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Harris v. Investor’s Business Daily: California Class Action By Telemarketing Employees Not Preempted By Federal FLSA (Fair Labor Standards Act) California Court Holds

California Appellate Court Holds that Federal Fair Labor Standards Act (FLSA) May Serve as Unlawful Act for California Unfair Competition Claim, and Triable Issues of Fact Exist As to Overtime Pay Claim and Unlawful Deductions for Cancelled Subscriptions Claim

Employees who worked as telemarketers selling newspaper subscriptions filed a class action in California state court “alleging claims under the California Labor Code for overtime pay, unlawful commission deductions, and waiting penalties, and for unfair competition pursuant to [California Business & Professions Code] section 17200.” Harris v. Investor’s Business Daily, 138 Cal.App.4th 28, 31 (Cal.App. 2006). The claims were based on a compensation system whereby employees “were compensated on the basis of a point system which rewarded them for selling longer subscriptions, winning daily contests, and meeting weekly sales goals” but they were “subject to a ‘chargeback’ – a deduction from points earned on a sale if the customer cancelled the subscription within 16 weeks.” Id. To ensure that it complied with state and federal laws, the compensation system provided that employees would be paid no less than the prevailing minimum wage. Id. The complaint was later amended to a add a claim that alleged violations of the federal FLSA (Fair Labor Standards Act, 29 U.S.C. § 207(a)(1)) as the predicate for a new section 17200 violation. Id., at 32. The defense demurrer to the new 17200 cause of action was sustained without leave to amend, and the defense summary adjudication motion as to the balance of the class action claims was granted. Id.

The appellate court first addressed the FLSA-based 17200 claim. The defense had argued that FLSA preempted the claim “because traditional opt-out class actions are available under the California law, while, under FLSA, class members must opt in.” Harris, at 32. Relying upon several unpublished federal court decisions, id., at 34-36, the appellate court concluded that FLSA did not preempt section 17200, and that the purpose behind the federal “opt-in” requirement – “to protect employers from facing ‘financial ruin’ and prevent employees from receiving ‘windfall payments, including liquidated damages'” – is not implicated by a section 17200 claim “limited to restitution.” Id., at 33-34.

With respect to the overtime pay claims, the employees claimed that they had raised a triable issue as to whether the commission exemption relied on by the trial court applies. The commission exemption provides that the overtime pay statute “does not apply to any employee ‘whose earnings exceed one and one-half . . . the minimum wage if more than half of that employee’s compensation represents commissions.'” Harris, at 37 (quoting Cal. Code Regs., Title 8, § 11040(3)(D)). After a detailed analysis, the appellate court concluded that the defense had not established as a matter of undisputed fact that commissions constituted more than half of the employee’s compensation. Id., at 38-39.

With respect to the chargebacks, the defense argued that “the chargebacks were a lawful recovery of an advance” and that the employees were “aware of and agreed to the policy.” Harris, at 40. The appellate court noted, however, that the policy was changed in November 2001, after the filing of the class action complaint. Id. The court also noted that while California case law had upheld chargebacks in certain circumstances, those cases were distinguishable, particularly because the employer here retained the portion of the subscription fee incurred prior to cancellation. Id., at 41. At bottom, the court found a triable issue of fact, requiring that summary adjudication order in favor of the defense be reversed.

NOTE: Importantly, the appellate court assumed that Proposition 64 “does not affect the present controversy,” Harris, at 33, but the retroactivity of Proposition 64 is presently before the California Supreme Court and the weight of appellate court authority holds that Proposition 64 is retroactive. The fundamental premise as to the section 17200 claims may be flawed.

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