April 23, 2015 Articles

The Economic Realities of Employment Class Actions

An uncensored look for employees and employers alike.

By Lisa Sherman – April 23, 2015

Employment class actions receive significant attention because of the shockingly large recoveries reported in the news and the ever-changing standards applied by state and federal courts, as well as the highest court in the land, the U.S. Supreme Court, which leaves employers of all sizes nationwide in a constant state of panic.

As a former in-house corporate counsel, I will let you in on a well-kept secret among my colleagues who are responsible for minimizing their company’s exposure and controlling costs. We fear employment class actions and multi-plaintiff lawsuits the way Californians fear the “big one,” i.e., earthquake. In whispered tones, we remind our superiors ad nauseam that we must prepare for the “big one,” which is always reflected in our annual legal budgets.

Little has been written on the economic realities of employment class actions for individual employee class members, who must consider whether it is economically worth pursuing or joining. Likewise, employers, large and small alike, are faced with complying with standards that continually change, exorbitant defense costs before even reaching the merits, and total potential liability that alone can bankrupt any size company. Through my own experiences and those my colleagues have shared with me regarding their experiences, as well as the most recent research available on this topic, this article provides an uncensored look at the economic realities of employment class actions for employees and employers alike.

The Frequently Touted Benefits of Employment Class Actions

If you search for “employment law class action counsel” on Google, you will find hundreds of law firms touting the benefits of filing or joining an employment class action. For example, Adam Klein, partner and chair of a large law firm’s class action practice group, states boldly, “together Class Actions level the playing field. They are an agent of change and a potent tool to remedy injustice.” The following are frequently touted benefits of employment class actions:

Strength in numbers will result in the employer discontinuing the practice. The employment class action is essentially a form of leverage to force companies to pay, with interest, wages that were not paid to employees at the time those wages were due. The plaintiffs’ employment bar claims that the class action is an invaluable tool for large groups of employees who might never see the recovery of the wages owed to them in any other way and is virtually a guarantee that the employer will discontinue these practices.

The class action allows an employee who could not afford to sue individually to obtain representation and recovery. Workplace Fairness is a nonprofit corporation, working to promote employees’ rights in all 50 states. It explains the basis for large attorney fee recoveries in class actions:

[M]ost class actions take two to five years, thousands of man hours and often from $500,000 to $1,000,000 in cash to bring to court, all of which are generally funded by the law firm representing the plaintiffs and class. Since most plaintiffs in employment class actions are not wealthy, and cannot afford to pay their attorneys by the hour, these cases are often handled on a contingency fee basis, meaning that the attorneys pay these large costs over many years and only get paid if they win or settle the case. Finally, the probability of success on any employment class case is generally no better than fifty percent.

Where class members have suffered small losses, a class action increases the likelihood that individual employees may recover even though they could not afford to file an individual claim against their employer. Moreover, where there are numerous employees with the same issues, the class action is a valuable savings of judicial time and resources and will prevent inconsistent judgments.

Class certification is easy. For years in California, for example, commentators would joke that a group of plaintiffs could certify even a ham sandwich. Indeed, most recently, on September 3, 2014, the U.S. Court of Appeals for the Ninth Circuit upheld certification of a class of approximately 800 nonexempt insurance claims adjusters who claimed they worked overtime without compensation despite the employer’s lawful written policy to pay nonexempt employees for all hours worked. Notably, the court held that whether the employer should have known that employees were working off the clock could be resolved with statistical sampling.

And even if the claims themselves are without merit, the employer will typically settle anyway. If a court approves certification of a proposed class, even if the claims themselves are completely frivolous, employers are likely to settle because there is too much at stake and the costs of defense are prohibitive. If the company loses the class action, the judgment and attorney fees will likely bankrupt the entire company.

