Supreme Court to Review Ruling on Attorney-Client Privilege
Charter Counties Not Bound by Certain Labor Code Provisions Regarding Employee Compensation

Hayward Living Wage Ordinance Upheld

Until last month, no California appellate decision had construed the requirements of any municipality’s living wage ordinance, or addressed the constitutional challenges to any such ordinances. Now, however, most of the defenses commonly raised when employers challenge living wage ordinances have been rejected in an opinion published last month by the First District Court of Appeal in Amaral v. Cintas Corporation No. 2 (2008) __ Cal.App.4th __. Amaral addressed the constitutionality and application of a living wage ordinance enacted by the City of Hayward and incorporated into its municipal contracts. Defendant Cintas entered into such contracts with the City, but did not provide the minimum wages or benefits required by the ordinance to employees who worked in the company’s stockroom or laundry production facilities, which are located outside the City of Hayward. Some of those employees filed a class action seeking the living wages due, benefits, civil penalties and waiting time penalties. On cross-motions for summary judgment, the trial court found that Cintas violated the ordinance, which was enforceable; that it breached its contracts with the City, and violated the Unfair Competition Law and numerous Labor Code provisions. The court awarded back wages and unpaid benefits, imposed penalties under the Private Attorneys General Act of 2004 and awarded plaintiffs statutory attorneys’ fees and costs. However, the trial court found that, prior to the determination of its legal duties under the new ordinance, Cintas’s conduct was not “willful” so as to justify waiting time penalties. The Court of Appeal affirmed all of the trial court's rulings. The opinion is most noteworthy for its analysis of the constitutionality and vagueness attacks on the living wage ordinance, but for wage and hour lawyers, its 60+ pages were full of interesting analysis of wage and hour issues.

At issue was Hayward's Living Wage Ordinance, which provides:

Service contractors subject to this Ordinance shall pay their employees a wage of no less than eight dollars ($8.00) per hour, if health benefits are paid to the employees, or nine dollars and twenty-five cents ($9.25) per hour if no such health benefits are paid.” (Hayward Mun. Code, § 2-14.020, subd. (c).) For purposes of the ordinance, an employee is defined as “any individual employed by a service contractor on or under the authority of any contract for services with the City . . . .” (Hayward Mun. Code, § 2-14.010, subd. (c).) Considering these two provisions together, the plain language of the ordinance requires contractors to compensate every individual they employ to perform work on or under a service contract with Hayward with a wage of at least $9.25 per hour, or $8.00 per hour if the employer provides health benefits.

The court first disposed of Cintas's constitutional arguments:

Cintas’s first constitutional challenge to the LWO rests on article XI, section 7 of the California Constitution, a provision which Cintas contends prohibits attempts by a municipality to exercise power outside its territorial boundaries. However, the language of the provision and cases interpreting it make it clear the prohibition applies only where a local government exercises its regulatory or police power, as opposed to its contracting or proprietary power. (Burns Internat. Security Services Corp. v. County of Los Angeles (2004) 123 Cal.App.4th 162, 168.
...
Cintas also argues the LWO is so vague that it violates due process under the federal and state constitutions. “[D]ue process of law is violated by ‘a statute which either forbids or requires the doing of an act in terms so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application.’ [Citations.]” (Britt v. City of Pomona (1990) 223 Cal.App.3d 265, 278.) It is true that the terms of the LWO do not spell out precisely how the ordinance will apply in situations where contractors perform work outside of Hayward or commingle an employee’s contract-related work with work for other customers. However, due process “does not . . . require that statutes must be drafted with the precision of a laser.” (Personal Watercraft Coalition v. Marin County Bd. of Supervisors, supra, 100 Cal.App.4th at p. 138.) “ ‘ “Reasonable certainty is all that is required. . . .” [Citation.] . . .’ [Citations].”

Cintas also contended that the plaintiff class members did not fit the LWO’s definition of employees because they rendered a service to Cintas, not to the City. The court noted that this argument was waived because it was not presented to the trial court, but went on to add that "[i]t is also nonsensical. ... When they laundered and maintained uniforms used by the City of Hayward, plaintiffs were carrying out Cintas’s obligations under service contracts with the City. Accordingly, these employees were working “on or under the authority of” a service contract."

The court rejected claims that the employees lacked a private right of action to enforce the living wage ordinance.

