Ca. Court Says Lexmark’s Use-It-Or-Lose-It Vacation Policy is Illegal

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California Court Says Lexmark's Use-It-Or-Lose-It Vacation Policy is Illegal

By Dan Prochilo Law360
New York — A California appeals court last week upheld a lower court’s ruling that Lexmark International Inc.'s "use it or lose it" vacation policy violated state labor law, but the panel said the $13.6 million judgment entered against the company in the wage-and-hour class action should be recalculated.

The three-judge panel of the Second Appellate District affirmed a superior court judge’s decision that Lexmark's policy barring employees from carrying over vacation and personal days from one year to the next was unlawful, but agreed with the printer manufacturer that the court had overestimated how much the workers were owed.

"The matter is remanded for the trial court to recalculate damages in accordance with the views expressed in this opinion," the justices said. "In all other respects, the amended judgment is affirmed."

The proposed class action said that Lexmark, which was spun off from IBM in March 1991, had pledged to honor vacation days workers had accumulated while working for the tech giant, which allowed employees who had been with the company for at least five years to carry their vacation and personal days from year to year. But the company changed its rules effective May 1991, and said employees had to use all their time off by year's end or forfeit it, the suit said.

The complaint, filed in August 2005, alleged that the new rules constituted a "use it or lose it" policy that was illegal under state law because it effectively deprived employees of earned wages.

"The company changed a lawful policy to one that violated the California Labor Code in order to save money," Bonita Moore, an attorney for the workers, said in a statement Wednesday.

The trial court, granting a motion by the workers, extended the company's period of liability to its founding in 1991 and in June 2007 granted class certification to all current and former employees who had worked for Lexmark since the Lexington, Ky.-based company's inception — a group of 178 workers.

The lower court ultimately ruled in favor of the workers, finding that their paid time off was deferred compensation that Lexmark illegally seized, and that the company's policy violated a state law forbidding the forfeiture of vacation and personal days.

Following a separate proceeding on damages, the court in June 2010 came up with its own estimate of the compensation the workers were owed, citing the poor records Lexmark had maintained of its employees' vacation usage and the flaws in both sides' expert reports. The lower court pegged the amount at $8.29 million, according to the appellate decision.

Los Angeles County Superior Court Judge Gregory Alarcon reopened the trial in January 2011, based on a motion for a new trial from Lexmark, which argued that the damages award was excessive, and in April of that year the court readjusted the figure to $7.7 million. 

Facing the prospect of paying that sum in addition to $5.7 million in attorneys' fees and $145,341 in costs, the company appealed in May 2011, arguing the class should not have been certified, that its policy was lawful, and that the damages were still off. 

But on Sept. 19, the appellate court found class certification was warranted because the workers had shown they were all affected by a common, allegedly illegal employment practice in the form of Lexmark's vacation policy.

The panel also rejected the company’s characterization of its rule as a lawful "no additional accrual" vacation policy that just imposed a limit on the amount of vacation time employees could bank. The court noted that Lexmark's policy was more than just a cap because it illegally "divested employees of already accrued vacation time."

The judges did, however, agree with Lexmark that the lower court had incorrectly calculated the vacation pay to which the employees were entitled based on their gross pay — complete with commissions — instead of their base rate of pay. State law says employers and employment contracts set the rate for vacation pay, and Lexmark's policy had always been that vacation pay was calculated at the base rate, the court said.

"We conclude the trial court erred in calculating the wages to include commissions rather than base rate of pay," the panel wrote.

A representative for Lexmark was not immediately available to comment Wednesday.

Justices Edward Ferns, Judith Ashmann-Gerst and Victoria Chavez sat on the panel for the Court of Appeal.

The workers were represented by Bonita D. Moore, Thomas R. Freeman, Ekwan E. Rhow and Karis A. Chi of Bird Marella Boxer Wolpert Nessim Drooks & Lincenberg PC and by Sheila Thomas, Antonio Lawson, and Richard Pearl.

Lexmark was represented by Frank M. Liberatore, Henry L. Sanchez, Sherry L. Swieca and Sarine C. Sahatjian of Jackson Lewis LLP.

The case is Ron Molina v. Lexmark International Inc., case number B227746, before the Court of Appeal of the State of California, Second Appellate District, Division Two.

