Employers bring PAGA lawsuit

In California, lawsuits filed pursuant to California's Private Attorneys General Act, Labor Code sections 2698-2699.5, are nothing new. To the contrary, since its enactment in 2004, PAGA claims have become commonplace and expected in any wage and hour lawsuit. What is new and noteworthy is an employer, not an employee, filing a PAGA lawsuit. Yet this is exactly what a group of upset and frustrated California-based employers have recently done.

On Nov. 28, 2018, the California Business and Industrial Alliance sued the attorney general of California on the basis that PAGA, as written and applied, is unconstitutional and seeking injunctive and declaratory relief. Cal. Bus. & Indus. Alliance v. Becerra, 2018-01035180 (Or. Cnty. Super. Ct. Nov. 28, 2018). The alliance's declared mission is to "promote the interests of California-owned small- and mid-sized businesses and the people they employ" through education, lobbying, and grassroots organizing.

According to the founder of the alliance, Tom Manzo, he decided to take action after the company he worked for was sued under PAGA, which "caused [him] to realize that the over 1,000 pages of California Labor Law are nothing more than a tool for plaintiff's attorneys to use against hardworking businesses." In its complaint, the alliance goes further to declare that "PAGA [has] become a tool of extortion and abuse by the Plaintiff's Bar, who exploit the special standing of their PAGA plaintiff clients to avoid arbitration, threaten business-crushing lawsuits, and extract billions of dollars in settlements, their one-third of which comes right off the top." Indeed, when one considers how PAGA is applied and the level of oversite, or lack thereof, it appears that the alliance is not wrong.

PAGA allows employees to seek civil penalties from employers for Labor Code violations, which prior to PAGA could only be obtained by state agencies, such as the Labor and Workforce Development Agency. See Legislative Analyst's Office, The 2016-17 Budget: Labor Code Private Attorneys General Act Resources, Budget and Policy Post (Mar. 25, 2016). "The general intent of PAGA is to allow employees to pursue civil penalties through the legal system when LWDA and related state agencies do not have the resources to do so, with a goal of increasing the deterrent effect of the civil penalties and compliance with labor law." Id.; see also Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 379 (2014). Where the Labor Code does not set out the applicable civil penalty for violations, PAGA sets forth a civil penalty of $100 for each aggrieved employee per pay period for the initial violation for $200 per pay period per aggrieved employee for each subsequent violation. Labor Code Section 2699(f)(2). Civil penalties obtained by such "aggrieved employees" then split with 25 percent going to the employees and 75 percent to the LWDA. Id. Section 2699(i). Additionally, an "employee who prevails in any [PAGA] action shall be entitled to an award of reasonable attorney's fees and costs." Id. Section 2699(g)(1). PAGA does not include any connection between the attorney fees that can be obtained the civil penalties obtained. It appears that such an incentive to obtain attorney fees based on the total amount of recovery (or settlement), and the current treatment of PAGA actions, has resulted led to PAGA's use as a "tool of extortion and abuse" as described by California Business and Industrial Alliance.

In enacting PAGA, the California Legislature did include some preliminary checks before granting employees the ability to step in the shoes of the state. For instance, there is an administrative exhaustion requirement, which requires an employee to notify the LWDA of the alleged violations thereby providing the LWDA with 60 days to decide whether to investigate the allegations. Labor Code Section 2699.3(a)(2). It is only after the LWDA notifies the employee that it will not be pursuing its own investigation, or if no such notice is provided within 65 days, that the employee is permitted to file a lawsuit on his behalf and other "aggrieved employees." Id. But the reality is that PAGA's time constraints and understaffing at the LWDA means that this administrative check is not actually much of a check at all. As presented by Legislative Analyst's Office, the data is quite shocking -- since 2014, only one position is devoted to performing a "high-level review of PAGA notices and determin[ing] which claims to investigate." Legislative Analyst's Office, The 2016-17 Budget: Labor Code Private Attorneys General Act Resources, Budget and Policy Post (Mar. 25, 2016). More shocking still -- the "LWDA estimates that less than 1 percent of PAGA notices have been reviewed or investigated since PAGA was implemented." Id. Moreover, even when a PAGA notice is investigated, the LWDA has a difficult time completing the investigation within the time frames set out by PAGA, which then means that employee is then able to proceed to file his PAGA claim. Id.; Labor Code Section 2699.3(a)(2).

