On September 27, 2018, the Los Angeles Daily Journal published a column I wrote regarding the progress made by LGBT attorneys in the profession, with strengthened laws protecting against discrimination and harassment and heightened focus on diversity and its benefits. Whatever progress has occurred, there is still much work to do. You can read the column at 2018-09-27 LA DJ
In its May 21, 2018 decision in Epic Systems Corp. v. Lewis, 584 U.S. ___, 2018 WL 2292444, the U.S. Supreme Court closed the door on efforts by employees to avoid class action waivers in arbitration agreements. Having previously held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that “courts may not allow a contract defense to reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent,” the Court in Epic stated that the same holds true in the employment context:
“[A]s a matter of law the answer is clear. In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms – providing for individualized proceedings.”
It further held that the protections for collective activity under section 7 of the National Labor Relations Act (NLRA) do not impede class action waivers in the employment context. Although the NLRA “secures to employees rights to organize unions and bargain collectively,” it does not speak to “how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.” The FAA and the NLRA are not in conflict; enforcing class action waivers in arbitration agreements pursuant to the FAA impacts no fundamental principle or provision of the NLRA.
The Court again emphasized that the “savings clause” in section 2 of the FAA authorizes courts to deny enforcement of arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” Therefore, section 2 permits as a defense to enforcement of an arbitration agreement (or class-action waiver in the agreement) only “generally applicable contract defenses, such as fraud, duress, or unconscionability.” And such defenses may not target arbitration agreements “either by name or by more subtle methods,” for example, by challenging “fundamental attributes of arbitration,” like its individualized and less formal procedures. The Court found that the employees’ defense to the arbitration agreements involved in Epic improperly targeted those very attributes.
In ruling that the NLRA does not prohibit class action waivers in employment arbitration agreements, the Court noted that section 7 “focuses on the right to organize unions and bargain collectively,” but “does not express approval or disapproval of class or collective action procedures. It does not even hint at a wish to displace the” FAA.
What does Epic portend for the means of resolving legal disputes between employees and their employer? Employers should consider the following consequences in managing the risks and costs of resolving disputes via class action procedures as compared to multiple individual actions:
- What policies an employer should adopt in response to Epic may depend upon how employees’ counsel adapt their strategies. If they start bringing multiple individual arbitrations, then employers may find that class action waivers do not serve the interests of efficient and less expensive resolution of legal disputes with employees. One advantage of a class action is that it can fully and finally resolve all employee complaints regarding particular issues without having to engage in multiple lawsuits or arbitrations. An employer in California that faces many individual arbitration proceedings, will, under the California Supreme Court decision in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000), have to pay any costs incurred by an employee that exceed what the employee would incur in bringing an action in court. And depending upon the discovery permitted in those arbitrations, an employer could find it necessary to have company officials deposed multiple times in separate arbitrations.
- On the other hand, with individual arbitrations, an employer should find it easier to manage the risks of an adverse result in arbitration or litigation with regard to a particular employment practice or circumstances. It could focus on one or a few cases to determine the risk of liability exposure and then, depending on the outcome of those limited number of cases, determine whether and at what amount to try to settle all the cases or, rather, to dig in and defend the cases to the end.
- Another advantage of individual arbitration will be that an employer should find it easier to resist discovery of the identity of other potential claimants or of practices with regard to other similarly situated employees.
- In California, collective or representative claims under the Private Attorneys General Act (PAGA), Cal. Labor Code § 2698 et seq., are not subject to class action waivers in arbitration agreements. In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court held that “a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents—either the [California] Labor and Workforce Development Agency or aggrieved employees—that the employer has violated the Labor Code.” The U.S. Supreme Court refused to take up Iskanian.
I. Introduction: Employers should review their practices in regard to using contractors’ services to comply with the expanded definition of “employ” under Dynamex.
