California Court of Appeal Finds Arbitration Agreement With PAGA Waiver Unenforceable

On March 10, 2009, the California Second District Court of Appeal in Franco v. Athens Disposal Company, Inc., B203317 (Mar. 10, (2009) addressed the enforceability of an arbitration agreement with a class action and “private attorney general” waiver clause in a case brought by a former employee as a class action against his employer for violations of the California Labor Code.

Background Facts

The plaintiff, Edizon Franco, was a former garbage truck driver for Athens Disposal Company. During his employment, the plaintiff signed an arbitration agreement (written in Spanish) that included a waiver of “any right to join or consolidate claims in arbitration with others or to make claims in arbitration as a representative or as a member of class or in a private attorney general capacity.” Following the termination of his employment, the plaintiff fi led a class action complaint against Athens alleging that he had been denied meal and rest periods, overtime and that the company engaged in illegal payroll practices in violation of the California Labor Code and Business and Professions Code. In his complaint, the plaintiff sought civil penalties as provided for by the Private Attorneys General Act (PAGA). The PAGA authorizes an aggrieved employee to recover civil penalties “on behalf of himself ... and other current or former employees.”1 Following the fi ling of the lawsuit, Athens fi led a motion to dismiss the case and compel arbitration per the terms of the arbitration agreement signed by the plaintiff. The trial court granted the company’s motion to compel arbitration of the plaintiff’s claims because the arbitration agreement precluded the plaintiff from proceeding either as a class representative or as a private attorney general.

FOREIGN CORRUPT PRACTICES ACT

The Foreign Corrupt Practices Act (FCPA), adopted in 1977, prohibits the
bribery of foreign government officials by U.S. persons and firms. The non-U.S.
subsidiaries of U.S. firms are also subject to this law. Liability results from an
actual payment, an offer or promise of payment, or the authorization of a
payment, offer, or promise for the purpose of obtaining or retaining business or
'any improper advantage' to which the company is not entitled. 'Grease
payments' to facilitate routine procedures, and the reimbursement of an official's
legitimate expenses associated with the execution of a contract, are allowable
under the FCPA.

European Court of Justice Clarifies Leave Obligations

Under Article 7 of the Working Time Directive 2003/88, member states of the European Community must take appropriate measures to ensure that every worker1 receives at least four weeks’ paid annual leave (i.e., vacation).2 For many years, however, it has been an open issue whether a worker on sick leave is still entitled to accrue annual leave, even though for all intents and purposes that worker is unfit to work. On Jan. 20, 2009, the European Court of Justice (ECJ) delivered its judgment in co-joined cases Stringer, formerly Ainsworth, & Others v. Her Majesty's Revenue and Customs, Case No. C-350/06, and Gerhard Schultz-Hoff v. Deutsche Rentenversicherung Bund, Case No. C-520/06. The ECJ reinforced the European Community’s governing principle that the right to annual leave is a fundamental social right and cannot be taken away from any worker, whether or not the worker is on sick leave.

The United Kingdom (UK) Stringer case involved two categories of plaintiffs: One made up of workers who wanted to take paid annual leave while on long-term sick leave; the other made up of workers who were on sick leave immediately before their dismissal, and who had asked their employer to pay their accrued statutory annual leave entitlement on termination. In both situations, the employer refused the workers’ requests. In the German Schultz-Hoff case, Schultz-Hoff’s employer refused him an allowance in lieu of paid annual leave not taken while he was on long-term sick leave.

As a result, the ECJ was asked by the UK and German courts to decide two questions:

(1) whether a worker on indefinite sick leave could exercise the right to take annual leave; and (2) whether a worker who had been sick for an entire leave year was entitled to payment of untaken annual leave on termination of employment.

On the first question, the ECJ held that under the Working Time Directive, national law could either permit a worker to take leave while he or she was on sick leave or could deny the entitlement to take leave while on sick leave. More importantly, however, the ECJ added that if national law prevented a worker who was on sick leave from taking annual leave, the worker must have the opportunity to take his or her annual leave at another time, because the right to accrued annual leave under the Working Time Directive is not dependent on the worker being “healthy and capable of working.”

Currently, under UK law, there is no right to carry over annual leave to the following year.3 As a result, employers have been allowed to operate a “use it or lose it” policy, under which a worker on sick leave who is not allowed to take leave in a particular leave year loses his or her right to annual leave at the end of the leave year. It is now up to the House of Lords to deal with the fine points of Stringer and determine the ultimate outcome. The House of Lords may construe the Working Time Regulations so as to allow employees on indefinite sick leave to take annual leave while they are sick. Alternatively, the House of Lords could hold that the Working Time Regulations are incompatible with the Working Time Directive, in which case the UK government will need to amend the Working Time Regulations.

