Judge David S. Cunningham, Case Number: 23STCV04762, Date: 2023-08-22 Tentative Ruling

Judge: David S. Cunningham, Case: 23STCV04762, Date: 2023-08-22 Tentative Ruling

Moving Party: The Coding Network, LLC (“TCN”) and J. Mark Babst (“Babst”) (collectively “Defendants”)

Defendants’ demurrer to Plaintiff’s individual causes of action is sustained with leave to amend.

Plaintiff alleges that Defendants hire workers to perform coding and auditing services but misclassify them as independent contractors and subject them to “wage and hour” violations.

The first amended complaint (“FAC”) is brought on behalf of current and former independent contractors. Plaintiff asserts nine causes of action: (1) unpaid overtime; (2) unpaid minimum wages; (3) failure to provide meal periods; (4) failure to provide rest breaks; (5) noncompliant wage statements and failure to maintain payroll records; (6) failure to pay wages at termination; (7) unreimbursed business expenses; (8) violation of the UCL; and (9) violation of PAGA.[1]

When considering demurrers, courts read the allegations liberally and “treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.” (Serrano v. Priest (1971) 5 Cal.3d 584, 591.) “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.” (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) It is error “to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.)

Plaintiff resides in Tennessee. (See FAC, ¶ 4.) In January 2004, when she signed a contract to work for Defendants, she resided in Wisconsin. (See Defendants’ RJN, Ex. A, pp. 1, 3 [attaching “INDEPENDENT CONTRACTOR AGREEMENT”].) It is undisputed that she performed her work under the contract outside California.

Defendants contend the Court should sustain the demurrer because California’s wage-and-hour laws do not cover work done by nonresidents in other states. (See Demurrer, pp. 3-7.)

The Court turns to Defendants’ authorities. First is North Alaska Salmon Co. v. Pillsbury (1916) 174 Cal. 1. It recognizes a presumption against giving “extraterritorial effect” to statutes:

Although a state may have the power to legislate concerning the rights and obligations of its citizens with regard to transactions occurring beyond its boundaries, the presumption is that it did not intend to give its statutes any extraterritorial effect. The intention to make the act operative with respect to occurrences outside the state will not be declared to exist unless such intention is clearly expressed or reasonably to be inferred “from the language of the act or from its purpose, subject-matter, or history.”

(North Alaska Salmon, supra, 174 Cal. at 4 [finding “nothing to indicate that the compensation provisions [of the Workmen’s Compensation, Insurance, and Safety Act] were intended to apply to injuries occurring in foreign jurisdictions”].)

Sullivan v. Oracle Corp. (2011) 51 Cal.4^th 1191 recognizes the same presumption:

However far the Legislature’s power may theoretically extend, we presume the Legislature did not intend a statute to be “‘operative, with respect to occurrences outside the state, . . . unless such intention is clearly expressed or reasonably to be inferred “from the language of the act or from its purpose, subject matter or history.”’”

(Sullivan, supra, 51 Cal.4^th at 1207 [finding that the Labor Code and UCL apply to nonresidents’ work in California, but the UCL does not apply to out-of-state work].)

Clark v. VIP Petcare, LLC (N.D. Cal., Apr. 4, 2023, Case No. 22-cv-08935-VC) 2023 WL 2779090 stands for the proposition that “California wage and hour laws do not apply to people who work entirely in another state, even if they work for a California company.” (Clark, supra, 2023 WL 2779090 at *1 [“Clark’s contract provides that it ‘will be governed by and construed in accordance with the laws of the state of California.’ [Citation.] But that provision means that California contract law controls the meaning of the contract. It does not, and cannot, extend California’s labor laws to Tennessee. [Citation.] Clark’s claims for violations of California Labor Code sections 226.8 and 1102.5 are therefore dismissed.”], emphasis added.)

Campagna v. Language Line Services, Inc. (N.D. Cal., May 2, 2012, Case No. 5:08-CV-02488-EJD) 2012 WL 1565229 and Sarviss v. General Dynamics Information Technology, Inc. (C.D. Cal. 2009) 663 F.Supp.2d 883 stretch the proposition to nonresidents who primarily work out of state. (See Campagna, supra, 2012 WL 1565229 at *3 [“None of the cases read California wage and hour laws to cover out-of-state work performed by nonresidents who primarily work outside California.”]; see also Sarviss, supra, 663 F.Supp.2d at 900 [“Although the cases discussing the extraterritorial application of California’s wage and hour law are sparse, those decisions that do discuss it have tended to find that California wage and hour provisions do not apply to non-resident Californians who work primarily outside of California.”], emphasis deleted; Paparella v. Plume Design, Inc. (N.D. Cal., July 25, 2022, Case No. 22-cv-01295-WHO) 2022 WL 2915706 at *5 [recognizing that “the appropriate test for [] extraterritorial application [of the Labor Code is] whether the employee’s ‘principal place of work is in California[]’”].)

