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Employer’s unreasonable assumption underlying amount in controversy argument justified remand of California wage-hour class action

By Brandi O. Brown, J.D.

In its argument for federal court jurisdiction, the employer unreasonably assumed that all of the hourly employee class members were also members of the two subclasses.

Affirming a district court decision remanding a wage and hour class action to state court, the Ninth Circuit held that an employer’s amount in controversy argument in favor of federal jurisdiction was based on unreasonable assumptions regarding class membership. The employer failed to carry its burden of proving the statutory amount in controversy by a preponderance of the evidence, the court explained, and so the lower court did not err in granting the employee’s motion for remand. Judge Daniel Collins dissented (Harris v. KM Industrial, Inc., November 13, 2020, Eaton, R.).

Labor code claims. In 2019, a former employee of KM Industrial, Inc., filed a class action against his former employer in California state court. He alleged that the company had committed several violations of the California Labor Code, including failing to provide meal and rest breaks and pay overtime wages. He filed suit on behalf of several putative classes and subclasses, including an hourly employee class, a meal period subclass, and a rest period subclass. The meal period subclass was defined to include those hourly employee class members who worked a shift in excess of five hours during the relevant time period. The rest period subclass was defined to include all hourly employee class members who worked a shift of at least 3.5 hours during that time.

Removal to federal court. Asserting that the amount in controversy exceeded $5 million, the employer filed a notice of removal, to remove the matter to federal district court. It alleged that the amount in controversy was over $7 million, as supported by allegations in the complaint, employee and payroll data, and its own assumptions regarding the frequency of violations as applied to the class or subclass. It submitted a declaration by the corporate HR director for the employer’s parent company as evidence. To come up with the figure, the employer assumed that all of the individuals in the putative hourly employee class, of which there were more than 400, were also members of both the meal period and rest period subclasses during the relevant time period.

Remand and appeal. However, after removal the employee filed a motion to remand the case back to state court, arguing that the employer failed to establish by a preponderance of the evidence that the amount in controversy under the Class Action Fairness Act (CAFA) was satisfied. The employer opposed the motion and submitted a second declaration by the HR director, but it was mostly unresponsive to the employee’s assertions and it did not address the frequency with which hourly employee class members worked shifts that would have made them eligible for rest or meal breaks. The district court granted the employee’s motion for remand and the employer appealed.

Factual attack, employer’s burden. First, the appeals court considered whether the employee’s argument was a “facial” or “factual” attack on the employer’s jurisdictional allegations. The appeals court found it was a factual attack because it directly challenged the truth of the employer’s allegation that all of the hourly employee class members had worked shifts long enough to qualify for meal and rest periods. Because it was a factual attack, the court explained, the burden was on the employer to show, by a preponderance of the evidence, that the amount in controversy exceeded $5 million.

To levy a factual attack, the employee did not need to introduce evidence outside of the pleadings. He only needed to challenge the truth of the employer’s jurisdictional allegations with a reasoned argument that the assumptions upon which they were based were unsupported by the evidence. He did so by disputing the employer’s assumption that all of the hourly employee class members had suffered one meal and two rest period violations per workweek across the four-year class period and, thus, that they were also members of the subclasses.

Assumption was not reasonable. However, the employer failed to prove by a preponderance of the evidence that the assumption was reasonable. In fact, the court noted, the employer failed to provide any evidence in support of its assumption. Nothing in the complaint supported the assumption that all members of the hourly employee class were members of the two subclasses. In fact, the complaint defined the former more broadly than the latter. The second declaration by the HR director, moreover, failed to address class membership or shift length, in spite of the factual attack.

Therefore, the appeals court agreed with the district court that the “factually unsupported and unreasonable assumption” made by the employer would exaggerate the amount in controversy and it concluded that the employer failed to carry the burden of proving the amount in controversy by a preponderance of the evidence. It concluded that the district court did not err in granting the motion to remand and noted that a remand to the district court for additional factfinding was not necessary.

Judge Collins’s dissent. Dissenting, Judge Collins contended that the district court’s reasons for remanding the case were “clearly erroneous” and the “level of up-front precision” it required was uncalled for.