The gig economy – in which companies have expanded the use of independent contractors over employees – has raised concerns among employee rights advocates and some governmental officials over the welfare of workers. That concern appears to permeate the April 30, 2018 decision by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, __ Cal.5th __, 2018 WL 1999120 (Apr. 30, 2018).
But the decision can be expected have a much broader impact, reaching to more traditional industries in which companies have often relied upon independent contractors, because of the expanded definition of “employ”. The Court holds that, for purposes of the wage orders governing wage and hour obligations of California employers, the definition of “employ” presumes that a worker is the employee of a hiring entity, unless the entity can show (A) that the entity lacks control and direction over work performance, and (B) that the work in question is outside the usual course of the entity’s business, and (C) that the worker’s work for the entity is of the same nature as the independently established trade, occupation or nature in which he or she is customarily engaged.
While the opinion is likely to result in years of litigation and appeals ferreting out the uncertainties the new standard creates, hiring entities should promptly review their hiring and contracting practices to adapt, in the following ways:
- Companies should carefully review their practices for hiring contractors to perform work at their facilities. The initial question should be whether, in light of the expanded definition of “employ” and “employer” under California’s wage orders, retaining workers as contractors rather than employees provides a sufficient benefit to the company to justify either the risk of liability based on misclassification or a restructuring of the relationship between the company and the worker.
- If the work performed by workers retained by a company is the kind of work normally performed in the usual course of its business, then it should consider taking steps to classify those workers as employees. While in many cases, the determination that the work is or is not what is normally performed in the usual course of business will be clear, in other cases, the company should seek legal counsel for advice on how such close calls are likely to be resolved in the courts.
- If a company wants to classify as contractors workers whose work is not in the normal course of the company and who are customarily engaged in an independently established trade of the same nature as that work, then the company needs to establish safeguards to assure that it does not assert control or direction over the performance of the work. A company should seek legal counsel to establish appropriate safeguards.
- If a company wants to classify as contractors workers whose work is not in the normal course of the company and over whose work performance it lacks control and direction, it should make sure that the workers are customarily engaged in an independently established trade, occupation or business of the same nature of that work.
- When taking these steps, companies need to consider that the Dynamex decision emphasizes the strong public policy focused on protecting workers, which underlies the expansive definition of “employ”. Therefore, courts are likely to bend toward finding an employment, rather than independent contractor, relationship.
II. In Dynamex, the California Supreme Court justifies the expansion of the “employee” classification based upon the purpose of California Wage Orders to protect worker’s wages and benefits.
In Dynamex, the Court focused on one of the three definitions of the term “to employ” – “to suffer or permit to work” – in the California wage orders that establish wage and hour obligations for California employers, and interpreted that definition broadly to include as employees “all workers who would ordinarily be viewed as working in the [business that hired them].” (Emphasis in original.)
A. The “ABC Test” imposes on companies the burden to justify classification of workers as contractors by showing all prongs of a three-part test related to the level of control over work performance and the nature of the work.
The Court further determined that, a company, which the Court refers to throughout the opinion as the “hiring entity,” has the burden to rebut the presumption of an employment relationship, to justify treatment of the worker as an independent contractor “to whom a wage order does not apply.” The presumption is rebutted only if the hiring entity can show:
“(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.”
This so-called “ABC standard” broadens the circumstances in which a worker must be deemed an employee and a hiring entity deemed an employer subject to the wage and hour obligations under the wage orders.
B. The Dynamex decision addresses the definition of “employ” and “employer” in the context of California wage orders, but leaves open whether the definition will be expanded to apply to other labor statutes.
The California Supreme Court described its precedent pertinent to the issue of employee-contractor classification. The prior cases used a narrower (although not narrow) test to determine whether a worker for a hiring entity was an independent contractor or employee. In a case addressing whether farmworkers should be classified as employees or independent contractors for purposes of applying the workers compensation statutes, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), the California Supreme Court had instructed that, in determining what test to employ in interpreting the term “employee” in a statute or wage order, a court had to focus on the statutory purpose of the protective legislation. Therefore, the Court
“concluded that in determining whether a worker should properly be classified as a covered employee or an excluded independent contractor with deference to the purposes and intended reach of the remedial statute at issue, it is permissible to consider all of the various factors set forth in prior California cases, in Labor Code section 2750.5, and in the out-of-state cases adopting the six-factor test.”
