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Staying Ahead of the Class (Action)

What is the Class Action Fairness Act of 2005 and how will it affect HRO?

by William B. Bierce

In February 2005, President Bush signed the Class Action Fairness Act of 2005, reducing some of the litigation burden for defendants in class action lawsuits. The law will benefit both employers and HRO providers who help administer and comply with laws governing the employment relationship. To protect their rights, employees can sue an employer, group of employers, and potentially their service providers for common law torts and/or violations of federal and state constitutions, statutes, and regulations. Some claims might be broadly generic, such as failures or breaches in security, privacy, data protection, healthcare information mismanagement, and disclosure of Social Security or income tax information. Other claims might relate to the employment relationship, including civil rights violations and wage violations under the Fair Labor Standards Act. The Class Action Fairness Act was engineered and promoted by a consortium of business leaders who lobbied Congress to change the rules so that they are more uniform under the federal court system. These are some of the areas that are affected:


Attorneys Fees

Where the class action results in any injunctive or other equitable remedies against the defendants, the court may apply a lodestar (or base imputed value) computation with a multiplier method to award attorneys fees. Plaintiffs attorney cannot charge any outof- pocket expenses, net after a damage award, to individual named plaintiffs without court approval.


Mandatory Transfers

Federal courts will have original jurisdiction for all class actions that are mass actions (100 or more class members each with a claim of $75,000 or more), subject to certain exceptions, where the aggregate claims have a sum or value of $5 million, exclusive of interest and costs.


Optional Transfers

District courts can decline to exercise jurisdiction over a class action where between one and two thirds of the members of all proposed plaintiff classes in the aggregate and the primary defendants are citizens of the state where the action was originally filed.


Local Cases, No Transfer

Mandatory transfer to federal district court of class actions that have a distinctly local characterat least two thirds of the plaintiffs and at least one major defendant are local, there are at least 100 members of the proposed plaintiff class, and the principal injuries were incurred in the State in which the action was originally filedis not required.


The Act clearly offers some predictability for enterprise customers and their HRO providers. A stronger judiciary, more discipline in following stricter civil procedure rules, and a more balanced approach (and statutory ban on disproportionate damage awards to local plaintiffs), all benefit corporate defendants and their service providers. Federal procedures also help remove financial incentives for plaintiffs attorneys to inflate claims, delay settlement, or otherwise impose burdens on defendants solely because the aggregation of claims creates its own substantive rule that settlement is cheaper at all costs than the risk of astronomical liability. The new Act overcomes part of the substantive effect of class actions that are independent of the underlying claims of the plaintiffs.


Luckily, employee class action claims are not as prevalent as other forms, such as mass torts (asbestos, tobacco, etc.) or consumer frauds. Numerosity and commonality are high hurdles for obtaining class action certification. Employees must continue to use federal courts to decide ERISA claims, since defendants can cause the transfers in such cases of statutory federal law. The Act will help reduce liability insurance premiums for general liability insurance, freeing capital for capital investment, research and development, innovation investments, dividends to shareholders, and/or reduced prices to consumers.


Avoiding class action status means going back to basicsHR programs for job design, staffing, performance evaluation, compensation, and business alignment should be tailored to individual capacities and business process needs within the companys core business. All systems should contain a cross-section of relevant variables for application to unique individuals. HR programs should attract, retain, and motivate sales and operational personnel and management on an individual basis.


Class actions may arise because certain non-core jobs should have been outsourced but were retained in-house and treated with indifference. The threat of a class action lawsuit should focus managements attention on a global sourcing strategy, keeping those business functions that add value in the marketplace and outsourcing the rest. Litigation planning starts with effective business design.   

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