair Franchising v. Southland Corp., 85 Cal. App. 4th 1135, 1149-50 (2000) (noting  that courts are allowed to look with skepticism on claims from objectors that settlements were inadequate and should  have been for more money: “proposed settlement is not to be judged against a hypothetical or speculative measure of  what might have been achieved by the negotiators”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 124 the context of class action settlements, formal discovery is not a necessary ticket to the  bargaining table where the parties had sufficient information to make an informed decision  about settlement.” 552   Most courts have generally accepted the sworn statements from  counsel that they conducted the necessary investigation and settled the case in mediation  and in an arms-length transaction. In late 2008, however, the First District Court of Appeal decided Kullar v. Foot Locker  Retail, Inc., 553 which signaled greater judicial scrutiny of the value of class settlements,  especially those obtained following limited, informal discovery. In Kullar, a settlement was negotiated by experienced class action counsel (on both sides)  with the assistance of a respected mediator.  The parties had undertaken only informal  discovery and the exchange of information had been conducted as part of the mediation,  protecting the nature of the information disclosed from disclosure.  The parties ultimately  settled the action for $2 million.  Another plaintiff who had filed a separate class action  alleging similar claims objected and contended that the plaintiff’s counsel had failed to  provide any evidence that counsel had conducted enough investigation to intelligently  valuate the case for mediation.  The trial court overruled the objections and found that  sworn representations from counsel that they had exchanged necessary information in  mediation and that the matter was negotiated at arms-length were sufficient to support  approval of the settlement.  The objector appealed. 554 The court remanded the case and ordered the trial court to conduct a more searching  inquiry into the investigation of class counsel.  The court explained that this inquiry should  require the settling parties to introduce evidence reflecting the potential recovery if the  plaintiffs prevailed and some explanation why the presumably lesser settlement amount  represented a fair recovery for the class: While an agreement reached under these circumstances presumably will be fair  to all concerned, particularly when few of the affected class members express  objections, in the final analysis it is the court that bears the responsibility to  ensure that the recovery represents a reasonable compromise, given the  magnitude and apparent merit of the claims being released, discounted by the  risks and expenses of attempting to establish and collect on those claims by  pursuing the litigation. 555                                                       552 Id. at 1149.  553 168 Cal. App. 4th 116. 554 Id. at 121-27. 555 Id. at 129.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 125 Furthermore, the court ordered that the objector was entitled to some limited discovery to  evaluate the case and to support an objection that the settlement amount was too low to be  approved.  Although the trial court is not to decide the merits of the case or easily overturn  a negotiated settlement, the trial court “must at least satisfy itself that the class settlement  is within the ‘ballpark’ of reasonableness.” 556 For practical purposes, the main effect of this ruling has simply been to require the  plaintiffs’ lawyer, in the motion for approval of a settlement, to spell out some theoretical  maximum exposure and explain in general terms why a discounted amount was proper. But the ruling also creates the potential that a court could reject a settlement solely because it  was reduced too much from a theoretical “maximum” exposure value. The Kullar decision overlooks that forecasting a maximum exposure is problematic,  especially where there is a lack of documentary evidence to prove the extent of possible  damages.  For example, in an exempt misclassification case, there may be no agreed way  to assess what percentage of the class was misclassified or the average amount of  overtime worked.  In the absence of a comprehensive survey of the class (which can cost  tens or hundreds of thousands of dollars to accomplish and even then may be of  questionable validity), plaintiffs’ counsel will be working with cherry-picked data to estimate  the average overtime worked by the class.  Similarly, in a case where the employer argues  great variation among the class, there may be a dispute as to what percentage of the class  is properly classified.  Accordingly, a theoretical maximum exposure number built on 100%  misclassification of the class and 10-15 hours of overtime may bear no relation whatsoever  to the fair “settlement value” of a case. As long as this exercise of analyzing the proper value of a settlement is truly limited to  some kind of “rational basis” review, judicial scrutiny of the settlement value should not  have any great impact on class settlement.  If the trend toward greater judicial scrutiny of  settlements continues unreasonably, however, it could discourage class settlements  because employers will lack confidence that the settlements they negotiate will ultimately  be approved. D. Class Notice Courts have also exercised greater scrutiny of the notice that is sent to the class.  The law  requires that the class receive notice using the best “practicable” method. 557   Courts have  been increasingly concerned that recipients of the class notice understand the nature of the                                                        556 Id. at 133. 557 Hypertouch, Inc. v. Superior Court, 128 Cal. App. 4th 1527, 1539 (2005) (notice “must be the best practicable,  reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and  afford them an opportunity to present their objections”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 126 claim, can calculate the value of their share of the settlement, and can readily access court  documents to investigate the nature of the case. The judges in the Alameda Complex Division have requiried that the parties make  exhaustive efforts to notify class members of the claims and have sufficient information to  exercise their options under the settlement.  For example, in addition to requiring that the  administrator send a reminder postcard to class members who have not made claims, the  judges in Alameda have ordered that the administrator make at least three telephone calls  to class members. E. Objection to Settlements When a class settlement is slated for final approval, often the last hurdle the settling parties  must surmount any objection to the settlement.  Any member of the settlement class who  does not opt out of the settlement may assert an objection to the settlement. 558   Courts tend  to be extremely reluctant to sustain objections where the sole basis is that the objector  believes the settlement is not generous enough.  After all, if an individual believes his wage  and hour claim is worth more than the class is receiving, then he can opt out of the  settlement and assert his own claim (and typically can recover attorney’s fees if he  prevails). In 7-Eleven Owners for Fair Franchising v. Southland Corp., 559 the court explained that in  evaluating an objection that a settlement was too low given the merits of the case, a court  must not substitute its own opinion on the merits for those of the settling parties: “the merits of the underlying class claims are not a basis for upsetting the  settlement of a class action; the operative word is ‘settlement.’  Instead the  inquiry is on whether the parties conducted sufficient discovery to evaluate the  claims themselves—something even the plaintiffs in the 7-Eleven case agreed the defendants had done.  In such circumstances, the court should not  disapprove a settlement based on a hypothetical or speculative measure of what  might have been achieved by the negotiators.’” 560                                                          558 Wershba v. Apple Computer, Inc., 91 Cal. App. 4th 224, 235 (2001). 559 85 Cal. App. 4th 1135 (2000). 560 Id. at 1149-50; but see Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116, 129 (2008) (parties are not excused  from explaining what the claims potentially were worth and why less money was accepted: “While an agreement  reached under these circumstances presumably will be fair to all concerned, particularly when few of the affected class  members express objections, in the final analysis it is the court that bears the responsibility to ensure that the recovery  represents a reasonable compromise, given the magnitude and apparent merit of the claims being released, discounted  by the risks and expenses of attempting to establish and collect on those claims by pursuing the litigation.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 127 Furthermore, where relatively few class members object, that factor weighs against  sustaining the objection. 561 Objectors have better success in their objections when they identify procedural defects in  the settlement process.  For example, objections have been sustained when the class  notice was excessively vague and confusing, or when class counsel failed to undertake  sufficient discovery to properly evaluate the case. 562   In short, the odds of a successful  objection are low if the parties conduct an adequate investigation, make the notice  documents clear, set forth some rational basis for the settlement amount, and take  adequate steps that class members are informed in their choices. F. Individual Settlements with Putative Class Members Class actions differ from individual actions in that most of the parties on whose behalf the  action allegedly is advanced have no involvement in the case (and may be totally unaware  of the case) until a court orders certification and notice.  This aspect of class litigation has  raised the question of whether employers and their counsel should be entitled to  communicate with putative class members before certification or whether they should be  treated in the same manner as the named plaintiff, in which case the right to communicate  with the putative class members would be severely restricted. 563 Putative class members are not treated the same as parties and there is no attorney-client  relationship between a plaintiff’s attorney and putative class members before a court  certifies a class. 564   Despite this fact, an employer does not have carte blanche to  communicate with putative class members any way it desires.  Rather, courts are  empowered to limit such communications where the employer engages in conduct that has  been coercive or misleading. One area where there is great potential for an employer to be accused of coercive conduct  is where the employer attempts to settle a case directly with individual employees who are  within a putative class in an ongoing class action.  Because current employees may fear for  their jobs or future career prospects if they do not cooperate with the employer, there is at                                                        561 Id. at 1152-53 (out of a class of 5454 people, only nine objected and only 80 opted out). 562 Cho v. Seagate Technology Holdings, Inc., 177 Cal. App. 4th 734, 747-48 (2009) (settlement disapproved without  prejudice to issuance of new class notice where original notice was confusing as to who qualified as a class member);  Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116, 132-33 (2008) (case remanded for parties to better explain  what information the parties considered in reaching settlement, and to allow objector limited discovery relevant to  valuation of case). 563 See generally Cal. Rule of Professional Conduct 2-100. 564 Atari v. Superior Court, 166 Cal. App. 3d 867 (1985); see also Ochoa-Hernandez v. Cjaders Foods, Inc., 2010 WL  1340777 (N.D. Cal. April 2, 2010) (denying plaintiff’s motion for a protective order seeking to prohibit defense attorneys  from interviewing “aggrieved employees” in connection with a PAGA claim, finding that no attorney-client relationship  existed between plaintiff’s counsel and those employees).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 128 least the potential for coercion when an employer tries to settle individually.  At the same  time, an employer may seek to resolve a case on fair terms in situations where a plaintiff’s  counsel has staked out an overly aggressive position on class settlement.  The law must  strike a balance between promoting genuine settlement efforts and employee coercion. The proper steps that an employer should take to ensure that their settlement efforts are  seen as non-coercive were discussed in In re M.L. Stern Overtime Litigation. 565   Among the  steps the court suggested an employer should undertake to ensure its settlements will be  enforceable include:  Preparing a handout that explains the case in neutral terms, and is up front about  the fact that the employee may be able to obtain more money than the settlement  offered by pursuing the class action.  Providing each employee with a copy of the operative class action complaint and  letting putative class members know that they are free to contact plaintiffs’ counsel  to discuss the case if they so desire.  Reassuring employees that they have the right to participate in the class action  rather than agree to the settlement, and that they will suffer no retaliation if they  choose to participate in the class action.  If a settlement agreement is offered to the employee, the employee should be  given a reasonable period of time (several weeks) to consider the offer and discuss  it with counsel of their choice. 566 The Labor Code also includes extra protections for employees to prevent them being  coerced into waiving their wage claims for less than the claims are truly worth.  Labor Code  Section 206.5 provides: “An employer shall not require the execution of a release of a claim  or right on account of wages due . . ., unless payment of those wages has been made.”   The Section goes on to provide that any release obtained in violation of the section “shall  be null and void as between the employer and the employee.”  Before 2009, there was  some ambiguity whether this language precluded enforcement of any settlement of a claim  for unpaid wages where the employee could prove that the amount received in settlement  was less than the total amount the employee was owed. In 2009, however, two decisions clarified that the protection in Labor Code Section 206.5  applies only to releases obtained where there was no genuine dispute over the wages                                                        565 250 F.R.D. 492 (S.D. Cal. 2008). 566 Id. at 498-500.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 129 owed. 567   In other words, where an employer concedes (or lacks a genuine dispute) that it  owes an employee wages, it cannot obtain a release of that claim by paying less than the  undisputed amount owed.  But, where the employer has a good faith defense to wage  claims and seeks to compromise them with a member of a putative class in an ongoing  class action, such a settlement would not be invalidated by Labor Code Section 206.5. It should be emphasized that the above decisions arose under facts where the employer  took pains to ensure it did nothing in its individual settlement efforts that could be viewed as  coercive conduct.  As the law currently stands, employers who are careful to be fair may  settle individually with class members and enforce the releases obtained as a result.   Notwithstanding that ability, employers must be very careful not to overreach and attempt  to settle these cases in a coercive manner or at an unreasonable discount, as those sorts  of facts may yield a less favorable outcome for employers in the next case. XVII. Class Action Waivers and Arbitration Employers have attempted to protect themselves from potential class actions by including  provisions in mandatory arbitration agreements that the employee must individually arbitrate any  claims and that the arbitrator cannot certify a class or otherwise allow employees covered by the  arbitration agreements to pursue their claims on anything other than an individual basis.  Federal  courts outside California have enforced such provisions. 568   Unfortunately for California employers,  the California Supreme Court issued two decisions – Discover Bank and Gentry – that severely  hampered the ability of an employer in California to enforce a class action waiver in an employment  arbitration agreement. In Discover Bank v. Superior Court, 569 the Court struck down as unenforceable a class action  waiver in a consumer contract. 570   The Discover Bank case involved a credit card holder who                                                        567 Chindarah v. Pick up Stix, Inc., 171 Cal. App. 4th 796, 803 (2009) (individual settlements enforceable when they involve  “a bona fide dispute over wages already earned,” settle “a dispute over whether [the employer]  had violated wage and  hour laws in the past”; and do not “purport to exonerate [the employer] from future violations.”); Watkins v. Wachovia  Corp., 172 Cal. App. 4th 1576, 1586-87 (2009) (same). 568 See, e.g., Livingston v. Assocs. Fin., Inc., 339 F.3d 553, 559 (7th Cir. 2003) (class action waiver enforceable in action  filed under federal Truth-in-Lending Act); Snowden v. Checkpoint Check Cashing, 290 F.3d 631, 638-39 (4th Cir. 2002)  (same); Burden v. Check Into Cash of Kentucky, LLC, 267 F.3d 483, 492 (6th Cir. 2001) (same); Randolph v. Green  Tree Fin. Corp.-Alabama, 244 F.3d 814, 819 (11th Cir. 2001) (same); Johnson v. West Suburban Bank, 225 F.3d 366,  370-78 (3d Cir. 2000) (same). 569 36 Cal. 4th 148 (2005). 570    In contrast, the Second District Court of Appeal held that the U.S. Supreme Court’s decision in AT&T Mobility Corp. v.  Concepcion,  131 S. Ct. 1740 (April 27, 2011) (discussed below),  invalidated California authority prohibiting the waiver  of class action rights in an arbitration agreement contained in a retail installment sale contract for a BMW in Sherf v.  Rusnak/Westlake,  2012 WL 4882547, at *1 (Oct. 16, 2012).  The court concluded that “Concepcion rejects the  argument that class action waivers in consumer contracts can be invalidated in order to vindicate statutory rights even if  the statutory right is desirable for other reasons.  Concepcion expressly concludes that nothing in FAA ‘suggests an  intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objective’ and arbitration Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 130 initiated a class action alleging that Discover Bank had made misleading statements that imposed  late fees on him and thousands of other credit card holders.  Meanwhile, Discover Bank had included a notice within the card holder’s monthly bill that the arbitration agreement was being  amended to preclude class actions and that the credit card holder would have to cancel the credit  card to prevent this change from going into effect.  Although the agreement provided for alternative  means of recovery, individual card holders had little incentive to sue over the imposition of a small  late fee. In a split decision, a bare majority of the California Supreme Court held that the class action waiver  within the arbitration agreement rendered the arbitration agreement unconscionable.  The primary  bases for the ruling in Discover Bank were that the arbitration agreement was part of a “bill stuffer”  that made it a true contract of adhesion and that the claims at issue in the consumer setting were  too small to be viable without resorting to the class action device. 571 The reasoning of Discover Bank would not seem to preclude class action waivers in the  employment context.  After all, California has in place procedures to incentivize individual  employees to sue to recover for Labor Code violations (including various substantial penalties and  the right to recover attorney’s fees).  Moreover, mandatory arbitration and class action waivers are  usually presented to employees in a more visible manner than a bill stuffer with a credit card bill. In Gentry v. Superior Court, 572 the California Supreme Court took review of an employment case  that seemed to provide good facts for the employer.  The employee at issue presented no evidence  that he had been coerced to agree to arbitration and, on the contrary, the employee had declined to  take advantage of a company policy that allowed him to opt out of mandatory arbitration of  employment disputes.  Despite these facts, the seven California Supreme Court justices split along  the same 4-3 lines as in Discover Bank and invalidated the class action waiver. In concluding that class action waivers in arbitration agreements are generally not enforceable, the  majority first noted that the rights to minimum wage and overtime compensation are unwaivable  statutory rights.  The majority reasoned that class action arbitration waivers may tend to create a  “de facto waiver” of employee rights, as employees are more likely to pursue such claims in a class  action rather than on an individual basis.  Given the “modest” damages at issue in many overtime  cases, the expense of litigation, and potential for retaliation by the employer, the majority concluded  that class action waivers in employment arbitration agreements should not be enforced if a trial  court determines that class arbitration would be more effective than individual arbitration in  vindicating employee rights.                                                                                                                                                                                      agreements must be enforced ‘notwithstanding any state substantive or procedural policies to the contrary.’” Id. at *5  (citing Concepcion, 131 S. Ct. 1740, 1748-49 (2011)).     571 Id. at 161. 572 42 Cal. 4th 443 (2007). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 131 As such, the court set forth several factors a trial court must consider when evaluating whether a  class action waiver to pursue overtime wages contained in an arbitration agreement is valid:  whether individual recovery amounts sufficiently incentivized litigation; 573  the risk of retaliation to employees;  employees’ lack of knowledge about their legal rights; and  “other real world obstacles to the vindication of class members’ right to overtime pay  through individual arbitration.” 574 Another interesting wrinkle in the Gentry case is that the employer did not present the arbitration  agreement on a take-it-or-leave-it basis, but rather gave employees an opportunity to opt out of the  arbitration system if they did so within the first thirty days of employment.  Even if class action  waivers were substantively unconscionable, an arbitration agreement of the sort used in Gentry  should arguably be enforceable on the ground that it is not procedurally unconscionable.  A contract  typically must be infected both by procedural and substantive unconscionability to be unenforceable  as unconscionable. 575 Yet the Gentry Court held that in determining whether an arbitration  agreement was unenforceable based on unconscionability, procedural unconscionability could be  found in employment arbitration agreements even when employees are given an opportunity to opt  out of arbitration. 576 The Gentry decision seemingly eliminated an employer’s ability to place effective class action  waivers in employment arbitration agreements.  Decisions since Gentry have applied its reasoning  to invalidate class action waivers for other types of wage and hour claims, such as meal and rest  break claims. 577 For example, in Samaniego v. Empire Today, LLC, 578 the First District Court of Appeal affirmed a trial court’s refusal to compel contractual arbitration of claims by carpet installers who alleged that  Empire violated multiple provisions of the Labor Code.  The Court ruled that the arbitration provision                                                        573 The Court cited Bell III, 115 Cal. App. 4th 715 (2004), indicating that even an award as large as $37,000 would not be  “ample incentive,” and concluding even more broadly “class actions may be needed to assure the effective enforcement  of statutory policies even though some claims are large enough to provide an incentive for individual action.”  574 Gentry, 42 Cal. 4th at 463.   575 See Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1071 (2003) (unconscionability has both procedural and substantive  element); see also Hicks v. Macy’s Dep’t Stores, Inc., No. C 06-02345 CRB, 2006 U.S. Dist. LEXIS 68268, at *9-12  (N.D. Cal. Sept. 11, 2006) (arbitration agreement containing class action waiver not procedurally unconscionable  because employee had an opportunity to opt out of arbitration system). 576 Gentry, 42 Cal. 4th at 470.  577 Franco v. Athens Disposal Co., 171 Cal. App. 4th 1277 (2009). 578    205 Cal.App.4th 1138 (2012) .Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 132 was unconscionable under California Law.  First, the court found the agreement procedurally  unconscionable because it consisted of 11 densely worded, single-spaced pages with no individual  headings. 579   Furthermore, plaintiffs had to sign the agreement after they were hired but before  starting work, but they were not able to read English and were not provided with a requested  Spanish translation, and neither was provided with a copy of the agreement or the arbitration  rules. 580   Second, the court found that the agreement was substantively unconscionable because  (1) it shortened the limitations period for the statutory wage and hour claims asserted from three or four years to six months, (2) it obligated employees to pay attorneys’ fees incurred by Empire under  certain circumstances, but did not impose a reciprocal obligation on Empire, and (3) the agreement  exempted claims typically brought by employers from the arbitration requirement, such as those  seeking declaratory and preliminary injunctive relief to protect Empire’s proprietary information and  noncompetition/nonsolicitation provisions. 581    Next, the Court of Appeal held that California law applied, even though the parties’ contract called for Illinois law and an Illinois venue.  The Court noted that “the same factors that render the  arbitration provision unconscionable warrant the application of California law” because “the  Agreement was obtained by ‘improper means’ and to the extent Illinois law might require  enforcement of its arbitration clause, enforcing Empire’s choice-of-law provision would result in  substantial injustice.” 582   The court also held that the trial court did not err in declining to sever the  objectionable portions of the agreement and enforcing the remainder. 583   Lastly, the court held that  the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, discussed below, does not  prevent courts from rejecting arbitration agreements that the court finds unconscionable. 584        The Impact of the Federal Arbitration Act on Class Action Arbitration Waivers While California courts have essentially negated any employer efforts to restrict class actions, the  United States Supreme Court has developed other ideas.  In a 2010 decision, Stolt-Nielsen S.A. v.  AnimalFeeds International Corp., 585 the Court held that imposing class arbitration on parties that did  not specifically agree to it would be inconsistent with the Federal Arbitration Act (“FAA”). 586    Employers have attempted to utilize this decision in the trial courts to compel class representative  plaintiffs who had entered into arbitration agreements with class action waivers to arbitrate their                                                        579 Id. at 1146. 580 Id. 581 Id. at 1147. 582 Id. at 1148-49. 583 Id. at 1149. 584 Id. at 1150. 585 559 U.S. 662 (2010). 586 Id. at 687.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 133 cases as individuals.  Thus far, these attempts have sometimes been successful and sometimes  unsuccessful.  Until there is guidance on this issue at an appellate court level, it remains unclear as  to what effect Stolt-Nielsen S.A. will have on California law regarding class action waivers. Another potentially even more favorable class action decision for employers came in 2011 in AT&T Mobility LLC v. Concepcion, where the Supreme Court held that the FAA preempted California’s  Discover Bank rule in a consumer class action case. 587   This holding has been extended to  employment cases in some instances. 588   If given full recognition by courts, Concepcion would  effectively overturn Gentry and permit employers to require arbitration of employment claims while  ensuring that class arbitration does not proceed. 589   Many employers are now exploring the  implementation of arbitration agreements with an eye towards limiting or eliminating class actions of  various sorts.   For example, in Quevedo v. Macy’s Inc., 590 the court compelled arbitration of plaintiff’s individual  PAGA claims because the arbitration agreement properly encompassed those “employment-related  legal disputes.” The arbitration agreement permissibly precluded the plaintiff from “representing,  and seeking relief, on behalf of a group.”  The fact that the plaintiff’s PAGA claim was not arbitrable  on behalf of a group did not mean it could proceed in court because there was “no authority  suggesting that [plaintiff could] pursue PAGA claims on behalf of others without also pursuing them  himself.”  Relying on Concepcion, the court held that California case law requiring arbitration  agreements to allow for representative PAGA claims on behalf of other employees would be  inconsistent with the FAA. 591                                                       587 AT&T Mobility LLC v. Concepcion,  __U.S.  _, 131 S. Ct. 1740 (2011); but see Sanchez v. Valencia Holding Company,  LLC., 201 Cal. App. 4th 74, 89 (2011), review granted, (holding that “Concepcion is inapplicable where . .  [the court is]  not addressing the enforceability of a class action waiver or a judicially imposed procedure that is inconsistent with the  arbitration provision and the purposes of the Federal Arbitration Act,” and therefore courts may still invalidate arbitration agreements by applying “unconscionability principles [that] govern all contracts, are not unique to arbitration  agreements, and do not disfavor arbitration”).   588    In Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013), the California Supreme Court  applied Concepcion and  held that the FAA preempts any state laws preventing arbitration of employment disputes.  However, the SonicCalabasas A court also held that an arbitration agreement can still be held to be unconscionable if the agreement  conflicts with state unconscionability rules that do not involve the “fundamental attributes of arbitration.” 589    But see Balasanyan v. Nordstrom, No. 11-CV-2609 (S.D. Cal. Mar. 8, 2012), the district court denied defendant's  motion to compel arbitration because the arbitration agreement originally was mailed to employees about two months  after the complaint was filed.  Employees subsequently were provided with "the most current version" of the arbitration  agreement at work and were asked to sign a form acknowledging receipt of the information.  The court held that "the  purported imposition of the agreement constituted an improper class communication." 590 Quevedo v. Macy’s Inc., 798 F. Supp. 2d 1122, 1141-42 (C.D. Cal. 2011). 591    The decision in Quevedo was mirrored in Gerardo Miguel v. JPMorgan Chase Bank, N.A., 2013 WL 452418 (C.D. Cal.  Feb. 5, 2013).  The court in Gerardo held that the FAA applied to PAGA claims and that as a result an employee who  was subject to an arbitration agreement banning representative actions could bring PAGA claims in arbitration only on  an individual basis.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 134 While the full impact of Concepcion is yet to be determined, the California Court of Appeal for the  Second District has held that PAGA claims are not preempted by the FAA.  In Brown v. Ralphs  Grocery Co., the court reasoned that PAGA claims are inherently different from private causes of  action because, in a PAGA claim, “the aggrieved employee acts as the proxy or agent of the state  labor law enforcement agencies, representing the same legal right and interest as those agencies,  in a proceeding that is designed to protect the public, not benefit private parties.” 592   The court  concluded that, because the purpose of the FAA was to govern arbitration of private disputes, as  opposed to enforcing “public rights,” the FAA does not preempt state law exemptions PAGA claims  from arbitration. 593 The National Labor Relations Board has also entered the fray, joining the assault on class-action  waivers, in Cuda v. D.R. Horton, Inc., where the Board ruled that Concepcion did not apply in cases  that involved waiver of rights protected by the NLRA. 594   The Board held that employers cannot  force employees to sign arbitration agreements that include class action waivers.  Such an  agreement unlawfully restricts employees’ Section 7 right to engage in concerted action for mutual  aid or protection, notwithstanding the FAA.  The Board stressed that arbitration agreements are not  per se unenforceable.  However, whether the class/collective action mechanism is used in  arbitration or in a court of law, the Board held that class resolution must be available to employees.   The Board distinguished Concepcion on the ground that it involved a conflict between the FAA and  state law, whereas D.R. Horton involved a conflict between two federal statutes. Before the ink was dry on the D.R. Horton decision, however, it faced a hostile reaction by the  judiciary.  The California Court of Appeal expressly rejected D.R. Horton in Leos v. Darden  Restaurants, Inc., stating that “D.R. Horton does not invalidate class or collective action waivers in  an arbitration agreement.” 595   Further, in Gerardo Miguel v. JP Morgan Chase Bank, N.A., a federal District Court rejected D.R. Horton and held that the NLRB is owed no deference in its interpretation  of the FAA. 596   The Ninth Circuit has also disapproved of D.R. Horton, but has yet to explicitly reject  it.  In Richards v. Ernst & Young, LLP, the Ninth Circuit noted that D.R. Horton had been roundly  rejected by virtually every federal court that had an opportunity to weigh in on it.  The Ninth Circuit also noted that the FAA can be overridden only by an act of Congress. 597                                                          592 197 Cal. App. 4th 489, 500 (2011); see also Reyes v. Macy’s, Inc., 202 Cal. App. 4th 1119, 1123 (2011) (holding that  PAGA claims were not individual claims but rather were brought by plaintiff “as the proxy or agent of the state’s labor  law enforcement agencies”).   593 Id.  (“AT&T does not provide that a public right, such as that created under PAGA, can be waived if such a waiver is  contrary to state law”). 594 Cuda v. D.R. Horton, Inc., 12-CA-25764 (N.L.R.B. Jan. 3, 2012). 595    217 Cal. App. 4th 473, 496 (2013). 596    2013 WL 452418 at *2 (C.D. Cal. Feb. 5, 2013). 597    2013 WL 6405045 at *2, n.3 (9th Cir. Dec. 9, 2013).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 135 In 2012, two California appellate courts reached opposite conclusions as to whether Gentry survived Concepcion.  The California Supreme Court has decided to review both decisions. 598      In Iskanian v. CLS Transportation Los Angeles, LLC, Division Two of the Second District Court of  Appeal affirmed a trial court’s decision to compel arbitration and dismiss class claims. 599   The  plaintiff had brought a putative class action and representative PAGA action alleging wage and hour  violations, but had signed an arbitration agreement that expressly waived his right to bring a class  action or representative action. 600   The Court of Appeal held that Gentry did not apply after  Concepcion, because “Concepcion thoroughly rejected the concept that class arbitration  procedures should be imposed on a party who never agreed to them.” 601   The court also expressly  held that Brown v. Ralphs Grocery Co., incorrectly concluded that PAGA waivers were not  preempted by the FAA. 602    In contrast, in Franco v. Arakelian Enterprises, Inc., Division One of the Second District Court of  Appeals reached the opposite conclusion. 603   The plaintiff there also brought a putative class action  and representative PAGA action alleging wage and hour violations and had also signed an  arbitration agreement that waived his rights to proceed as a class action or representative action. 604    The Court of Appeal reasoned that Gentry “is not a categorical rule against class action waivers”  which Concepcion found impermissible under the FAA. 605   Rather, Gentry requires courts to apply a  multifactor test for arbitration agreements, which must be considered on a case-by-case basis to  determine if they are preempted by the FAA and Concepcion. 606   Furthermore, the court concluded                                                        598 Iskanian v. CLS Transportation Los Angeles, LLC, 206 Cal. App. 4th 949, 959 (2012) (“[W]e find that the Concepcion decision conclusively invalidates the Gentry test.”), rev. granted, 286 P.3d 147 (Sep. 9, 2012); cf. Franco v. Arakelian  Enterprises, Inc., 211 Cal. App. 4th 314, 368 (2012) (“Accordingly, Gentry is not preempted by the FAA because it is not  a categorical rule that invalidates class action waivers---the type of rule that Concepcion condemned.”), rev. granted,  294 P.3d 74 (Feb. 13, 2013).     599 Iskanian, 206 Cal. App. 4th at 961.   600 Id. at 954.   601 Id. at 959.   602 Id. at 966 (“Following Concepcion, the public policy reasons underpinning the PAGA do not allow a court to disregard a  binding arbitration agreement.  The FAA preempts any attempt by a court or state legislature to insulate a particular  type of claim from arbitration.”).  Similarly, in Nelsen v. Legacy Partners Residential, Inc., 207 Cal. App. 4th 1115, 1131- 32 (2012), Division One of the First District Court of Appeal called into doubt Gentry’s enforceability after Concepcion.   The court declined to reach the issue, however, because the plaintiff failed to set forth evidence requiring a court to  conduct the multifactor test under Gentry in the first instance.   603 Franco v. Arakelian Enterprises, Inc., 211 Cal. App. 4th 314, 368 (2012).  604 Id. at 327.   605 Id. at 367-68.   606 Id.  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 136 that where Gentry’s multifactor test is satisfied as to a plaintiff’s substantive claims, the PAGA  claims are similarly not subject to arbitration. 607 The California Supreme Court has granted review of these two decisions and will have to decide  Gentry’s continued viability in light of Concepcion.              XVIII. Individual Liability  Some plaintiffs seeking allegedly unpaid wages have employed the tactic of suing corporate  officials personally.  In 2005, in Reynolds v. Bement, 608 the California Supreme Court held that  individuals cannot be held liable for overtime pay under Labor Code Sections 510 or 1194.  The  court left open the possibility, however, that individual supervisors could be held liable for civil  penalties. Seyfarth Shaw advocated in Reynolds that California law does not impose individual liability on  managers for wage and hour violations.  Rather, the law imposes the primary civil obligation to  comply with the wage and hour laws—including the obligation to provide back pay or damages— upon “employers” (a term that is not defined), while expending the scope of criminal liability or civil  punishment to broader categories, such as “other persons” or “officers or agents” of an employer.   Where the Legislature wanted to create individual liability, it referred to “any person” being liable, as  opposed to cases where it held that an “employer” is liable. 609 The plaintiffs attempted to justify suing individual officers for damages by invoking the expansive  definition of “employer” contained in the IWC Wage Orders.  The defendants responded that to the  extent anything in the Wage Orders could be read as creating individual liability for failure to pay  overtime, such pronouncements are void in that they would exceed the scope of the Labor Code,  which authorizes the IWC to adopt only regulations “consistent with” the Labor Code. 610 In 2005, the California Supreme Court largely adopted the defendants’ position, holding that under  general common law principles of managerial immunity, managers are not liable for the corporate                                                        607 Id. at 375 (“[W]hen substantive Labor Code claims must be adjudicated in court under Gentry, the PAGA remedies ‘tag  along’ under the same unwaivable statutory rights analysis that applies to the substantive claims.”).   608 36 Cal. 4th 1075 (2005). 609 Compare Lab. Code § 553 (criminal liability for overtime violations available against “[a]ny person”) with Lab. Code  § 510 (discussing only “employer’s” liability); see also Lab. Code § 1197.1 (imposing a civil fine on “[a]ny employer or  other person acting either individually or as an officer, agent, or employee of another person” who fails to pay the  minimum wage); Lab. Code § 210 (imposing a fine on “every person” who fails to make payments on paydays as  required by §§ 204, 204b, and 205); Lab. Code § 215 (imposing criminal liability against “[a]ny person, or the agent,  manager, superintendent or officer thereof” who violates statutory requirement to post a notice identifying when and  where pay is made); Lab. Code § 1175 (imposing criminal liability on “[a]ny person, or officer or agent thereof” who fails  to make certain kinds of work records and to make those records available to state inspectors). 610 Lab. Code § 517(a).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 137 employees’ failure to pay wages.  The Court found nothing in the plain meaning of the relevant  Labor Code sections or in public policy to read individual overtime liability into the overtime  statute. 611   The Court left the door open, however, to the recovery by an employee of statutory  penalties from individual supervisors, such as the recovery of Section 558 penalties through a  PAGA claim. 612   Moreover, the Court reaffirmed that a manager might be held liable under an alter  ego theory if the employee proves the elements for this common law liability theory. 613 In 2010, the Supreme Court backtracked on its decision in Reynolds when it issued its ruling in  Martinez v. Combs. 614   There, the Court held that “[i]n actions under section 1194 to recover unpaid  minimum wages, the IWC’s wage orders do generally define the employment relationship, and thus  who may be liable.” 615   The Court noted that the Wage Orders set forth a multi-pronged, disjunctive  definition of employment: an employer is one who, directly or indirectly, or through an agent or any  other person, engages, suffers, or permits any person to work, or exercises control over the wages,  hours, or working conditions of any person. 616 The “engage, suffer, or permit” component of the  definition does not require a common law “master and servant” relationship, but is broad enough to  cover “irregular working arrangements the proprietor of a business might otherwise disavow with  impunity.” 617 Further, “phrased as it is in the alternative (i.e., wages, hours, or working conditions),  the language of the IWC's 'employer' definition has the obvious utility of reaching situations in which  multiple entities control different aspects of the employment relationship, as when one entity, which  hires and pays workers, places them with other entities that supervise the work.” 618    The Court noted that the plaintiffs in Reynolds had conceded that “the plain language of Wage  Order No. 9 defining employer does not expressly impose liability under section 1194 on individual  corporate agents.” 619   “In a footnote, we added that the ‘plaintiff . . . ha[d] not persuaded us that one  may infer from the history and purposes of section 1194 a clear legislative intent to depart, in the  application of that statute, from the common law understanding of who qualifies as an employer.’” 620    The Martinez plaintiffs, however, gave the Court extremely detailed, exhaustive briefing on the  history of California’s minimum wage law, the IWC, and the Wage Orders. This effort apparently  convinced the Court that “an examination of section 1194 in its full historical and statutory context                                                        611 Reynolds, 36 Cal. 4th at 1087. 612 Id. at 1089. 613 Id. 614 Martinez v. Combs, 49 Cal. 4th 35 (2010). 615 Id. at 52 (emphasis added). 616 Id. at 57. 617 Id. at 58. 618 Id. at 59. 619 Id. at 63. 620 Id. at 64.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 138 shows unmistakably that the Legislature intended to defer to the IWC’s definition of the employment  relationship in actions under the statute.” 621 As a result, the Court limited the application of  Reynolds:  In sum, we hold that the applicable wage order‘s definitions of the employment  relationship do apply in actions under section 1194. The opinion in Reynolds, supra, 36  Cal.4th 1075, properly holds that the IWC‘s definition of employer does not impose  liability on individual corporate agents acting within the scope of their agency. (Reynolds,  at p. 1086.) The opinion should not be read more broadly than that. 622                                                       621 Id.   622 Id. at 66.  The Court of Appeal in Futrell v. Payday California, Inc. held that, because Wage Order 12 and Wage Order  14 use identical language to define the terms “employ,” “employee” and “employer,”  the Supreme Court’s holding in  Reynolds that applied Wage Order 14’s definition of “employment” also applies to Wage Order 12.  190 Cal. App 4th  1419, 1429 (2011).“Seyfarth Shaw” refers to Seyfarth Shaw LLP. Our London office operates as Seyfarth Shaw (UK) LLP, an affiliate of Seyfarth Shaw LLP.  Seyfarth Shaw (UK) LLP is a limited liability partnership established under the laws of the State of Delaware, USA and is authorised  and regulated by the Solicitors Regulation Authority with registered number 55692. Our Australian practice operates as Seyfarth Shaw  Australia, an Australian multidisciplinary partnership affiliated with Seyfarth Shaw LLP, a limited liability partnership established in  Illinois, USA. Legal services provided by Seyfarth Shaw Australia are provided only by the Australian legal practitioner partners and  employees of Seyfarth Shaw Australia. ©2014 Seyfarth Shaw LLP. All rights reserved. Prior results do not guarantee a similar outcome. #14-1796 www.seyfarth.com Atlanta Boston Chicago Houston London Los Angeles Melbourne New York Sacramento San Francisco Shanghai Sydney Washington, D.C. 2 N D   E D I T I O N Litigating California Wage & Hour and Labor Code Class Actions 14TH EDITIONSeyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 1 Editor’s Note The current edition of this volume is the result of thousands of hours of work, stretching back to before the turn  of the last century, by scores of Seyfarth Shaw attorneys.  While it is impossible to list them all here, their efforts  are sincerely appreciated. The 14th Edition contains significant contributions from Co-Editors Jonathan L. Brophy, Nicholas Rosenthal, Andrew Crane, Rachel Gradstein, Maya Harel, Leo Li, and David Rosenberg.  David Kadue deserves special  thanks for performing the unenviable task of editing the Editors.  And thanks to Andrew Paley for his leadership  and guidance. Christopher A. Crosman, Editor in Chief   Important Disclaimer This book is general commentary, not legal advice. We disclaim liability as to anything done or omitted in  reliance on this publication. Readers should refrain from acting on any discussion in this publication without  obtaining specific advice applying current law to particular circumstances. Thus, while we aim to provide  authoritative information, this book is not legal advice. (From a Declaration of Principles adopted by a  Committee of the American Bar Association and a Committee of Publishers and Associations.) Legal Notice Copyrighted © 2014. All rights reserved. Apart from fair use for private study or research permitted under  copyright law, no part of this publication may be reproduced or transmitted without the prior written permission  of Seyfarth Shaw LLP.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 2 Table of Contents I. Introduction and Overview......................................................................................5 II. Common Exempt Misclassification Claims ...........................................................5 A. Overview of State Overtime Law............................................................................................... 6 B. The Executive (Managerial) Exemption .................................................................................... 7 C. The Administrative Exemption ................................................................................................ 11 D. The Outside Sales Exemption................................................................................................. 16 III. Unlawful Deductions from Wages ........................................................................19 A. Generally ................................................................................................................................. 19 B. Unlawful Bonus Plans ............................................................................................................. 20 C. Unlawful Commission Chargebacks ....................................................................................... 22 IV. Reimbursement of Employee Expenses ..............................................................27 A. The Duty to Reimburse Expenses Under Labor Code Section 2802 ..................................... 27 B. Reimbursement for Uniforms Under the Wage Orders........................................................... 30 V. Meal and Rest Period Claims ................................................................................31 A. Nature of Claims...................................................................................................................... 31 B. Debate over Whether One-Hour Payment Is a “Penalty”........................................................ 33 C. Meaning of “Provide” a Meal Period........................................................................................ 35 D. Limits on IWC’s Power to Alter Labor Code Meal Period Rules ............................................. 40 VI. Tip-pooling..............................................................................................................42 A. Actions Alleging Tips Were Diverted to Co-Workers Who Did Not Earn Them...................... 42 B. Actions Alleging “Agents” of Management Wrongfully Took Tips ........................................... 44 C. The Future of Tip-pooling Cases Under California Law.......................................................... 45 VII. Vacation/Paid Time Off Forfeiture ........................................................................46 VIII. Waiting Time Penalties ..........................................................................................48 A. Generally ................................................................................................................................. 48 B. Application to Fixed-Term and Temporary Employment......................................................... 50 IX. Itemized Wage Statement Claims .........................................................................52Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 3 X. California Minimum Wage Claims.........................................................................55 A. Wage Averaging Improper Under California Law ................................................................... 55 B. The Conflict Between Piece Rate Formulas and the Requirement to Pay Minimum Wage ... 57 C. Neutral Time-Rounding Practices Are Lawful ......................................................................... 58 XI. California Labor Code Private Attorneys General Act ........................................60 A. General Scope of the Law....................................................................................................... 60 B. Scope of the “Civil Penalty” Provisions ................................................................................... 63 C. Pursuing PAGA Claims Collectively Without Class Certification ............................................ 64 D. Release of PAGA Claims Through Class Settlement ............................................................. 65 E. Wage Order Claims................................................................................................................. 66 XII. Unfair Competition Claims, Business & Professions Code Section 17200.......68 A. Former Law—Pre-Proposition 64............................................................................................ 68 B. Reform of the Law—Passage of Proposition 64 ..................................................................... 70 C. Proposition 64’s Restrictions on UCL Class Actions............................................................... 71 XIII. Class Action Fairness Act of 2005........................................................................72 A. The Purpose of the Act............................................................................................................ 72 B. General Requirements ............................................................................................................ 72 C. Removal Under CAFA............................................................................................................. 73 D. Exceptions to CAFA Jurisdiction ............................................................................................. 77 E. Waiver ..................................................................................................................................... 78 F. After Removal and Effect of Denial of Class Certification....................................................... 79 G. Settlement Process ................................................................................................................. 80 XIV. Class Certification..................................................................................................82 A. General Requirements ............................................................................................................ 82 B. Class Certification in Exempt Misclassification Cases ............................................................ 83 C. Subclasses .............................................................................................................................. 87 D. Opt-In Classes......................................................................................................................... 88 E. Wal-Mart Stores, Inc. v. Dukes - The Supreme Court Shifts The Landscape Of Class  Certification ............................................................................................................................. 90 F. In Comcast v. Behrend, The Supreme Court Emphasizes That It Meant What It Said In Dukes ................................................................................................................................. 94 G. The Caifornia Supreme Court Enforces Due Process In Duran v. U.S. Bank ........................ 97 H. Easing of Class Certification Standards Post-Brinker........................................................... 100Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 4 I. Relitigation of Class Certification Denials ............................................................................. 102 J. Defense Motions to Deny Class Certification (“Vinole Motions”) .......................................... 105 XV. Discovery Issues in Class Actions .....................................................................107 A. Disclosure of Class Member Names and Addresses to Allow Access to Potential Witnesses107 B. Discovery to Facilitate Location of Substitute Class Representatives .................................. 110 C. Discovery Issues Regarding Putative Class Declarations .................................................... 115 XVI. Class Action Settlement ......................................................................................119 A. Generally ............................................................................................................................... 119 B. Restrictions on Reversions of Settlement Funds .................................................................. 120 C. Court Scrutiny of the Adequacy of the Settlement Amount................................................... 123 D. Class Notice .......................................................................................................................... 125 E. Objection to Settlements ....................................................................................................... 126 F. Individual Settlements with Putative Class Members ........................................................... 127 XVII. Class Action Waivers and Arbitration ................................................................129 XVIII. Individual Liability.................................................................................................136Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 5 I. Introduction and Overview Since the turn of the century, there has been a huge increase in the number of class action lawsuits  filed in state courts alleging violations of California’s overtime laws or other Labor Code statutes  and wage and hour regulations.  Currently, several such class actions are filed every day in  California. The reasons for this trend are essentially fourfold.  First, California’s wage and hour law differs from  federal law in subtle yet important ways.  This means that an employer might be compliant with  federal law, but not California law.  Second, California procedural rules make it easier to file a class  action or collective action.  In contrast, the federal Fair Labor Standards Act requires an “opt-in”  procedure that tends to restrict the size of classes as compared to the “opt-out” class action  procedure used in California.  Third, California’s unfair competition law allows claimants to borrow  violations of other laws and extend the statute of limitations to four years, which tends to make  class actions more lucrative.  