By Paul Coady
The Private Attorney General Act, also known as PAGA, is the greatest threat to California employers since the Agricultural Labor Relations Act.
Signed by Gray Davis in his waning days in office, PAGA deputizes employees to sue for monetary penalties for virtually any violation of the California Labor Code or IWC Orders. It creates the fiction that the employee who sues is stepping into the shoes of the state, allows the “aggrieved employees” to keep 25 percent of the recovered penalties, and requires the remaining 75 percent to be remitted to the state. As an additional incentive, PAGA also entitles a prevailing employee to attorney fees.
PAGA was supposedly designed to correct two flaws in the Labor Code’s enforcement scheme. The first was that civil penalties were unavailable for certain Labor Code violations. The second was that even where the Labor Code expressly provided civil penalties, there were too few resources to pursue enforcement. On these assumptions, PAGA created civil penalties for most Labor Code violations.
PAGA exposure can be ruinous. For Labor Code violations for which no express penalty is provided, PAGA penalties are generally $100 for each aggrieved employee per pay period for the initial violation and $200 per employee per pay period for each subsequent violation. If, for example, an employer with 200 employees omits certain required information on its paystubs, such as the applicable piece rate, that employer is subject to a $100 penalty for each of its 200 employees whose paychecks contained this error in the first pay period, or $20,000 in penalties. If the error persists during the employer’s 25 remaining pay periods that year, the employer is liable for an additional $1 million in penalties. If more than one form of violation occurs, the penalties multiply.
Notwithstanding its sponsors’ lofty intentions, the statute has been every plaintiffs’ class action attorney’s dream. Consider the following. First, to proceed to trial, a PAGA claim does not have to be certified as a class action. Second, PAGA claims are exempt from mandatory arbitration agreements. Third, class action waivers do not bar PAGA claims. And finally, a PAGA claim ordinarily cannot be removed to federal court, the forum deemed more sympathetic by employers. In a very real sense, a PAGA claim is a class action in disguise that avoids all the pitfalls of class actions normally encountered by the plaintiffs’ bar.
There has been a gold rush of PAGA lawsuits. In an average month, 650 pre-litigation complaints are filed with the Labor and Workforce Development Agency (LWDA) to initiate a PAGA lawsuit. After 30 days, the waiting period set by statute to permit the state to act on its own, virtually all of the LWDA complaints result in a PAGA lawsuit being filed. The ultimate irony is that while PAGA was enacted to assist an overburdened governmental agency police Labor Code violations, the same statute now threatens to overburden another governmental entity with severe budgetary restraints, the courts.
A PAGA plaintiff’s ability to go to trial without class certification gives him an enormous tactical advantage. In a routine class action, a class can be certified only if rigorous requirements under Rule 23 of the Federal Rules of Civil Procedure and its California counterpart, Section 382 of the Code of Civil Procedure, are met. Unless the class action plaintiff complies with these highly technical standards, his lawsuit normally collapses. PAGA dispenses with all of these niceties, creating a Shangri La for plaintiffs’ lawyers: a PAGA plaintiff can proceed to trial even if a host of factual determinations would dwarf any common questions and tie up the court for weeks or months.
In fact, unlike a class action plaintiff, a PAGA plaintiff can sue if he has a conflict of interest because of a close business or personal relationship with his counsel. Moreover, a plaintiff can sue under PAGA even if there has already been a class action settled over the very same Labor Code violations. And because there is no class action “opt-out” procedure by which other employees decide whether they want to be bound by the outcome, a PAGA plaintiff can settle his case and bind other “aggrieved employees” without bothering to give them a say.
Furthermore, even though PAGA requires the trial court to approve any PAGA settlement, the statute contains no standards for a court’s review. Finally, unlike “fairness hearings” that are required to settle class actions, there is no requirement that a court review the amount of attorney fees awarded to the PAGA plaintiff’s counsel. Thus, there is no way to ensure that PAGA counsel does not “sell out” the aggrieved employees with a low-dollar settlement in exchange for an eye-popping award of attorney fees. With all these procedural benefits, it is no wonder that PAGA claims have become the “lawsuit du jour” in California.
As recently as last October, Governor Jerry Brown signed an amendment for relief from PAGA’s excesses. AB 1506, sponsored by Roger Hernandez of West Covina, provided employers with a limited right to cure violations of certain pay statement requirements. Specifically, if the violation consists of the failure to provide the inclusive dates of the pay period or the name and address of the legal entity that is the employer (or in the case of a farm labor contractor, the name and address of the legal entity that secured the services of the employer), the employer may cure the violation by showing that it has provided a fully compliant wage statement to each “aggrieved employee” for each pay period for the three-year period before it received notice of the violation. This “cure” right can be exercised only once every 12 months. As the Labor Code provides thousands of other opportunities for piggy-backing PAGA claims on top of inconsequential violations, this amendment, targeting only two possible pay statement deficiencies, provides little meaningful relief.
Within the last month, however, the governor included in an addendum to his 2016-2017 budget a proposal that is being touted as a serious move to curb PAGA suits. The 22-page budget change proposal includes various adjustments to PAGA that are supposedly reflective of the administration’s commitment “to reducing unnecessary litigation and lowering the costs of doing business in California to support a thriving economic environment.”
