Since its passage in 2004, California’s Private Attorneys General Act (“PAGA”) has been a weapon used by employees and their lawyers across California. PAGA allows one “aggrieved employee” to sue his/her employer in a representative capacity and to recover penalties and attorneys’ fees for technical violations of the California Labor Code suffered by that one employee and all other employees.
The supposed policy goal of PAGA is to increase employers’ compliance with California employment laws by “deputizing” employees to bring lawsuits on behalf of the State of California for technical Labor Code violations that they and other employees have endured. If successful, the deputized PAGA plaintiff gets his/her attorneys’ fees plus 25% of the statutory penalties for each and every violation suffered by each and every aggrieved employee. The State of California gets the remaining 75% of the penalties imposed.
PAGA’s Devastating Impact on Small Businesses
Many small businesses operate without a compliant, competent HR infrastructure. This combined with the fact that California has some of the most complicated, unique, and employee-friendly laws in the nation means that many small businesses are unwittingly making many employment law mistakes every day. Add this reality to the statewide cottage industry of PAGA law firms and attorneys waiting to pounce, and you begin to understand why PAGA is a small business nightmare in California. A single PAGA case can cause an employer to pay hundreds of thousands of dollars in penalties for violations suffered by dozens — if not hundreds or thousands — of employees.
Plus, as mentioned above, PAGA contains an attorneys’ fees provision that requires an employer to pay the attorneys’ fees of the plaintiff, if the plaintiff prevails. So, on top of the massive penalties the employer must pay, and its own legal bills for the cost of defense, the employer then gets hit with yet another legal bill from the plaintiff as well. I’ve heard of several California businesses who have closed and filed for bankruptcy as a result a single PAGA lawsuit. PAGA is deadly serious for businesses in California.
Arbitration — A Shield Against PAGA?
It is against this backdrop that many California employers are using mandatory arbitration agreements with their employees. These agreements require the employee to agree to waive their rights to bring a class action or any type of representative (i.e., PAGA) action against the employer. Instead, in exchange for receiving something of value from the employer, the employee signs the arbitration agreement and agrees only to bring individual claims and then only to do so in an arbitration (rather than litigation) forum.
[Note: California courts generally follow what is called the Iskanian rule, which I have blogged about here. The Iskanian rule holds that an otherwise valid mandatory arbitration agreement may require an employee to arbitrate his/her class action claims but not his/her PAGA claims. That’s because the State of California, considered the real party in interest in a PAGA lawsuit, has not consented to the arbitration. A few courts have ruled differently and held that PAGA claims can be forced into arbitration, a development which I also blogged about here. More recently, one California court allowed an employer to force a PAGA claim to arbitration because the plaintiff in that PAGA case sought unpaid wages and not exclusively PAGA penalties that would flow to the state. Esparza v. KS Industries, 13 Cal. App. 5th 1228 (2017). A later decision by a different Court in Lawson v. ZB, 18 Cal. App. 5th 705 (2017), criticized the Esparza decision, so the debate continues to simmer. This issue will likely remain unresolved until the U.S. Supreme Court issues its opinion in the Morris, Lewis, and Murphy Oil consolidated cases, which was argued in October 2017.]
But California employers still use arbitration agreements to attempt to force a plaintiff’s claims into arbitration, where employers feel they have a better chance of prevailing. If the Court rules that the PAGA portion of the plaintiff’s lawsuit cannot be arbitrated, the Court typically stays the PAGA claims until resolution of the arbitration case.
While there are dozens of important arbitration cases now making their way through California courts that could impact this strategy one way or the other, one recent California Court of Appeal has shown employers one way to use a competently drafted arbitration agreement — along with a settlement payment — to defeat a PAGA lawsuit.
Kim v. Reins International California, Inc.
In Kim v. Reins International California, Inc., the PAGA plaintiff sued his former employer and alleged individual and class claims for numerous wage and hour violations.
The employer had previously required all employees, including this PAGA plaintiff, to sign a mandatory arbitration agreement. As a result, when confronted with the employee’s lawsuit, the employer successfully moved to compel arbitration of the employee’s individual claims. The Court granted the employer’s motion to compel arbitration and reserved the issue of class arbitrability for the arbitrator. In addition, the Court stayed the PAGA lawsuit pending resolution of the employee’s individual claims in the underlying arbitration.
While the arbitration was pending, the employer settled with the employee on those individual claims. The employee signed a settlement agreement in which the employee dismissed all of the employer’s alleged violations with prejudice in exchange for a settlement payment.
But the PAGA lawsuit was still alive because it was a representative action. After filing the dismissal with prejudice in the arbitrated matter, the employer then moved for summary judgment on the PAGA lawsuit. The employer’s argument was that the plaintiff was no longer an “aggrieved employee” because he had released and waived all violations as a result of the settlement. In effect, the employer argued, this PAGA plaintiff had no standing to assert a violation of PAGA because this employee had dismissed and released the employer from all prior Labor Code violations.
The Court agreed with the employer. Whenever a PAGA plaintiff agrees to “dismiss his individual claims with prejudice,” then that plaintiff loses his standing to bring a representative PAGA action. The result is that, once the PAGA plaintiff dismisses his underlying individual claims, the PAGA action gets dismissed as well.
Kim v. Reins International California, Inc. means that employers can now wipe away a pending PAGA case by settling the individual claims being asserted by the PAGA plaintiff. That’s the good news. The bad news, however, is that the law firm representing that plaintiff will likely have other current and/or former employees at the ready to bring a new PAGA action against the employer.
Interestingly, the Kim v. Reins International California, Inc. Court did not address the broader question of what impact an adverse decision in the arbitration would have on the plaintiff’s PAGA standing. In other words, had the matter not been settled in arbitration but, instead, had the arbitrator ruled against the employee, would the employee still have standing to bring a PAGA claim because the employee is standing in the shoes of all other aggrieved employees? There would be no dismissal with prejudice in that scenario. Would that change the outcome?
As courts, lawyers, and employers across California grapple with PAGA and the decision of whether to use arbitration agreements, one thing is certain — the Kim v. Reins International California, Inc. decision will put employees in a bind. Either they bring a PAGA lawsuit without alleging individual violations, or they allege individual violations in their PAGA lawsuit but then refuse the settlements from employers that are sure to come. Only time — and potentially an intervention and decision by the California Supreme Court — will tell. Stay tuned!
You can read the Court’s decision in Kim v. Reins International California, Inc. here.