In other words, the Borello Court “was not adopting ‘detailed new standards for examination of the issue.’” Factors established by statute or pertinent treatises could “overlap those pertinent under the common law. [Citation.] Each service arrangement must be evaluated on its facts, and the dispositive circumstances may vary from case to case.’” A six-factor test used in other states could be pertinent as well.
The Dynamex Court characterized Borello “as call[ing] for application of a statutory purpose standard that considers control of details and other potentially relevant factors identified in prior California and out-of-state cases in order to determine which classification (employee or independent contractor) best effectuates the underlying legislative intent and objective of the statutory scheme at issue.”
The Court next described its decision in Martinez v. Combs, 49 Cal.4th 35 (2010), in which the Court addressed “the meaning of the terms ‘employ’ and ‘employer’ as used in California wage orders, although not in the context of whether workers were employees or independent contractors. The Court explored the history of how the term “employ or suffer or permit” a person to work came to be used in the definition in California wage orders. Derived from statutes regulating and prohibiting child labor adopted in the early 1900s throughout the country, the terms were used to expand the protection of the laws to relationships that did not fit in the common law master and servant relationship. The intent was to “reach irregular working arrangements the proprietor of a business might otherwise disavow with impunity.” And the Court observed that the use of those terms in the wage orders was useful in “reaching situations in which multiple entities control different aspects of the employment relationship . . . .” Ultimately, the Court concluded that the wage orders’ definitions of the employment relationship are applicable in a civil action.
In the last case discussed by the Court, Ayala v. Antelope Valley Newspapers, Inc., 59 Cal.4th 522 (2014), a wage and hour class action alleging that newspaper carriers had been misclassified as independent contractors rather than employees, the Court teed up and left open the question “whether in a wage and hour class action alleging that the plaintiffs have been misclassified as independent contractors when they should have been classified as employees, a class may be certified based on the wage order definitions of ‘employ’ and ‘employer’ as construed in Martinez . . . or, instead, whether the test for distinguishing between employees and independent contractors discussed in Borello, is the only standard that applies in this setting.”
The Dynamex Court determined that basing the applicability of the wage order on its definition of employment in the wage order, rather than the Borello standard, was appropriate. Two rationales compelled use of that definition: First, courts “must respect the IWC’s [California’s Industrial Welfare Commission’s] legislative authority to promulgate the test that will govern the scope of the wage order.” Second, the “wage order . . . purposefully adopts its own definition of ‘employ’ to govern the application of the wage order’s obligations that is intentionally broader than the standard of employment that would otherwise apply.”
In light of the purposes of the wage orders and the inherent “disadvantages, particularly in the wage and hour context,” of relying upon “a multifactor, all the circumstances standard for distinguishing between employees and independent contractors,” the Court found it appropriate “to interpret that standard as: (1) placing the burden on the hiring entity to establish that the worker is an independent contractor who was not intended to be included within the wage order’s coverage; and (2) requiring the hiring entity, in order to meet this burden, to establish each of the three factors embodied in the ABC test . . . .”
On its face, the new standard for classifying workers as independent contractors or employees to determine applicability of the obligations under the wage orders appears to offer more certainty to companies. The presumption that workers are employees supports that certainty. The three factors that a company must show to justify classifying workers as independent contractors leave substantial room for interpretation. But the Court’s strong admonition about the breadth of the wage orders’ definition of “employ” and “employer” in light of the history of those definitions when they were first adopted, indicates that courts are likely to side with workers in interpreting any ambiguity in the factors. Application of the expanded standard to worker classification issues in other statutory contexts, where the definition of “employ” and the purpose underlying the statute may differ, is uncertain.
