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Epic Systems and Dynamex: Landmark Decisions from the US Supreme Court and the California Supreme Court

In the past several weeks, the US and California Supreme Courts have each issued important decisions affecting the rights and duties of employers and employees:

  • On May 21, the US Supreme Court ruled in Epic Systems Corp. v. Lewis, No. 16-285, that arbitration provisions with class waivers in employment agreements do not violate the National Labor Relations Act and instead are generally enforceable under the Federal Arbitration Act. As a result, employers and employees will be able to enter into enforceable agreements requiring arbitration of employment disputes on an individual basis so long as those agreements provide individual workers with fair procedures for dispute resolution. Mayer Brown lawyers filed an amicus brief  with the Supreme Court on behalf of the US Chamber of Commerce, and they have written a blog post examining Epic Systems in more detail, which is available here.
  • On April 30, the California Supreme Court issued a decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), in which it adopted a new, narrower test for determining whether a worker can properly be classified as an independent contractor under California’s Industrial Welfare Commission Wage Orders. The new test requires the worker to: (a) be free from the control and direction of the hiring entity, (b) perform work outside the hiring entity’s usual course of business and (c) customarily be engaged in an independently-established trade, occupation or business. This test will make it significantly more difficult for California employers to classify workers as independent contractors. Another Mayer Brown article analyzing Dynamex and its expected impact is available here.

Seventh Circuit Permits Outside Job Applicants to Assert Disparate Impact Claims under the ADEA, Creating Circuit Split

Decision: In Kleber v. CareFusion Corp., the US Court of Appeals for the Seventh Circuit held that job applicants can assert disparate impact claims under the Age Discrimination in Employment Act of 1967 (“ADEA”) against prospective employers. The plaintiff had responded to a job posting that sought applicants with no more than seven years of relevant experience. Kleber applied for the job despite having far more than seven years experience. CareFusion did not select him for an interview and eventually filled the position with a 29-year-old applicant. Kleber filed suit against CareFusion, alleging that the experience cap violated the ADEA because it had a disparate impact on older job applicants. The district court dismissed the case, holding that the ADEA’s disparate impact provisions do not cover outside job applicants. The Seventh Circuit reversed and held that the ADEA protects both outside job applicants and current employees, explaining that it would be “arbitrary and even baffling” to interpret the statute so as to allow an internal applicant to sue for a disparate impact violation, while precluding an external applicant from doing so. The holding directly conflicts with the Eleventh Circuit’s recent decision in Villareal v. R.J. Reynolds Tobacco Co., 839 F.3d 958 (11thCir. 2016) (en banc), which held that only current or former employees can bring ADEA disparate impact claims.

Impact: This ruling opens the door for a new line of lawsuits by employees challenging the disparate impact of employer recruiting and hiring practices. Employers should therefore consider whether their hiring and recruiting practices have a disproportionately negative impact on certain groups of applicants. In addition, the use of experience caps as a basis for a disparate impact claim will make it more challenging for employers to establish parameters to avoid hiring “overqualified applicants” in more junior-level positions.

District Court in California Rules That All Forms of Compensation Must Be Included in Regular Rate of Pay When Paying Rest Period Premiums

Decision: In a recent class action against a major financial services institution, plaintiffs filed a class action lawsuit in the District Court for the Central District of California alleging, inter alia, that they were not provided with rest periods pursuant to California law. After litigation of the merits, the primary legal dispute before the court centered on how to calculate the premium payment that class members were entitled to receive for the failure to provide rest periods. Specifically, Labor Code section 226.7(c) mandates payment of one additional hour of pay at the employee’s “regular rate of compensation” for each workday that rest periods are not provided. The employer in Ibarra contended that the “regular rate of compensation” should be based on the employee’s hourly rate of pay, while the plaintiffs contended that the hourly rate should include all forms of compensation earned during the relevant pay period, including commissions and other non-discretionary pay.

The court held that the employee’s “regular rate of compensation” under section 226.7 is not limited to the employee’s hourly rate of pay but must include other forms of compensation. The court explained that the employees’ “normal compensation was not comprised solely or even primarily of pay calculated at an hourly rate. By definition, it included hourly pay, incentive pay, and overtime premiums, and the hourly pay was stated to be only an advance on commissions.” In so ruling, the court parted ways with several district courts in California that had ruled that section 226.7’s “regular rate of compensation” language is distinguishable from Labor Code section 510’s “regular rate of pay” language, which requires all forms of non-discretionary compensation to be included in the employee’s “regular rate” for overtime premium pay purposes. The result was that the court awarded the class members approximately $97.2 million in damages, four times the damages that would have been owed had the premium pay been calculated using just the hourly rate of pay.

Impact: In light of the split among district courts regarding the appropriate method for calculating meal and rest period premiums, it is not clear how broad an impact this decision will have on California employers. The decision could arguably be limited to circumstances in which the employee’s hourly rate of pay is not the primary factor in determining an employee’s wages, such as where compensation is based on a combination of hourly pay and commissions. However, there is risk associated with such an interpretation given the court’s determination that the language in Section 226.7 and Section 510 are not distinguishable. Additional guidance on this question may be forthcoming, as the employer has filed a notice of appeal of the district court’s judgment to the Ninth Circuit.

Ninth Circuit Decision Eases Plaintiffs’ Burdens in Wage & Hour Class Actions

Decision: In Sali v. Corona Regional Medical Center, No. 15-56460, the US Court of Appeals for the Ninth Circuit reversed a district court decision denying class certification in a wage-and-hour class action and in the process may have eased the burden on plaintiffs seeking to certify classes in future cases. In Sali, nurses filed a putative class action against their employer alleging a number of wage-and-hour violations, including failure to pay wages based on the employer’s policy of rounding employee clock-in and clock-out times to the nearest quarter hour. The plaintiffs moved to certify a “rounding time” class. In support of that motion, plaintiffs submitted a declaration by a paralegal, who had created a spreadsheet based on the plaintiffs’ payroll records to demonstrate that plaintiffs were underpaid due to the employer’s rounding policy. The district court denied class certification in part on the ground that the paralegal’s declaration was not admissible evidence, meaning plaintiffs had failed to offer any admissible evidence of their injuries.

The Ninth Circuit reversed, holding that “[i]nadmissibilty alone is not a proper basis to reject evidence submitted in support of class certification.” The court reasoned that “[l]imiting class-certification-stage proof to admissible evidence risks terminating actions before a putative class may gather crucial admissible evidence” through discovery. In so ruling, the Court deepened a split among the courts of appeals about whether admissible evidence is required to support class certification. The Ninth Circuit’s decision sided with the Eighth Circuit but the Third, Fifth and Seventh Circuits have directly or indirectly held that admissible evidence is required.

Impact: The Ninth Circuit’s decision in Sali has the potential to make the wage-and-hour class certification process easier for plaintiffs and their counsel. The Sali plaintiffs’ strategy of relying on a paralegal’s analysis of their compensable time, rather than an expert’s analysis, could save plaintiffs’ substantial costs by avoiding the need to retain experts for certification purposes.