In Cotter v. Lyft, Inc. (N.D. Cal. 2014) 60 F.Supp.3d 1059, two former drivers alleged that Lyft misclassified them as independent contractors and failed to pay them in compliance with California’s wage-and-hour statutes. They filed a putative nationwide class action. The court struck the class allegations, finding that the wage-and-hour laws did not apply to workers who drove exclusively in other states:

The plaintiffs argue that California's connection with the claims brought on behalf of the drivers who work in other states is sufficient to justify application of California wage and hour law to those claims. In particular, the plaintiffs allege that Lyft's principal place of business is in California, that its decision to classify drivers as independent contractors was made in California, and that its decision to implement the “administrative fee” that the plaintiffs challenge was made in California. They contend that because of these connections, California wage and hour laws can potentially apply to work performed by drivers exclusively in other states, and the only thing that might bar the application of those laws is if they if conflict with the law of the drivers' home states. Therefore, the plaintiffs argue, they may bring claims on behalf of a nationwide class under California law unless Lyft demonstrates that another state has a greater interest in applying its own law. And the plaintiffs contend that because California's laws are more worker-protective than those of other states, Lyft will be unable to show that the other states have a greater interest in applying their own laws.

There are several problems with this argument. As a preliminary matter, the plaintiffs are wrong that California's wage and hour laws are the most worker-protective. Washington and Oregon, for example, both have higher minimum wages than California. [Citation.] Therefore, pursuit of claims under California law on behalf of people in those states appears against their interest. Moreover, even if California law were most protective of workers, each state has the right (subject to federal law, of course) to regulate the work performed within its own borders without regard to another state’s approach to regulating the employer-employee relationship. But most importantly, by jumping straight to a conflict of laws analysis, the plaintiffs skip an important analytical step. A court conducts a conflict of laws analysis only where the laws of multiple states could conceivably apply to the same claim. Where only one state’s law applies, no such analysis is necessary. And as explained below, the California wage and hour laws asserted here simply do not apply to employees who work exclusively in another state. Therefore, regardless of the connection between Lyft and California, Lyft drivers who worked in other states cannot bring claims under California's wage and hour statutes.

State statutes are presumed not to have extraterritorial effect. [Citation.] This presumption is rebutted only where a contrary intent is “clearly expressed or reasonably to be inferred from the language of the act or from its purpose, subject-matter, or history.” [Citation.] In North Alaska Salmon[], the California Supreme Court considered whether a worker injured outside of California could seek compensation under the state's workers' compensation statute. [Citation.] The statute “define[d] the conditions upon which the right to compensation rest[ed], [and] simply declare[d] that liability for the compensation provided shall exist where the given conditions concur.” [Citation.] At the time, there was nothing in the law “to indicate that the compensation provisions were intended to apply to injuries occurring in foreign jurisdictions.” [Citation.] The statute contained nothing about “the place of injury,” nor did it contain any other “language from which the intention to extend [its] operation ... beyond the territorial limits of the state [could] be inferred.” [Citation.] Therefore, the Court held, the statute was limited to injuries that occurred within California. [Citation.]

More recently, California's Supreme Court has explained that an employee may be understood to be a “wage earner of California,” and therefore subject to the state's wage orders, if the “employee resides in California, receives pay in California, and works exclusively, or principally, in California.” [Citation.] The Court left open the possibility that the state's wage orders – and, presumably, other labor provisions – “may” be enforced outside of California “in limited circumstances, such as when California residents working for a California employer travel temporarily outside the state during the course of the normal workday but return to California at the end of the day.” [Citation.] But there is no hint that the wage and hour laws could apply to people who work exclusively in other states.

And in Sullivan v. Oracle Corp., . . . the California Supreme Court considered and rejected an argument similar to the one the plaintiffs make here – that because the company was based in California and because decisions about the workers’ employment status were made in California, California law should govern the employer-employee relationship. Rather than focusing on the location of the company or its decisionmakers, the Court focused on the location of the work. The Court held that the California Labor Code applies to overtime work “performed in California,” [citation], but that California law did not, at least on the facts of that case, “apply to overtime work performed outside California for a California-based employer by out-of-state plaintiffs.” [Citation.]

