Labor Code section 218.5 controls contractual attorney fee provisions when wage and contract claims are intertwined

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This is a little nugget for the wage & hour set. In a matter of first impression, the Court of Appeal (Fourth Appellate District, Division Three), in Dane-Elec Corp. v. Bodokh (May 24, 2019) considered the effect of Labor Code section 218.5 on a prevailing party employer’s right to recover contract-based attorney fees from an employee where the employer successfully defended against a wage claim, found not to have been brought in bad faith, when the wage claim was inextricably intertwined with a contract claim for which the employer would otherwise be contractually entitled to recover attorney fees.

The Court described Labor Code section 218.5 as follows:

Labor Code section 218.5 is a fee-shifting statute in actions for nonpayment of wages. The first sentence of section 218.5(a) states: “In any action brought for the nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions, the court shall award reasonable attorney’s fees and costs to the prevailing party if any party to the action requests attorney’s fees and costs upon the initiation of the action.”There is a significant limitation if the prevailing party is not an employee. The second sentence of section 218.5 (a) states: “However, if the prevailing party in the court action is not an employee, attorney’s fees and costs shall be awarded pursuant to this section only if the court finds that the employee brought the court action in bad faith.”

Slip op., at 15. The issue in the case arose because the wage claim and a contract claim were inexplicably intertwined. The Court resolved the question after looking at apportionment rules and the purpose of similar fee-shifting statutes, such as the Cartwright Act. The Court observed that while section 218.5 isn’t exactly a one-way fee shifting statute, the bad faith requirement effectively renders it a one-way fee-shifting statute that favors employees.

In an entertaining twist, Kirby, et al. v. Immoos Fire Protection, Inc. holds that nobody gets fees under 226.7

As a general rule, the law lacks a sense of humor.  Because of that substantial absence of levity, it is up to us to find amusement in unexpected places.  Sometimes a court authors a witty opinion that is entertaining as a form of sharp commentary.  Other times, the humor is relegated to commentary on current legal news.  But that doesn't exhaust our options.  Today, in Kirby, et al. v. Immoos Fire Protection, Inc. (April 20, 2012), the California Supreme Court demonstrated that humor exists in the law when a case outcome is contrary to all expectations.  When asked to decide whether the plaintiff alone, or any prevailling party, is entitled to attorney's fees for alleged violations of Labor Code § 226.7, the Court chose Answer C, none of the above.

The plaintiffs brought a wage & hour class action.  Certification was denied.  The plaintiffs dismissed the case with prejudice.  Defendant Immoos moved for fees as the prevailing party on claims for meal and rest break violations.  Plaintiffs argued that, because section 226.7 claims require payment of wages for the violation of the statute in a manner that is tantamount to a minimum wage obligation, the one-way fee-shifting statute applicable to section 1194 applies.  Defendant Immoos argued that the action was for the "non-payment of wages," thereby brining the action within the two-way fee provision of section 218.5.  Breaking its task down, the Supreme Court said:

In resolving the case before us, we must initially ask whether a section 226.7 claim is a claim for which attorney's fees could be awarded to a prevailing employee under section 1194. If so, then IFP may not be awarded fees under section 218.5 even though it prevailed on the rest period claim in this case. If not, then we must separately examine whether section 218.5 authorizes a fee award to IFP on plaintiffs' section 226.7 claim.

Slip op., at 6.  The Court immediately rejected the argument that any statutory or administrative compensation requirement is a "legal minimum wage."  Instead, the Court supplied a common sense reading to the meaning of section 1194, finding that it created a minimum hourly rate of pay, and not a one-way fee shifting provision for every form of statutory or administrative compensation.  Based on this construction, the Court concluded that section 226.7 claim is not a claim for which attorney's fees could be awarded to a prevailing employee under section 1194.

Nonpayment of wages is not the gravamen of a section 226.7 violation. Instead, subdivision (a) of section 226.7 defines a legal violation solely by reference to an employer's obligation to provide meal and rest breaks. (See § 226.7, subd. (a) [“No employer shall require any employee to work during any meal or rest period mandated by an applicable order of the Industrial Welfare Commision.”].) The “additional hour of pay” provided for in subdivision (b) is the legal remedy for a violation of subdivision (a), but whether or not it has been paid is irrelevant to whether section 226.7 was violated. In other words, section 226.7 does not give employers a lawful choice between providing either meal and rest breaks or an additional hour of pay. An employer's failure to provide an additional hour of pay does not form part of a section 226.7 violation, and an employer's provision of an additional hour of pay does not excuse a section 226.7 violation. The failure to provide required meal and rest breaks is what triggers a violation of section 226.7. Accordingly, a section 226.7 claim is not an action brought for nonpayment of wages; it is an action brought for non-provision of meal or rest breaks.

