California Supreme Court limits effect of individual settlements on PAGA claims

On March 12, the California Supreme Court decided Kim v. Reins Int'l California, Inc., 2020 DJDAR 2210, an important wage and hour case deciding whether an individual may still pursue a representative claim under the Private Attorneys General Act of 2004 despite settling all of their individual claims. While Kim decided an important issue, it also left open some significant questions.

PAGA permits any "aggrieved employee" to sue his or her employer to collect civil penalties that were formerly only recoverable by the state. Cal. Labor Code Section 2699(a). Under PAGA, 75% of all recovery is awarded to the state and 25% is awarded to the "aggrieved employees." Cal. Labor Code Section 2699(i). "Aggrieved employee" is defined as "any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed." Cal. Labor Code Section 2699(i).

In Kim, the plaintiff sued his employer under PAGA, and in the same action asserted non-PAGA class claims arising from the same alleged Labor Code violations. Kim at 2. The trial court compelled the plaintiff's non-PAGA claims to individual arbitration and the related PAGA claims were stayed, while the arbitration proceeded. Several months later, the employer served a statutory offer to settle the plaintiff's "individual claims" under Cal. Code Civ. Proc. Section 998. The plaintiff accepted and dismissed his individual non-PAGA claims.

The employer then moved for summary adjudication of the plaintiff's PAGA claims on the ground that the release and dismissal of the plaintiff's individual claims meant he was no longer an "aggrieved employee" and therefore lacked standing to proceed on his PAGA representative claims. The trial court granted the employer's motion for summary adjudication on the plaintiff's PAGA claims and the court of appeal affirmed.

On review, the California Supreme Court reversed. The court held that the plain language of PAGA's definition of "aggrieved employee" allows an employee to bring a PAGA representative claim if he or she suffered one or more of the alleged violations, regardless of whether the employee released the right to seek personal recovery for those same violations. The court held that the "Legislature defined PAGA standing in terms of violations, not injury. Kim became an aggrieved employee, and had PAGA standing, when one or more Labor Code violations were committed against him ... Settlement did not nullify these violations." (Emphasis added.) The court continued: "The remedy for a Labor Code violation, through settlement or other means, is distinct from the fact of the violation itself." Id. at 3.

The California Supreme Court further held that the purpose of PAGA, the statutory context, and the legislative history all supported the conclusion that a plaintiff who releases their individual employment claims retains standing to sue under PAGA. In the course of this discussion, the court strongly implied that individual settlements with non-plaintiff employees will not reduce the employer's potential liability for PAGA penalties. Solicitation of individual settlements is a common tactic employers use to limit potential liability in class action cases. See Chindarah v. Pick Up Stix, Inc., 171 Cal. App. 4th 796 (2009). Kim, however, suggests that this procedure may not be available for PAGA claims.

The California Supreme Court further held that the plaintiff's dismissal of his individual claims did not preclude his PAGA claims by operation of res judicata. The court held that res judicata was inapplicable because: (1) the settlement upon which the dismissal was based was expressly limited to the plaintiff's individual non-PAGA claims, and (2) the PAGA claims and dismissed individual claims were joined in the same action. The employer had relied on Villacres v. ABM Indus. Inc., 189 Cal. App. 4th 562 (2010), a California Court of Appeal case holding that a class action settlement can preclude subsequent PAGA claims brought by a class member based on the same facts and theories as the released class claims. Kim held that "even assuming Villacres was correctly decided, the situation here is obviously distinguishable," because the plaintiff "joined all claims against Reins, including one for PAGA penalties, in a single action." Kim at 9.

While Kim clarified a number of issues relating to PAGA, others remain murky. The California Supreme Court did not tip its hand on how it might decide the res judicata issue had the settlement agreement not been expressly limited to the plaintiff's individual claims, or had the plaintiff split his PAGA and non-PAGA claims into separate actions.

Kim also creates challenges and uncertainty for parties who wish to resolve a PAGA action with an individual settlement. Often, a plaintiff will file a PAGA complaint only to later learn that he or she is last in line behind several earlier filed PAGA actions. In this common scenario it is frequently in both parties' interest to settle the plaintiff's individual claims in exchange for a release and the plaintiff agreeing to dismiss his or her PAGA claims. But under Kim the individual settlement may not deprive the plaintiff of standing as an "aggrieved employee" with the right to pursue PAGA claims. Cal. Labor Code Section 2699(l)(1); Kim at 5 ("There is no individual component to a PAGA action because 'every PAGA action ... is a representative action on behalf of the state'").

What then is an employer to do in such situation? Employers can attempt to protect themselves by including in an individual settlement representations that the plaintiff is not "aggrieved," a express agreement to dismiss pending PAGA claims, and a covenant not to sue under PAGA, but it is not clear whether California courts would view these measures as effective or enforceable.

Until the appellate courts resolve these uncertainties, negotiating individual settlements with employees will remain a challenge, especially where the employee has pending PAGA claims. Employers should take great care negotiating the terms of any such agreements and understand that they might not be effective to preclude PAGA claims. 