Beyond these cases, the idea that the wage and hour provisions do not apply to people who perform work exclusively in other states finds support in the provisions themselves. For example, the California Labor Code directs the Industrial Welfare Commission “to ascertain the wages paid to all employees in this state, to ascertain the hours and conditions of labor and employment in the various occupations, trades, and industries in which employees are employed in this state, and to investigate the health, safety, and welfare of those employees.” [Citation.] And “[o]ne of the functions of the Department of Industrial Relations is to foster, promote, and develop the welfare of the wage earners of California.” [Citation.] Conversely, where the legislature has intended a Labor Code provision to apply to a broader range of people, it has said so explicitly. The current workers' compensation statute, for example, applies to certain accidents that occur “outside of this state” and characterizes this application as “extraterritorial.” [Citation.]

Here, the plaintiffs propose to represent class members who are residents of other states, who drive for Lyft exclusively in those states, and who apparently never set foot in California in furtherance of their work with the company. The California wage and hour laws at issue here do not create a cause of action for people who fit this description, even if they work for a California-based company that makes all employment-related decisions in California.

The opposite conclusion would raise serious constitutional concerns. “The Commerce Clause . . . precludes the application of a state statute to commerce that takes place wholly outside of the State's borders, whether or not the commerce has effects within the State.” [Citations.] The compensation of nonresidents who work exclusively outside the state would seem to constitute “commerce that takes place wholly outside of [California's] borders.” Whether California may constitutionally regulate this compensation is therefore, at best, a difficult question. [Citations.] Although the wage and hour laws themselves are clear that they do not apply to work performed exclusively outside the state, these constitutional concerns cement that conclusion.

(Cotter, supra, 60 F.Supp.3d at 1061-1064, emphasis deleted, underlined case names added, footnotes omitted.)

The Cotter court also held that the Lyft contract’s choice-of-law provision did not create California wage-and-hour causes of action for the out-of-state drivers:

The plaintiffs argue that even if California does not directly provide a statutory cause of action for drivers outside the state, these drivers may bring claims under the state's Labor Code because the contract between Lyft and its drivers contains a California choice of law provision. That provision states: “This agreement shall be governed by the laws of the State of California without regard to choice-of-law principles.”

This argument conflates statutory claims that exist independent of the contract with claims that arise from the agreement itself. California's labor laws “are part of a broad regulatory policy defining the obligations” of employers “without regard to the substance of [their] contractual obligations.” [Citations.] Although the agreement “will likely be used as evidence” to support their statutory claims, their “claims do not arise out of the contract, involve the interpretation of any contract terms, or otherwise require there to be a contract” in the first place. [Citations.] The choice of law provision governing the agreement is therefore inapplicable to the plaintiffs’ wage and hour claims.

Even if the choice of law provision were intended to confer upon out-of-state drivers a cause of action for violation of California’s wage and hour laws, it could not do so. An employee cannot create by contract a cause of action that California law does not provide. “When a law contains geographical limitations on its application, . . . courts will not apply it to parties falling outside those limitations, even if the parties stipulate that the law should apply.” [Citations.] California wage and hour law contains such a limitation: It does not apply extraterritorially. Parties cannot, by contract, extend its reach.

The Ninth Circuit's decision in [a case called Gravquick A/S v. Trimble Navigation International Ltd. (9^th Cir. 2003) 323 F.3d 1219] is not to the contrary. . . . [T]he parties entered into a distribution contract that was to “be governed and construed under the laws of the State of California.” [Citation.] When the defendant – a California manufacturer – refused to renew the agreement, the plaintiff – a Danish distributor – sued, alleging that the refusal violated the California Equipment Dealer's Act. [Citation.] Although the parties agreed that their distribution agreement fell “within the literal terms” of the Act, they disagreed about whether the statute “contains unstated geographical limitations that,” despite the choice of law provision, would “prevent its application” to non-California distributors. [Citation.] The Ninth Circuit held that it did not. [Citation.] Therefore, the Court reasoned, the California choice of law provision could be applied to govern the plaintiff's claims. [Citation.]

Thus, as with their argument that the mere connection between Lyft and California allows the application of California law to work performed elsewhere, the plaintiffs skip a preliminary analytical step in arguing that the choice of law provision should apply here. When companies from different states enter into a distribution agreement where goods are transported between states, they may, to avoid future confusion, specify which state's law applies to the transaction, since both laws could potentially apply. [Citation.] And in this case, it made sense for the parties to identify which state's law applies to interpretation of the contract itself, because the parties who entered into that contract are from different states (Lyft being from California and the driver being from elsewhere), meaning that the contract law of either state could apply. But with respect to the employer-employee relationship relating to work performed exclusively in one state, only the law of that state can apply, which means a choice of law provision has no application in this context.