Potential Drawbacks of Employment Class Actions for Employees

Class action waivers in arbitration agreements. Employers are engaging in preemptive strikes by asking employees to sign away their rights to participate in class and any other collective actions by relying on the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion,which increased the likelihood of enforcement. These waivers are often buried in the stacks of employment policies, handbooks, and the like, provided to new hires at the beginning of employment or to current employees who are periodically provided with new or changed policies and handbooks and a new and improved arbitration agreement. In the technological age we live in, this too is being accomplished through an online click-through system, which is rarely recommended because it is highly unlikely the employees even read what they were agreeing to, as appropriately noted by the comedian Mindy Kaling in her commencement address to Harvard University law students: “You wrote the terms and conditions I scroll through quickly when I download the update for Candy Crush. ITunes may own my ovaries for all I know.”

Multiple hurdles, longer time, and limited recovery. Almost without exception, class actions will take longer to get to trial than an individual employment lawsuit because the court must first decide “as early as possible” whether the proposed class can be maintained. The investigation of the class claims will take a minimum of several months, followed by complex motions filed by the parties in support of and opposition to class certification. Only after the court rules on the class claims will an individual class member’s claims be addressed, which can last a year or two longer than an individual case. Moreover, it is difficult for class members to recover compensatory and punitive damages because the court will normally not certify a class if there is going to be an individualized determination of damages for each class member. As a result, class actions often seek only back pay and interest and injunctive relief, which does not amount to much for the individual class members.

Employers are defeating, fracturing, or devaluing employment class actions resulting in fewer settlements and at lower amounts. Recent rulings by the U.S. Supreme Court in Wal-Mart Stores v. Dukes (2011) and Comcast Corp. v. Behrend(2013) placed a greater burden on plaintiffs seeking class certification, including requiring that plaintiffs put forward a realistic class-wide damage approach tailored to their claims. More recently in California, in Duran v. U.S. Bank National Assn, the California Supreme Court insisted that the plaintiffs allege more than the existence of a uniform policy to support their effort to certify a class. This has resulted in employers settling fewer employment discrimination class actions last year than at any time over the past decade and at a fraction of the levels of 2006–2012. SeeSeyfarth Shaw LLP, Annual Workplace Class Action Litigation Report: 2014 Edition2 n.1. The same is true with wage and hour, Employee Retirement Income Security Act, and governmental enforcement litigation, with the aggregate recoveries in 2013 the lowest overall since 2006. Id. at 2 n.2.

Actual recovery to individual class members is far less than class action proponents contend. Mayer Brown LLP, a leading global law firm, conducted an empirical study of class-action lawsuits filed in, or removed to, federal court of 148 putative consumer and employee class-action lawsuits from 2009 that had reached a final resolution by September 1, 2013, the date when the study ended. SeeMayer Brown LLP, Do Class Actions Benefit Class Members? An Empirical Study of Class Actions.

The vast majority of cases examined produced little to no benefits to most members of the putative class but, not surprisingly, evidenced that the attorneys representing the class and the defendants were the only winners. The study concluded the following:

  • Not one of the class actions ended in a final judgment on the merits for the plaintiffs, which means there was no final determination of the case’s merits.
  • None went to trial before either a judge or a jury.
  • Twenty-one cases (14 percent) of the class actions remained pending four years after filing because either no motion for class certification had been filed or the court had not ruled on the motion. (From my own experience, the class-certification motion may never be ruled on before the case is ultimately dismissed or the court’s ruling will be without prejudice, which precludes appeal because there is no final judgment.)
  • Of the 127 class actions that reached resolution
    • 45 cases, over one-third (35 percent), were resolved and dismissed voluntarily by the plaintiffs. This means either the plaintiff simply decided not to pursue the class action or the parties settled only the individual named plaintiff’s claim, while class members received nothing; no benefit to the class at all.
    • 41 cases, just under one-third (31 percent) of those class actions, were dismissed on motions to dismiss or summary judgment motions, which also meant that, absent an appeal, the plaintiffs recovered nothing.
    • one-third (33 percent) of resolved cases were settled on a class basis. The settlement rate is half the average for federal court litigation, which means that a class member is much less likely to recover more than an employee suing on his or her own. For those cases that did settle, the recovery to the individual class members was significantly small.
    • 40 of the 2009 class actions (28 percent of the resolved cases) settled on a class-wide basis, which is much lower than individual plaintiff federal court cases settled as a whole (33 percent). Accordingly, Mayer Brown concluded that “class actions are significantly less likely to produce settlements, and therefore less likely to produce any benefit to class members, than other forms of litigation.” Id. at 7. And even if the class action results in class-wide relief, the employees have no say in the method or amount of distribution.