Fourth, many California Labor Code provisions allow for the recovery  of attorney’s fees to a prevailing plaintiff, creating additional incentives to pursue litigation. California Labor Code class actions come in various shapes and sizes.  Essentially, however, any  Labor Code violation that can be tied to a corporate policy could support a class action.  For that  reason, plaintiffs in California continue to come up with new theories as to how wage and hour  violations may support class litigation.  This publication reviews the most commonly filed wage and  hour and Labor Code class claims and the development of the law over the last several years.  It  does not, however, attempt to provide a comprehensive overview of California wage and hour law. Sections II through X of this paper address some of the most common types of class claims in  California, such as claims for exempt classification, meal period violations, and denial of expense  reimbursement.  Sections XI and XII then address some peculiar provisions in California law that  tend to expand potential damages recoverable in California class actions such as the Labor Code  Private Attorneys General Act, and the Unfair Competition Law (“UCL”).  Lastly, Sections XIII through XVIII address various aspects of class action procedure in California—the rules governing  class certification, class discovery, class settlement, class arbitration, and individual liability. II. Common Exempt Misclassification  Claims The first wave of class claims filed against large California employers challenged the exempt  status of groups of employees holding the same job.  In short, the plaintiffs’ counsel argued that the  employer had engaged in a common practice of misclassifying a group of employees as exempt  from overtime, thus entitling all employees in the group to back overtime pay, interest, and Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 6 associated statutory penalties. 1   The following discussion addresses some of the issues that have  arisen concerning the misclassification of employees under the various available exemptions. A. Overview of State Overtime Law Before January 1, 2000, the California Industrial Welfare Commission (“IWC”) was the body  authorized by statute to set overtime requirements.  It acted in a quasi-legislative capacity,  promulgating a series of “Wage Orders” that set rules for wages, hours, and working  conditions that differed slightly from one industry to another.  The IWC eliminated daily  overtime from the Wage Orders in 1997. 2   In response, in 1998 the Legislature passed AB  60 which amended the Labor Code to provide for daily overtime and to enshrine various  employee protections into the Labor Code so that they could not be altered by the IWC. 3    The Wage Orders are still in effect, but the IWC is precluded from promulgating rules within  the Wage Orders that are inconsistent with the Labor Code itself. 4 Under Labor Code Section 510, employees are entitled to one and one-half times their  regular rate when they work more than eight hours in a single day, more than forty hours in  a workweek, or during the first eight hours of the seventh straight day of a single  workweek. 5   Employees are entitled to double time when they work more than twelve hours  in a single day or beyond the eighth hour of the seventh straight day of a single workweek.   These rules apply to non-exempt employees in California in every industry. 6   These rules                                                        1 Punitive damages are not recoverable when liability is premised solely on Labor Code wage and hour violations.   Brewer v. Premier Golf Properties, 168 Cal. App. 4th 1243, 1252 (2008). 2 Collins v. Overnite Transp. Co., 105 Cal. App. 4th 171, 176 (2003).  3 See, e.g., Lab. Code § 510 (daily overtime requirement) and Lab. Code § 226.7 (meal and rest period requirements).   Note that Labor Code section 510 does not apply to employees covered by a valid collective bargaining agreement if  “the agreement expressly provides for the wages, hours of work, and working conditions of the employees” and  “provides premium wage rates for all overtime hours worked and a regular hourly rate of pay for those employees of not  less than 30 percent more than the state minimum wage.”  Lab. Code § 514; see also Vranish v. Exxon Mobil Corp.,  166 Cal. Rptr. 3d 845 (2014) (affirming trial court ruling that employer: (1) properly paid overtime under the terms of a  collective bargaining agreement; and (2) was exempted from Labor Code section 510 pursuant to Labor Code section  514). 4 Collins, 105 Cal. App. 4th at 178-80 (Wage Orders and Labor Code should be read together to understand scope of  wage and hour regulation of California employees).  5 Note that employers may assign employees to work schedules that differ from company’s designated  workweek/workday and base overtime calculations on the designated workweek/workday as long as the schedule is not  established for the purpose of evading lawful overtime requirements.  Seymore v. Metson Marine, 194 Cal.App. 4th 361  (2011). 6 However, employees and employers may specifically agree in advance to a “specific mutual wage agreement”  that  provides a guaranteed salary covering both base hours and a specific number of overtime hours.  The required elements of such an agreement are: “(1) the days that [employee] would work each week; (2) the number of hours  [employee] would work each day; (3) that [employee] would be paid a guaranteed salary of a specific amount; (4) that  [employee] was told the basic hourly rate upon which his salary was based; (5) that [employee] was told his salary  covered both his regular and overtime hours;  and (6) the agreement must have been reached before the work was  performed.”  Archiega v. Dolores Press, Inc., 192 Cal. App. 4th 567, 571 (2011) quoting Ghory v. Al-Lanham, 209 Cal.  App. 3d 1487, 1491 (1989).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 7 also apply to non-resident employees who perform work in California for California  employers. 7 Individual employees have a private right of action for unpaid overtime.  Typically, a plaintiff  invokes a private right of action by alleging violation of Labor Code Section 510 or a  provision of the governing IWC order.  Such a claim does not depend on the Fair Labor  Standards Act (“FLSA”) or other federal law.  A prevailing plaintiff may recover attorney’s  fees for an overtime claim, 8 but California law, unlike the FLSA, does not provide a remedy  of double damages for willful overtime violations. 9   In a private action for unpaid overtime  compensation under the Labor Code, the statute of limitations reaches back to three years  before the date the lawsuit is filed in court. 10 B. The Executive (Managerial) Exemption One issue frequently raised in misclassification class actions is that a proposed class of  exempt managers—most often “working managers” in a retail establishment—do not  qualify for the “executive” (aka “managerial”) exemption.  The FLSA and California law  contain similar executive exemptions, but California’s is more restrictive in key respects. California requires that an “executive” employee be paid a higher level of compensation  than required under the FLSA. 11   The salary must be set at a level at least twice the  minimum wage, which, as of July 1, 2014, is $9.00 per hour in the State of California. 12                                                          7 The California Supreme Court in Sullivan v. Oracle, 51 Cal. 4th 1191 (2011), held that California overtime laws apply to  out-of-state employees who perform work within the state.  Further, the Court held that overtime work performed by outof-state employees within California can serve as the basis for a claim under California’s unfair competition law.  Cal.  Bus. & Prof. Code § 17200 (“UCL”).  However, the Court also held that FLSA violations as to out-of-state employees  outside California cannot serve as the basis for a California UCL claim.  Although the Sullivan court explicitly limited its  decision to “the circumstances of this case,” the plaintiff’s bar may argue its reasoning suggests that similar conclusions  may result for non-California-based employers.  The Sullivan court declined to opine on the different burdens that a  non-California-based employer may face in applying California overtime laws to nonresident employees working in  California, but the plaintiff’s bar will undoubtedly seek to obtain judicial rulings that the California Supreme Court’s  conflict of laws analysis suggests no reason for why a different conclusion would result for non-California-based  employers.  8 The California Court of Appeal has held that only the prevailing employee, and not the prevailing employer, may recover  attorney’s fees in an action for overtime pay or for unpaid minimum wages.  Early v. Superior Court, 79 Cal. App. 4th  1420 (2000). 9 But see Lab. Code § 1194.2 (providing double damages for minimum wage violations). 10 As explained infra, this statute of limitations can be extended to four years through the pleading of a companion claim  under the state Unfair Competition Law, Bus. & Prof. Code § 17200, et seq. 11 The revised FLSA regulations that went into effect on August 23, 2004, increased the minimum salary from $250 per  week to $455 per week.  Even under this revised minimum, California’s minimum remains higher than the FLSA’s  minimum.  12 The minimum wage in California was $8.00 per hour prior to July 1, 2014, and will increase to $10,00 per hour on  January 1, 2016.  The federal minimum wage is currently $7.25;  employees working within California are generally  subject to the higher state minimum wage.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 8 Accordingly, to qualify for the exemption, a manager must now be paid $37,480 per year.   A manager who does not meet the threshold compensation test is automatically disqualified  from the exemption. The other requirements are that the manager (1) must have the power to hire and fire, or  make recommendations on those topics that are given particular weight; (2) must supervise  at least two full-time equivalent positions; (3) must “primarily” be engaged in managerial  duties; and (4) must “customarily and regularly” exercise discretion and independent  judgment. 13 Most litigation in California arises out of element (3) above, because the California  Supreme Court in Ramirez v. Yosemite Water Co. 14 held that an employee meets element  (3) only when the employee spends more than half of the work time on exempt duties.  By  contrast, under the FLSA’s executive exemption, the employer need only establish that  management is the employee’s “primary duty,” which focuses on the relative importance of  the duty rather than just the amount of time devoted to the duty. 15 Aside from its emphasis on the percentage of work time devoted to exempt duties, there  has been little California case law explaining precisely which duties qualify as exempt  “managerial work.”  Since July of 2000, however, the Wage Order has expressly  incorporated by reference the then-existing FLSA regulations defining “managerial”  duties. 16   Accordingly, federal authority construing those specific regulations is highly  relevant in interpreting the California executive exemption. 17 Some examples of exempt work set forth in the federal regulation are interviewing,  selecting and training employees, setting and adjusting pay rates and work hours, directing                                                        13 See IWC Wage Order 1-2001(1)(A)(1); Nordquist v. McGraw-Hill Broad. Co., 32 Cal. App. 4th 555, 573 (1995)  (“‘Discretion and independent judgment’ within the meaning of IWC Order No. 11-80 involves the comparison of  possible courses of conduct, and acting after considering various possibilities.  It implies that the employee has the  power to make an independent choice free from immediate supervision and with respect to matters of significance . . .  [meaning matters] of substantial significance to the policies or general operations of the business of the employer.”). 14 20 Cal. 4th 785 (1999). 15 Id. at 797; see also Baldwin v. Trailer Inns, Inc., 266 F.3d 1104, 1113-16 (9th Cir. 2001) (although store managers  spent less than one-half their time on duties that met the federal executive exemption, they still qualified as exempt  because management was found to be their “primary” or most important duty). 16 See Whiteway v. FedEx Kinko’s Office & Print Servs., Inc., 2007 U.S. Dist. LEXIS 61239; 12 Wage & Hour Cas. 2d  (BNA) 1503 (N.D. Cal. Aug. 21, 2007) (citing IWC Wage Order 7-2001 § (1)(A)(1)(e) and noting that it incorporates the  federal definition of management as set forth in 29 C.F.R. § 541.102). 17 See Whiteway, 2007 U.S. Dist. LEXIS 61239, at *22 (relying on federal cases construing 29 C.F.R. § 541.202 to  interpret California executive exemption); see also Bldg. Material & Constr. Teamsters Union v. Farrell, 41 Cal. 3d 651,  658 (1986) (“[f]ederal decisions have frequently guided our interpretation of state labor provisions the language of which  parallels that of federal statutes”); Alcala v. Western Agric. Enters., 182 Cal. App. 3d 546, 550 (1986) (“It has been held  that when California’s laws are patterned on federal statutes, federal cases construing those federal statutes may be  looked to for persuasive guidance”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 9 work, keeping production records for subordinates, evaluating employees’ efficiency and  productivity, handling employee complaints, disciplining employees, planning work,  determining techniques to be used, distributing work, deciding on types of materials,  supplies, machinery and tools to be used or merchandise to be bought, stocked, and sold,  controlling the flow and distribution of merchandise and supplies, and providing for  employee safety. 18 Seyfarth Shaw has successfully defended many cases where liability turned on whether a  particular job duty qualifies as exempt or non-exempt.  From our experience in such cases,  it is important to carefully analyze cases that have addressed similar duties under the FLSA  regulations that are expressly incorporated into the Wage Orders.  For example, we  defended a case for a large HMO that turned on whether working pharmacy managers  were misclassified as exempt executives.  One of the main duties of the managers was to  check the work of other pharmacy employees for medication errors in filling prescriptions— a duty also performed by licensed pharmacists who were not managers.  We obtained  summary judgment by relying on numerous cases holding that (1) a manager checking  another employee’s work for compliance with a standard qualifies as exempt “supervision” 19 and (2) it does not alter the analysis that non-managers also perform the same task. 20 Another federal regulation expressly incorporated into the IWC Wage Orders is (former) 29  CFR Section 541.108, which includes in the definition of exempt work all work that is  “directly and closely related to exempt work.”  The FLSA regulation explains that this  concept allows seemingly non-exempt duties to be treated as exempt duties: [It] brings within the category of exempt work not only the actual  management of the department and the supervision of the  employees therein, but also activities which are closely associated  with the performance of the duties involved in such managerial and  supervisory functions or responsibilities.  The supervision of  employees and the management of a department include a great  many directly and closely related tasks which are different from the                                                        18 29 C.F.R. § 541.102.  Although the FLSA regulations were updated in 2004, the definition of exempt “executive” work  has remained substantially the same for decades. 19 See Sturm v. Toc Retail, Inc., 864 F. Supp. 1346, 1351 (M.D. Ga. 1994) (convenience store manager checking for  employees compliance with “Majik Market dos and don’ts”  was exempt supervision even though often performed by  senior clerks as well as the manager); see also Baldwin, 266 F.3d at 1117 (trailer park managers’ duty of ensuring that  park employees followed company policy was supervisory and, therefore, exempt work); Beauchamp v. Flex-N-Gate LLC, 357 F. Supp. 2d 1010, 1015-17 (E.D. Mich. 2005) (supervisory duty for a plant manager to “ensure that employees  in their charge actually meet [company] standards in their daily work”). 20 Sturm, 864 F. Supp. 1346; see also Baldwin, 266 F.3d at 1115 (“[Having non-exempt employees perform] managerial  tasks does not render the tasks non-exempt.”); Sepulveda v. Wal-Mart Stores, Inc., 237 F.R.D. 229, 239 (C.D. Cal.  2006) (“[T]he (assistant managers) seem to consider any task performed by an hourly employee to be a non-exempt  task.  That is not the law.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 10 work performed by subordinates and are commonly performed by  supervisors because they are helpful in supervising the employees  or contribute to the smooth functioning of the department for which  they are responsible.  Frequently such exempt work is of a kind  which in establishments that are organized differently or which are  larger and have greater specialization of function, may be performed  by a non-exempt employee hired especially for that purpose. 21 In other words, non-discretionary work can be “directly and closely related” to exempt  work—and hence itself considered exempt work—even if it is not strictly speaking essential  to the exempt work, 22 and even if it is work that need not be performed by managers. 23   As  long as the work is related to a management function, it is considered to be exempt.  These  amendments raise substantial arguments that activities, which when viewed in the abstract  seem non-exempt, may be considered exempt if they are undertaken with the purpose of  effectuating exempt functions of a manager’s job.   Another important issue in these cases that Ramirez does not resolve is how one applies  the purely quantitative approach to time spent simultaneously performing exempt and nonexempt tasks: Is this time exempt, non-exempt, or some combination of the two?  Under  federal law, a manager might concurrently be engaged in hands-on, non-exempt type work  and be monitoring the operation of a business for managerial purposes (e.g., pouring  coffee at a restaurant while directing work). 24 Employers received a different answer under California law when, in 2005, the First District  Court of Appeal in Murphy v. Kenneth Cole Productions, Inc. 25 rejected an employer’s  argument that time spent simultaneously managing and engaged in non-exempt work  counts entirely as “exempt time.”  The California Supreme Court, by granting review of the                                                        21 Former 29 C.F.R. § 541.108(a). 22 Harrison v. Preston Trucking Co., 201 F. Supp. 654, 658-59 (D. Md. 1962) (“[T]he test is not whether the work is  essential to the proper performance of the more important work, but whether it is related. Thus, notemaking, by a  consultant when standing alone or separated from his primary duties, would be routine and, hence, not directly and  closely related within the meaning of the regulations, but at the same time such work is necessary to the proper  performance of his primary duties and thus is considered to be ‘directly and closely related’ when performed by the  consultant.”). 23 Adams v. United States, 36 Fed. Cl. 91, 98 (1996) (“A supervisor does not become non-exempt merely by doing tasks  which are incidental to his main work, even if non-supervisory workers might perform them as well. The question is  whether a supervisor engages in those tasks because he is a supervisor.”). 24 See Donovan v. Burger King Corp., 672 F.2d 221, 225-26 (1st Cir. 1982).  The 2004 FLSA regulations added a new  regulation entitled “concurrent duties,” 29 C.F.R. § 541.106, explaining that a manager is engaged in exempt  managerial work when he is engaged simultaneously in exempt and non-exempt work.  This new regulation has not  been incorporated into the IWC regulations, however. 25 134 Cal. App. 4th 728 (2005), revd. on other grounds in Murphy v. Kenneth Cole Products, Inc., 40 Cal. 4th 1094  (2007). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 11 meal period issues within Murphy but not the concurrent duties issue, effectively rendered  the Murphy discussion of concurrent duties unciteable.  Nonetheless, the appellate court’s  analysis is instructive as to how other courts might address the issue of concurrently  exempt and non-exempt duties going forward. The Murphy appellate court held that a manager could not satisfy the executive exemption  where he spent 90 percent of the time working in non-exempt tasks even though he was  continually keeping an eye on other employees and otherwise “managing” throughout the  day while his hands engaged in the same kind of work his non-exempt subordinates  performed.  The court reasoned that a manager is non-exempt when he is “a nominal  coxswain who performed most of the time as an oarsman alongside the rest of the crew.” 26    The court did not state, however, that time spent simultaneously directing other employees  and engaged in non-exempt tasks counts purely as non-exempt time.  Rather, the court  suggested that the time spent in such a dual capacity may need somehow to be allocated  between exempt and non-exempt time. 27   As such, time engaged simultaneously in exempt  and non-exempt work might generate at least partial credit towards the 50 percent exempt  threshold to qualify for the exemption.  Further development in the case law is required to  clarify this concept. C. The Administrative Exemption 1. General Overview Like the FLSA, California wage and hour law recognizes an administrative overtime  exemption. 28   To qualify for the exemption in the most common circumstances, 29 the  employer must establish four elements: 1) More than one-half the employee’s work time involves the performance of  office or non-manual work directly related to the employer’s management  policies or general business operations; 2) The employee customarily and regularly exercises discretion and independent  judgment in carrying out job duties as to matters of significance to the  business. 30                                                       26 Id. at 744. 27 Id. at 744 n.8. 28 See, e.g., Wage Order 7-2001 § 1(A)(2). 29 There are alternative bases to qualify for the administrative exemption such as through regularly and directly assisting a  proprietor or performing administrative function in a school system, but those alternative bases rarely come up in class  litigation. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 12 3) The employee performs his or her job only under general supervision and  works along specialized or technical lines in work requiring special training,  experience, or knowledge; and 4) The employee is paid a salary equivalent to at least twice the state minimum  wage. 31 As with the executive exemption, the IWC Wage Order provision on the  administrative exemption has since 2001 incorporated several FLSA regulations by  reference.  As a result, decisions interpreting the federal administrative exemption  often provide persuasive guidance to California courts interpreting the California  administrative exemption. 32   Nonetheless, as explained below, California’s  interpretation of the administrative exemption in some ways departs from the way the  administrative exemption has been interpreted in most other jurisdictions. 2. California Develops a Unique Interpretation of the  Administrative/Production Dichotomy An issue of substantial dispute under the administrative exemption is whether the  employees at issue are working in an “administrative” capacity or in a “production”  capacity.  Generally speaking, only employees in the former group are eligible for the  exemption.  This distinction between production and administrative workers is  sometimes referred to as the “administrative/production dichotomy.”   One of the few class actions that actually went to trial in California, Bell v. Farmers  Insurance Exchange, 33 was a case challenging whether certain insurance adjusters  of the defendant qualified for the administrative exemption.  The plaintiffs prevailed  on the basis that the insurance adjusters at issue were found, on a classwide basis,  not to qualify for the administrative exemption.  Following the plaintiffs’ success in  Bell, numerous other cases have been filed to challenge the exempt status of  insurance adjusters.                                                                                                                                                                                      30 Some courts mistakenly hold that employees must exercise discretion and independent judgment more than fifty  percent of the time.  In fact, the term “customarily and regularly” is defined in the FLSA regulations that are incorporated  in the Wage Orders and “more than occasionally but less than constantly.”  It is generally established by showing that a  duty is carried out on a recurrent, non-sporadic basis.  See Baca v. United States, 1 Wage & Hour Cas. 2d (BNA) 1066  (U.S. Fed. Cl. 1993) (doing exempt duties only one-third of the total work time, but on a regular recurring basis, qualified  as performing the task “customarily and regularly”). 31 Wage Order 7-2001 § 1(A)(2)(f). 32 Combs v. Skyriver Communications, LLC, 159 Cal. App. 4th 1242, 1254-55 (2007) (recognizing that the incorporation of  FLSA regulations was intended to make the California exemption “closely parallel the federal regulatory definition of the  same exemption”). 33 87 Cal. App. 4th 805 (2001).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 13 In Bell, the California Court of Appeal addressed the requirement that an  administratively exempt employee work in an administrative job rather than a  production role—a concept referred to as the “administrative/production dichotomy.” 34    In doing so, the court examined FLSA regulations and case law that draw a  distinction between “administrative work” which can qualify as exempt work under the  exemption and “production work” which cannot qualify. 35 Because Farmers Insurance Exchange was the claims subsidiary of Farmers Group,  performing adjusting services for a variety of underwriting entities within the group,  and because Farmers Group provided administrative support to Farmers Insurance  Exchange, the court held that the work of adjusters was inherently production of  Farmers’ product (insurance adjusting), which rendered them ineligible for the  exemption regardless of their duties. 36   In a more recent published decision from the  same Bell case, the court declined to reconsider its earlier holding on this point. 37    Both these decisions left open the possibility that an insurance adjuster that did not  work for a special claims adjusting subsidiary insurance company might still qualify  for the exemption. Bell was decided under the pre-2000 version of the Wage Orders, which did not  expressly incorporate the FLSA’s regulations on its administrative exemption.  Given  that the current version of the IWC regulations expressly incorporates the federal  administrative exemption regulations, and given that numerous federal decisions  have refused to apply Bell’s reasoning to FLSA insurance adjuster cases, 38 employers have at least a colorable argument that Bell is not good law for cases  arising since 2001.  Moreover, the 2004 amendments to the FLSA regulations, which  purport merely to clarify and to update what the FLSA has always required, state that  insurance adjusters can be covered by the administrative exemption “whether they                                                        34 Id. at 811-12. 35 See, e.g., Dalheim v. KDFW-TV, 918 F.2d 1220, 1230 (5th Cir. 1990) (“The distinction § 541.205(a) draws is between  those employees whose primary duty is administering the business affairs of the enterprise from those whose primary  duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce and  market.”). 36 Bell, 87 Cal. App. 4th at 823-28.  Although the court specifically held that it did not need to look at the duties test, it  noted that the undisputed evidence showed that the adjusters at issue simply acted as claims processors with little  authority or discretion. 37 Bell v. Farmers Ins. Exch. (Bell III), 115 Cal. App. 4th 715 (2004). 38 See, e.g., Miller v. Farmers Ins. Exch., 481 F.3d 1119 (9th Cir. 2007) (criticizing Bell’s interpretation of the  administrative/professional dichotomy and finding insurance adjusters categorically to qualify as exempt employees); In  re Farmers Ins. Exch., 336 F. Supp. 2d 1077, 1087-88, 1091 (D. Or. 2004) (rejecting notion that Farmers’ adjusters  were non-exempt “production” workers regardless of whether they met the other requirements of the administrative  exemption; refusing to apply Bell to a case under the FLSA).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 14 work for an insurance company or another type of company.” 39   Several federal  decisions have concluded that under the FLSA, insurance adjusters are not entitled  to overtime. 40 Employers hoped that subsequent developments in case law would limit Bell to its  facts.  Their hopes were bolstered with the Ninth Circuit’s 2007 issuance of Miller v.  Farmers Insurance Exchange. 41   In this opinion, the Ninth Circuit held that insurance  adjusters, as a rule, qualify for the administrative exemption, and it criticized the Bell decisions’ overbroad construction of the meaning of “production work.” 42 More recently, the Fourth District Court of Appeal provided some additional  ammunition to employers trying to demonstrate that workers fit within the  administrative exemption.  In Combs v. Skyriver Communications, Inc., 43 the  appellate court affirmed the trial court’s decision not to apply the  administrative/production dichotomy at all in connection with evaluating the exempt  status of an information technology (“IT”) professional. The Combs opinion distinguished Bell on multiple grounds.  First, the court noted that  Bell was legally distinguishable because it was decided before Wage Order Number  4 was revised to expressly incorporate the applicable federal regulations. 44   The court  also found Bell to be factually distinguishable because the insurance adjusters at  issue in Bell were found to have job responsibilities that were restricted to “handling  of the routine and unimportant.” 45   In contrast, the plaintiff in Combs was found to  have more specialized job duties that “cannot be readily categorized in terms of the  administrative/production worker dichotomy.” 46                                                       39 29 C.F.R. § 541.203(a).  The current regulations still require an adjuster to meet the duties test to qualify as exempt,  which requires the adjuster to perform such activities as “interviewing insureds, witnesses and physicians; inspecting  property damage; reviewing factual information to prepare damages estimates; evaluating and making  recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements;  and making recommendations regarding litigation.”  See also former 29 C.F.R. § 541.205(c)(5) (identifying insurance  adjusters within the universe of employees often covered by the administrative exemption). 40 See, e.g., Munizza v. State Farm Mut. Auto. Ins. Co., 103 F.3d 139 (9th Cir. 1996) (memorandum); Blinston v. Hartford  Accident & Indemn. Co., 20 Wage & Hour Cas. (BNA) 6 (W.D. Mo. 1970). 41 481 F.3d 1119 (9th Cir. 2007). 42 481 F.3d at 1124, 1132. 43 159 Cal. App. 4th 1242, 1260-62 (2008), review denied (May 14, 2008).  44 Id. at 1259-60. 45 Id. at 1259. 46 Id. at 1261.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 15 Some thought that Combs signaled a backlash against the Bell decision, which many  believe went too far in emphasizing the administrative/production dichotomy over  other aspects of the test for the administrative exemption.  Although Combs has  some pro-exemption language in its discussions distinguishing Bell, its application  may be somewhat limited because the plaintiff held a fairly high-level, atypical IT  position.  This makes it more difficult to apply Combs to other situations involving  lower level IT jobs or other sorts of mid-level administrative positions. 47 3. The Administrative/Production Dichotomy Test Survives—Harris v.  Superior Court On December 29, 2011, the California Supreme Court issued its decision in Harris v.  Superior Court, 48 holding that the Court of Appeal mistakenly concluded that claims  adjusters, as a matter of law, do not qualify for the administrative exemption.  The  Supreme Court did not provide definitive guidance on this topic in its opinion.  Rather,  the Court simply held that the Court of Appeal had improperly applied the  “administrative/production worker dichotomy” as a dispositive test.  Liberty Mutual claims adjusters had filed a class action alleging that Liberty Mutual  misclassified them as exempt administrative employees.  The trial court denied  plaintiffs’ motion for summary adjudication on Liberty Mutual’s administrative  exemption affirmative defense, but the Court of Appeal reversed the trial court and  held that as a matter of law, the administrative exemption did not apply to the claims  adjusters.  The Court of Appeal strictly applied the “administrative/production worker  dichotomy” test set forth in the Bell v. Farmers Insurance Exchange cases and held  that adjusting claims was part of the “product” that their employer sold and therefore  not an administrative duty.  While the administrative exemption analysis depends on multiple factors, the Harris decision focused on only one—whether the employees’ work qualified as  administrative.  The California Supreme Court broke this analysis down into two  components, one “qualitative” (i.e., whether the work is administrative in nature) and  the other “quantitative” (i.e. whether it is of “substantial importance” to the employer’s  management policies or general business operations).                                                          47 In Heffelfinger v. Electronic Data Systems, 580 F. Supp. 2d 933, 961-62 (C.D. Cal. 2008), affirmed in part, reversed in  part, 492 Fed. Appx. 710 (9th Cir. 2012) , a federal district court surveyed various cases that analyzed whether IT  workers were exempt, and found there to be a “clear demarcation point,”  with employees who “were tasked to install,  maintain, and troubleshoot software” falling on the non-exempt side, and those “charged with writing code,  programming, or ‘administering’ databases or networks” falling on the exempt side. 48 53 Cal. 4th 170 (2011).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 16 In reversing the Court of Appeal, the California Supreme Court distinguished Bell.   First, the Court noted that the Bell opinions limited their holding to the specific facts of  that case (including defendants’ stipulation that the work performed by all plaintiffs was ‘routine and unimportant’).  Second, the Court noted that the analysis in Bell relied on the applicable Wage Order at that time (Wage Order 4-1998).  That order  did not provide a sufficient definition of the administrative exemption, thereby  requiring the Bell court to look beyond the Wage Order’s language.  In contrast,  Wage Order 4-2001 (the current Wage Order, applied in Harris) incorporates specific  federal regulations and contains “detailed guidance” concerning the administrative  exemption. The Court of Appeal in Harris erred by focusing too heavily on the  administrative/production dichotomy rather than applying the language of the relevant  wage order and regulations.  The Supreme Court ultimately declined to adopt a rule precluding the use of the  dichotomy as an analytical tool.  Instead, the Court held that, in determining whether  work is administrative, courts must consider the particular facts and apply the  language of the statutes and wage orders at issue. 49   If the statutes and wage orders  fail to provide adequate guidance, the Court held, then it would be appropriate to  consider other sources, including, presumably, the administrative/production  dichotomy. The only concrete guidance from the California Supreme Court in Harris is that the  administrative/production dichotomy is not a dispositive test for the administrative  exemption.  The Court left open the possibility that the dichotomy may still apply in  future cases.  Employers who were looking for more specific guidance from the Court  on the administrative exemption were disappointed, as, even after Harris,  determining whether an employee satisfies the administrative exemption remains a  highly fact-specific venture. D. The Outside Sales Exemption The outside sales exemption is the broadest of all in that it exempts the employees from all provisions in the Wage Orders, even minimum wage protections. 50   To qualify as an outside  salesperson, an employee must “customarily and regularly work more than half the working  time away from the employer’s place of business selling tangible or intangible items or                                                        49 The Court specifically noted that to properly interpret California’s administrative exemption, courts should only consider  the FLSA regulations effective as of 2001.  See also Heffelfinger v. Electronic Data Systems Corp., 2012 WL 2045960  (9th Cir. June 7, 2012) (applying Harris rule in determining administrative exemption for computer professionals).   50 IWC Wage Order 1-2001(1)(c) (“the provisions of this wage order shall not apply to outside salespersons”).  By  contrast, the white collar exemptions exempt employees only from Section 3 through 12 of the Wage Orders and other  exemptions exempt employees only from Section 3 (governing hours of work).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 17 obtaining orders or contracts for products, services or use of facilities.” 51   This definition is  slightly different from the definition of an outside salesperson under the FLSA, which  provides that an employee is an outside salesperson if (1) the employee’s primary duty is making sales (as defined in the FLSA), or obtaining orders or contracts for services or for  the use of facilities for which a consideration will be paid by the client or customer; and (2)  the employee is customarily and regularly engaged away from the employer’s place or  places of business. 52 In 1999, in Ramirez, 53 the California Supreme Court held that the difference in the wording  of the federal and state outside sales exemptions was intentional and that California  therefore has an exemption narrower than the FLSA’s.  In particular, the inclusion of the  phrase “more than half the employee’s working time” in the California definition of an  outside salesperson indicated that employees could not qualify for the California exemption  if they consistently spent more than one-half their time on work other than “outside sales”  work. 54   The Supreme Court also noted that there was no reference in the California  definition to work “incidental to or in conjunction” with an employee’s sales work, which the  court interpreted as excluding any such “incidental” work from the 50 percent standard. 55    Nonetheless, the Supreme Court held that if the employer could show that it reasonably expected that its employees would spend the majority of their time engaged in outside  sales, but the employee violated those expectations by not doing so, then the employer  could still take advantage of the exemption. 56 The facts of the Ramirez case were relatively straightforward and thus did not provide the  Supreme Court with the opportunity to address more nuanced situations.  The job at issue  in Ramirez had employees spending virtually all their work time away from the employer’s  place of business and doing essentially the same small set of tasks every day—i.e., driving  to the homes of customers to deliver bottled water and attempting, where possible, to sell  them additional water products.  The job duties were easily divided into “sales” and  “delivery,” and the court merely held that more time had to be devoted to sales than to  delivery for the delivery salespersons to qualify as outside salespersons. 57                                                       51 IWC Wage Order 1-2001(2)(j) (defining “outside salesperson”). 52     29 C.F.R. § 541.500. 53 20 Cal. 4th 785 (1999).  This decision was discussed, supra, in the context of the executive exemption. 54 Id. at 797-98. 55 Id. at 797. 56 Id. at 802. 57 Id. at 801.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 18 Ramirez left open the following questions:  What does it mean to “customarily and regularly” spend more than one-half of the  work time on outside sales?  “Customarily and regularly” is defined in the FLSA  regulations as “more than occasionally but less than constantly.” 58   If an employee  has a habit of often spending two or three days working away from the employer’s  place of business, but spends the overall majority of all work time at the employer’s  place of business, would that qualify as “customarily and regularly” spending more  than one-half the work time outside?  How does one attribute time spent before a sale preparing to make a sales call or  time spent after a sale completing the paper work?  The Ramirez decision  mentions that the employer argued it would be absurd to exclude those tasks from  the “outside sales” calculation, but the California Supreme Court did not explain  how those duties should be analyzed under the exemption.  What constitutes “away from the employer’s place of business”?  Clearly delivering  water to a customer’s home qualifies, but what if the employee is in a job where he  is making customer contact by telephone?  Is any time selling outside the  employee’s designated “office” considered time “away from the employer’s place of  business”?  How does an employer enforce reasonable expectations that its employees spend  the majority of their time outside selling?  Where the employer encourages selling,  but allows the employees to make sales any way they want without tracking their  movements, what is the employer’s reasonable expectation as to “outside sales”  activity? Because all these questions remain open, there is still a great deal of litigation over the  outside sales exemption. Separate from the substantive issue of whether a particular employee meets the outside  sales exemption, there has been significant litigation over whether outside sales exempt  status can be decided collectively on a class basis.  Courts have been more willing to deny  class certification in these cases where the only question is whether employees who  undisputedly focus on sales spend enough of their time “outside” to meet the exemption.                                                         58 See Baca v. United States, 1 Wage & Hour Cas. 2d (BNA) 1066 (U.S. Fed. Cl. 1993) (doing exempt duties only onethird of the total work time, but on a regular recurring basis, qualified as performing the task “customarily and regularly”);  Shriner v. Smurfit-Stone Container, 2006 Mont. Dist. LEXIS 606 (D. Mont. Aug. 30, 2006) (employee who spent less  than half of his total work time supervising employees still “customarily and regularly” supervised employees because  “his role as a relief supervisor was expected, relied upon and regularly performed” and was his role “on more than  isolated or occasional incidents”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 19 Most notably, in a case in which Seyfarth Shaw represented the prevailing defendant, the  Ninth Circuit, in Vinole v. Countrywide Home Loans, Inc., 59 affirmed a district court order  that the outside sales exempt status of branch loan originators could not be litigated on a  collective basis.  There was no evidence that Countrywide required its employees to spend  a certain amount of time inside, and there was great variation in the testimony as to how  different loan originators actually spent their time.  The Ninth Circuit explained how this  made class certification inappropriate: “Plaintiffs seek to minimize the district court’s main concern--that although there are  common issues, including uniform classification, the inquiry into each HLC’s exempt status  would burden the court.” 60   “The principal factor in determining whether common issues of  fact predominate is whether the uniform classification, right or wrong, eases the burden of  the individual inquiry. But this is a legitimate concern. Plaintiffs’ claims will require inquiries  into how much time each individual HLC spent in or out of the office and how the HLC  performed his or her job; all of this where the HLC was granted almost unfettered autonomy  to do his or her job. This must be considered along with the lack of issues subject to  common proof that would actually ameliorate the need to hold several hundred mini-trials  with respect to each HLC’s actual work performance.” 61 III. Unlawful Deductions from Wages A. Generally A second allegation commonly made in Labor Code class actions is that the employer  unlawfully deducted from the employee’s wages.  Plaintiffs have used these allegations to  challenge policies designed to hold employees liable for cash shortages or theft, to pay  bonuses based on net profits, and to advance commissions subject to recoupment or  “chargeback.” Under California law, an employer cannot deduct from an employee’s wages to account for  losses to the business that occurred as a result of simple negligence or through no fault of  the employee.  Courts have held that such losses are part of the cost of doing business  and, therefore, should be borne by the enterprise rather than the individual employees.   This principle is codified specifically in Section 8 of the Wage Orders:                                                       59 571 F.3d 935 (9th Cir. 2009). 60 Id. at 946. 61 Id. at 947 (emphasis added); see also Mevorah v. Wells Fargo Home Mortgage, Inc., 268 F.R.D. 604 (N.D. Cal. Jan.  12, 2010) (on remand after reversal of certification decision for reconsideration, district court denied certification as to  class of Wells Fargo home loan consultants); Maddock v. KB Homes, Inc., 248 F.R.D. 229 (C.D. Cal. 2007) (denying  class certification as to putative class of commissioned home salespersons).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 20 No employer shall make any deduction from the wage or require any  reimbursement from an employee for any cash shortage, breakage, or loss of  equipment, unless it can be shown that the shortage, breakage, or loss is caused  by a dishonest or willful act, or by the gross negligence of the employee. In dicta, several California cases have indicated the rule codified in Section 8 extends  beyond deductions for cash shortage, breakage, or loss of equipment.  The seminal case  on this issue, Kerr’s Catering Service v. Dep’t of Industrial Relations, 62 held only that the  IWC had the authority to promulgate Section 8.  In explaining its reasoning, however, the  California Supreme Court used sweeping language and invoked several provisions from  the California Labor Code, such as Section 221 (which precludes an employer from  demanding an employee pay back wages once the wages are earned), and Sections 400- 410 (which limit employers’ rights to seek cash bonds from employees).  The court did not hold that those Labor Code provisions barred deductions for cash shortages, but rather  held that the public policies that underlie those Labor Code Sections gave the IWC  authority to enact Section 8. Later cases read Kerr’s Catering to say that the Labor Code itself barred deductions for  “unanticipated losses” or “business losses that may result from the employee’s simple  negligence.” 63   By locating this anti-deduction rule in the Labor Code rather than the Wage  Orders, these decisions effectively nullified Section 1(A) of the Wage Orders, which  provides that the anti-deduction rules within Section 8 do not apply to exempt  administrators, professionals, or executives. 64   If the anti-deduction rule stems from the  Labor Code rather than Section 8, then it applies to exempt and non-exempt employees. B. Unlawful Bonus Plans Based on the broad anti-deduction dicta in cases that cited Kerr’s Catering, some class  actions were filed alleging that certain bonus plans violated Labor Code Section 221 and  Sections 400-410 when the size of the bonus was determined in any part by the level of net  profits of the business.  Although an appellate court adopted much of the plaintiffs’  reasoning in the 2003 opinion Ralphs Grocery Co. v. Superior Court (Ralphs I), 65 the                                                        62 57 Cal. 2d 319, 329 (1962). 63 Hudgins v. Neiman Marcus Group, Inc., 34 Cal. App. 4th 1109, 1118 (1995) (discussed infra); see also Quillian v. Lion  Oil Co., 96 Cal. App. 3d 156, 162-63 (1979) (citing Kerr’s Catering for the principle that the Labor Code itself bars  unexpected deductions for losses not the result of an employee’s willful misconduct). 64 Section 1(A) provides that “[p]rovisions of Sections 3 through 12 shall not apply to persons employed in administrative,  executive, or professional capacities.” 65 112 Cal. App. 4th 1090 (2003).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 21 California Supreme Court in Prachasaisoradej v. Ralphs Grocery Co. (Ralphs II) 66 rejected  much of that decision and instead held that net-profit based bonus systems are lawful. The plaintiffs had reasoned that net profits were reduced when merchandise in the store  was lost or broken or when cash went missing from the cash register.  Accordingly, they  argued, reducing an employee’s bonus when net profits decreased was tantamount to  holding the employee personally liable for “business losses” that were not the employee’s  fault.  Furthermore, these plaintiffs also turned to Labor Code Section 3751, which forbids  employers, “directly or indirectly,” to “exact or receive from any employee any contribution,  or make or take any deduction from the earnings of any employee” to pay for workers’  compensation expenses.  The plaintiffs argued that if these workers’ compensation  expenses were factored into the net profit calculation, then any reduction in bonus to  account for increased workers’ compensation expenses plainly violated Section 3751, just  as a bonus taking cash shortages into account violated Section 8 of the Wage Orders, as  interpreted by Kerr’s Catering.  At least one appellate decision agreed that net profits based  calculations ran afoul of Section 3751. 67 After several years in which many bonus plan class actions were filed, the California  Supreme Court effectively put an end to them in 2007 with the issuance of Ralphs II. 68 There, the Court held that traditional net-profits-based bonus systems are lawful in  California and are not the functional equivalent of a scheme to deduct from employee’s  wages on improper bases. The California Supreme court distinguished earlier cases that invalidated bonus plans that  tied a bonus or commission to an employee’s individual sales effort, but which then  reduced the bonus amount to cover employer costs.  Under those types of bonus plans,  employers used the bonus as an artifice to hide the fact that they were charging employees  on a dollar-for-dollar basis for losses to the company and merely hid the deduction in the  calculation of the so-called “bonus.” 69 By contrast, “the [Ralphs plan] did not create an expectation or entitlement in a specified  wage, then take deductions or contributions from that wage to reimburse Ralphs for its  business costs.”  Each Ralphs store employee received a guaranteed dollar wage, which  was paid regardless of a store’s profit or loss for a specified period.  Under the Ralphs  bonus plan, employees were entitled to a supplementary incentive compensation payment                                                        66 42 Cal. 4th 217 (2007). 67 Ralphs I, 112 Cal. App. 4th at 1104-5. 68 42 Cal. 4th 217 (2007). 69 See, e.g., Quillian, 96 Cal. App. 3d 156 (1970) (manager received bonus calculated as a percentage of store sales  minus the dollar value of any cash shortages during the bonus period). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 22 “only after the store had completed the relevant period of operation” and the resulting profit  or loss figure was calculated.  This final figure “was the amount offered or promised as  compensation for labor performed by eligible employees, and it thus represented their  supplemental ‘wages’ or ‘earnings.’”  Therefore, the amount “offered or promised as  compensation for labor performed” already accounted for the deductions about which the  plaintiff complained. 70 Accordingly, the Ralphs plan did not illegally shift business losses to employees.  Rather, it  provided supplemental compensation the company used to “encourage and reward certain employees’ cooperative and collective contributions to the profitable performance of their  stores” by providing them a portion of their store profits that “Ralphs would otherwise be  entitled to retain itself.” 71 Ralphs represents a victory for employers because its holding permits a business to have a  bonus plan that distributes sums based on the level of the company’s net profits.  Although  Ralphs addressed and reconciled a significant question of California wage law, it remains  to be seen how the lower courts will treat bonus plans that depart from the standard netprofit-based bonus system at issue in Ralphs. C. Unlawful Commission Chargebacks 1. Nature of the Violation Another Labor Code class action that was once common, but has become less so, is  one alleging that commission chargebacks constitute illegal deductions.  Companies  often employ commissioned salespeople who receive a commission immediately  upon the completion of a sale, subject to the occurrence of some future event.  For  example, a salesperson might sell a product on day one and immediately receive a  commission that is subject to “chargeback” if the customer fails to pay within sixty  days. Plaintiffs attack chargebacks primarily by citing Labor Code Section 221, which  makes it unlawful for an employer to “collect or receive from an employee any part of  wages theretofore paid” to the employee.  In addition, where the chargeback occurs  for reasons beyond the control of the sales employee (such as the customer’s failure  to pay for the item), plaintiffs have invoked Section 8 of the Wage Orders and the  Kerr’s Catering line of cases for the argument that a chargeback constitutes an  “unlawful deduction” from an employee’s wage not attributable to the employee’s  willful misconduct.                                                       70 42 Cal. 4th at 229. 71 Id. at 228.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 23 In particular, plaintiffs have attempted to derive a “no-chargebacks” rule from Hudgins  v. Neiman Marcus, 72 a case involving commission chargebacks for retail sales  employees on certain returns of merchandise.  Plaintiffs read the case as generally  prohibiting chargebacks where the employee was not at fault for the return.   Defendants respond that the case’s holding is more limited, addressing only the  situation where Neiman Marcus held its employees collectively responsible for the  return of any item that could not be traced back to the particular salesperson who  sold it.  The court never suggested that charging back the commission was unlawful  where the sale can, in fact, be traced back to the person who received the  commission and only that employee experiences the chargeback when the item is  returned.  In fact, the state Division of Labor Standards Enforcement (“DLSE”) has  construed Hudgins as approving a commission chargeback for such an identified return. 73   Moreover, multiple cases have since echoed that interpretation of Hudgins. 74 As discussed below, guidelines have now emerged that should allow employers to  craft compensation systems that include a chargeback element without running afoul  of California law. 2. The Steinhebel Case Approves Certain Chargeback Plans In February 2005, in Steinhebel v. Los Angeles Times Communications, LLC, 75 the  Second District Court of Appeal rejected the broad reading of Section 221 that the  plaintiffs advanced.  The court expressly held that California’s various “antideduction” provisions do not preclude an employer from advancing a commission to  an employee subject to chargeback if a condition for “earning” the chargeback is not  satisfied. More specifically, the court upheld a pay system that advanced newspaper telesales  employees a commission the day they sold a newspaper subscription, but wherein                                                        72 34 Cal. App. 4th 1109 (1995). 73 DLSE Opinion Letter 1999.01.09.  The DLSE has also opined that chargebacks of commissions are acceptable when a  customer fails to pay for an item so long as the sales contract makes clear that the commission is not earned until  payment is received.  DLSE Opinion Letter 1999.01.09 (“A commission is ‘earned’ when the employee has perfected  the right to payment; that is, when all of the legal conditions precedent have been met.  Such conditions precedent are  a matter of contract between the employer and the employee, subject to various limitations imposed by common law or  statute.”); see also DLSE Opinion Letter 2002.12.09-2 (“Commissions are earned only after the reasonable conditions  precedent of the employment agreement have been met and commissions can be calculated.”). 74 See Steinhebel v. Los Angeles Times Communications, LLC, 126 Cal. App. 4th 696, 711 (2005); Harris v. Investor’s  Bus. Daily 138 Cal. App. 4th 28, 41, modified, 138 Cal. App. 4th 871 (2006) (discussed below, each interpreting  Hudgins as allowing chargebacks for identified returns). 75 126 Cal. App. 4th 696 (2005).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 24 the subscription was not “earned” until the customer kept the subscription for twentyeight days without canceling.  If the customer canceled sooner for any reason, then  the commission was “charged back” by being deducted from the employee’s next  commission advance.  The court held that the contract was consistent with the Labor  Code and public policy because the contract plainly defined the “earning” of the  commission as the customer keeping the newspaper for twenty-eight days without  canceling, and the overall pay system inured to the benefit of the employees by  allowing them to be paid sooner than the “earning” date. 76   Indeed, given the  widespread nature of commission chargeback systems, the court was reluctant to  declare such a system illegal without some express language in the Labor Code  requiring such a result: Compensating employees in part with advances on commissions is a  longstanding practice.  