Slip op., at 13-14.  Thus, since section 226.7 is not an action for nonpayment of wages, section 218.5 does not apply either.  The Court followed with this observation:

It is no answer to say that a section 226.7 claim is properly characterized as an action brought for (i.e., on account of) nonpayment of wages because if a defendant employer had provided the additional hour of pay remedy, presumably the plaintiff would not have brought the action at all. Such a characterization is a departure from the way we conventionally distinguish between the legal basis for a lawsuit and the remedy sought. Consider a typical lawsuit that alleges unlawful injury and seeks compensatory damages. We may say that the suit is an action brought for violation of some legal duty. But we do not say that the suit is an action brought for nonpayment of damages — even though the action would not have been brought had the defendant paid the damages for the plaintiff's injury.

Slip op., at 14.  So that's that.  No fees for prevailing party under section 226.7 for either side.

Meanwhile, note again this little morsel:  "In other words, section 226.7 does not give employers a lawful choice between providing either meal and rest breaks or an additional hour of pay."  Oops.  Even if the employer pays the money, it isn't excused from the violation.  But, since attorney's fees aren't available directly, the chances of an action for injunctive relief are diminished.  That leaves 1021.5 or other fee-shifting bases, which are far from guaranteed.

Decision forthcoming in Kirby, et al. v. Immoos Fire Protection, Inc.

On Monday, April 30, 2012, the California Supreme Court will issue its decision in Kirby, et al. v. Immoos Fire Protection, Inc.  The Court of Appeal decision was discussed on this blog here.  The great question, of course, is whether the relatively employee-protective decision in Brinker will be tempered by prevailing party fee concerns.  The California Supreme Court describes the issues under review as follows:

The court limited review to the following issues: (1) Does Labor Code section 1194 apply to a cause of action alleging meal and rest period violations (Lab. Code, § 226.7) or may attorney’s fees be awarded under Labor Code section 218.5? (2) Is our analysis affected by whether the claims for meal and rest periods are brought alone or are accompanied by claims for minimum wage and overtime?

An objector has no standing to challenge a class action fee award where he has no financial interest in the award and fails to show harm as a result of the award

In Glasser v. Volkswagon of American, Inc. (9th Cir. May 17, 2011), the Ninth Circuit considered objector-appellant David Murray's contention that the district court erred when it awarded attorneys’ fees and costs to plaintiff-appellee Jacob Glasser.  Glasser challenged the inadequacy of disclosures by Volkswagon about the limited availability of "smart keys" for certain Audi and Volkswagon vehicles.  Soon after the case was filed, the parties initiated settlement discussions.  As part of those discussions, Glasser evidently learned that replacement key technology was available through independent dealers and agreed that Volkswagon had not fixed the price of replacement keys.  Volkswagon agreed to make additional disclosures about "smart keys," but no monetary benefit was obtained for the class.

The trial court approved a settlement in which the class was notified of the agreement to make new disclosures and Volkswagon's agreement to either pay an agreed-upon amount of attorney's fees or let the trial court decide fees if the parties did not reach agreement on that issue.  Murry filed an objection to the settlement.  The district court awarded plaintiff attorney's fees in the amount of $417,663.75, costs and expenses in the amount of $16,614.40, and an incentive award to Glasser in the amount of $2,500.

The Court began with a discussion of Article III standing.  The Court observed that fees paid from common funds confer standing on objectors because the fees reduce the fund:

When attorneys’ fees are paid out of a common fund, from which both the class recovery and the fee award are paid, a class member who participates in the settlement generally has standing to challenge the fee award because any reduction in the fee award results in an increase to the class recovery.

Slip op., at 6356.  But the Court then concluded that Murray failed to satisfy his obligation to establish Article III standing:

Murray does not contend that Plaintiff’s counsel colluded with VW to orchestrate an excessively high fee award in exchange for an unfair settlement for the class. Had he alleged as much, he may have been able to meet the requirements of Article III standing under a “constructive common fund theory.” See Lobatz, 222 F.3d at 1147. However, Murray has expressly disclaimed recovery under a “constructive common fund” theory. Instead, he argues Plaintiff’s claims were entirely meritless from the beginning of the lawsuit. Further, he claims only that an excess fee award will cause VW to pass along the cost to its shareholders and customers, and that he may somehow benefit as a consumer from any savings that may result from the denial or reduction of the award.