The study summarized the three kinds of class-action settlements: (1) “claims-made agreements,” in which class members must submit claims to recover compensation and leftover money either goes back to defendants or to a charity; (2) “automatic distribution” settlements, in which the settlement amount is divvied up to class members when their identity is already known; and (3) “injunctive relief/cy pres” cases, in which class members receive no monetary compensation, only a promise by the employer to stop the unlawful conduct or money is paid to charitable organizations rather than class members.

“[A] common formula in class actions for damages is to distribute the net settlement fund after payment of counsel fees and expenses, ratably among class claimants according to the amount of their recognized transactions during the relevant time period. A typical requirement is for recognized loss to be established by the filing of proofs of claim. . . .” 4 Newberg on Class Actions § 12:35 (4th ed. 2013) (emphasis added). Moreover, the actual benefit to individual class members from the settlement is rarely revealed. Why? The attorneys do not wish to reveal the low payout because their attorney fees will appear grossly overstated. Where claims-made settlements were reached, distributions to individual class members were lower than 10 percent. Injunctive relief and cy pres awards do nothing more than inflate attorney fee awards while benefiting third parties having nothing even to do with the class! Injunctive relief permits class counsel to recover attorney fees, whilecy pres payments artificially inflate the size of the benefit to the class to justify higher awards of attorney fees to class counsel. Not surprisingly, a disproportionate allocation of settlement funds went to attorney fees.  

The Mayer Brown study’s most important point is that we know nothing about what happened after settlement in 34 of the 40 settled cases in the study. While the study confirms that class actions will result in either no recovery or minimal benefits to class members, the true injustice is that the public never learns the actual amount that is paid to each class member, which is not even the focus of a court’s inquiry in reviewing the recommended settlement by the parties. Most judicial opinions assess the fairness of the entire settlement pool and accompanying fees for class counsel, not the total amount of money each class member actually was paid after the settlement was administered or whether anyone in the class at all subsequently files a claim. Plaintiffs’ lawyers don’t want courts to see that only a few class members actually submitted claims. Defense counsel don’t want to upset plaintiffs’ lawyers because they fear that in future class-action cases, class counsel will refuse to settle. Also, they know that their clients are benefiting from a low claims rate in settlements that call for unclaimed money to be returned to them or donated. Judges don’t want to add to their burdensome dockets by requiring post-settlement review of claims. It is no coincidence that claims administrators who are the keepers of these secrets mostly operate under a confidentiality agreement that precludes them from disclosing such information unless ordered by a court.  

The survey concluded that “in over half of all putative class actions studied [between 2009 and September 1, 2013]—and nearly two-thirds of all resolved cases studied—members of the putative class received zero relief.” Do Class Actions Benefit Class Members?, supra, at 6. Finally, although the distribution of class-action settlements is rarely available, six cases in the data set revealed settlement distributions, and in five of the six cases, class members were paid as little as 0.0000006 percent, 0.33 percent, 1.5 percent, 9.66 percent, and 12 percent of the total distributions! Id. at 2.

Conclusion

One thing we know for sure in 2015: Employment class-action lawsuits are not going away. Employers need to wake up to the new reality by making compliance and financial readiness a priority. No longer can employers disregard the various insurance options available to survive employment litigation lawsuits. Similarly, no longer can attorneys file rote class-action complaints and await a quick payoff. What remains to be seen is whether the statistically low rate of return for employees will ultimately force the plaintiffs’ bar to change the current structure.


Keywords: litigation, employment law, labor relations, class action, attorney fees, back pay, recovery


Lisa Sherman is with Sherman Law Corp. in Los Angeles, California.


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