Probably the most important wage-and-hour case to be published so far in 2009 has been Chindarah v. Pick Up Stix Inc. (2009) 171 Cal.App.4th 796, which holds that Labor Code § 206.5 does not apply to any wage release that is given in connection with payment that settles a good faith dispute.
Pick Up Stix was the defendant in a wage-and-hour class action involving, among other things, a claim for overtime brought by two plaintiffs, on behalf of a group of employees who were alleged to have been misclassified. After an unsuccessful mediation, Pick Up Stix went to the individual employee class members, many of whom weren't even aware that there was a case pending, and offered to pay them their share of what was offered at the mediation (the opinion does not explain how the amount was calculated) in exchange for a full release."By signing the agreement, the employee acknowledged that he or she had spent more than 50% of the time performing managerial duties, released Stix from all claims for unpaid overtime and any other Labor Code violations during the relevant time period, and agreed “not to participate in any class action that may include ... any of the released Claims ....” The plaintiffs and several other employees, including eight current and former employees who had signed the releases, alleged that the releases were not valid under Labor Code §§ 206.5 and 1194(a).
Labor Code § 206.5 provides:
“An employer shall not require the execution of a release of a claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of those wages has been made. A release required or executed in violation of the provisions of this section shall be null and void as between the employer and the employee. Violation of the provisions of this section by the employer is be a misdemeanor.”
Labor Code § 1194(a) provides:
“Notwithstanding any agreement to work for a lesser wage, any employee receiving less than the legal minimum wage or the legal overtime compensation applicable to the employee is entitled to recover in a civil action the unpaid balance of the full amount of this minimum wage or overtime compensation, including interest thereon, reasonable attorney’s fees, and costs of suit.”
After some of those employees joined the putative class action, Pick Up Stix filed a cross-complaint against them, alleging breach of contract, and it defended the underlying wage claims asserting the release as an affirmative defense. Both sides brought summary judgment motions. The trial court found the Labor Code did not prohibit the release of a claim for unpaid wages where there is a bona fide dispute over whether any wages were owed, and that Pick Up Stix “produced evidence showing a good faith dispute with regard to classification of the employees,” and thus had a bona fide dispute as to "whether or not [plaintiffs] were owed any additional wages.” Finding the releases valid as a matter of law, the trial court then granted Pick Up Stix’s motion for summary judgment and denied the motion brought by the plaintiffs.
The Court of Appeal affirmed.
This public policy is not violated by a settlement of a bona fide dispute over wages already earned. The releases here settled a dispute over whether Stix had violated wage and hour laws in the past; they did not purport to exonerate it from future violations. Neither did the releases condition the payment of wages concededly due on their executions. The trial court correctly found the releases barred the Chindarah plaintiffs from proceeding with the lawsuit against Stix.
Unfortunately, the short (10-page) opinion offers no guidance as to what must be shown to render a dispute sufficiently bona fide to get around Section 206.5's language that invalidates releases given in exchange for less than all wages actually owed. It appears that any "good faith" belief by the employer will suffice, whether or not it would have actually passed scrutiny:
“[W]ages are not ‘due’ if there is a good faith dispute as to whether they are owed. Because [the employer’s] defense that [the plaintiff] was an exempt employee under California law would, if successful, preclude any recovery for [the plaintiff], a bona fide dispute exists and the overtime pay cannot be considered ‘concededly due.’”
Rare is the case in which an employer cannot argue that its misclassification of employees was done, subjectively, in good faith. Thus, almost any misclassification case would be subject to this sort of tactic. Moreover, since the quantification of hours in almost any off-the-clock case is usually subject to bona fide disputes, this tactic would also seem easily available in any off-the-clock cases.
The opinion does not offer any guidance as to what - or even whether - employees need to know about the existence of the bona fide dispute. It would appear that the employee need not even know that there is a good faith dispute, or any dispute, about the wages due. In the case of Pick Up Stix, there is no indication that most, if any, of the unnamed class members even knew that a dispute existed until they were offered money in exchange for a release.
The opinion does not set any standard as to the amount that must be paid, as long as the wages that are "concedely due" are paid. Theoretically, as long as the employer knows of the dispute, and it holds a good faith belief in the dispute, any sum, no matter how small, that exceeds the "concedely owed" wages, would be sufficient consideration for a release that would withstand any contrary requirements specified in Labor Code § 206.5.
The opinion offers no standards to follow for the communications used by the employer when soliciting such releases. Thus, for example, there seems to be no obligation for an employer to disclose to employees that there is a matter pending. If it does, the employer is under no apparent obligation to engage in neutral, honest communication. An offer could be accompanied by a notice, for example, explaining that the company is aware that some employees have asserted the right to this additional money, and that the company is offering this additional payment simply to keep its workers happy and to prevent greedy lawyers from charging them outrageous attorney's fees. Such a communication would be improper as part of a court-supervised communication with class members (See, e.g., Gainey v. Occidental Land Research (1986) 186 Cal.App.3d 1051, 1058 [“One of the purposes of the court's supervisory role is to assure that the notice be "neutral and objective in tone, neither promoting nor discouraging the assertion of claims."]) but would not run afoul of anything in the Pick Up Stix opinion.