No prior case has held the practice to violate the  California Labor Code, and we are pointed to no statute that expressly  bars such a practice.  In view of its widespread nature, we are loathe to  hold the Labor Code bars such a practice by implication. 77 3. Further Development of the Law Since Steinhebel Steinhebel remains good law, and an employer setting up a chargeback system may  use the Steinhebel system as a safe template.  It is important to note, however, that  Steinhebel involved ideal facts for the defendant: the chargeback agreement was in a  writing signed by the employees; the agreement referred to the initial payment as an  “advance”; the conditions to earn the commissions were spelled out in the  compensation plan; and those conditions did not seem particularly onerous.  But  what if some of the ideal elements are missing? The first word on chargebacks following Steinhebel suggested that if an employer did  not document the chargeback agreement properly, it could violate California law.  In  Harris v. Investor’s Business Daily, 78 another panel of the Second District Court of  Appeal held that the lack of a written chargeback agreement precluded summary  judgment for the employer.  As in Steinhebel, the plaintiffs sold newspaper  subscriptions, and the money they initially received was subject to chargeback if the  customer canceled the subscription without holding it a certain period of time.  Unlike  Steinhebel, however, there was no written agreement that described the initial  payment as an advance or otherwise suggested that it was not “earned” upon the                                                        76 Id. at 708-09. 77 Id. at 709. 78 138 Cal. App. 4th 28, modified, 138 Cal. App. 4th 871 (2006).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 25 completion of the sale.  Given that the plaintiffs testified that they understood they  earned the money when their sale was completed, the court held that there was a  triable issue of fact whether the chargeback system violated Labor Code Section  221. 79 Later, the First District Court of Appeal issued a far more favorable chargeback  opinion in Koehl v. Verio, Inc., 80 a case involving chargebacks against salespersons  who sold internet services.  As in Steinhebel, the chargeback plan in Koehl was in a  writing acknowledged by each employee.  Unlike Steinhebel, however, the  compensation plan did not refer to the original payment as an “advance,” although it  did state expressly that the commission was not “earned” until the customer made  three months of payments on the contract.  The Koehl court held that, as long as the  plan made clear that the commission was not earned until a later condition was  satisfied, it made no difference whether the payment was labeled a “commission” or  an “advance.” 81   The court further noted that this conclusion was entirely consistent  with Harris, which merely held that, in the absence of a writing memorializing the  parties’ agreement, a material dispute between the employer and employee as to  when the commission was “earned” made summary judgment of the Section 221  claim inappropriate. 82 Koehl actually went further than Steinhebel in two respects.  Steinhebel ended the  chargeback inquiry at whether the chargebacks at issue violated Section 221.  Koehl went further by affirming the judgment in the defendant’s favor on a separate,  alternative basis—i.e., that even if the chargeback violated Section 221, it was  nonetheless saved by an exception to Section 221 set forth in Labor Code Section  224. 83   Koehl also went beyond Steinhebel in holding that the doctrine of  unconscionability did not invalidate the chargeback system. 84 Section 224 provides, in relevant part, that Section 221 “shall in no way make it  unlawful for an employer to withhold or divert any portion of an employee’s wages  when . . . a deduction is expressly authorized in writing by the employee to cover . . .  deductions not amounting to a rebate or deduction from the standard wage.”   Although Steinhebel took note of Labor Code Section 224, it did not rely on it to                                                        79 Id. at 41. 80 142 Cal. App. 4th 1313 (2006). 81 Id. at 1334. 82 Id. 83 Id. at 1337-38. 84 Id. at 1338-40.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 26 support the holding that the chargeback there was lawful. 85   By contrast, Koehl held  that Section 224 rendered the chargeback system at issue lawful even if it otherwise  violated Section 221. 86 To support that conclusion, the court interpreted Section 224 as saving a chargeback  system where (1) the chargeback is authorized in writing; and (2) the compensation  system includes base pay (i.e., a “standard wage”) that is not subject to the  chargeback. 87   If that is indeed the proper meaning of “standard wage,” then  employers should be able to defend existing chargeback systems as long as the  employees have acknowledged the system in writing and the chargeback is taken  only from incentive pay that is paid over and above a base wage. The Koehl court also held that the chargeback at issue was not unconscionable.  The  court noted that there was no element of unfair surprise given that the chargeback  system was common in the industry and was clearly disclosed to the employees.   Furthermore, given that the employees had a continuing duty to service the  customers, there was a valid basis for the employer to hold them responsible for  customers canceling internet service in the first three months. 88 Although the California Supreme Court denied review to both the Steinhebel and  Koehl decisions, it implicitly approved of those decisions in its Ralphs II opinion.  In  discussing the limited scope of Section 221, the California Supreme Court cited  Steinhebel and Koehl with approval, effectively strengthening them as precedents. 89 In 2012, the California Court of Appeal went even further than Steinhebel with its  decision in Deleon v. Verizon Wireless, LLC. 90   In Deleon, the court ruled that a  commission advance is not a wage, because all conditions for performance have not  been satisfied; accordingly, Verizon’s chargeback provisions did not violate Section  221. 91   The Deleon court also held that an employee does not have to sign an  acknowledgement of a compensation plan in order to be bound by its terms, as in                                                        85 Steinhebel, 126 Cal. App. 4th at 707. 86 Koehl, 142 Cal. App. 4th at 1337-38. 87 Id. 88 Id. 89 Ralphs II, 42 Cal. 4th at 220. 90 207 Cal. App. 4th 800 (2012). 91 Deleon, 207 Cal. App. 4th at 809-10.  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 27 Steinhebel: rather an employee’s continued employment can constitute acceptance  of those terms. 92            IV. Reimbursement of Employee Expenses A. The Duty to Reimburse Expenses Under Labor Code Section  2802 Labor Code Section 2802 requires an employer to “indemnify” its employees for “all  necessary expenditures incurred” in the course of their employment.  This provision has  been in effect since 1937, and over the next sixty-plus years, litigation over Section 2802  focused almost exclusively on seeking “indemnification” from the employer in the narrow  insurance-context sense of the word—”to reimburse (another) for a loss suffered because  of a third party’s act or default.” 93 Plaintiffs have attempted to use Section 2802 as a vehicle to obtain reimbursement of  routine business expenses that employees incur in the course of their duties—such as  driving a car or talking on a cell phone.  Before 2005, all the published cases under Section  2802 involved circumstances where an employee sought to have the employer pay the cost  of tools or equipment lost or damaged on the job, 94 or to indemnify the employee for the  cost of legal counsel the employee incurred in defending a claim based on the employee’s  performance of job duties. 95   But in November 2007, the California Supreme Court in  Gattuso v. Harte-Hanks Shoppers, Inc. 96 assumed (without deciding) that Section 2802  does indeed require the reimbursement of necessary business expenses.                                                       92 Id. at 812 (“[A] signed acknowledgement that the employee read, understood and agreed to the compensation plan as  was the case in Steinhebel and Koehl, is not the only form of assent under contract law.”).  93 BLACK’S LAW DICTIONARY, 342 (2d pocket ed. 2001). 94 See, e.g., Machinists Auto. Trades v. Utility Trailers Sales, 141 Cal. App. 3d 80 (1983) (mechanic entitled to  indemnification for loss of his tools from employer’s premises in a burglary when employer required that employee have  tools and leave them on employer’s premises); Earll v. McCoy, 116 Cal. App. 2d 44 (1953) (employee not entitled to  reimbursement under Section 2802 for tools lost in a fire on employer’s premises when employee was not required to  leave tools at the place of employment). 95 See, e.g., Jacobus v. Krambo Corp., 78 Cal. App. 4th 1096 (2000) (expenses employee incurred in successful defense  against sex harassment allegations); Devereaux v. Latham & Watkins, 32 Cal. App. 4th 1571 (1995) (expenses incurred  by employee in connection with her depositions in two actions brought by third parties against her employer); Grissom  v. Vons Companies, Inc., 1 Cal. App. 4th 52 (1991) (expenses incurred by employee in defending third party lawsuit  arising out of auto accident that occurred during course and scope of employee’s employment; employee who retained  his own counsel after employer provided counsel is due reimbursement for attorney’s fees incurred because retention of  separate counsel was deemed necessary); Douglas v. Los Angeles Herald-Examiner, 50 Cal. App. 3d 449 (1975)  (expenses incurred by employee in defending lawsuit filed as a result of services rendered by employee in course and  scope of employment). 96 42 Cal. 4th 554 (2007) (noting the issue was not before the Court).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 28 The most common targets for Section 2802 class actions are businesses employing large  numbers of outside salespersons who are paid on straight commission.  Many such  businesses encourage their salespeople to make sales calls and to entertain clients to  generate business.  In addition, many such salespeople are constantly using cell phones  because they are on the road often and lack an office.  Many businesses believe that these  expenses are self-reimbursing in that employees incur expenses to generate more sales,  which generate more commissions, thereby covering those higher expenses. Before Gattuso, the law was unclear on how the employer could satisfy its duty to  reimburse necessary expenses.  The plaintiff in Gattuso argued that with respect to  business mileage, the employer had to allow employees to submit expense reports and  then reimburse the employees at the IRS mileage rate.  By contrast, the defendant argued  that Section 2802 allows any method to reimburse employee expenses so long as the  employer does, in fact, reimburse the employee for the full value of all expenses  necessarily incurred on the job. The California Supreme Court largely sided with the defendant.  The Court agreed that an  employer could choose among various alternative methods to reimburse employee  mileage, including (1) tracking the actual costs to the employee for necessary fuel,  insurance, depreciation, and service, and reimbursing that amount; (2) paying the  employee a lump sum payment each month so long as the lump sum actually covered all  necessary mileage expenses; (3) paying a per-mile rate, such as the IRS mileage rate; or  (4) increasing the salespersons’ commission rate with the extra commissions being  devoted to cover the employees’ expenses. 97 The California Supreme Court did set some limits, however.  For one, the Court held that, pursuant to Labor Code Section 2804, the employer and employee could not agree to  waive the right to reimbursement, so the employee was entitled to reimbursement of all  necessary expenses.  As such, if an employer offered a fixed expense allowance or an  enhanced commission rate, the employer would violate Section 2802 to the extent that  payment did not, in fact, cover all the employee’s necessary expenses. 98 The Court also established a requirement that the employer must communicate to the  employees to the extent any portion of the employees’ wages is intended to be devoted to expense reimbursement.  For example, if two percentage points of a 10 percent  commission is intended to cover expenses, the Court suggested that the employer would  have to make this fact known to employees to comply with Section 2802.  The Court also  stated that, going forward, the employer would be required to identify the portion of the                                                        97 Gattuso, 42 Cal. 4th at 568-71, 574. 98 Id. at 570-71.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 29 wage payments that was allocated to expenses on the employees’ itemized wage  statements (required under Labor Code Section 226(a)). 99 Although the Court clarified that only necessary expenses require reimbursement—as  opposed to any expense that is incurred in the course of performing work—the Court did  not provide much detailed guidance on how to distinguish a necessary expense from an  unnecessary one.  In discussing how an employer and employee would decide whether  mileage expenses were truly necessary, however, the Court suggested that it would be an  individualized inquiry that could vary markedly from one employee to another: In calculating the reimbursement amount due under Section 2802, the employer  may consider not only the actual expenses that the employee incurred, but also  whether each of those expenses was “necessary,” which in turn depends on the  reasonableness of the employee’s choices. For example, an employee’s choice of automobile will significantly affect the costs incurred.   An employee who chooses an expensive model and replaces it frequently will incur  substantially greater depreciation costs than an employee who chooses a lower priced  model and replaces it less frequently.  Similarly, some vehicles use substantially more fuel  or require more frequent or more costly maintenance and repairs than others.  The choice  of vehicle will also affect insurance costs.  Other employee choices, such as the brand and  grade of gasoline or tires and the shop performing maintenance and repairs, will also affect  the actual costs. 100 Separate from Gattuso, another decision issued in 2007 held that the employer has a duty  to reimburse for employee business expenses.  In Estrada v. FedEx Ground Package  System, Inc., 101 three drivers brought a class action against FedEx, contending that for the  limited purpose of their entitlement to reimbursement for work-related expenses, they were  employees, not independent contractors, and thus were entitled to reimbursement of  business expenses under Section 2802.  Although FedEx maintained that payments it  made as part of its operating agreement with the drivers provided reasonable  compensation for expenses, the trial court disagreed and ordered FedEx to pay $5.3 million  for under-reimbursed expenses. The Court of Appeal affirmed in part and reversed in part.  The court affirmed the trial  court’s central finding that the drivers were employees for purposes of Section 2802 and  that FedEx had failed to indemnify the drivers fully for their business expenses as required                                                        99 Id. at 574 n.6, 575-76. 100 Gattuso, 42 Cal. 4th at 568. 101 154 Cal. App. 4th 1 (2007).  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 30 by Section 2802.  The Court of Appeal held that although the drivers were entitled to  recover their out-of-pocket expenses and work accident insurance premiums, they were not  entitled to reimbursement for the cost of purchasing trucks to perform the job.  In essence,  the court held that an employer may require employees to furnish their own cars to perform  a job without indemnifying the employees for the cost of such purchases.  The court’s  reasoning also suggested that employers may be allowed to require employees to  purchase other items as a pre-condition of employment, such as cell phones or computers,  and that the requirement to furnish such items as a condition of employment does not  violate the reimbursement requirements of Section 2802. 102 B. Reimbursement for Uniforms Under the Wage Orders Separate from Section 2802, several Wage Orders state that when uniforms, tools, or  equipment are required by the employer, or necessary to perform the job duties, they must  be provided by the employer. 103   For example, employees may be required to wear a  company’s logo shirt while on duty.  The Wage Orders define “uniform” to include “apparel  or accessories of distinctive design or color.” 104   The IWC has explained, however, that the  employer’s obligation to pay for uniforms does not require the employer to pay for an  employee’s work clothes when the employee has only a broadly-defined dress code, such  as a dark suit and a tie for lawyers. 105 Due to the ambiguity in the meaning of “uniform,” class actions have been brought alleging  that employers must purchase clothing that arguably constitutes de facto “uniforms.”  In one  case, the DLSE instituted an action (and obtained a sizeable settlement) based on  allegations that a dress code consisting of a blue shirt and tan or khaki pants constituted a  uniform. 106   Also, some retailers have been sued for requiring sales associates to purchase  and wear the employer’s clothing products. 107                                                       102 DLSE Bulletin 84-7 states that “an applicant for employment may be required, as a condition of employment, to furnish  his [ ] own automobile or truck to be used in the course of employment, regardless of the amount of wages paid.”   Under Section 2802, “an employer who requires an employee to furnish his [ ] own car or truck to be used in the course  of employment would be obligated to reimburse the employee for the costs necessarily incurred by the employee in  using the car or truck in the course of employment.”   103 See, e.g., Wage Order 7-2001 § 9. 104 See, e.g., Wage Order 7-2001 § 9(A). 105 See IWC Order No. 4-98, Statement as to Basis (stating that employers may “specify basic wardrobe items which are  usual and generally usable in the occupation, such as white shirts, dark pants and black shoes and belts” and may  require the employees to bear the expense of such items”); DLSE Enforcement Policies and Interpretations Manual  (2002 Update) (“DLSE Manual”) § 45.5.2. (stating same). 106 Dep’t of Indus. Relations v. UI Video, 55 Cal. App. 4th 1084, 1088 (1997) (Blockbuster Video settled action brought by  DLSE alleging that dress code requirements for its 1,914 employees violated Section 9(A) of Wage Order 7). 107 Such a policy might also violate Labor Code Section 450, which precludes an employer from forcing an employee to  patronize the employer or to purchase a thing of value from a particular vendor.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 31 Certain Wage Orders provide that work uniforms must also be “maintained” by  employers. 108 In O’Connor v. Starbucks Corp., 109 the plaintiff brought a putative class action  on behalf of Starbucks employees to recover the cost of cleaning aprons issued by the  company.  Starbucks provided that workers were responsible for maintaining and  laundering their own aprons.  The plaintiff had taken his apron to a laundry service where,  pursuant to the recommendation of the owner, the apron had been dry cleaned in order to  avoid bleeding of the color.  The district court, relying on the IWC’s written statements  interpreting the Wage Orders, found the relevant question to be whether the aprons  required only “minimal care” or if they required “special laundering because of heavy soil or  color.”  If only minimal care of the aprons was necessary, Starbucks could legitimately have  placed this obligation on its employees.  The district court granted summary judgment in  favor of Starbucks, finding that there was no evidence that the aprons required special  laundering.  The court found that the opinion of the proprietor of the one laundry service to  which the plaintiff had taken his apron was insufficient to establish his claim. V. Meal and Rest Period Claims A. Nature of Claims Since January 1, 2001, the Labor Code has imposed on employers a duty to provide employees one additional hour of pay for each daily violation of the meal and rest period  requirements of the Wage Orders.  The enactment of this rule triggered a massive wave of  class actions against hundreds of employers in California.  Most notably, in December 2005  a jury in Alameda County awarded a class $172 million in a meal period lawsuit against  Wal-Mart. 110 Labor Code Section 512 requires employers to “provide” an employee with a thirty-minute  off-duty meal period on every day in which the employee works more than five hours. 111    The IWC Wage Order does not use the word “provide,” but states that an employer is not to  employ a person for a work period exceeding five hours without a meal period.  An  employee who works no more than six hours in one day may waive the thirty-minute unpaid  meal period, with the mutual consent of the employer. 112   An employee who works more  than ten hours in one day must be provided a second thirty-minute meal period, although  that second meal period can be waived if the employee works no more than twelve hours in                                                        108 See, e.g., IWC Wage Order 7-2001 § 9(A). 109 2008 U.S. Dist. LEXIS 53877 (N.D. Cal. Jul. 14, 2008) 110 Savaglio v. Wal-Mart Stores, No. S152827, 2007 Cal. LEXIS 7293 (Cal. Jul. 11, 2007) (Dec. 22, 2005 verdict).  The  verdict included an award of $115 million in punitive damages.   111 See, e.g., Wage Order 7-2001 § 11(A). 112 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 32 a day and has not waived the first meal period. 113   During a break that qualifies as a meal  period, the employee must be relieved of all work duties. 114    The Wage Orders also require an employer to allow employees to take paid rest breaks.   This requirement is somewhat different than the meal period requirement in that nothing in  the Wage Orders or the Labor Code restricts employees from voluntarily waiving their rights  to rest periods.  Waiver issues aside, Section 12(A) of the Wage Orders requires employers  to allow employees a paid, ten-minute rest period for every four hours worked, or major  portion thereof.   No rest break is required unless an employee works three and one-half hours in a  workday. 115   Employees are entitled to 10 minutes rest for shifts from three and one-half to  six hours in length, 20 minutes for shifts of more than six hours up to 10 hours, and 30  minutes for shifts of more than 10 hours up to 14 hours. 116   Employers normally must  provide rest breaks near the middle of each four hour work period, but need not provide a  rest period before the first meal period. 117   Rest breaks, unlike meal periods, are not subject  to any requirement that the employer keeps records. For each workday the employer fails to provide an employee with a required thirty-minute  meal period or ten-minute rest break, the employee is entitled to recover one hour of pay at  the employee’s regular rate. 118   Although the statute is unclear on how failure to provide  multiple required meal or rest periods in a single day is punished, the DLSE has taken the  position that one penalty for missed meal periods and one penalty for denied rest periods  may be imposed per workday. 119   In 2009, a federal district court in Marlo v. United Parcel  Service 120 analyzed the issue and agreed that an employee could recover both a meal  period and a rest period penalty in the same workday. 121 However, the court determined that an employee can recover penalty pay for only one meal and only one rest period  violation per day, even if the employee were to miss two meal periods or two rest  periods. 122   This decision runs counter to an earlier district court decision that had                                                        113 Lab. Code § 512(a). 114 Wage Order 7-2001 § 11(A). 115 See, e.g., Wage Order 7-2001 § 12(A). 116 Brinker Restaurant Corp. v. Superior Court, 53 Cal. 4th 1004, 1029 (2012). 117 Id. at 1031-32. 118 Lab. Code § 226.7.  See, e.g., Wage Order 7-2001 §§ 11(D) and 12(B). 119 DLSE Manual § 45.2.8 and 45.3.7. 120 2009 WL 1258491 (C.D. Cal 2009). 121 Id. at *7. 122 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 33 decided—in a less detailed analysis—that an employee could recover penalty pay for only  one violation per day, even if the employee were denied both meal and rest periods in the  same workday. 123 In 2011, the California Court of Appeal agreed with Marlo in deciding United Parcel Service,  Inc. v. Superior Court. 124   There, the court noted that the legislative history demonstrated  that Section 226.7 was specifically drafted to conform to the IWC wage orders. 125   Because  the wage orders “provide[] a separate remedy for violations of meal period requirements  and violations of rest period requirements . . . up to two premium payments are allowed per  work day.” 126   Therefore, it appears that this issue has finally been settled. Many employers fail to maintain records that comprehensively establish that employees in  fact took their meal and rest periods.  This is especially the case when an employer has  mistakenly classified a position as exempt, because employers are not required to keep  time records for employees covered by the most common exemptions (administrative,  executive, and professional).  Section 7 of the Wage Orders requires employers to record  meal periods of non-exempt employees, and the DLSE generally takes the position that in  the absence of records proving that meal periods were taken, the employees are presumed  not to have taken them (although the presumption is rebuttable).  In addition, employees  may deny they took meal breaks that they actually took if the employer has not enforced a  requirement that they document such breaks. Accordingly, when recordkeeping has been poor, these cases have been more difficult to  defend, and numerous meal period class actions have been filed.  With respect to rest  breaks, by contrast, employers need only authorize such breaks; the law is clear that employee may waive them or that employers need not record the ones they take.  For  these reasons, successful rest break class actions are less common. 127 B. Debate over Whether One-Hour Payment Is a “Penalty” Labor Code Section 226.7, which went into effect January 1, 2001, requires any employer  who fails to provide meal or rest periods, as required by the governing Wage Order, to pay  the employee one hour of pay at the employee’s regular rate.  From the enactment of                                                        123 Corder v. Houston’s Restaurants, Inc., 424 F. Supp. 2d 1205, 1207 n.2 (C.D. Cal. 2006) (“Section 226.7(b) states that  the employer is liable ‘for each work day’ that a break is not provided. Thus, the plain wording of the statute is clear that an employer is liable per work day, rather than per break not provided.”). 124 196 Cal. App. 4th 57 (2011). 125 Id. at 67-8. 126 Id. at 68. 127 Such actions also may require individualized inquiries into whether given employees understood they could take a rest  break and why they failed to do so.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 34 Section 226.7 until the California Supreme Court resolved the issue against employers on  April 16, 2007, the most hotly disputed issue within the meal and rest period cases was  whether the one hour of pay required by Section 226.7 is a penalty or a compensatory  wage. Although the question of whether the payment constitutes a penalty or a wage may seem  arcane, construing the payment as a penalty would drastically reduce the employer’s  exposure for a meal period class action—sometimes by more than 75 percent—for the  following reasons:  The statute of limitations would be reduced to one year only. 128  The penalties could not be recovered under the Unfair Competition Law, thus  precluding using the UCL to extend the statute of limitations to four years. 129  Waiting time penalty liability could not arise from meal period violations, as such  penalties only arise from failures to pay wages. 130  Arguably, no additional $100-per-pay-period penalty would be recoverable under  the Labor Code Private Attorney General Act of 2004 (“PAGA”). 131  A prevailing plaintiff would not be entitled to attorney’s fees under Labor Code  Section 218.5. 132  The employee would not be entitled to prejudgment interest under Labor Code  Section 218.6. 133 In 2007, in a decision that surprised many in the wage and hour community, the California  Supreme Court held unanimously that Section 226.7 provides for “a wage or premium pay”                                                        128 Compare Code Civ. Proc. § 340 (one-year statute for penalty claims) with Code Civ. Proc. § 338(a) (three-year statute  for an action upon a claim of liability created by a statute other than a penalty or forfeiture).  129 See Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 179 (1999) (plaintiff may not recover  penalty of “treble damages” through UCL action); Bus. & Prof. Code § 17206 (penalties recoverable only in action  brought by the actual attorney general).  130 Lab. Code § 203 (penalties recovered for failure to pay promptly all wages owed to employees who quit or are  discharged). 131 Lab. Code § 2698, et seq., discussed infra in Section X.  But see Caliber Bodyworks v. Superior Court, 134 Cal. App.  4th 365, 377 (2005) (suggesting that penalties recoverable by individuals independent of PAGA are not civil penalties,  which would allow recovery of a separate civil penalty for violations of Labor Code Section 226.7 even if the one-hourof-pay requirement is a penalty). 132 Lab. Code § 218.5 (attorney’s fees available for actions to recover wages). 133 Cf. Lab. Code § 218.6 (statutory pre-judgment interest recoverable in action for wages).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 35 rather than a penalty. 134   Although the decision definitively decided that the statute of  limitations on a Section 226.7 claim is three years, the decision left open several other  issues of meal period law:  Whether the meal must be provided within the first five hours of an employee’s shift  and after any additional stint when an employee is required to work for more than  five hours; and  Whether an employer who gives an employee an opportunity to take an off-duty  meal period is nonetheless liable for “premium pay” when the employee voluntarily  opts not to take the meal period. C. Meaning of “Provide” a Meal Period Following the Supreme Court’s ruling in Murphy v. Kenneth Cole, the most hotly debated  issue in meal period law has been whether the employer complies with its duty to “provide”  a meal period by making the meal period available for employees to take, or whether the  employer is liable whenever it fails to mandate its employees to go off duty for an  uninterrupted thirty-minute meal break. The implications are significant for class actions because it is much more difficult for  plaintiffs to argue that common issues predominate in a case if the employer can defend  itself merely by establishing that individual employees have had a bona fide opportunity to  take a meal break.  By contrast, under the “mandatory” interpretations, the employer is very  limited in its ability to raise individualized issues as to why the employees failed to take their  meal breaks.  If they failed to do so a jury could assess on a collective basis whether the  employer made sufficient efforts to force them to take the meal period and enter a verdict  for the class if the employer’s efforts were inadequate. Aside from the issue of class action liability, a “mandatory” interpretation would also require  employers to overhaul oversight of employee meal breaks.  In order to comply with the law,  employers would have to implement systems to ensure employees take full thirty-minute  breaks.  Employers would need to upgrade timekeeping systems and even discipline  employees for not taking full meal periods.  Without oversight, opportunistic employees  might take short breaks and then later claim an hour’s worth of pay, because the breaks did  not last the mandated thirty minutes. For years, the only published California decision to address the issue was Cicairos v.  Summit Logistics, Inc. 135   The Cicairos decision held that an employer has an “affirmative                                                        134 Murphy v. Kenneth Cole Prods., 40 Cal. 4th 1094 (2007). 135 133 Cal. App. 4th 949 (2005).  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 36 obligation to ensure that workers are actually relieved of all duty” by taking a meal break.   The Cicairos court further held that an employer cannot simply “assum[e] that the meal  periods are taken.” 136   The court suggested that the standard for meal periods was akin to  the standard of when an employer must pay overtime—i.e., when it either suffered or  permitted the employee to work.  The court found that the defendant did not “provide” meal  breaks, because the plaintiff-truckers were deprived of a meaningful ability to elect to take  breaks due to pressure from management to maximize deliveries, the lack of a  companywide policy on meal periods, and the fact that the plaintiffs would be penalized for  taking meal breaks as the timekeeping system was unable to record meal breaks. 137 The Cicairos court did not define the scope of “relieving employees of all duty” and the term  is subject to multiple possible interpretations.  What if the employer scheduled a period  each day within which the employee was told that he or she had no duty to perform any  work?  That sounds like it amounts to “relieving” the employee of duty, and an employee  who chooses to work in that situation would have no claim for meal period penalty pay.  What if the employee worked without supervision, the employer instructed the employee to  take meal periods, and the employee failed to notify the employer that he had skipped meal  breaks?  These facts would seem to indicate that the employer neither “suffered nor  permitted” the employee to work through the missed meal break, which could plausibly  exonerate the employer. 138   On the other hand, “relieving of duty” could mean actually  forcing the employee not to do any work.  Unfortunately, Cicairos did not clarify this  confusion and the facts of the case did not involve a situation where the employees were  given a genuine opportunity to take a meal break but voluntarily declined to do so.  Rather,  the employees argued that they were not informed they were permitted to take meal breaks  and, moreover, they had no way to record time as a break on the timekeeping system. Employers breathed a sigh of relief when, in July 2008, the Fourth District Court of Appeal  issued its decision in Brinker Restaurant Corporation v. Superior Court, 139 which concerned  a putative class of hourly restaurant employees who contended they had not been provided  with meal and rest periods. 140 The plaintiffs claimed that employers were required to ensure  that employees took their meal breaks, to provide meal breaks as close as possible to the  middle of each shift, and to provide a meal break for each five-hour block of time on a  “rolling” basis.  The trial court had certified a class on these claims, without first deciding                                                        136 Id. at 962. 137 Id. at 964. 138 Forrester v. Roth’s I.G.A. Foodliner, Inc., 646 F.2d 413, 414-14 (9th Cir. 1981) (“where the acts of an employee prevent  an employer from acquiring knowledge, here of alleged uncompensated overtime hours, the employer cannot be said to  have suffered or permitted the employee to work”). 139 Previously published at 165 Cal. App. 4th 25 (2008). 140 The complaint also alleged a claim for working “off the clock.”Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 37 any relevant legal issue, such as whether employers were required to mandate meal  breaks.  Instead, the trial court stated that this was a common legal issue to be decided on  a classwide basis following certification. The court of appeal reversed the trial court, holding that it was an abuse of discretion for  the trial court to fail to determine the legal elements of the plaintiffs’ claims in ruling on class  certification.  The court held that employers need only make meal periods available to  employees, which rendered the plaintiffs’ claims unsuitable for class adjudication because it  would be necessary to determine on a case-by-case basis whether each employee was  actually denied meal breaks (company policy clearly provided for meal periods). 141   The  court of appeal also distinguished Cicairos, essentially limiting that case to its peculiar facts. Fresh on the heels of the Brinker decision, employers seemed to score another victory  when the Second District Court of Appeal issued its decision in Brinkley v. Public Storage,  Inc. 142 In Brinkley, the plaintiff brought claims on behalf of a putative class of property  managers, alleging, among other things, 143 that Public Storage violated Labor Code Section  226.7 by failing to provide meal periods within the first five hours of each shift, and by  failing to ensure that its employees actually took meal breaks.  The trial court granted  summary adjudication as to the meal period claim, and the plaintiff appealed. The appellate court upheld the trial court’s grant of summary adjudication.  As to the meal  period claim, the court held that employers need only provide employees with an  opportunity to take meal breaks; they are not obligated to mandate such breaks.  The court  distinguished Cicairos by noting that the employer in that case “managed and scheduled  the [employees] in such a way that prevented [them] from taking their meal periods,” which  amounted to an active denial of the employees’ right to such breaks.  The court also held  that employers need not provide meal periods within the first five hours of work, but rather  after five hours. 144                                                       141 The court also determined that:  (1) employers are not required to provide a meal period during every block of five  consecutive hours worked, and therefore the defendant’s policy of sometimes providing meal periods early in  employees’ shifts was not improper; (2) employers need only provide rest breaks, not mandate them; (3) employers are  only required to provide one rest period per four hours worked or “major fraction thereof,” with the “major fraction  thereof” meaning between three and one-half to four hours; (4) rest breaks are not required to be in the middle of each  four-hour work period where that would be impracticable; and (5) employers may be liable for employees working  “off  the clock”  only where the employer knew or should have known about such work being performed.  142 Previously published at 167 Cal. App. 4th 1278 (2008). 143 The plaintiff also brought claims for pay stub and rest period violations. 144 The court of appeal also affirmed summary adjudication as to the itemized wage statement and rest break claims, but  those portions of the decision were vacated upon the grant of review.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 38 These victories were short-lived, as the California Supreme Court granted review of both  Brinker and Brinkley in 2008.  For nearly four years thereafter, the law was unsettled as the  Supreme Court wrestled with these two cases. Rather than wait for those decisions, the California Court of Appeal decided to tell  employers its view of the applicable legal standard.  In October 2010, the court affirmed the  trial court’s decision in Hernandez v. Chipotle Mexican Grill, Inc. and held that Labor Code  § 226.7(a) states that employers must make meal and rest periods available, not ensure  that they are taken. 145   The court stressed that “provide” means “to supply or make  available” and that enforcement of meal breaks would place undue burden on large  employers and create perverse incentives for employees to receive extra compensation  under the wage & hour laws. 146   The court also distinguished Cicairos, on the ground that  there the employer effectively precluded its employees from taking their meal and rest  periods. 147   However, the California Supreme Court also granted review in Hernandez pending its decision in Brinker, making Hernandez unciteable. 148   However, around this  time at least seven federal decisions were issued that also held that an employer’s duty to  “provide” a meal period is to make it available and that meal period claims based on a mere  failure to ensure employees took meal periods are unsuitable for class certification. 149 Finally, on April 12, 2012, the Supreme Court issued its decision in Brinker. 150   The opinion  was mostly favorable to employers, holding—as expected—that employees need not be  forcibly prevented from working through their lunch breaks in order to be properly  “provided” with a meal period.  The Court stated that “an employer must relieve the                                                        145 Hernandez v. Chipotle Mexican Grill, Inc., 118 Cal. Rptr. 3d 110 (2010), transferred following review, 208 Cal. App. 4th  1487 (2012), rev. denied, depublished; see also In re Lamps Plus Overtime Cases, 195 Cal. App. 4th 389 (2011),   (holding employers need not ensure meal periods be taken), transferred following review, 209 Cal. App. 4th 35 (2012),  rev. denied, depublished. 146 Hernandez, 118 Cal. Rptr. 3d at 118-19. 147 Id. at 119. 148 The Court of Appeal reached the same conclusion in Tien v. Tenet Healthcare, 192 Cal. App. 4th 1055 (2011),  transferred following review, 209 Cal. App. 4th 1077 (2012), Rev. denied, depublished. 149 See White v. Starbucks Corp., 497 F. Supp. 2d 1080 (N.D. Cal. 2007) (cited in Brinker; first published decision to hold  “provide” means “make available.”); Brown v. Federal Express Corp., 249 F.R.D. 580, 585-86 (C.D. Cal. 2008)  (“Requiring enforcement of meal breaks would place an undue burden on employers whose employees are numerous  or who . . .do not appear to remain in contact with the employer during the day.”); Kenny v. Supercuts, Inc., 252 F.R.D.  641, 645-46 (N.D. Cal. Jun. 2, 2008) (“[The Labor Code] does not require an employer to ensure that an employee take  a meal break.”); Salazar v. Avis Budget Group, Inc., 251 F.R.D. 529, 533 (S.D. Cal. 2008) (“The Court agrees with the  compelling reasons advanced by the White, Brown, and Kenny decisions for interpreting ‘provide’ to mean ‘make  available’ rather than ‘ensure taken.’”); Kohler v. Hyatt Corp., No. EDCV 07-782-VAP (CWx), 2008 U.S. Dist. LEXIS  63392, at *18 (C.D. Cal. Jul 23, 2008) (“An employee must show that he was forced to forego his meal breaks, as  opposed to merely showing that he did not take them regardless of the reason.”); Nguyen v. Baxter Healthcare Corp.,  2011 WL 6018284 (C.D. Cal., Nov. 28, 2011) (noting that employers only need to make meal periods available to  employees and that posting a copy of the Wage Order was sufficient to advise employees of that right). 150 Brinker Restaurant Corp., 53 Cal.4th 1004 (2012).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 39 employee of all duty for the designated period, but need not ensure that the employee does  no work.” 151    “Indeed, the obligation to ensure employees do no work may in some  instances be inconsistent with the fundamental employer obligations associated with a  meal break:  to relieve the employee of all duty and relinquish any employer control over  the employee and how he or she spends the time.” 152   Furthermore, if an employee who is  properly relieved of all duty decides to continue working anyway, the employer will not be  liable for payment of one hour of penalty pay, and will be liable to pay straight-time pay only  if it “knew or reasonably should have known that the worker was working through the  authorized meal period.” 153 The Court did find, however, that employers must provide meal periods “after no more than  five hours of work, and a second meal period after no more than 10 hours of work.” 154   This  would mean that, for example, an employee who starts work at 9 a.m. would need to be  provided a lunch break beginning by no later than 2 p.m., or else the employer would be  liable for one hour of premium wages.  However, it would also seem that the employee  could voluntarily decide to take meal breaks later on in the work day, as long as they were  made available in a timely manner.  The Court rejected the plaintiffs’ contention that a meal  break must be provided during every “rolling” 5-hour block of work time, and thus held that  employers can provide meal breaks quite early in the work day. 155 Following the issuance of its decision in Brinker, the Supreme Court remanded to the Court  of Appeals three other meal break class actions for which it had granted review pending  issuance of a ruling in Brinker: Flores v. Lamps Plus, 156 Tien v. Tenet Healthcare 157 and  Hernandez v. Chipotle Mexican Grill. 158   Employers rejoiced when the Court of Appeal,  Second District, Division Eight, quickly issued opinions in each of these cases affirming  denial of certification, citing to Brinker. 159   This jubilation was short-lived, however.  The                                                        151 Id. at 1034.  The Court of Appeal in Brinkley reached the same conclusion in an unpublished decision issued after  Brinker.  Brinkley v. Public Storage, Inc., 2012 WL 3126606,  at *5 (Aug. 2, 2012) (“[An employer’s obligation is to  relieve its employee of all duty, with the employee thereafter at liberty to use the meal period for whatever purpose he  or she desires, but the employer need not ensure that no work is done.”).  The Brinkley court also held that an employer  not need not ensure that an employee take rest periods.  Id. at *6 (“California law does not require an employer to  ensure that employees take rest periods.”).   152 Id. at 1038-39  (citing Morillion v. Royal Packing Co., 22 Cal 4th 575, 584-585 (2000)). 153 Id. at 1039-40 n.19 (quoting DLSE Opinion Letter No. 1991.06.03). 154 Id. at 1049. 155 Id. at 1048. 156    195 Cal. App. 4th 389 (2011). 157    192 Cal. App. 4th 1055  (2011). 158 118 Cal. Rptr. 3d 110 (2010). 159    Tien,  209 Cal. App. 4th 1077 (2012); Lamps Plus, 209 Cal. App. 4th 35 (2012); Hernandez, 208 Cal. App. 4th 1487  (2012).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 40 plaintiffs in these cases all petitioned the Supreme Court for review, and while these  petitions were all denied, the Supreme Court took the unusual step of depublishing each of  these opinions. The Supreme Court did not provide any reason for its decision to depublish these cases,  and employers are nervous that this may be a signal that the Court is reconsidering its  holding in Brinker, or that it intends Brinker to have a very narrow application.  Clues to the  Court’s reasoning may lie within the petitions for review filed by the plaintiffs in these cases.   Among other arguments, in each petition the plaintiffs argued that the Court of Appeal had  simply tacked on some language paying lip-service to Brinker to the earlier opinion, while  leaving intact discussion that the plaintiffs argued ran contrary to Brinker. 160   Specifically,  each petition asserted that the Court of Appeal had erred in supposedly stating that an  employer could “provide” lawful meal periods by having a policy making lawful meal periods  available to employees, while the Court in Brinker had stated that employees must  affirmatively be “relieved of all duty” and that practices that discouraged or prevented  employees from taking meal periods were improper. 161   In any event, the fact that the Court  declined review of these cases indicates that it likely agreed with the end result, but may  have felt that some of the reasoning did not completely fit with Brinker. 162   Employers  should therefore continue to assert that Brinker precludes certification of meal period claims  except in the most clear-cut cases where workers are uniformly prevented from taking their  meal breaks. D. Limits on IWC’s Power to Alter Labor Code Meal Period Rules Effective September 19, 2000, before Labor Code Section 226.7 went into effect, the  California Legislature amended Labor Code Section 516.  As amended, the statute  provides that the IWC may adopt or amend Wage Orders with respect to break periods and  meal periods “except as provided in Section 512.”  On its face, this language would seem  to limit the IWC’s authority to adopt or to amend Wage Orders in such a way as to be  inconsistent with the specific provisions of Labor Code Section 512. In 2006, in Bearden v. U.S. Borax, Inc., 163 the Second District Court of Appeal held that  Section 516 invalidated provisions of IWC Wage Order No. 16 on the ground that the Wage                                                        160    Tien petition, 2012 WL 6608787;  Lamps Plus petition, 2012 WL 5868726; Hernandez petition, 2012 WL 5392867. 161    Id., Tien petition at *16-18; Lamps Plus petition at *9-11; Hernandez petition at * 162    The plaintiffs in Tien, Lamps Plus and Hernandez also argued that Justice Werdegar’s concurring opinion in Brinker gave rise to a rule that records showing missed meal periods could establish a rebuttable presumption that these meal  periods were unlawfully denied.  Because the Supreme Court declined to grant review and consider this issue, thereby  leaving the rulings on these cases intact, it seems likely that this argument was not the reason for the depublication.   Rather, it seems likely that the Supreme Court felt these decisions reached the correct result, but depublished them due  to some concern that the language used by the Court of Appeal did not completely comport with Brinker in all respects.  163 128 Cal. App. 4th 429 (2006).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 41 Order was inconsistent with specific meal period regulations within Labor Code Section  512. By way of background, Section 512 specifies these regulations on meal periods:  An employer may not employ an employee for a work period of more than five  hours per day without providing a meal period of not less than thirty minutes,  except the meal period can be waived by mutual consent if the total work period is  no more than six hours [§ 512(a)].  The IWC is empowered to adopt a Wage Order permitting a meal period to  commence after six hours of work [§ 512(b)].  The general rule in Section 512(a) does not apply to certain employees in the  wholesale baking industry [§ 512(c)].  The general rule in Section 512(a) does not apply to certain employees in the  broadcasting industry covered by a collective bargaining agreement. Effective January 1, 2001, the IWC adopted Wage Order 16-2001 covering employees in  the construction, drilling, logging, and mining industries.  Unlike other Wage Orders, Wage  Order 16-2001 includes a collective bargaining exemption to the meal period requirements,  which provides that meal period requirements do not apply to employees covered by a  collective bargaining agreement that provides for wages, hours of work and working  conditions, a regular pay rate at least 30 percent above minimum wage, and premium pay  for all overtime hours worked.  The defendants argued that this provision exempted them  from the normal requirement to provide meal periods. The Bearden court held that this collective bargaining exemption from meal period  requirements was invalid because it created a new exemption not recognized in  Section 512. 164   The court noted that Section 512 contains specific exemptions from the  normal meal period requirement—i.e., when an employee working no more than six hours  in a day waives the meal period and under other specified conditions for employees  working in the wholesale baking and broadcasting industries. 165   The court reasoned that  where the Legislature has set forth specific exemptions in a statute, those exemptions are  generally assumed to be exclusive.  Proceeding on that premise, the court reasoned that  Section 516 forbade the IWC to adopt exemptions beyond those set forth in Section 512. 166    Despite the invalidity of the collective bargaining exemption, the court held that the                                                        164 Id. at 486-88. 165 Id. at 487. 166 Id. at 487-88.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 42 employer could not be held liable for any penalties because Section 226.7 allows for such  penalties only when the employer violates an IWC Wage Order, and U.S. Borax had  complied with Wage Order 16-2001. 167 VI. Tip-pooling Labor Code Section 351 makes it unlawful for an “employer or agent” to “collect, take, or receive  any gratuity or a part thereof that is paid, given to, or left for an employee by a patron.”  In the past,  this statute led to two distinct types of class actions on behalf of employees who claim their tips  were unlawfully taken.  The first type of action alleged that the employees unlawfully were required  to share tips with co-workers for whom the patrons did not leave the tips.  The second type of action  alleged that “agents” of the employer unlawfully took employees’ tips.  In 2010, the California  Supreme Court held in Lu v. Hawaiian Gardens Casino, Inc. 168 that Section 351 does not authorize  a private right to sue.  Although this decision was certainly a victory for employers, it does not  necessarily mean the end of tip-pooling actions. A. Actions Alleging Tips Were Diverted to Co-Workers Who Did Not  Earn Them In 2006, some twenty separate class action lawsuits were filed in quick succession alleging  a claim for “tip-pooling violations” against various restaurants and restaurant chains in  California.  The underlying theory in the cases was that when a customer leaves a tip for a  server at a restaurant table, the employer may not require the server to share the tip with  bartenders who do not provide “direct table service” to the customer who left the tip.  This  alleged prohibition on certain tip-pooling arrangements is purportedly derived from Labor  Code Section 351, which bars an employer from “tak[ing], collect[ing] or receiv[ing] any  gratuity or a part thereof” left for a server, or from using such tips as a credit against the  state minimum wage. This wave of lawsuits was unexpected, given that a published case from 1990, Leighton v.  Old Heidelberg, Ltd., 169 expressly held that Section 351 does not preclude tip-pooling among restaurant employees.  Moreover, the tip-pooling arrangement approved in Leighton required that servers share tips left at the table with both the busboy and the bartender, and there was no suggestion anywhere in the case that the bartender had provided “direct table  service.”  Nonetheless, the “direct table service” notion derives from one rationale for  finding tip-pooling lawful and consistent with public policy:                                                       167 Id. at 493. 168 50 Cal. 4th 592 (2010). 169 219 Cal. App. 3d 1062 (1990) (emphasis added).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 43 [T]he restaurant business has long accommodated this practice which, through  custom and usage, has become an industry policy or standard, a ‘house rule and  is with nearly all restaurants,’ by which the restaurant employer, as part of the  operation of his business and to ensure peace and harmony in employee  relations, pools and distributes among those employees, who directly provide  table service to a patron, the gratuity left by him, and enforces that policy as a  condition of employment. 170 The plaintiffs in these tip-pooling cases contended this language meant that only those  who provide direct table service may share in the tip pool.  Employers responded by  pointing to the fact that Leighton approved a pool that included bartenders, and that this  gloss on Leighton ignores other statements by the court that suggest that its holding was  much broader, such as the court’s reasoning that (1) the legislative history shows that  Section 351 was not intended to address tip-pooling at all, but rather was intended to  prevent employers from using tips as a method of paying employees sub-minimum wages;  (2) Section 351 makes no mention of tip-pooling among co-workers; and (3) tip-pooling has  been around a long time, so the presumption should be that the California Legislature  would have been explicit if it had wanted to outlaw the practice. 171 A DLSE opinion letter did once suggest that it is inappropriate for an employer to include in  the tip pool those employees who do not provide “direct table service.” 172   But even that  opinion places “bartenders” in the category of employees who provide “direct table service,”  and notes only dishwashers, cooks, and chefs as examples of employees who should not  be included in the tip pool.  Moreover, the DLSE has apparently retreated from that  position.  A more recent DLSE opinion letter states that tip pools may include anyone in the  “chain of service,” which is an undefined term that presumably would include anyone who  provides any service to clients (e.g., bartenders making their drinks). 173 The sudden tide of tip-pooling cases was stemmed by the issuance of a lengthy and  persuasive district court opinion, Louie v. McCormick & Schmick Restaurant Corp. 174   The  court in Louie held that Section 351 allows management to force servers to share tips with  other employees who provide any service to customers at all (whether or not at the patron’s  table).  Following this federal decision, the trial courts handling the other cases filed at the  same time all reached the same conclusions and dismissed their tip-pooling cases.                                                       170 Leighton, 219 Cal. App. 3d at 1067. 171 Id. at 1067-68. 172 DLSE Opinion Letter 1998-12-28-1 at 2. 173 DLSE Opinion Letter 2005-09-08 at 2. 174 460 F. Supp. 2d 1153 (C.D. Cal. 2006) (Seyfarth Shaw case).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 44 Post-Louie California appellate courts appear to have slain this species of tip-pooling action  altogether.  Three decisions in early 2009 – Lu v. Hawaiian Gardens Casino, Inc., 175 Budrow v. Dave & Buster’s of California, Inc., 176 and Grodensky v. Artichoke Joe’s  Casino 177 – confirmed that Section 351 does not preclude forced sharing of tips with other  non-management employees.  