Down the PAGA hole: Guidance needed as claims go up

With an ever increasing number of California employers requiring employees to sign arbitration agreements that include class action waivers, employees seeking to bring claims for labor code violations are relying more and more on the Private Attorneys General Act to pursue these claims. This reliance on PAGA will only increase if the U.S. Supreme Court rules that arbitration agreements with class action waivers are enforceable in both state and federal courts, as many experts are predicting.

Bringing claims under PAGA has several advantages for aggrieved employees, including the fact that such claims cannot be waived as part of a class or collective action waiver in an arbitration agreement, per Iskanian v. CLS Transportation Los Angeles LLC. In addition, under Arias v. Superior Court, an aggrieved employee bringing an action under PAGA need not meet the stringent class certification requirements necessary in class actions. Finally, an aggrieved employee can bring claims under PAGA for all aggrieved employees, even if the violations suffered by other employees are not the same as those suffered by the plaintiff. These advantages make PAGA claims attractive, even with the much shorter statutory period (one year) than provided by standard wage and hour class actions (three or four years).

As employees' reliance on PAGA continues to grow, California courts will need to provide substantial additional guidance on how to proceed with, and in a vast majority of the cases, settle these actions. To date, there are few published opinions addressing how a PAGA case should be tried, or how a PAGA settlement should be administered.

One of the primary dilemmas faced by counsel litigating PAGA actions is how such actions should proceed to trial, given the fact that they are not required to meet the requirements for class certification. Thus, two of the primary advantages of PAGA actions (no need for certification and the ability to bring varied claims on behalf of different employees) also create the most prominent question regarding litigating such cases.

In cases with only one or two straight forward claims -- for example, a facially noncompliant meal period policy or facially noncompliant wage statements -- a trial still remains a fairly uncomplicated matter, because plaintiff can rely on documentary evidence, buttressed by anecdotal evidence from a small number of employees, to prove his or her case. However, if the case relies more on the testimony of employees than on documentary evidence -- such as with rest period claims (since in most instances rest periods are not recorded) or claims of off-the-clock work, or where various different claims are brought on behalf of different employees or groups of employees -- there is less certainty, and less guidance from the courts, on how those cases will be tried.

In the absence of a "representative" plaintiff, would plaintiff's counsel be required to call every aggrieved employee to testify as to his or her injury? If so, even a case with a relatively small number of employees runs the risk of becoming cumbersome and unwieldly. To date, California courts have not offered any consistent roadmap on how to proceed with such actions, but such instruction will be critical as more "PAGA-only" actions make their way through the system.

Of equal or greater importance, given that almost all wage and hour representative and class actions end in settlement before trial, is the fact that courts have provided little insight into how PAGA settlements should be administered. In a traditional wage and hour class action, the class or classes are conditionally certified for purposes of settlement, and notice is sent to all class members of the terms of the proposed settlement, as well as the class members' rights and responsibilities for remaining in or opting out of the settlement, as well as for objecting to the settlement. The procedure for administering such notice, and the required contents of such notice are well established. In most cases, class members who do not wish to release their rights can opt-out of the settlement to preserve their individual rights.

The same clarity does not exist for PAGA settlements and any notice procedure for such settlements. The aforementioned Arias case establishes that a PAGA judgment is binding on the aggrieved employees defined by the PAGA complaint. However, it is unclear whether a court-approved PAGA settlement is equally binding on the aggrieved employees. If so, that would seem to suggest that such employees should be given the opportunity to object to such a settlement, since their substantive rights are being directly impacted. Yet there are no case discussing the requirement that such notice be sent to the aggrieved employees, or the procedure by which such notice would be sent. In an effort to avoid this uncertainty, many counsel litigating PAGA actions will agree, as part of the settlement, to amend the PAGA action to include class claims so that the parties can follow the much more well-established procedure for obtaining approval for a class action settlement. As PAGA-only actions continue to proliferate, however, attorneys will need substantial direction from California courts on how to proceed in attempting to obtain approval of PAGA-only settlements.

Likewise, the increased focus on PAGA as a tool for vindicating the rights of aggrieved employees will also raise questions as to the proper allocation of the settlement funds as between the plaintiff, the aggrieved employees, and the Labor and Workforce Development Agency. Per the Labor Code, 75 percent on any money recovered as part of a PAGA judgment is to be allocated to the LWDA, with only 25 percent being distributed among the plaintiff and the other aggrieved employees. However, in the context of settling cases that include PAGA claims, courts have regularly approved settlements that allocate as little as one percent of the gross settlement to the LWDA. Such a small allocation is justified or explained by counsel arguing, in support of settlement, that the PAGA claims themselves only constituted a very small amount of the defendant's exposure, as compared with the underlying wage and hour class claims.

If more cases are brought as "PAGA-only" moving forward, the absence of any underlying class claims will make it impossible to argue for a small allocation to the LWDA. Whether that means that 75 percent of any PAGA settlement must be paid to the LWDA is unclear. Labor Code Section 2699(i) currently calls for the 75 percent allocation for actual civil penalties recovered by aggrieved employees, not settlements. Might the courts approve PAGA settlements that allocate more than the miniscule fraction that is presently paid to the LWDA, but far less than the 75 percent called for by statute? That is unclear.

These are just a few of the questions that will face California courts in the coming years, as PAGA claims become a more prevalent mechanism for litigating wage and hour claims on a representative basis. How the courts answer these questions will go a long way toward determining whether PAGA claims remain a valid mechanism for pursuing wage and hour claims in the face of arbitration agreements with class action waivers, or whether the use of this tool will be substantially curtailed, to the benefit of California business and at the expense of California employees.