Perhaps most troubling for plaintiffs is the fact that, although the case was pending as a putative class action, the court did not impose any requirements for judicial oversight of the payments or releases. The Court of Appeal considered, but rejected the concept that court oversight or approval should be required:
The Legislature is capable of expressly providing oversight for employee releases or compromises of claims. It did so when enacting Labor Code section 5001, which bars any compromise or release of such a claim unless approved by the workers’ compensation appeals board. The Legislature did not enact a similar provision for wage claims.
As an employee's counsel, my first reaction to that language is to observe that judicial oversight of a compromise would be superfluous where the Legislature has already dictated that such releases are only valid upon payment of all wages that are actually due. In other words, the reason the Legislature didn't impose such a requirement is because the Labor Code's plain language doesn't permit any release to be valid until after all wages that were due have been paid. My second reaction would be to note that allowing this settlement mechanism not only defeats the purpose of Section 206.5 - which is to prohibit employers from persuading employees to accept less than their full wages due - but that it creates an ethical dilemma for judges and class counsel who are faced with settlement offers in class action cases where the offers are clearly unreasonable, but might be accepted by unsophisticated or intimidated employees. Essentially, Pick Up Stix did an end-run around the class action, and although the court (and in particular, this trial judge) is always concerned about the fairness of a class action settlement, there was no analysis, much less concern, over whether Pick Up Stix's offers to settle out from under the class action were fair or adequate.
To prevent fraud, collusion or unfairness to the class, settlement or dismissal of a class action, or a cause of action in a class action, or a party requires court approval. Dunk v. Ford Motor Co.(1996) 48 Cal.App.4th 1794, 1800-1801. Any settlement of a class action must be shown to be fair, adequate and reasonable. California Rules of Court Rule 3.769(a), 3.770(a); In re Microsoft I-V Cases(2006) 135 Cal.App.4th 706, 723. The trial court has broad discretion in determining whether the settlement is fair, but normally must consider certain factors, including the strength of plaintiff's case; the risk, expense, complexity and likely duration of further litigation; the risk of maintaining class action status through trial; the amount offered in settlement; the extent of discovery completed and stage of the proceedings; the experience and views of counsel; the presence of a governmental participant; and the reaction of the class members to the proposed settlement. The court is free to balance and weigh the factors depending on the circumstances of the case, but must take them all into consideration. Wershba v. Apple Computer, Inc.(2001) 91 Cal.App.4th 224, 244-245.
If the plaintiff's case appears very strong, there is relatively little risk and expense being faced taking the case to trial, there is little discovery completed, and an experienced attorney representing the putative class believes the damages to be significant, a lowball offer at mediation must be rejected. If that lowball offer is accepted, the court must scrutinize the settlement, whether or not any objectors challenge the settlement. If the settlement is not fair, adequate and reasonable, the court must reject the settlement. In fact, even if the settlement is actually fair and adequate, if the court is not given sufficient evidence to support the fairness, adequacy and reasonableness of the settlement, it must reject the settlement. Kullar v. Foot Locker Retail, Inc.(2008) 168 Cal.App.4th 116. This is true even though putative class members always have the right to opt out of a settlement that they do not wish to accept.
However, if (to borrow a phrase coined by one of my defense counsel colleagues) a defendant decides to "pull a Pick Up Stix" on the case, the very same offer, already rejected by class counsel and/or rejected by the trial court, can be repackaged and stuffed, along with a coercive memo, into a payroll envelope during the holidays, and any employees who accept it are bound by the release. Those who reject the offer, like those who opt out of a class action settlement, get nothing, not even the "concededly due" wages. Failure to pay those employees their "concededly due" wages does not appear to have any bearing upon the validity of the other employees' releases, and the releases can be as broad and heavy-handed as the employer wishes. In a class action settlement, of course, there are limits as to how overbearing the employer can be in the release. See, e.g., Kakani v. Oracle Corp.(N.D. Cal 2007) 2007 U.S. Dist. LEXIS 47515; 12 Wage & Hour Cas. 2d (BNA) 1308; 154 Lab.L.Rep. (CCH) 35,310. Why the greater scrutiny should apply when the employees are being represented by putative class counsel, who have fiduciary duties to the employees, and no scrutiny should apply with the employees are left flapping in the wind, facing an inherently coercive request from their employer, makes no sense to us.
The plaintiffs in Chindarah have filed a petition for review. There have been If review is denied, we can expect to see a lot of lowball settlement offers, followed by individual lowball offers, at least to existing employees. It will be interesting to see how courts handle objections to low, unfair settlements when the only response that can be offered in reply to an objection is "but if we don't take the deal, they will just cram it down the employees' throats anyhow."