Meanwhile, in Etheridge v. Reins International, the Court of  Appeal resolved the remaining issues in the employer’s favor when it held that  management can mandate that tips be shared with any employee who “contributes” to a  patron’s service, which arguably could include cooks and kitchen staff as well as bartenders. 178   Accordingly, it appears that tip-pooling cases may have been extinguished  except in the unusual circumstance where an employer forces employees to share tips with  their managers. B. Actions Alleging “Agents” of Management Wrongfully Took Tips The Leighton line of cases all permitted the sharing of tips among non-management employees.  Employers have fared much worse, however, in cases where employees with  supervisory power have shared in tip pools.  Several courts have held that such tip-pooling arrangements violate the prohibition in Section 351 against “agents” of the employer  sharing in the tip pools.  Perhaps the highest profile of these cases was a now-overturned  trial court decision in March 2008 that held Starbucks Corporation liable for $105 million in  restitution to a class of approximately 120,000 baristas for the share of tips Starbucks  allocated to its shift supervisors. 179 These cases spring from a 2003 decision, Jameson v. Five Feet Restaurant, 180 in which the  court of appeal held that it violated Section 351 for a “floor manager” to receive 10% of the  tips left for servers.  The court noted that Section 350 defines “agent” as any person who  has “authority to hire or discharge any employee or supervise, direct, or control the acts of  employees.”  Because the floor manager’s duties included “scheduling servers’ stations,  disciplining servers, hiring employees, and recommending the discharge of employees,” the  court found that there was a sufficient basis in the record to support the jury’s finding that  they qualified as agents.                                                       175 170 Cal. App. 4th 466, 479 (2009) (“In its analysis of Labor Code Section 351, the legislative history, and related  statutes, Leighton’s statements were not restricted to restaurants”). 176 171 Cal. App. 4th 875, 878 (2009) (Seyfarth Shaw case; noting that “section 351 does not distinguish between the  various functions that restaurant employees perform”). 177 171 Cal. App. 4th 1399 (2009), disagreed with by Lu v. Hawaiian Gardens Casino, Inc., 50 Cal. 4th 502 (2010) (holding  § 351 does not authorize a private right to sue, contrary to the holding in Grodensky) . 178 172 Cal. App. 4th 908 (2009). 179 Chau v. Starbucks Corp., San Diego County Case No. GIC836925, rev’d, 174 Cal. App. 4th 688 (2009). 180 107 Cal. App. 4th 538 (2003).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 45 Several cases have reaffirmed Jameson and held other types of supervisory employees to  be agents who may not participate in tip pools. 181 In the Grodensky case, however, the  court of appeal affirmed the trial court’s finding that “floor managers” were not agents  because they lacked the power to hire and fire and had a power to supervise, direct, or  control the acts of the dealers that was limited to resolving disputes between customers  and the dealers. 182 In the appeal of Chau, the appellate court held that “shift supervisors” at Starbucks – who  performed the same work as regular employees 90 percent of the time, lacked any  authority to discipline, and were not considered by the company to be part of  “management” – could get a share of the tips. 183   It should be noted that the decision  distinguished itself from “tip-pooling” cases because the tips in question were left in  collective tip jars, making this instead a “tip apportionment” case because the tips are  already “pooled.” 184   The court held that in this kind of case it is presumed the patron  intends for the tip to be shared by the entire service “team,” particularly in light of the fact  that it is probably difficult for the average patron to distinguish between those who are “shift  supervisors” and those who are not. 185   While this decision was a significant victory for  employers, the specific circumstances of the case mean that it should not be interpreted to  suggest that supervisors with the powers normally attributed to managers (power to  discipline, hire and fire, and give commands, etc.) may share in a traditional “tip pool.”  It is  unclear whether Section 351 was intended to preclude the supervisor from receiving tips in  the situation where the tips were actually left for the supervisors. C. The Future of Tip-pooling Cases Under California Law Although it has now been clarified that certain types of tip-pooling arrangements are  permissible under California law, there remained a dispute about whether Section 351  contained a  private right of action that allowed plaintiffs to sue under the statute at all.  This  dispute was finally put to rest in 2010 when the California Supreme Court decided Lu v.  Hawaiian Gardens, Inc.  There, the Court held that no private right of action to sue exists  under Section 351, foreclosing any future tip-pooling cases under that statute. 186   What the                                                        181 Hawaiian Gardens, 170 Cal. App. 4th at 485-86 (triable issue of fact whether customer service representatives qualified  as agents because they had responsibility to write reports about and evaluations of tipped dealers); Grodensky, 171  Cal. App. 4th at 1409-10 (shift managers who assigned work, had power to discipline and were responsible for  operation of casino in card room manager’s absence were agents not permitted to share in tip pool) . 182 Grodensky, 171 Cal. App. 4th at 1452-53. 183 174 Cal. App. 4th 688 (2009). 184 Id. at 700. 185 Id. at 705. 186 50 Cal. 4th 592 (“there is no clear indication that the Legislature intended to create a private cause of action under the  statute”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 46 Court did not do, however, is foreclose the possibility of tip-pooling cases altogether.  The  Lu Court specifically found that if an employee is entitled to misappropriated gratuities, the  employee could collect them under other legal theories, e.g., conversion. 187   A plaintiff could  also, most likely, recover such monies as restitution under California’s Unfair Competition  Law or recover penalties for the violation under Labor Code Section 203, Section 226, or  PAGA. VII. Vacation/Paid Time Off Forfeiture Another type of wage and hour class action prevalent in California is one seeking payment of  forfeited vacation or other paid time off (“PTO”).  California law does not require that employers  provide employees with vacation or PTO. 188   Furthermore, an employer can lawfully require that  employees work for a certain period of time without any vacation benefit, and then begin to accrue  vacation only after the waiting period has ended. 189 If the employer provides a vacation benefit, however, it may not create a plan whereby the  employee “forfeits” vested vacation or PTO time.  Under California law, accrued vacation or PTO  constitutes “wages,” which is payable to the employee at termination. 190   As such, employers may  not have a “use it or lose it” provision in their vacation or PTO policy.  A policy that places a  reasonable cap on accrual of vacation or PTO generally is acceptable. 191   The DLSE has taken the  position, however, that an accrual cap that is set near one year’s allotment of vacation is a de facto use it or lose it policy since many employees will earn no additional vacation in a year if they do not  take the vacation that year. 192 “Use it or lose it” policies are lawful in most other states.  Therefore, many out-of-state employers  doing business in California are unaware of this requirement.  Needless to say, where an action is  filed challenging a written corporate vacation policy containing a “use it or lose it” provision, class  certification and liability likely will follow. A vacation decision that came down in 2006, Church v. Jamison, 193 has made vacation class claims  more attractive because it creates the possibility that they may reach back much further than the                                                        187 Id. at 603-04 (“holding that section 351 does not provide a private cause of action does not necessarily foreclose the  availability of other remedies”). 188 DLSE Manual 15.1.2. 189 Owen v. Macy’s, Inc., 175 Cal. App. 4th 462 (2009) (employer’s policy of delaying onset of accrual of vacation benefits  for first six months was lawful). 190 Suastez v. Plastic Dress-up Co., 31 Cal. 3d 774 (1982). 191 DLSE Manual 15.1.4. 192 DLSE Manual 15.1.5. 193 143 Cal. App. 4th 1568 (2006).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 47 four-year period of a typical wage and hour class action.  The decision was not actually a class  action decision, but rather addressed the appropriate statute of limitations on any claim for unpaid  vacation.  Vacation differs from regular wages in that an employee has no entitlement to be paid for  accrued but unused vacation until the employee quits or is discharged.  That leaves open the  question of whether an employee may sue only for vacation accrued but unpaid during the four  years before the lawsuit, or for any vacation that accrued that was unpaid during the employment  (assuming the employee brings suit within four years of leaving his employment). 194 The Church court reasoned that the statute of limitations begins to run only when a cause of action  accrues, and that no cause of action for unpaid vacation accrues until termination of employment. 195    Accordingly, the court held that an employee who sues within the limitations period can sue for any  unpaid vacation that accrued at any time throughout the entire tenure of employment. 196 The Church decision is squarely at odds with an older decision, Sequeira v. Rincon-Vitova  Insectaries, Inc., 197 which had adopted the DLSE position that an employee suing for unpaid  vacation may sue only for vacation accrued within the limitations period (which is four years for  claims based on a written contract such as a written vacation policy).  The DLSE reasoned that  although an employee cannot demand payment of unused vacation until termination, the employee  is entitled to take vacation upon earning the vacation.  The DLSE also noted that allowing an  employee to reach back throughout the entire employment would create serious recordkeeping  problems for employers who may not save such records for periods that exceed the typical  limitations period (e.g., three or four years).  Accordingly, Sequeira held that the statute of  limitations on a claim for vacation pay begins running as soon as the vacation is earned. 198 The Church court declined to follow Sequeira because the Church court thought that the Sequeira  decision improperly deferred to a DLSE interpretative bulletin. 199   The Church court noted that  intervening California Supreme Court precedent in Tidewater Marine Western, Inc. v. Bradshaw 200 had held that such a bulletin is an invalid underground regulation that is not entitled to any  deference.  Re-evaluating the issue anew, the Church court thought that the more persuasive  reasoning was that a cause of action for unpaid vacation pay does not accrue until the termination                                                        194 Church suggested, without deciding, that the statute of limitations on a vacation claim may be either two years (if based  on oral promises) or four years (if based on a written contract).  Id. at 1577.  Given a plaintiff’s ability to recover unpaid  vacation through a claim under the UCL, Bus. & Prof. Code § 17200, et seq., which has its own four-year statute of  limitations, the discussion in Church of the appropriate statute of limitations is primarily academic. 195 Id. at 1576-77, 1582-83. 196 Id. at 1578-79. 197 32 Cal. App. 4th 632 (1995). 198 Id. at 635-36. 199 Church, 143 Cal. App. 4th at 1578. 200 14 Cal. 4th 557 (1996).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 48 of employment and, therefore, chose not to follow Sequeira. 201   Despite this clear conflict in  appellate decisions, the California Supreme Court declined to review the Church decision.   Accordingly, the law remains uncertain in this area. Another employer policy fomenting class actions, has been a “floating holiday” policy that allows  employees to take a paid day off at the employee’s discretion but does not treat the floating holiday  as vacation–i.e., the employee who does not use the floating holiday is not credited with a day of  vested vacation time, but instead simply loses the opportunity for a paid day off.  The DLSE has  opined that an employer may have a use-it-or-lose-it policy with bona fide “holidays,” but only when  the holiday is tethered closely to a specific event.  For example, an employer may give employees  Martin Luther King, Jr. Day as a paid day off, on a use-it-or-lose-it basis.  But where “holiday” pay  can be claimed on any day, at an employee’s discretion, the DLSE views it as disguised “vacation”  pay, and has opined that an employer must treat any such holiday pay as vested vacation time. 202 Based on this announced interpretation of the law, numerous class actions have been filed against  employers who have a use-it-or-lose-it policy with respect to floating holidays.  To date, no court  decision has adopted or rejected the DLSE’s interpretation. VIII. Waiting Time Penalties A. Generally Many class actions assert, on behalf of class members who are former employees, claims  for “waiting time penalties” under Labor Code Section 203. 203 Under California law, all wages due must be paid at the time of termination, unless the  employee quits without notice, and then within seventy-two hours of termination. 204   When  wages of a terminated employee are not timely paid, the employee’s wages continue, as a  penalty, until paid or up to thirty days, whichever is shorter.  Thirty days of penalties means  thirty consecutive calendar days, including Saturdays, Sundays and holidays (typically  equivalent to six weeks of pay), rather than simply one month’s pay.  Each calendar day  that passes before the employer pays all wages owed triggers an additional day of                                                        201 Church, 143 Cal. App. 4th at 1582-83. 202 DLSE Enforcement Manual § 15.1.12, et seq. (“there must be an objective standard by which it can be established that  the leave time is attributable to holidays, sick leave, bereavement leave or other specified leave.”) 203 The statute of limitations period on Lab. Code § 203 claims is three years, regardless of whether only penalties are  sought or whether underlying wages are also sought in same action.  Pineda v. Bank of America, 50 Cal. 4th 1389,  1401 (2010), overruling McCoy v. Sup. Ct., 157 Cal. App. 4th 225, 233 (2008). 204 Lab. Code § 203.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 49 penalties at the employee’s regular daily rate, even if the employee is not normally  scheduled to work on all of these days. 205 On its face, the waiting time penalty provision reads as though it were designed to apply  when an employer fails to give a terminating employee the employee’s final paycheck.  The  Labor Commissioner, despite regulations providing that a good faith dispute precludes the  imposition of penalties, 206 routinely applies the penalty provision when the employer has  failed to pay any wage claim over the entire course of employment and continues not to  pay it at the time of termination.  As a result, an employer who shorts an employee $1 of  owed vacation pay could be required to pay the employee the equivalent of six weeks’ pay  in penalties. Courts have ruled that good faith, or lack of willfulness, is a defense to waiting time  penalties. 207   As the California Supreme Court explained:  “A good faith dispute that any  wages are due will preclude imposition of waiting time penalties under Section 203.” 208    Simple ignorance of the law, as opposed to a reasonable, good faith belief that the law  provided a defense to payment of wages, generally is insufficient to avoid waiting time  penalties. 209 Unvested stock that an employee chose to receive in lieu of full wages is not viewed as  wages that must be paid to an employee if the employee resigns prior to the vesting date of  the stock, though the wages not paid due to the receipt of the stock must be paid (without  interest) to an employee who is involuntarily terminated prior to the vesting date. 210                                                       205 Mamika v. Barka, 68 Cal. App. 4th 487 (1998). 206 8 C.C.R. § 13520 (“[A] good faith dispute that any wages are due will preclude imposition of waiting time penalties  under Section 203.”). 207 Road Sprinkler Fitters Local Union No. 669 v. G&G Fire Sprinklers, Inc., 102 Cal. App. 4th 765 (2002); Davis v. Morris,  37 Cal. App. 2d 269 (1940). 208 Smith v. Rae-Ventner Law Group, 29 Cal. 4th 345, 354 n.3 (2002), superseded on other grounds by statute, Code Civ.  Proc. § 98.2(c) as recognized in Eicher v. Advanced Business Integrators, Inc., 151 Cal. App. 4th 1363 (2007); Amaral  v. Cintas Corp., 163 Cal. App. 4th 1157, 1201-03 (2008)(defendant’s failure to pay wages according to “living wage”  clause in contract did not constitute a willful violation of the Labor Code where the defendant’s position raised  “complicated issues of first-impression”); see also Nordstrom Com’n Cases, 186 Cal. App. 4th 576, 584 (2010) (holding  that the trial court did not abuse its discretion in discounting the penalties on a Section 203 claim because the  defendant could avoid the penalties by showing that a “good faith dispute” existed regarding the claimed wages). 209 Barnhill v. Robert & Saunders Co., 125 Cal. App. 3d 1, 7 (1981). 210 Schacter v. Citigroup, Inc., 47 Cal. 4th 610 (2009).  This decision did not foreclose the possibility of a different outcome  if the employee were fired rather than voluntarily resigned.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 50 B. Application to Fixed-Term and Temporary Employment 1. Assignments for a Fixed Term By Section 203’s terms, waiting time penalties are recoverable only by an employee  “who is discharged or who quits.” 211   But what happens when the assignment simply  comes to an end by its own terms, either because a fixed term has expired, or a fixed  project is completed?  The appellate court held that neither of those circumstances  was a “discharge” triggering application of Section 203, but the California Supreme  Court reversed. In Smith v. Superior Court, 212 the plaintiff worked a one-day assignment as a hair  model for L’Oreal, for which she earned $500.  The employer, pursuant to its regular  practice, did not pay her until sixty days after the model shoot ended. 213   If the  delayed payments violated Labor Code Section 203 as to every hair model L’Oreal  paid in a similar fashion in California, potential liability would have amounted to  $15,000 per model per assignment (thirty working days of penalty pay times $500 per  day), which could quickly add up to millions of dollars.  If the end of the assignment  was not a “discharge,” however, then the employee would be limited solely to suing  for payment of the wages, interest, and any attorney’s fees accrued in bringing the  suit. 214 The California Supreme Court ruled that the end of the one-day assignment resulted  in a “discharge” of the employee.  The court explained that the term “discharge” was  ambiguous: it could mean either “fire” or “release from one’s obligations.”  When  someone has an assignment of a fixed term or performs a fixed task, the employer  “discharges” (i.e., releases) the employee at the end of the term or completion of the  task.  The California Supreme Court analyzed the legislative history and concluded  that this interpretation—”discharge” as synonymous with “release from one’s  obligations”—was more consistent with the overall purpose of the statute and the  strong public policy for immediate payment underlying Section 203.  Accordingly, the  end of a fixed-term assignment that ends the employment relationship between the  employer and employee triggers the obligation for immediate payment under Labor  Code Sections 201-203.                                                       211 Lab. Code § 203.  In addition, the penalties for employees who quit are limited to employees “not having a written  contract for a definite period.”  Lab. Code § 202. 212 123 Cal. App. 4th 128 (2004) (single-plaintiff case). 213 The employer erroneously treated its models as independent contractors.  If the employer lacked a reasonable basis for  that position, that could qualify as a “willful” violation sufficient to trigger waiting time penalties. 214 Lab. Code § 218.5 (attorney’s fees recoverable); Lab. Code § 218.6 (pre-judgment interest recoverable from the date  payment was owed).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 51 2. Temporary Employment Agencies In 2006, a slew of class actions were filed against temporary agencies, arguing that  the end of every temporary assignment is a “discharge” that triggers the right to  immediate payment and the application of waiting time penalties.  Temporary  agencies typically do not pay wages on the date a given assignment ends, but rather  send paychecks in regular one or two-week intervals (except in the rare case where  the agency “fires” the temporary employee by giving notice that the temp will not be  considered for further work). In one such class action, Elliot v. Spherion Pacific Work, LLC, 215 Seyfarth Shaw  obtained summary judgment for the defendant temporary agency.  The plaintiff was  employed by Spherion as a temporary worker for over a year, during which time she  completed 15 temporary assignments of varying length.  Plaintiff submitted time  sheets for work performed each Friday, and was paid by Spherion on the following  Friday via direct deposit.  Following what turned out to be her last assignment with  Spherion, the plaintiff was paid pursuant to the normal pay schedule, and continued  to seek assignments through Spherion for over a month thereafter.  The district court  held that the plaintiff was not “discharged” each time one of her temporary  assignments ended, noting that she remained employed by Spherion and she  understood that assignments would be intermittent.  Therefore, the plaintiff was not  entitled to waiting time penalties under the Labor Code. 216   The Ninth Circuit affirmed  the decision in early 2010. Effective January 1, 2009, Labor Code Section 201.3 resolved this issue, providing  that: If an employee of a temporary services employer is assigned to work for a  client, that employee’s wages are due and payable no less frequently than  weekly, regardless of when the assignment ends, and wages for work  performed during any calendar week shall be due and payable not later  than the regular payday of the following calendar week.  A temporary  services employer shall be deemed to have timely paid wages upon  completion of an assignment if wages are paid in accordance with this  subdivision.                                                       215 572 F. Supp. 2d 1169 (C.D. Cal. 2008), aff’d, 368 Fed. Appx. 761 (9th Cir. Feb. 26, 2010) (unpublished).  216 See also Sullivan v. Kelly Services, Inc., No. C 07-2784 CW,  2008 U.S. Dist. LEXIS 91608 (N.D. Cal Nov. 12, 2008)  (granting summary judgment in favor of defendant temporary agency on Labor Code Section 201 claim on grounds that  plaintiff was not “dismissed” by the agency at the conclusion of a temporary work assignment).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 52 The legislative history of Section 201.3 provides that its enactment effects a  clarification of existing law, rather than a change in the law. 217 Because of this, courts  have applied it retroactively to claims arising before the Section’s effective date. 218 IX. Itemized Wage Statement Claims Labor Code Section 226 has for many years required that employers include certain specific  information in an itemized wage statement provided to employees with every paycheck.   Section 226(a) requires that each wage statement of non-exempt employees show (1) gross wages  earned; (2) total hours worked by the employee; (3) the number of piece-rate units earned (for  piece-rate workers); (4) all deductions taken; (5) net wages earned; 219 (6) the inclusive dates of the  period for which the employee is paid; (7) the name of the employee and either the last four digits of  the employee’s social security number or the employee ID number; 220 (8) the name and address of  the employer; and (9) all applicable hourly rates in effect during the pay period and the  corresponding number of hours worked at each hourly rate. 221   Any departure from these rules  arguably could violate Section 226(a). 222 The primary remedy for violations of Labor Code Section 226(a) is a penalty set forth in  Section 226(e).  Section 226(e) provides that when an employer “knowingly and intentionally”  violates Section 226(a) any employee “suffering injury” may sue and collect actual damages or a  penalty of $50 or $100 (for repeat offenders), whichever is greater, up to a maximum of $4,000 per  employee. 223    Before 2003, the statute required only that employers furnish a wage statement.  There was no  requirement that the information in the wage statement be accurate.  With the amendments in  2003, however, the statute required that all information be accurate.  As a result of this change,                                                        217 See Senate Bill Analysis, SB 940 at p. 5. 218 Elliott v. Spherion, 572 F. Supp. 2d 1169 (C.D. Cal. 2008); Sullivan v. Kelly Services, Inc., Case No. C 07-2784 CW,  2008 U.S. Dist. LEXIS 91608 (N.D. Cal 2008). 219 Seyfarth Shaw convinced a federal district court that a wage statement claim premised on a failure to pay for missed  breaks under labor Code section 226.7 did not constitute a failure to identify wages earned pursuant to Labor Code  section 226.  Jones v. Spherion Staffing LLC, 2012 WL 3624081 at *9 (C.D. Cal., Aug. 7, 2012) (“Because the  underlying violation that gives rise to a section 226.7 claim is not the nonpayment of wages, other claims premised on  nonpayment of wages do not arise.”).   220 Until January 2008, the wage statement was allowed to contain the employee’s entire social security number.  Now, an  employee ID or the last four digits of the Social Security Number must be substituted. 221 Lab. Code § 226(a). 222 See, e.g., Zavala v. Scott Bros. Dairy, Inc., 143 Cal. App. 4th 585 (2006) (“The failure to list the precise number of hours  worked during the pay period conflicts with the express language of the statute and stands in the way of the statutory  purpose.”); Cicairos, 133 Cal. App. 4th at 954, 961 (“[T]he wage statements and driver trip summaries do not list the  defendant employer’s name and address and thus are not adequate itemized wage statements.”). 223 Lab. Code § 226(e); as with other Labor Code penalty provisions, the limitations period is one year.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 53 plaintiffs’ lawyers began including wage statement claims in class actions alleging exempt  misclassification or failure to properly calculate overtime.  Their theory was that all those  employees’ wage statements were “inaccurate” because they failed to set forth the proper amount  of overtime owed.  The plaintiffs would then seek penalties for each employee receiving an  inaccurate wage statement. Plaintiffs have generally used wage statement claims as bargaining chips in mediation, without  placing much settlement value on them.  Two primary aspects of Section 226 claims have been  hotly disputed. First, there was substantial dispute whether the language in subsection (e) that an employee must  “suffer injury” to recover the penalties means that only employees suffering actual harm from a  wage statement violation can recover.  Defendants, arguing that there must be actual harm to  “suffer injury,” relied on the definition of “injury” as used in other aspects of California law. 224    Defendants also supported their position by pointing out that employees who did not suffer actual  injuries could obtain injunctive relief pursuant to Labor Code Section 226(g), which does not contain  language about “suffering injury.” Plaintiffs, by contrast, argued that the term “injury” is simply the violation of one’s legal rights. 225    Plaintiffs contended  that Section 226 created a right for employees to receive an accurate wage  statement, and that right is violated when the employer knowingly provides a defective wage  statement.  By this logic, any violation of Section 226(a) causes an injury sufficient to trigger  penalties under Section 226(e). In a blow to employers, effective January 1, 2013, the Legislature amended Labor Code section  226 to adopt a pro-plaintiff definition of “injury” for purposes of certain violations of the statute. An  employee now is deemed to suffer injury if (A) the employer fails to provide a wage statement or (B) fails to provide accurate and complete information and the employee cannot promptly, without  reference to other documents or information, determine the following from the wage statement  alone: (1) gross or net wages paid during the pay period, (2) total hours worked, (3) piece rate units  earned and rate, (4) deductions, (5) pay period, (6) hourly rates and corresponding hours worked at  each rates, (7) the employer’s name and address, (8) the employee’s name, and (9) the employee’s  last 4 digits (only) of his or her social security number or employee identification number.  Following                                                        224 See, e.g., Steketee v. Lintz, Williams & Rothberg, 38 Cal. 3d 46, 55 (1985) (“The word ‘injury’ signifies both the  negligent cause and the damaging effect of the alleged wrongful act and not the act itself.”); Lueter v. State of Cal., 94  Cal. App 4th 1285, 1303 (2002) (“‘Injury’ refers to the fact of harm suffered by the plaintiff due to the defendant’s  conduct.”); San Fran. Unified Sch. Dist. v. W.R. Grace & Co., 37 Cal. App. 4th 1318, 1330 (1995) (“[W]hen injury or  damage is the last element of a tort cause of action to occur, the cause of action accrues once any actual and  appreciable harm has occurred.”). 225 See, e.g., BLACK’S LAW DICTIONARY 466 (4th ed. 1968) (“the injury is the violation of the legally protected interest . . . and  not necessarily the resulting harm”); Migliori v. Boeing N. Am., Inc., 97 F. Supp. 2d 1001, 1007 (C.D. Cal. 2000)  (distinguishing “injury” from “damages” for purposes of res judicata analysis).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 54 this amendment, an employer can no longer argue that employees must individually demonstrate  that they suffered actual injury resulting from a violation of Labor Code section 226(a), which  previously was a very potent weapon when opposing certification of such claims.  It is anticipated  that the plaintiffs’ bar may now more aggressively pursue such claims.  The remaining dispute over the construction of Section 226 concerns the meaning of the phrase  “knowing and intentional.”  This standard appears, on its face, to differ from the standard for  awarding waiting time penalties under Labor Code Section 203, which is mere “willfulness.”   Normally, if an employer is conscious that it committed an act, and if the employer lacks a  reasonable basis for believing the act is lawful, then the act is “willful” for purposes of Section 203  even where the employer lacked bad faith or an intention to break the law. 226   Although this  statutory interpretation departs from the common-sense understanding of the term “willful violation,”  it furthers a strong public policy favoring payment of final wages to an employee (who may depend  on such wages for survival), so there is a colorable reason to use a broad interpretation of  “willful.” 227 With wage statement violations, by contrast, any true injury to the employee is often purely  theoretical.  Employers contend there is no strong public policy reason to hold them liable for  penalties totaling thousands (or even millions) of dollars merely because they were ignorant of a  technical requirement as to what should appear on an itemized wage statement.  Accordingly, they  believe there is no strong reason to assume the Legislature intended to equate “knowing and  intentional” with “willful.”  Several district court decisions have now granted summary adjudication  against a claim for penalties on the ground that while the wage statements violated Section 226(a),  there was no evidence that the employer knew of Section 226 and intended to violate it. 228 Recent court decisions have begun to flesh out the meaning of the phrase “knowing and intentional”  in the context of Section 226.  These cases, however, do not provide clear guidance as to the lower  threshold for the “knowing and intentional” standard, because the defendants in these cases were  alleged to have been aware that their wage statements were not in compliance and to have done  nothing to fix them.  In any event, the January 2013 amendment to the statute clarified that a                                                        226 Barnhill v. Robert & Saunders Co., 125 Cal. App. 3d 1, 7 (1981). 227 See id. at 7-8 (explaining public policy underlying Section 203). 228 See Harris v. Vector Marketing Corp., 656 F. Supp. 2d 1128, 1145-46 (N.D. Cal. 2009) (summary adjudication  warranted on plaintiff’s § 226(e) claim where dispute existed as to whether plaintiff was independent contractor or  employee and record lacked evidence that conduct was knowing or willful); Reber v. AIMCO/Bethesda Holdings, Inc.,  No. SA CV07-0607 DOC (RZx), 2008 WL 4384147 (C.D. Cal. Aug. 25, 2008) (summary adjudication appropriate on  plaintiff’s § 226 claim because of a good faith dispute as to whether employees are exempt precludes finding  defendant’s conduct was knowing and intentional);  Mutec v. Huntington Mem’l Hosp., LASC Case No. BC 288727 (LA  Superior Court, Mar. 10, 2006) (Hon. Tricia Ann Bigelow) (granting summary adjudication against claim for penalties  where employer did not know that its pay stubs violated Section 226(a)).  But see Heritage Residential Care, Inc. v  Division of Labor Standards Enforcement, 192 Cal. App. 4th 75, 88 (2011) (defendant’s “good faith mistake of law”  that  employees who lacked Social Security numbers were not required to be provided with wage statements was not an  “inadvertent” mistake, such as a clerical error would be).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 55 "knowing and intentional failure" will not include an isolated and unintentional payroll error due to a  clerical or inadvertent mistake. The fact finder can consider whether the employer, prior to an  alleged violation, has adopted and complied with a set of policies, procedures, and practices that  fully comply with section 226. X. California Minimum Wage Claims A. Wage Averaging Improper Under California Law In Armenta v. Osmose, Inc., 229 the Second District Court of Appeal held that employees who  alleged that their employer had failed to pay them for certain hours they worked off the clock had  violated the state minimum wage laws with respect to every hour they worked but were not paid.   The employer defended the claim with the argument that the employees’ average hourly pay for the  workweek was greater than the minimum wage, which defeated any claim for minimum wage under  the federal “averaging method” for determining minimum wages. 230   The Armenta court, however,  rejected the averaging method and instead adopted the position set forth in a DLSE Opinion Letter  that California requires that the minimum wage be paid for each and every hour worked.   Accordingly, regardless of the total compensation an employee earns during a week, or even during  a single day, if there are hours the employee has worked for which the employee was paid less  than the minimum wage, then the employer has violated Labor Code Section 1194 by failing, for the  hours in question, to pay minimum wage. 231 Interestingly, a federal district court in California previously had expressly rejected the DLSE’s  position, holding that the FLSA’s averaging method applied to claims under California minimum  wage law as well. 232   The Armenta court rejected the federal court’s conclusion, reasoning that  California intended its minimum wage law to be more protective than that under the FLSA, and that  part of this greater protection is a requirement to pay minimum wage for “all hours worked,” which is  language absent from the FLSA. 233   The Armenta court also noted that Labor Code Sections 221- 223, which have no counterparts under the FLSA, make it illegal to secretly pay employees less  than the amount designated by statute or contract. 234   The court failed to explain, however, why the  violation of these particular Labor Code statutes signaled an intent to treat those violations as  minimum wage violations.                                                       229 135 Cal. App. 4th 314 (2006). 230 Armenta, 135 Cal. App. 4th at 319. 231 Id. at 324-25. 232 Medrano v. D’Arrigo Bros. Co., 336 F. Supp. 2d 1053 (N.D. Cal. 2004). 233 Armenta, 135 Cal. App. 4th at 323-24. 234 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 56 The Armenta decision affects California law in several ways.  First, allowing a minimum wage claim  whenever there are some uncompensated work hours will allow employees who could not state a  claim for unpaid overtime an alternative basis upon which to sue.  For example, unionized  employees whose overtime claims are preempted by Section 301 of the Labor Management  Relations Act may still be able to sue under California law for unpaid minimum wages.  Indeed, the  plaintiffs in Armenta were members of a union who had pleaded claims for overtime, but later  abandoned them because they recognized that those claims were preempted. 235   Minimum wage  law claims, by contrast, are generally not preempted given that they can be resolved entirely  independently of a collective bargaining agreement. 236 Second, employees who sue for minimum wage violations can recover liquidated damages under  Labor Code Section 1194.1, which are not available for other sorts of wage violations.  If liquidated  damages are awarded, then employees will recover twice the minimum wage (which would  currently amount to $18 per hour) for each hour they can show they worked but received no pay. Third, plaintiffs will be able to plead minimum wage claims in any case where they allege some  work time was unpaid.  For example, in meal period cases where the employer is alleged to have  recorded meal periods automatically whether or not the employees actually took them, employees  may argue that they worked through the meal period, but were not paid for that work time.  Those  facts might trigger minimum wage claims now.  Similarly, a claim that an employee worked  controlled standby time that the employer erroneously treated as unpaid will now trigger a minimum  wage claim. The ruling in Armenta may not apply, however, in certain situations where the state minimum wage  law is preempted by federal law.  In Fitzgerald v. Skywest Airlines, Inc., 237 the plaintiff was a flight  attendant.  Her governing contract called for her to receive $1.60 an hour for “block time” while her aircraft was readied for flight, while passengers boarded and disembarked, and for flight standbys.   On the whole, however, only a fraction of her hours were block time, the remainder of her hours  was paid at a rate of $20 to $30 per hour, and there was no evidence that wages paid to the  employee averaged less than minimum wage for even one day.  Nonetheless, the plaintiff argued,  under Armenta, that paying only $1.60 for each hour of “block time” was a violation of the minimum  wage law. The court affirmed summary judgment for the defendant based primarily on the doctrine of federal  preemption under the Railway Labor Act. 238   In addition, however, the court suggested that Armenta                                                       235 Id. at 318.  Unionized employees’ overtime claims often fail because those employees generally work under a collective  bargaining agreement that provides premium pay for all hours worked, which then brings the employees within the  Labor Code Section 514 “collective bargaining exemption.”   236 Id. 237 155 Cal. App. 4th 411 (2007). 238 Fitzgerald, 155 Cal. App. 4th at 421-22.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 57 might not apply where, as in Fitzgerald, the employment contract specifies that certain hours are to  be paid at less than the minimum wage, but the employee always receives an average wage for  hours worked each day above minimum wage: In Armenta, the employer violated its own CBA and written employment policies which  required that employees be paid for time spent driving company vehicles to and from job  sites. . . . Unlike Armenta, here there is no evidence that SkyWest pays [attendants] less  than what was collectively bargained for.  As discussed in Armenta, Labor Code  “[s]ections 221, 222, and 223 articulate the principle that all hours must be paid at the  statutory or agreed rate. . . .”  Here the agreed rate is set forth in the SkyWest CBA which  was voted on and approved by SkyWest [attendants]. 239 As a result of this language in Fitzgerald, in some circumstances employers may be able to argue that Armenta applies only where employees are forced to work hours without any pay, as long as  there was a clear agreement in place regarding varying rates of pay, and average pay does not  amount to less than the minimum wage. 240 B. The Conflict Between Piece Rate Formulas And The  Requirement To Pay Minimum Wages Several recent cases have raised questions regarding the ability of employers to pay workers on a  piece rate basis.  In Bluford v. Safeway Stores, Inc., 241 the Court of Appeal held that rest breaks  must be separately compensated under a piece rate system because the breaks are considered to  be work time.  There, the plaintiff was a truck driver who was compensated based on the miles he                                                        239 Fitzgerald, 155 Cal. App. 4th at 417. 240 Employers may also face both contractual liability and Labor Code penalties for failing to pay workers in accordance  with a city “living wage” ordinance that sets minimum pay above the statutory minimum wage rate.  Amaral v. Cintas  Corp., 163 Cal. App. 4th 1157 (2008) (employee class could bring claims to recover contract damages for unpaid  wages, as well as Labor Code penalties for failure to pay wages and accrued vacation on termination, and for improper  wage statements, pursuant to living wage clause in laundry services contract between the City of Hayward and Cintas);  see also McKenzie v. Fed. Express Corp., 765 F. Supp. 2d 1222 (C.D. Cal. Apr. 14, 2011) (judgment entered against  defendant for PAGA penalties where violation under Section 226 is established; injury need not be shown). But see  Balasanyan v. Nordstrom, Inc., Nos. 3:11-cv-2609-JM (WMC), 3:10-cv-2671-JM (W<C), 2012 WL 6675169, at *1-2  (S.D. Cal. Dec. 12, 2012), the district court denied Nordstrom’s motion for summary judgment with respect to plaintiff’s  claims under Labor Code sections 1194 and 1197.  Plaintiffs contended that Nordstrom underpaid its sales people by  compensating them only through commissions earned for time spent on stocking assignments, pre-opening, and postclosing periods.  Id. at *1.  Plaintiffs contended  they worked at least 1.5 hours per work shift without compensation.  Id. Nordstrom contended that its commission plan did not violate Sections 1194 and 1197, because “California law permits  employers to pay commissions for all hours worked and does not impose any restrictions on the type of work employers  can pay with commissions.”  Id. at *2.  Furthermore, Nordstrom argued that commissions may be used to compensate  employees for “non-sell time” work as it is part of the services provided in connection with sales, and that the  employment contracts, which comply with  minimum wage laws, should govern.  Id. at *2-3.  Plaintiffs argued that  averaging is impermissible under Armenta, supra, and Nordstrom countered that here, unlike Armenta, the  commissions Nordstrom paid for selling time here always exceeded minimum wage. Id. at *4.  The court denied  Nordstrom’s motion for summary judgment with respect to the Section 1194 and 1197 claims.  Id. at *6. It remains to be  seen whether this type of commission plan will be held to be lawful when it is evaluated on its merits 241 216 Cal. App. 4th 864 (2013). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 58 drove and for the performance of specific tasks.  The plaintiff argued that because his employer did  not separately pay him for the time he spent on rest breaks, this constituted a violation of the  California minimum wage law.  The Court of Appeal agreed, holding that a piece rate compensation  formula that does not provide separate wages for time spent on rest breaks is improper. Piece rate compensation systems were dealt another significant blow in Gonzalez v. Downtown LA  Motors, LP. 242   In Gonzalez, the plaintiffs were automobile service technicians who were paid a flat  rate based on a formula for each repair job satisfactorily completed.  Although the employer kept time records for the employees and maintained a “minimum wage floor” to ensure that workers  were always paid at least the minimum wage times the total number of hours worked in a pay  period, the plaintiffs complained that they were not separately paid an additional hourly rate for  downtime or time spent on non-repair tasks. The Court of Appeal ruled in favor of the plaintiffs, holding that “averaging all hours worked ‘in any work week’ to compute an employer’s minimum  wage obligation under California law is inappropriate.” 243    The Bluford and Gonzales decisions have negative implications for California employers who use  piece rate compensation formulas.  The core purpose of paying employees a piece rate is to  incentivize them to be productive.  This incentive is counteracted when employers are required to  also pay employees for non-productive time. 244 These recent decisions are especially alarming  because the Wage Orders specifically permit paying employees piece rates, and the types of piece  rate plans used by the employers in these cases had been widely utilized without incident for  decades.  It is anticipated that the plaintiffs’ bar will initiate a new wave of class action litigation  attacking piece rate compensation plans, so employers utilizing such plans should ensure that they  comply with the latest legal developments. C. Neutral Time-Rounding Practices Are Lawful Federal law allows employers to use a neutral practice of rounding reported time, up or down, as  long as the overall effect is not to underpay employees for their time. 245   Under one such policy, for  example, employees who work between 1 and 7 minutes during a quarter-hour segment of time                                                        242 215 Cal. App. 4th 36 (2013), review denied July 17, 2013. 243 Id. at 48. 244   Employers paying piece rates compensation formulas may wish to consider utilizing a hybrid compensation system that  pays employees a base rate for each hour and an additional piece rate or “bonus” for each completed item.  This would  ensure compliance with the minimum wage law as well as incentivizing employees to be productive.  Note, though, that  the production bonus would still be subject to rules governing overtime premium pay. 245    See 29 C.F.R. §  785.48(b); see also Alonzo v. Maximus, Inc., 832 F. Supp. 2d 1122, 1127-29 (C.D. Cal. 2011)(facially  neutral policy rounding time to the nearest quarter hour was proper).  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 59 would have their time rounded down, while those who work between 8 and 14 minutes would be  paid for a full 15 minutes. 246 Until the recent Court of Appeal holding in See’s Candy Shops, Inc. v. Superior Court, 247 California  law did not expressly permit this employer practice, thus giving rise to lawsuits contending that  employees were not being compensated at the minimum wage for all hours worked, as required  under Labor Code Section 1194.  In See’s Candy, the employer used a timekeeping software  system that required employees to punch in at the beginning and out at the end of their shifts. 248    Two company policies provided for adjustments to the timecards: a “rounding” policy and a “grace  period” policy. 249   Under the “rounding” policy, punches in and out were rounded up or down to the  nearest tenth of an hour. 250 Under the “grace period” policy, an employee could voluntarily punch in  up to 10 minutes before the scheduled start time and punch out 10 minutes after the scheduled end  time, but was prohibited from working during these periods. 251   If an employee punched into the  system during the grace period, the employee was paid based on the scheduled start/stop time,  rather than the punch time. 252     Plaintiff, a former retail sales employee, sued See’s on behalf of herself and others, claiming that  the company’s time-rounding and “grace period” practices failed to compensate employees for all  hours worked. 253   The company alleged that any unpaid amounts were de minimis, and that the  rounding policy and grace period policy complied with federal and state law.  The trial court granted  summary judgment for the plaintiff and the company appealed. 254 The Court of Appeal reversed, finding both policies to be lawful. 255 Citing the federal rounding  standard, the court held that a rounding policy is permissible under California law if it is “fair and  neutral” on its face and is “used in such a manner that it will not result, over a period of time, in  failure to compensate the employees properly for all the time they have actually worked.” 256 With  respect to the grace period policy, the court concluded that the plaintiff failed to produce any                                                        246   All timekeeping systems employ rounding at some point, whether to the minute, second, or tenth of a second.  The  discussion of rounding here generally applies to situations where rounding is done in increments greater than the  nearest minute. 247    210 Cal.App.4th 889 (2012). 248   Id. at 892.   249   Id. 250 Id. 251 Id. at 892-93. 252   Id. at 893. 253 Id.  254   Id. at 899. 255   Id. at 907.   256   Id.  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 60 evidence showing that class members who clocked in during the grace period were working or were  under the employer’s control, and the parties agreed that under California law a grace period is  permitted if the employee is not working or is not under the employer’s control. 257    As a result of the See’s decision, California employers should be able to employ neutral rounding  policies in their timekeeping systems.  Rounding policies that round only in favor of the employer,  however, are improper.  Furthermore, even properly implemented, facially-neutral rounding policies  may still be subject to claims that they tend to result in underpayment to employees over a period of  time, and thus result in litigation. XI. California Labor Code Private Attorneys  General Act A. General Scope of the Law Effective January 1, 2004, California law greatly expanded the prospect of litigation under  the Labor Code.  Labor Code Section 2698, et seq., the Labor Code Private Attorneys  General Act (“PAGA”), provides employees with added financial incentives to sue and  creates new penalties for Labor Code violations.  Previously, many of the Labor Code  provisions carried no civil penalty at all, and others had a civil penalty but provided no  private right of action.  Civil penalties could generally be obtained only if the DLSE actually  brought an enforcement action against the employer. PAGA drastically altered Labor Code enforcement by creating (1) new civil penalties for  every provision of the Labor Code that affects employees and that did not previously have  a civil penalty 258 and (2) a private right of action to recover civil penalties. 259   Where no  specific civil penalty is previously attached to a Labor Code violation, the new penalty is  $100 for each aggrieved employee per pay period for an initial violation, and $200 for every  further violation. 260   The law requires the successful plaintiff to give three-fourths of any civil  penalties recovered to the Labor and Workforce Development Agency.  The aggrieved employees are allowed to keep only the remaining one-quarter of the penalties awarded. 261                                                       257 Id. at 909. 258 Lab. Code § 2699(f). 259 Lab. Code § 2699(a). 260 Lab. Code § 2699(f)(2). In Amaral v. Cintas Corp., 163 Cal. App. 4th 1157, 1209 (2008), the California Court of Appeal  held that an “initial” violation encompassed violations covering multiple employees for multiple pay periods, up until  such time as “the employer has learned that its conduct violates the Labor Code,” at which point “the employer is on  notice that any future violations will be punished just the same as violations that are willful or intentional,” meaning the  penalty rate will be doubled.  261 Lab. Code § 2699(i).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 61 An aggrieved employee suing pursuant to this statute sues on behalf of himself or herself,  or on behalf of any other current or former employees. 262   A union may not bring a PAGA  claim on behalf of “aggrieved employees.” 263   The California Supreme Court has held that  PAGA claims may proceed as collective actions without satisfying class certification  requirements. 264   In so holding, the Court stated that because a PAGA suit is analogous to  a suit brought by a government agency on behalf of the public interest, there is no need to  satisfy class certification requirements. 265   Furthermore, as initially drafted, the statute  contained no requirement that the employee exhaust administrative remedies by first filing  a claim with the Labor Commissioner (or even that the employee notify the Labor  Commissioner of the lawsuit). Seyfarth Shaw has estimated that this statute created a new right to recover penalties on  more than 100 Labor Code provisions, several of which are quite obscure.  Even though  the limitations period for a penalty claim would be only one year, 266 the effect of these  penalty provisions can be significant.  Suppose, for example, that an employer of 150  employees is sued for a repeated violation of some obscure Labor Code section, and the  violation affected each employee over the course of one year—during each of 26 biweekly  pay periods.  In this example the employer could be subject to penalties in the amount of  more than $700,000. 267   Because penalties are cumulative for distinct Labor Code  violations, that figure could be doubled or tripled if there were multiple, recurrent Labor  Code violations (or if one act of misconduct violated multiple Labor Code provisions).   Attorney’s fees to the prevailing plaintiff would augment that total. 268 When Arnold Schwarzenegger became governor in 2004, one of his first initiatives was an attempt to repeal PAGA.  Although he did not succeed in obtaining total repeal, he and the                                                        262 At least one court has held that the employee does not sue on behalf of the state.  Waisbein v. UBS Financial Services  Inc., No. C-07-2328 MMC, 2008 U.S. Dist. LEXIS 21727 (N.D. Cal. Mar. 19, 2008).  It appears  this holding was  overruled by Arias v. Superior Court, 46 Cal. 4th 969 (2009).  Furthermore, in Reyes v. Macy’s, Inc., 202 Cal. App. 4th  1119, 1123 (2011), the Court of Appeal held that a plaintiff “may not . . . bring the PAGA claim as an individual claim,  but ‘as the proxy or agent of the state’s labor law enforcement agencies’” (quoting Arias,  46 Cal. 4th at 986). 263 Amalgamated Transit Union v. Superior Court, 46 Cal. 4th 993 (2009). 264 Arias v. Superior Court, 46 Cal. 4th 969 (2009).  265 Id. at 987. 266 Code Civ. Proc. § 340(a) (one-year statute of limitations on statutes to recover a penalty); Moreno v. Autozone, Inc.,  No. C05-04432-MJJ, 2007 U.S. Dist. LEXIS 43873, at *4-10 (N.D. Cal. June 5, 2007) (analyzing PAGA and holding that  a one-year statute of limitations applies); Thomas v. Home Depot USA Inc., 527 F. Supp. 2d 1003 (N.D. Cal. 2007)  (same). 267 $15,000 ($100 x 150 employees) for the first violation and then $30,000 for each of the 25 further violations, if the $200  penalty is found to apply for all later pay periods.  An employer may be able to demonstrate that it should only be fined  for one continuous violation, in which case the proper penalty might be $100 for each violation, but under that scenario  the employer would still be liable for $390,000 ($15,000 x 26 pay periods) see Amaral v. Cintas Corp., 163 Cal. App. 4th  1157, 1209 (2008). 268 Lab. Code § 2699(g).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 62 Legislature did scale back a few of the most controversial provisions and to insert some  additional procedural protections.  SB 1809, signed into law in August 2004, effected the  following changes to PAGA:  The bill repealed the requirement (formerly in Labor Code Section 431) that  employers file a copy of their job application forms with the Division of Labor  Standards Enforcement.  Violations of Labor Code provisions that merely require notice, posting, agency  reporting, or filing of documents with a state agency are now exempt from  prosecution by aggrieved employees.  An exception to this exemption was carved  out for “mandatory payroll or workplace injury reporting.” 269  All settlements in which penalties are paid must now be judicially approved.  The court now may reduce the amount of civil penalty if, under the circumstances,  the penalty otherwise would be “unjust, arbitrary and oppressive, or confiscatory.” 270  Before suing, an aggrieved employee now must exhaust an administrative  procedure that involves providing written notice of the particular Labor Code  violation to the employer and the Labor Commissioner, for possible investigation  before filing suit. 271 Failure to exhaust this administrative remedy within one year of  the violation bars the suit. 272  The Labor Commissioner now has authority to promulgate regulations to  implement the statute (although they have yet to attempt to do so). Although the 2004 reforms to PAGA may seem modest, they appear to have had the effect  of substantially reducing the attractiveness of these kind of lawsuits.   