The pendulum of enforcement of wage and hour claims appears to be swinging toward protecting employers against undue liability. In the past few weeks, the U.S. Supreme Court has generously interpreted an exemption to the Fair Labor Standards Act overtime requirement, to include service advisors at automobile dealerships. A few weeks after the National Labor Relations Board reinstated the Obama-era Browning-Ferris decision (for now) easing the test for finding joint employer liability, California appellate courts in two cases involving joint employers have protected, in one case, a staffing company, and in a second case, a client of a staffing company, against wage and hour liability.
The lessons of these cases are:
- Employers can expect the United States Supreme Court to give a less aggressively employee-oriented interpretation to wage and hour laws and regulations, but employers are still best served by carefully adhering to the applicable rules.
- Employers and staffing companies should carefully review their agreements with each other to be clear on which party is responsible for establishing and enforcing policies to comply with wage and hour laws. Employers and staffing companies should consider including in their agreements representations and warranties of compliance with wage and hour laws, as well as indemnification provisions.
- To minimize risk of liability for wage and hour violations, employers should assure that they are in compliance with those laws, even if the staffing companies they use are not vigilant in such matters. And staffing companies should assure that they are doing what is necessary, to the extent feasible, to comply with such laws with regard to employees they place.
Encino Motor Cars: Service Advisors Employed by Auto Dealers Are Exempt Employees.
In its April 2, 2018 decision in Encino Motorcars, LLC v. Navarro, the U.S. Supreme Court held that service advisors employed by automobile dealerships are exempt from overtime pay requirements under the federal Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201 et seq. Section 213(b)(10)(A) of the FLSA “exempts from its overtime-pay requirement ‘any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles . . . , if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles . . . to ultimate purchasers.” In this case which involved statutory interpretation and construction of the FLSA exemption provisions, the Court reversed a decision by the U.S. Court of Appeals for the Ninth Circuit, which had narrowly interpreted the exemption to exclude service advisors.
This was the second time the case had come before the Court. In a 2016 decision, the Court had held that it was error for the Ninth Circuit to defer to a 2011 U.S. Department of Labor regulation that had stated that the term “salesman” in section 213(b)(10)(A) of the FLSA excluded service advisors. According to the Court, the regulation “undermined significant reliance interests in the automobile industry by changing the treatment of service advisors without a sufficiently reasoned explanation.” In the prior case, the Court had left open the issue of whether, absent such deference, the term “salesman” included service advisors.
In the current case, after explaining that “[s]ervice advisors ‘interact with customers and sell them services for their vehicles,’” the Court held: “Under the best reading of the text, service advisors are ‘salesm[e]n’ and they are ‘primarily engaged in . . . servicing automobiles.’” In reaching this conclusion, the Court relied on the “ordinary meaning” of “salesman,” in part based on the definition of the term in the Oxford English Dictionary. Relying on the definition of “servicing” in same source, the Court explained that service advisors “are integral to the servicing process.”
The Court rejected the Ninth Circuit’s invocation of the “distributive canon” of interpretation, by which the lower court had matched the statutory term “salesman” with “selling” and the terms “partsman” and “mechanic” with “servicing,” thereby concluding that the FLSA excluded service advisors (salesmen who were primarily engaged in servicing automobiles) from the overtime-pay exemption. According to the Supreme Court, under the ordinary, disjunctive meaning of “or” in the statute, the term “salesman” could be matched with “servicing,” and, thereby, include service advisors in the exemption. And the context of that provision “favors the ordinary disjunctive meaning of ‘or’”: “narrow distributive phrasing” under the distributive canon was “unnatural,” because “the entire exemption bespeaks breadth.” In sum, the “more natural reading is that the exemption covers any combination of [the statute’s] nouns, gerunds, and objects.”