Among other things, the budget trailer bill would authorize the hiring of 10 employees, including three attorneys and a deputy labor commissioner, to review and investigate incoming PAGA notices. Currently, there is a lone state employee in Sacramento charged with this function. In addition, the proposal would: (1) require more detail in PAGA notices filed with the Labor Workforce Development Agency and that claims for 10 or more employees be verified and accompanied by a copy of the proposed civil complaint, (2) extend the LWDA’s time to review PAGA notices from 30 to 60 days and specify that employers may request the state to investigate a PAGA claim, (3) require PAGA notices to be submitted online and accompanied by a filing fee, (4) extend the time for the LWDA to investigate an accepted claim from 120 to 180 days, (5) require the Director of Industrial Relations (DIR) to be served with a copy of the civil complaint if filed, (6) require court approval of all PAGA settlements, and that the DIR be provided with notice and an opportunity to object before the court determines whether to approve a settlement, and (7) following the invalidation of a widespread industry practice, create a procedure through which interested parties may request the DIR to establish a temporary amnesty and safe harbor program to provide expedited back wage payments to affected employees and penalty relief to employers.
Although ballyhooed as a great reform that will curb abusive PAGA litigation, the budget trailer bill would likely provide no significant relief to California employers. Instead, it would allow the state to get a larger share of penalties potentially available for Labor Code violations by enhancing the state’s own ability to bring such claims. Further, in empowering the LWDA to disallow proposed PAGA settlements, the net result for California employers is likely to be an increase in the size of PAGA settlements, not a reduction. It is hard to see how giving the state a bigger piece of the pie helps guard against PAGA claims for hyper-technical Labor Code violations.
Furthermore, even a staff of 10 LWDA employees charged with responsibility for reviewing and investigating incoming PAGA complaints is unlikely to succeed when there are more than 30 new PAGA notices every day the LWDA is open for business. To keep even, each of the 10 employees will need to review, investigate, and recommend the disposition of at least three PAGA claims per day, a near impossibility. No one is overly excited about this budget trailer. The employer community has been lukewarm to it and the plaintiffs’ bar has condemned it as something that would “undercut the fundamental right of all Californians.”
Regardless of whether its drafters’ intentions were noble or if its enactment constituted a payback by an outgoing governor to the plaintiffs’ attorneys who had financially supported him, PAGA is a structurally-defective statute. It cannot be salvaged with a hodgepodge of repairs, such as AB 1506 and Governor Brown’s budget trailer bill. Short of outright repeal, only systemic changes will accomplish meaningful reform and provide much-needed relief for California employers. Here are a few to consider.
First, we should start treating PAGA claims as what they are: disguised class actions. Although generating many of the benefits to plaintiffs and their counsel as class actions, a PAGA claim is exempt from the class certification requirements that apply to all other class claims. One means to address this problem and weed out abusive claims would be to revise the statute to require that a judge find, prior to trial of any PAGA action, that the case is “manageable.” In resolving the manageability issue, the court would be required to apply the same standards for determining whether a case is certifiable as a class proceeding under Section 382 of the Code of Civil Procedure. Compliance with these requirements would be by noticed motion, with the burden on the plaintiff. Aggrieved employees, like absent class members, would be afforded an opportunity to opt-out so that they would not be bound by a PAGA judgment not of their liking. Any grant or denial of the manageability motion would be directly appealable.
Second, under existing law, an “aggrieved employee” is entitled to PAGA penalties even if he has incurred no damages. If, for example, he receives a paycheck that fails to comply with all of the exacting Labor Code requirements, he may recover PAGA penalties regardless of whether the shortcoming resulted in any monetary loss and even if he had personal knowledge of the missing information, such as his piece-rate. It is simply presumed that he has been hurt. The simplest means to deal with this problem is to amend the statute to provide that PAGA penalties are recoverable if and only if those on whose behalf the action is brought have suffered actual damages or losses as a result of the conduct being challenged. This would have the benefit of eliminating many of the “gotcha” claims over hyper-technical violations and recognize only claims with real world significance.
Third, while PAGA now provides that “the superior court shall review and approve any penalties sought as part of a proposed settlement agreement,” it provides no guidance for the courts to do this. For example, it does not require that the court find, as it must in connection with a class proceeding, that the settlement is “fair” or “adequate.” The absence of any standards for “reviewing and approving any penalties” essentially means that a judge can be as principled or arbitrary as he chooses on any particular day.
The remedy for this problem is obvious: Require the court in performing its settlement review function to apply the same standards used to review and approve class action settlements. This would necessarily include review of attorney fees paid to PAGA plaintiffs’ counsel to ensure that the amount is not inflated.
Enacted into law when the state was revenue-strapped and justified by its proponents as a means of ensuring enforcement of Labor Code requirements that were supposedly overlooked, PAGA has instead turned the state into a judicial hellhole. Although the state’s coffers are now flush with cash as the result of an improved economy and “temporary” tax increases on high income taxpayers, there is no talk of repealing PAGA to reflect present realities. If, as he declared in his budget trailer bill, the governor is truly committed “to reducing unnecessary litigation and lowering the costs of doing business in California to support a thriving economic environment,” his administration should have no objection to providing meaningful, not cosmetic, PAGA relief.
Paul Coady, a labor and employment attorney, is the managing partner of the Los Angeles office of the law firm of Payne & Fears. Payne & Fears is a member of the Western Growers Ag Legal Network.