Minnesota Employers Brace for California-Style State Wage and Hour Class Actions

Minnesota employers may face legal attacks similar to those besetting their California counterparts in the form of state wage and hour class actions, following the Minnesota Supreme Court's decision in Milner v. Farmers Ins. Exch., 748 N.W. 2d 608 (Minn. 2008). The decision is the first from Minnesota's high court recognizing a class action wage claim brought under state law. The Court held that civil penalties are available for violations of the Minnesota Fair Labor Standards Act ("MFLSA"). Additionally, it clarified that the statute allows a private right of action for civil penalties and injunctive relief.

Until now, Minnesota businesses facing wage and hour class actions usually have defended them under federal, not state, law. While MFLSA, Minnesota's equivalent of the federal Fair Labor Standards Act, has been on the books for many years, employers have not faced serious claims under it.

The differences between claims brought under federal and state laws are important. In federal "class actions", employees must affirmatively sign a consent form to become part of the lawsuit, called "opting in". On the other hand, state class action lawsuits include all similarly situated employees unless the individual on his/her own takes steps to be excluded from the case, called "opting out".

In Milner, a class of insurance adjusters asserted they were misclassified as exempt workers under state laws and unlawfully denied overtime pay. (While insurance adjusters nationwide decided to challenge their classification together, the Minnesota group was severed from the rest of the country and went to trial on its own.) A Minnesota jury decided the individuals were nonexempt and thus entitled to overtime. The jury, however, also found the workers had not worked sufficient hours under state law to entitle them to overtime pay. Nevertheless, the trial judge assessed stiff penalties for the employer's violations of law and ordered that the penalties be paid to the workers, not to the State of Minnesota. The employer appealed the question of whether the misclassification, standing alone, constituted a violation of MFLSA. It did not appeal the nonexempt status determination.

Minnesota's Supreme Court noted that the case presents a "question of first impression regarding the interpretation and application of the MFLSA." The Supreme Court found that the misclassification, standing alone, did not constitute a violation of MFLSA. The Court noted that, like the federal FLSA, the MFLSA does not consider misclassification a violation, per se. Rather, violations occur when workers do not receive minimum wage payments and overtime payments to which they are otherwise entitled. Here, the jury found the workers in question were not entitled to overtime and, therefore, the misclassification, without more, did not violate MFLSA.

The employer did not keep wage records as required by the state law (because it had considered the employees exempt). That violation was subject to a penalty. To whom civil penalties are to be paid under the MFLSA is not specified. While the trial court ruled penalties for failure to keep records could be paid to the individual workers, Minnesota's Supreme Court reversed, holding penalties are payable to the state, not to individual plaintiffs.

Finally, the large attorneys' fees award of $1.8 million was too high for the amount of recovery and the Court sent the case back with instructions to the trial judge to reduce the amount to reflect a reasonable fee award for the actual "win" ($376,000 in civil penalties).

Post-Milner, pay challenges likely will no longer be restricted to federal courts. How Minnesota's state judges administer state wage law is unpredictable. Surely, Milner heralds a new era. The immediate lesson of the decision is clear: Minnesota employers should audit their payroll practices for compliance under state law before plaintiffs' lawyers do it for them in state law class actions.

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