This is not to say the drivers could never have entered into a contract with Lyft that would have imposed substantive obligations similar to the ones California imposes for work performed inside its borders. For example, there would presumably be nothing wrong with a contractual provision that stated, “Lyft agrees to pay its drivers an amount equal to California's minimum wage” (at least where the relevant drivers work in a jurisdiction with a lower minimum wage than California's). Lyft would then have a contractual obligation to pay its drivers that amount. But it would be a contractual obligation, not a statutory one, and failure to pay the prescribed amount would give rise to a breach of contract claim. In this case the parties did not adopt contractual provisions borrowing California's substantive rules regarding wages and the employer-employee relationship. Instead, even if the plaintiffs were correct about the intended meaning of the choice of law provision, the most that can be said is that the parties attempted to give the drivers the ability to sue Lyft under California wage and hour law. But because California's wage and hour provisions do not create a cause of action for work performed exclusively outside the state, and because parties cannot create a cause of action under the wage and hour statutes where none exists, the plaintiffs cannot seek to enforce those provisions on behalf of a nationwide class.

(Id. at 1064-1066, emphasis deleted, underlined case name added, footnote omitted; see also Paparella, supra, 2022 WL 2915706 at *1, *5-*6 [finding that California’s wage-and-hour laws did not govern the Arizona plaintiff’s work in Arizona notwithstanding the presence of a California choice-of-law clause].)

In Ward v. United Airlines, Inc. (2020) 9 Cal.5^th 732, pilots and flight attendants filed three putative class actions, claiming United’s wage statements failed to comply with Labor Code section 226. The California Supreme Court determined that section 226’s applicability depends on where the employee’s principal place of work is:

We conclude that whether plaintiffs are entitled to California-compliant wage statements depends on whether their principal place of work is in California. For pilots, flight attendants, and other interstate transportation workers who do not perform a majority of their work in any one state, this test is satisfied when California serves as their base of work operations, regardless of their place of residence or whether a collective bargaining agreement governs their pay.

To determine how far these protections extend, we return to the central insight that has long guided courts seeking to discern the geographic scope of legislative enactments: that the Legislature ordinarily does not intend for its enactments to create conflicts with other sovereigns. We can infer from this that the Legislature intended for section 226 to apply to workers whose work is not performed predominantly in any one state, provided that California is the state that has the most significant relationship to the work. For interstate transportation workers and others who do not work more than half the time in any one state, we conclude this principle will be satisfied if the worker performs some work here and is based in California, meaning that California serves as the physical location where the worker presents himself or herself to begin work. This is not a new concept in labor law; this is, in fact, the same general test that has been applied for some decades in the field of unemployment insurance, where the Legislature has paid focused attention to the problem of coverage for employees whose work is not localized in any one state. [Citation.] Applied to section 226, it means that workers are covered if they perform the majority of their work in California; but if they do not perform the majority of their work in any one state, they will be covered if they are based for work purposes in California. This familiar test supplies clarity and certainty for employers and employees, while also appropriately balancing the Legislature's weighty interest in the protection of California workers, including interstate transportation workers, with similarly weighty considerations of interstate comity and avoidance of conflicts of laws.

[T]o determine whether section 226 applies, courts should consider in the first instance whether the employee works the majority of the time in California, or in another state. For employees, like those here, who do not work principally in any one state, a court should consider secondarily whether the employee has a definite base of operations in California, in addition to performing at least some work in the state for the employer. Thus, if a pilot or flight attendant has a designated home-base airport, section 226 would apply if that airport is in California, and not if it is elsewhere. The remaining factors mentioned in the Ninth Circuit's question – employer location, employee residence, receipt of pay, and payment of taxes – are not pertinent.

Plaintiff contends Defendants’ cases are distinguishable because they did not involve contracts that had forum clauses or choice-of-law clauses. (See Opposition, pp. 5-6, 8-9.) She claims Cotter is bad law. (See id. at pp. 6-8 [arguing that Performance Team Freight Systems, Inc. v. Aleman (2015) 241 Cal.App.4^th 1233 (“Aleman”) overrules Cotter].) And she claims California law applies because:

* Defendants’ contract requires disputes between the parties “to be resolved in California and specifically in Los Angeles” (id. at p. 3);

* under California law, the laws of the selected forum govern absent a compelling reason to apply another forum’s laws (see id. at pp. 3-4); and

Some of Defendants’ cases did involve contractual provisions that were purported to be choice-of-law clauses. Clark, Campagna, Cotter, and Paparella did. The holdings support Defendants’ position.