PAGA claims are not  typically asserted by themselves, but rather are added to standard wage and hour class  actions, typically for bargaining leverage.                                                       269 Lab. Code § 2699(g)(2). 270 Lab. Code § 2699(e)(2). 271 Lab. Code §§ 2699(a), 2699(g)(1), and 2699.3. 272 Moreno, No. C05-04432-MJJ, 2007 U.S. Dist. LEXIS 43873, at *4-10 (N.D. Cal. June 5, 2007) (employee who filed  lawsuit within one year, but failed to exhaust administrative remedies until more than one year after leaving employment  was time-barred from asserting PAGA claims).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 63 B. Scope of the “Civil Penalty” Provisions With the creation of the administrative remedy requirement before an employee could seek  penalties under PAGA, the question arose whether this administrative requirement applied  to all statutes covered by PAGA.  More specifically, Section 2699.3 sets forth a long list of  particular statutes that are purportedly subject to the administrative remedy.  Included on  this list are several statutes that provided for penalties recoverable by individual employees  even before the passage of PAGA (e.g., Labor Code Section 203, which provides for  waiting time penalties where employers willfully fail to pay terminating employees all wages  owed to them).  Defendants began to argue that no employee could sue to recover  penalties under any statute listed in Section 2699.3 without first exhausting administrative  remedies. In November 2004, the Second District Court of Appeal issued Caliber Bodyworks v.  Superior Court, 273 which clarified the scope of the administrative remedy exhaustion  requirement in PAGA.  The court held that the administrative remedy requirement applied  only to actions seeking to recover a “civil penalty,” which the court distinguished from  actions that could be advanced by individuals to recover “statutory penalties,” such as  Labor Code Section 203.  In short, the court held that if a plaintiff seeks to recover penalties  that were available under a statute and recoverable by an individual prior to PAGA’s  passage, then the employee could still recover such statutory penalties without complying  with the administrative prerequisites of PAGA. 274 Although not at issue in the Caliber Bodyworks decision, the court’s holding that statutory  penalties differ from “civil penalties” arguably expanded the scope of PAGA beyond what  had broadly been understood.  PAGA created a new civil penalty for every section of the  Labor Code that did not previously provide for a “civil penalty.” 275   If statutes that always  provided for a statutory penalty (e.g., Labor Code Section 203) are not statutes that provide  for a “civil penalty,” then an employee arguably can recover civil penalties in addition to  the penalties already available under those statutes. On the other hand, the Caliber Bodyworks decision leaves open the possibility that no new  civil penalty is created for those Labor Code provisions that do not themselves provide for a  civil penalty, but for which civil penalties may be recovered under a separate Labor Code  provision. 276   Furthermore, even if it is theoretically possible to obtain an award of civil                                                        273 134 Cal. App. 4th 365 (2005). 274 Id. at 377-78.  The Second Appellate District reached the same result again in Dunlap v. Superior Court, 142 Cal. App.  4th 330 (2006). 275 Lab. Code § 2699(f). 276 See, e.g., Lab. Code § 256 (providing a separate civil penalty previously recoverable only by the DLSE for violations of  Labor Code Section 203); Lab. Code § 210 (providing a separate civil penalty recoverable only by the DLSE for  violations of Labor Code Sections 204, 204b, 204.1, 204.2, 205, 205.5, and 1197.5).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 64 penalties on top of statutory penalties for the same violation, courts may exercise discretion  not to award double penalties pursuant to Labor Code Section 2699(e)(2), which allows a  court not to award a penalty where doing so would be “unjust, arbitrary and oppressive, or  confiscatory.” C. Pursuing PAGA Claims Collectively Without Class Certification PAGA provides very little procedural guidance as to how an “aggrieved employee” is to  seek penalties on behalf of other aggrieved parties.  Given that the statute does not ever  require that the other “aggrieved parties” consent to a suit being brought on their behalf, a  dispute arose whether a party seeking to use PAGA to sue on behalf of aggrieved parties  who did not actively join the action as parties would need to satisfy the requirements for  class certification under Code of Civil Procedure Section 382. In Arias v. Superior Court, 277 the California Supreme Court held that there is no requirement  that a party seeking to sue on behalf of other aggrieved parties under PAGA must first  obtain class certification. 278   Rather, the employee bringing the issue stands in the shoes of  the Labor Commissioner and may seek to recover penalties in essentially the same manner  as the Labor Workforce Development Agency (“LWDA”).  The LWDA may pursue penalties  against an employer on behalf of employees who do not expressly consent to the LWDA’s  efforts.  If an employee can establish a violation affects a group of aggrieved employees,  then he may prove his case, recover the penalties, and the result of the case will be res  judicata (i.e., precluding litigation of the claim) as to the Labor Commissioner and the  “aggrieved employees” on whose behalf the action was brought. 279   The Court also stated  that while PAGA actions need not be brought as class actions, they can be. 280 The Arias decision raised many questions.  For example, if a plaintiff were to pursue a meal  period class action as well as a derivative PAGA action for penalties, and a court denied  certification of the case on the ground that individualized issues predominate as to whether  different employees experienced meal period violations, could the case proceed  nonetheless on a collective basis?  Presumably, this would require that the plaintiff  individually prove each employee’s claim to meal period violations, but if that could be done  in a manageable manner, the court likely would have certified a class. If it required each  aggrieved employee individually to prove a violation, would each of possibly hundreds of                                                        277 46 Cal. 4th 969 (2009). 278     Id. at 985; see also Henderson v. JP Morgan Chase Bank, No. CV 11-3428 PSG, at *8-9 (C.D. Cal. July 10, 2013)  (affirming reasoning in Arias and denying motion to strike PAGA claims even though class certification was denied with  respect to the same claims). 279 Id. at 985-86.  280 Id. at 981 n.5 (“Actions under the Labor Code Private Attorneys General Act of 2004 may be brought as class actions.”). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 65 such employees be required to appear and testify?  And if they failed to do so, would that  provide a basis for the court to rule against them on the merits? The most sensible reading of Arias was not that it endorsed the notion that every action for  Labor Code civil penalties could proceed collectively without class certification, but rather that it was not always necessary to use class action procedures.  In cases where the  violation can be proven through records or some other collective mechanism (e.g., a  minimum wage violation that could be proven by reference to payroll records), an employee  could prove it on behalf of a group of aggrieved employees without the need to obtain class  certification.  Of course, if it were that simple, a plaintiff presumably could obtain class  certification, and likely would want to do so.  It remains to be seen if appellate courts  interpret Arias more broadly and if it will lead to a wave of PAGA-only non-class group  actions.  Thus far, this wave has not materialized. D. Release of PAGA Claims Through Class Settlement Plaintiffs’ lawyers generally try to avoid characterizing any money from a settlement as  being attributed to PAGA claims, 281 as three-quarters of any such money must be paid to  the state. 282   Indeed, it is fairly common for plaintiffs’ counsel not to assert PAGA claims at  all, but rather simply to proceed with Labor Code claims.  If the case settles, however, the  defendant generally insists that the release cover all claims arising out of the same  underlying facts, including any claims for PAGA penalties.  Otherwise, the defendant would  face the risk of another lawsuit on the same issues. A dispute may arise if a member of the settlement class later seeks to bring his own PAGA  action.  The plaintiff will argue that the previous class representative had not exhausted the  administrative remedy under PAGA and thus never had a right to release PAGA claims.   Rather, until that administrative remedy is exhausted, the plaintiff argues, the PAGA claim  is the property of the state.  In short, the plaintiff argues that a prerequisite to a release of  PAGA claims is the exhaustion of the administrative remedy and the receipt of notice from  the state that it is opting not to pursue the claim. The court of appeal addressed this issue in Villacres v. ABM Industries Inc., 283 and held that  the class members could indeed waive their right to pursue PAGA claims and that a  judgment entered on such a class settlement creates a res judicata bar to those class  members pursuing PAGA claims in a separate action.  The court explained that the party in                                                        281 See Nordstrom Com’n Cases, 186 Cal. App. 4th 576, 589 (2010) (affirming trial court’s approval of a class wide  settlement that apportioned zero dollars to PAGA claims). 282 It is unclear in a class settlement whether the attorney may recover a percentage of the gross on a common fund basis  or whether the state is entitled to three-quarters of the gross sum, with the lawyer being limited to recovering a separate  sum on a lodestar basis (reasonable number of hours times a reasonable hourly rate). 283 189 Cal. App. 4th 562 (2010). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 66 a PAGA action is the aggrieved employee, rejecting the plaintiff’s argument that the State  of California is the real party in interest in a PAGA action. Separate from the res judicata argument, however, an employer may argue that where the  class release includes language that the class members are releasing PAGA claims based  on the same underlying facts as the Labor Code claims, the doctrine of release precludes  any class member from pursuing PAGA relief.  In other words, while there is no sort of res  judicata bar, basic contract principles of release prevent someone who agreed to the  release from going ahead and suing on the released claim.  This argument was approved  in a federal decision, Waisbein v. UBS Financial Services Inc., 284 which is not binding on  California courts but is persuasive authority. 285   Accordingly, while it remains unsettled  whether PAGA claims can be released other than through a settlement of a class action  that asserted PAGA claims, the law that exists suggests that such settlements are  proper. 286 E. Wage Order Claims California’s Industrial Welfare Commission sets forth minimum work standards for  California employees in Wage Orders.  These Wage Orders contain a variety of provisions  that employers must follow, including everything from overtime and minimum wage  requirements to the timing of meal and rest breaks.  The Wage Orders, however, also  contain more obscure sections, with no corresponding Labor Code provision, regulating  things such as the location of clocks and, in some cases, bathroom temperature.  These  obscure sections have inspired claims that their violation constituted a violation of California  Labor Code section 1198, 287 and therefore give rise to PAGA penalties. The first case to reach the California Court of Appeal asserting this theory was Bright v. 99¢  Only Stores. 288   There, Bright filed a putative class action alleging that her employer                                                        284 2007 U.S. Dist. LEXIS 92051, at *8-9 (Dec. 5, 2007) (“[T]he question is whether the Bowman class members voluntarily  entered into an agreement in which they accepted a monetary benefit from UBS in exchange for not pursuing their  claims under PAGA. The indisputable answer to that question is ‘yes.’”) 285 Harris v. Investor’s Business Daily, Inc., 138 Cal. App. 4th 28, 34 (2006) (“even unpublished federal opinions have  persuasive value in [the superior] court”). 286 In any event, the best practice for settling PAGA claims in connection with an action where they were not alleged is to  require the plaintiffs’ counsel to amend the complaint to include a PAGA claim and also to provide the required notice to  the State. 287 California Labor Code section 1198 states: The maximum hours of work and the standard conditions of labor fixed by the commission shall  be the maximum hours of work and the standard conditions of labor for employees. The  employment of any employee for longer hours than those fixed by the order or under conditions  of labor prohibited by the order is unlawful. 288 189 Cal. App. 4th 1472 (2010).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 67 violated a requirement in Wage Order 7-2001 289 to provide employees with “suitable seats”  where the nature of the work reasonably permits their use.  Bright argued that 99¢ Only  Stores, by violating the Wage Order, also violated California Labor Code section 1198,  entitling her to PAGA penalties under Section 2699(f). 290 In response to the complaint, 99¢ Only Stores demurred on two grounds: (1) that the  violation of the Wage Order’s seating provision is not a violation of Section 1198, because it  is not a “prohibited” condition of labor; and (2) that even if a violation of the seating  provision was a violation of Section 1198, civil penalties under PAGA are not available  because the Wage Order has its own penalty provision. 291   The trial court sustained the  demurrer. 292   Bright appealed and the appellate court, in a case of first impression, found in  her favor, holding that the seating requirement in Wage Order 7-2001 is a condition of labor  under Section 1198 and that the use of the word “prohibited” in the statute did not mean  that the conduct had to be prohibited by the Wage Order for it to come within the statute’s  protections. 293   Moreover, the court found that the penalties provided for in Wage Order 7- 2001 section 20 are, by the Wage Order’s own terms, nonexclusive.  And because Section  1198 does not contain its own penalty provision, the penalty provision contained within  PAGA applies. 294 Shortly thereafter, another Division of the Court of Appeal for the Second District reached  the same result.  In Home Depot U.S.A., Inc. v. Superior Court, 295 the appellate agreed with  the Bright ruling and held that PAGA provides employees with a private right of action to  recover civil penalties for violations of the “suitable seats” requirement in Wage Order 7- 2001. 296                                                       289 Wage Order 7-2001 applies to retail employers. 290 189 Cal. App. 4th. at 1475. 291 See id. at 1476. 292 See id. 293 See id. at 1478-79. 294 See id. at 1481. 295 191 Cal. App. 4th 210 (2010). 296 Id.; see also Thurman v. Bayshore Transit Management, Inc., 203 Cal. App. 4th 1112 (2012) (Fourth District Court of  Appeal affirmed a trial court’s award of underpaid “wages”–i.e. premium payments for violations of California’s meal and  rest period laws and regulations–as a penalty under Cal. Labor Code section 558; underpaid wages may also be  recoverable under PAGA).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 68 In another appellate decision validating an action for “suitable seats,” the Ninth Circuit  recently held that an employee need not actually request a seat to be entitled to one. 297 These cases represent a new breed of class action lawsuit in California. 298   Though they refer to the “suitable seats” requirement in Wage Order 7-2001, it is likely that plaintiffs’  counsel will attempt to use the rulings to create private causes of action for similar Wage  Order provisions. Courts have differed on whether seating claims are good candidates for  class treatment. 299 XII. Unfair Competition Claims, Business &  Professions Code Section 17200 A. Former Law—Pre-Proposition 64 Beginning in the late 1990s, many plaintiffs in wage and hour cases also filed companion  claims under California’s Unfair Competition Law (“UCL”), Business & Professions Code  Section 17200, et seq.  Before the UCL was amended in 2004, it was an extremely potent  weapon because it had no traditional standing requirement.  Rather, it literally authorized  “any person acting for the interests of itself . . . or the general public” to bring an action to  enjoin unfair competition.  Court decisions gave a generous reading to the term “general  public.” 300   Moreover, unfair competition was defined as any “unlawful, unfair or fraudulent  business practice.”  The California Supreme Court construed this language in the  disjunctive, so that the UCL was turned into an omnibus consumer protection law, reaching  such issues as the sale of whale meat, 301 the filing of small claims court lawsuits by a                                                        297    Green v. Bank of America, 2013 U.S. App. LEXIS 2988, No. 11-56365 (9th Cir. Feb. 13, 2013).  The court also held that  it would be premature at an early stage of the litigation—when no facts of the case had been developed—to determine  whether an award under PAGA was unjust. 298     See also Garvey v. Kmart Corp., No. C 11-02575 WHA, 2012 U.S. Dist. LEXIS 178920 (N.D. Cal. Dec. 18, 2012), the  first of the “seating” cases to go to trial, plaintiff alleged that Kmart Corp. failed to provide suitable seating for checkout  cashiers in violation of Labor Code § 1198 and Section 14(A) of Industrial Welfare Commission Wage Order 7-2001.   The court summarized its holding: “’All working employees shall be provided with suitable seats when the nature of the  work reasonably permits the use of seats,’ according to the law in California.  In this civil action, class counsel have  failed to prove that the nature of the work reasonably permits the seating modification urged by counsel at trial.   Possibly a different modification involving a lean-stool would be provable but this record does not support it.”  Id. at *2. 299   In Hall v. Rite Aid Corp., San Diego Superior Court Case No. 37-2009-00087938-CU-OE-CTL (Oct. 11, 2012), the trial  court granted Rite Aid Corp.’s motion to decertify a class of cashiers and clerks, concluding that individualized issues  predominated as to whether the “nature of the work” of a cashier reasonably permitted the use of a suitable seat.  The  court concluded that the Rite Aid cashier job must be viewed as a whole, but the evidence demonstrated that an  improper individual-by-individual analysis was required.  However, in Garvey v. Kmart Corp., supra, the federal district  court found a seating claim by cashiers to be a good fit for class treatment, at least as to a single store. 300 A UCL representative action cannot, however, be brought on behalf of sophisticated business entities in their capacities  as “consumers” of goods or services.  Rosenbluth Int’l, Inc. v. Superior Court, 101 Cal. App. 4th 1073 (2002). 301 People v. Sakai, 56 Cal. App. 3d 531 (1976).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 69 collection agency in counties distant from where the defendants live, 302 the use of the “Joe  Camel” caricature to advertise cigarettes, 303 marketing sugar coated breakfast cereals as  something other than candy, 304 and the sale of cigarettes to minors.  The statute has never,  however, permitted damage awards. 305   It has authorized only injunctive relief, including,  significantly, any order that “may be necessary to restore to any person in interest any  money or property . . . which may have been acquired by means of such unfair  competition”—i.e., restitution. The California Supreme Court held that restitution included ordering an employer who  failed to pay premium overtime pay required by statute to disgorge the premium pay to the  affected employees, 306 an exercise functionally equivalent to paying damages for a  statutory overtime claim under the Labor Code.  California courts have subsequently  clarified, however, that equitable relief does not include forcing the defendant to go beyond  returning money wrongfully withheld from the plaintiff by disgorging additional profits the  employer earned as a result of its unfair practices. 307 There were three primary advantages a plaintiff would gain by joining a UCL claim to a  wage and hour suit.  First, because the restitutionary remedy under the UCL was similar to  a damages remedy for a wage law violation, a companion UCL claim effectively expanded  the statute of limitations on a Labor Code wage claim 308 from three years to four years, the  length of the UCL’s statute of limitations. 309   Second, a UCL claim provided a potential  vehicle for plaintiffs to secure class relief without satisfying the procedural burdens of class  certification. 310   Third, a plaintiff who lacked traditional standing to sue because he or she  was never impacted by an alleged wage and hour or Labor Code violation could                                                        302 Barquis v. Merchants Collection Ass’n, 7 Cal. 3d 94 (1972). 303 Mangini v. R. J. Reynolds Tobacco Co., 7 Cal. 4th 1057 (1994). 304 Comm. on Children’s Television, Inc. v. Gen. Foods Corp., 35 Cal. 3d 197 (1983). 305 The UCL cannot be used, for instance, to recover waiting time penalties, precisely because the damage awards are  penalties and not compensation.  Pineda v. Bank of America, N.A., 170 Cal. App. 4th 388 (2009), review granted, 207  P.3d 1 (2009).  The UCL also cannot be used to recover attorneys’ fees; these may be recovered only in cases where  the UCL is used to “borrow” other laws that specifically provide for recovery of attorneys’ fees.  People ex rel. City of  Santa Monica v. Gabriel, 186 Cal. App. 4th 882 (2010). 306 Cortez v. Purolator Air Filtration Prods. Co., 23 Cal. 4th 163, 177-78 (2000). 307 Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1152 (2003); see also Feitelberg v. Credit Suisse First  Boston, LLC, 134 Cal. App. 4th 997 (2005) (non-restitutionary disgorgement of profits unavailable under UCL even  where case has been certified as a class action). 308 Labor Code penalties, however, are not recoverable under the UCL, because they do not constitute restitution.  See,  e.g., Pineda v. Bank of America, 50 Cal. 4th 1389, 1401-2 (2010) (Labor Code section 203 waiting time penalties are  not recoverable under the UCL). 309 Cortez, 23 Cal. 4th at 179. 310 Kraus v. Trinity Mgmt. Servs., Inc., 23 Cal. 4th 116 (2000).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 70 nonetheless sue as a “private attorney general” on behalf of those employees who were  impacted by the violation. 311 B. Reform of the Law—Passage of Proposition 64 On November 2, 2004, California voters passed Proposition 64 (“Prop 64”), which amended  two of the three broadest aspects of the UCL—i.e., the near-universal standing requirement  and the ability to bring a collective action without obtaining class certification.  Prop 64 had  no impact on the governing statute of limitations for UCL claims, however. With respect to standing, Prop 64 revised Business & Professions Code Section 17203 and  17204 to impose real standing requirements on individuals seeking to bring UCL claims.   The statute previously gave standing to sue to any person suing on behalf of the “general  public.”  Individual standing under the UCL is now limited to a person “who has suffered  injury in fact and has lost money or property as a result of . . . unfair competition.” 312   The  proponents of the law argued that this change was intended to stop “shakedown lawyers”  who “appoint themselves to act like the Attorney General and file lawsuits on behalf of the  people of the State of California.” 313   The proponents also argued that voters should support  Prop 64 because it “[p]rotects your right to file a lawsuit if you have been damaged” while it  “[a]llows only the Attorney General, district attorneys, and other public officials to file  lawsuits on behalf of the People of the State of California to enforce California’s unfair  competition laws.” 314 As for class certification requirements, Prop 64 amended Business & Professions Code  Section 17203 to include an express requirement that individuals seeking to bring collective  actions under the UCL must satisfy the requirements for class certification set forth in  Section 382 of the Code of Civil Procedure, including (1) a community of interest among  the class members; (2) common questions of law or fact which predominate over  individualized issues; (3) a claim that is typical of the class; and (4) the plaintiff must be  able to adequately represent the interests of the class. 315                                                       311 Stop Youth Addiction v. Lucky Stores, Inc., 17 Cal. 4th 553 (1998) (purported anti-smoking public interest advocacy  organization had standing under UCL to sue Lucky Stores for allegedly selling cigarettes to minors). 312 Bus. & Prof. Code § 17204. 313 Official Voter Information Guide, Arguments and Rebuttals, Proposition 64,  www.voterguide.ss.ca.gov/propositions/prop64-arguments.htm (accessed November 17, 2004). 314 Official Voter Information Guide, Arguments and Rebuttals, Proposition 64,  www.voterguide.ss.ca.gov/propositions/prop64-arguments.htm (accessed November 17, 2004). 315 Lockheed Martin Corp. v. Superior Court, 29 Cal. 4th 1096, 1103-04 (2003).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 71 C. Proposition 64’s Restrictions on UCL Class Actions An issue raised by Prop 64 was whether, in a UCL-based class action, the Prop 64  standing requirement applies to all members of the proposed class, or just to the class  representatives.  Initially, it appeared that courts were tending toward requiring all class  members to have standing. 316   However, in 2009, the California Supreme Court handed  down In re Tobacco Cases II, 317 which held that Prop 64’s standing requirement applied  only to the class representative and not to each and every person within the proposed  class.  More specifically, the California Supreme Court held that: imposing this unprecedented requirement would undermine the guarantee made  by Proposition 64’s proponents that the initiative would not undermine efficacy of  the UCL as a means of protecting consumer rights, because requiring all  unnamed members of a class action to individually establish standing would  effectively eliminate the class action lawsuit as a vehicle for the vindication of  such rights. 318 The ramifications of Tobacco II are substantial.  In many wage and hour class actions, the  plaintiffs use a UCL claim to extend the statute of limitations on their statutory claims to four  years.  In most of these cases, however, a significant portion of the certified class did not  lose any money or property as a result of the violation, but plaintiffs argue that the mere  fact that some class members have no damages does not preclude certification.  For  example, significant numbers of managers may not have worked any overtime, or  significant numbers of a meal period class may have actually taken all their meal periods.   After Tobacco II, trial courts may still certify classes despite the existence of members of  the class without any grounds for recovery. 319   While this is largely the way the courts had  handled class actions traditionally, if the California Supreme Court had adopted the position  of the dissent in Tobacco II, it might have substantially undercut the ability to use the UCL  as a vehicle for advancing Labor Code class actions. 320 321                                                       316 See, e.g., Pfizer, Inc. v. Superior Court, 141 Cal. App. 4th 290  (2006). 317 46 Cal. 4th 298 (2009). 318 Id. at 321. 319 See Sav-On, 34 Cal. 4th at 333 (explaining that “a class action is not inappropriate simply because each member of the  class may at some point be required to make an individual showing as to his or her eligibility for recovery or as to the  amount of his or her damages”). 320 Nevertheless, the reforms instituted by Proposition 64 still do apply where the class representatives themselves lack  any basis for recovery.  See, e.g., Birdsong v. Apple, 590 F.3d 955, 959-62 (9th Cir. 2009) (dismissing putative class  action where plaintiffs alleged that injury was possible, but failed to allege that they themselves suffered any actual  harm). 321 Another key development in regard to the application of the UCL was the decision of the California Supreme Court in  Sullivan v. Oracle, 51 Cal. 4th 1191 (2011).  There, the Court held that overtime work performed by out-of-state  employees within California can serve as the basis for a claim under California’s FLSA claims by competition law.  Cal. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 72 XIII. Class Action Fairness Act of 2005 A. The Purpose of the Act The Class Action Fairness Act of 2005 (“CAFA”) amended the federal diversity jurisdiction  statute, 28 U.S.C.A. § 1332, to broaden the basis for federal diversity jurisdiction.  In  enacting the CAFA, Congress’s intent was to shift class action litigation from state courts to  the federal courts. 322   The most significant increase in filings of class actions has been in  labor class actions. 323   Most of these class actions are brought under either F.R.C.P.  23 or  the Fair Labor Standards Act (FLSA). 324 B. General Requirements The CAFA grants the federal court jurisdiction over any class action in which: 1) the  proposed class consists of at least 100 members, 2) the total amount in controversy  exceeds $5 million after combining claims, exclusive of interest and costs, and 3) there is  diversity between at least one plaintiff class member and one defendant. 325    The CAFA expands the jurisdiction of the federal courts to hear class action lawsuits and  replaces the strict complete diversity requirement with a more lenient rule, thereby granting  jurisdiction where any diversity exists between plaintiffs and defendants. 326 CAFA diversity  exists when at least one plaintiff is a citizen of one state and one defendant is a citizen of a  different state, or when one plaintiff is a citizen of a foreign country and one defendant is a  U.S. citizen, or when one plaintiff is a U.S. citizen and one defendant is a citizen of a  foreign country. 327                                                                                                                                                                                      Bus. & Prof. Code § 17200 (“UCL”).  However, the Court also held that out-of-state employees working outside  California cannot serve as the basis for a California UCL claim.  Although the Sullivan Court explicitly limited its decision  to “the circumstances of this case,” it is anticipated that the plaintiff’s bar will argue that a logical extension of its  reasoning suggests that similar conclusions may result for non-California-based employers.  The Sullivan Court  declined to opine on the different burdens that a non-California-based employer may face in applying California  overtime laws to nonresident employees working in California, but the plaintiff’s bar will undoubtedly seek to obtain  judicial rulings that the California Supreme Court’s conflict of laws analysis suggests no reason for why a different  conclusion would result for non-California-based employers.  322 Federal Judicial Center, Impact of CAFA on the Federal Courts: Fourth Interim Report, at 1-2, Apr. 2008 (reporting a  72% increase in class action cases filed in the 88 district courts from January to June 2007 compared with July to  December 2001). 323 Id. at 7. 324 Id. (reporting a 228 percent increase when comparing the first six-month period to the last six-month period). 325 28 U.S.C. § 1332(d)(2).  CAFA does not confer federal subject matter jurisdiction when the primary defendants are  states, state officials, or other governmental entities against whom the district court may be foreclosed from ordering  relief.  Id. § 1332(d)(5). 326 Natale v. Pfizer, Inc., 379 F. Supp. 2d 161, 167 (D. Mass. 2005), aff’d, 424 F.3d 43 (1st Cir. 2005). 327 Id. § 1332(d)(2); Bush v. Cheaptickets, Inc., 425 F.3d 683, 684 (9th Cir. 2005).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 73 The CAFA defines class actions as any civil action filed under Federal Rule of Civil  Procedure 23 or similar state law. 328   Also included within this definition, for removal  purposes, are mass actions, i.e., actions in which monetary claims by 100 or more plaintiffs  are proposed to be tried jointly because they involve common questions of law or fact. 329 The CAFA is not retroactive and does not apply to class actions filed in state court before  its enactment on February 18, 2005, and removed to federal court after that date. 330 C. Removal Under CAFA The burden of establishing removal jurisdiction remains on the proponent of federal  jurisdiction. 331   Removal must be timely and must be done during one of two thirty-day  periods for removing the case.  The first thirty-day removal period is triggered “if the case  stated by the initial pleading is removable on its face.” 332   The second thirty-day removal  period is triggered if the initial pleading does not indicate that the case is removable, and  the defendant receives “a copy of an amended pleading, motion, order or other paper” from  which removability may first be ascertained. 333 If a complaint alleges damages in excess of $5 million, then the amount in controversy is  ”presumptively satisfied” unless it appears to a legal certainty that the claim is actually for  less than the jurisdictional minimum. 334    If the complaint fails to specify any amount in damages, the removal papers must provide  the court with facts to support the jurisdictional amount.  Moreover, the Ninth Circuit has  held that the defendant seeking removal must prove by a “preponderance of the evidence”  that the amount in controversy has been met. 335 The third scenario is when the complaint affirmatively states that the amount in controversy  is less than $5 million.  The Ninth Circuit addressed this situation in Lowdermilk v. United  States Bank, holding that the removing defendant must prove to a “legal certainty” that the                                                        328 28 U.S.C. § 1332(d)(1)(B).  At least one district court has held that representative actions under PAGA are not “class  actions” and therefore are not removable pursuant to CAFA.  Sample v. Big Lots Stores, Inc., 2010 WL 4939992 (N.D. Cal.) 329 Id. § 1332 (d) (11)(B)(i). 330 See Bush v. Cheaptickets, Inc., 425 F.3d 683 (9th Cir. 2005). 331 See Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345 (2013); Rodriguez v. AT&T Mobility Services LLC, 728 F.3d 975  (9th Cir. 2013). 332 Harris v. Bankers Life & Cas. Co., 425 F.3d 689, 694 (9th Cir. 2005). 333 Carvalho v. Equifax Info. Serv., LLC, 629 F.3d 876, 885 (9th Cir. 2010). 334 Abrego Abrego v. Dow Chem. Co., 443 F.3d 676 n.8 (9th Cir. 2006). 335 Id. at 683; Sanchez v. Monumental Life Ins. Co., 102 F.3d 398, 404 (9th Cir.1996).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 74 CAFA amount in controversy has been met. 336   The Ninth Circuit noted that federal courts  are courts of “limited jurisdiction” and therefore should strictly construe subject matter  jurisdiction. 337   Second, the court noted that the plaintiff is “master of her complaint” and can  plead to avoid federal jurisdiction. 338   Moreover, the court raised the bar in cases where  there is no evidence of bad faith, requiring the defendant to not only contradict the plaintiff’s  own assessment of damages, but also overcome the presumption against federal  jurisdiction. 339 The Lowdermilk rule threatened to eviscerate CAFA by making it easy for plaintiffs to avoid  removal by disingenuously stating that the amount in controversy was less than $5 million.   Plaintiffs could then later amend their complaints or otherwise contend that they had  discovered additional evidence supporting greater damages than they had initially alleged,  and there was no way to bind class members to the initial amount-in-controversy estimate. Lowdermilk was dealt an initial blow in 2013 when the United States Supreme Court  restored CAFA’s integrity in Standard Fire Insurance Co. v. Knowles. 340   There, the named  plaintiff, Knowles, claimed that his homeowners insurer had shorted him and “hundreds [or]  possibly thousands” of other policyholders in the putative class that he sought to represent  by failing to include certain benefits when paying out claims.  Knowles sued in Arkansas  state court and attempted to avoid removal to federal court by stating in his complaint that  he was seeking less than $5 million in damages on behalf of the class. 341     The defendant nonetheless removed the case to federal court, invoking CAFA. In analyzing  jurisdiction, the district court concluded that the total potential damages put in controversy by the class action claim exceeded the threshold amount.  But  the court concluded that the  plaintiff’s statements that he would not seek more than $5,000,000 on behalf of the class  served to limit the amount in controversy to less than the jurisdictional minimum, making  CAFA inapplicable. 342                                                       336 Lowdermilk v. United States Bank, 479 F.3d 994, 1000 (9th Cir. 2007);  see also CiFuentes v. Red Robin Int’l, Inc., No.  C-11-5635-EMC, 2012 WL  693930 (N.D. Cal. 2012) (holding that defendants failed to provide “concrete evidence” to  estimate the amount in controversy to a “legal certainty” as required under Lowdermilk —“a very high, although not  insurmountable, threshold for defendants.”).   337 Id. at 998. 338 Id. at 999. 339 Id. 340    133 S. Ct. 1345 (2013). 341    Id. at 1347. 342    Id. at 1348.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 75 After the Eighth Circuit declined the insurer’s interlocutory appeal, the Supreme Court  granted certiorari. 343   The Court overturned the trial court's holding and found that the  plaintiff’s supposed “stipulation” did not limit the amount in controversy in the case.  Writing  for a unanimous Court, Justice Breyer noted that while the plaintiff could agree to limit his  own request for damages, he could not do so on behalf of absent members of a class that  no court had yet empowered him to represent. 344   These individuals thus might seek more  damages if, for example, Knowles was replaced as the named plaintiff or another class  member intervened in the case.  Because the named plaintiffs’ stipulation was thus not  effective, the district court’s original finding that the total potential damages in the case  exceeded $5,000,000 was controlling and the requirements for CAFA jurisdiction were  met. 345    Although Standard Fire is incompatible with Lowdermilk, it did not expressly overrule it.   Because of this, some courts in California clung to the notion that removing defendants must prove to a “legal certainty” that the CAFA amount in controversy has been met. The  Ninth Circuit corrected this situation in Rodriguez v. AT&T Mobility Inc., 346 holding that the  Supreme Court’s ruling in Standard Fire effectively overturned Lowdermilk. In Rodriguez, the Ninth Circuit found that the lead plaintiff’s asserted waiver of any claim in excess of the  $5 million amount-in-controversy requirement was ineffective in light of Standard Fire. 347    Accordingly, the court held that the proper burden of proof imposed upon a defendant to  establish the jurisdictional amount is the “preponderance of the evidence” standard, and not  the “legal certainty” standard set forth in Lowdermilk. 348 1. “Other Paper” Requirement Defendants should be aware that mere verbal statements that opposing counsel or  the plaintiff make regarding the amount in damages may not qualify as the “other  paper” that can trigger removal. 349   The published decisions have considered only  oral statements made in the context of mediation and settlement communications, so                                                       343    Id. 344 Id. at *1348-49. 345    Id. at 1350. 346    728 F.3d 975 (9th Cir. 2013).  347   Id. at 982.  348   Id. at 981. 349 See Molina v. Lexmark Int’l, Inc., 2008 U.S. Dist. LEXIS 22031, at *4 (C.D. Cal. 2008) (holding that oral communications  during settlement do not constitute “other papers for the purposes of § 1446(b)”); see also Jiminez v. Sears, Roebuck &  Co., 2010 U.S. Dist. LEXIS 22031, at *4 (C.D. Cal. 2010); see also Mendoza v. OM Fin. Life Ins. Co., 2009 U.S. Dist.  LEXIS 59008 (N.D. Cal. 2009).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 76 it is unclear whether oral statements made in other contexts can be used to satisfy  the “other paper” requirement. The Ninth Circuit has established the framework for determining whether the amount  in controversy meets the jurisdictional threshold.  A district court “may consider  whether it is ‘facially apparent’ from the complaint that the jurisdictional amount is in  controversy.  If not, the court may consider facts in the removal petition, and may  ‘require parties to submit summary-judgment-type evidence relevant to the amount in  controversy at the time of removal’.” 350    2. Premature Removal and Sanctions The Ninth Circuit has made clear that it disfavors premature removal.  The seminal  case, Abrego Abrego v. The Dow Chemical Co., reaffirmed the principle of  “guard[ing] against premature and protective removals and minimiz[ing] the potential  for a cottage industry of removal litigation.” 351 The court reminded the parties that  CAFA’s legislative history agreed with such a conclusion, citing to a portion of the  Senate Judiciary Committee Report:  The Committee understands that in assessing the various criteria  established in all these new jurisdictional provisions, a federal court may  have to engage in some fact-finding, not unlike what is necessitated by  the existing jurisdictional statutes. The Committee further understands  that in some instances, limited discovery may be necessary to make  these determinations. However, the Committee cautions that these  jurisdictional determinations should be made largely on the basis of  readily available information. Allowing substantial, burdensome discovery  on jurisdictional issues would be contrary to the intent of these provisions  to encourage the exercise of federal jurisdiction over class actions. 352 Defendants eager to remove a case should also consider the possibility of sanctions  in the event their removal petition is deemed unreasonable.  The Supreme Court has  noted that an award of costs and fees is permissible under Section 1447(c), when  “such an award is just” and “the removing party lacked an objectively reasonable  basis for removal.” 353   The Ninth Circuit has also previously stated that an award of                                                        350 Singer v. State Farm Mutual Auto. Ins. Co., 116 F.3d 373, 377 (9th Cir. 1997) (citing Allen v. R&H Oil & Gas Co., 63  F.3d 1326 (5th Cir. 1995)). 351 Abrego Abrego, 443 F.3d at 691. 352 Id. at 692 (citing S. Rep. No. 109-14, at 44, 2005 U.S.C.C.A.N. at 42 (emphasis added)). 353 Martin v. Franklin Capital Corp., 546 U.S. 132 (2005); see also Mosaic Sys., Inc. v. Bechtolsheim, No. C 07-3892-SI,  2007 WL 3022581, at *5 (N.D. Cal. Oct. 15, 2007) (denying request for fees and costs given “objectively reasonable”  basis for removal); Gardner v. UICI, 508 F.3d 559, 561-62 (9th Cir. 2007) (reversing award of fees and costs where Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 77 attorney fees is permitted even when defendant’s removal was “fairly supportable,”  but wrong as a matter of law. 354   But, a California federal district court has previously  held that all a defendant may need to support the removal is an argument “that is not  irrational or implausible.” 355 D. Exceptions to CAFA Jurisdiction There are narrow exceptions to CAFA jurisdiction. 356   The party that is seeking remand  back to the state court bears the burden of proof in establishing any exceptions to CAFA  jurisdiction. 357 1. Local Controversy Exception Under the local controversy exception, a federal court must decline jurisdiction  where: (1) greater than 2/3 of the proposed class members are citizens of the forum  state, (2) at least one “significant” defendant (i.e., from whom significant relief is  sought and whose alleged conduct forms a significant basis for the claims asserted  by the class) is a citizen of the forum state, (3) the principal injuries caused by the  alleged conduct or any related conduct of each defendant were incurred in the forum  state, and (4) no other class action was filed within the past three years asserting the  same or similar factual allegations against any of the defendants on behalf of the  same or other persons. 358 Some circuits, including the Eleventh Circuit, have made it clear that the CAFA’s  language favors federal jurisdiction over class actions and that its legislative history  suggests that Congress intended the local controversy exception to be a narrow one,  “with all doubts resolved ‘in favor of exercising jurisdiction over the case.’” 359    Consistent with this notion, several circuits agree that the party seeking remand back  to the state court bears the burden to demonstrate that the court lacks jurisdiction  under the “local controversy” exception. 360                                                                                                                                                                                      removing party had “an objectively reasonable basis for removal;” if a “reasonable litigant . . . could have concluded that  federal court was the proper forum,” a request for fees and costs must be denied). 354 Balcorta v. Twentieth Century-Fox Film Corp., 208 F.3d 1102, 1106 n.6 (9th Cir. 2000). 355 Hornung v. City of Oakland, No. C-05-4825 EMC, 2006 WL 279337, at *4 (N.D. Cal. Feb. 3, 2006).   356 28 U.S.C. § 1332(d)(4)(A)-(B). 357 Serrano v. 180 Connect, Inc., 478 F.3d 1018, 1024 (9th Cir. 2007). 358 28 U.S.C. § 1332(d)(4). 359 Evans v. Walter Indus., Inc., 449 F.3d 1159 (11th Cir. 2006). 360 See Serrano, 478 F.3d at 1019 (noting agreement with other circuits that party seeking remand must demonstrate  applicability of “local controversy” exception); Frazier v. Pioneer Americas LLC, 455 F.3d 542, 546 (5th Cir. 2006); Hart  v. FedEx Ground Package Sys. Inc., 457 F.3d 675, 680-81 (7th Cir. 2006); see also S. Rep. No. 109-14, at 44 (“It is the Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 78 The Ninth Circuit finally addressed this issue on January 25, 2011, in Coleman v.  Estes Express Lines, holding that a “district court cannot look beyond the complaint  in determining whether the criteria of subsections (aa) [“significant relief”] and (bb)  [“significant basis”] have been satisfied.” 361   Thus, extrinsic evidence will not be  considered in evaluating this exception.  The court explained that this conclusion was  required not only by the plain language of these subparts, but also because any  contrary holding would result in an expansive “mini-trial,” contrary to congressional  intent that jurisdiction determinations be made quickly under CAFA. 362 2. Home State Exception Under the home state exception, a federal court must decline jurisdiction where: (1)  2/3 or more of the proposed class members are citizens of the forum state and (2)  the primary defendants are citizens of the forum state. 363   Unlike the local controversy  exception, this exception does not require the court to consider other lawsuits.  The  party moving to remand the class action to state court must prove that the home state  exception applies. 364 E. Waiver A defendant may be considered to have waived the right to remove to federal court when,  after it is apparent that the case is removable, it takes actions in state court that manifest  an intent to have the matter adjudicated there. 365    The Ninth Circuit has held that “a waiver of the right of removal must be clear and  unequivocal.” 366   In Carvalho v. Equifax Info. Serv., LLC, the plaintiffs argued that  defendant’s removal was untimely because defendant filed a demurrer in state court and  then waited a year after the complaint was filed to remove. 367   The district court held that  because the complaint did not specify an amount of damages, the defendant’s filing of a  demurrer did not waive its right to remove. 368   The court stressed that the defendant did not                                                                                                                                                                                       Committee’s intention with regard to each of these exceptions that the party opposing federal jurisdiction shall have the  burden of demonstrating the applicability of an exemption.”).   361 Coleman v. Estes Express Lines, 631 F.3d 1010, 1015 (9th Cir. 2011). 362 Id. at 1017. 363 28 U.S.C. § 1332(d)(4)(B). 364 Serrano, 478 F.3d at 1024. 365 Resolution Trust Corp. v. Bayside Developers, 43 F.3d 1230, 1240 (9th Cir. 1995). 366 Id. 367 Carvalho v. Equifax Info. Serv. LLC., 2008 WL 2693625, at *4 (N.D. Cal. 2008). 368 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 79 engage in “any conduct that  manifested its intent to stay in state court” after removability  was first ascertained, and therefore did not waive its right. 369 F. After Removal and Effect of Denial of Class Certification A long-standing rule set out by the United States Supreme Court (the “Red Cab rule”) is  that “events occurring subsequent to removal which reduce the amount recoverable,  whether beyond the plaintiff’s control or the result of his volition, do not oust the district  court’s jurisdiction once it has attached.” 370   Although courts have disagreed over whether  denial of class certification affects federal jurisdiction, the trend is to apply the Red Cab rule  in this context as well. A number of courts have held that denial of class certification eliminates CAFA jurisdiction  as to that federal court, especially if it is not “reasonably foreseeable” that a class will be  certified in the future. 371   Other courts have held that denial of class certification does not destroy CAFA jurisdiction, because jurisdiction is determined at the moment the case was  removed and thus any subsequent changes do not affect the court’s continued  jurisdiction. 372 Initially, the decisions were split on this issue among the various California district courts.   In In re HP Inkjet Printer Litigation, a court in the Northern District extended the Red Cab rule to apply to CAFA jurisdiction.  The court held that it continued to have subject matter  jurisdiction even after denying the motion to certify a nationwide class. 373   But in Arabian v.  Sony Electronics, a Southern District court held otherwise, dismissing the case for lack of  subject matter jurisdiction because a class could not be certified, nor was certification likely  in the foreseeable future. 374   And in Darneal v. Allied Waste Transp., Inc., a defendant  employer attempted to obtain remand to state court because it realized it had erroneously  calculated the number of potential class members when it originally removed the case. 375                                                          369 Id. 370 St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 293 (1938). 371 McGaughey v. Treistman, 2007 WL 24935, at *3-4 (S.D.N.Y. 2007); Gonzalez v. Pepsico, Inc., 2007 WL 1100204, at *4  (D. Kan. 2007). 372 Vega v. T-Mobile, USA, Inc., 564 F.3d 1256, 1268 at n. 12 (11th Cir. 2009); Cunningham Charter Corp. v. Learjet, Inc.,  592 F.3d 805, 806 (7th Cir. 2010); Falcon v. Phillips Electronics N.A., Corp., 489 F. Supp. 2d 367 (S.D.N.Y. 2007);  In  re HP Inkjet Printer Litig., 2009 U.S. Dist. LEXIS 12271 (N.D. Cal. Feb. 5, 2009); Giannini v. Schering-Plough Corp.,  2007 U.S. Dist. LEXIS 48392, at *7-8 (N.D. Cal. June 26, 2007) (holding that jurisdiction was not necessarily divested  upon post-removal action and that supplemental jurisdiction provided the basis for retaining subject matter jurisdiction of  the claim at hand). 373 In re HP Inkjet Printer Litig., 2009 U.S. Dist. LEXIS 12271, at *7.  374 Arabian v. Sony Elecs. Inc., 2007 WL 2701340 (S.D. Cal. 2007). 375 Darneal v. Allied Waste Transp., Inc., 2010 WL 5292341 (E.D. Cal. 2010).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 80 The court refused to remand, holding that the question of the number of potential class  members is a factual inquiry that is likely to be resolved through continued litigation.   The Ninth Circuit Court of Appeal resolved this split in United Steel, Paper & Forestry,  Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union v.  Shell Oil Co. 376   In that case, the defendant, represented by Seyfarth Shaw, defeated  plaintiffs’ motion for class certification, and plaintiffs thereafter obtained remand to state  court on the grounds that there was “no reasonably foreseeable possibility” that a class  would be certified, and that therefore CAFA’s jurisdictional requirements could not be  satisfied. 377   The Ninth Circuit disagreed, and held that, in the context of CAFA jurisdiction,  the Red Cab rule applies “because no one suggests that a class action must be certified  before it can be removed to federal court under the Act.” 378 G. Settlement Process The enactment of CAFA has also brought changes to class action settlement  procedures. 379   In contingency fee cases, if a proposed settlement of a class action  provides for provision of coupons to class members, the portion of any attorney’s fee award  that is attributable to the coupons is based on the value to class members of the coupons  that are actually redeemed. 380   Alternatively, the fee award may be based on the lodestar  method which considers the amount of time the class counsel reasonably expended  working on the action. 381 In any event, in connection with any proposed coupon settlement, the court may approve  the settlement only after a hearing and “a written finding” that the settlement is “fair,  reasonable, and adequate for class members.” 382 In True v. American Honda Motor Company, the district court reiterated that heightened  scrutiny is necessary in reviewing coupon settlements, which are generally disfavored. 383    The court gave three reasons why such settlements are generally disfavored: “they often  do not provide meaningful compensation to class members; they often fail to disgorge illgotten gains from defendant; and they often require class members to do future business                                                        376     602 F.3d 1087, 1091-2 (9th Cir. 2010) 377 Id. at 1090. 378 Id. at 1091. 379 28 U.S.C. § 1711. 380 See id. § 1712(a). 381 See id. § 1712(b)(1). 382 See id. § 1712(e). 383 True v. Amer. Honda Motor Co., 749 F. Supp. 2d 1052, 1069 (C.D. Cal. 2010).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 81 with the defendant in order to receive compensation.” 384   Nonetheless, coupon settlements  can be approved if the value of the specific coupon settlement is “reasonable in relation to  the value of the claim surrendered.” 385 Settling parties must also be careful to avoid conditioning incentive awards to class  representatives on their acceptance of the settlement.  In Radcliffe v. Experian Info  Solutions, the Ninth Circuit determined that class counsel and class representatives were  inadequate where a settlement conditioned the provision of incentive awards to class  representatives on the representatives’ approval of the settlement. 386   The Ninth Circuit  reasoned that this condition “corrupted” the settlement by motivating the class  representatives to support a possibly unfair settlement in exchange for the award, as  opposed to seeking a fair settlement for the entire class. 387 Settlements may also not be approved if any class member is forced to pay an amount to  class counsel that would result in a net loss to the class member, unless the court makes a  written finding that the benefits substantially outweigh the loss. 388   Finally, the court will not  approve a settlement that provides for a payment to some class member that is more than  the payment to others solely due to their geographic proximity to the court. 389 The CAFA also contains specific requirements regarding the issuance of class settlement  notifications. 390   The CAFA requires defendants to serve a notice on (1) the “appropriate  federal official” and (2) the “appropriate state official.” 391   The notice must include several  things, including copies of the complaint, notices of scheduled judicial hearings, proposed  or final notification to class members of rights to request for exclusion, any proposed or  final class action settlement, among other papers. 392                                                       384 Id. (citing Figueroa v. Sharper Image Corp., 517 F. Supp. 2d 1292, 1302 (S.D. Fla. 2007)). 385 Id. 386 Radcliffe v. Experian Info. Solutions, 715 F.3d 1157 (9th Cir. 2013). 387 Id. at 1164.  The Court went on to explain that a large disparity between the incentive award and the payments to the rest  of the class members “exacerbated the conflict.”  Id. at 1165. 388 See 28 U.S.C. § 1713. 389 See 28 U.S.C. § 1714. 390 See 28 U.S.C. § 1715. 391 See id. § 1715(a). 392 See id. § 1715(b).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 82 XIV. Class Certification A. General Requirements In order to certify a class action, plaintiffs must show “the existence of an ascertainable  class and a well-defined community of interest among the class members.”  The community  of interest requirement embodies three factors: (1) predominant common questions of law  or fact, (2) class representatives with claims or defenses typical of the class, and (3) class  representatives who can adequately represent the class.” 393   There must also be enough  class members to make the effort worthwhile.  These elements are referred to as  ascertainability, commonality or predominance, typicality, adequacy, and numerosity.   Class certification is most often defeated on commonality or predominance grounds, and  less often on the grounds of typicality, adequacy, ascertainability, and numerosity. In the past, some defendants resisted class certification by arguing that plaintiffs would not  be able to establish liability on the merits.  