On the second question, concerning the right to a payment on termination, the ECJ ruled that the right to annual leave is not lost because a worker happens to be sick for the entire leave year prior to termination and has not been able to take his or her annual leave. Accordingly, in the UK, reading this judgment together with the Employment Appeal Tribunal decision in Canada Life Ltd v. Gray and Farrar [2004] ICR 673, leads to the conclusion that a worker in this situation must receive a payment in lieu of annual leave on termination of employment. Further, in determining the amount of that payment, employers have to ignore sickness-based absences. In addition, a worker could potentially raise claims based on the ECJ's ruling extending as far back as 1998, when the Working Time Regulations 1998 came into existence. It is unlikely, however, that a worker can make a claim while his or her employment is continuing.

The ECJ’s ruling is a disappointing development for most employers. Prudent employers should not wait for European national courts to interpret this ECJ judgment before taking action. Employers should review their employment practices to ensure that all workers on sick leave are given the opportunity to either (1) take paid annual leave during any given leave year or (2) take the annual leave at an alternative time. Employers also should evaluate their exposure to claims from both present and past workers who are or have been on sick leave and did not receive paid annual leave entitlement. As a result of this judgment, it is anticipated that an avalanche of claims will ensue.

1 Worker is defined more broadly than an employee. In the UK, under Regulation 2 (1) of the Working Time Regulations 1998 (as amended), a worker is defined as an individual who has entered into or works under (or, where the employment has ceased, worked under) (a) a contract of employment; or (b) any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual; and any reference to a worker’s contract shall be construed accordingly.

2 This entitlement is in addition to member states’ public and bank holidays.
3 Regulation 13(9) of the Working Time Regulations 1998 (as amended).

Wage and Hour Class Actions Surface in Canada

Wage and hour class action litigation has existed in the United States for years and has led to many significant settlements and damage awards. However, it took a $650 million class action filed against the Canadian Imperial Bank of Commerce (CIBC) for Canadian employers to take notice of the considerable risk that unpaid overtime may expose them to. Now that similar actions have followed, Canadian employers are scurrying to ascertain what pre-emptive steps they can take to minimize any potential liability.

What is a Class Action?

Class actions start when a large number of potential plaintiffs—usually each with a relatively small claim—form a class to commence proceedings against a common defendant. A representative plaintiff then litigates the claim on behalf of the class.

In Ontario, where most of the Canadian class action cases have originated, class actions are governed by the Rules of Civil Procedure and the Class Proceedings Act (CPA). A class action must be certified in order for it to proceed to trial. Certification requires that:

• The pleadings disclose a cause of action.
• The claims raise issues common to all class members.
• There is an identifiable class of two or more persons.
• A class proceeding is the preferable method to resolve the common issues.
• The representative plaintiff would fairly and adequately represent the interests of the class.

The most contentious criterion in “wage and hour” certification motions is whether a class action is the preferred method for proceeding. In order to defeat the certification of the class, employers must convince the courts that an alternate procedure meets the three major goals of the CPA: access to justice, judicial economy and modification of behavior. Without evidence to the contrary, judges tend to presume class proceedings are the preferable procedure.

Origins of Wage and Hour Class Actions in Canada

In the United States, wage and hour class actions have been around since the mid-1980s. Several large judgments, including one against Wal-Mart for $185 million, have been awarded against employers for unpaid overtime.

In Canada, similar actions have only recently gained national prominence. Since 2007, four major wage and hour class actions have been launched against large national employers—CIBC, KPMG, Scotiabank and CN Rail—with unpaid overtime claims in excess of $1 billion dollars.

Most notably, in Fresco v. CIBC, CIBC is facing Canada’s largest unpaid overtime class action suit. The pending decision on the recently argued certification motion in that case will have an enormous impact on the viability of wage and hour class actions in Canada.

How Can Employers Protect Themselves?

The only foolproof way for an employer to avoid an overtime class action is to comply with the applicable employment standards legislation. As a result, it is imperative that employers fully understand their legal obligations. Common issues that may trigger liability include:

• A misconception that salaried employees are not entitled to statutory overtime pay.
• Misclassifying employees as exempt.
• Poorly enforced overtime policies.
• Poor recordkeeping.
• Treating certain type of work as off-the-clock (i.e., clean-up before and after shifts).

Adopting the following best practices can help avoid overtime class actions:

• Regularly audit your overtime policies.
• Verify who is entitled to overtime and that statutoy exemptions are applied properly.
• Keep accurate, up-to-date records and review them with employees regularly.
• Ensure all working time is considered.
• Clearly communicate the overtime policy to all employees.
• Consistently and regularly enforce overtime policies.

Employers also may wish to address overtime liability by:

• Making alternate arrangements with employees (e.g., time-off-in-lieu-of-pay agreements or compressed workweek “averaging agreements”).
• Seeking a permit allowing nonpayment of overtime.
• Restructuring the employment relationship to fall within an exemption.
• Clearly setting out when overtime pay is triggered (in Ontario, as high as 44 hours worked in a week).

Class actions are enormously expensive to litigate even where the employer is successful. Consequently, Canadian employers are well advised to pay close attention to how their overtime policies are applied and enforced. To the extent that employers are not entirely clear about their legal obligations or how these obligations might apply with respect to particular employees, it is critical to seek proactive legal advice.