Slip op., at 6537.  The appeal was then dismissed for lack of standing.  Oops.  I suppose an assertion of a "constructive common fund" theory will become the new standard refrain for objectors, particularly in consumer class actions.

California Supreme Court activity for the week of May 9, 2011

The California Supreme Court held its (usually) weekly conference on May 11, 2011.  Notable results include:

  • On a petition for review, review was granted, and the matter held, in United Parcel Service Wage And Hour Cases (February 24, 2011) (fees not available to defendant prevailing on Labor Code section 226.7 claims), covered previously on this blog here.  Review was previously granted in a case addressing this issue: Kirby v. Immoos Fire Protection, Inc. (July 27, 2010).
  • On a petition for review, review was denied in Price v. Starbucks Corporation (February 17, 2011).

Reasonable lodestar hourly rates in the Northern District of California

For those keeping track of such things, United States District Court Judge Marilyn Hall Patel (Northern District of California) found "reasonable attorneys fees based on rates of $650 for partner services, $500 for associate attorney services and $150 for paralegal services. See Suzuki v. Hitachi, 2010 WL 956896 *3 (N.D.Cal. March 12, 2010)."  Faigman v. AT&T Mobility LLC, 2011 WL 672648 (N.D.Cal. Feb 16, 2011).  The opinion also noted that counsel requesting a higher rate should provide information supporting the departure from those presumptively reasonable hourly rates.

United Parcel Service Wage And Hour Cases holds that a defendant cannot recover fees after prevailing on Labor Code section 226.7 claims

In Kirby v. Immoos Fire Protection, Inc. (July 27, 2010), the Court of Appeal (Third Appellate District) held that a prevailing defendant could recover fees when it prevailed against a plaintiff asserting claims arising under Labor Code section 226.7 (meal and rest periods).  The Supreme Court then granted review.  The answering brief is currently due in that matter on March 21, 2011.   Today, the inscrutable Second Appellate District (Division Eight) held, in United Parcel Service Wage And Hour Cases (February 24, 2011), that fees were not available to a prevailing defendant in such actions.  In its analysis, the Court said:

Nothing in the legislative history suggests the Legislature meant the reciprocal fee recovery provisions of Labor Code section 218.5 to apply in an action for violation of the section 226.7 mandate that employers provide meal and rest breaks for certain nonexempt employees. The statutory remedy of section 226.7, providing compensation for missed breaks, was first enacted in 2000 in response to poor employer compliance with the meal and rest break requirements. (Murphy, supra, 40 Cal.4th at pp. 1105-1106; Stats. 2000, ch. 876, § 7, p. 6509.) Before 2000, the only remedy available to an aggrieved employee was injunctive relief to prevent future abuse. (Murphy, at p. 1105.)

The 2000 amendment providing a pay remedy bears sufficient hallmarks of a penalty designed to shape employer behavior, and is sufficiently distinct from the customary types of bargained-for wages recognized under the law, that we cannot conclude the Legislature intended a claim under Labor Code section 226.7 to be interpreted as a claim for “nonpayment of wages” within the meaning of section 218.5. The section 226.7 pay remedy for missed meal and rest breaks was enacted 14 years after the Legislature enacted the reciprocal fee recovery provisions of section 218.5. It is therefore not reasonable to assume that when the Legislature enacted section 218.5 in 1986 to provide for recovery of prevailing party fees in claims for nonpayment of wages and benefits, it intended that provision to permit a prevailing employer-defendant to recover fees from an employee raising a claim for denial of breaks -- a claim which at that time only supported injunctive relief.

Construing the entire statutory scheme with a view toward protecting employees, as we must, we find that a claim for remedial compensation under Labor Code section 226.7 does not trigger the reciprocal fee recovery provisions of section 218.5. Since none of the claims on which UPS prevailed permit the recovery of attorney fees, the award of statutory fees to UPS was in error.

Slip op., at 14.

Considering the current state of Kirby, it seems like this decision will be citable law for about 90 days, give or take a week here or there.  If a Petition for Review wasn't granted, we'd certainly have a good idea about how a part of Kirby will be decided.