Despite recent Supreme Court and lower-court rulings that have favored employers in class-action lawsuits brought on behalf of workers, there’s no room for complacency among top corporate executives over the potential for such legal actions to wreak financial havoc on companies.
That’s according to Gerald Maatman, co-chair of the class-action defense group at law firm Seyfarth Shaw and author of the firm’s tenth annual, 819-page “Workplace Class Action Litigation Report,” which analyzes 1,123 class-action rulings in 2013.
“In the past two years we’ve seen a combination of Supreme Court decisions help create a defensive barrier for employers in class-action cases,” says Maatman. “However, plaintiff lawyers have begun to breach this barrier with new theories and approaches. That, combined with increasing and aggressive government enforcement litigation, means employers may once again find themselves facing ‘bet-the-company’ class actions in 2014.” That’s a reference to lawsuits large enough to force a company to change its business model or, in a worst-case scenario, bankrupt it.
Since June 2011, some observers had assumed that the days of worrying about employee class-action lawsuits of such import were, in large part, gone for good or at least significantly diluted. That was when the Supreme Court issued its ruling in the landmark case, Wal-Mart Stores, Inc. v. Dukes. It was a gender-discrimination lawsuit, but the high court opined on the issue of the requirements for certifying a class.
The business-friendly decision made it more difficult for plaintiff lawyers to file and win class actions against companies. In the workplace arena, it has translated into fewer ERISA (Employment Retirement Income Security Act) and employment-discrimination cases, a lower success rate in those that have been brought and decreased settlement values for those that go plaintiffs’ way, Maatman says. There have also been fewer shareholder-derivative lawsuits stemming from such cases.
But as it turns out, the Wal-Mart case has had little impact on wage-and-hour class actions under the Fair Labor Standards Act, which gave nonexempt workers the right to overtime pay. “When the FLSA was passed in 1938, it basically applied to minimum-wage workers,” says Maatman. “But in the past 10 years there have been an increasing number of cases where, for example, financial analysts earning six-figure incomes have sued for overtime.”
Judges “have not been applying [the Wal-Mart vs. Dukes ruling] with the same rigor in the wage-and-hour area as they have in other areas,” Maatman says. “So we’re seeing a migration of good plaintiff ERISA lawyers, employment-discrimination lawyers and securities lawyers to the wage-and-hour space, where there is an opportunity.”
According to Seyfarth Shaw’s report, the number of employment-discrimination and ERISA cases filed in the United States both fell significantly in 2013 (declines of 13.7 percent and 8 percent, respectively), while FLSA cases increased by 2.7 percent.
Settlement sizes have been coming down across the board, but less so for wage-and-hour cases. The 10 largest ERISA class-action settlements totaled just $156 million last year, down 32.4 percent from $237 million in 2012. Settlements in the 10 biggest wage-and-hour cases amounted to $248.5 million in 2013, a comparatively low 14.9 percent drop from the prior year.
The aggregate value of the top 10 employment-discrimination class-action settlements rose steeply to $234.1 million last year, but $160 million of that was for one case, McReynolds, et al. v. Merrill Lynch & Co., in which African-American employees claimed discrimination in pay and promotions. Minus that outlier, the total for the 10 largest payouts in that category of cases was the second-lowest since 2006. (The second-biggest workplace class-action settlement in 2013, by Merrill Lynch parent Bank of America, was more than four times smaller, at $39 million.)
“The takeaway for a CFO is that the No. 1 workplace litigation risk entering 2014 is wage-and-hour class actions,” Maatman says. Employers can expect nonexempt employees to bring cases based on, for example, their off-site use of mobile devices for work and employers’ “rounding practices” — rounding employees’ hours over a period of time, which some jurisdictions permit.
At the same time, 2014 could be a banner year for employment-discrimination cases. Enforcement activity by the Equal Employment Opportunity Commission hit record levels in 2011 and 2012, and given the typical time lag between the filing of EEOC charges and the filing of lawsuits, this year looks ripe for court action, according to the Seyfarth Shaw report.
Meanwhile, the Supreme Court has made some other recent, important rulings favorable to businesses. Deciding Comcast Corp. v. Behrend last March, the high court further restricted class certifications. It clarified that class actions can be brought only where every class member’s damages rise or fall on the same basis.
While the case centered on the Philadelphia-area cable industry, the decision has since been applied in workplace litigation. For example, says Maatman, some lower-court judges have denied class certification to women claiming discrimination in pay or promotions, reasoning that every class member’s situation would be unique — based on whether he or she deserved to be promoted, what pay raise was deserved and who the person’s supervisor was, among other factors.
Also last March, the Supreme Court handed down its first decision related to the Class Action Fairness Act (CAFA) signed by President George W. Bush in 2005.
CAFA’s purpose was to allow employers to more easily move cases to federal courts, which are typically less worker-friendly than many state and local courts. But plaintiff lawyers began finding ways around CAFA, according to Maatman. Most notably, he says, they took to filing several regional class actions against employers with operations in multiple states, all claiming damages of just under $5 million — the threshold over which CAFA is applicable. The Supreme Court, after taking on the matter in Standard Fire Insurance Co. v. Knowles, effectively prohibited that strategy for avoiding the removal of class actions to federal court.
Depending on the jurisdiction, the advantage defendants gain from getting a case moved to federal court can be huge. The latest annual report by the American Tort Reform Association names California, Louisiana, New York City and West Virginia as the country’s top “Judicial Hellholes,” from the perspective of employers. Other worker-friendly bastions include New Jersey, Pennsylvania and the southern district of Florida, Maatman notes.
Last June, deciding one issue of American Express Co. et al. v. Italian Colors Restaurant, the Supreme Court upheld an employer’s right to include in employment contracts a provision prohibiting an employee from being a party to a class-action claim, and providing that contract disputes instead will be arbitrated on an individual basis. Since then, notes Maatman, a few lower courts have applied that decision specifically to wage-and-hour class actions, saying that employees who sign workplace arbitration agreements can only bring individual claims and not class actions.
“Today, for the first time in a very long time, employers are taking a very hard look at whether to use employment agreements with arbitration clauses as a strategy to mitigate litigation risk,” Maatman says.
Commenting on the broad landscape of workplace-related class-action litigation, he observes that “the story for employers is good, but it’s not a consistent story. It’s a patchwork quilt” from jurisdiction to jurisdiction and from one type of case to another.
“Even within the federal system there are some courts, like the Southern District of New York and the Northern District of California, that are becoming magnets for workplace class actions because the judges there tend to be more liberal,” Maatman adds. “I don’t think, if I’m a CEO or CFO, that I should assume I don’t need to worry about these litigation exposures.”
(Seyfarth Shaw’s Workplace Class Action Litigation Report can be purchased in its entirety.)