Morales v. 22nd District Agricultural Association

          Order Date August 5, 2016

         APPEAL from an order and judgment of the Superior Court of San Diego County, No. 37-2013-40938-CU- OE-CTL Joel R. Wohlfeil, Judge.

          Law Offices of David J. Gallo and David J. Gallo for Plaintiffs and Appellants.

          Gordon & Rees, James J. McMullen, Matthew G. Kleiner, Autumn Moody and Justin Michitsch for Defendant and Respondent.

         ORDER MODIFYING OPINION AND DENYING REHEARING

         THE COURT:

         It is ordered that the opinion filed herein on July 13, 2016, be modified as follows:

         1. On page 28 of the opinion the last sentence in subpart d, addressing "Appellants' Proposed Special Jury Instruction Number 5" is deleted, and the following inserted:

         On this record, any assumed error in not giving the proposed instruction was not prejudicial.

         2. On page 44 of the opinion the last sentence of the first paragraph is deleted, and the following inserted:

         As relevant here, it exempts "any employees directly employed by the State or any political subdivision thereof, including any city, county, or special district." (Cal. Code Regs., tit. 8, § 11100(1)(C).)

         There is no change in judgment.

         The petitions for rehearing are denied.

          AARON, J.

         This appeal addresses a collective action alleging nonpayment of overtime, as required by state law under Labor Code^[1] section 510 and federal law under the Fair Labor Standards Act of 1938 (FLSA, 29 U.S.C. § 201, et seq.). We conclude that the trial court properly entered judgment for the defendant on the FLSA claim. Defendant proved the amusement or recreational exemption (29 U.S.C. § 213(a)(3), the amusement exemption) as an affirmative defense and plaintiffs failed to show error in the denial of their nonsuit motion, in the jury instructions, in the verdict form or in the court's exclusion of witnesses from the courtroom. We also conclude that the trial court properly sustained defendant's demurrer to the section 510 claim, but further conclude that the court erred in denying leave to amend.

         FACTUAL AND PROCEDURAL BACKGROUND

         Plaintiff Jose Luis Morales and 177 other similarly situated plaintiffs (collectively appellants) sued their employer, the 22nd District Agricultural Association of the State of California (the DAA), alleging nonpayment of overtime, as required by state law under section 510 and federal law under the FLSA. The DAA is a California agency that owns and manages the Del Mar Fairgrounds (Fairgrounds) and the Del Mar Horsepark (Horsepark). The DAA leases out part of the Fairgrounds property to the Surf & Turf Recreation Golf Center (Recreation Center). Also on the Fairgrounds property is a satellite wagering facility, which is leased to another entity. The Horsepark is located on another parcel of land, located about three miles from the Fairgrounds.

         Appellants are seasonal employees of the DAA who assist with amusement and seasonal operations. Appellants are limited to working 119 days in a calendar year and are internally referred to as "119-day employees." Appellants are not limited as to the number of hours that they may work in those 119 days. Appellants filed a putative class action against the DAA to recover penalties and damages for alleged violations of state and federal overtime laws. The trial court sustained, without leave to amend, the DAA's demurrer to appellants' section 510 cause of action. After the trial court conditionally certified the case as a collective action, the DAA answered the complaint, asserting the amusement exemption as an affirmative defense to the remaining federal claim. Under this exemption, an employee of an amusement or recreational establishment is not entitled to overtime compensation if certain criteria are met. (29 U.S.C. § 213(a)(3).)

         In response to a court-approved notice, 177 individuals joined the action as additional plaintiffs. The trial court bifurcated the action; the parties stipulated that the first phase of trial would be for the exclusive purpose of adjudicating the DAA's affirmative defense regarding the applicability of the amusement exemption. Any remaining issues would subsequently be tried before a new jury.

