Litigation Counsel Series Wage and Hour Class Actions in the Technology Industry Exposure, Litigation, and Corporate Governance May 24, 2006
Wage & Hour Class Actions In the Bay Area Wal Mart - $172 million jury award Morgan Stanley - $42.5 million settlement Bell v. Farmers Insurance $262 million (jury award plus later settlement) In the Tech Sector Electronic Arts - $15.6 million settlement in Oct. 2005; $14.9 million settlement in April 2006 Computer Sciences Corporation - $24 million settlement in July 2005 IBM (pending in federal court) SONY (pending in state court) 2
The Archaic Meets High Tech Overlaying rigid wage and hour laws on the technology industry What are hours worked? Clocking in = logging on? What about surfing the net, internet shopping or worse? Enforcing meal and break periods feasibility of the Wal Mart solution Overtime and the technology work ethic Non-Exempt: image vs. reality Professional? Morale issues and re-classification 3
Exempt v. Non-Exempt Traditional exemptions in California (professional, executive and administrative) must be primarily engaged in exempt duties California computer related occupational exemption ($47.81 per hour, check CPI annually) Aggregation issue (i.e. overtime, meal and rest periods, etc.) Periodic review of classification status Collecting evidence from employee during employment 4
AB 1093: The Computer Professional Federal Law v. California Law Fed: $27.63 hour / $455 wk salaried CA: $47.81 hour for every hour worked AB 1093 clarified that computer professionals can be paid a salary, but still must be paid for every hour worked Hourly rate adjusted each year by Division of Labor Statistics and Research in October effective January 1 of following year based on the CPI. For future years, check with us or www.dir.ca.gov//dlsr/cpi/otcpi.pdf. 5
The Computer Professional Problem Hypothetical high tech company 100 software engineers who each work 50 hours per week and are paid $60,000 annually Fails to pay overtime or to provide meal / rest periods Overtime violations = $9 million $2.25 million per year (four year limitations period) Meal / rest period violations = $750,000 per year (1 year) Punitive damages (2X multiplier) = $19.5 million Total liability = almost $30 million Not including interest (10%), waiting time penalties, PAGA penalties, attorneys fees 6
Implementing AB 1093 Is exception reporting allowed? Annual salary of $124,306 = 47.81 per hour x 50 hours (Includes 50 hours a week or 60 hours a week etc.) Written agreement, but still questionable Legislative efforts/ ballot measures/ trade union AB 1093 efforts to get a salaried basis test for computer professionals Opportunities for legislative lobby CELC (members) or new lobbying effort 7
Employee v. Independent Contractor No self determination EDD audits and follow on litigation / caution against changing classifications Applicable state and federal tax penalties Civil suit and aggregation of violations Payment of all overtime due to individual All benefits the individual should have received as employee If non-exempt, overtime, meal and rest periods etc. 8
Meal and Rest Periods Provide meal period for every 5 hours Provide = compel The after 5 hours dilemma Labor Code Section 226.7 one hour of pay Recording meal and rest periods on time sheet 9
Statute of Limitations: Wages vs. Penalties One year for penalties CCP 340(a) PAGA Claims for civil penalties = one year Meal and rest periods under 226.7 Three years for non-penalties CCP 338 (A) Split in the courts Tax / deduction implications 10
Miscalculation of Incentive Compensation Bonuses and commissions are wages, no improper deductions Ralphs Grocery Co. v. Superior Court (2003) In determining compensation based on profitability, may not include expenses prohibited as deductions from wages Profit calculation cannot include prohibited expenses Workers compensation (exempt and non-exempt) Cash and merchandise shortages (non-exempt) Prachasaisoradej v. Ralphs, (Cal. Sup. Ct., on Review) Total returns as improper deduction from commissions Steinhbel v. L.A. Times, (2005) (defining earned ) 11
Vacations No use it or lose it in California (no limits on carry-over ) Consequence = continued accrual / waiting time penalties Cap on accruals permitted Exempt employees = deductions against accrued vacation for partial day absences Conley, but be careful 12
Deferred Compensation Not permitted in California Top Hat plans for executives only ERISA preemption issue 13
Improper Pay Practices During Shut Downs Shut downs of one day or less than one week Exempt Employee (California & Federal Law): full salary for any week in which employee performs work regardless of days or hours worked Subject to exceptions for full day absences for personal reasons or Illness Weekly shut downs Maintain exempt employee status (currently $2,340 per month) Forcing employees to take vacation during shut downs Scheduled vs. unscheduled (notice issues) Allowed vs. mandated (DLSE opinion letters) PAGA claims 14
Sweat Equity and Volunteer Employees Cannot compensate only in stock Volunteers only allowed in public agencies or private non-profit companies Acquisition issues 15
Final Wages Timely paying final wages Wages (vacation, bonuses etc.) due immediately upon termination (72 Hrs for resignation) California Labor Code Section 203: Waiting Time Penalties up to 30 working days of wages (6 weeks of salary) Statute of Limitations (3 to 4 Years Possible) Improper set-offs can result in failure to pay final wages Debt acceleration deducted from final pay 16
