One of the biggest risks faced by employers in California is the threat of a financially ruinous lawsuit under the California Private Attorneys General Act of 2004 (“PAGA”), codified as Labor Code section 2698, et seq. The PAGA permits an “aggrieved” employee to sue as a proxy or agent of the state’s labor law enforcement agencies to protect the health, safety and compensation of workers under the provisions of the California Labor Code. An “aggrieved” employee is any person who was employed and against whom one or more of the alleged Labor Code violations was committed. The PAGA, which employers demean as a “bounty hunter” law that encourages meritless lawsuits, creates severe statutory penalties, of which 75 percent are paid to the California Labor Workforce Development Agency (“LWDA”), and 25 percent allocated to employees, plus attorneys fees. The PAGA statutory penalties provide recovery beyond actual losses of wages suffered by employees.
Typically, a PAGA claim is filed in an employee’s lawsuit alleging individual and class claims on behalf of similarly situated employees for the same wage-and-hour violations. On March 12, 2020, the California Supreme Court’s decision in Kim v. Reins International California, Inc., S246911, looked at the conditions under which a settlement of an individual employee’s wage-and-hour claims does not necessarily prevent a subsequent claim by the settling employee under the PAGA. The factual circumstances of Kim are instructional for employers, because the statutory requirements under which employers should settle a PAGA claim were not followed.
In Kim, Reins International California, Inc. (Reins) operates restaurants in California and employed Kim as a training manager, a position it classified as exempt from overtime laws (and therefore not subject to rest and meal break requirements). Kim filed a class action lawsuit, together with a PAGA claim, alleging he and other employees were misclassified as exempt employees, which resulted in denial of overtime pay and rest and meal breaks. Kim had executed an individual employment agreement that required his employment claims to be arbitrated and waived his right to pursue class claims. Based on Kim’s arbitration agreement and waiver of class claims, Reins successfully obtained a court order dismissing the class claims and staying his PAGA claim pending arbitration of Kim’s individual claims Kim and Reins then settled the individual claims in the arbitration. The employer subsequently obtained a court order dismissing the PAGA claim on the ground that Kim was not an “aggrieved” employee under the PAGA because he was not owed further wages.
The Supreme Court reversed the dismissal of Kim’s PAGA claim, holding that even though Kim dismissed his individual claims, he nonetheless was an “aggrieved” employee who could pursue a PAGA claim because his settlement agreement did not dismiss the PAGA claim. The Supreme Court noted that Kim’s settlement of his underlying individual wage-and-hour claims against his employer specifically excluded the pending PAGA action. Supreme Court noted:
“[Rains] settled the arbitrable claims with an offer that encompassed only Kim’s ‘individual claims.’ Indeed, Rein’s one-page offer mentions Kim’s individual claims three times. When Kim returned to court to litigate the PAGA claim, which the parties had specifically carved out of the settlement, Reins argued Kim had lost standing.” [emphasis in original] … The PAGA claim was never resolved. Indeed, consistent with the settlement agreement, Kim’s request for dismissal of the individual claims specified that ‘Cause of Action Seven for penalties pursuant to Lab. Code § 2699 et seq. (‘PAGA’) for the underlying violations … shall remain.’”
(See pp. 18-19.)
This a reminder for employers that they should follow all statutory requirements in a settlement to conclusively terminate a PAGA claim. Under the PAGA, an employer and employee may not conclusively settle a PAGA claim without Court approval. (Cal. Labor Code § 2699(l)(2).) The statute requires that a proposed settlement shall be submitted to the Labor Workforce Development Agency (“LWDA”) at the same time that the settlement of a PAGA claim is submitted to the court for approval. (Id.) The superior court’s judgment of a PAGA claim then must be submitted to LWDA within 10 days after of the judgment or order. (Id., at § 2699(l(3).)
Kim should not prevent employers from settling a plaintiff’s underlying wage-and-hour individual and class claims, and a PAGA claim at the same time, if the statutory requirements of a settlement are satisfied under Labor Code section § 2699(l). A settlement agreement conclusively dismissing a PAGA claim should require the plaintiff to give notice of the settlement to the LWDA, and if no opposition is presented by the LWDA (which is typically if not always the case), the superior court can then approve the settlement of the PAGA as a binding judgment on all potential “aggrieved” employees, under the doctrine of res judicata. Because a PAGA lawsuit is brought on behalf of the state’s labor law enforcement agencies, unnamed employees need not be given notice of PAGA claim as it is fundamentally a law enforcement action to recover penalties. (See, Arias v. Superior Court (2009) 46 Cal.4th 969, 986 [“Because an aggrieved employee’s action under the Labor Code Private Attorneys General Act of 2004 functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. The act authorizes a representative action only for the purpose of seeking statutory penalties for Labor Code violations (Cal. Lab. Code § 2699, subds. (a), (g)), and an action to recover civil penalties “is fundamentally a law enforcement action designed to protect the public and not to benefit private parties”).)
That was not done in Kim. In fact, the PAGA claim was excluded from Kim’s settlement agreement. Employers should not make this mistake when faced with a PAGA claim.
Questions
If you have any questions regarding this Legal Alert, please contact the following attorneys from our office, or the attorney with whom you typically consult.
Bruce Scheidt
bscheidt@kmtg.com | 916.321.4502