When employee protection becomes calamity

In Kim v. Reins, the California Supreme Court is deciding whether an employee who sues for unpaid wages for certain Labor Code violations and settles those claims loses standing to recover civil penalties under the Private Attorneys General Act for the same Labor Code violations.

PAGA allows "aggrieved employees" to recover civil penalties for violations of the California Labor Code. For instance, if an employee believes he was not paid all overtime wages, he could recover the sum of the unpaid overtime wages plus an additional PAGA civil penalty of $100 for every pay period in which overtime was earned and not paid. Without proof of the underlying Labor Code violation (i.e., unpaid overtime) however, no PAGA penalty is due.

In Kim, the plaintiff settled his underlying Labor Code claims with prejudice for $20,000 -- well in excess of the amount individual wages he was claiming. As a result of this settlement, Reins argued that Kim was no longer "aggrieved" and thus, lost standing to recover any related PAGA civil penalty. The Court of Appeal agreed that Kim lost standing stating:

"The legislative history demonstrates that the term 'aggrieved employee' was not initially defined in the original proposed language of [Labor Code] section 2699. (Sen. Bill 796, introduced Feb. 21, 2003.) Employer groups opposing the bill expressed concerns that this type of statute could be abused by the filing of thousands of lawsuits against small businesses by members of the general public. (Judiciary Com., Analysis of Sen. Bill No. 796 (2003-2004 Reg. Sess. as amended Apr. 29, 2003, p. 6.)."

To address these concerns, the bill sponsors stated that "private suits for Labor Code violations could be brought only by an 'aggrieved employee'" and the bill "would not open private actions up to persons who suffered no harm from the alleged wrongful act." (Judiciary Com., Analysis of Sen. Bill No. 796 (2003-2004 Reg. Sess.) as amended Apr. 29, 2003, p. 7.) The bill was amended "[t]o clarify who would qualify as an 'aggrieved employee' entitled to bring a private action under this section," defining "aggrieved employee" to be "any person employed by the alleged violator and against whom one or more of the violations alleged in the action was committed." (Judiciary Com., Analysis of Sen. Bill No. 796 (2003-2004 Reg. Sess.) as amended Apr. 29, 2003, p. 8.)

Kim appealed and last month the California Supreme Court heard oral argument. At the hearing, the court seemed inclined to side with Kim. Members of the court asked what would happen if Reins were permitted to pay "outsized settlements" to "essentially pick off individuals" for instance. According to the court, "every plaintiff could be bought off ... for less than the total value of the suit," further suggesting that it might "defeat the point of the [PAGA] action" and would create a "no cure environment" for employees. The court pondered, "[w]hen would it stop?"

Reins counsel replied that others, including the state, could always bring an enforcement action. This response was met with the court opining, "[w]e all know that doesn't work."

Conversely, these facts of the case seemed unremarkable: Kim entered into a voluntary settlement (with the advice of counsel) and accepted $20,000 in exchange for a full release of his claims with prejudice. Kim could have rejected the settlement or, after he decided to proceed to litigate his PAGA claims, he could have not accepted payment. However, he did neither and kept suing for the same alleged wrong.

The court's statements reflect a genuine concern to protect California workers. However, at what point should the judiciary acknowledge that litigants (especially represented ones) always have a choice as to whether to proceed in litigation or settle? Does California public policy not also favor settlements? If so, when should settling parties be given a proverbial "pass" after they have released their claims simply because the settlement sum was too good to pass up?

Assuming a decision is rendered in Kim's favor, what practical impact will the decision have on employment settlements and PAGA litigation going forward? While the court's comments suggest a desire to protect California workers, will a decision in Kim's favor actually benefit them? It actually may not.

Settlements and Severance Agreements May "Stop"

The Supreme Court speculated that employers will settle a virtual panoply of individual Labor Code claims in order to avoid settling and/or litigating a larger group of PAGA "aggrieved employee" claims. Perhaps. However, there is no shortage of large PAGA representative cases and settlements on the books. On the other hand, if an employer cannot receive assurance that all claims (including those under PAGA) will be released when it settles the underlying Labor Code claims, then the employer may be less likely to settle any claim. After all, why would anyone pay an individual to keep suing them?

Employers may also opt to settle only the civil PAGA penalty claims in an effort to save money and still obtain a full release. In these instances, the employee will only receive 25% of the settlement proceeds. This might actually result in a net negative for the employee in a case where he alleges he is owed $500 in unpaid wages in one pay period but only receives $25 as part of the $100 PAGA civil penalty settlement.

Taking this one step further, it is also plausible that employers will stop offering severance payments to terminated employees. While California is an "at-will" state which allows employers and employees to end the employment relationship at any time and for any reason, many employers offer severance packages in exchange for a full release of claims. These severance agreements are not required but do assist employees by providing income while they search for new employment. Should Kim prevail, any severed employee's release of underlying Labor Code claims may not preclude his ability to file a future PAGA lawsuit for the same Labor Code claims he was paid to release.

PAGA Litigation Certainly Will Not "Stop"

The Supreme Court seemed unconvinced that if Kim's settlement covered his PAGA claims that someone else (including the state) could bring an enforcement action under PAGA. However, the data suggests otherwise. The state of California's PAGA's data search page shows that tens of thousands of PAGA letters are filed each year. Kim's lawyer (Eric Kingsley) has filed over 850 PAGA cases alone. In essence, there are no shortage of PAGA plaintiffs and no shortage of lawyers who are willing to help them.

Importantly, should employers not be able to settle an employee's underlying Labor Code claims without automatically releasing the corresponding PAGA claims, PAGA litigation will become even more unwieldy, unmanageable and expensive than it currently is. Imagine a scenario where three employees (each with his own set of attorneys) have each filed his own PAGA lawsuit against the same employer. Should the Court side with Reins, this employer could settle with two of these individuals and allow the third plaintiff to proceed with his PAGA representative action. Should the decision reverse, the employer will be forced to litigate three PAGA representative actions along with three sets of lawyers unless it decides to capitulate and settle the representative claims. While this type of scenario is already apparent today, if the Court sides with Kim, the complex litigation burden on employers -- not to mention the courts -- will undoubtedly increase.

Job Opportunities for Workers May "Stop"

Litigation (PAGA or not) costs employers money. With the potential increase in PAGA litigation (including the potential for multiple large attorneys' fees awards), companies in California will struggle to stay in business as long as these lawsuits keep coming. This, in turn could impact job opportunities for California workers.

From even before its adoption, PAGA has faced criticism for working to the detriment of already overburdened employers. Critics have long argued that PAGA "adds to an already unfriendly business climate in the state by encouraging suits against employers," which could potentially increase business costs to the point of inciting an exodus of business to states with more employer friendly laws. See Matthew J. Goodman, "The Private Attorney General Act: How to Manage the Unmanageable," 56 Santa Clara L. Rev. 413, 446 (2016). Opponents have also argued that PAGA harms California's economy by increasing business costs to businesses of all sizes and furthers California's reputation for having an unfair liability law system. More to the point, "the impact [of PAGA] on California jobs is disastrous." Erich Shiners, "Chapter 221: A Necessary but Incomplete Revision of the Labor Code Private Attorneys General Act," 36 McGeorge L. Rev. 877, 881 (2005).

Accordingly, while the "protection" of California workers is admittedly an important public policy, one must ask what exactly are we protecting against? And, in cases where employees who settle their lawsuits are represented by competent and highly experienced counsel, one might wonder why these employees need any further protection at all? 