In 2000, the California Supreme Court formally  rejected such a practice, holding that a trial court could not consider the factual or legal  merits in deciding class certification, except to the (limited) extent that the merits affected  the ascertainability of the class. 394   In other words, while it is appropriate for the trial court to  examine the evidence closely to determine if the relevant class action factors have been  met (e.g., predominance of common issues), the court may not deny class certification on  the ground that the class claims ultimately lack substantive merit. 395    However, as discussed in more detail below, courts must make necessary factual and legal  inquiries regardless of whether they overlap with the merits, in order to ascertain whether  the claims alleged are amenable to resolution on a class-wide basis. 396   Recent                                                        393 Richmond v. Dart Indus., Inc., 29 Cal. 3d 462, 470 (1981). 394 Linder v. Thrifty Oil, 23 Cal. 4th 429 (2000).  The procedure disallowed in Linder should be distinguished from a precertification motion for summary judgment as to the individual’s claims.  Such a motion, if granted as to all named  plaintiffs, effectively would defeat class certification because it would remove all adequate representatives.  Allen v.  Pacific Bell, 348 F.3d 1113, 1115 (9th Cir. 2003).  Such a pre-certification summary judgment would not bind the class,  however. 395 See Brinker Restaurant Corp. v. Superior Court, 53 Cal.4th 1004, 1025 (2012)  (“Presented with a class certification  motion, a trial court must examine the plaintiff’s theory of recovery assess the nature of the legal and factual disputes  likely to be presented, and decide whether individual or common issues predominate.  To the extent the propriety of  certification depends upon disputed threshold legal or factual questions, a court may, and indeed must, resolve them”);  Bartold v. Glendale Fed. Bank, 81 Cal. App. 4th 816, 829 (2000) (“when the merits of the claim are enmeshed with  class action requirements, the trial court must consider evidence bearing on the factual elements necessary to  determine whether to certify the class”). 396    Wal-mart Stores, Inc. v. Dukes , 131 S. Ct. 2541, 2551-52 (2011) (citing Gen. Telephone Co. of S.W. v. Falcon, 457  U.S. 147, 102 S. Ct. 2364, 72 L. Ed. 2d 740 (1982)); see also Ellis v. Costco Wholesale Corp., 657 F.3d 970, 984 (9th  Cir. 2011) (holding the district court erred by failing to conduct a “rigorous analysis” of the merits to determine whether  the plaintiffs had established commonality under Rule 23);  In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 318  (3d Cir. 2008) (class certification requires “thorough examination” of factual and legal allegations; “rigorous analysis  may include a preliminary inquiry into the merits” and consideration of “the substantive elements of the plaintiffs’ case in Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 83 developments in this aspect of the law concerning class action certification procedures  have significantly bolstered defendants’ ability to defeat class certification. 397 B. Class Certification in Exempt Misclassification Cases It is well established that “class actions will not be permitted where there are diverse factual  issues to be resolved, despite the existence of common questions.” 398 In the 2003 decision  Lockheed Martin Corp. v. Superior Court, 399 the California Supreme Court explained the  plaintiffs’ burden in moving for class certification: Plaintiffs’ burden on moving for class certification, however, is not merely to show  that some common issues exist, but, rather, to place substantial evidence in the  record that common issues predominate. As we previously have explained, this  means “each member must not be required to individually litigate numerous and  substantial questions to determine his [or her] right to recover following the class  judgment; and the issues which may be jointly tried, when compared to those  requiring separate adjudication, must be sufficiently numerous and substantial to  make the class action advantageous to the judicial process and to the  litigants.” 400 The executive exemption has the potential to raise inherently individualized issues that are  not consistent with class treatment as outlined in the Lockheed case. 401   The Wage Orders  caution that:                                                                                                                                                                                      order to envision the form that a trial on those issues would take”); In re Coordinated Pretrial Proceedings in Petroleum  Prods. Antitrust Litig., 691 F.2d 1335, 1342 (9th Cir. 1982) (affirming denial of class certification, where “any theory on  which [plaintiffs] might rely [to prove the allegations of the complaint] would raise predominantly individual questions”). 397     In Morgan v. Wet Seal, Inc., 210 Cal.App.4th 1341, 1371 (2012), the Court of Appeal affirmed the denial of class  certification with respect to two wage and hour claims: (1) that Wet Seal unlawfully required employees to buy Wet Seal  clothing and merchandise, and (2) that Wet Seal failed to reimburse employees for work-related travel.  The court  determined that assessing whether common issues predominated over individualized issues necessitated an evaluation  of the merits of the legal claims.  Id. at 1354.  The court then evaluated the policies at issue, and determined that  because Wet Seal did not have a facially unlawful dress code policy, the employees failed to show that liability could  “rest on proof of a company-wide policy” and individualized inquiries would be required.  Id. at 1365.  Similarly, proving  the travel expense reimbursement claim would require individualize inquiries because the policy itself was not facially  unlawful.  Id. at 1358. 398 Clausing v. San Francisco Unified Sch. Dist., 221 Cal. App. 3d 1224, 1233 (1990). 399 29 Cal. 4th 1096 (2003). 400 Id. at 1108 (2003); see also Newell v. State Farm Gen. Ins. Co., 118 Cal. App. 4th 1094 (2004) (class certification  inappropriate even though insurer had uniform policy for evaluating earthquake claims, because individual liability for  each policy holder would require examination of numerous individualized factors); Frieman v. San Rafael Rock Quarry,  116 Cal. App. 4th 29, 40-41 (2004) (class certification denied for nuisance claims against a quarry arising from blasting  noise where liability varied from one homeowner to another based on a “myriad of different factors”). 401 In Lockheed, a medical monitoring case, the California Supreme Court ultimately reversed the trial court’s ruling  granting class certification because “[t]he questions respecting each individual class member’s right to recover that  would remain following any class judgment appear so numerous and substantial as to render any efficiencies attainable Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 84 The work actually performed by the employee during the course of the work  week must, first and foremost, be examined and the amount of time the  employee spends on such work, together with the employer’s realistic  expectations and the realistic requirements of the job, shall be considered in  determining whether the employee satisfies this requirement. 402 Given California’s complete rejection of any form of qualitative test for exempt status, it  would be possible for one manager to spend only 45 percent of his or her time performing  exempt tasks (or closely and directly related tasks), and for another manager in the same  position to spend 55 percent.  The first manager would not be exempt, while the second  manager would be exempt.  In Nordquist v. McGraw-Hill Broadcasting Co., 403 this is  precisely what happened: the court of appeal refused to rely on another court’s ruling that  the plaintiff’s own successor was exempt because the inquiry was too “fact specific.”  While  Nordquist was not a class action, its reasoning seemed inconsistent with the notion that  exempt misclassification cases would be good candidates for class litigation. In light of the various pronouncements about the individualized inquiry necessary to  determine an employee’s exempt status, the defense bar was hopeful that courts would  disapprove of a plaintiff obtaining class certification on the ground that a class of managers  was uniformly misclassified as exempt.  If an employer could bring forth some declarations  from managers attesting that they spend more than half their time on exempt tasks, the  best a plaintiff could argue was that many managers at other stores spent the majority of  their time on non-exempt tasks.  In any case, the finder of fact would need to examine each  store and each manager individually to determine if the managers there were misclassified  as exempt—an inquiry inconsistent with class litigation. Employers were disappointed when the California Supreme Court issued Sav-On Drug  Stores, Inc. v. Superior Court, 404 which indicated that exempt misclassification cases may  often be appropriate for certification.  In Sav-On, the trial court certified a class of store  managers notwithstanding evidence that exempt status of individual managers varied  from store manager to store manager based on differences in how they divided their time  between exempt and non-exempt tasks.  The court of appeal held that individualized issues  necessarily predominated over common issues because the fact finder would need to  examine each store manager’s work habits to see whether that manager spent the majority  of his or her time on exempt tasks.                                                                                                                                                                                      through joint trial of common issues insufficient, as a matter of law, to make a class action certified on such a basis  advantageous to the judicial process and the litigants.”  Lockheed, 29 Cal. 4th at 1111. 402 See, e.g., Wage Order 7-2001 § 2(K). 403 32 Cal. App. 4th 555, 569 (1995). 404 34 Cal. 4th 319 (2004).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 85 In reversing, the California Supreme Court emphasized that the appellate court had given  insufficient deference to the trial court’s determination that common issues predominated.   The court clarified that if a reasonable person might conclude from the record that common  issues predominated over individualized ones, then a trial court’s certification order should  not be disturbed on appeal. 405   The court also suggested that the reverse would be true, in  that a trial court’s order denying certification was entitled to similar deference: “We need not  conclude that plaintiffs’ evidence is compelling, or even that the trial court would have  abused its discretion if it had credited defendant’s evidence instead.” 406   Accordingly, the  same types of arguments that the defendant in Sav-On raised—that individualized issues  will predominate over common ones—still have potential to persuade a trial court to deny  certification; the trial court simply has the discretion to accept or reject the argument based  on its assessment of the facts before it. While the California Supreme Court’s decision does not mandate certification in  misclassification cases, the court specifically identified several issues that are commonly  present in many manager misclassification cases that the court indicated could be  established through collective proof:  whether, as the plaintiff argued, the defendant had a deliberate policy to misclassify  non-exempt employees as exempt;  whether the defendant implicitly conceded all the employees were non-exempt  when it reclassified all the employees at issue as non-exempt in 1999;  whether any given task within the limited universe of tasks that managers  performed qualifies as exempt or non-exempt; and  whether a manager following the defendant’s reasonable expectation for  performing the job would spend the majority of the work time on exempt duties. 407 The court held that a trial court could rationally conclude that those common issues  predominated over the individualized issues concerning how individual managers spent  their time.  Dismissing concerns that these cases could prove unmanageable, the court  further noted that the trial court had broad discretion as to how to handle individualized  issues once the class issues were resolved.  The court said little more about those                                                        405 Id. at 331; but see Aguiar v. Cintas Corp. No. 2, 144 Cal. App. 4th 121 (2006) (reversing court’s decision to deny  certification because the court did not consider the use of subclasses, but affirmatively ruling that certification was  required rather than remanding with instructions for trial court to exercise its discretion using proper standard). 406 Id. 407 Id. at 327. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 86 proceedings other than to encourage trial courts to be “procedurally innovative” in  fashioning procedures to resolve remaining individualized issues efficiently. 408 In the immediate wake of Sav-On, there appeared to be a trend among trial courts to certify  more exemption misclassification cases.  That trend was offset somewhat in 2006 by the  issuance of a published appellate decision that expressly made the point that Sav-On had  implied—i.e., that a trial court’s decision to deny certification is entitled to the same  deference as a decision to certify a class.  In two post-Sav-On cases, Dunbar v. Albertson’s Inc., 409 and Keller v. Tuesday Morning, Inc., 410 the Court of Appeal held that the trial court  did not abuse its discretion when it determined that differences in how specific managers  allocated their time between exempt and non-exempt duties was a predominant issue in  the case, and an issue that supported denial of class certification or decertification. In the years that have passed since Sav-On, a body of federal district court cases (removed  on diversity jurisdiction grounds) has emerged deciding class certification in a variety of  different exemption contexts.  It is notable how two cases with closely similar facts often  result in one being certified while the other is not.  Certification decisions appear to vary  depending on the policy preferences of the particular judge assigned to the case.  Several  cases have come down issued by judges with a more pro-certification bent that suggest  that exemption cases should commonly be certified if all the employees were uniformly  classified as exempt without the employer engaging in a person-by-person audit of the  employees’ job duties (something that almost never occurs in real life). 411   On the flip side,  numerous cases from judges more skeptical of class certification have denied class  certification notwithstanding a common job description and an absence of an employer’s  exemption audit of each person in the proposed class. 412                                                       408 Id. at 339. 409 141 Cal. App. 4th 1422 (2006). 410 179 Cal. App. 4th 1389 (2009). 411 See, e.g., Wells Fargo Home Mortg. Overtime Pay Litig., 527 F. Supp. 2d 1053 (N.D. Cal. 2007) (Judge Patel certified  class of loan originators because employer had a common policy of treating all such employees as exempt without  conducting an individual inquiry into their job duties), rev’d, 571 F.3d 953 (9th Cir. 2009); Alba v. Papa John’s USA,  2007 U.S. Dist. LEXIS 28079, 12 Wage & Hour Cas. 2d (BNA) 710 (C.D. Cal. Feb. 7, 2007) (Judge Feess certified  class of restaurant managers on the ground of common job description and evidence that employer encouraged  uniform practices among stores); Wang v. Chinese Daily News, Inc., 231 F.R.D. 602 (C.D. Cal. 2005) (Judge Marshall  found that predominant common issue was defendant’s “policy of classifying all reporters and account executives as  ‘exempt’”); Tierno v. Rite-Aid Corp., 2006 U.S. Dist. LEXIS 66436 (N.D. Cal. 2006) (Judge Henderson granted  certification based on common job description and casting doubt on credibility of surveys obtained by employer postlitigation). 412 See, e.g., In re Wells Fargo Home Mortgage Overtime Pay Litigation, 571 F.3d 953 (9th Cir. 2009) (overturning grant of  class certification for loan originators because a uniform exemption policy cannot be the sole basis for a class  certification, but is only one factor to be looked at); Vinole v. Countrywide Home Loans, Inc., 246 F.R.D. 637 (S.D. Cal.  2007) (Judge Sabraw denied certification of proposed class of loan originators on ground individualized issues  predominated as to whether any originator spent enough time outside to qualify for outside sales exemption), aff’d, 571 Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 87 The most practical lesson to draw from these cases is to pay very close attention to the  assigned judge’s history with respect to class certification.  An employer can usually learn  more about whether to settle the case or fight through class certification based upon the  judge’s general views on class certification than from any facts in the case. C. Subclasses In Sav-On, the California Supreme Court suggested that one way to handle individualized  issues without denying class certification altogether would be to divide the class into  subclasses.  For example, if a key individualized factor that would affect a manager’s  exempt status is the size of the store managed, the trial court might divide the class into  multiple subclasses based on store size.  When a court is considering whether to divide a  class into subclasses, the employer should be prepared to assert defenses that could  defeat certification as to those particular subclasses. Employers may have typicality and adequacy arguments as to the subclass that do not  apply to a broader class.  For example, if none of the named plaintiffs is a member of a  particular subclass, then the court may not certify the subclass because the plaintiff’s  claims would not typify those of the subclass.  In addition, under federal class action law  that likely applies to California law as well, numerosity must be met as to each subclass.                                                                                                                                                                                        F.3d 935 (9th Cir. 2009); Jimenez v. Domino’s Pizza, 238 F.R.D. 241 (C.D. Cal. 2006) (Judge Selna denied class  certification of store manager class based on predominance of individualized issues as to how store managers divide  their time between exempt and non-exempt work); Sepulveda v. Wal-Mart Stores, Inc., 237 F.R.D. 229 (C.D. Cal. 2006)  (Judge Fischer denied class certification of assistant manager class based on predominance of individualized issues as  to how employees divided time between exempt and non-exempt work); Campbell v. PricewaterhouseCoopers, 253  F.R.D. 586 (E.D. Cal. 2008) (certification denied as to categories of employees holding the same jobs as the class  representatives, but in different departments; “The fact that an employer classifies all or most of a particular class of  employees as exempt does not eliminate the need to make a factual determination as to whether class members are  actually performing similar duties”); see also Marlo v. United Parcel Service, 453 Fed. Appx. 682 (9th Cir. 2011)  (affirming Judge Pregerson’s denial of class certification as to store managers because plaintiff could not devise a trial  plan by which classwide misclassification could be established by use of collective proof); Mora v. Big Lots Store, Inc.,  194 Cal. App. 4th 496 (2011) (affirming trial court’s denial of class certification as to store managers due to insufficient  evidence of a uniform corporate policy requiring store managers to engage primarily in non-managerial duties); Weigele  v. Fedex, 267 F.R.D. 614 (S.D. Cal. 2010) (Judge Sammartino decertified class of Dock Service Managers, holding that the fact the managers were all uniformly trained and classified as exempt was insufficient to overcome individualized  issues concerning widespread differences in the manner in which the employees chose to manage, which affected the  actual duties they performed); Cruz v. Dollar Tree Stores, 2011 WL 2682967 (N.D. Cal. July 8, 2011) (Judge Conti  decertified a class of store managers, holding that the “glue” that gave rise to a common resolution was now missing  given that the majority of the class members testified that verification forms did not accurately reflect how class  members spent their time and therefore individual testimony would be required); Gales v. Winco Foods, 2011 WL  3794887, at *10-11 (N.D. Cal. Aug. 26, 2011) (Judge Breyer denied class certification based on predominance of  individualized issues as to whether assistant store managers spent their time performing primarily exempt or nonexempt tasks); Wang v. Chinese Daily News, 709 F.3d 829, 835-836 (9th Cir. 2013) (remanding for reconsideration of  certification of wage and hour class where class was certified on the basis of a uniform exemption policy; the Ninth  Circuit disapproved “the district court’s conclusion that common questions predominate in this case … on the fact,  considered largely in isolation, that plaintiffs are challenging CDN’s uniform policy of classifying all reporters and  account executives as exempt employees”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 88 Thus, “carving up the class” may result in certain subclasses being too small to warrant  certification. 413 Similarly, employers may argue that the “commonality” element is missing, thereby  potentially avoiding the creation of a sub-class.  Seyfarth Shaw successfully defeated class  certification in Hughes v. WinCo Foods by advancing such an argument. 414   In WinCo,  plaintiff brought a class action alleging that defendant failed to comply with California law  with respect to providing meal and rest breaks.  Plaintiff asserted that the commonality  requirement was satisfied due to the store-wide policy of requiring employees to obtain  management approval before going on a meal break.  The court rejected that argument,  explaining that the decision-making as to when employees took breaks varied from store to  store and department to department.  The court also concluded that the wide variation  among employees even within each department would require “hundreds or thousands of  ‘mini trials.’” 415 D. Opt-In Classes Because of the broad language in Sav-On suggesting that trial courts should be innovative  in fashioning class action procedures, 416 some commentators opined that Sav-On was  approving the trial court’s ability to certify an “opt-in” class action, modeled after the  procedure employed in FLSA and Age Discrimination in Employment Act (“ADEA”)  collective actions.  In 2005, however, the First District California Court of Appeal in  Hypertouch, Inc. v. Superior Court 417 barred trial courts from certifying opt-in classes. In an “opt-in” class action, employees participate in the action only if they “opt in” by signing  a form.  Any judgment obtained in the decision binds only those individuals who opted in.   Although this procedure limits the number of class members bound by a decision,  employers generally like it because it reduces the number of employees offered a recovery,                                                        413 See Betts v. Reliable Collection Agency, 659 F.2d 1000, 1005 (9th Cir. 1981) (“Each subclass must independently meet  the requirements of Rule 23 for the maintenance of a class action, . . . [and as] a practical matter, the litigation as to  each subclass is treated as a separate lawsuit.”); Andrews v. Bechtel Power Corp., 780 F.2d 124, 132 (1st Cir. 1985)  (denying certification of a subclass of three people because it had too few members); see also Carabini v. Superior  Court, 26 Cal. App. 4th 239, 242-43 (1994) (California courts should look to precedent arising under federal class action  law for guidance as to unsettled areas of California law). 414 2012 WL 34483 (C.D. Cal. Jan. 4, 2012) 415 See also Sotelo v. Medianews Group, Inc., 207 Cal. App. 4th 639, 650-51 (2012) (affirming trial court’s denial of  certification for class of newspaper carriers and finding no error for refusing to certify subclass, where proposed  subclass failed to meet other class certification requirements of predominance of common issues of law and fact);  Hadjavi v. CVS Pharmacy, Inc., 2011 WL 3240763  (C.D. Cal. Jul 25, 2011) (denying class certification of overtime,  meal and rest period claims of nonexempt pharmacy employees and holding that the allegation that workload prohibited  breaks was not enough to justify certification). 416 Sav-On, 34 Cal. 4th at 339. 417 128 Cal. App. 4th 1527 (2005) (modified without change in judgment, 129 Cal. App. 4th 1348 (2005)).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 89 and because those employees who elect not to opt in usually lack interest in the litigation  and are unlikely to sue later. Although opt-in classes were rare in California, nothing before Sav-On expressly forbade  them (in contrast to Federal Rule of Civil Procedure 23, which forbids opt-in classes except  where, as in the FLSA and ADEA, Congress provides that an opt-in class is the only kind  permitted). 418   In barring opt-in classes under state law, the Hypertouch court reasoned that  Code of Civil Procedure Section 382 should be interpreted as parallel to Rule 23, which  does not allow for opt-in class actions. 419   The court also criticized the opt-in procedure as a  device that improperly is used by the defendant to “chip away at the size of the class.” 420   In  addition, the court attempted to construe its decision as beneficial to class defendants  because an opt-out class binds more potential plaintiffs in those cases where the employer  prevails on the merits. 421   Whatever the merits of this reasoning, the fact remains that trial  courts throughout California are now barred from certifying cases as opt-in class actions. In 2007, however, another appellate court narrowed Hypertouch.  In Estrada v. FedEx  Ground Package System, Inc., 422 the trial court certified an independent contractor misclassification class but only of certain drivers of certain trucks on certain routes.  The  only way to determine who qualified as a class member under the particular class definition  the court adopted was to ask the class members, because no records existed that would  reveal class membership.  Accordingly, the trial court authorized the sending of a  questionnaire for drivers to answer under oath to determine whether they qualified as class  members.  Those who failed to respond were ultimately deemed not to be class members  and were dismissed from the case without prejudice. The plaintiffs argued that this was tantamount to having certified a class on an opt-in basis,  in violation of Hypertouch.  The Court of Appeal rejected the comparison, noting that the  questionnaire mechanism was not used to opt in to the class action, but merely to identify  drivers as class members. 423   In essence, the questionnaire was used to ascertain class  membership, not to determine whether someone, once identified as a class member,  wished to participate in the class action.  In cases where a trial court certified a class that  requires gathering information from putative class members to determine class  membership, Estrada may provide a hook for the defendant to argue that the potential                                                        418 Id. at 1547-48. 419 Id. at 1542-43. 420 Id. at 1542. 421 Id. 422 154 Cal. App. 4th 1 (2007).   423 Id. at 26 (“discovery was necessary to determine whether in fact there was an ascertainable class”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 90 class must be surveyed to determine who are class members, with all non-respondents to  the survey being dismissed from the case. E. Wal-Mart Stores, Inc. v. Dukes - The Supreme Court Shifts The  Landscape Of Class Certification In June 2011, the U.S. Supreme Court issued its long-awaited decision in Wal-Mart Stores,  Inc. v. Dukes. 424   This opinion transformed Rule 23 law and dramatically changed how  workplace class actions are structured and defended and, in doing so, will also assist  employers in defeating certification in wage and hour cases. The Supreme Court reversed the Ninth Circuit and held that class action certification should  not have been granted as to the element of commonality.  Dukes is because it holds  requires plaintiffs to establish commonality among all putative class members as to the  reason for a particular employment decision – the “glue” that holds the alleged unlawful  conduct together.  The Court ruled that the proof of commonality required by Rule 23(a) will  frequently overlap with the merits of the case.  This holding repudiates plaintiffs’ usual  argument that it is inappropriate to consider the merits of claims at the certification stage of  class litigation.  In addition to commonality, the Court severely limited the use of Rule  23(b)(2), pertaining to class-wide injunctive and declaratory relief, in cases seeking back  pay, ruling that such money damages may be awarded under this rule only when they are  truly incidental to the requested equitable relief. 425    Dukes thus contains two core holdings.  First, the Court held unanimously that certification  of a class of female Wal-Mart workers was inappropriate under Rule 23(b)(2), which  permits certification where “the party opposing the class has acted or refused to act on  grounds that apply generally to the class, so that final injunctive relief or corresponding  declaratory relief is appropriate respecting the class as a whole.”  Second, the Court ruled, 5-4, that the plaintiffs failed to satisfy the “commonality” requirement of Rule 23(a)(2).  Each  of these holdings will reverberate in important ways in wage and hour litigation. Class Members Must All Suffer A Common Injury Capable Of Class-Wide Resolution Dukes reiterates that, because class actions are “an exception to the usual rule,” a class  representative “must ‘possess the same interest and suffer the same injury’ as the class  members.”  One gauge for measuring whether that requirement has been met is the  “commonality” test of Rule 23(a).  According to Justice Scalia’s majority opinion,  commonality requires class members to have suffered the same injury as each other, not                                                        424      -- U.S. --, 131 S.Ct. 2541 (2011). 425 See Sepulveda v. Wal-Mart Stores, 2011 WL 6882918 (9th Cir. 2011) (affirming that the non-incidental test should be  applied when determining class certification under Rule 23(b)(2)).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 91 just a violation of the same provision of law.  Moreover, the common injury must be  “capable of classwide resolution – which means that determination of its truth or falsity will  resolve an issue that is central to the validity of each one of the claims in one stroke.” Although Dukes was a discrimination case brought under Title VII, the Court’s discussion of  the “commonality” prong of Rule 23(a) should serve as important authority in wage and  hour cases. 426 First, many wage claims are brought under state law, either in state court under Rule 23  analogues or in federal court via removal, supplemental jurisdiction, or diversity.  In those  cases, the Dukes discussion of commonality, and its tightening of the requirements to  establish that prong of the Rule 23 test, will be directly applicable. Second, Dukes should lead courts to narrow their application of the “similarly situated”  requirement in collective actions under FLSA section 216(b).  Most courts faced with  §216(b) collective actions now use a two-stage approach to certification. In the first stage,  plaintiffs are required to show that the named plaintiffs and other potential party plaintiffs  are “similarly situated.”  Courts have struggled with the meaning of “similarly situated” for  almost 65 years because the statute does not define the phrase, and the courts have not  settled on a uniform definition.  However, courts have consistently approached this  question by examining whether common factors are present, such as the geographic scope  and job duties of the potential party plaintiffs, as well as whether the individuals were  subject to similar practices or policies.  The Similarly Situated And Commonality Standards Are Not So Different Most courts have set a very low bar for plaintiffs to clear at this stage in order to obtain  “conditional” class certification.  However, inquiries under the similarly situated standard are  comparable to those that the Dukes Court said must be tightened under the commonality  standard of Rule 23(a)(2).  In fact, a number of courts have equated “similarly situated” to  the commonality requirement of Rule 23(a)(2).  Dukes should thus compel lower courts to  pay closer attention to the disparities that often exist among members of a putative FLSA  collective action – such as variations in supervisors, departments, facilities, divisions, and  regions – because the Court held that the “dissimilarities” in the proposed class, not the  common questions raised, have the most potential to determine whether classwide  resolution of a matter is permissible.                                                         426 See, e.g., Wang v. Chinese Daily News, 709 F.3d 829, 834 (9th Cir. 2013) (remanding wage and hour class action case  in light of Dukes in order to determine whether claims of class of roughly 200 employees depended “upon a common  contention … of such a nature that it is capable of classwide resolution”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 92 The final certification stage of a § 216(b) action requires a more stringent judicial analysis  than the first, and typically comes after discovery has been largely completed.  At this  stage, courts assess whether the differences among the party plaintiffs (all of whom will  have opted in by this point following issuance of court-approved notice) outweigh their  similarities.  If so, the action should be decertified.  This “differences” inquiry runs hand-inhand with the Supreme Court’s emphasis in Dukes on dissimilarities in the Rule 23 class  context.     The Dukes Effect Could Create An Early Evidentiary Hurdle For Plaintiffs The effects of Dukes will likely be seen in all types of wage-and-hour litigation, whether the  alleged violation relates to minimum wages, overtime or other legal protections, and  whether the claim alleges exempt status misclassification, off-the-clock work, a violation of  technical pay practice requirements under state law, or independent contractor  misclassification.  For example, while differences in the application of pay policies from one  facility to the next, or variations in the independent judgment and discretion exercised by  employees subject to the “administrative” exemption,” have sometimes been relegated to  the “decertification” stage of a Section 216(b) case, after Dukes these or similar inquiries  may be critical very early, at the first, conditional certification stage.   Likewise, in cases raising the “executive” exemption, plaintiffs often contend that they were  improperly classified because they did not have the authority to make employment  decisions with respect to their subordinates, performed non-managerial tasks as their  primary duty, or otherwise.  Courts’ resolution of certification issues based on these  assertions could be based less on anecdotal evidence about the named plaintiffs and more  on an analysis of whether there is a common thread tying those occurrences together on a  collective basis. The Dukes Court also dispelled the notion that the merits of a case may not be considered  during the “rigorous analysis” required to determine if class certification is appropriate.  This  could lead to challenges at the conditional certification stage about how much evidence is  enough to extrapolate to the group.  In practice, this may mean that the critical merits  question of whether putative class members actually worked off the clock, actually failed to  take meal and rest periods, or otherwise were subjected to a violation of wage and hour  law, gets addressed far earlier in the litigation than was previously the case. 427                                                          427    See, e.g., Gonzalez v. Millard Mall Services, Inc., 281 F.R.D. 455 (S.D. Cal. 2012) (denying class certification as to  claims regarding meal and rest breaks, split-shift pay, and failure to timely pay wages upon termination, because  plaintiffs failed to establish the commonality prerequisite under Dukes; however, the court reasoned that class  certification was not necessary for PAGA claim because PAGA relief is mainly ”for the benefit of the general public  rather than the party bringing the action” and PAGA “provides no specific class certification requirements.”).   Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 93 Following Dukes, plaintiffs should now be pressed earlier in litigation to put forth actual  evidence, beyond mere allegations, that issues common to all class or collective action  members exist.  From a due process perspective, this requirement could limit much of the  additional burden and expense of conducting broad discovery and litigating decertification  where there is no evidence of issues common to all class or collective action members.   Indeed, this broad discovery is often so costly as to leave employers with little choice but to  settle the case.  Show Me [You Are Owed] The Money In the less controversial section of its decision, the Dukes Court held that Rule 23(b)(2)  applies only when “a single injunction or declaratory judgment would provide relief to each  member of the class,” not when individuals seek an individual award of monetary damages.   By its very nature, the recovery of money is central to wage and hour litigation.  Plaintiffs  often argue that damages may be readily quantifiable based on a sample of the employer’s  pay records or that backpay calculations for a random group of class or collective members  can be utilized to extrapolate the damages on a classwide basis. Although the setting was different, the Court’s rejection in Dukes of a “Trial By Formula”  approach to class litigation should undermine this formulaic approach to the viability of trials  in which the evidence is limited to groups of opt-ins providing representative testimony.   The Court held that such an approach not only conflicts with Rule 23(b)(2), but also  prevents the employer from litigating statutory defenses to individual claims, thereby  violating its right to due process.   In Cruz v. Dollar Tree Stores, Inc. (N.D. Cal. July 8, 2011), the court decertified a class in  part for this reason.  The judge stated, “In light of the Supreme Court’s rejection of [the “trial  by formula”] approach, it is not clear to the Court how, even if class-wide liability were  established, a week-by-week analysis of every class member’s damages could be feasibly  conducted.”  Similarly, in Aburto v. Verizon, another federal district court cited Dukes in  denying class certification of misclassification claims, holding that whether Verizon  unlawfully classified its managers as exempt is an individualized inquiry involving facts  unique to each potential plaintiff. 428   Thus, it will be more important than ever for employers  to argue that class treatment is inappropriate because the necessary individualized inquiry  into each individual’s claims could result in a series of mini-trials that would undermine the  efficiency benefits that class treatment is meant to offer.                                                        428 Aburto v. Verizon, 2012 WL 10381, at *5 (C.D. Cal. Jan. 3, 2012) (“The court simply cannot conclude that all FLMs  performed the same job duties, that the job duties were all clerical, or that Verizon’s restrictions on FLMs precluded ‘any  exercise of independent judgment or discretion.’”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 94 This point also applies to FLSA cases.  In particular, when courts examine whether a  conditionally certified case should be decertified, typically after extensive discovery, they  often require that plaintiffs set forth a trial plan explaining how the claims of the opt-in  plaintiffs can be tried by collective proof.  Following Dukes, the use of representative  testimony to establish such proof simply may not suffice. In addition to rejecting the “trial by formula” approach, Dukes held that employers are  entitled to present individual defenses to each employee’s specific claim for damages, even  if a violation of the statute is found.  Following this holding, employers should now have a  strong due process argument in wage-and-hour cases that even if a statutory violation is  found, they are entitled to present individual defenses to each class or collective action  member’s entitlement to the back wages sought in the litigation.  The argument is even  stronger in FLSA collective actions because an individual must affirmatively consent to be a  member of the case, at which point he becomes a party plaintiff for purposes of  adjudicating his individual claims. While the full impact of Dukes will not be known for years, the decision has undoubtedly  created an environment that will prove more friendly to employers defending against wageand-hour claims.  As always, the strongest defense to potential wage-and-hour claims is  vigilant attention to compliance efforts before litigation arises, including the adoption,  distribution, and effective enforcement of internal policies mandating compliance with  federal and state labor laws.  Such policies remain the most important weapon in the  employer’s defense arsenal, and their importance will only be magnified after Dukes, since  their existence and enforcement on a company-wide basis will underscore the atypical,  “one off” nature of any alleged violations that may have occurred. F. In Comcast v. Behrend, The Supreme Court Emphasizes That It  Meant What It Said In Dukes On March 27, 2013, the Supreme Court issued its opinion in Comcast Corp. v. Behrend. 429 The Court, in a 5-4 decision, reaffirmed its holding in Wal-Mart v. Dukes that district courts  must conduct a “rigorous analysis” to ensure that Rule 23 requirements have been  satisfied, even if doing so would require consideration of the merits of the plaintiffs’  claims. 430 The decision held that the trial court had improperly certified a class in this antitrust action.   The Court said the plaintiffs failed to establish a sufficient connection between their alleged  theory of liability and their claimed damages.                                                       429 133 S. Ct. 1426 (2013). 430 Id. at 1433.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 95 THE SUPREME COURT HOLDING The Court held that the class action was improperly certified under Rule 23(b)(3). The Rule  "does not set forth a mere pleading standard." 431 Rather, a party must not only "be  prepared to prove that there are in fact sufficiently numerous parties, common questions of  law or fact," typicality of claims or defenses, and adequacy of representation, as required  by Rule 23(a). The party must also satisfy through evidentiary proof at least one provision of Rule 23(b). The provision at issue here was Rule 23(b)(3), which requires a court to find  that "the questions of law or fact common to class members predominate over any  questions affecting only individual members." 432 A court considering that issue may need to  “probe behind the pleadings before coming to rest on the certification question," an analysis  that "will frequently overlap with the merits of the plaintiff's underlying claim." 433 THE ANTITRUST CLAIM According to the plaintiffs, Comcast had engaged in “clustering” cable television operations  in the Philadelphia region. Comcast acquired competitor providers and swapped their own  systems outside a particular region for competitor systems in the region. By 2007,  Comcast's dominance of the Philadelphia Designated Market Area ("DMA"), which includes  sixteen counties in Delaware, Pennsylvania, and New Jersey, had increased substantially,  reaching 69% from only 24% in 1998. Based on the company's increased market share,  customers in the Philadelphia DMA filed a class action suit in federal district court, alleging  that Comcast had violated the Sherman Act through unlawful swapping agreements and  attempted monopolization. 434 THE DISTRICT COURT OPINION The district court held that the plaintiffs, to meet the predominance requirement, had to  show (1) that the existence of individual injury resulting from the alleged antitrust violation  (referred to as "antitrust impact") was "capable of proof at trial through evidence that [was]  common to the class rather than individual to its members," and (2) that the damages  resulting from that injury were measurable "on a class-wide basis" through use of a  "common methodology." 435   The plaintiffs presented four distinct theories of antitrust impact.  First, plaintiffs alleged Comcast reduced the benchmark levels of competition in the  Philadelphia DMA. Second, Comcast's activities allegedly reduced the level of competition                                                        431    Id. at 1432. 432 Id. 433 Id. 434 Id.  at 1430. 435 264 F. R. D., at 154.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 96 from overbuilders, companies that build competing networks in areas where an incumbent  cable company already operates. Third, the clustering technique allegedly decreased  market penetration by satellite providers, as it made it profitable for Comcast to withhold  local sports programming from its competitors. Finally, the plaintiffs alleged Comcast's  clustering technique increased Comcast's bargaining power relative to content providers. Although the district court accepted only one of the plaintiffs' theories of antitrust impact— that Comcast's activities reduced the level of competition from overbuilders— the Court  found that plaintiffs could still prevail under Rule 23(b)(3), and certified the class under this  theory. Furthermore, the court found that damages resulting from such deterrence could  still be calculated on a class-wide basis, even though the plaintiffs' expert had calculated  overall damages based on the combination of all four theories of impact, not just the  overbuilder theory. 436 THE THIRD CIRCUIT DECISION Comcast appealed to the Third Circuit, arguing that plaintiffs' alleged damages were based  on all four theories of antitrust impact and, thus, did not adequately measure the harm  attributable only to the overbuilder theory. According to Comcast, since it was not clear  which plaintiffs' damages were based on which theory, the plaintiffs could not satisfy the  commonality required under Rule 23(b). On appeal, however, a divided Third Circuit panel  affirmed the trial court's certification, finding "an attack on the merits of the methodology  had no place in the class certification inquiry," and plaintiffs merely had to show they were  able to prove damages of some sort. 437 THE SUPREME COURT APPLIES ITS HOLDING TO THE FACTS The Supreme Court rejected the Third Circuit’s reasoning: "in light of the [damages]  model's inability to bridge the differences between supra-competitive prices in general and  supracompetitive prices attributable to the deterrence of overbuilding, Rule 23(b)(3) cannot  authorize treating subscribers within the Philadelphia cluster as members of a single  class. 438 The Court reasoned that it was not clear whether every plaintiff was necessarily  damaged by each of the four alleged theories of antitrust impact, and it was distinctly  possible that some plaintiffs in the Philadelphia DMA were damaged by one type of  conduct, while others were injured by another. As such, the Court held that the damages  model the plaintiffs presented failed to show that individual damages calculations would not  overwhelm questions common to the class. For the customers to prevail, they would have                                                        436 133 S.Ct. at 1430-31. 437 Id. at 1431. 438 Id. at 1435.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 97 had to measure damages attributable only to the overbuilder theory of competition. In this  case, it was not clear which damages resulted from which type of antitrust impact, leading  to uncertainty about whether damages could be measured class wide, rather than on an  individual basis." According to the majority, adopting the Third Circuit’s position would  render any method of measurement acceptable, "no matter how arbitrary," and would  reduce Rule 23(b)(3)'s predominance requirement to a nullity. 439 With its decision in Comcast, the Supreme Court left no doubt that district courts must  conduct a “rigorous analysis” at the class certification stage to ensure that the requirements  of Rule 23 are satisfied, even if doing so would require an inquiry into the merits of the  plaintiffs’ claims.  The Court also clarified that the method of proving classwide damages  must be tied to the theory of liability on which plaintiffs will be proceeding at trial.  In the wage and hour context, this ruling should provide further ammunition to employers in  opposing class certification.  Many wage and hour cases require significant individualized  proof of damages—for example, determining whether and why each class member worked  off the clock.  After Dukes and Comcast, it is clear that plaintiffs’ counsel cannot simply  offer a few examples and ask the court to just assume that all other employees had  identical experiences. G. The California Supreme Court Enforces Due Process In Duran v.  U.S. Bank On May 29, 2014, the California Supreme Court issued its much-anticipated opinion in  Duran v. U.S. Bank, vacating a $15 million judgment in a wage and hour class action on the  ground that the judgment resulted from a flawed statistical sampling methodology. While  the Court did not foreclose the possibility of using statistical sampling to establish classwide liability, the Court’s unanimous opinion makes clear that (1) a trial plan that proposes statistical sampling must be presented to the trial court before class certification, (2) the  proposed sampling must be statistically reliable, and (3) the trial plan must not deprive the  defendants of its due process right to present affirmative defenses.  Duran is significant because it recognizes the due process concerns raised by the use of  representative evidence, and it requires trial courts to meaningfully address those concerns  early in litigation. These points provide welcome ammunition for employers in opposing  class certification.                                                       439 Id. at 1433.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 98 Lower Court Proceedings Plaintiffs filed a class action alleging that their employer, U.S. Bank, misclassified its  Business Banking Officers (“BBO”) as exempt outside sales employees. After certification,  the parties submitted their respective trial plans, crafted with the aid of their experts. Over  U.S. Bank’s objections, the trial court adopted its own trial plan, under which a purportedly  random sample of twenty class members—plus two of the named plaintiffs—would testify  at trial, and the liability and damages findings based on the sample group would be  extrapolated to the entire class.  After the trial court denied U.S. Bank’s decertification motion, it held a bench trial on U.S.  Bank’s exemption defense. During the liability phase, the trial court excluded all evidence  concerning BBOs who were not part of the sample group, including U.S. Bank’s evidence  showing some class members were properly classified as exempt. Based primarily on the  sample group’s testimony, the court found the entire class of 260 BBOs had been  misclassified.  During the damages phase, the trial court adopted the determination of plaintiffs’ expert  that class members worked on average 11.87 hours of overtime per week, subject to a  43% margin of error—meaning the actual amount of overtime worked by each BBO could  range from 6.7 hours to almost 17 hours per week. Based on that extrapolation, the court  entered judgment against U.S. Bank in the amount of approximately $15 million. The Court of Appeal reversed, holding that the trial court’s reliance on flawed and  unreliable statistical sampling to extrapolate class-wide liability denied U.S. Bank its right to  litigate affirmative defenses, and that the high margin of error underlying the damages  calculations implicated due process concerns. Additionally, the Court of Appeal held, the  trial court abused its discretion in denying U.S. Bank’s decertification motion and ordered  the class decertified. The Supreme Court Decision The California Supreme Court, in a unanimous decision, affirmed the Court of Appeal’s  judgment in its entirety and ordered a new trial. In so doing, the Supreme Court articulated  several principles that are likely to have a significant impact on certification and trial  proceedings in all class actions, particularly those in the wage and hour arena. First, and perhaps most significantly, the Supreme Court recognized a defendant’s due  process right to “litigate its statutory defenses to individual claims,” a proposition on which  lower courts had disagreed. Thus, “any trial must allow for the litigation of affirmative  defenses, even in a class action case where the defense touches upon individual issues.”  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 99 Second, while the Supreme Court was careful not to reach a sweeping conclusion  regarding whether or when statistical sampling should be available as a tool for proving  liability in a class action, it did set forth some concrete guidelines. As an initial matter, any  trial plan involving statistical proof must allow the defendant to litigate relevant affirmative  defenses, even when they turn on individualized questions, and if the trial plan fails to do  so, then the statistical proof may not be appropriate. Moreover, the trial plan must employ  valid statistical methodology, which means, among other things: (a) the sample size must  be “sufficiently large to provide reliable information about the larger group,” (b) the sample  must be random and free of selection bias, and (c) analysis of the sample must yield results  within a reasonable margin of error. Further, the defendant “must be given a chance to  impeach that [statistical] model or otherwise show that its liability is reduced because some  plaintiffs were properly classified as exempt.”  Third, the Supreme Court instructed lower courts to consider at the certification stage whether a trial plan has been developed to address the use of statistical evidence, rather  than “accepting assurances that [one] will eventually be developed.” That plan must show  how individual issues can be managed at trial, and if the plan proves “unworkable,” then the  class must be decertified.     Turning to the facts before it, the Supreme Court held that the lower court’s trial plan met  none of these basic requirements. Among other things, the plan deprived U.S. Bank of its  right to litigate its affirmative defenses by excluding relevant evidence relating to BBOs  outside the sample group, and by extrapolating liability based on a flawed statistical model.  That model, the Supreme Court held, was fatally flawed because the 22-member sample  group was too small relative to the 260-member class, and because the supposed  randomness of the sample group was undermined by the inclusion of the named plaintiffs  and the later exclusion of others who had opted out, were replaced, or were unavailable. As  a result, the sample was “biased in plaintiffs’ favor.”  The Court also found the 43% margin  of error to be “intolerably high,” potentially yielding a judgment twice the size of U.S. Bank’s  actual liability. What Duran Means For Employers While the Supreme Court stopped short of establishing a bright-line rule that statistical  sampling cannot be used to prove class-wide liability, Duran nonetheless makes it clear  that class counsel face an uphill battle if they wish to rely on statistical evidence.  Any  proposed statistical methodology must allow a defendant to litigate its affirmative defenses.  And, in cases involving questions unique to each class member, statistical evidence cannot  create commonality where it does not otherwise exist. Nor can liability be extrapolated  where commonality is absent. Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 100 Duran is also significant because it requires trial courts to consider—at the class  certification stage—whether a workable trial plan involving statistical evidence can be  developed. When opposing class certification, therefore, employers should be prepared to  challenge the class counsel’s proposed trial plan, or their failure to identify one, based on  the principles set forth in Duran. Finally, Duran is particularly useful to employers defending misclassification cases, as it  affirms that such claims—unless they turn on standardized job duties or policies that  compel employees to uniformly spend their time on nonexempt work—have “the potential  to raise numerous individual questions that may be difficult, or even impossible to litigate on  a class-wide basis.”  H. Easing of Class Certification Standards Post-Brinker In 2012, the California Supreme Court issued its long-awaited decision in Brinker  Restaurant Corp. v. Superior Court, addressing employers' obligations to "provide" meal  and rest breaks. 440 Brinker was a landmark ruling in the context of meal break litigation,  and was widely heralded as a key victory for employers.  However, the Brinker decision  also contained unfortunate language suggesting that class-wide liability may be established  by demonstrating that employees were subject to an unlawful written policy, regardless of  how that policy was actually applied to individual employees. 441    A number of cases post-Brinker have certified classes based on the existence of an unlawful policy or based on the allegations that the employer had no policy, even where the  employer demonstrated that many employees were, in fact, being provided lawful meal and  rest breaks.  For example, in Faulkinbury v. Boyd & Associates, Inc., 442 the Court of Appeal concluded that the defendant’s liability would attach “upon a determination that [the  employer’s] uniform on-duty meal break policy was unlawful.” 443   It reached a similar  conclusion concerning rest breaks, based solely on the plaintiff’s allegations that the  employer did not have a written policy for rest breaks, despite the fact that there is no legal  requirement that employers adopt their own written meal and rest break policies (as  opposed to posting the Wage Orders that set forth meal period and rest break  requirements).  