Keeping Tabs on the Ninth Circuit
December 12, 2023 - This Week at the Ninth

This Week At The Ninth: Class Representatives and Overtime

Dating App

This week, the Ninth Circuit considers the adequacy of a class representative and addresses the Fair Labor Standards Act’s overtime exceptions.

KIM v. TINDER, INC.

The Court holds that a named plaintiff bound by an arbitration clause is not an adequate representative of a proposed class containing individuals not similarly bound.

The panel: Judges M. Smith, Friedland, and Miller, with Judge M. Smith writing the opinion.

Key highlight: “[T]he district court already held that Kim is subject to arbitration because there was evidence that she signed into her Tinder account multiple times after Tinder began using its sign-in wrap method of notifying users of the TOU.  However, Tinder concedes that—at least at this point in the litigation—it lacks any evidence of an agreement to arbitrate as to over 7,000 members of the class that was certified for settlement.  Therefore, . . . Kim has a strong ‘interest in settling’ her claim, ‘even at the cost of a broad release of other claims’ that are not subject to arbitration, because unlike the 7,000 or more members who may not be bound by arbitration at all, she has no chance of going to trial.”

Background:  Tinder, an online dating application, charges subscribers to access premium version of its app. For years, Tinder charged customers 29 or older a higher monthly fee than it charged younger subscribers. That two-tiered priced model spawned two class actions, a first in California state court, and then a second in federal court brought by named plaintiff Lisa Kim. Tinder moved to compel arbitration of Kim’s claims based on an arbitration clause contained in a Terms of Use Agreement to which Tinder began requiring all users to agree. The district court granted the motion to compel, and Kim appealed. 

While the appeal from the arbitration order was pending, Kim and Tinder reached a settlement that would cover a broad proposed settlement class of California Tinder subscribers aged 29 or older. The district court approved the settlement, rejecting the arguments of two objectors who were represented by the counsel to the named plaintiff in the parallel California litigation. The Ninth Circuit reversed and remanded for the district court to conduct a more thorough assessment of the settlement’s fairness. On remand, the objectors again challenged the settlement. The district court again rejected their arguments, certified the proposed class, and approved the settlement. 

Result:  The Ninth Circuit reversed. As the Court explained, in both certifying a class and approving a class settlement, a district court must ensure that the named plaintiff would be an adequate class representative, which requires determining that the plaintiff and his or her counsel (1) have no conflicts of interest and (2) will vigorously prosecute the action on behalf of the class. Kim, the Court held, failed both requirements.

First, the Court held, Kim had a conflict of interest with other class members.  The district court had concluded she was subject to arbitration because she had signed into Tinder after Tinder began conditioning log-ins on agreement to its Terms of Use Agreement. But there was no similar evidence for as many as 7,000 other members of the certified class members. That divergence created a conflict:  Kim had an interest in settling her claims even at the cost of a release of other class members’ claims that could, in fact, go to trial. That conflict was, the Court continued, exacerbated by the other provisions of the Terms of Use Agreement, which would require disputes to be resolved under Texas law and limited the recoverable damages. The Court rejected Kim’s argument that these 7,000 absent class members were just a small percentage of the certified class, noting that the number could in fact be higher, and that in any event “Kim and her counsel’s willingness to put even a minority of class members’ claims at risk for a fee is precisely the kind of conflict Rule 23(a)(4) was designed to avoid.”

Second, the Court held the district court had also erred in concluding that Kim and her counsel had vigorously prosecuted this action. The Court determined that there was no evidence to support the district court’s conclusion that Kim had engaged in any sort of meaningful discovery. And, the Court continued, “Kim’s approach to opposing Tinder’s motion to compel is not suggestive of vigor”—she had made only a single legal argument, then belatedly attempted to raise additional arguments regarding the formation of the Terms of Use Agreement in a supplemental brief.

SANDERS v. COUNTY OF VENTURA

The Court holds that fees deducted from employees’ monetary credits when they opt out of health plans are not part of employees’ regular rate of pay for purposes of calculating overtime compensation under the Fair Labor Standards Act.