Moreover, the Court rejected the principle applied by the Ninth Circuit “that exemptions to the FLSA should be construed narrowly.” Because the text of the statute gives no indication “that its exemptions should be construed narrowly,” courts should give them “a fair (rather than a ‘narrow’) interpretation.” (Citing A. Scalia, Reading Law.) The lack of any reference in the statute’s legislative history to service advisors was not persuasive in excluding service advisors from exemptions, in light of a fair reading of the clear statutory text. “If the text is clear, it needs no repetition in the legislative history; and if the text is ambiguous, silence in the legislative history cannot lend any clarity.”
Serrano: Staffing Company that Provides for Meal Breaks Held Not Liable for Failure of Employees to Take Such Breaks at Company at which They Are Placed.
In Serrano v. Aerotek, Inc., __ Cal.App.5th __, 230 Cal.Rptr.3d 802 (March 21, 2018), a California Court of Appeal held that Aerotek, a staffing agency that had placed temporary employees with its client Bay Bread, LLC, was not liable for meal breaks missed by those employees. The Court based its conclusion on two grounds: (1) Aerotek had satisfied its obligations under Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1041, to provide meal periods, and (2) Aerotek could not be held vicariously liable as a joint employer, with Bay Bread, of the employees, because, under Brinker, Aerotek’s provision of compliant meal periods precludes liability even if it was aware that its employees were not taking the breaks.
The facts establishing that Aerotek had satisfied its Brinker obligations included that, in addition to having a compliant meal period policy, its contract with Bay Bread “required Bay Bread to comply with applicable laws, Aerotek provided its meal period policy to temporary employees and trained them on it during orientation, and the policy required them to notify Aerotek if they believed they were being prevented from taking meal breaks,” and prohibited retaliation resulting from such a notification.
Aerotek could not be held vicariously liable even if, as the Court assumed, it was a joint employer with Bay Bread, because the determination of whether a joint employer is liable under the California Labor Code for a violation by its co-joint employer depends not on principles of agency or joint and several liability, but rather on “the duties imposed under the particular statute at issue.” Under section 226.7 of the Labor Code and Brinker, whether an employer is liable for a co-employer’s violations depends on the scope of the employer’s own duty under that provision. The applicable wage order governing meal breaks contained no provision imposing liability on an employer “for a co-employer’s breach of the co-employer’s own duty to provide compliant meal periods.”
Castillo: Settlement of Wage and Hour Class Action Against Staffing Company Bars Subsequent Claims Against Client Companies.
In a case decided a few weeks after Aerotek, the California Court of Appeal, in Castillo v. Glenair, Inc., ___ Cal.App.5th __, 2018 WL1790683 (Apr. 16, 2018), held that a wage and hour class action lawsuit brought against a company by an employee placed at the company by a staffing company was barred by the settlement of a prior class action against the staffing company, which had included a broad release of the agents of the staffing company, as to the very same claims asserted in the pending case against the company where the employees had been placed.
In the prior case, a different plaintiff represented by different attorneys had filed a complaint asserting class claims against staffing company GCA Services Group of Texas, L.P., for unpaid minimum wages, overtime wages, meal and rest break violations, related Labor Code violations and unfair business practices under section 17200 of the Business and Professions Code. The agreement settling that case was on behalf of all class members, generally listed ten wage and hour claims as “Released Claims,” and included “agents” of GCA among the “Released Parties”. Castillo, the representative plaintiff in the pending Castillo v. Glenair case did not opt out of the settlement of the prior case, as had been permitted by the order approving the Settlement.
In Castillo, Glenair moved for summary judgment, based upon the settlement of the prior case. The trial court granted the motion, and the Court of Appeal affirmed, concluding that the claims were barred by the doctrine of res judicata, based upon the settlement of the prior lawsuit, for two reasons.
First, the Court concluded that Glenair was “in privity” with GCA. In other words, the subject matter of the pending case and the prior case was the same – “namely, both cases involve the same wage and hour causes of action arising from the same work performed by the same GCA employees (the Castillos) at GCA’s client company Glenair.” And both companies were responsible for payment of their wages, with respect to which any errors were corrected by the settlement of the prior lawsuit. “[W]ith respect to the Castillos’ wage and hour causes of action, the interests of Glenair and GCA are so intertwined as to put Glenair and GCA in the same relationship to the litigation here.”