Citing to Brinker, the Court of Appeal in Faulkenbury held that “the  lawfulness of [defendant's] lack of a rest break policy and requirement that all security                                                        440    See discussion of Brinker’s impact on meal break claims in Section V(C). 441    Brinker Rest. Corp. v. Super. Ct., 53 Cal. 4th 1004, 1033 (2012) (“An employer is required to authorize and permit the  amount of rest break time called for under the wage order for its industry.  If it does not—if, for example, it adopts a  uniform policy authorizing and permitting only one rest break for employees working a seven-hour shift when two are  required—it has violated the wage order and is liable.”).   442     Faulkinbury v. Boyd & Associates, Inc., 216 Cal. App. 4th 220 (2013).   443    Id. at 235.  See also Bradley v. Networkers Int'l, LLC, 211 Cal. App. 4th 1129, 1150 (2012) (“The lack of a meal/rest  break policy and the uniform failure to authorize such breaks are matters of common proof.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 101 guard employees remain at their posts can be determined on a class-wide basis,” despite  evidence provided by the defendant showing that, regardless of the policies (or lack  thereof), employees were being provided proper breaks. 444   The court dismissed this  evidence by stating that “the employer’s liability arises by adopting a uniform policy that  violates the wage and hour laws.  Whether or not the employee was able to take the  required break goes to damages.” 445   The court did not explain how such “damages” could  be ascertained on a class-wide basis where the facts demonstrated that individualized  factors determined whether or not a specific employee was actually provided meal breaks,  despite the uniform written policy. In another pro-certification case, Benton v. Telecom Network Specialists, Inc., telecommunications technicians filed a wage and hour class action lawsuit alleging  violations of meal and rest break laws and overtime requirements. 446   The plaintiffs' theory  was that the defendant violated the law by failing to adopt a policy authorizing and  permitting its technicians to take meal periods or rest breaks.  Citing Brinker, the Court of  Appeal explained that “for purposes of certification, the proper inquiry is ‘whether the theory  of recovery advanced by the plaintiff is likely to prove amenable to class treatment.’” 447   The  Court of Appeal therefore held that the class should be certified, even though the defendant  had demonstrated that the experiences of individual employees varied widely, and that  some employees were subcontracted out to other employers who did have lawful written  meal and rest break policies. 448 These unwelcome decisions potentially lower the certification bar for plaintiffs pursuing  class claims based on an allegation that an employer instituted an unlawful policy.   Employers have often defeated class certification by demonstrating that an alleged unlawful                                                       444    Id. at 237.  See also Abdullah v. U.S. Sec. Associates, Inc., 731 F.3d 952, 962 (9th Cir. 2013) (following Faulkinbury and Brinker in certifying an action brought under Rule 23 on the basis of the employer’s uniform policy of requiring  security guards to sign on-duty meal period agreements). 445    Faulkinbury v. Boyd & Associates, Inc., 216 Cal. App. 4th at 234. 446    Benton v. Telecom Network Specialists, Inc., 220 Cal. App. 4th 701, 705 (2013). 447    Id. at 726;  see also Williams v. Superior Court, 221 Cal. App. 4th 1353, 1364 (2013) (holding that plaintiffs’ allegation that the defendant had an unwritten policy to deny overtime pay was an appropriate issue for class-wide resolution, and  that the fact that the evidence demonstrated that many putative class members did not work off the clock was merely a  “damages” issue);  Jones v. Farmers Insurance Exchange, 221 Cal. App. 4th 986, 997 (2013) (holding that the plaintiffs’  theory that Farmers required unpaid pre-shift work was amenable to class-wide resolution;  the trial court erred in  denying certification by focusing on the fact that this only affected some employees and then only on certain days  depending on a number of varying factors; all of these variables only went to “the right to recover damages” and  therefore did not preclude class treatment). 448 Id. at 727;  see also Martinez v. Joe’s Crab Shack, 221 Cal. App. 4th 1148, 1164-65 (2013) (holding that class could  properly be certified based on the plaintiffs’ claims that managers were not properly classified as exempt, despite job  description that set forth exempt duties and evidence that many putative class members performed exempt duties most  of the time.  The court stated “we understand from Brinker . . . a renewed direction that class-wide relief remains the  preferred method of resolving wage and hour claims, even those in which the facts appear to present difficult issues of  proof.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 102 policy was applied so variably that individualized questions predominated over the common  fact that the same policy applied to all employees. This new wave of cases now holds that  class certification may be granted solely upon the basis that an employer's written policy violates the law, regardless of whether or not the unlawful policy was actually uniformly  applied to the class.  Indeed, plaintiffs’ mere allegations that a policy did not exist may now  be enough to show that there is commonality sufficient to proceed with class treatment of  their claims.  It remains to be seen how courts will handle these cases when they actually  go to trial and it becomes apparent that individualized application of the policies makes  them extraordinarily difficult, if not impossible to adjudicate on a class-wide basis, while at  the same time respecting the defendant’s right to due process. I. Relitigation of Class Certification Denials Litigation through class certification can be tremendously expensive for employers.  The  primary justification for the expenditure of litigating class certification is that if the employer  persuades a court to deny class certification, it is therefore established that employees in  the putative class must come forward and litigate their claims individually (or through a  joinder action).  But, what if another attorney finds another class representative, and  asserts the same class action claims in a different lawsuit?  Given the broad discretion that  trial courts have to decide certification, class action plaintiffs’ lawyers have an incentive to  try their luck again in a different jurisdiction. In Alvarez v. May Department Stores, 449 the court of appeal limited an attorney’s ability to  continually relitigate class certification of the same proposed class. 450   The plaintiffs’  counsel first filed an action in Los Angeles in 1997.  In 1998, counsel moved for class  certification for a putative class of store managers and the motion was denied.  In 1999, he  refiled with another class representative alleging the same class claims.  The trial court  considered class certification anew, but ultimately also decided to deny class certification.   That denial was affirmed on appeal in 2003.  Undeterred, the plaintiffs’ counsel filed  another action in Los Angeles County asserting the same claims on behalf of essentially  the same putative class.  This time the defendant demurred to the complaint on the ground  that the class allegations were barred by principles of collateral estoppel.  The trial court  agreed and sustained the demurrer. The court of appeal affirmed the sustaining of the demurrer.  The court did not go so far as  to state a per se rule that a class certification denial always bars another class member  from coming forward and seeking class certification of the same claims.  The court did,  however, hold that if, after class certification is denied, the same attorney brings essentially                                                        449 143 Cal. App. 4th 1223 (2006). 450 A similar conclusion was drawn by the Seventh Circuit in Bridgestone/Firestone, Inc., Tires Products, 333 F.3d 763 (7th  Cir. 2003). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 103 the same claims on behalf of essentially the same putative class, principles of collateral  estoppel would preclude certification of the second action. 451   Although the court did not  address how it would have ruled if a different attorney had represented the new class  representative seeking to sue on behalf of the same class, it implied that collateral estoppel  would apply unless the new attorney came forth with evidence that the first attorney’s  efforts had been incompetent or otherwise inadequate to fairly protect the putative class’s  interests: It is manifestly unfair to subject respondent to a revolving door of endless  litigation.  In cases, such as this one, where a party had a full opportunity to  present his or her claim and adequately represented the interests of a second  party who seeks the same relief, principles of equity, “[p]ublic policy and the  interest of litigants alike require that there be an end to litigation.” 452 The plaintiffs’ bar has been unwilling to accept the notion that one lawyer losing class  certification means that no other lawyer can try to get a class certified against that  employer.  Plaintiffs’ counsel were aided in this regard when, in Bufil v. Dollar Financial, 453 the court of appeal held that collateral estoppel did not preclude certification of meal and  rest period claims for a sub-class of a broader proposed class for which certification had  previously been denied.  Previously, in Chin v. Dollar Financial Group, 454 the court had  denied class certification of meal and rest break claims for clerks working alone in the  defendant’s check-cashing stores.  In the middle of the class period, the defendant adopted  a policy of requesting that the clerks execute an on-duty meal period agreement, which the  plaintiffs contended they were forced to sign.  The Chin court held that the question of  whether each individual clerk was pressured to sign the meal period agreement was an  individualized inquiry not suitable for class treatment.  Furthermore, the court found that,  prior to the institution of the meal period agreement, defendant did not have a uniform meal  period policy, therefore requiring individualized inquiry as to whether each class member  was denied meal breaks during this time. The Court of Appeal in Bufil held that this previous denial of certification did not create a res  judicata bar to certification of the class proposed by Bufil because both the proposed class  and the rationale for certification were different.  The class in Bufil was a smaller subset of  the class alleged in Chin, including only clerks who worked for the defendant after the  institution of the meal period agreement.  Furthermore, Bufil did not allege that the clerks  had been forced to sign the meal period agreements, which was one of the individualized                                                        451 Id. at 1238-40. 452 Id. at 1240. 453 162 Cal. App. 4th 1193 (2008). 454 2006 WL 1351491 (unpublished, unavailable on LEXIS).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 104 inquiries that had doomed plaintiffs’ claims in Chin.  Rather, Bufil contended that the  employees did not work in a situation where an on-duty meal period would be permissible  even with the consent of the employees, which was a legal question that could be decided  on a class-wide basis. 455 While Bufil can be harmonized with Alvarez as addressing a case where the plaintiff truly is  seeking certification of a different class using a different theory of collective proof, a fullblown split in authority developed when the Second District decided Bridgeford v. Pacific  Health Corporation. 456   The Bridgeford court, relying on the U.S. Supreme Court’s ruling in  Smith v. Bayer Corp., 457 held that collateral estoppel did not apply; therefore a denial of  class certification in one case would still leave unnamed putative class members free to file a second suit alleging identical claims. 458 In Bridgeford, a wage and hour class action, the trial court had granted defendants’  demurrer on the grounds that the named plaintiffs had been members of the putative class  in an earlier action wherein class certification had been denied on the same claims, and so  collateral estoppel precluded them from seeking class certification in the second action. 459    The Court of Appeal reversed, stating that even if the minimum requirements for applying  collateral estoppel had been met, if a party had not had a full and fair opportunity to litigate  the issue in the prior proceeding, then collateral estoppel should not apply. 460   The court  concluded: [U]nder California law . . . the denial of class certification cannot establish  collateral estopped against unnamed putative class members on any issue  because unnamed putative class members were neither parties to the prior proceeding nor represented by a party to the prior proceeding so as to be  considered in privity with such a party for purposes of collateral estoppel. 461                                                       455 See also Johnson v. GlaxoSmithKline, Inc., 166 Cal. App. 4th 1497, 1513-15 (2008) (reversing trial court’s application  of Alvarez collateral estoppel where enactment of Prop 64 after first court denied certification ran counter to the  rationale the first court had given for denying class certification; also considering (without deciding) whether Alvarez was overruled sub silentio by the United States Supreme Court’s discussion of virtual representation in Taylor v.  Sturgell, 553 U.S. 880 (2008)). 456    202 Cal. App. 4th 1034, 1043 (2012). 457    131 S. Ct. 2368 (2011). 458    Id. at 1044.   459   Id.  at 1039-40.   460   Id. at 1042. 461   Id. at 1044Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 105 If the reasoning in Bridgeford is widely adopted, serial class claims could result:   even if an employer is successful in defeating class certification, courts may  allow attorneys to forum-shop by recruiting new plaintiffs to file a case with  similar allegations and seek class certification again and again from different  judges. J. Defense Motions to Deny Class Certification (“Vinole Motions”) It is often to the employer’s tactical advantage to file the motion that triggers the resolution  of the question of whether a class should be certified.  By filing first, the employer can time  the briefing to its advantage.  If the employer can quickly assemble the evidence it needs to  defeat class certification, then filing such a motion may put pressure on the plaintiffs’  lawyers (who often take on many cases) to oppose such a motion with less preparation  than they would have if they could delay discovery for months and months until they felt  prepared to file a motion for certification.  Furthermore, filing first gives the employer the  opportunity to file a reply brief, which it usually may not file if the plaintiff moves for class  certification first. The plaintiffs’ bar does not agree that employers should be permitted move to deny class  certification before the plaintiffs file their own certification motion.  Plaintiffs’ lawyers often  contend that such a motion robs the plaintiff of the right to define the class it wants certified  and establish that such a class is possible.  The plaintiffs also contend that such motions  are not allowed under California procedure (or under federal procedure if the case has  been removed to federal court). 462   A problem the plaintiffs face with this argument is that  the California Supreme Court rejected it more than thirty years ago in City of San Jose v.  Superior Court. 463   There, the court stated in no uncertain terms that either party can move  for class certification and that such determinations should take place as soon in the  litigation as practicable: [W]e have directed [lower courts] to rule 23 of the Federal Rules of Civil  Procedure, which provides:  “As soon as practicable after the commencement of  an action brought as a class action, the court shall determine by order whether it  is to be so maintained.”  This determination may be made on motion of either  plaintiff or defendant – or on the court’s own motion. 464                                                       462 However, California Rules of Court, Rule 3.764(a) appears to contemplate such motions (“A party may file a motion to: .  . . Decertify a class”).  463 12 Cal. 3d 447 (1974); accord Chevron USA, Inc. v. Vermilion Parish Sch. Bd., 364 F.3d 607 (5th Cir. 2004) (upholding  trial court’s grant of defendants’ motion to deny class certification); Sipper v. Capital One Bank, 2002 U.S. Dist LEXIS  3881 (C.D. Cal. Feb. 28, 2002) (granting “motion to deny class certification”); Lightfoot v. Gallo Sales Co., 15 Fair Empl.  Prac. Cas. (BNA) 615, 616 (N.D. Cal. 1977) (granting “Motion That Class Be Denied Certification Pursuant to Rule  23(c)(1)”). 464 City of San Jose, 12 Cal. 3d at 453-54.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 106 Because the City of San Jose case is from the 1970s, plaintiffs’ counsel often argue that its  statement did not survive the later enactment of the complex rules within the California  Rules of Court, which set a special briefing schedule for motions to “certify a class;  determine the existence of and certify subclasses; amend or modify an order certifying a  class; or decertify a class.” 465   Plaintiffs argue that the absence from this list of “motion to  deny certification” was a deliberate decision to preclude such a motion.   The employer’s cause to allow such motions was aided by Seyfarth Shaw’s victory in  Vinole v. Countrywide Home Loans. 466   There, the Ninth Circuit upheld the grant of a motion  to deny class certification and rejected the plaintiffs’ argument that such motions were  inappropriate, especially when they were not decided simultaneously with a plaintiffs’  motion for class certification. 467   The court rejected the plaintiffs’ argument, noting that Rule  23 of the Federal Rules of Civil Procedure places no limitations on which party may move  for a determination whether a case should proceed as a class action.  The court also noted  that it is at the discretion of the trial court to decide when to rule on a certification or  decertification motion and that there is no rule that the court must wait for the discovery  period to end. 468 Following the issuance of the district court decision in Vinole, the Second District Court of  Appeal held that the same rules apply under California civil procedure. In In re BCBG  Overtime Cases, 469 the court held that “under both California and federal law, either party  may initiate the class certification process.”  Relying on Carabini v. Superior Court, 470 the  court held that plaintiffs could file a motion for class certification, or defendants could move  for a determination that the case should not proceed as a class action.  As in Vinole, a key  element in the court’s analysis was whether the plaintiffs had sufficient opportunity to  conduct relevant discovery.  The court determined that the plaintiffs before it had plenty of  time (more than two years) to conduct discovery relevant to class certification issues, and  therefore the trial court acted within its discretion when it granted the defendant’s motion to  deny class certification rather than wait for the plaintiffs to file a motion for certification. 471                                                       465 California Rules of Court, Rule 3.764. 466 571 F.3d 935 (9th Cir. 2009). 467 Most cases approving defense motions to deny certification involve the filing of cross-motions by the defendant and the  plaintiff.  See, e.g., Maddock v. KB Homes, Inc., 248 F.R.D. 229 (C.D. Cal. 2007) (motion for class certification and  motion to deny certification filed simultaneously; court granted defendant’s motion and denied plaintiffs’ motion). 468 571 F.3d at 943. 469 163 Cal. App. 4th 1293, 1299 (2008). 470 26 Cal. App. 4th 239, 242 (1994). 471 BCBG, 163 Cal. App. 4th at 262-63.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 107 XV. Discovery Issues in Class Actions A. Disclosure of Class Member Names and Addresses to Allow  Access to Potential Witnesses An ongoing dispute in Labor Code class actions revolves around the disclosure of the  names, addresses, and telephone numbers for potential class members prior to class  certification.  Plaintiffs typically argue they need this information to assist them in  prosecuting their case, and to alleviate any inherent advantage the defendant has in  contacting potential class members.  In cases reaching back to Atari v. Superior Court, 472 California courts have recognized the principle that both sides in litigation should have  equal access to potential class members, as they are often key witnesses. Plaintiffs typically seek names and addresses of potential class members in order to send  them some sort of communication describing the plaintiffs’ case or to invite them to assist  the plaintiffs’ counsel in investigating the claims asserted.  Of course, a defendant employer  has a duty to maintain the confidentiality of the personal information of its current and  former employees.  Courts must strike a balance between these interests. In 2003, the Second District Court of Appeal weighed these considerations in Parris v.  Superior Court. 473   In Parris, the plaintiffs filed a putative class action alleging that they were  misclassified as exempt employees. 474   The plaintiffs moved to compel the disclosure of  potential class member names and addresses, and for leave to communicate with potential  class members.  The trial court denied the motions. The appellate court held that plaintiffs have a constitutional right to free speech, which  includes the right to communicate with potential class members. 475   Requiring court  approval of such communications would constitute an impermissible prior restraint on free  speech. 476   Therefore, the court held the trial court should have dismissed the plaintiffs’  motion for leave to communicate with the class because no such motion was required. 477 Regarding the disclosure of potential class member names and addresses, the Parris court  held that it was “appropriate for the court to consider ‘the possibility of abuses in classaction litigation’” in determining whether to order disclosure of potential class member                                                        472 166 Cal. App. 3d 867 (1985). 473 109 Cal. App. 4th 285 (2003). 474 Id. at 290. 475 Id. at 296-99. 476 Id. 477 Id. at 299-300.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 108 information. 478   Without expressing any opinion on the propriety of ordering disclosure in the  case before it, the court remanded the case to the trial court to make that determination.   Although this decision plainly restricted a trial court’s ability to stop plaintiffs’ counsel from  communicating with class members once plaintiffs’ counsel located them, it did not address  whether plaintiffs may typically obtain discovery of the putative class members’ names and  personal contact information. The California Supreme Court directly addressed this issue, albeit within the consumer  class action context, in Pioneer Electronics (USA), Inc. v. Superior Court. 479   The plaintiff in  Pioneer filed a discovery motion seeking to compel the defendant to disclose the names  and addresses of customers who complained about a defective DVD player.  Ruling for the  plaintiff, the Court instructed Pioneer to send a notice of the suit to all potential class  members allowing them to object to the release of their names and contact information to  the plaintiff.  The Court ordered the defendant to release the names of those who did not  respond to the notice and affirmatively object to disclosure. The first published appellate decision to apply Pioneer to the wage and hour context was  Belaire-West Landscape, Inc. v. Superior Court. 480   In that case, the appellate court went  even further than Pioneer, requiring the defendant to release the addresses and personal  telephone numbers of all current and former employees who did not affirmatively opt out in  response to a pre-certification class notice.  Moreover, in contrast to the plaintiff in Pioneer,  who sought information only on those putative class members who had affirmatively  complained about the product at issue, the Belaire-West plaintiff sought personal  information of all current and former employees within the putative class. Two decisions that followed in the wake of Belaire-West have extended its holding to  broaden the plaintiffs’ rights to contact information.  Indeed, the decisions have led many  plaintiffs’ lawyers to contend that they always have the right to the putative class members’  contact information and that the court has discretion to skip the Belaire-West process  altogether. First, in Puerto v. Superior Court, 481 the Second District Court of Appeal held that it was an  abuse of discretion to withhold the personal contact information of putative class members when the defendant had responded to discovery by listing each putative class member as a  witness with information relevant to the case.  The court held that “the right to privacy in                                                        478 Id. at 300 (citing Gulf Oil Co. v. Bernard, 452 U.S. 89 (1981) and Howard Gunty Profit Sharing Plan v. Superior Court,  88 Cal. App. 4th 572 (2001)). 479 40 Cal. 4th 360 (2007). 480 149 Cal. App. 4th 554 (2007). 481 158 Cal. App. 4th 1242 (2008).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 109 contact information [does not] trump the [plaintiffs’] right to investigate their claims by  contacting witnesses.” 482   Because of the unusual fact that the defendant had listed every  putative class member by name and attested in verified discovery responses that each  person was a percipient witness, Puerto could be distinguished from the typical class  action. 483 In the second decision, Crab Addison, Inc. v. Superior Court, 484 the Second District Court of  Appeal went even further, and held that a procedure by which putative class members had  to affirmatively agree to the disclosure of their contact information was not permissible even  where (1) the employer had not listed the employees as witnesses or otherwise disclosed  their names and (2) the employees had signed a form indicating they did not wish to have  their personal information released—including specifically in connection with “class action  lawsuits.”  The court found that employees, in signing the release form, would not realize  that the form might encompass a class action aimed at vindicating their own Labor Code  rights, and that “public policy concerns weigh in favor of enforcing unwaivable statutory  wage and overtime rights through class action litigation over a right to privacy.” 485 Although neither the Puerto nor the Crab Addison decision announced a per se rule that  plaintiffs are entitled to production of all putative class member contact information without  any protections being afforded to the putative class members to protect their privacy rights  in that information, the decisions certainly indicate that a trial judge would not abuse  discretion by simply ordering all the information to be turned over without resort to a  Belaire-West opt-out privacy mailing.  We have not yet seen a trend among courts in  bypassing the Belaire-West opt-out process and none of the holdings in the Belaire-West,  Puerto, or Crab Addison cases would seem to mandate that information be disclosed  without any kind of protection for employee privacy. It would appear that the need to obtain the employees’ contact information would depend  on the nature of the class action claims.  Even the Crab Addison court recognized that  there was enough of a privacy interest in putative class members’ identities and contact  information to protect against disclosure when the information “is unnecessary to the                                                        482 Id. at 1248. 483 Puerto was followed by a federal district court in Stone v. Advance America, 2010 WL 5892501 (S.D. Cal. 2010).  In  Stone, the court had previously allowed the plaintiff to obtain class-member contact information through notice and an  opt-out procedure.  Thereafter, the plaintiff propounded interrogatories requesting the identities and contact information  for defendant’s former employees during the class period.  The court held that no notice or opt-out procedure was  required to obtain this information under Rule 26 of the F.R.C.P., because it sought only basic discovery, i.e., the  names and contact information for percipient witnesses, which the court distinguished from the names and contact  information of class members (even though there was substantial overlap between the two). 484 169 Cal. App. 4th 958, 973-74 (2008). 485 Id. at 974.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 110 prosecution of the litigation.” 486   There are class actions where the plaintiffs’ need to contact  putative class members is minimal, but the lawyers seek the contact information anyway  with the hope that they can locate some disgruntled former employees who might uncover  additional possible class claims.  For example, in a case concerning miscalculation of the  overtime rate, the case turns almost exclusively on payroll records, so there would seem to  be little need to contact class members.  Although, technically speaking, the employees are  witnesses, employers contend that they are not essential witnesses and that their right to  privacy should outweigh the plaintiffs’ right to contact them, given the ability of plaintiffs to  prosecute the case without such contact information. As explained above, the court in Parris held that a court deciding whether to allow  discovery of class member identities must weigh the danger of possible abuses of the class  action procedure against the rights of the parties under the circumstances. 487   Accordingly,  the trial court has discretion to deny disclosure of names and addresses upon a showing  that the plaintiff’s class claims are merely a pretext designed to gain access to the putative  class members’ contact information.  This will be a difficult burden to establish in most  cases, but may be successful where the need for the discovery is minimal, where facts can  be shown that the plaintiff lacks a reasonable basis for believing his or her individual claims  are common to a broader class, or where there is evidence that the lawyer is controlling the  litigation for an ulterior purpose.  We expect that the law will continue to develop to address  this situation, as we encounter it on a regular basis. B. Discovery to Facilitate Location of Substitute Class  Representatives One method to defeat class certification is to argue that the class representative is atypical  or inadequate.  The problem with this argument is that, even when it succeeds, it leaves  open the question of whether a class could properly be certified with a different member of  the putative class acting as class representative. In 1971, in La Sala v. American Savings & Loan Association, 488 the court held that, on the  facts before it, the plaintiff should have been permitted to substitute a proper class  representative for a class representative who was inadequate.  A key aspect of the  decision, however, was that the defendant had engaged in questionable conduct that  rendered the plaintiff inadequate.  More specifically, the case addressed the alleged  impropriety of a fee charged by the defendant savings & loan.  The defendant excused the                                                        486 Crab Addison, 169 Cal. App. 4th at 967. 487 109 Cal. App. 4th at 300-01. 488 5 Cal. 3d 864 (1971).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 111 plaintiff from paying the fee as a basis to argue that the plaintiff suffered no harm and, thus,  lacked standing to represent a class of injured customers. The court left open the question of whether the plaintiff’s lack of any injury rendered him  inadequate to represent the putative class as a matter of law, but it held that a defendant  should not be able to defeat a class action by simply paying off class representatives oneby-one as they come forward: In the present case, American has waived its acceleration clause only as to [the  plaintiffs].  If other borrowers bring a class action, American may again waive as  to those representative borrowers, and again move to dismiss the action.  Such a  procedure could be followed ad infinitum for each successive group of  representative plaintiffs.  If defendant is permitted to succeed with such revolving  door tactics, only members of the class who can afford to initiate or join litigation  will obtain redress; relief for even a portion of the class would compel  innumerable appearances by individual plaintiffs. 489 La Sala has been interpreted to permit a plaintiff to amend the complaint to add a new  class representative when the original plaintiff, although a bona fide member of the putative  class, has particular traits that make him an inadequate class representative. 490   Thus,  under La Sala, a plaintiff who is deemed inadequate generally can find and substitute in  another class representative. 491 La Sala left open the important question of whether the plaintiff may use the discovery  process as a mechanism to obtain contact information for other putative class members for  the express purpose of asking them if they would be willing to be a substitute class  representative.  That question was answered “yes” in Best Buy Stores, L.P. v. Superior  Court. 492 In Best Buy, a class action attorney was subjected to an allegedly illegal “restocking fee”  when he returned an item to Best Buy.  Invoking the Consumer Legal Remedies Act and  the UCL, he sought to represent a class of similarly situated consumers who were charged                                                        489 Id. at 873. 490 But see Howard Gunty Profit Sharing Plan v. Superior Court, 88 Cal. App. 4th 572, 580-81 (2001) (leave to substitute  class representative may be inappropriate where trial court determines that the class representative was a “professional  plaintiff” with a history of abusing the class action procedure). 491 See, e.g., Aguiar v. Cintas Corp. No. 2, 144 Cal. App. 4th 121, 137 (2006) (“the second amended complaint may be  amended once again on remand to add another named plaintiff should it be determined that . . . [plaintiff] needs an  additional, adequate representative”); Shappell Indus., Inc. v. Superior Court, 132 Cal. App. 4th 1101, 1109 (2005) (“[La  Sala] demonstrate[s] that California courts recognize and preserve the rights of absent class members, even before the  issue of certification has been determined”). 492 137 Cal. App. 4th 772 (2006).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 112 the fee.  The trial court ruled that he could not simultaneously be class counsel and class  representative. 493   The plaintiff requested that the court order Best Buy to disclose to a third  party administrator the names and addresses of all putative class members, so that the  administrator could advise them of the case and invite them to express interest in serving  as class representative in the lawyer’s stead.  When the trial court granted the request,  Best Buy sought a writ of mandate to reverse the decision. Although the writ petition was granted, the appellate court ultimately affirmed the crux of the  trial judge’s order. 494   The court held that it was indeed appropriate to use the discovery  process to locate a substitute class representative when the original class representative  was found inadequate. 495   It also held that facilitating “recruiting” of a class representative in  this manner was not improper “solicitation” under the Rules of Professional Conduct, because “solicitation” was limited to in-person or telephonic contact, not a mailing. 496 The result in Best Buy was understandable in that the class representative appeared to be  a proper class representative but for the fact that he also wanted to serve as class counsel.   After all, he did go to Best Buy and was charged a restocking fee, so he otherwise  appeared to have a colorable claim.  But what happens when the class representative has  no actual claim against the defendant?  For example, could a person simply pick a large  employer for whom he has never worked, sue for Labor Code violations, and, upon being  held inadequate (because he never was an employee), obtain a court order for a mailing to  assist him recruit a “proper” class representative? That question was answered “no” in First American Title Insurance Company v. Superior  Court. 497   The plaintiff, who was not a member of the class he purported to represent, and  who had no other interest in the litigation, obtained an order for precertification discovery so                                                        493 See Apple Computer, Inc. v. Superior Court , 126 Cal. App. 4th 1253 (2005) (attorney in class action may not also act  as class representative). 494 But see Best Buy, 137 Cal. App. 4th at 778 (court should not have included contact information in letter for plaintiff, but  rather should simply have disclosed to plaintiff contact information of all individuals who returned postcards stating they  were interested in serving as class representative). 495 Id. at 779; see also Rand v. American Nat’l Ins. Co., 2010 WL 2758720 (N.D. Cal. July 13, 2010) (permitting use of  class information to solicit new class representative after previous class representative died).  The Best Buy court cited  Budget Finance Plan v. Superior Court, 34 Cal. App. 3d 794, 799 (1973), to reason that a proper purpose of discovery  is to look for a substitute class representative when the original class representative is inadequate, and the Budget Finance case does state as such.  But the Budget case cited no authority for that proposition other than the conclusory  statement that the right to such discovery impliedly flows from the right of a plaintiff to substitute in a new class  representative.  See First American Title Ins. Co. v. Superior Court, 146 Cal. App. 4th 1564, 1577-78 (2007) (noting lack  of analysis in Budget Finance’s conclusion concerning right to discovery, and questioning its continuing validity as  precedent). 496 Id. at 776-77. 497 146 Cal. App. 4th 1564 (2007).  See also Cryoport Sys. v. CAN Ins. Co., 149 Cal. App. 4th 627 (2007) (“Best Buy  Stores does not stand for the proposition that a plaintiff with no interest in the action has a right to discovery to find a  substitute plaintiff to keep the action alive.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 113 that he could locate a class representative.  In holding that the order was an abuse of  discretion, the appellate court concluded, “the potential abuse of the class action  [precertification discovery] procedure greatly outweighs the rights of the parties under the  circumstances.” 498   The court noted that it would counter the public policy enshrined in Prop  64 to allow people without any injury in fact to sue and then use the discovery process to  troll for class representatives. 499   The appellate court also noted that putative class  members, if they really felt aggrieved, were free to come forward and bring their own case: Any further legal action can be pursued by members of the class, if they so  desire.  [Plaintiff] makes no argument that any future action they might pursue  would be time-barred, or offers any other reason why the class members might  be denied relief if this action is unable to proceed on their behalf.  In short, the  potential for abuse of the class action procedure is overwhelming, while the  interests of the real parties in interest are minimal.  Precertification discovery  under these circumstances would be an abuse of discretion. 500 However, in CashCall, Inc. v. Superior Court, 501 precertification discovery was permitted in  order to locate proper class representatives, even though the original representatives, as  well as the first set of replacements, were all found to not be members of the putative class. CashCall involved a suit against a lender who allegedly had illegally monitored certain of its  collection calls in violation of the California Penal Code. 502   The defendant notified the  plaintiffs that none of the three named class representatives had been subject to  monitoring.  Five new class representatives were then substituted in, but it again turned out  that none of these individuals had had their calls monitored. 503   The trial court then ordered  CashCall to disclose the identities of the 551 individuals for whom collection calls had been  monitored so that proper class representatives could be substituted in. 504 The Court of Appeal determined that the trial court had not abused its discretion in  permitting discovery of the class list for the purpose of locating proper class  representatives. 505   The court distinguished First American, noting that, in that case, “the  class members’ rights against the defendant had already been protected and enforced                                                        498 Id. at 1577. 499 Id. 500 Id. 501 159 Cal. App. 4th 273 (2008). 502 Id. at 278. 503 Id. at 280. 504 Id. at 283. 505 Id. at 292.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 114 through state agency investigations and settlements with the defendant.” 506   This was not  the case in CashCall, where the putative class had no knowledge of the alleged unlawful  conduct and the court noted that “absent precertification discovery and continuation of this  class action, it appears unlikely any of the class members will have a realistic opportunity to  assert claims, and potentially obtain relief.” 507    More recently, Safeco v. Superior Court 508 was decided similarly to CashCall, with the  appellate court emphasizing that First American “does not stand for the proposition that a  plaintiff who was never a class member in a UCL action necessarily is not entitled to  conduct precertification discovery to identify a substitute class representative.” 509    However, in Starbucks Corp. v. Superior Court, the California Court of Appeal reversed the  trial court’s order permitting plaintiffs to conduct discovery to locate a suitable class  representative. 510   There, the plaintiffs had brought a putative class action against  Starbucks, alleging that the company’s preprinted job application improperly sought  information relating to minor marijuana convictions that were over two years old. 511   But  because the named plaintiffs had never been convicted of any such crimes, they were  dismissed as class representatives on summary judgment. 512   Thereafter, class counsel  amended their complaint and obtained an order from the Superior Court permitting them to  discover the names of job applicants who had disclosed minor marijuana convictions on  their applications, in order to locate “suitable” class representatives. 513   The Court of Appeal  overturned the order, holding that the trial court had abused its discretion in allowing this  precertification discovery. 514   The court distinguished CashCall, noting that, in that case,  “the only conceivable class members were debtors who were unaware of the secret  monitoring,” and therefore unaware that they had potential claims. 515   “However, in contrast,  Starbucks’ job applicants who had marijuana convictions know about their own previous  convictions and about the fact that they had applied for a job at Starbucks,” and therefore  had a fair opportunity to file suit if they so desired. 516   Thus, the court held that the Parris                                                       506 Id. at 298. 507    Id. 508 173 Cal. App. 4th 814 (2009). 509 Id. at 829. 510 Starbucks Corp. v. Superior Court, 194 Cal. App. 4th 820 (2011). 511 Id. at 721. 512 Id. 513 Id. 514 Id. at 725. 515 Id. at 726. 516 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 115 balancing test required the requested precertification discovery to be denied because the  potential abuse of the class action procedure in this instance outweighed the rights of the  class members. 517 To the extent that any rule derives from these cases, it appears to be that the trial court has  broad discretion to deny discovery for the plaintiff to locate a new class representative  when the plaintiff is inadequate, but has more narrow discretion in the absence of a  showing that the plaintiff never was a proper putative class member or never experienced  an injury in fact.  Trial courts appear to lack any discretion to deny discovery where the  plaintiff is rendered inadequate by conduct of the defendant or as a result of some other  characteristic independent of the merits of the plaintiff’s claims. C. Discovery Issues Regarding Putative Class Member Declarations Defense counsel in class actions routinely obtain declarations from putative class members to contradict the plaintiffs’ allegations and defeat class certification.  In gathering such witness statements, it is important to consider the manner in which the interviews are  conducted, and the potential discoverability of the witness statements.  1.    Employers Must Approach Pre-Certification Communications    With Their Employees With Caution  In general, defendants in class actions are not barred from communications with putative  class members prior to class certification unless the communications are misleading,  coercive, or improper. 518   In the context of employment class actions, courts specifically  recognize the heightened potential for coercion.  For these reasons, many employers utilize  some variation of the longstanding Johnnie’s Poultry safeguards to minimize the potentially  coercive impact of attorney interviews of putative class members.  These safeguards  include: communicating the purpose of the questioning to the employee prior to the  interview; assuring the employee that no reprisal will take place; and explaining that  participation is voluntary. 519   When employers violate these safeguards, courts are likely to  disregard any declarations obtained and to limit any further pre-certification  communications with employees.                                                       517 Id. at 726 (also noting that “the excessive penalties sought by class counsel bear little relationship to any true public  interest for what, at most, appears to be a technical violation of Labor Code 432.8 by Starbucks”). 518 Following class certification, the class members are represented by plaintiffs’ counsel and should not be contacted by  defense counsel. 519   Johnnie’s Poultry Co. and District Union 99, Amalgamated Meat Cutters & Butcher Workmen of N. Am., AFL-CIO, 146  NLRB 770, 775 (1964)Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 116 Quezada v. Schneider Logistics Transloading & Distrib., Inc. 520 is a prime example.  In that  case, a wage and hour class action brought by warehouse workers, a California federal  court found that an employer’s communications with putative class members were  deceptive and coercive, struck all declarations obtained from them, and barred any further  attempts by the defendant’s attorneys to contact the class members. The facts that led to this result were as follows: shortly after the plaintiffs filed their  complaint, defense counsel began interviewing employees about the allegations.  The  meetings were held in a manager’s office during work hours and the employees were called  to the office over a loud speaker or ordered to attend by their supervisors.  Some  employees did not know why they were being ordered to the manager’s office.  Before the start of each interview, defense counsel informed the employees that the  meeting was “just an interview” and that the meetings were being conducted in connection  with the company’s attorneys’ “internal investigation about the conditions at the  warehouse.” 521   Applying some of the Johnnie’s Poultry safeguards, the attorneys further  explained that the interview and subsequent participation in drafting and signing the  declarations were voluntary and that the employee could end the interview at any time; that  if the employee decided to sign a declaration, he or she should make sure it was truthful  and accurate; that the employer could not retaliate against or reward the employee based  on the decision to participate or the information provided; that the employee was a potential  class member in a lawsuit with claims pertaining to the subject of the meeting; that defense  counsel represented the company, not the employees; and that the employees could  consult with an attorney regarding the process. 522 At the end of each interview, the employees were asked to sign a declaration.  The  attorneys did not explain, however, that the document was a sworn declaration that the  employer could use to limit the employees’ potential recovery in the class action. 523    Instead, the attorneys told the employees that the document was a “consent form”  regarding their voluntary participation in the interview process. 524   Some employees said  they felt pressure to sign and only six out of the 120 interviewees declined to sign. 525    The court determined that, despite the attorneys’ disclosures to the employees at the outset  of the interviews, the communications were deceptive because the employees were never                                                        520 No. CV 12-2188 CAS (DTBx) (C.D. March 25, 2013). 521 Id. at 3. 522 Id. at 2-3. 523 Id. at 3 524 Id. at 4.  525 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 117 told of the nature and purpose of the interviews, which was to gather evidence to use against class members in the lawsuit. 526   In addition, the court held that the interviews were  conducted in a coercive manner because the employees were essentially ordered to attend  the meetings. 527 Even though the employees were told the interviews were voluntary, the  fact that only five employees actually chose to leave and that only six refused to sign a  declaration confirmed the coercive nature of the interviews. 528   Accordingly, the court  ordered the declarations struck and barred any further communications with putative class  members, absent a court order.  2.    Protection Of Attorney Procured Witness Interviews From    Discovery  Once employers and their counsel have invested time and expense to gather witness  statements, they face yet another hurdle: resisting attempts by plaintiffs’ counsel to obtain their hard-earned declarations during discovery.  Plaintiffs’ counsel routinely request  production of such declarations, which defense counsel often prefer not to disclose prior to  filing them with the court in opposition to class certification. 529   In an employer friendly  decision, the California Supreme Court recently affirmed that attorney-directed internal  investigations and statements taken from witnesses are entitled to at least a qualified work  product protection.    For years, litigants in California had relied upon dicta in Nacht & Lewis Architects, Inc. v.  Superior Court 530 for the proposition that recorded witness statements taken by an attorney  or his agent are entitled to absolute work product protection and thus, are not discoverable.   In 2010, however, the Court of Appeal in Coito v. Superior Court 531 declined to follow Nacht and held that recorded witness statements and signed declarations were not entitled to  work product protection as a matter of law.  This meant plaintiffs could now sit back while  defense counsel expended time and effort conducting witness interviews and then freely  obtain their declarations.   In 2012, the California Supreme Court reversed the Court of Appeal, holding that attorneydirected witness interviews and statements are entitled as a matter of law to at least                                                        526 Id. at 8.  527 Id.   528 Id.  529 Note that in federal court, pursuant to Rule 26 of the Federal Rules of Civil Procedure, such declarations usually must  be disclosed shortly after they are executed.  One way to comply with this requirement is to prepare declarations that  are in final form but not signed, and then have the witnesses execute them when they are needed.  A risk inherent in this approach, of course, is that witnesses may change their minds about signing declarations. 530 47 Cal. App. 4th 214, 217 (1996). 531 182 Cal. App. 4th 758 (2010).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 118 qualified work product protection and may be entitled to absolute protection upon a proper  showing. 532 Influenced by the legislative history and policy underlying the protection of attorney work  product, the Court concluded that a default rule allowing discovery of attorney-procured  witness statements would impede the Legislature’s intent “to encourage [attorneys] to  prepare their cases thoroughly and to investigate not only the favorable but the unfavorable  aspects of their cases.” 533 There would be a chilling effect on case investigation and  preparation, which might inhibit the truth from coming out.  Moreover, it would undermine  the legislative policy of preventing an attorney from taking advantage of an adversary’s  efforts. 534 Accordingly, the Court held that where witness statements reveal an attorney’s  impressions, conclusions, opinions or legal research, the statement is entitled to absolute  protection. 535   The Court pointed out that absolute work product protection is more likely to  apply when witness statements include or evidence: (1) explicit comments or notes by the  attorney stating his or her impressions of the witness of other case issues; (2) facts that  provide a window into the attorney’s theory of the case or the attorney’s evaluation of what  issues are most important; (3) follow-up questions that reveal the attorney’s thoughts or  strategy; and (4) the selection of a specific witness from a multitude of witnesses  available. 536    Even if witness statements do not reveal an attorney’s impressions or opinions sufficient to  merit absolute protection, they will ordinarily not be discoverable unless the party seeking  disclosure establishes that that denial of such discovery will result in unfair prejudice or  injustice. 537   If a party resisting discovery alleges that a witness statement is absolutely  protected, that party must make a preliminary or foundational showing that the disclosure  would reveal the attorney’s impressions, conclusions, opinions, legal research or  theories. 538   The trial court may then determine whether and to what extent the absolute  privilege applies. 539                                                       532    Coito v. Sup. Court, 54 Cal. 4th 480, 496 (2012). 533 Id. 534 Id. at 495. 535 Id. at 496. 536 Id. at 495. 537 Id.  at 500. 538 Id.   539 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 119 The Supreme Court’s decision in Coito expanded work product protection for witness  interviews and signed declarations in California state courts. This case also highlights the  importance of involving legal counsel as early as possible in order to protect witness  interviews and declarations through the attorney work product doctrine.  Interviews should  be conducted by counsel, or at the direction of counsel, because otherwise the work  product of non-attorney investigators will be subject to discovery. XVI. Class Action Settlement A. Generally The vast majority of class actions result in a settlement.  Unlike an individual settlement of  employment law claims, a court must approve a class settlement to ensure that it is fair and  reasonable, is not the product of collusion, and does not subordinate the interests of the  broader class to those of the named plaintiffs. 540 Typically, the plaintiffs and the defendant enter into a stipulation of settlement, which a  court analyzes to determine if the agreement looks reasonable on its face.  If so, the court  will grant preliminary approval (sometimes called “conditional certification”) and then notice  of the settlement will be sent to the class.  Most commonly, class members will be given a  choice of (1) returning a claim form to receive money under the agreement; (2) returning a  request for exclusion (“opt out”) form that excludes them from the settlement and preserves  their individual right to sue; or (3) doing nothing, in which case the class members receive  nothing but still are bound by the class release.  Those class members who do not request  exclusion will also have the option of filing an objection to the settlement. 541 After a fixed period following the issuance of notice (usually 45-60 days), the claims period  will end, and class counsel will seek final approval of the settlement.  Above and beyond  the analysis the court conducted at preliminary approval, the court will examine the extent  of class participation in the settlement, will rule on any objections, and will make final  determinations as to class counsel’s request for attorney’s fees and an incentive payment  or “enhancement” for the class representative (additional money beyond that received by  other class members as a reward for taking the risk of filing the class action).                                                       540 See generally Dunk v. Ford Motor Co., 48 Cal. App. 4th 1794, 1800-01 (1996). 541 See generally Wershba v. Apple Computer, Inc., 91 Cal. App. 4th 224, 251-52 (2001) (explaining different choices class  members typically have upon receiving class notice).  Recent case law also implies that it may be permissible to settle a  certified class action through the acceptance of an offer of judgment by the class representative.  See Nelson v.  Pearson Ford Co., 186 Cal. App. 4th 983, 1024-26 (2010) (assuming without deciding that a valid California Code of  Civil Procedure § 998 offer can be made in a certified class action).  Should this process be used, after acceptance, the  parties would then provide class notice, etc., just as if a stipulation of settlement had been entered.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 120 When Labor Code class actions were relatively novel, there was little consistency between  different judges as to the scrutiny of settlements they would undertake or the rules they  would apply.  Most courts who did not have much experience with class actions typically  undertook very little scrutiny of class settlements beyond ensuring that they were not  collusive and that the notice provided clear instruction to the class.  