This issue has been addressed by courts of appeal in the analogous context of California’s prevailing wage law. (Lab. Code, §§ 90.5, 1720-1861.) This law requires that all contractors and subcontractors working on a public works contract must pay their employees the prevailing wage rate for work performed on the contract. (Lab. Code, §§ 1771, 1774.) Although the Labor Code imposes a statutory duty to pay prevailing wages and the prevailing wage law is incorporated into public works contracts, our Supreme Court has not yet decided whether employees have a right to enforce the prevailing wage law absent a specific provision in their employment contracts. (Department of Industrial Relations v. Fidelity Roof Co. (1997) 60 Cal.App.4th 411, 425 (Fidelity Roof); see Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 969, fn. 5.) Two appellate court decisions have considered the issue, however, and both conclude aggrieved employees are third party beneficiaries who may sue to enforce a contractor’s promise to pay prevailing wages.

Cintas also failed in its claim that the enforcement of Labor Code penalties under the Private Attorneys General Act (PAGA), Labor Code § 2698 et seq., constituted an unlawful retroactive application of a new statute. PAGA went into effect on January 1, 2004. PAGA allowed aggrieved employees to recover Labor Code penalties directly from their employers, whereas only the Labor Commissioner could do so before. Because PAGA did not become effective until after plaintiffs filed their lawsuit, Cintas argued its provisions could not be applied retroactively. The trial court and the Court of Appeal disagreed.

In this case, the only effect of the new statute was to allow private parties—class members who are present or former employees of Cintas—to recover penalties that previously could have been recovered only by the state Labor Commissioner. This change did not increase Cintas’s liability in any way, because the Labor Commissioner could have recovered the same penalties for Cintas’s violations before the passage of PAGA. It does not matter that Cintas’s wrongful conduct occurred before PAGA was enacted because the legal consequences of this conduct remained the same. “A statute is retroactive if it substantially changes the legal effect of past events. [Citations.] A statute does not operate retroactively merely because some of the facts or conditions upon which its application depends came into existence prior to its enactment. [Citations.]” (Kizer v. Hanna (1989) 48 Cal.3d 1, 7-8.) Nor does it matter that Cintas may have expected to be held accountable for penalties to the Labor Commissioner instead of to plaintiff class members. “A statute does not operate ‘retrospectively’ merely because it is applied in a case arising from conduct antedating the statute’s enactment [citation] or upsets expectations based in prior law. Rather, the court must ask whether the new provision attaches new legal consequences to events completed before its enactment.” (Landgraf v. USI Film Products, supra, 511 U.S. at pp. 269-270, fn. omitted.) Because PAGA did not increase Cintas’s liability for Labor Code penalties, its application in this case was not retroactive.

The Court of Appeal also found support for this position in the Supreme Court’s decision in Californians for Disability Rights v. Mervyn’s, LLC (2006) 39 Cal.4th 223, regarding the effect of Proposition 64's amendment of the standing provisions of the unfair competition law.

The Court upheld the trial court's findings of violations of Labor Code § 223: “Where any statute or contract requires an employer to maintain the designated wage scale, it shall be unlawful to secretly pay a lower wage while purporting to pay the wage designated by statute or by contract.”

The court addressed the meaning of "initial" violations under penalty provisions which increase for "subsequent violations". These statutes, which are substantially identical, provide for civil penalties as follows: "(a) For any initial violation, [fifty dollars ($50)] for each failure to pay each employee. (b) For each subsequent violation, or any willful or intentional violation, [one hundred dollars ($100)] for each failure to pay each employee...." The employees asserted that a violation occurs every pay period that an employee’s wages are underpaid, and that the first underpayment constitutes an “initial” violation, and all future pay periods are “subsequent” violations, penalized at the higher rate. Cintas argued that an employer could not be penalized at the higher rate for subsequent violations until it received some notice that its previous underpayment was a violation of the law. The court agreed with a different approach set forth in a February 22, 1984 DLSE memorandum.