Furthermore, PAGA has become the exception to almost every type of protection, limitation and oversight that apply to other forms representative actions, such as Rule 23 class actions. For instance, many courts have held that such an "aggrieved employee" is not required to demonstrate that he is any way similarly situated to other California employees and, thus, he can seek to represent his employer's current and former hourly employees without limitation or consideration of job titles, duties, departments, location. See, e.g., Moua v. Int'l Bus. Machines Corp., 2012 WL 370571, at *3-4 (N.D. Cal. Jan. 31, 2012); Zayers v. Kiewit Infrastructure W. Co., 2017 WL 7058141, at *8 (C.D. Cal. Nov. 9, 2017); see also Cardenas v. McLean Food Serv., Inc., 2011 WL 379413 (C.D. Cal. Jan. 31, 2011) ("Because the statute allows 'aggrieved employees' to act as private attorneys general, 'PAGA plaintiffs do not hold the rights and obligations of a class in their hands.").

Similarly, PAGA plaintiffs are also permitted broad discovery regarding these "aggrieved employees" without first establishing any similarity, uniform policy, or the manageability and efficiency of pursuing such a representative action. See Williams v. Superior Court, 3 Cal. 5th 531, 546 (2017) (PAGA's legislative purpose "would be ill-served by presuming, notwithstanding the failure explicitly to so indicate in the text, that deputized aggrieved employees must satisfy a PAGA-specific heightened proof standard at the threshold, before discovery."). As such, plaintiffs (and their attorneys) are given free rein to go on a fishing expedition, which when faced with such a daunting proposition, may drive employers to settle early particularly when an arguably minor Labor Code violation, such as a technical error on the issued paystubs, can quickly balloon up to a potential liability in the high six or seven figures. Not only do employers not wish to face potential increased exposure and liability, but there is also little guidance to know how such a PAGA action would actually fare at trial because very few cases ever make it that far.

Additionally, an employee cannot waive PAGA claims because he is considered to be pursuing the action while in the shoes of the state, and thus acting in an enforcement capacity. Iskanian, 59 Cal. 4th at 384 ("An employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law."). As such, PAGA-only actions have become an increasingly popular means to circumvent arbitration agreements and class action waivers.

Moreover, there is little to no oversight to ensure that the plaintiff and his attorneys are truly acting in the best interest of the state and the employees they represent. Specifically, once a PAGA claim is allowed to proceed, the LWDA is no longer involved beyond payment the allotted portion of any civil penalties. Moreover, courts are only required to approve settlements of PAGA claims that include civil penalties as part of the settlement. Labor Code Section 2699(k). Yet, not all settlements arising out of PAGA actions include such civil penalties. For instance, in 2014, "roughly 10 percent of the [PAGA] notices received" by the LWDA actually resulted in payments of civil penalties. Legislative Analyst's Office, The 2016-17 Budget: Labor Code Private Attorneys General Act Resources, Budget and Policy Post (Mar. 25, 2016). Further, even when court of approval is required, it does not require the same level of scrutiny and findings required for class actions. See Arias v. Superior Court, 46 Cal. 4th 969 (2009) (discussing and holding that PAGA actions are not subject to class action requirements). As such, plaintiff's attorneys may structure the settlement so that only a small portion of the total settlement amount represents civil penalties (or to exclude them all together).

The California Business and Industrial Alliance's claims that PAGA violates the California and U.S. Constitutions is based as the reasons presented above and more. They point to not only the lack of judicial and legislative oversight, but the absence due process protections such as those present in Rule 23 class actions. The alliance also references Assembly Bill 1654, which became effective Jan. 1, 2019, and which exempts from PAGA construction industry employees with collective bargaining agreements meeting certain requirements. The alliance claims that there is no reason to exempt an entire industry from PAGA and as such they are being denied equal protection under the law. For all of these reasons, according to the alliance, PAGA is abused and regularly used to threaten and obtain large settlements that benefit plaintiffs' attorneys.

Whether we can expect changes to PAGA, either from the Legislature or resulting from judicial challenges, remains to be seen. Until then, California employers would be well served to speak with their attorneys to review and ensure that they are in compliance with the Labor Code. For now, it is likely the best defense against PAGA.