         After conclusion of the DAA's evidence, the trial court denied appellants' oral motion for nonsuit. The jury rendered a special verdict in favor of the DAA and the court later entered judgment. Thereafter, the parties submitted a stipulation regarding the form of judgment and attached a proposed judgment. The trial court endorsed the parties' stipulation, but did not separately enter the agreed form of judgment. Appellants contend, and the DAA does not contest, that the initial judgment, as modified by the order approving the parties' stipulation, constitutes a final, appealable judgment. Appellants timely appealed from the order sustaining the demurrer and from the judgment.

         DISCUSSION

         Appellants contend that reversal of the judgment in favor of the DAA on their FLSA claim is required because the trial court: (1) improperly denied their nonsuit motion; (2) erred in instructing the jury; (3) provided an erroneous special verdict form; and (4) improperly excluded party witnesses from the courtroom. We address these contentions in part I of this opinion, concluding that appellants have not met their burden to demonstrate reversible error. In part II of the opinion, we conclude that the trial court properly sustained the DAA's demurrer to appellants' section 510 claim, but further conclude that the court erred in denying leave to amend.

         I. FLSA Claim

         A. Legal and Factual Background

         The FLSA requires that an employer pay overtime wages to employees unless those employees are classified as exempt employees under applicable law. (29 U.S.C. §§ 207, 213.) The FLSA requires overtime pay only if an employee works more than 40 hours per week, regardless of the number of hours worked during any one day. (29 U.S.C. § 207(a)(1).) However, the FLSA provides for a number of exemptions to this general rule. (29 U.S.C. § 213.) One of these exemptions is the amusement exemption that applies to any employee of an establishment whose business is to provide amusement or recreation. (29 U.S.C. § 213(a)(3).)

         The amusement exemption states, in relevant part, that it applies to "any employee employed by an establishment which is an amusement or recreational establishment, organized camp, or religious or non-profit educational conference center, if (A) it does not operate for more than seven months in any calendar year, or (B) during the preceding calendar year, its average receipts for any six months of such year were not more than 33 ⅓ per centum of its average receipts for the other six months of such year...." (29 U.S.C. § 213(a)(3).)^[2]

         The amusement exemption thus has two main elements: first, the business must qualify as an "amusement or recreational" establishment and second, the establishment must satisfy either the duration test or the receipts test. (29 U.S.C. § 213(a)(3); 29 C.F.R. § 779.385 (2015).) The first element has two subparts: (1) identifying the "establishment" and (2) determining the "amusement or recreational" nature of that establishment. "The logical purpose of the [amusement exemption] is to exempt... amusement and recreational enterprises... which by their nature, have very sharp peak and slack seasons.... Their particular character may require longer hours in a shorter season, their economic status may make higher wages impractical, or they may offer non-monetary rewards." (Brock v. Louvers and Dampers, Inc. (6th Cir. 1987) 817 F.2d 1255, 1259.)

         Appellants contend that they are entitled to overtime wages under the FLSA. As an affirmative defense, the DAA asserted that it is exempt from the FLSA under the amusement exemption. The matter proceeded to trial, at which the DAA presented evidence that it is exempt from the FLSA under the amusement exemption. After the conclusion of the DAA's evidence, appellants orally moved for nonsuit, asserting that, as a matter of law, the amusement exemption did not apply because the DAA failed to show: (1) that it existed to promote youth summer employment, and (2) that the majority of its income was derived from amusement or recreation. The trial court denied the motion, concluding that the evidence could support a finding that the DAA operated as a single establishment, that the nature of that single establishment was amusement or recreational, and that it satisfied the receipts test.

         B. Eligibility for Amusement Exemption

         As a preliminary matter before we examine the nonsuit motion, the parties dispute whether eligibility for the amusement exemption turns on (1) the nature of the employer's revenue producing activities, or (2) the work performed by the employee. As appellants note, this question is of great importance to this appeal because it impacts the order denying nonsuit and some of the challenged jury instructions. The parties have not cited, and we have not found, any California case law addressing this issue. The parties rely on federal case law. While we are not bound to follow federal court precedent, " 'numerous and consistent' " federal decisions may be particularly persuasive when they interpret federal law. (Etcheverry v. Tri-Ag Service, Inc. (2000) 22 Cal.4th 316, 320-321.)

