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Class claims survive even though FLSA was sole basis for alleged violations of California’s Unfair Competition Law

June 18th, 2012  |  Ron Miller

It is not at all unusual for employees seeking recovery on wage claims under the FLSA to also include allegations of alleged violations of state law. In California, however, plaintiffs are also likely to include allegations that the employer’s conduct violated the Unfair Competition Law (UCL) and the California Business and Professional Code. In a recent decision, Burden v SelectQuote Insurance Services, an action attempting to bring class claims under the UCL, the court was called upon to examine the operation of that where the only surviving claim was an alleged violation of federal law—the FLSA.

SelectQuote is an independent life insurance sales agency. Its sales agents worked under a Variable Compensation Plan and were classified as exempt from California and federal overtime laws. This suit was initially filed in state court asserting failure to pay overtime, violation of the UCL and California Business and Professional Code for failing to pay overtime in accordance to the FLSA, failure to pay all wages owed upon termination. After the suit was removed to federal court, the employer was granted summary judgment based on a finding that the employees were properly classified under state law. However, the court rejected the employer’s contention that the agents were properly classified under the FLSA. Thereafter, the employer moved to strike remaining class allegations.

According to the employer, the court’s prior ruling on the employee’s exempt status under state law meant that their UCL claims were dependent solely on a violation of the FLSA. Because the an FLSA claim may only be brought as an “opt-in” collective action, as opposed to a class action, the employer argued that all class allegations must be stricken.

Safe harbor. Here, the court was presented with the question whether the employee pursue a UCL claim as a class action under Rule 23 where the underlying statutory violation was premised entirely on a violation of the FLSA. The employer proffered two arguments for striking the class allegations involving the UCL. First, it asserted that it was shielded from liability under the UCL’s “safe harbor” provision. However, the court rejected the employer’s contention that because its agents were properly classified as exempt under California law, it was entitled to seek the shelter of the UCL’s safe harbor. Safe harbor exists only where conduct is expressly permitted, and not merely because conduct is not expressly prohibited. The fact that California law authorized compensating the agents on a salaried basis without overtime, did not establish that agents were properly classified under the FLSA. Because the UCL may be predicated on the violation of federal, state, or local law, the fact that the employer remained potentially in violation of federal law was sufficient to render the UCL’s safe harbor provision inapposite under the circumstances presented.

Opt-in versus opt-out procedures. The employer’s second contention fared no better. Here, the employer argued that the employee must utilize the opt-in procedures applicable to actions brought directly under the FLSA, as opposed to the opt-out procedures of Rule 23. According to the employer, permitting the employee to seek class certification under Rule 23 would circumvent Congress’ intention to limit the scope of FLSA actions through the opt-in procedure. Again, the court disagreed with the employer’s assessment. The court observed that the employer’s argument ignored the fundamental operation of the UCL. The UCL borrows violations of other laws and treats them as unlawful practices that the unfair competition law makes independently actionable. Thus, the “unlawful” prong of the UCL effectively transforms a violation of the underlying law — here the FGLSA — into a violation of the UCL. Because the employer’s alleged violations of the FLSA are tantamount to violations of California law that is why federal and state courts have rejected the notion that a UCL claim premised on a violation of the FLSA must utilize the FLSA’s opt-in procedure.

Consequently, although the employer’s insurance agents were found to be properly classified as “exempt” employees under California law, a federal district court denied the employer’s motion to strike class allegations with respect to a claim that it violated the UCL.