2006-7

Investor's Business Daily Forced to Face Class Action Lawsuit By Employee-Telemarketers Alleging Unfair Competition, Unlawful Wage Deduction, and Overtime Pay Violations.

In Harris v. Investor's Business Daily, Inc., 2006 DJDAR 3775 (Cal. App. March 29, 2006)(1), Harris was the representative plaintiff in a wage-and-hour class action filed against Investor's Business Daily by a group of newspaper subscription telemarketers alleging violations of federal and state labor laws. Plaintiffs were compensated based on a point system in which they were rewarded for selling longer subscriptions, winning daily contests, and achieving certain sales goals. This commission sales job was also subject to a "chargeback" for subscriptions that were cancelled within 16 weeks. A chargeback would result in a point deduction, which equated to less commission.

The lawsuit alleged overtime pay violations, unlawful commission deductions, and waiting penalties, and unfair competition (Cal. Bus. & Prof. Code § 17200). Individual plaintiff Harris also sought damages for wrongful termination. Defendants moved for summary judgment on all causes of action except for Harris individually. Plaintiffs immediately filed a second amended complaint, adding a new claim under Section 17200, alleging violations of the federal Fair Labor Standards Act ("FLSA"). The Defendants demurred to the second amended complaint and the trial court sustained the demurrer to the new Section 17200 claim without leave to amend, and to the seventh cause of action for violation of the Private Attorneys' General Act. The trial court also severed Harris' individual claim, and granted summary adjudication on all other causes of action. Plaintiffs appealed.

The principal issues were: (1) whether a federal FLSA claim may serve as the predicate act for a Business & Professions Code § 17200 cause of action; (2) whether the employees qualified for the commission exemption from California overtime laws; and (3) whether the employer lawfully deducted points employees had earned from a sale if the customer later cancelled the subscription. The Defendants argued that the new Section 17200 claim was preempted by the FLSA because FLSA class members had to opt in rather than opt out. "Conflict preemption" occurs where it is impossible for a private party to comply with both a state and federal requirement or the state law stands as an obstacle to the accomplishment of the congressional objectives. The Defendants claimed it would be impossible to comply with the FLSA opt-in provision and at the same time comply with the opt-out requirements of Section 17200. The Court of Appeal disagreed, finding that Congress implemented the opt-in provision of the FLSA because it was concerned with "financial ruin" of employers due to the influx of litigation. The FLSA's opt-in provision requires potential class members to affirmatively join the lawsuit by filing written consent with the court in which the lawsuit is filed. Section 17200 allows for representative actions but permits only restitution for the plaintiffs. Even though class members do not have to "opt-in," this does not present a danger of financial ruin to employers since Section 17200 permits only restitution. For this reason, the court concluded that a single cause of action alleging violations of the FLSA under Section 17200 was not preempted by the FLSA's opt-in requirement. Therefore, the trial court erred in sustaining Defendants' demurrer to the new Section 17200 cause of action.

The Plaintiffs also argued they had raised a triable of issue as to whether they were subject to the commission exemption from California overtime protection. Labor Code § 510(a) requires overtime compensation for those working over 40 hours in a work week. These provisions do not apply to any employee "whose earnings exceed one and one half ... the minimum wage if more than half of that employee's compensation represents commissions." This section is known as the commission exemption from overtime pay laws. An employer bears the burden to show that the commission exemption affirmatively bars an overtime claim. In order to show this, Defendants needed to conclusively establish that the Plaintiffs were paid more than half of their earnings via commissions, and also were paid more than 1½ times in commission what they would have earned at minimum wage. Defendants failed to meet this burden. The court noted that Defendants failed to submit time records which could have supported their affirmative defense.

There was an additional basis to reject Defendants' argument. A commission program is tied to the product price. In the case of the point program implemented by the Defendants, a six-month subscription could amount to a higher dollar amount than a year's subscription, depending upon whether the shorter subscription was sold during a special sales program, etc. Therefore, the pay scheme was not clearly based upon the price of the product, and the Defendants had failed to establish that such earnings were based on a commission scheme. In contrast, the Plaintiffs had demonstrated a triable issue of material fact on the point by presenting evidence that none of the compensation constituted commission. The Defendants also failed to meet the additional requirement of the commission exemption by proving that the employees had always earned more than 1½ times the minimum wage.

