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Pepperidge Farm to pay over $22.7M in approved independent contractor misclassification settlement

By Lisa Milam, J.D.

The court granted preliminary approval but has continued misgivings about the appropriateness of $25,000 incentive awards to seven named plaintiffs.

A federal district court in California has granted preliminary approval to a $22.7 million settlement agreement resolving claims that Pepperidge Farm misclassified its product distributors as independent contractors. The class of roughly 925 distributors includes three subclasses of distributors from California, Illinois, and Massachusetts—all states that utilize the “ABC” test for determining whether workers are independent contractors or statutory employees under the operative state law. And while the court OK’d $25,000 incentive awards to seven named plaintiffs on a preliminary basis, it wants to see more information to justify those amounts before granting final approval (Alfred v. Pepperidge Farm, Inc., October 10, 2019, Kronstadt, J.).

The product distributors pay Pepperidge Farm to secure a distribution territory where they deliver, stock, merchandise, and promote the company’s food products for sale in retail stores. The terms of the arrangement and the work to be performed are set forth in “consignment agreements” which identify the distributors as “independent businessmen.” However, the distributors contended that Pepperidge Farm in fact maintains the “unfettered right to control” them and exercises “extensive actual control” over their work such that they are, in fact, statutory employees. In addition to their overtime cause of action, the operative complaint alleged the usual litany of California wage claims, including meal and rest period violations, waiting time penalties, failure to furnish wage statements, and derivative Unfair Competition and PAGA claims.

In 2017, the court certified two subclasses in this wage action. Two other suits against Pepperidge Farm—one pending in Illinois, one in Massachusetts—were then consolidated with this action for settlement purposes, and the plaintiffs filed an unopposed motion to provisionally certify three subclasses.

Settlement terms. The settlement agreement provides a $22.7 million settlement fund; attorney’s fees of up to $5.625 million (nearly one-quarter of the fund), incentive awards of up to $25,000 to each named plaintiff, a $190,000 PAGA payout, and other costs will come from the settlement. The remainder will be distributed to the subclasses based on the applicable state law causes of action and the available remedies they provide, as well as the relative strength of the claim and other factors. In exchange, the distributors release all wage and hour claims under the applicable state laws and the FLSA, and any derivative claims under ERISA or other statutory or common-law causes of action. The named plaintiffs release all claims against the company pursuant to the settlement.

In addition to monetary relief, Pepperidge Farm will issue revised consignment agreements to those distributors who do not opt out of the settlement; the new contracts will give them additional rights and “substantially decrease” the company’s control over them. Distributors may reject products and sales assistance, reduce their recordkeeping requirements, retain authority over hiring and sales negotiations, gain rights regarding the sale of distribution territories, and engage in dispute resolution. (There appears to be no reclassification in the works; rather, the agreements apparently are revised to ensure that the working relationship better conforms to their independent contractor status.).

Class certification. The court also certified the class and subclasses for settlement purposes only, first finding that a class of 925 distributors (and approximately 376 California members, 264 Illinois subclass members, and 247 Massachusetts subclass members) easily met numerosity requirements. Typicality also was satisfied: The claims of the named plaintiffs were representative in that they were based on the same policies and practices that applied to other class members in their respective subclasses.

The class also satisfied commonality requirements. Despite some differences among the class members in the terms of their consignment agreements, each class member was a party to such an agreement and “allegedly sustained common and similar injuries.” And any variations as to the injuries suffered were immaterial for commonality purposes. As for adequacy of representation, the court did cite some concerns about the monetary relief provided to the named plaintiffs and counsel, but in the end it found the proposed attorney’s fees and incentive awards were not so disproportionate to the relief afforded class members that they could not adequately represent the class.

Rule 23(b) criteria were also met. The court found common questions here as to whether the distributors should have been classified as “employees” under each of the subclasses’ respective state laws. Because all three states utilize the “ABC” test, the question can be resolved as to all class members in all subclasses “in a single stroke,” the court said. Moreover, resolving one or more elements of the ABC test with respect to the distributors’ working conditions under the consignment agreements will resolve all claims of all class members, which meant the question of employment status under the consignment agreements predominate over any individual issues. Although individual awards must be calculated separately according to unique facts, including the number of years they were subject to the consignment agreement in question, “damage calculations alone cannot defeat certification,” the court noted.

Preliminary approval granted. The court observed that this matter has been actively litigated for over five years and that extensive discovery took place, which means the parties had enough information with which to make informed decisions about the merits of the claims and their respective settlement positions. Moreover, they engaged in a full-day mediation session to reach the settlement, engaged in arm’s-length negotiations, and there was no evidence of fraud or collusion. The terms of the settlement ensure that the bulk of the fund will be allocated to class members; none of the settlement fund reverts to Pepperidge Farm unless certain class members opt out.

The potential liability in the case ranged anywhere from $98 million to over $135 million, and the company had “vigorously contested” both liability and class certification—leaving significant uncertainty as to whether the plaintiffs would prevail in certifying the class and establishing liability and damages. On the other hand, the settlement would provide the distributors with about 20 percent of the maximum potential damages, which the court deemed reasonable given the risks of continued litigation, including the prospect of a jury finding they were properly classified as independent contractors. Therefore, the court found the relief provided to the class to be adequate.

Equitable distribution across subclasses. The court concluded that the proposed settlement treats the class members equitably in relation to each other. The California subclass stood to receive the largest chunk of the settlement fund because it is the largest subclass and the farthest along of the three cases procedurally. The California class members also benefit from the broadest range of relief under their state’s law. Massachusetts offers comparatively lower potential recovery, and the Illinois subclass would have to contend with unique defenses and thus “lower potential aggregate recovery.” While the court speculated that objectors might well raise concerns regarding equitable distribution, for now, there was no showing that weighting the distribution by subclass is unfair. Likewise, the PAGA allocation “strikes an appropriate balance” between the leverage gained by the California plaintiffs in pursing this derivative claim and the amount designated in the order.

Pepperidge Farm had argued that because the litigation had reduced the value of the distribution territories, some named plaintiffs could be exposed to claims against them by individuals who purchased their routes. Another variable as to the equity of distribution: the named plaintiffs in the California suit agreed not to seek their 25 percent cut of the PAGA award but rather, to distribute it among the subclass.

Incentive awards may be unreasonable. The court’s nagging concern, however, was the amount going to the seven named plaintiffs in incentive awards. It had previously asked for additional information from plaintiff’s counsel in support of this relief but was not yet fully satisfied. The average allocation to class members would be $18,720 after deductions from the fund, and the incentive payments proposed amounted to 134 percent of that payout. While it wasn’t “per se unreasonable” in the court’s view, it was high nonetheless, and called for an analysis of the reasonableness as to each individual named plaintiff and the time they spent on the case. Did their contributions to the litigation and settlement justify these disparities?

Based on the supplemental information provided by class counsel on this point, the court computed that, extrapolated to an hourly rate, the proposed total incentive award of $175,000 divided by the estimated range of the total number of hours spent by all named plaintiffs would come to between $117.50 and $108.40 (or about $225,000 a year over a 40-hour workweek)—”a very substantial amount,” especially given that it’s on top of the amount they stand to receive as class members. Consequently, the court granted preliminary approval of a total incentive award pool of up to $150,000 but said it will make a de novo determination as to whether any portion of these award should be disallowed, and reallocated and distributed to class members instead. The court asked the parties to submit additional facts justifying the incentive awards (and, as to attorneys’ fees and costs), and set a final hearing date for February 2020.