PAGA (The Private Attorneys General Act) has been the subject of frequent litigation since it was added to the California Labor Code in 2004. The law deputizes employees (and their lawyers) allegedly harmed by an employer’s labor violations to bring “representative claims” on behalf of other “aggrieved employees.” A court may award up to $200 per employee, per pay period, for each Labor Code violation proven in a PAGA lawsuit. The state government gets to keep 75 percent of the total penalty, but the employees receive the remaining 25 percent. In addition, the plaintiffs’ lawyers also are entitled to have the employer pay their reasonable attorney’s fees.
One reason PAGA claims are so attractive to plaintiffs’ lawyers is that they are an “end-run” around a United States Supreme Court decision which allows employers to include so-called class action waivers in arbitration contracts. Those clauses preclude employees from filing class action lawsuits for wage and hour violations and the like. The California Supreme Court has ruled that any agreement to waive PAGA claims as part of an arbitration pact is null and void as a matter of state law and public policy. However, an employer still may require its employees to submit their individual claims to arbitration, and then proceed with their PAGA representative claims after the individual claims are decided.
Some employers have sought to avoid PAGA claims by reaching settlement agreements under which the employees dismiss their individual claims. However, plaintiffs and their lawyers have argued that these settlements do not bar them from continuing to pursue PAGA claims on behalf of other employees.
California employers recently received some good news on this issue from the state Court of Appeal. In Kim v. Reins International California, Inc. , the court ruled that a plaintiff who voluntarily dismissed his individual wage and hour claims as part of a settlement is no longer an “aggrieved employee” under PAGA and may no longer assert a PAGA lawsuit on behalf of other employees.
The plaintiff in the Kim case claimed his former employer, a restaurant operator, misclassified him as exempt from overtime requirements. He brought the usual collection of wage and hour claims, including failure to pay overtime, failure to allow meal and rest periods, failure to provide adequate wage statements, and “waiting time penalties.” The plaintiff also sought civil penalties for himself and other employees under PAGA.
Because the plaintiff signed an arbitration agreement, a trial court judge ordered that the individual claims must be sent to arbitration, and that the PAGA claim would be delayed until arbitration was completed. While the case was in arbitration, the employer made a settlement offer which the plaintiff accepted. As part of this settlement, the plaintiff dismissed his individual claims “with prejudice,” meaning he could not assert those claims in the future. The PAGA claim was not part of this settlement, and was sent back to the trial court.
The employer then asked the trial court to dismiss the PAGA claim because the plaintiff’s settlement meant he was no longer an “aggrieved employee” and had no right to bring the PAGA claim. The trial court agreed and dismissed the lawsuit. The Court of Appeal upheld this ruling.
The appellate court noted that an employee must have suffered harm in order to bring a PAGA claim. In legal jargon, this requirement is called “standing.” The plaintiff initially claimed he was harmed by the company’s alleged Labor Code violations. However, the court found that when the plaintiff accepted a settlement and dismissed his individual claims, he essentially admitted he no longer had any Labor Code-based claims against the company. This meant that the plaintiff no longer was an “aggrieved employee” with “standing” to bring a PAGA claim on behalf of others.
The court cautioned that its ruling does not impact the rights of the plaintiff’s former co-employees to bring PAGA claims, nor does it suggest that those claims are without merit. Instead, the court ruled that only the plaintiff who agreed to settle and dismiss his individual claims was precluded from pursuing a PAGA claim on behalf of others.
The Kim decision encourages employers to negotiate settlements with individual plaintiffs on their wage and hour claims, particularly if those plaintiffs have PAGA claims waiting in the wings. It remains to be seen how plaintiffs’ lawyers will respond to the Kim decision. In the meantime, Kim serves as another reminder that employers must be proactive in ensuring all of their wage and hour practices comply with the Labor Code.