Second, the Court concluded that, because Glenair was an agent of GCA “with respect to GCA’s payment of its employees” (including the Castillos), the release included in the settlement of the prior lawsuit explicitly reached agents of GCA. “… GCA authorized Glenair [as its agent] to collect, review, and transmit GCA employee time records to GCA” for purposes of GCA making appropriate payments of compensation to its employees.
 It is unclear whether, under the arrangement between Aerotek and Bay Bread in Serrano v. Aerotek, Inc., Bay Bread would have been found to have been an agent of Aerotek, because Aerotek had an account manager on Bay Bread’s site, who reviewed time records of temporary Aerotek employees, and Bay Bread was not as involved in collecting information for payroll for Aerotek.
While conversing over eggs and a croissant with a prospective client about our respective kids and spouses (his wife, my partner), in the back of my mind I note an anomaly. Later that evening, I realize that the simple, natural, human interaction I had earlier that day still feels so foreign, unexpected, unreal. I also note that, in the midst of talking with the prospect, I felt a mix of, on one hand, gratitude for his easy acceptance and, on the other hand, exasperation (at myself? society?) that my colleague’s acceptance should be something for which I feel gratitude.
When I first came out, many lesbians and gay men did not disclose personal details, because much of society rejected the ultimate detail, our sexual orientation. Even if I disclosed that I was gay, I revealed little else about my life to most straight colleagues, to avoid an awkward or unpleasant reaction.
That reticence about being more open stifled my ability to engage fully with colleagues and clients or to develop business relationships. I felt like the “other,” not belonging, and wondered whether revealing personal facts would incline a prospect not to build a relationship with me. The energy I spent worrying about how much I dared disclose detracted from the focus I could have placed on thinking strategically about how I could meet the needs of the prospect or his business.
My reticence derived in part from a sense of self-preservation at a time when an employer could terminate an employee based on his sexual orientation. While I was innately self-reserved, I doubt I would have exercised such caution had I not felt the need to hide so fundamental a part of myself.
With this history, identity and experience, how could a simple conversation during a breakfast about an everyday subject not feel both natural and foreign? I understand why I would feel grateful for such a human interaction. In light of the years it has taken to get (society and me) to the point where the interaction is natural, I understand my annoyance as well.
The ease of connection that many take for granted is an opening to friendship, business, or maybe just an occasional drink. Many minority, including LGBT, employees have historically been excluded from such privilege. Diversity and inclusion programs have sought to remedy this exclusion, with some success.
Celebration is appropriate for the progress reflected in the ease with which LGBT professionals can now, in many places and under many circumstances, engage fully without fear, due in large part to the non-discrimination laws and diversity and inclusion programs. And exasperation directed at the missed opportunities resulting from a combination of societal rejection and prejudice, or at the notion that I feel gratitude for something that others take for granted, or at the efforts to roll back, protections amidst resurgent homophobia by leaders who want to rebuild barriers for LGBT workers and professionals, can, if appropriately channeled professionally and politically, be productive.
Particularly under the current administration, continued vigilance is essential to push back against policies that would permit religious beliefs to trump laws prohibiting discrimination against LGBT people or that would prevent the expansion of such laws. Those policies threaten the interactions that we have begun to enjoy – the interactions in which we acknowledge and appreciate the humanity in each other, and which are the foundation of meaningful relationships – personal, professional or political.
My experiences as an LGBT professional have informed my perspective in advising companies on employee relations, setting boundaries and standards for employees with performance problems, encouraging employee productivity and defending against claims of harassment and discrimination based on sexual orientation or other characteristics. For example, in a matter that appeared headed for litigation, I helped a client develop a performance plan that addressed the substandard performance by an employee, who was gay, and included opportunities for mentoring and development that had been missing. I know from personal experience that the lack of such opportunities can have a significant impact on employee morale and success. The plan not only made a positive outcome for the employee more likely, it also cast the employer in a justifiably better light for a defense if the employee later brought a claim.
