Reason for improved outlook to mitigate PAGA claims in 2022

For California employers, the cost to defend a lawsuit or resolve a prelitigated matter under the Private Attorneys General Act is typically insurmountable, and often, leads to small (and large) businesses declaring bankruptcy because of PAGA claims. Currently, the PAGA paradigm unjustifiably bends heavily towards high-employer exposure based on its existing framework.

The California Fair Pay and Employer Accountability Act is the employer community's attempt to bring balance to this unequal structure, which in turn will allow employers to consider additional risk management strategies to defend against these runaway claims.

Where Are We Now with PAGA?

Under PAGA, an "aggrieved employee" may bring a representative action on behalf of him or herself and other "aggrieved employees" for civil penalties for various violations of the Labor Code. Labor Code Sections 2698, et seq.

PAGA was intended to deputize citizens as private attorneys general to enforce the labor code considering the state government's limited resources. Particularly, PAGA -- sometimes called "the Bounty Hunter" statute -- allows these employees to step into the shoes of state regulators to recover civil penalties and to receive part of the amount recovered as compensation: 75% of the penalties recovered go to the state, and 25% go to the employees.

However, since its enactment in 2004, rather than streamline and regulate employer violations of the Labor Code, PAGA claims have skyrocketed for various reasons unrelated to legitimate violations, including the fact that employees cannot waive their right in an arbitration agreement to bring PAGA claims, thus creating litigation challenges for employers. Further, because PAGA allows for attorney fees, most employers will settle PAGA claims before trial to avoid expensive litigation.

Notably, underlying claims that create exposure in PAGA actions include the full gamut of wage and hour violations, such as missed meal and rest breaks, failure to provide itemized wage statements, and failure to pay overtime. Given the array for potential exposure, even for the scrupulous employer, plaintiffs are incentivized to file complaints alleging a wide variety of purported violations, even if they did not or could not have personally suffered a violation of the subject provision.

Where Could We Go with the CFPEAA

Last October, several business organizations, including the California Chamber of Commerce, California New Car Dealers Association and Western Growers proposed the California Fair Pay and Employer Accountability Act for the 2022 ballot. If approved by California voters, the CFPEAA effectively repeals PAGA by eliminating the ability to pursue civil penalties via a representative action. Supporters of the initiative have until June 6 to collect at least 623,212 valid signatures to qualify the measure for the November general election.

For employers, the greatest upside of the CFPEAA as it relates to future PAGA lawsuits, and risk associated with it, is that the CFPEAA would eliminate the ability for aggrieved employees to stand in the shoes of the labor commissioner and recover civil penalties through a representative action. Instead, the Division of Labor Standards Enforcement would have greater enforcement responsibility and the California Legislature would be required to provide funding for the labor commissioner to enforce Labor Code violations (i.e., the labor commissioner handles violations). This would remove the presumed need for private enforcement.

Additional benefits of the CFPEAA to employers, includes, but is not limited to the following:

• Reforms California's wage and hour enforcement law to: eliminate shakedown lawsuits on small businesses; streamline the system to produce quicker resolutions; avoid prolonged and costly court processes

• Allows workers to recover 100% of the penalties imposed without hiring a lawyer, instead of 25% going to workers and 75% going to the state

• Provides resources to guide and assist employees with compliance. The Consultation and Publication Unit would provide: confidential consultation; and binding compliance letter advice

• Prohibits the outsourcing of the labor commissioner's enforcement duties/actions

• Redirects the state's portion of any remaining PAGA settlements to the labor commissioner to fund enforcement including the costs of this program

Risk Management Considerations

As noted, employees cannot waive their right in an arbitration agreement to bring PAGA claims. However, if PAGA is effectively repealed via the CFPEAA, then arbitration becomes a viable option to mitigate risk with representative actions, like it currently does with class action lawsuits. Presuming the CFPEAA is enacted, employers must still be careful with how they utilize arbitration agreements under the new regime.

Recall the 9th U.S. Circuit Court of Appeals recent decision, Chamber of Commerce of the United States of America, et al. v. Bonta, 2021 DJDAR 9599 (Sept. 15, 2021), where the court partially vacated the lower court's injunction against enforcement of California Assembly Bill 51, holding, in pertinent part, that AB 51 is not preempted by the Federal Arbitration Act. As a result, arbitration agreements cannot be presented as a condition of employment.

However, the law does not prohibit employers from requesting employees to voluntarily sign arbitration agreements. Thus, from a risk management standpoint, while employers have been urged to halt use of mandatory arbitration agreements upon hire (i.e., as a condition of employment) to date, if the CFPEAA is approved, then employers will likely be able to secure class action and representative action waivers within arbitration agreements. This change has the potential to significantly reduce the employer's exposure to excessive claims with exorbitant damages currently associated with PAGA where no claim waiver is available.

Ultimately, the CFPEAA is a promising solution to California's uncontrolled PAGA problem. Employers are also encouraged to monitor the case of Viking River Cruises, Inc. v. Moriana (20-1573) currently pending before the U.S., Supreme Court. The court will determine whether PAGA is subject to the FAA and therefore whether those claims are arbitrable. If the court finds that PAGA claims are arbitrable, this would similarly dispel of the employer liability for PAGA claims in representative actions before California superior courts and would encourage the employer community to implement arbitration agreements where possible. While the CFPEAA may admittedly struggle to qualify for the ballot (considering that three PAGA-reform initiatives did not make it on the ballot in 2017), the passage of Proposition 22 in 2020 demonstrates that business-driven employment law ballot measures can be adopted, even in the very employee-friendly Golden State.