Seyfarth Synopsis: Calculating the correct “regular rate of pay” for overtime hours under California law, in order to properly factor in certain types of bonuses, can give nightmares to even the most diligent employers. The Ninth Circuit, however, recently held that a potentially wrong formula for calculating overtime is not, by itself, enough to justify class certification—rather, there must be proof that employees have actually been harmed. The decision will impact the ability of plaintiffs’ lawyers to simply rely on a common unlawful policy or practice, and instead be forced to show that class members have, in fact, suffered an injury.

The Ninth Circuit last week affirmed a district court’s denial of class certification of claims involving an alleged failure to properly calculate and pay overtime wages in violation of California law.

The Ninth Circuit held that the plaintiff had established the “commonality” and “typicality” requirements under Rule 23, because the question of whether a bank’s policy of calculating overtime wages is lawful was common to the putative class and employees were subject to these policies.

The plaintiff could not establish “predominance” because the challenged company policy either did not apply to or did not cause an injury to many employees. This inability to prove liability for a large number of putative class members was the fatal flaw that precluded class certification.

Case Background

The plaintiff, Cindy Castillo, worked as an hourly employee at the bank’s call center. She filed a lawsuit alleging various wage-hour violations under California law, with the main issue concerning the bank’s policies and practices for calculating overtime wages.

While the plaintiff was an employee, she and other employees could receive a flat-sum, nondiscretionary incentive bonus ranging from $350 to $2,100 per month. If employees worked overtime and received a bonus during the same period, the bank would apply the bonus to the employee’s straight pay to calculate the employee’s regular rate of pay for purposes of overtime premiums.

The bank factored the bonus into the overtime pay calculations in two different ways, over two periods of time. During one period of time, the bank “divided the incentive pay amount by the number of total hours worked in the previous two pay periods, even if those two pay periods did not coincide with the month for which the incentive pay compensated, then multiplied that amount by the overtime hours worked in those pay periods.”

During a later period of time, the bank used another method. First, it “divide[d] the month’s incentive pay by weekdays in the month regardless of how many days an employee actually worked that month.” Second, it “multiplie[d] that number by five, representing the days worked in a week, regardless of how many days an employee actually worked.” Third, the bank then divided “that number by total hours worked instead of only non-overtime hours worked.” Finally, it would then divide “that number by two to get the new overtime ‘half rate,’ which it multiplied by the overtime hours worked to retroactively pay the underpaid overtime amount.”

The plaintiff alleged that both of these methods were unlawful, based on the California Supreme Court’s ruling in Alvarado v. Dart Container Corp. of Cal., and sought class certification. The district court denied class certification, holding that the plaintiff did not meet the predominance requirement of Rule 23(b)(3).

The Ninth Circuit Affirms The Denial Of Class Certification

The Ninth Circuit held that “it is not sufficient to establish predominance where a large portion of the proposed class either (1) did not work overtime or did not receive a bonus in the same period, and thus could not have been exposed to [the bank’s] overtime formulas in the first place; or (2) if they were exposed to a formula, they were not underpaid and thus were not injured.” Instead, “determining liability for all class members would require complicated individualized inquiries. Although [the bank’s] method of calculation [for overtime pay] has been deemed improper, the use of the method to calculate overtime wages is not evidence of harm in every instance to all employees, for those who did not work overtime or receive a bonus in the same period, as well as those who were overpaid for it have no actual injury and hence have no claim.”

The Court agreed with the bank that “the question of whether the putative class members were ever ‘subject to [the] overtime calculation policy and ever underpaid as a result goes to liability rather than damages.’” The Court explained that there was “no common proof of liability, because a large portion of the proposed class was never exposed to the challenged formulas or was not underpaid, and thus could not have been injured by those formulas in the first place.” As the Court aptly noted, “[t]he issue is not that Castillo is unable to prove the extent of the damages suffered by each individual plaintiff at this stage. Instead, it is that Castillo has been unable to provide a common method of proving the fact of injury and any liability.”

Put simply, the predominance prong failed “because many of [the putative class] members were never exposed to the challenged formulas or, if they were, were never injured by them. Some of the putative class members were (1) not exposed to one or both overtime policies, (2) paid adequately by one or both overtime polices, or even (3) overpaid by one or both of the overtime policies.”

This was particularly true because an expert estimated that “roughly 35.2% of putative class members … either never received an incentive payment, or never worked overtime during a period for which they received a bonus,” and a sample of data showed that 41.7% of employees “never received a bonus or never worked overtime during a period for which they received a bonus.”

Implications For Employers In Defending Wage-Hour Class Actions

This is an important and refreshing case coming out from the Ninth Circuit, because it reinforces the importance of the “predominance” prong of Rule 23.

All too often, courts are quick to simply grant class certification at the sight of a potentially unlawful policy or practice that applies, in theory, to all putative class members—especially one involving overtime claims for improper regular rate of pay calculations. But this case provides a roadmap for defending a purportedly indefensible policy or practice, by showing that some putative class members were either not exposed to or not harmed by the policy or practice.

These arguments are not limited just to claims for overtime wages or “regular rate of pay” calculations and bonuses—they can be broadly applied to all wage-hour claims based on a purportedly unlawful policy, such as off-the-clock work, meal periods, or rest periods.

An unlawful policy or practice may certainly be a “common” issue, but Rule 23 requires more—predominance of those issues over individualized inquiries. And, as the Ninth Circuit has explained (and now reaffirmed), “[i]f the plaintiffs cannot prove that damages resulted from the defendant’s conduct, then the plaintiffs cannot establish predominance.”