Over the intervening years, however, a substantial body of law has developed to provide courts with better  guidance as to how to evaluate class settlements in wage and hour cases. B. Restrictions on Reversions of Settlement Funds Most class settlements result from mediation.  Unlike a court, which must protect the  interests of a class, a mediator seeks solely to broker a settlement acceptable to the parties  who hired the mediator—i.e., the lawyers for the parties.  Irrespective of their fealty to  ethical obligations, plaintiffs’ counsel—who often have near absolute control over  wage/hour class litigation—have a financial interest in maximizing the attorney’s fees they  will receive through the settlement. The employers’ financial incentive is to achieve as  broad of a release as possible for as little money as possible.  Because the plaintiff’s lawyer  typically receives an attorney’s fee that is a percentage on the gross value of the class  settlement, employers would commonly agree to a nominally larger gross settlement value  on the condition that any unclaimed settlement funds be returned to the employer.  These  sort of “reversionary” settlements have been popular because they allowed an employer  the possibility of paying substantially less in settlement than the gross settlement would  suggest, particularly in industries where the employer could predict that the claims rate  would be low. For example, in particular industries where there is a transient workforce, it is common for  only about one quarter of the class members to make claims—either because they do not  receive notice or because the value of the individual settlement amounts is too low to  attract their attention.  When a small percentage of the class submits claims in a  reversionary settlement, it may actually result in class counsel receiving significantly more  money than the class as a whole.  For example, in connection with a settlement of one  million dollars, if class counsel received thirty percent, that would leave no more than  $700,000 for the class (actually less, because settlement administration costs are typically  paid out of the gross settlement).  If the class claims only 25% of the amount set aside for  claims, then the class would receive no more than $175,000 versus the $300,000 class  counsel would be slated to receive.  While this arrangement could be defended on the  ground that class counsel secured a potential one million dollar settlement, courts have  looked unfavorably on large payouts to class counsel as compared to the payment received  by the class.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 121 One way courts can address this inequity is simply to cut the attorney’s fee and distribute  the difference to those members of the class who made claims.  In the above example, if  class counsel’s fee was reduced to 15% of the gross, then it would result in the lawyers  obtaining $150,000, and the class receiving $325,000, an effective contingency of 31%.  Of  course, this result is at odds with what class counsel negotiated, so a routine reduction in  fees would substantially reduce the willingness of plaintiff’s counsel to agree to  reversionary settlements. Courts could also take greater pains to ensure that class members understand that they  have claims and make an informed decision whether to make claims.  Courts could extend  the notice period, could order that the claims administrator send multiple reminders of the  need to return a claim form, or even that the administrator (or class counsel) actually  telephone class members and encourage them either to make claims or opt out.  While  such steps make settlement administration more expensive, they serve the goal of  minimizing the number of situations where class members unwittingly receive no money  under a settlement as a result of simple ignorance. Rather than address the problem of low claims rates through better notice or adjustment of  the attorney’s fee, many courts have simply refused to approve reversionary settlements. 542    That is, courts have been reluctant to approve a settlement by which attorney’s fees are  calculated as a percentage of the gross value, but to the extent class members fail to claim  their designated portion of the settlement fund, the money is returned to the defendant. 543    Initially, there appeared to be a valid statutory basis for this approach.  Specifically, Code of  Civil Procedure Section 384(b) provides: [P]rior to the entry of any judgment in a class action . . . the court  shall determine the total amount that will be payable to all class  members [and] shall also set a date when the parties shall report  to the court the total amount that was actually paid to the class  members. After the report is received, the court shall amend the  judgment to direct the defendant to pay the sum of the unpaid  residue, plus interest . . . to nonprofit organizations or  foundations to support projects that will benefit the class or  similarly situated persons, or that promote the law consistent  with the objectives and purposes of the underlying cause of                                                        542 See Managing Class Action Litigation, A Pocket Guide for Judges (Federal Judicial Center, 2005)  http://www.fjc.gov/public/pdf.nsf/lookup/classgde.pdf/$file/classgde.pdf. 543 This can be contrasted with a true “claims made” settlement, where the employer simply agrees to pay a sum consisting  of: (1) payments to class members who submit claims (pursuant to a formula), (2) payment to class counsel for fees  and costs that is based on the value of the money paid out in claims rather than some fictional “gross settlement value”,  and (3) payment of settlement administration costs.  In this scenario, there is no money returned to the employer.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 122 action, to child advocacy programs, or to nonprofit organizations  providing civil legal services to the indigent. Many trial courts interpreted this language as forbidding the return of any funds from a  class settlement fund to the defendant.  Instead, leftover funds either had to be distributed  to other class members, donated to charity, or escheated to the state. 544 This interpretation of Section 384 was rejected, however, in In Re Microsoft I-V Cases. 545    The court in that case faced a settlement where a portion of unclaimed funds from a  consumer class action would be returned to Microsoft.  The court analyzed the statutory  language and legislative history of Section 384 and determined that it applied only to funds  an employer has paid as a result of a judgment entered in favor of the class on the merits,  and did not apply to a stipulated settlement of class claims. 546   Accordingly, In re Microsoft makes clear that there is no absolute prohibition under California law on parties agreeing to  reversions in class settlements. Nonetheless, some trial courts have continued to exercise their general discretion to  determine fairness as a basis to refuse to approve reversionary settlements.  This tendency  became more widespread following a determination in Kakani v. Oracle Corporation, 547 in  which United States District Court Judge William Alsup sharply criticized numerous aspects  of a negotiated class settlement on the ground that they aimed to benefit class counsel and  the defendant at the expense of the class.  For example, he criticized settlement terms  providing that (1) class members were subject to a general release of all claims (not just  claims raised by the class action) if they failed to opt out of the settlement; (2) the employer  would receive back any money class members failed to claim, but the plaintiff’s attorney fee  award was to be a percentage of the gross settlement; (3) the named class members were  each to receive $15,000 incentive awards for acting as class representatives; and (4) no  one explained why class members would receive only about 11% of an amount the parties  agreed was the maximum possible recovery. 548                                                       544 Cy pres settlements should ensure that the class is benefited and the purposes of the underlying statutes sued upon  are best served.  See, e.g., Dennis v. Kellog Co., 697 F.3d 858, 865-867 (9th Cir. 2012) (reversing trial court’s approval  of settlement where cy pres fund benefited the hungry indigent rather than class of purported victims of statutory  violations—those who relied upon false advertisements); Nachshin v. AOL, LLC, 663 F.3d 1034 (9th Cir. 2011) (trial  court abused its discretion in approving cy pres settlement because the proposed distribution did not address the  objectives of the underlying statutes sued upon, did not target the nationwide plaintiff class, and did not provide a  reasonable certainty that any member of the class would be benefited). 545 135 Cal. App. 4th 706 (2006). 546 Id. at 722. 547 2007 U.S. Dist. LEXIS 47515 (N.D. Cal. Jun 19, 2007). 548 Id.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 123 Judge Alsup’s decision, although not binding on any other court, influenced judges in the  complex courts in California who rule upon most of the class action settlements.  More  recently, the criticism of large inventive payments to class representatives was enshrined in  an appellate decision, Clark v. American Residential Services LLC, 549   which was written by  an Orange County complex trial court judge temporarily sitting by designation on the court  of appeal. C. Court Scrutiny of the Adequacy of the Settlement Amount Traditionally, if class counsel was an experienced practitioner with a good reputation and  the case was settled using an experienced class action mediator, the courts would  presume that the settlement amount was fair as the product of an arm’s-length negotiation  between sophisticated parties.  Indeed, longstanding case law for evaluating class  settlements in response to objections from class members that the settlement was  inadequate suggested that the court’s inquiry should not go beyond that level of scrutiny. 550 Furthermore, it has become a common practice with Labor Code class actions for counsel  for the parties to agree early in the action to forego formal discovery and set the action for  early mediation.  The purpose of this exercise is to minimize expense and bring the matter  to a more rapid conclusion.  Often, discovery will be informal and limited to disclosing  relevant policies, contact information for a sample of the proposed class to interview, and  enough payroll data to allow the parties to assess potential exposure under whatever  theory the plaintiffs advance. Problems may arise, however, when multiple lawyers representing distinct potential class  representatives file essentially the same class action against the same defendant and then  differ in their view of the value of the case.  They may also differ on the propriety of settling  the case.  As any one of these class representatives could enter into a settlement with the  defendant and seek to have the settlement approved, a dissenting class representative  may be placed in the position of an objector.  Because the law disfavors setting aside a  class settlement on the ground that the objector could have obtained an even better class  settlement, 551 objectors instead argue that the plaintiff failed to undertake the necessary  due diligence to properly evaluate the claim. There has never been a requirement that exhaustive formal discovery be undertaken  before a class settlement could be affirmed.  Rather, the general standard has been that “in                                                        549 175 Cal. App. 4th 785 (2009). 550 Id. at 1149.  551 See generally 7-Eleven Owners for Fair Franchising v. Southland Corp., 85 Cal. App. 4th 1135, 1149-50 (2000) (noting  that courts are allowed to look with skepticism on claims from objectors that settlements were inadequate and should  have been for more money: “proposed settlement is not to be judged against a hypothetical or speculative measure of  what might have been achieved by the negotiators”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 124 the context of class action settlements, formal discovery is not a necessary ticket to the  bargaining table where the parties had sufficient information to make an informed decision  about settlement.” 552   Most courts have generally accepted the sworn statements from  counsel that they conducted the necessary investigation and settled the case in mediation  and in an arms-length transaction. In late 2008, however, the First District Court of Appeal decided Kullar v. Foot Locker  Retail, Inc., 553 which signaled greater judicial scrutiny of the value of class settlements,  especially those obtained following limited, informal discovery. In Kullar, a settlement was negotiated by experienced class action counsel (on both sides)  with the assistance of a respected mediator.  The parties had undertaken only informal  discovery and the exchange of information had been conducted as part of the mediation,  protecting the nature of the information disclosed from disclosure.  The parties ultimately  settled the action for $2 million.  Another plaintiff who had filed a separate class action  alleging similar claims objected and contended that the plaintiff’s counsel had failed to  provide any evidence that counsel had conducted enough investigation to intelligently  valuate the case for mediation.  The trial court overruled the objections and found that  sworn representations from counsel that they had exchanged necessary information in  mediation and that the matter was negotiated at arms-length were sufficient to support  approval of the settlement.  The objector appealed. 554 The court remanded the case and ordered the trial court to conduct a more searching  inquiry into the investigation of class counsel.  The court explained that this inquiry should  require the settling parties to introduce evidence reflecting the potential recovery if the  plaintiffs prevailed and some explanation why the presumably lesser settlement amount  represented a fair recovery for the class: While an agreement reached under these circumstances presumably will be fair  to all concerned, particularly when few of the affected class members express  objections, in the final analysis it is the court that bears the responsibility to  ensure that the recovery represents a reasonable compromise, given the  magnitude and apparent merit of the claims being released, discounted by the  risks and expenses of attempting to establish and collect on those claims by  pursuing the litigation. 555                                                       552 Id. at 1149.  553 168 Cal. App. 4th 116. 554 Id. at 121-27. 555 Id. at 129.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 125 Furthermore, the court ordered that the objector was entitled to some limited discovery to  evaluate the case and to support an objection that the settlement amount was too low to be  approved.  Although the trial court is not to decide the merits of the case or easily overturn  a negotiated settlement, the trial court “must at least satisfy itself that the class settlement  is within the ‘ballpark’ of reasonableness.” 556 For practical purposes, the main effect of this ruling has simply been to require the  plaintiffs’ lawyer, in the motion for approval of a settlement, to spell out some theoretical  maximum exposure and explain in general terms why a discounted amount was proper. But the ruling also creates the potential that a court could reject a settlement solely because it  was reduced too much from a theoretical “maximum” exposure value. The Kullar decision overlooks that forecasting a maximum exposure is problematic,  especially where there is a lack of documentary evidence to prove the extent of possible  damages.  For example, in an exempt misclassification case, there may be no agreed way  to assess what percentage of the class was misclassified or the average amount of  overtime worked.  In the absence of a comprehensive survey of the class (which can cost  tens or hundreds of thousands of dollars to accomplish and even then may be of  questionable validity), plaintiffs’ counsel will be working with cherry-picked data to estimate  the average overtime worked by the class.  Similarly, in a case where the employer argues  great variation among the class, there may be a dispute as to what percentage of the class  is properly classified.  Accordingly, a theoretical maximum exposure number built on 100%  misclassification of the class and 10-15 hours of overtime may bear no relation whatsoever  to the fair “settlement value” of a case. As long as this exercise of analyzing the proper value of a settlement is truly limited to  some kind of “rational basis” review, judicial scrutiny of the settlement value should not  have any great impact on class settlement.  If the trend toward greater judicial scrutiny of  settlements continues unreasonably, however, it could discourage class settlements  because employers will lack confidence that the settlements they negotiate will ultimately  be approved. D. Class Notice Courts have also exercised greater scrutiny of the notice that is sent to the class.  The law  requires that the class receive notice using the best “practicable” method. 557   Courts have  been increasingly concerned that recipients of the class notice understand the nature of the                                                        556 Id. at 133. 557 Hypertouch, Inc. v. Superior Court, 128 Cal. App. 4th 1527, 1539 (2005) (notice “must be the best practicable,  reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and  afford them an opportunity to present their objections”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 126 claim, can calculate the value of their share of the settlement, and can readily access court  documents to investigate the nature of the case. The judges in the Alameda Complex Division have requiried that the parties make  exhaustive efforts to notify class members of the claims and have sufficient information to  exercise their options under the settlement.  For example, in addition to requiring that the  administrator send a reminder postcard to class members who have not made claims, the  judges in Alameda have ordered that the administrator make at least three telephone calls  to class members. E. Objection to Settlements When a class settlement is slated for final approval, often the last hurdle the settling parties  must surmount any objection to the settlement.  Any member of the settlement class who  does not opt out of the settlement may assert an objection to the settlement. 558   Courts tend  to be extremely reluctant to sustain objections where the sole basis is that the objector  believes the settlement is not generous enough.  After all, if an individual believes his wage  and hour claim is worth more than the class is receiving, then he can opt out of the  settlement and assert his own claim (and typically can recover attorney’s fees if he  prevails). In 7-Eleven Owners for Fair Franchising v. Southland Corp., 559 the court explained that in  evaluating an objection that a settlement was too low given the merits of the case, a court  must not substitute its own opinion on the merits for those of the settling parties: “the merits of the underlying class claims are not a basis for upsetting the  settlement of a class action; the operative word is ‘settlement.’  Instead the  inquiry is on whether the parties conducted sufficient discovery to evaluate the  claims themselves—something even the plaintiffs in the 7-Eleven case agreed the defendants had done.  In such circumstances, the court should not  disapprove a settlement based on a hypothetical or speculative measure of what  might have been achieved by the negotiators.’” 560                                                          558 Wershba v. Apple Computer, Inc., 91 Cal. App. 4th 224, 235 (2001). 559 85 Cal. App. 4th 1135 (2000). 560 Id. at 1149-50; but see Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116, 129 (2008) (parties are not excused  from explaining what the claims potentially were worth and why less money was accepted: “While an agreement  reached under these circumstances presumably will be fair to all concerned, particularly when few of the affected class  members express objections, in the final analysis it is the court that bears the responsibility to ensure that the recovery  represents a reasonable compromise, given the magnitude and apparent merit of the claims being released, discounted  by the risks and expenses of attempting to establish and collect on those claims by pursuing the litigation.”).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 127 Furthermore, where relatively few class members object, that factor weighs against  sustaining the objection. 561 Objectors have better success in their objections when they identify procedural defects in  the settlement process.  For example, objections have been sustained when the class  notice was excessively vague and confusing, or when class counsel failed to undertake  sufficient discovery to properly evaluate the case. 562   In short, the odds of a successful  objection are low if the parties conduct an adequate investigation, make the notice  documents clear, set forth some rational basis for the settlement amount, and take  adequate steps that class members are informed in their choices. F. Individual Settlements with Putative Class Members Class actions differ from individual actions in that most of the parties on whose behalf the  action allegedly is advanced have no involvement in the case (and may be totally unaware  of the case) until a court orders certification and notice.  This aspect of class litigation has  raised the question of whether employers and their counsel should be entitled to  communicate with putative class members before certification or whether they should be  treated in the same manner as the named plaintiff, in which case the right to communicate  with the putative class members would be severely restricted. 563 Putative class members are not treated the same as parties and there is no attorney-client  relationship between a plaintiff’s attorney and putative class members before a court  certifies a class. 564   Despite this fact, an employer does not have carte blanche to  communicate with putative class members any way it desires.  Rather, courts are  empowered to limit such communications where the employer engages in conduct that has  been coercive or misleading. One area where there is great potential for an employer to be accused of coercive conduct  is where the employer attempts to settle a case directly with individual employees who are  within a putative class in an ongoing class action.  Because current employees may fear for  their jobs or future career prospects if they do not cooperate with the employer, there is at                                                        561 Id. at 1152-53 (out of a class of 5454 people, only nine objected and only 80 opted out). 562 Cho v. Seagate Technology Holdings, Inc., 177 Cal. App. 4th 734, 747-48 (2009) (settlement disapproved without  prejudice to issuance of new class notice where original notice was confusing as to who qualified as a class member);  Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116, 132-33 (2008) (case remanded for parties to better explain  what information the parties considered in reaching settlement, and to allow objector limited discovery relevant to  valuation of case). 563 See generally Cal. Rule of Professional Conduct 2-100. 564 Atari v. Superior Court, 166 Cal. App. 3d 867 (1985); see also Ochoa-Hernandez v. Cjaders Foods, Inc., 2010 WL  1340777 (N.D. Cal. April 2, 2010) (denying plaintiff’s motion for a protective order seeking to prohibit defense attorneys  from interviewing “aggrieved employees” in connection with a PAGA claim, finding that no attorney-client relationship  existed between plaintiff’s counsel and those employees).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 128 least the potential for coercion when an employer tries to settle individually.  At the same  time, an employer may seek to resolve a case on fair terms in situations where a plaintiff’s  counsel has staked out an overly aggressive position on class settlement.  The law must  strike a balance between promoting genuine settlement efforts and employee coercion. The proper steps that an employer should take to ensure that their settlement efforts are  seen as non-coercive were discussed in In re M.L. Stern Overtime Litigation. 565   Among the  steps the court suggested an employer should undertake to ensure its settlements will be  enforceable include:  Preparing a handout that explains the case in neutral terms, and is up front about  the fact that the employee may be able to obtain more money than the settlement  offered by pursuing the class action.  Providing each employee with a copy of the operative class action complaint and  letting putative class members know that they are free to contact plaintiffs’ counsel  to discuss the case if they so desire.  Reassuring employees that they have the right to participate in the class action  rather than agree to the settlement, and that they will suffer no retaliation if they  choose to participate in the class action.  If a settlement agreement is offered to the employee, the employee should be  given a reasonable period of time (several weeks) to consider the offer and discuss  it with counsel of their choice. 566 The Labor Code also includes extra protections for employees to prevent them being  coerced into waiving their wage claims for less than the claims are truly worth.  Labor Code  Section 206.5 provides: “An employer shall not require the execution of a release of a claim  or right on account of wages due . . ., unless payment of those wages has been made.”   The Section goes on to provide that any release obtained in violation of the section “shall  be null and void as between the employer and the employee.”  Before 2009, there was  some ambiguity whether this language precluded enforcement of any settlement of a claim  for unpaid wages where the employee could prove that the amount received in settlement  was less than the total amount the employee was owed. In 2009, however, two decisions clarified that the protection in Labor Code Section 206.5  applies only to releases obtained where there was no genuine dispute over the wages                                                        565 250 F.R.D. 492 (S.D. Cal. 2008). 566 Id. at 498-500.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 129 owed. 567   In other words, where an employer concedes (or lacks a genuine dispute) that it  owes an employee wages, it cannot obtain a release of that claim by paying less than the  undisputed amount owed.  But, where the employer has a good faith defense to wage  claims and seeks to compromise them with a member of a putative class in an ongoing  class action, such a settlement would not be invalidated by Labor Code Section 206.5. It should be emphasized that the above decisions arose under facts where the employer  took pains to ensure it did nothing in its individual settlement efforts that could be viewed as  coercive conduct.  As the law currently stands, employers who are careful to be fair may  settle individually with class members and enforce the releases obtained as a result.   Notwithstanding that ability, employers must be very careful not to overreach and attempt  to settle these cases in a coercive manner or at an unreasonable discount, as those sorts  of facts may yield a less favorable outcome for employers in the next case. XVII. Class Action Waivers and Arbitration Employers have attempted to protect themselves from potential class actions by including  provisions in mandatory arbitration agreements that the employee must individually arbitrate any  claims and that the arbitrator cannot certify a class or otherwise allow employees covered by the  arbitration agreements to pursue their claims on anything other than an individual basis.  Federal  courts outside California have enforced such provisions. 568   Unfortunately for California employers,  the California Supreme Court issued two decisions – Discover Bank and Gentry – that severely  hampered the ability of an employer in California to enforce a class action waiver in an employment  arbitration agreement. In Discover Bank v. Superior Court, 569 the Court struck down as unenforceable a class action  waiver in a consumer contract. 570   The Discover Bank case involved a credit card holder who                                                        567 Chindarah v. Pick up Stix, Inc., 171 Cal. App. 4th 796, 803 (2009) (individual settlements enforceable when they involve  “a bona fide dispute over wages already earned,” settle “a dispute over whether [the employer]  had violated wage and  hour laws in the past”; and do not “purport to exonerate [the employer] from future violations.”); Watkins v. Wachovia  Corp., 172 Cal. App. 4th 1576, 1586-87 (2009) (same). 568 See, e.g., Livingston v. Assocs. Fin., Inc., 339 F.3d 553, 559 (7th Cir. 2003) (class action waiver enforceable in action  filed under federal Truth-in-Lending Act); Snowden v. Checkpoint Check Cashing, 290 F.3d 631, 638-39 (4th Cir. 2002)  (same); Burden v. Check Into Cash of Kentucky, LLC, 267 F.3d 483, 492 (6th Cir. 2001) (same); Randolph v. Green  Tree Fin. Corp.-Alabama, 244 F.3d 814, 819 (11th Cir. 2001) (same); Johnson v. West Suburban Bank, 225 F.3d 366,  370-78 (3d Cir. 2000) (same). 569 36 Cal. 4th 148 (2005). 570    In contrast, the Second District Court of Appeal held that the U.S. Supreme Court’s decision in AT&T Mobility Corp. v.  Concepcion,  131 S. Ct. 1740 (April 27, 2011) (discussed below),  invalidated California authority prohibiting the waiver  of class action rights in an arbitration agreement contained in a retail installment sale contract for a BMW in Sherf v.  Rusnak/Westlake,  2012 WL 4882547, at *1 (Oct. 16, 2012).  The court concluded that “Concepcion rejects the  argument that class action waivers in consumer contracts can be invalidated in order to vindicate statutory rights even if  the statutory right is desirable for other reasons.  Concepcion expressly concludes that nothing in FAA ‘suggests an  intent to preserve state-law rules that stand as an obstacle to the accomplishment of the FAA’s objective’ and arbitration Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 130 initiated a class action alleging that Discover Bank had made misleading statements that imposed  late fees on him and thousands of other credit card holders.  Meanwhile, Discover Bank had included a notice within the card holder’s monthly bill that the arbitration agreement was being  amended to preclude class actions and that the credit card holder would have to cancel the credit  card to prevent this change from going into effect.  Although the agreement provided for alternative  means of recovery, individual card holders had little incentive to sue over the imposition of a small  late fee. In a split decision, a bare majority of the California Supreme Court held that the class action waiver  within the arbitration agreement rendered the arbitration agreement unconscionable.  The primary  bases for the ruling in Discover Bank were that the arbitration agreement was part of a “bill stuffer”  that made it a true contract of adhesion and that the claims at issue in the consumer setting were  too small to be viable without resorting to the class action device. 571 The reasoning of Discover Bank would not seem to preclude class action waivers in the  employment context.  After all, California has in place procedures to incentivize individual  employees to sue to recover for Labor Code violations (including various substantial penalties and  the right to recover attorney’s fees).  Moreover, mandatory arbitration and class action waivers are  usually presented to employees in a more visible manner than a bill stuffer with a credit card bill. In Gentry v. Superior Court, 572 the California Supreme Court took review of an employment case  that seemed to provide good facts for the employer.  The employee at issue presented no evidence  that he had been coerced to agree to arbitration and, on the contrary, the employee had declined to  take advantage of a company policy that allowed him to opt out of mandatory arbitration of  employment disputes.  Despite these facts, the seven California Supreme Court justices split along  the same 4-3 lines as in Discover Bank and invalidated the class action waiver. In concluding that class action waivers in arbitration agreements are generally not enforceable, the  majority first noted that the rights to minimum wage and overtime compensation are unwaivable  statutory rights.  The majority reasoned that class action arbitration waivers may tend to create a  “de facto waiver” of employee rights, as employees are more likely to pursue such claims in a class  action rather than on an individual basis.  Given the “modest” damages at issue in many overtime  cases, the expense of litigation, and potential for retaliation by the employer, the majority concluded  that class action waivers in employment arbitration agreements should not be enforced if a trial  court determines that class arbitration would be more effective than individual arbitration in  vindicating employee rights.                                                                                                                                                                                      agreements must be enforced ‘notwithstanding any state substantive or procedural policies to the contrary.’” Id. at *5  (citing Concepcion, 131 S. Ct. 1740, 1748-49 (2011)).     571 Id. at 161. 572 42 Cal. 4th 443 (2007). Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 131 As such, the court set forth several factors a trial court must consider when evaluating whether a  class action waiver to pursue overtime wages contained in an arbitration agreement is valid:  whether individual recovery amounts sufficiently incentivized litigation; 573  the risk of retaliation to employees;  employees’ lack of knowledge about their legal rights; and  “other real world obstacles to the vindication of class members’ right to overtime pay  through individual arbitration.” 574 Another interesting wrinkle in the Gentry case is that the employer did not present the arbitration  agreement on a take-it-or-leave-it basis, but rather gave employees an opportunity to opt out of the  arbitration system if they did so within the first thirty days of employment.  Even if class action  waivers were substantively unconscionable, an arbitration agreement of the sort used in Gentry  should arguably be enforceable on the ground that it is not procedurally unconscionable.  A contract  typically must be infected both by procedural and substantive unconscionability to be unenforceable  as unconscionable. 575 Yet the Gentry Court held that in determining whether an arbitration  agreement was unenforceable based on unconscionability, procedural unconscionability could be  found in employment arbitration agreements even when employees are given an opportunity to opt  out of arbitration. 576 The Gentry decision seemingly eliminated an employer’s ability to place effective class action  waivers in employment arbitration agreements.  Decisions since Gentry have applied its reasoning  to invalidate class action waivers for other types of wage and hour claims, such as meal and rest  break claims. 577 For example, in Samaniego v. Empire Today, LLC, 578 the First District Court of Appeal affirmed a trial court’s refusal to compel contractual arbitration of claims by carpet installers who alleged that  Empire violated multiple provisions of the Labor Code.  The Court ruled that the arbitration provision                                                        573 The Court cited Bell III, 115 Cal. App. 4th 715 (2004), indicating that even an award as large as $37,000 would not be  “ample incentive,” and concluding even more broadly “class actions may be needed to assure the effective enforcement  of statutory policies even though some claims are large enough to provide an incentive for individual action.”  574 Gentry, 42 Cal. 4th at 463.   575 See Little v. Auto Stiegler, Inc., 29 Cal. 4th 1064, 1071 (2003) (unconscionability has both procedural and substantive  element); see also Hicks v. Macy’s Dep’t Stores, Inc., No. C 06-02345 CRB, 2006 U.S. Dist. LEXIS 68268, at *9-12  (N.D. Cal. Sept. 11, 2006) (arbitration agreement containing class action waiver not procedurally unconscionable  because employee had an opportunity to opt out of arbitration system). 576 Gentry, 42 Cal. 4th at 470.  577 Franco v. Athens Disposal Co., 171 Cal. App. 4th 1277 (2009). 578    205 Cal.App.4th 1138 (2012) .Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 132 was unconscionable under California Law.  First, the court found the agreement procedurally  unconscionable because it consisted of 11 densely worded, single-spaced pages with no individual  headings. 579   Furthermore, plaintiffs had to sign the agreement after they were hired but before  starting work, but they were not able to read English and were not provided with a requested  Spanish translation, and neither was provided with a copy of the agreement or the arbitration  rules. 580   Second, the court found that the agreement was substantively unconscionable because  (1) it shortened the limitations period for the statutory wage and hour claims asserted from three or four years to six months, (2) it obligated employees to pay attorneys’ fees incurred by Empire under  certain circumstances, but did not impose a reciprocal obligation on Empire, and (3) the agreement  exempted claims typically brought by employers from the arbitration requirement, such as those  seeking declaratory and preliminary injunctive relief to protect Empire’s proprietary information and  noncompetition/nonsolicitation provisions. 581    Next, the Court of Appeal held that California law applied, even though the parties’ contract called for Illinois law and an Illinois venue.  The Court noted that “the same factors that render the  arbitration provision unconscionable warrant the application of California law” because “the  Agreement was obtained by ‘improper means’ and to the extent Illinois law might require  enforcement of its arbitration clause, enforcing Empire’s choice-of-law provision would result in  substantial injustice.” 582   The court also held that the trial court did not err in declining to sever the  objectionable portions of the agreement and enforcing the remainder. 583   Lastly, the court held that  the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, discussed below, does not  prevent courts from rejecting arbitration agreements that the court finds unconscionable. 584        The Impact of the Federal Arbitration Act on Class Action Arbitration Waivers While California courts have essentially negated any employer efforts to restrict class actions, the  United States Supreme Court has developed other ideas.  In a 2010 decision, Stolt-Nielsen S.A. v.  AnimalFeeds International Corp., 585 the Court held that imposing class arbitration on parties that did  not specifically agree to it would be inconsistent with the Federal Arbitration Act (“FAA”). 586    Employers have attempted to utilize this decision in the trial courts to compel class representative  plaintiffs who had entered into arbitration agreements with class action waivers to arbitrate their                                                        579 Id. at 1146. 580 Id. 581 Id. at 1147. 582 Id. at 1148-49. 583 Id. at 1149. 584 Id. at 1150. 585 559 U.S. 662 (2010). 586 Id. at 687.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 133 cases as individuals.  Thus far, these attempts have sometimes been successful and sometimes  unsuccessful.  Until there is guidance on this issue at an appellate court level, it remains unclear as  to what effect Stolt-Nielsen S.A. will have on California law regarding class action waivers. Another potentially even more favorable class action decision for employers came in 2011 in AT&T Mobility LLC v. Concepcion, where the Supreme Court held that the FAA preempted California’s  Discover Bank rule in a consumer class action case. 587   This holding has been extended to  employment cases in some instances. 588   If given full recognition by courts, Concepcion would  effectively overturn Gentry and permit employers to require arbitration of employment claims while  ensuring that class arbitration does not proceed. 589   Many employers are now exploring the  implementation of arbitration agreements with an eye towards limiting or eliminating class actions of  various sorts.   For example, in Quevedo v. Macy’s Inc., 590 the court compelled arbitration of plaintiff’s individual  PAGA claims because the arbitration agreement properly encompassed those “employment-related  legal disputes.” The arbitration agreement permissibly precluded the plaintiff from “representing,  and seeking relief, on behalf of a group.”  The fact that the plaintiff’s PAGA claim was not arbitrable  on behalf of a group did not mean it could proceed in court because there was “no authority  suggesting that [plaintiff could] pursue PAGA claims on behalf of others without also pursuing them  himself.”  Relying on Concepcion, the court held that California case law requiring arbitration  agreements to allow for representative PAGA claims on behalf of other employees would be  inconsistent with the FAA. 591                                                       587 AT&T Mobility LLC v. Concepcion,  __U.S.  _, 131 S. Ct. 1740 (2011); but see Sanchez v. Valencia Holding Company,  LLC., 201 Cal. App. 4th 74, 89 (2011), review granted, (holding that “Concepcion is inapplicable where . .  [the court is]  not addressing the enforceability of a class action waiver or a judicially imposed procedure that is inconsistent with the  arbitration provision and the purposes of the Federal Arbitration Act,” and therefore courts may still invalidate arbitration agreements by applying “unconscionability principles [that] govern all contracts, are not unique to arbitration  agreements, and do not disfavor arbitration”).   588    In Sonic-Calabasas A, Inc. v. Moreno, 57 Cal. 4th 1109 (2013), the California Supreme Court  applied Concepcion and  held that the FAA preempts any state laws preventing arbitration of employment disputes.  However, the SonicCalabasas A court also held that an arbitration agreement can still be held to be unconscionable if the agreement  conflicts with state unconscionability rules that do not involve the “fundamental attributes of arbitration.” 589    But see Balasanyan v. Nordstrom, No. 11-CV-2609 (S.D. Cal. Mar. 8, 2012), the district court denied defendant's  motion to compel arbitration because the arbitration agreement originally was mailed to employees about two months  after the complaint was filed.  Employees subsequently were provided with "the most current version" of the arbitration  agreement at work and were asked to sign a form acknowledging receipt of the information.  The court held that "the  purported imposition of the agreement constituted an improper class communication." 590 Quevedo v. Macy’s Inc., 798 F. Supp. 2d 1122, 1141-42 (C.D. Cal. 2011). 591    The decision in Quevedo was mirrored in Gerardo Miguel v. JPMorgan Chase Bank, N.A., 2013 WL 452418 (C.D. Cal.  Feb. 5, 2013).  The court in Gerardo held that the FAA applied to PAGA claims and that as a result an employee who  was subject to an arbitration agreement banning representative actions could bring PAGA claims in arbitration only on  an individual basis.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 134 While the full impact of Concepcion is yet to be determined, the California Court of Appeal for the  Second District has held that PAGA claims are not preempted by the FAA.  In Brown v. Ralphs  Grocery Co., the court reasoned that PAGA claims are inherently different from private causes of  action because, in a PAGA claim, “the aggrieved employee acts as the proxy or agent of the state  labor law enforcement agencies, representing the same legal right and interest as those agencies,  in a proceeding that is designed to protect the public, not benefit private parties.” 592   The court  concluded that, because the purpose of the FAA was to govern arbitration of private disputes, as  opposed to enforcing “public rights,” the FAA does not preempt state law exemptions PAGA claims  from arbitration. 593 The National Labor Relations Board has also entered the fray, joining the assault on class-action  waivers, in Cuda v. D.R. Horton, Inc., where the Board ruled that Concepcion did not apply in cases  that involved waiver of rights protected by the NLRA. 594   The Board held that employers cannot  force employees to sign arbitration agreements that include class action waivers.  Such an  agreement unlawfully restricts employees’ Section 7 right to engage in concerted action for mutual  aid or protection, notwithstanding the FAA.  The Board stressed that arbitration agreements are not  per se unenforceable.  However, whether the class/collective action mechanism is used in  arbitration or in a court of law, the Board held that class resolution must be available to employees.   The Board distinguished Concepcion on the ground that it involved a conflict between the FAA and  state law, whereas D.R. Horton involved a conflict between two federal statutes. Before the ink was dry on the D.R. Horton decision, however, it faced a hostile reaction by the  judiciary.  The California Court of Appeal expressly rejected D.R. Horton in Leos v. Darden  Restaurants, Inc., stating that “D.R. Horton does not invalidate class or collective action waivers in  an arbitration agreement.” 595   Further, in Gerardo Miguel v. JP Morgan Chase Bank, N.A., a federal District Court rejected D.R. Horton and held that the NLRB is owed no deference in its interpretation  of the FAA. 596   The Ninth Circuit has also disapproved of D.R. Horton, but has yet to explicitly reject  it.  In Richards v. Ernst & Young, LLP, the Ninth Circuit noted that D.R. Horton had been roundly  rejected by virtually every federal court that had an opportunity to weigh in on it.  The Ninth Circuit also noted that the FAA can be overridden only by an act of Congress. 597                                                          592 197 Cal. App. 4th 489, 500 (2011); see also Reyes v. Macy’s, Inc., 202 Cal. App. 4th 1119, 1123 (2011) (holding that  PAGA claims were not individual claims but rather were brought by plaintiff “as the proxy or agent of the state’s labor  law enforcement agencies”).   593 Id.  (“AT&T does not provide that a public right, such as that created under PAGA, can be waived if such a waiver is  contrary to state law”). 594 Cuda v. D.R. Horton, Inc., 12-CA-25764 (N.L.R.B. Jan. 3, 2012). 595    217 Cal. App. 4th 473, 496 (2013). 596    2013 WL 452418 at *2 (C.D. Cal. Feb. 5, 2013). 597    2013 WL 6405045 at *2, n.3 (9th Cir. Dec. 9, 2013).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 135 In 2012, two California appellate courts reached opposite conclusions as to whether Gentry survived Concepcion.  The California Supreme Court has decided to review both decisions. 598      In Iskanian v. CLS Transportation Los Angeles, LLC, Division Two of the Second District Court of  Appeal affirmed a trial court’s decision to compel arbitration and dismiss class claims. 599   The  plaintiff had brought a putative class action and representative PAGA action alleging wage and hour  violations, but had signed an arbitration agreement that expressly waived his right to bring a class  action or representative action. 600   The Court of Appeal held that Gentry did not apply after  Concepcion, because “Concepcion thoroughly rejected the concept that class arbitration  procedures should be imposed on a party who never agreed to them.” 601   The court also expressly  held that Brown v. Ralphs Grocery Co., incorrectly concluded that PAGA waivers were not  preempted by the FAA. 602    In contrast, in Franco v. Arakelian Enterprises, Inc., Division One of the Second District Court of  Appeals reached the opposite conclusion. 603   The plaintiff there also brought a putative class action  and representative PAGA action alleging wage and hour violations and had also signed an  arbitration agreement that waived his rights to proceed as a class action or representative action. 604    The Court of Appeal reasoned that Gentry “is not a categorical rule against class action waivers”  which Concepcion found impermissible under the FAA. 605   Rather, Gentry requires courts to apply a  multifactor test for arbitration agreements, which must be considered on a case-by-case basis to  determine if they are preempted by the FAA and Concepcion. 606   Furthermore, the court concluded                                                        598 Iskanian v. CLS Transportation Los Angeles, LLC, 206 Cal. App. 4th 949, 959 (2012) (“[W]e find that the Concepcion decision conclusively invalidates the Gentry test.”), rev. granted, 286 P.3d 147 (Sep. 9, 2012); cf. Franco v. Arakelian  Enterprises, Inc., 211 Cal. App. 4th 314, 368 (2012) (“Accordingly, Gentry is not preempted by the FAA because it is not  a categorical rule that invalidates class action waivers---the type of rule that Concepcion condemned.”), rev. granted,  294 P.3d 74 (Feb. 13, 2013).     599 Iskanian, 206 Cal. App. 4th at 961.   600 Id. at 954.   601 Id. at 959.   602 Id. at 966 (“Following Concepcion, the public policy reasons underpinning the PAGA do not allow a court to disregard a  binding arbitration agreement.  The FAA preempts any attempt by a court or state legislature to insulate a particular  type of claim from arbitration.”).  Similarly, in Nelsen v. Legacy Partners Residential, Inc., 207 Cal. App. 4th 1115, 1131- 32 (2012), Division One of the First District Court of Appeal called into doubt Gentry’s enforceability after Concepcion.   The court declined to reach the issue, however, because the plaintiff failed to set forth evidence requiring a court to  conduct the multifactor test under Gentry in the first instance.   603 Franco v. Arakelian Enterprises, Inc., 211 Cal. App. 4th 314, 368 (2012).  604 Id. at 327.   605 Id. at 367-68.   606 Id.  Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 136 that where Gentry’s multifactor test is satisfied as to a plaintiff’s substantive claims, the PAGA  claims are similarly not subject to arbitration. 607 The California Supreme Court has granted review of these two decisions and will have to decide  Gentry’s continued viability in light of Concepcion.              XVIII. Individual Liability  Some plaintiffs seeking allegedly unpaid wages have employed the tactic of suing corporate  officials personally.  In 2005, in Reynolds v. Bement, 608 the California Supreme Court held that  individuals cannot be held liable for overtime pay under Labor Code Sections 510 or 1194.  The  court left open the possibility, however, that individual supervisors could be held liable for civil  penalties. Seyfarth Shaw advocated in Reynolds that California law does not impose individual liability on  managers for wage and hour violations.  Rather, the law imposes the primary civil obligation to  comply with the wage and hour laws—including the obligation to provide back pay or damages— upon “employers” (a term that is not defined), while expending the scope of criminal liability or civil  punishment to broader categories, such as “other persons” or “officers or agents” of an employer.   Where the Legislature wanted to create individual liability, it referred to “any person” being liable, as  opposed to cases where it held that an “employer” is liable. 609 The plaintiffs attempted to justify suing individual officers for damages by invoking the expansive  definition of “employer” contained in the IWC Wage Orders.  The defendants responded that to the  extent anything in the Wage Orders could be read as creating individual liability for failure to pay  overtime, such pronouncements are void in that they would exceed the scope of the Labor Code,  which authorizes the IWC to adopt only regulations “consistent with” the Labor Code. 610 In 2005, the California Supreme Court largely adopted the defendants’ position, holding that under  general common law principles of managerial immunity, managers are not liable for the corporate                                                        607 Id. at 375 (“[W]hen substantive Labor Code claims must be adjudicated in court under Gentry, the PAGA remedies ‘tag  along’ under the same unwaivable statutory rights analysis that applies to the substantive claims.”).   608 36 Cal. 4th 1075 (2005). 609 Compare Lab. Code § 553 (criminal liability for overtime violations available against “[a]ny person”) with Lab. Code  § 510 (discussing only “employer’s” liability); see also Lab. Code § 1197.1 (imposing a civil fine on “[a]ny employer or  other person acting either individually or as an officer, agent, or employee of another person” who fails to pay the  minimum wage); Lab. Code § 210 (imposing a fine on “every person” who fails to make payments on paydays as  required by §§ 204, 204b, and 205); Lab. Code § 215 (imposing criminal liability against “[a]ny person, or the agent,  manager, superintendent or officer thereof” who violates statutory requirement to post a notice identifying when and  where pay is made); Lab. Code § 1175 (imposing criminal liability on “[a]ny person, or officer or agent thereof” who fails  to make certain kinds of work records and to make those records available to state inspectors). 610 Lab. Code § 517(a).Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 137 employees’ failure to pay wages.  The Court found nothing in the plain meaning of the relevant  Labor Code sections or in public policy to read individual overtime liability into the overtime  statute. 611   The Court left the door open, however, to the recovery by an employee of statutory  penalties from individual supervisors, such as the recovery of Section 558 penalties through a  PAGA claim. 612   Moreover, the Court reaffirmed that a manager might be held liable under an alter  ego theory if the employee proves the elements for this common law liability theory. 613 In 2010, the Supreme Court backtracked on its decision in Reynolds when it issued its ruling in  Martinez v. Combs. 614   There, the Court held that “[i]n actions under section 1194 to recover unpaid  minimum wages, the IWC’s wage orders do generally define the employment relationship, and thus  who may be liable.” 615   The Court noted that the Wage Orders set forth a multi-pronged, disjunctive  definition of employment: an employer is one who, directly or indirectly, or through an agent or any  other person, engages, suffers, or permits any person to work, or exercises control over the wages,  hours, or working conditions of any person. 616 The “engage, suffer, or permit” component of the  definition does not require a common law “master and servant” relationship, but is broad enough to  cover “irregular working arrangements the proprietor of a business might otherwise disavow with  impunity.” 617 Further, “phrased as it is in the alternative (i.e., wages, hours, or working conditions),  the language of the IWC's 'employer' definition has the obvious utility of reaching situations in which  multiple entities control different aspects of the employment relationship, as when one entity, which  hires and pays workers, places them with other entities that supervise the work.” 618    The Court noted that the plaintiffs in Reynolds had conceded that “the plain language of Wage  Order No. 9 defining employer does not expressly impose liability under section 1194 on individual  corporate agents.” 619   “In a footnote, we added that the ‘plaintiff . . . ha[d] not persuaded us that one  may infer from the history and purposes of section 1194 a clear legislative intent to depart, in the  application of that statute, from the common law understanding of who qualifies as an employer.’” 620    The Martinez plaintiffs, however, gave the Court extremely detailed, exhaustive briefing on the  history of California’s minimum wage law, the IWC, and the Wage Orders. This effort apparently  convinced the Court that “an examination of section 1194 in its full historical and statutory context                                                        611 Reynolds, 36 Cal. 4th at 1087. 612 Id. at 1089. 613 Id. 614 Martinez v. Combs, 49 Cal. 4th 35 (2010). 615 Id. at 52 (emphasis added). 616 Id. at 57. 617 Id. at 58. 618 Id. at 59. 619 Id. at 63. 620 Id. at 64.Seyfarth Shaw LLP | www.seyfarth.com Litigating California Wage & Hour Class Actions (14th Edition) 138 shows unmistakably that the Legislature intended to defer to the IWC’s definition of the employment  relationship in actions under the statute.” 621 As a result, the Court limited the application of  Reynolds:  In sum, we hold that the applicable wage order‘s definitions of the employment  relationship do apply in actions under section 1194. The opinion in Reynolds, supra, 36  Cal.4th 1075, properly holds that the IWC‘s definition of employer does not impose  liability on individual corporate agents acting within the scope of their agency. (Reynolds,  at p. 1086.) The opinion should not be read more broadly than that. 622                                                       621 Id.   622 Id. at 66.  The Court of Appeal in Futrell v. Payday California, Inc. held that, because Wage Order 12 and Wage Order  14 use identical language to define the terms “employ,” “employee” and “employer,”  the Supreme Court’s holding in  Reynolds that applied Wage Order 14’s definition of “employment” also applies to Wage Order 12.  190 Cal. App 4th  1419, 1429 (2011).“Seyfarth Shaw” refers to Seyfarth Shaw LLP. Our London office operates as Seyfarth Shaw (UK) LLP, an affiliate of Seyfarth Shaw LLP.  Seyfarth Shaw (UK) LLP is a limited liability partnership established under the laws of the State of Delaware, USA and is authorised  and regulated by the Solicitors Regulation Authority with registered number 55692. Our Australian practice operates as Seyfarth Shaw  Australia, an Australian multidisciplinary partnership affiliated with Seyfarth Shaw LLP, a limited liability partnership established in  Illinois, USA. Legal services provided by Seyfarth Shaw Australia are provided only by the Australian legal practitioner partners and  employees of Seyfarth Shaw Australia. ©2014 Seyfarth Shaw LLP. All rights reserved. Prior results do not guarantee a similar outcome. #14-1796 www.seyfarth.com Atlanta Boston Chicago Houston London Los Angeles Melbourne New York Sacramento San Francisco Shanghai Sydney Washington, D.C.