Proceeding With PAGA After Settlement

An employee settling their individual Labor Code claims against an employer still meets the PAGA statutory definition of “aggrieved employee” and may proceed with a PAGA action even when it concerns the same underlying conduct. On March 12, 2020, the California Supreme Court in Kim v. Reins International California, Inc., held that for standing to prosecute a PAGA action, an employee does not need to have suffered a “redressable” injury and only need demonstrate: (1) an employment relationship and (2) suffered one or more Labor Code violations.

PAGA allows an employee who asserts certain California Labor Code violations to proceed on his or her own behalf and that of similarly situated employees. PAGA deputizes employees to collect civil penalties for Labor Code violations on behalf of the California Labor and Workforce Development Agency and similarly situated employees. The statute holds that 75 percent of any penalties collected be paid to the state, with the remaining 25 percent to be distributed to affected employees, and attorney’s fees be reimbursed to lawyers who successfully demonstrate a specific violation the Labor Code. Court approval is required by statute for every PAGA settlement.

Background

In December 2017, former training manager Justin Kim filed a putative class action against his restaurant employer. Kim alleged he and other managers were misclassified as exempt and entitled to unpaid wages and overtime, premiums for meal and rest period violations, inaccurate pay stubs, and waiting time penalties. Kim asserted a PAGA claim based upon the same underlying alleged Labor Code violations.

Upon hire, Kim signed an arbitration agreement. The company successfully compelled the matter to arbitration of all of Kim’s individual and putative class claims except for the PAGA claim, which was stayed pending the completion of arbitration. During arbitration, Kim accepted a statutory offer to settle his individual claims and dismiss them with prejudice. The settlement agreement did not include a release of Kim’s remaining PAGA claim.

When the trial court lifted the stay, Reins filed a motion for summary adjudication as to the PAGA claim on the grounds Kim did not meet the definition of the statutory term “aggrieved employee.” Reins argued Kim lacked standing to continue because he did not have a “redressable injury” because he previously settled his underlying California Labor Code violations. The trial court agreed and dismissed Kim’s PAGA claim on the grounds he no longer met the definition of “aggrieved employee,” which was affirmed on appeal.

The California Supreme Court's Holding in Kim

The Court analyzed two areas: (1) the text, legislative history and purpose of PAGA to determine standing requirement; and, (2) the preclusive effect of dismissed individual claims on the later adjudication PAGA actions in state court.

Legislative Text, History, and Purpose

The Court stated that:

• The Legislature intended only two straightforward requirements for an employee to have PAGA standing or be considered “aggrieved”: (1) employed by the violator; and, (2) subject to at least one alleged Labor Code violation.
• The Legislature described PAGA in terms of whether a violation in fact occurred, not on the injury to the employee(s) or how to remedy a violation. So, while the parties may resolve PAGA disputes through settlement, settlement will not excuse a Labor Code violation.
• PAGA claims are distinct from class actions in that they are an enforcement action brought on behalf of the state to deter Labor Code violations, whereas class actions are a procedural device to streamline and aggregate identical claims from a large group of plaintiffs.
• The state’s interest in receiving civil penalties for Labor Code violations would be diminished if employers could settle out individual claims to avoid steep civil penalties.
• A narrow definition of “aggrieved employee” contradicts the well-established remedial and deterrent purpose of PAGA.

Claim Preclusion

The Court rejected Rein’s arguments for preclusive effect of Kim’s settled claims.

In an illustrative example “bad facts make bad law,” the settlement reached was the result of Kim accepting a statutory offer to compromise his individual claims which expressly excluded claims made under PAGA.

When the parties returned to state court, Reins argued Kim now lacked sufficient standing to proceed under PAGA. In dicta, the Court suggested Reins may be judicially estopped from making this argument. The Court believes a statutory offer to compromise presents PAGA plaintiffs with a “Hobson’s choice” if they are required to either reject the 998 offer and risk incurring substantial costs or accept the offer and waive the right to recover the additional civil penalties available under PAGA.

Notably, the Court did not evaluate whether a separate and subsequent PAGA lawsuit will be subject to this same rule.

Key Takeaways for Employers

Eliminating any standing requirement under PAGA may result in plaintiffs free to completely resolve their own claims, dismiss them, and step aside while their attorneys pursue the PAGA claim in state court. The popular use of standalone PAGA actions to avoid arbitration became a widespread tactic used primarily to avoid arbitration. The erosion of the representative standing requirement under PAGA may result in not only more lawsuits but will necessarily impact the claims asserted , procedural direction of PAGA actions and settlement.

The Kim Court did not decide whether an arbitrator’s dismissal of individual Labor Code claims has any material effect on subsequent PAGA litigation in state court or how a PAGA trial can be fairly managed. This uncertainty creates additional risk when assessing. There is even less incentive now, however, for employers to resolve disputes early by offering an enhanced amount of damages in exchange for a release of the employee’s right to pursue any PAGA claims stayed in state court pending the outcome of arbitration.

The best protection against PAGA remains compliance with the California Labor Code and correcting any problems before or shortly after getting a LWDA notice in the mail. The first step in preventing exposure is to understand the risk through a proactive approach of conducting a privileged audit of pay practices.