In one of the most anticipated employment decisions in recent years, the California Supreme Court disappointed employers on August 26, 2004, by reversing a California court of appeal decision in Sav-On Drugs v. Superior Court (Rocher). In a near unanimous opinion, the court found the trial court did not abuse its discretion in certifying a class of assistant managers and operating managers employed by Sav-On in California.

We previously have written in this column on the proliferation of overtime wage- hour class action litigation in California, particularly in the area of the exempt/nonexempt classification of managers and assistant managers in retail and restaurant businesses. The gist of the claim in these cases is that managers essentially perform non-exempt tasks more than half of their time at work, and therefore should be classified as non-exempt and receive overtime pay.

The battle in most wage-hour class actions is fought during the class certification process. Employers generally argue the class action device is not appropriate for wage-hour claims because the actual duties performed by each manager must be evaluated on a case-by-case basis. In other words, individual issues predominate and each manager should be forced to file a separate action. The California Supreme Courts ruling in Sav-On likely will make this argument much less effective. In addition, in its decision, the court confirmed the broad discretion afforded trial courts in deciding whether a particular case should be certified as a class action, which will make it much more difficult for employers to appeal a trial courts decision to certify a class.
Background of the Case

On April 3, 2000, plaintiffs Robert Rocher and Connie Dahlin filed suit against Sav-On in Los Angeles Superior Court. Plaintiffs alleged Sav-On wrongfully failed to pay overtime wages to between 600 and 1,400 current and former employees designated by Sav-On as assistant managers and operating managers at approximately 300 retail stores in California. Sav-On uniformly classified the assistant managers and operations managers as exempt from overtime until December 1999.

Before the lawsuit was filed, Sav-On reclassified the assistant managers as non-exempt. The job description and duties remained unchanged. According to Sav-On, the reclassification decision was made to achieve greater consistency in store operations following the merger of American Stores Company and Albertsons. Albertsons had two salaried store-level positions and, before the change, Sav-On had three salaried store-level positions. Plaintiffs argued Sav-Ons reclassification of the assistant manager position was an admission of the managers actual status as non-exempt employees.

On June 22, 2001, the trial court granted plaintiffs motion for class certification. Sav-On appealed, and on April 4, 2002, the court of appeal ruled the trial court abused its discretion in certifying the class.

In sharp contrast to the Supreme Courts recent ruling, the court of appeal found Sav-On demonstrated the circumstances under which the managers operated were not identical, but rather involved significant variations which affected their tasks and the amounts of time spent on those tasks. It also ruled that evidence relating to the disputed issue in the litigation, whether the managers spent more than 50% of their workweek on nonexempt tasks, would involve separate facts applicable to each manager, and certifying a class action therefore was inappropriate.

Plaintiffs appealed. After more than two years of extensive briefing, the court held oral argument on June 1, 2004.
The California Supreme Courts Decision

In its decision, six of the seven justices (with the seventh concurring in a separate opinion) found the trial court record contained substantial, if disputed, evidence that Sav-On had a policy and practice of deliberately misclassifying its managers. The court also held that neither variations in the mix of actual work performed by the individual managers, nor differences in the total unpaid overtime compensation owed each manager, prevented class action treatment as a matter of law.

According to the court, the trial court reasonably concluded that general issues regarding the proper classification of the managers as exempt or nonexempt and Sav-Ons policies and practices were likely to predominate over any individual calculations of actual overtime hours worked that might be necessary to establish the plaintiffs damages.

In its arguments before the court, Sav-On relied heavily on language from an earlier California Supreme Court decision in Ramirez v. Yosemite Water Co. In Ramirez, the court ruled that determining whether an employee is properly classified as exempt requires an examination of how the employee actually spends his or her time. In Sav-On, the court found the need for such an examination did not preclude class certification.

Judicial economy also appeared to drive the courts decision. The court ruled that many of the issues likely to be contested in an exempt/non-exempt case such as Sav-On are common (e.g., the employers policy, the job descriptions for the positions at issue, etc.) Therefore, without class action treatment, each individual plaintiff would present the same or essentially the same arguments and evidence, including expert testimony. In the courts view, the result would be a multiplicity of trials conducted at enormous expense to both the judicial system and the litigants.

The Sav-On decision is certain to encourage plaintiffs attorneys to pursue additional wage-hour class actions against California employers. Employers must proactively prepare for such claims, and recognize the change in the legal landscape brought about by the courts ruling.

In response to Sav-On, California employers should carefully review all employee classifications, with particular emphasis on those classifications deemed exempt from overtime. As part of this process, employers should carefully review all job descriptions, policies, practices and training materials. Employers also should undertake detailed analyses of the reasonable expectations for the positions, how the employees actually spend their time on the job, and how the employer responds to deviations from the expectations for the positions.

After the passage of the Labor Code Private Attorneys General Act of 2004, (more commonly referred to as the bounty hunter or sue your boss law), many employers conducted audits of their wage-hour practices in an effort to identify their weaknesses in this important area. Although recent amendments to the Act reduced some of the potential liability for employers, audits remain an important prevention tool.

As many employers have learned, misclassification of employees can be extremely costly. Employers therefore are strongly encouraged to consult experienced employment counsel to obtain guidance regarding the proper classification of employees under California law.

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