Sheppard Mullin Helps Overturn $102 Million Verdict

Sheppard Mullin Richter & Hampton LLP

Sheppard Mullin Richter & Hampton LLP

A former Wal-Mart employee had his $102 million verdict overturned in a recent win for California employers. Roderick Magadia, the former employee, brought a class action and Labor Code Private Attorneys General Act (“PAGA”) complaint against Wal-Mart alleging, in part, that Wal-Mart issued deficient wage statements in violation of Labor Code Section 226. The alleged defect was prompted by a “Myshare” bonus, a quarterly bonus based on non-discretionary metrics. Because the bonus was non-discretionary, the law required Wal-Mart to factor the bonus into the “regular rate” of pay used to calculate the overtime premium. But, since the bonus was earned and paid quarterly while the overtime premium on hourly pay is paid during every two-week pay period, the premium must be recalculated and adjusted with a supplemental payment each quarter.

Nobody in the case disputed that Wal-Mart calculated and paid the correct adjusted amount using the formula the law requires. However, when Wal-Mart listed the overtime adjustment payment on the employees’ itemized wage statement, it did not describe its method for calculating the adjustment. Although the formula to calculate the adjustment involved dividing the bonus by all hours worked in the quarter, multiplying that figure by one-half, and then multiplying it again by the total overtime hours worked in the quarter, the wage statement did not show either the total hours or total overtime hours worked over the quarter. Instead, it listed only the dollar value of the overtime adjustment and was blank where the wage statement had a space next to the payment for “hourly rate” and “hours worked.”

Magadia alleged that this failure to list an hourly rate and hours worked figure violated Labor Code Section 226(a)(9), which requires employers to list all hourly rates in effect and the corresponding hours an employee worked at each rate “during the pay period.” The District Court Judge, Hon. Lucy Koh, agreed that Wal-Mart violated Section 226(a)(9), although she never specified what figures Wal-Mart should have included to satisfy the requirements of Section 226(a)(9). She just indicated that Section 226(a)(9) applied to the overtime adjustment resulting from the quarterly bonus and that Wal-Mart’s failure to list any hourly rate or hours worked information for the payment violated the wage statement law. For this alleged violation, the Court ordered $96 million in civil and statutory penalties.

Wal-Mart appealed to the Ninth Circuit. The Ninth Circuit reversed the judgment in full. Sheppard Mullin submitted amicus briefing explaining why Judge Koh’s ruling ignored the text of the statute. The Ninth Circuit adopted Sheppard Mullin’s amicus arguments, holding that Labor Code section 226 requires employers to list hourly rates and corresponding hours worked only for hourly rates “in effect during the pay period,” which did not cover quarterly adjustments to overtime. More specifically, the Ninth Circuit reasoned that Section 226(a)(9) does not apply “to an artificial, after-the-fact rate calculated based on overtime hours and rates from preceding pay periods that did not even exist during the time of the pay period covered by the wage statement.” Because the quarterly overtime adjustment was based on total hours worked and overtime hours worked over a three-month period distinct from the two-week pay period for the wage statement, Wal-Mart was not required to list how the adjustment was calculated.

Key takeaway: Employers who provide non-discretionary bonuses that encompass multiple pay periods need not list an “hourly rate” or “hours worked” figure for such payments, but may properly leave those fields on the wage statement blank.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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