“Small Businesses Face Big Trouble in Employee Suits”
Daily Journal, October 25, 2012
When small business owners Soraya and Patrick Aughney faced allegations of wage-and-hour violations from their employees last year, they opted for an unusual defense: bankruptcy. According to one of their attorneys, it was a choice between that or losing their company, the valet parking service Certified Parking Attendants LLC. “That class claim would have destroyed the business,” said David N. Chandler, their Santa Rosa-based bankruptcy lawyer. The plaintiffs were parking attendants who claimed unpaid overtime and meal-and-rest breaks as well as misappropriated tips. Combined with other claims, the action could have cost the Aughneys millions of dollars in back-wages and penalties. James Robert Mortland III et al. v. Certified Parking Attendants LLC et al., CIV1000135 (Marin Super. Ct., filed Jan. 11, 2010).Chandler is up-front about the fact that he used bankruptcy to avoid the plaintiffs’ class claims, which have been dismissed in state court and federal bankruptcy court. The named plaintiffs are now filing individually as creditors in the bankruptcy.
Bryan J. Schwartz, the Oakland-based lawyer for the plaintiffs, said he has seen small businesses take such a tack several times. “There’s always a moment of truth: will they engage or pull the tablecloth out from underneath?” he said.
Bankruptcy is only the most dramatic in a range of tactics small businesses use to avoid wage-and-hour lawsuits. And while class actions might seem like a problem limited to bigger, wealthier employers like Wal-Mart Stores Inc and Costco Wholesale Corp., a substantial number of small businesses face these complaints, too.
In fact, while large corporations present deeper pockets, attorneys for employees and companies alike agree that small businesses are more likely to violate labor laws, leading to debilitating penalties.
Some 1,300 employment class actions have been filed in California since 2010, according to Keith A. Jacoby of Littler Mendelson PC, who estimates that a quarter to a third of them were filed against small, private companies. Littler Mendelson tracks employment lawsuit numbers by surveying the filings recorded by Courthouse News Service and LexisNexis’s Courtlink database.
Even a business with a single location can be a target, Jacoby said. If some workers decide to sue a high-turnover business such as a 60-employee restaurant, “250 [class members] might be big enough for a class action,” he said.
Jacoby said he doesn’t recommend the bankruptcy technique Chandler used. “You’re just trading one problem for another,” he said. But he did say small businesses often have to place money in escrow and enter a multi-year payment plan when they lose class actions.
To avoid such a result, small businesses rely on a variety of legal, insurance and human resource services to avoid making big employment law mistakes or to cover court costs when they do.
For companies that can afford it, such as tech startups with venture capital backing, an ounce of prevention can save millions of dollars in liability.
One such liability is misclassifying workers as independent contractors when they should be employees, which can make employers vulnerable to expensive meal-and-rest claims and IRS enforcement. For this reason, many startups contract with outside companies to handle their human resources and payroll work.
Business insurance also can help buffer companies from claims of harassment, retaliation, wrongful termination and discrimination. “[Insurance] has become more important ever since the economy took a dip, because people had to be let go,” said Lou Moreno, Senior Vice President of Heffernan Insurance Brokers in Menlo Park.
But insurance will only go so far when it comes to wage-and-hour claims, which make up between 80 percent and 90 percent of California’s employment class actions, according to Littler Mendelson. While employment liability policies cover attorneys fees, the company is on its own to pay back wages and penalties. Moreno said many insurers that do cover attorneys fees for wage-and-hour claims generally won’t do so in California because the risk of litigation in the state is much higher.
Small businesses without venture backing, like Certified Parking Attendants, do not typically carry these insurance policies. And without human resource departments or legal advice, they try to avoid class actions with any information available.
“They will rely on free Chamber of Commerce materials, and those are very good, but wage-and-hour law is about technical compliance,” said Jacoby, who represents both small and large employers.
Schwartz puts it more strongly, saying these businesses often operate in a “lawless environment,” relying on their workers’ ignorance of the law to avoid paying legally mandated wages.
For the Aughneys, filing for Chapter 11 bankruptcy protection for their business and Chapter 13 bankruptcy protection to shield their personal assets has allowed them to stay in business.
The legal trick was to keep the employees from filing their claims in bankruptcy court until 180 days after they stopped working for the valet service, thus eliminating the special consideration given in bankruptcy court to wages owed to recent employees.
“You’ve got to stall them on class certification until the 180-day priority period runs out, and then you drop them into bankruptcy,” Chandler said, “and then you’re driving the bus.”DailyJournal10-25-12
Bryan Schwartz and team are stellar professionals. I worked really closely with Renato Flores. He was patient and showed a lot of care and rigor in explaining the ins and out to me and the practical advice he shared was outstanding. Bryan is well connected…
Exceptional people, powerful advocates, tough negotiators. Bryan Schwartz and senior associate Jane Mackie truly care about fairness and justice. Their hard work, attention to detail, and the time and responsiveness they devoted to all my questions let me know in a hundred ways that they…
I cannot say enough GREAT things about Bryan Schwartz Law, P.C. -- and in particular, former paralegal Devin Stuzin. I was recently part of a large class-action settlement -- one the firm tenaciously pursued for a whopping 17 years before getting a record settlement on…
Best people they took my case right a way and fought and win my case best lawyers in bay-area love you all
I was a member of the Doering Meyer class action lawsuit versus the State Department. Bryan Schwartz is a very tenacious and outstanding attorney. When this law firm first contacted me about the case, I was skeptical about their ability to win a case against…
Bryan Schwartz Law, P.C., is a leading employment rights law firm in the United States with a global reach. His is a legal practice of conscientiousness and virtue. Labor law protects a most fundamental right of citizenship and civic engagement. Worker rights are human rights.…
A great team, who kept me informed every step of the way along a many year path to winning a successful class action case.
The staff at this firm are very professional, responsive, friendly, and effective. They persevere for years to get results. I highly recommend them.
Amazing experience with communication and handling of this massive case; I appreciate the help and resolution.
I had a great experience with the firm. They represented me and others in a case that lasted for several years, yet I always knew who to contact and they were always responsive and professional, even as more junior team members transitioned over the years.…
Submit an inquiry to have Bryan Schwartz Law, P.C. evaluate your situation.
*Your submission of an intake request form does not guarantee that Bryan Schwartz Law, P.C. will take your case or provide legal advice. You must be offered and sign a representation agreement with the firm before you will receive any legal advice.
How did we do?
Note: Your review may be shared publicly.