Labor & Employment Law Daily Proposed $4.5M settlement of wage-hour class lawsuit put on hold due to ‘obvious’ defects
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Thursday, June 11, 2020

Proposed $4.5M settlement of wage-hour class lawsuit put on hold due to ‘obvious’ defects

By Marjorie Johnson, J.D.

An inference of a conflict of interest was raised since the class claims received deductions of over 95 percent, the incentive payments were much greater than potential awards to putative class members, and the almost $1.6M attorneys’ fee award was far in excess of the benchmark.

Recommending denial of preliminary approval of a proposed $4.5M settlement of a class and collective action asserting a myriad of FLSA and California Labor Code claims on behalf of approximately 6,000 individuals, a federal magistrate judge in California found “glaring deficiencies” that precluded a finding that the settlement was fair and reasonable. In order to gain court approval, amongst other things the plaintiffs needed to explain how they calculated the potential value of the claims to be $81M, why they set the discounted amount for these claims to be 4.9 percent of that amount, and why the attorneys’ fees award of almost $1.6M was set well above the usual range at 35 percent of the settlement fund (Beltran v. Olam Spices and Vegetables, Inc. a/k/a Olam West Coast, Inc., June 2, 2020, Boone, S.).

The plaintiffs brought a myriad of wage-hour claims under the FLSA and California Labor Code, including denial of overtime pay and failure to pay minimum and provide rest periods. They also brought a claim for violation of California’s Public Attorney General Act (PAGA). The class was composed of approximately 6,000 individuals who worked at the employer’s California plants in various roles and were allegedly misclassified as non-exempt. The employer offered $4.5M to settle the class and collective action.

Proposed settlement. The net settlement, which was estimated to be $2,656,000 prior to the deduction of the employer’s payroll taxes, consisted of the gross settlement fund less the incentive awards to five named plaintiffs ($33,500), settlement administration costs ($58,000); the LWDA payment ($112,500); attorney fees ($1,575,000) and costs ($65,000).

Deficiencies in the proposed settlement. To determine whether the settlement was “fair, reasonable, and adequate,” the magistrate considered whether the class representatives and class counsel had adequately represented the class; the proposal was negotiated at arm’s length; the relief provided for the class was adequate, and the proposal treated class members equally relative to each other. Reviewing these factors, the judge found “obvious deficiencies” which precluded it from finding that the proposed settlement was fair and reasonable.

Failure to explain calculations. Balancing the class’s potential recovery against the amount offered in settlement is “perhaps the most important factor to consider” in preliminary approval and plaintiffs should “show their work by explaining the relative value of their claims in significant detail.” Here, the plaintiffs asserted that the potential value of their claims was approximately $81,000,000 and that the discounted amount for these claims was approximately $3,995,000 (4.9 percent of the maximum value). However, they did not address how they calculated the potential value.

In particular, they did not state whether liquidated damages were included in the FLSA damage calculation. They also did not indicate whether the two- or three-year statute of limitations was used in calculating FLSA damages, which could mean that the discounted value of the FLSA claims was much greater than the 95 percent reflected in their figures. While a fractional recovery of the possible maximum recovery amount may be fair and adequate “in light of the uncertainties of trial and difficulties in proving the case,” the plaintiffs failed to provide sufficient information for the court to find that such large deductions were appropriate.

Conflict of interest. The magistrate was also troubled by the attorneys’ fees and incentive fees to be awarded in relation to the overall settlement deductions and the actual amounts that the putative class members would receive, which expected to range from $31.14 to $1,993.06. Notably, the class representatives sought an incentive payment which was almost double to over triple the most that any putative class member would receive, and the attorneys’ fee award represented 35 percent of the gross settlement fund which was well over the usual range of 20 to 30 percent. Because the parties did not provide an explanation for these figures, an inference was raised that the settlement had been reached due to the self-interest of the representative plaintiffs and their attorneys at the expense of the putative class members.

Other deficiencies. Several other deficiencies existed, including that the plaintiffs failed to demonstrate that a bona fide dispute existed for the FLSA claims or that notice of the proposed settlement was provided to the Labor and Workforce Development Agency (LWDA). The parties also proposed that a member would opt into the FLSA class by cashing their settlement check, but that procedure did not comply with FLSA requirements.

Certification request. Finally, in seeking to certify a Rule 23 class and a FLSA collective for purposes of settlement, the plaintiffs failed to identify the specific policy or policies that would support such lass certification and address how resolution of a common question regarding the policy or policies would provide common answers. Indeed, the employees worked at six different job sites and the plaintiffs’ declarations indicated that there may be site or supervisor specific rather than a system wide policy. This raised an issue of whether there were individualized issues that would preclude this claim from being adjudicated on a class wide basis.

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