California Court Says Lexmark's Use-It-Or-Lose-It Vacation Policy is Illegal

By Dan Prochilo Law360
New York — A California appeals court last week upheld a lower court’s ruling that Lexmark International Inc.'s "use it or lose it" vacation policy violated state labor law, but the panel said the $13.6 million judgment entered against the company in the wage-and-hour class action should be recalculated.

The three-judge panel of the Second Appellate District affirmed a superior court judge’s decision that Lexmark's policy barring employees from carrying over vacation and personal days from one year to the next was unlawful, but agreed with the printer manufacturer that the court had overestimated how much the workers were owed.

"The matter is remanded for the trial court to recalculate damages in accordance with the views expressed in this opinion," the justices said. "In all other respects, the amended judgment is affirmed."

The proposed class action said that Lexmark, which was spun off from IBM in March 1991, had pledged to honor vacation days workers had accumulated while working for the tech giant, which allowed employees who had been with the company for at least five years to carry their vacation and personal days from year to year. But the company changed its rules effective May 1991, and said employees had to use all their time off by year's end or forfeit it, the suit said.

The complaint, filed in August 2005, alleged that the new rules constituted a "use it or lose it" policy that was illegal under state law because it effectively deprived employees of earned wages.

"The company changed a lawful policy to one that violated the California Labor Code in order to save money," Bonita Moore, an attorney for the workers, said in a statement Wednesday.

The trial court, granting a motion by the workers, extended the company's period of liability to its founding in 1991 and in June 2007 granted class certification to all current and former employees who had worked for Lexmark since the Lexington, Ky.-based company's inception — a group of 178 workers.

The lower court ultimately ruled in favor of the workers, finding that their paid time off was deferred compensation that Lexmark illegally seized, and that the company's policy violated a state law forbidding the forfeiture of vacation and personal days.

Following a separate proceeding on damages, the court in June 2010 came up with its own estimate of the compensation the workers were owed, citing the poor records Lexmark had maintained of its employees' vacation usage and the flaws in both sides' expert reports. The lower court pegged the amount at $8.29 million, according to the appellate decision.

Los Angeles County Superior Court Judge Gregory Alarcon reopened the trial in January 2011, based on a motion for a new trial from Lexmark, which argued that the damages award was excessive, and in April of that year the court readjusted the figure to $7.7 million. 

Facing the prospect of paying that sum in addition to $5.7 million in attorneys' fees and $145,341 in costs, the company appealed in May 2011, arguing the class should not have been certified, that its policy was lawful, and that the damages were still off. 

But on Sept. 19, the appellate court found class certification was warranted because the workers had shown they were all affected by a common, allegedly illegal employment practice in the form of Lexmark's vacation policy.

The panel also rejected the company’s characterization of its rule as a lawful "no additional accrual" vacation policy that just imposed a limit on the amount of vacation time employees could bank. The court noted that Lexmark's policy was more than just a cap because it illegally "divested employees of already accrued vacation time."

The judges did, however, agree with Lexmark that the lower court had incorrectly calculated the vacation pay to which the employees were entitled based on their gross pay — complete with commissions — instead of their base rate of pay. State law says employers and employment contracts set the rate for vacation pay, and Lexmark's policy had always been that vacation pay was calculated at the base rate, the court said.

"We conclude the trial court erred in calculating the wages to include commissions rather than base rate of pay," the panel wrote.

A representative for Lexmark was not immediately available to comment Wednesday.

Justices Edward Ferns, Judith Ashmann-Gerst and Victoria Chavez sat on the panel for the Court of Appeal.

The workers were represented by Bonita D. Moore, Thomas R. Freeman, Ekwan E. Rhow and Karis A. Chi of Bird Marella Boxer Wolpert Nessim Drooks & Lincenberg PC and by Sheila Thomas, Antonio Lawson, and Richard Pearl.

Lexmark was represented by Frank M. Liberatore, Henry L. Sanchez, Sherry L. Swieca and Sarine C. Sahatjian of Jackson Lewis LLP.

The case is Ron Molina v. Lexmark International Inc., case number B227746, before the Court of Appeal of the State of California, Second Appellate District, Division Two.

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October 1, 2013 at 12:22 PM