         Relying on Brennan v. Six Flags Over Georgia, Ltd. (5th Cir. 1973) 474 F.2d 18 (Six Flags), appellants contend that it is the "nature [or character] of the work" and "not the source of the remuneration, that controls" and "gives rise to the need for [the amusement] exemption." (Id. at p. 19.) About a year later, however, the Fifth Circuit came to the opposite conclusion, holding that an employer's "principal activity should be determinative of [its] eligibility for an exemption." (Brennan v. Texas City Dike & Marina, Inc. (5th Cir. 1974) 492 F.2d 1115, 1119 (Texas City).) The Fifth Circuit provided no reason in Texas City regarding its change in position. (Ibid.) The Sixth, First and Tenth Circuits later adopted the Fifth Circuit's new position that it is the employer's principal activity that controls. (Marshall v. New Hampshire Jockey Club, Inc. (1st Cir. 1977) 562 F.2d 1323, 1331, fn. 4 (Marshall); Brennan v. Southern Productions, Inc. (6th Cir. 1975) 513 F.2d 740, 746-747; Hamilton v. Tulsa County Public Facilities Authority (10th Cir. 1996) 85 F.3d 494, 497; Chessin v. Keystone Resort Management, Inc. (10th Cir. 1999) 184 F.3d 1188, 1193-1194 (Chessin).)^[3] We find these "numerous and consistent" federal circuit court decisions to be persuasive on the issue. (Conrad v. Bank of America (1996) 45 Cal.App.4th 133, 150.)

         Moreover, appellants have not provided a reasonable basis for us to reject these decisions. As one court noted, the plain language of the amusement exemption suggests that the inquiry "turns on the nature of the employer's business, not on the nature of the employee's work." (Marshall, supra, 562 F.2d at p. 1331, fn. 4.) Additionally, the applicable federal regulations state that exemptions "depend on the character of the establishment." (29 C.F.R. § 779.302 (2015).) "[I]f the establishment meets the tests enumerated in these sections, employees 'employed by' that establishment are generally exempt" from the FLSA's overtime provision. (Ibid.) Finally, a formal opinion letter from the U.S. Department of Labor (DOL), Wage and Hour Division provides: "Whether or not an establishment has an 'amusement or recreational' character for purposes of the section 13(a)(3) exemption depends on its principal or primary activity." (DOL Wage and Hour Division Opinion Letter FLSA 2006-39 (DOL 2006-39); http://www.dol.gov/whd/opinion/FLSA/2006/2006_10_12_39_FLSA.htm [as of July 12, 2016].) "[I]nterpretations contained in formats such as opinion letters are 'entitled to respect.' " (Christensen v. Harris County (2000) 529 U.S. 576, 587.)

         In summary, we conclude that eligibility for the amusement exemption turns on the nature of the employer's revenue producing activities, not on the nature of the work performed by the employee.

         C. Nonsuit Motion

         Appellants assert that one of the most important issues in this case in the trial court was whether all of the DAA's business operations, locations, buildings and departments constitute a single establishment because, if it is deemed to be a single establishment, it would satisfy the receipts test for the claimed exemption. Appellants argued in the trial court that they were entitled to a nonsuit because a required element of the amusement exemption is showing that the employment "plainly and unmistakably" falls within the letter and spirit of the exemption, and the DAA had failed to show that all of its operations constitute a single establishment. The trial court denied the motion, finding that the DAA had presented sufficient evidence from which the jury could find that the DAA operated a single establishment, and that the nature of the establishment was amusement or recreational.

         The principal purpose in enacting the FLSA was to protect all covered workers from substandard wages and oppressive working hours. (Barrentine v. Arkansas-Best Freight System, Inc. (1981) 450 U.S. 728, 739.) A defendant bears the burden of proof of establishing the applicability of an FLSA exemption as an affirmative defense. (Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 794-795 (Ramirez); accord, Corning Glass Works v. Brennan (1974) 417 U.S. 188, 196-197.) Determining whether an exemption applies is a fact-specific inquiry. (Vinole v. Countrywide Home Loans, Inc. (9th Cir. 2009) 571 F.3d 935, 945.)