Cotter is good law. (See Reply, pp. 8-10.) It remains published, it has not been reversed, and it has only been distinguished once on a different ground. (See Zenelaj v. Handybook Inc. (N.D. Cal. 2015) 82 F.Supp.3d 968, 976 [finding that the delegation clause in the defendant’s arbitration agreement required the arbitrator to decide arbitrability and that Cotter did not change the result].) It is not binding, but it is persuasive.

Aleman does not overrule Cotter. Aleman concerned a motion to compel arbitration, not a demurrer. The arbitration provision stated: “Any dispute between the parties with respect to the interpretation or the performance of the terms of this Agreement may be submitted to arbitration by reason of either party giving written notice of its desire for arbitration to the other party.” (Aleman, supra, 241 Cal.App.4^th at 1238.) The Court of Appeal found the language broad enough to cover the plaintiffs’ wage claims and granted the motion. Yet there was no issue about applying the Labor Code beyond California. In fact, the parties agreed that the plaintiffs’ “worked exclusively within California[.]” (Id. at 1240 [noting, undisputedly, that the plaintiffs’ trucking routes “were relatively short and to destinations within California”].)

California law does not apply. Plaintiff cites section 11 of Defendants’ contract, which is titled “ARBITRATION/JURISDICTION[.]” (Opposition, Ex. 1, p. 3, § 11.) It provides:

Any dispute between the parties related to this Agreement shall be submitted to binding arbitration by the American Arbitration Association, in Los Angeles, California, to be determined and resolved by the rules and procedure of the Association in effect at the time of arbitration. The cost of such arbitration shall be borne by the prevailing party. The final arbitration decision shall be enforceable through the courts of the State of California and the parties hereto hereby agree to submit to the jurisdiction of the courts of the State of California for such purposes.

(Ibid., emphasis added.) Plaintiff contends section 11 is a forum clause.[2] The Court disagrees. It is an arbitration provision, and, regardless, if it constitutes a forum clause at all, it is a very narrow one. The italicized words clearly limit the scope of jurisdiction to enforcement of the final arbitration decision. They do not lengthen the coverage range of California’s wage-and-hour laws, nor can they. (See Clark, supra, 2023 WL 2779090 at *1; see also Cotter, supra, 60 F.Supp.3d at 1065-1066; cf. Gravquick A/S, supra, 323 F.3d at 1223 [finding that the California Equipment Dealers Act could be applied out of state via a choice-of-law clause because, unlike California’s wage-and-hour statutes, it did not contain geographical limitations].)[3]

Finally, Plaintiff cites Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5^th 903. Dynamex instructs California courts to use the ABC test to determine whether a worker should be classified as an independent contractor. Plaintiff claims it is essential under Dynamex to consider Defendants’ contract language in applying the ABC test. She contends the Court is required to follow Dynamex – and the demurrer should be overruled – since Defendants’ contract mandates application of California law. (See Opposition, pp. 4-5, 8.)

The Court disagrees. Dynamex was decided post-certification and does not address the extraterritoriality issue. Moreover, to repeat, Plaintiff’s interpretation of section 11 is incorrect. Her contention also puts the cart before the horse. (See Demurrer, p. 6 n.3; see also Reply, p. 8 n.5.) The precursor question at this stage is whether the wage-and-hour laws apply to out-of-state work. They do not.

Consequently, the demurrer is sustained as to Plaintiff’s individual causes of action.

Should it also be sustained as to the class causes of action? To answer this question, the Court needs to know whether the putative class includes people who worked in California a majority of the time or just out-of-state workers. Counsel should be prepared to discuss this issue at the hearing.

Either way, the Court is inclined to grant leave to amend to give Plaintiff an opportunity to allege federal claims and/or violations of other states’ laws. (See Opposition, pp. 9-10; see also Clark, supra, 2023 WL 2779090 at *1.) In addition, Plaintiff may want to name a new putative class representative (if the putative class includes workers who mostly worked in California).

[1] “UCL” means the Unfair Competition Law. “PAGA” means the Private Attorneys General Act.

[2] She concedes that it is not a choice-of-law clause. (See Opposition, p. 3; see also Reply, p. 6 n.2.)

[3] As Defendants argue, Kasel v. Remington Arms Co. (1972) 24 Cal.App.3d 711 fails to help Plaintiff. (See Reply, pp. 7-8.)