an “initial” violation is “[a]ny violation occurring [after the penalty becomes law], regardless of whether penalties were assessed,” whereas a “subsequent” violation is “[a]ny violation which occurs after notice of a previous violation, regardless of whether penalties were assessed.” In describing how an investigating deputy should calculate penalties, the memorandum states: “If the violation is an initial violation, the citing officer will assess a penalty of $50 per each employee per each pay period. [¶] If the violation is a subsequent violation, the citing officer will assess a penalty of $100 per each employee per each pay period.”
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The statutes state that a penalty for an initial violation is to be imposed “for each failure to pay each employee.” (§§ 210, subd. (a), 225, subd. (a).) This language conveys two things. First, by specifying a $50 penalty must be imposed “for each failure to pay each employee” (italics added), the language contemplates that an “initial violation” can result in more than one penalty at the $50 level. In other words, multiple $50 penalties can result from a single initial violation. The only way this could conceivably occur is if penalties are assessed at each pay period.
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Until the employer has been notified that it is violating a Labor Code provision (whether or not the Commissioner or court chooses to impose penalties), the employer cannot be presumed to be aware that its continuing underpayment of employees is a “violation” subject to penalties. However, after the employer has learned its conduct violates the Labor Code, the employer is on notice that any future violations will be punished just the same as violations that are willful or intentional—i.e., they will be punished at twice the rate of penalties that could have been imposed or that were imposed for the initial violation. Accordingly, we conclude the trial court properly assessed penalties against Cintas under sections 210 and 225.5 at the rate of $50 per pay period per class member.

The court rejected Cintas's claim that the trial court incorrectly determined that it lacked discretion not to award civil penalties (as opposed to discretion to reduce them):

Sections 210 and 225.5 state that “every person who” fails to pay wages (§ 210) or unlawfully withholds wages due (§ 225.5) “shall be subject to a civil penalty” as described in the statute. The parties disagree about whether the trial court was required to impose penalties under sections 210 and 225.5, or whether it had discretion to forgo imposing any penalties because Cintas had a good faith dispute about whether wages were due. No authority brought to our attention supports Cintas’s claim of legal error. Cintas argues that a trial court imposing PAGA penalties can exercise its discretion based only on the considerations mentioned in section 2699, subdivision (e)(2). This argument rests on a misunderstanding of the nature of PAGA penalties: As we have explained, they are mandatory, not discretionary.

The court rejected Cintas's claims that the $258,900 penalty assessment was confiscatory.

The court received evidence that Cintas’s parent company had $2.81 billion in sales and $272 million in profits during fiscal year 2004. The penalty award is certainly not “astronomical” in comparison. (See, e.g., City and County of San Francisco v. Sainez (2000) 77 Cal.App.4th 1302, 1318-1319 [approving $663,000 penalty for housing code violations, which represented about 28.4 percent of the defendants’ net worth].) The penalty award, which totaled less than one-third of plaintiffs’ $804,783 damage award, was also proportional to Cintas’s misconduct. (See Kinney v. Vaccari (1980) 27 Cal.3d 348, 356 [punitive assessment should be proportional to defendant’s misconduct, sufficient to achieve penalty’s deterrent purpose, and not constitutionally excessive].)

Some of the statutory penalties sought by the plaintiffs, including waiting time penalties under section 203 and paystub penalties under section 226, are imposed only if an employers’ violation was “willful” or “knowing.” The trial court concluded that Cintas’s conduct was not “willful,” and it declined to impose or increase penalties under all provisions that include a “willfulness” component. The Court of Appeal followed Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1 and decided that the failure to pay wages was not “willful” because the legal duty to pay them was unclear at the time of the violation.

Even more so than in Barnhill, the legal obligations imposed on employers by the LWO were unclear at the time of Cintas’s violations. As Cintas’s vigorous defense of this class action has made clear, numerous arguments exist concerning the constitutionality of the LWO and its proper interpretation.

In so holding, the court distinguished the facts of this case from those in Armenta v. Osmose, Inc. (2005) 135 Cal.App.4th 314, where the presumption of good faith was outweighed by evidence that the employer was in fact aware that its employees were not being fully compensated for their time, and Road Sprinkler Fitters Local Union No. 669 v. G & G Fire Sprinklers, Inc. (2002) 102 Cal.App.4th 765, where the employer’s legal obligation was clear and substantial evidence supported the lower court’s finding that the employer had acted in bad faith.

The court passed on the opportunity to address whether interest could be awarded on the restitutionary relief under the Unfair Competition Law claims pursuant to Civil Code § 3287(a), which provides for interest on an award of “damages certain, or capable of being made certain by calculation.” An award of interest was also authorized under the Labor Code for the wage claims, so the decision would have no practical effect on the judgment.

Finally, the court upheld the trial court's award of fees to plaintiffs’ attorneys based upon a lodestar multiplier of 1.65, which was less than the multiplier of 2.0 requested by the plaintiffs.

There certainly is a change that the Supreme Court will review this opinion, and the PAGA and other penalty issues add to the likelihood of review. Until and unless the case gets reviewed or depublished, however, it puts an end to the strongest and most frequently asserted defenses to living wage ordinances in California. You can download Amaral v. Cintas Corporation No. 2 here in pdf or word format.

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