On the "chargeback" for cancelled subscriptions, the Plaintiffs claimed the trial court erred in summarily adjudicating the causes of action for unjust enrichment. The Plaintiffs believed the points, and hence the commissions, were "earned" at the time the subscription was sold, despite the fact that the employer's written policy stated that a cancellation within 16 weeks would result in a chargeback against wages paid. The unjust enrichment occurred because Investor's Business Daily kept a portion of the subscription payment even in the event of a cancellation within 16 weeks.

The Defendants claimed that commission paid on subscription sales was an "advance" of wages, and if the subscription cancelled in 16 weeks, the employer had a right to recoup the advance it had paid. Furthermore, the employees were on notice of this written policy at the time of hire. The Court reviewed the written commission policy, and noted that the Defendants did not start referring to the commission as an "advance" until after the employees filed suit, in 2001. When the employees were hired in 1999, the program referred to the points as "earned" at the time the subscription was sold. Based upon the evidence, there was a triable issue as to whether the chargeback policy violated Labor Code § 221, which prohibits an employer from taking back any wages once they are earned.

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California Court of Appeal Reinstates Lawsuit by U.S. Borax Coal Miners for Failure to Provide Second Meal Period During Shifts Exceeding 12 Hours.

In Bearden v. U.S. Borax, Inc., 2006 DJDAR 4170 (Cal.App. April 7, 2006)(2), a wage order promulgated by the California Industrial Welfare Commission (IWC) exempted mineworkers from a second meal break provision who were covered by a collective bargaining agreement (CBA). Six mineworkers filed suit based on the employer's refusal to provide a second meal period break during their 12 hour shifts, as required by Labor Code § 512. Borax first removed the case to federal court, which adjudicated the first cause of action for denial of rest periods. The case was then remanded to the Los Angeles Superior Court. Borax demurred to the remainder of the complaint, pointing to the IWC exemption from the second meal period for employees who were covered by a CBA. Borax also argued the CBA required the employees to arbitrate their dispute. The trial court sustained the demurrer without leave, and the employees appealed, arguing that the IWC had exceeded its authority in promulgating the work order.

On appeal, Borax relied upon the statutory authority given to the IWC in Labor Code § 516 which supports the affirmation of the sustaining of demurrer. However, the court pointed out that the statutory authority was amended in 2000, to begin "Except as provided in section 512 ...," whereas Borax had relied upon the pre-amendment wording which began, "Notwithstanding any other provision of law, the IWC may adopt or amend working condition orders with respect to break periods ...." The court concluded that the IWC exceeded its authority in adopting Cal. Code Regs., tit. 8, § 11160, subd. 10(E), of the wage order and that the exemption was invalid because it contradicted express statutory provisions in the Labor Code. The IWC's powers did not extend to the creation of additional exemptions from the meal period requirement beyond those provided by the legislature. The legislature had only created two exceptions to the meal period in Section 512, and there was no evidence of a legislative intent to permit the IWC to adopt additional exemptions.

Borax also argued that the CBA required the employees to arbitrate their dispute. However, the court reviewed the CBA, and held that the grievance procedure only applied to disputes regarding the CBA itself. Since the second meal period required in a 12+ hour shift was not a part of the CBA, there was no requirement to arbitrate the dispute.

The employees also sought to hold the employer retroactively accountable for violations of the Labor Code meal period requirements. The court declined to take a position regarding the employer's potential liability for violations of Labor Code § 512 committed before the issuance of its opinion and ruled that the matter had to be initially addressed in the trial court.

The court did review the allegation of violations of Labor Code § 226.7, which authorizes penalties against employers who fail to provide meal periods in accordance with an IWC order. The court found there was no basis for application of Section 226.7. The decision was based upon the fact that Section 226.7 provides for a penalty only where there are violations for refusing to provide a meal period in accordance with an IWC order. In the instant case there was no IWC order requiring a meal period. Therefore, the employer did not violate an IWC order and Section 226.7 did not apply.

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1. Opinion by Epstein, P.J., joined by Curry and Hastings, JJ.

2. Opinion by Epstein, J., joined by Curry and Willhite, JJ.