         As a general matter, FLSA exemptions " 'are to be narrowly construed against the employers seeking to assert them and their application [is] limited to those establishments plainly and unmistakably within their terms and spirit.' " (Arnold v. Ben Kanowsky, Inc. (1960) 361 U.S. 388, 392; Guerrero v. Superior Court (2013) 213 Cal.App.4th 912, 941 (Guerrero).) Appellants, however, seek to transform this policy statement into a new standard of proof. Appellants' have cited no authority to support their contention, and we reject it. The amusement exemption has two, and only two, elements: first, the business must qualify as an "amusement or recreational" establishment and, second, the establishment must satisfy either the duration test or the receipts test. (29 U.S.C. § 213(a)(3); 29 C.F.R. § 779.385 (2015).)

         The parties stipulated that, if the DAA were viewed in the aggregate as a single establishment, it would meet the receipts test of the amusement exemption. Accordingly, we focus on the first element of the amusement exemption and examine whether the trial court properly denied nonsuit because the DAA presented evidence showing (1) that it is a single establishment, and (2) that the nature of its principal or primary activity is amusement or recreational.

         A party is entitled to a nonsuit when, as a matter of law, the evidence presented by the party opposing the nonsuit is insufficient to allow a jury to find in the opposing party's favor. (See Saunders v. Taylor (1996) 42 Cal.App.4th 1538, 1541.) In ruling on a nonsuit motion the trial court must interpret all of the evidence most favorably to the party opposing the nonsuit and most strongly against the party seeking the nonsuit, and must resolve all presumptions, inferences, conflicts, and doubts in favor of the party opposing the nonsuit. (Powerhouse Motorsports Group, Inc. v. Yamaha Motor Corp., U.S.A. (2013) 221 Cal.App.4th 867, 887.) We review the ruling on a nonsuit de novo, applying the same standard as the trial court. (Saunders v. Taylor, supra, 42 Cal.App.4th at pp. 1541-1542.) Thus, the issue before us is whether the evidence presented by the DAA, viewed favorably to its cause, was insufficient as a matter of law to show that the DAA operated a single establishment and that the nature of its principal or primary activity was amusement or recreational.

         1. Single Establishment

         Application of the amusement exemption depends on the general character of the establishment/employer. (29 C.F.R. § 779.302 (2015).) The term "establishment" refers to a " 'distinct physical place of business.' " (29 C.F.R. § 779.23 (2015).) An " 'enterprise' " may be "composed of a single establishment." (29 C.F.R. § 779.303 (2015).) "The term 'establishment, ' however, is not synonymous with the words 'business' or 'enterprise' when those terms are used to describe multiunit operations. In such a multiunit operation some of the establishments may qualify for exemption, others may not." (Ibid.) Leased departments in a departmentalized store are generally not considered to be separate establishments for purposes of the exemptions. (29 C.F.R. § 779.306 (2015).)

         Both parties cite 29 C.F.R. § 779.305 (2015), which provides that an establishment should be considered separate under the FLSA if "(a) It is physically separated from the other activities; and (b) it is functionally operated as a separate unit having separate records, and separate bookkeeping; and (c) there is no interchange of employees between the units."^[4] The trial court instructed the jury with a modified version of this regulation.