The panel:  Judges Rawlinson, Bress, and Zouhary (N.D. Ohio), with Judge Bress writing the opinion.

Key highlight:  “We have explained that what is included in the regular rate of pay . . . must be discerned from what actually happens under the governing employment contract. Thus . . . we ask[] whether the payments are functioning as compensation.” (Quotation marks and citations omitted)

Background: Plaintiffs work for Ventura County, which provides its employees healthcare through a Flexible Benefits Program. As part of that program, the County offers a Flexible Benefit Allowance (“Flex Credit”), which can be used to buy health benefits on a pre-tax basis. Plaintiffs chose to opt out of the Flexible Benefits Program. Upon doing so, they still received Flex Credit via a cash payment, but had to pay an opt-out fee that comprised most of that Flex Credit. That opt-out fee was used to fund the plans from which the plaintiffs had opted out. The County treated the residual cash payment as part of plaintiffs’ regular rate of pay when calculating their overtime pay, but did not include the value of the opt-out fee.

Plaintiffs filed a class-action lawsuit, contending that the opt-out fee should be treated as part of their “regular rate” of pay for purposes of calculating their overtime compensation under the Fair Labor Standards Act (FLSA). The district court granted summary judgment for the County.

Result: The Ninth Circuit affirmed, holding that the opt-out fee is not part of an employee’s regular rate of pay under the FLSA. The FLSA defines “regular rate” of pay to include all renumeration paid to or on behalf of an employee, subject to certain exceptions. One exception provides that regular rate of pay does not include “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees.” 29 U.S.C. § 207(e)(4). The Court concluded that the opt-out fees fell under this exception to “regular rate” of pay.

Plaintiffs raised three arguments against § 207(e)(4)’s applicability, each of which the Court rejected.

First, Plaintiffs argued that § 207(e)(4) was irrelevant because their paystubs provided that they had received the entire Flex Credit as part of their “earnings,” and listed the opt-out fee as a “pre-tax deduction,” not a “contribution” within the meaning of § 207(e)(4). On this basis, Plaintiffs contended that the payment structure resembled that in Flores v. City of San Gabriel, 824 F.3d 890 (9th Cir. 2016), where the Ninth Circuit held that cash payments employees received in lieu of medical-benefits payments were not subject to § 207(e)(4). The Court rejected this analogy. It explained Flores turned on the fact that the cash payments were not paid “to a trustee or third person,” as the statute required. Here, by contrast, the opt-out fees were directed to a third person. They thus did not “function[] as compensation”—and it is a “payment’s function [that] controls whether the payment is excludable from the regular rate.” Nor were the terms used in Plaintiffs’ paystubs dispositive: “the County sets its paystubs to align with the Internal Revenue Code, not the FLSA.”

Second, Plaintiffs argued that § 207(e)(4) did not apply because the opt-out fee was not used to support Plaintiffs’ own health care. The Court concluded that this argument was foreclosed by the plain text of the statute, which “is not limited to employer contributions made for a particular employee.”

Third, Plaintiffs argued that § 207(e)(4) did not apply because the County’s health plans are not “bona fide.” For a plan to be bona fide, its primary purpose must be to provide for the payment of benefits to employees, rather than act as disguised compensation. The Department of Labor has explained that a plan is bona fide so long as only an “incidental part” of the plan consists of cash payments to employees. Plaintiffs again relied on Flores, in which the Ninth Circuit had held that a plan was not bona fide when over 40% of the employer’s total contributions were paid to employees in cash. They also relied on a Department of Labor Final Rule stating that there should be a 20% cash contribution limit for a plan to be bona fide. Under these authorities, Plaintiffs argued, the County’s plan was not bona fide because the Flex Credit made available to Plaintiffs often exceeded 20% of the County’s total contributions. The Court determined that any bright-line rule for when cash contributions were more than “incidental” was unwarranted, and that it owed no deference to the Final Rule. And in any event, the Court explained, on a proper understanding of the opt-out fees, the County’s cash payments were below 20% of total contributions.