Posted by: Professionals In Human Resources Association (PIHRA) | March 24, 2010

107 New Reasons To Conduct Preventative Wage and Hour Audits And Maintain Privilege

DOL Guidance
In its February 18, 2010 newsletter, the U.S. Department of Labor (DOL) announced that 107 new members of its “Wage & Hour” staff have completed their “Basic I Investigator Training.”  The news regarding the recent graduates is in conjunction with the DOL’s announcement late last year that it is hiring and training 250 new “wage and hour investigators” to seek out wage-and-hour violations.


In late 2009, U.S. Secretary of Labor, Hilda L. Solis, stated:

“In early 2010, the department will launch a national public awareness campaign titled ‘We Can Help’ to inform workers about their rights…We will not rest until the law is followed by every employer, and each worker is treated and compensated fairly.”  DOL Wage and Hour Division News Release, November 19, 2009, Release No. 09-1452-NAT.

The Costco Decision
Until recently, California employers had been reluctant to conduct internal audits for fear the investigation reports would be discoverable in subsequent litigation.  However, the California Supreme Court recently overturned an appellate court decision which found that factual and descriptive portions of a comprehensive audit report regarding the exempt status of Costco managers prepared by Costco’s outside counsel were not privileged.  Costco Wholesale Corp. v. Sup. Ct. (Randall) (2009) 47 Cal.4th 725.  The Court held that the attorney-client privilege attached to the attorney’s opinion letter in its entirety because it was a confidential communication irrespective of whether it included unprivileged material.

In June 2000, Costco retained outside counsel to advise whether warehouse managers were properly classified as exempt employees under California’s wage and hour laws.  Costco’s attorneys interviewed warehouse managers and prepared a 22-page confidential opinion letter reporting their findings.

Years later, Costco employees filed a putative class action claiming that, from 1999 to 2001, Costco misclassified some of its managers as exempt and therefore, failed to pay them overtime.  During discovery, plaintiffs sought to compel production of the confidential opinion letter. Costco objected, asserting the attorney-client privilege and attorney work product doctrine.  Plaintiffs argued that they were at least entitled to the non-privileged information contained in the opinion letter (e.g., the facts gathered from the interviews).

The trial court ordered Costco to produce a redacted version of the opinion letter, including “factual information about various employees’ job responsibilities.” Costco appealed the trial court’s decision, but the appellate court affirmed the trial court ruling, finding that Costco failed to show that production of the unredacted portions of the letter would cause irreparable harm to Costco.  Costco then petitioned the California Supreme Court, which eventually held that even if factual information in an opinion letter is not protected by the attorney-client privilege and may be discoverable by other means, a party may not compel its disclosure. The Court found that the privilege attaches to any legal advice given in the course of an attorney-client relationship and bars discovery of the communication irrespective of whether it includes non-privileged material.

What Does This Mean?
The DOL initiative emphasizes the need for employers to conduct internal audits of their wage and hour practices, and pursuant to the Costco decision, California employers should once again feel confident reaching out to counsel to ensure proactive compliance with wage and hour laws.

Given the DOL’s announcement and the continued prevalence of wage and hour class action lawsuits filed in California, internal audits conducted by outside counsel are timely and protected.  The privileged nature of wage and hour audit reports fosters candid discussions between employers and their counsel regarding potential liability and preventative strategies.

Wage and Hour Audit Subjects
Employers may want to review the following areas for compliance:
•    Independent Contractor Status/Vendor Status
•    Compensable Time/ Off-the-Clock-Work
•    Meal and Rest Periods
•    Payroll Practices
•    Compensation Issues (e.g., bonuses, commissions, tips)
•    Record keeping
•    Classification of Employees (i.e., exempt vs. non-exempt)

Nicky Jatana, Esq. is a Partner and Catherine J. Coble, Esq. and Katharine J. Liao, Esq. are Associates in the Los Angeles office of Jackson Lewis LLP and can be reached at (213) 689-0404 or jatanan@jacksonlewis.com, coblec@jacksonlewis.com, and liaok@jacksonlewis.com.  Founded in 1958, Jackson Lewis is dedicated to representing management exclusively in workplace law with 600 attorneys practicing in 45 cities nationwide.  To learn more, please visit us at http://www.jacksonlewis.com.

Copyright 2010 PIHRA

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