When facing employee issues, employers, in my experience, have welcomed counsel that promotes the morale and productivity of their employees as much as minimizes their risk. With an increasingly diverse workforce, retaining counsel with life experiences that reflect that diversity adds value to the legal advice provided.
In the recent case of Heller Ehrman LLP v. David Wright Tremaine LLP (March 5, 2018) No. S236208, the California Supreme Court held that a dissolved law partnership has no right to claw back profits generated by hourly billed work performed by former partners of the dissolved firm (and their new firms), on matters that had started at the dissolved firm. As explained below, in light of this case, law firms should review their partnership or shareholder agreements to determine the ongoing need or applicability of a “Jewel v. Boxer waiver” in the agreements.
The case arose from adversary proceedings filed in the bankruptcy proceeding of Heller Ehrman LLP against firms that departed partners had joined. The U.S. Ninth Circuit Court of Appeals certified to the California Supreme Court the issue of “what property interest, if any, a dissolved law firm has in the legal matters, and therefore the profits, of cases that are in progress but not completed at the time of the dissolution.”
In a line of cases starting with Jewel v. Boxer (1984) 156 Cal.App.3d 171, the California appellate courts had developed case law that granted a firm some property rights in profits generated by work on some cases by partners who had departed the firm at which the case had originally been worked up. In Jewel, the appellate court had held that, in accordance with the California partnership statute in effect at the time and absent an agreement providing for a different arrangement, fees generated from contingency matters pending when a law firm dissolved had “to be shared by the former partners according to their right to fees in the former partnership, regardless of which former partner provides legal services in the case after the dissolution.” Later cases followed Jewel consistently, and one case, Rothman v. Dolin (1993) 20 Cal.App.4th 755, applied it to fees generated in hourly billed matters.
The California partnership statute was revised after these cases, and it changed some provisions, in part to remove the prohibitions against partners receiving compensation for services in winding up the affairs of a dissolved partnership. In Heller, the California Supreme Court weighed the application of the revised statute against the scope of a dissolved partnership’s property rights to fees in hourly billed matters pending at the time of dissolution and the interests of clients in retaining some of the former attorneys of the dissolved firm.
The Court determined that a law partnership does not have a property right in fees generated from work on matters existing at the time it ceases to handle the matters. “A property interest grounded in [an] expectation [of a law partnership to perform continuing hourly billed work on legal matters] requires a legitimate, objectively reasonable assurance rather than a mere unilaterally-held presumption.” Because such an expectation by a dissolved firm “is unlikely to be shared by either reasonable clients or lawyers seeking to continue working on these legal matters at a client’s behest,” that expectation is “best understood as essentially unilateral.”
Ultimately, “hanging over all agreements involving legal representation – especially those involving work paid on an hourly basis – is the possibility that a client will change the nature of the work requested, the terms on which the work is to be performed, or the lawyer the client prefers.” [T]he client legitimately retains flexibility to change the terms of the bargain for legal services after a lawyer has been retained.” While law partnership attorneys “feel some shared interest in each other’s work,” such an interest does not amount to a property right. Hopes that Heller Ehrman would continue to work on unfinished hourly fee matters and be compensated for future work “were speculative, given the client’s right to terminate counsel at any time, with or without cause.”
To conclude otherwise, i.e., that a firm has a property interest in hourly matters, would impinge upon the statutorily and judicially recognized right of a client to discharge an attorney at will. “The clients’ ability to retain their preferred counsel is a weighty interest, even if counterbalanced by an interest in partnership stability.”