Other Concerns California Labor Code Section 226 (A): requires itemized wage statement Penalty for violation = $250 per employee per violation If employer previously cited, $1,000 per employee per violation California Labor Code Section 232: prohibits rules that prevent employees from disclosing their wages 17
Sue Your Boss / Penalties Representative actions for Labor Code civil penalties (PAGA) Traditional class action certification not required Deputizes employees to be mini-labor commissioners PAGA establishes new civil actions for Labor Code violation $100 for each aggrieved employee per pay period for initial violation 24 pay periods, 100 employees = $240,000 $200 for each aggrieved employee per pay period for each subsequent violation 24 pay periods, 100 employees = $480,000 18
Personal Liability for Directors & Officers Employer Standard Federal law: Any person acting directly or indirectly in the interest of an employer in relation to an employee. Donovan v. Agnew (1 st Cir. 1983) California law: no individual liability for wages in California. Reynolds V. Bement, (2003); Jones v. Gregory, (2006) Directors and Officers can be individually liable only for misdemeanor penalties and civil fines, but will not be considered the employer for personal civil liability in civil wage and hour actions But... Section 2699(e)(1)(2): amount of PAGA penalties depend on number of employees the person employs Cal. WARN 1400 any person who directly or indirectly owns or operates a covered establishment Fraud and other tort claims Criminal liability (Cal. Labor Code Sections 215 and 216) 19
Litigation and Governance Perspectives Nature of the problem Fundamentally different from other large employment actions Financial statement implications: under-reporting of expenses Likely to implicate prior years financial statements Related liability and penalties could be reasonably known and estimable (FAS 5) Could impact future earnings projections and guidance If problem exists, duty to correct it regardless of whether company has been sued 20
Litigation and Governance Perspectives Legal duties that may be implicated Sarbanes-Oxley CEO and CFO certifications 404 compliance, both management and auditor certifications Disclosure controls Lawyers as gatekeepers Audit committee duties and responsibilities SEC Administrative regulations: books/records, internal controls, periodic reports 10b-5 21
Litigation and Governance Perspectives Managing the issue Internal review v. whistleblower complaint v. lawsuit Get out in front of the issue and control timetable and scope Self-reporting credit with SEC Significant and unsettled privilege and work product issues surrounding internal investigations Disclosure issues What are you facing? Clear error v. judgmental issue? Risk factors to cover litigation or judgmental errors Prior to suit being filed After suit has been filed Prompt remediation or change in policies to cut off exposure 22
Risk Factors Prior to suit being filed: From time to time, the Company is exposed to litigation arising from disputes in the ordinary course of business. In particular, there is a growing trend of class action lawsuits being filed against technology companies, such as the Company, involving claims of misclassification of employees under applicable law. This type of litigation, regardless of the validity of the claims, may be time-consuming and costly to defend, divert management s attention away from the operation of our business and subject us to significant liabilities. Any of these consequences could materially harm the Company s business. While we believe that we are in compliance with applicable wage and hour laws, in the event that this type of class action lawsuit is filed against us, there can be no assurance that we will prevail. These disputes may not be settled on commercially reasonable terms and may result in long and costly litigation. In cases where we may agree to settle these types of claims, the payment of any settlement amounts could have a material impact on our financial results. 23
Risk Factors After suit has been filed: In, 200_, a putative class action lawsuit was filed against us in alleging that we improperly classified employees under applicable law. The complaint seeks and. The Company believes the complaint is without merit and intends to vigorously defend the action, but there can be no assurance that the Company will prevail. The outcome of this litigation is inherently difficult to predict, and it is not possible at this time to make meaningful estimates of amount or range of loss that could result from this matter. The Company believes that the damage amounts claimed in this matter is not a meaningful indicator of the Company s potential liability. Whether any losses, damages or remedies, including any amounts paid in settlement of this matter, ultimately resulting from this proceeding could reasonably have a material adverse effect on our business, financial condition, results of operations or cash flows depends on a number of variables, including, for example, the timing and amount of such losses or damages, if any, and the structure and type of any such remedies and settlement. Depending on the ultimate resolution of this matter, it may have a material impact on the Company s operating results. [INCLUDE CROSS-REFERENCE TO DISCLOSURE IN LEGAL PROCEEDINGS ] 24
Best Practices Conduct internal audit Review classifications for exempt / non-exempt and employee / independent contractor Document hours worked, lunch, breaks Change use it or lose It vacation policies to caps in California Review bonus and commissions plans (Ralphs) Implement / change procedures to ensure all wages are paid on timely basis, including final pay 25
Parting Thoughts... Take the California Labor Code seriously Class actions = The new form of union organizing 26