         29 C.F.R. § 779.305 (2015) describes a three-part test for distinguishing whether "two or more physically separated portions of a business though located on the same premises … may constitute more than one establishment for purposes of the exemptions." (Italics added.) However, we question whether this test applies where, as here, multiple premises are involved. Significantly, the fact that multiple premises are involved is not fatal to a finding that the multiple premises constitute a single establishment. (Mitchell v T. F. Taylor Fertilizer Works, Inc. (5th Cir. 1956) 233 F.2d 284, 285, 287 (Mitchell) [fertilizer dry mixing plant and office located on different premises constituted a single establishment for purposes of the retail or service establishments exemption]; Doe v. Butler Amusements, Inc. (N.D. Cal. 2014) 71 F.Supp.3d 1125, 1127, 1140-1141 (Doe) [cross-motions for summary judgment denied where carnival operating in more than one physical location could constitute a single establishment]; see also Marshall, supra, 562 F.2d at p. 1331 ("[[W]e think it appropriate to proceed beyond [29 C.F.R. § 779.305 (2015)] and look more broadly into 'the integrity of the economic… and functional separation between the business units.' "].) As the Mitchell court noted, "the suggestion that the right to an exemption depends upon such factors as whether part of the business is separated by a partition, or is conducted in an adjoining building, or in a building across the street or five blocks away, does not recommend itself as a rational distinction; furthermore, it does not appear to have been the intent of Congress." (Mitchell, supra, at pp. 285-286.)

         The Doe court examined 29 C.F.R. § 1620.9 (2015), a regulation issued by the U.S. Equal Employment Opportunity Commission to interpret the Equal Pay Act (EPA), which is part of the FLSA. (Doe, supra, 71 F.Supp.3d at p. 1134 & fn. 5.) The definition of "establishment" is important to EPA analysis because the statute prohibits pay discrimination on the basis of sex within an "establishment." (29 U.S.C. § 206(d)(1).) 29 C.F.R. § 1620.9 (2015) provides that "each physically separate place of business is ordinarily considered a separate establishment, " but in unusual circumstances "two or more portions of a business enterprise, even though located in a single physical place of business, may constitute more than one establishment" or "two or more distinct physical portions of a business enterprise [could be treated] as a single establishment. For example, a central administrative unit may hire all employees, set wages, and assign the location of employment; employees may frequently interchange work locations; and daily duties may be virtually identical and performed under similar working conditions." (Italics added.) The Doe court concluded, and we agree, that this regulation offers guidance as to the meaning of "establishment" in the context of overtime and minimum wage claims. (Doe, supra, 71 F.Supp.3d at p. 1134 & fn. 5.)

         Accordingly, reliance by the parties and the court on the three-part test of 29 C.F.R. § 779.305 may be misplaced. Appellants, however, do not claim error on this ground. Thus, we examine the trial court's ruling on the nonsuit motion utilizing the three-part conjunctive test of 29 C.F.R. § 779.305 (2015) to determine whether the DAA presented evidence showing that it operates as a single establishment. Under this test, evidence showing physical and functional separation, and no interchange of employees is sufficient to show that an establishment should be considered separate, rather than a single establishment.

         The Horsepark is physically separated from the Fairgrounds. Nonetheless, the DAA presented evidence showing that its Board of Directors oversees the Fairgrounds, the Horsepark and the Recreation Center. The day-to-day operations of the Recreation Center are performed by private companies that run their respective businesses under written leases and operating agreements with the DAA, but the DAA, as the landlord, handles major issues such as plumbing or electrical problems. The chief financial officer for the DAA testified that the DAA has an organizational chart. Different areas of responsibility are divided into departments, with different department numbers. All departments are "very tightly linked together" and they share employees and resources. A single set of books exists for all of the departments and the departments cannot function separately. The DAA has a single operating bank account for all departments. The Horsepark does not have a separate bank account or accounts payable department.

         The department heads for all departments report to the executive management of the DAA. The departments do not have separate executive officers or boards of directors. Additionally, the DAA's accounting staff is used interchangeably as needed at the Horsepark to track accounts receivables, and the DAA's employees perform necessary maintenance, recycling, marketing, security and janitorial work for all departments. The Horsepark and the DAA use the same payroll and human resources departments.

         This constitutes substantial evidence showing that the two separate properties qualify as a single establishment, since they are not functionally operated as separate departments, do not have separate records and separate bookkeeping, and there is an interchange of employees between them. Although appellants may have presented conflicting evidence on this element, conflicting evidence is disregarded ...