In accordance with the provisions in the current California partnership statute that partners are entitled to compensation for work winding up the affairs of the dissolved partnership, the Court further held that a partner is entitled to compensation for (1) preserving legal matters for transfer to the client’s new counsel or the client itself, (2) effectuating such a transfer; and (3) collecting on work done pre-transfer. Therefore, Heller Ehrman was entitled to recover fees for such work, including filing motions for continuances, noticing parties and courts that it was withdrawing as counsel, arranging for shipment of client files, and helping new attorneys get up to speed on pending matters. Other substantive legal work was not compensable, because it went beyond winding up the partnership’s affairs.
The Court did not address whether its holding in Heller Ehrman would extend to contingency fee cases, such cases involve other issues, including but not limited to an assessment of the value of a former firm’s work as compared to the current firm’s efforts, in obtaining the amount recovered.
The partnership or shareholder agreements of law firms often contain a so-called “Jewel v. Boxer waiver,” a provision whereby the firm and its partners or shareholders waive their rights to any fees generated by work performed by a shareholder after he or she has left the firm or after the dissolution of the firm. Firms should review the need, breadth and applicability of such provisions to address the impact of the Heller Ehrman decision.
In Alvarado v. Dart Container Corp., decided on March 5, 2018, the California Supreme Court settled the issue of how a company, in accordance with California Labor Code section 510, should calculate an employee’s overtime pay rate when the company has paid a flat sum bonus during a single pay period. For reasons based on California policy protecting employees from overtime exploitation, the Court held that such a bonus should be assigned an hourly value by dividing the bonus amount by the number of non-overtime hours worked in the pay period, and that hourly value should then be multiplied by the number of overtime hours worked and by 1.5. This amount would then be added to the non-bonus overtime pay.
In coming to its decision, the Court reviewed the fine points of what weight courts should give to an administrative agency’s “void underground regulation,” that is a policy interpreting a statute that functions as “a rule that must be followed prospectively, and that is not announced in the context of resolving a specific case,” and as to which the agency did not follow the Administrative Procedure Act rule-making process. The Court’s guidance is that, while such a regulation is not entitled “any special weight or deference,” it is “something a court may consider, and assuming the court is persuaded that the agency’s interpretation is correct, the court may adopt it as its own.”
In her concurring opinion joined by three other Justices, Chief Justice Cantil-Sakauye was critical of California’s Division of Labor Standards Enforcement (DLSE), the agency tasked with adopting regulations to interpret wage and hour laws under the Labor Code. She noted that the DLSE “could, and … should, have” dispelled some of uncertainty around the issue addressed by the Court, by promulgating an interpretive regulation sometime in the prior two decades. Had the DLSE promulgated such regulations, employees and employers would have had “a more robust basis . . . to structure their affairs,” and employers could have avoided the prospect of substantial penalties for the miscalculation of overtime pay.
Turning to the overtime calculation issue, the Court held that the bonus should be “treated as if it were fully earned by only the nonovertime hours in the pay period, and therefore only nonovertime hours should be considered when calculating the bonus’s per-hour value.” Accordingly, in calculating overtime pay, the hourly value of an attendance bonus paid to an employee during a pay period should be calculated by dividing the amount of the bonus by the number of nonovertime hours actually worked during the pay period. That hourly value would then be multiplied by 1.5, and added to the amount of non-bonus overtime pay.
Two “overarching interpretive principles” supported this decision: first, the state’s “policy favoring an eight-hour workday and a six-day 40-hour workweek, and discouraging employers from imposing work in excess of those limits,” as reflected in the requirement that employers pay a premium for overtime work; and second, the liberal construction in favor of employee protection that is to be accorded California’s labor laws. Because the attendance bonus at issue in Alvarado was a flat sum, it did not “reward the employee ‘for each hour of work,’” i.e., it did not increase for each hour worked. It is not like piecework compensation, which does increase in rough proportion to the hours worked and therefore, arguably, should, like a base pay, be divided by the number of overtime and regular hours worked.
Employers now have the clarity to assure that they include the proper hourly rate of a flat bonus in calculating overtime pay for a pay period.