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Watch Out Employers! Employees’ Settlement of Individual Claims Does Not Extinguish PAGA Standing to Sue as State Representative for Labor Code Violations

Author: Po Waghalter

June 9, 2020 9:00am

In a recent holding by the California Supreme Court in Kim v. Reins International California, Inc., (March 12, 2020, CA Supreme Court Case No. S246911) the state’s public policy of supporting employee rights was reaffirmed: an employee does not lose standing to bring an action under the Private Attorney General Act (“PAGA”) on behalf of the State, for particular Labor Code violations, simply because the employee settled and dismissed his own private, individual action.

What is PAGA?

Firstly, what is PAGA? In simple terms, PAGA is a “hero” type of lawsuit where one employee sues an employer on behalf of all employees suffering Labor Code violations. Specifically, an “aggrieved employee” may sue an employer on behalf of similarly situated aggrieved employees, but stands “as the proxy or agent of the state’s labor law enforcement agencies.” (Arias v. Superior Court (2009) 46 Cal.4th 969, 980-981 (Arias).) PAGA allows for plaintiffs to recover civil and statutory penalties beyond a plaintiff’s actual losses incurred, including double or treble damages of civil penalties. Penalties recovered are shared with Labor and Workforce Development Agency, with 25% shared by plaintiffs, and 75% going to the Labor and Workforce Development Agency for enforcement of labor laws. (Labor Code, § 2699) Additionally, reasonable attorneys’ fees and costs are recoverable, serving as a strong motivating force for prosecution of PAGA lawsuits.

Prior to PAGA, employers could only be sued by the State for civil penalties under the Labor Code. (Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 378 (Iskanian).) As the sole enforcement agency, enforcement of the Labor Code’s laws protecting workers were often impacted by inadequate funding, insufficient resources, and the allocation and redirection of limited governmental resources to other priorities. (Iskanian, supra, 59 Cal.4th 348, 379) As a result, PAGA became the legislative answer to providing the State with additional resources in the form of an additional class of plaintiffs to assist in protecting the health, safety, and fair compensation of employees.

Background

As a background to the Kim case, Plaintiff Justin Kim (“Kim”) sued his former employer, defendant Reins International California, Inc. (“Reins”) for multiple labor code violations, related to allegations that he and other training managers were legally misclassified. Reins employed Kim as a “training manager” at one of its restaurants. As a “training manager,” Kim was classified as “exempt” from overtime laws. Based on Labor Code violations related to the alleged misclassification, Kim filed suit against Reins in a putative class action on behalf of similarly situated training managers, with multiple causes of action for statutory violations, including failure to pay wages and overtime, failure to provide meal and rest breaks, failure to provide accurate wage statements, waiting time penalties, and unfair competition, as well as a demand for civil penalties under the Labor Code’s Private Attorneys General Act of 2004 (“PAGA”). (Labor Code § 2698 et seq.)

As Kim agreed to arbitration upon his hiring, the court dismissed the class claims, stayed the PAGA and injunctive relief claim as to unfair competition, and ordered arbitration of all Kim’s remaining claims. Ultimately, Kim settled his individual claims with Reins for $20,000 following acceptance of a statutory offer to compromise pursuant to CCP § 998. Following this settlement and dismissal, Reins moved for summary judgment as to the remaining PAGA claim, with the argument that Kim no longer had standing as he was no longer an “aggrieved employee” by virtue of the resolution of Kim’s individual claims. The Trial Court granted Rein’s motion, and the summary judgment against Kim was affirmed by the Court of Appeal. The California Supreme Court, however, disagreed, clarifying that Kim did not lose standing under the PAGA act, and Kim may now move forward on the PAGA cause of action.

Supreme Court Rationale

Analyzing the novel issue of whether a PAGA claim is extinguished where an employee settles his individual action, the Supreme Court provided analysis based in the statutory language, underlying purpose, and legislative intent. (See Osborne v. Yasmeh (2016) 1 Cal.App.5th 1118, 1127.) The Court noted “the remedial nature of [PAGA’s] legislation [is] meant to protect employees.”

In analysis of statutory language, in brief, the Court focused on Rein’s argument that Kim was no longer an “aggrieved employee” because Kim was compensated for his injury. The Court rejected Rein’s argument, differentiating “injury” from “violations” and clarified that “settlement does not nullify these violations.” Additionally, the Court noted that the Legislature did not intend to limit PAGA standing to those with unresolved compensatory claims, as the clear wording of the statute did not explicitly so state. Moreover, the Court found the statutory language to be expansive, in order to serve “the state’s interest in vigorous enforcement” of the Labor Code.

The Court, then analyzing the statutory purpose and legislative intent, focused on the Legislature’s intent of augmenting enforcement capability “by empowering employees to enforce the Labor Code as representatives of the Agency.” (Iskanian, supra, 59 Cal.4th at 383; see id. at 388-389.) The Court indicated the state may “deputize anyone it likes,” even where there is no actual injury, as long as there has been a violation, further affirming its significant differentiation of “injury” from “violations.” (See id. at p. 382.)

Reins made additional arguments, including claim preclusion based in the individual claim’s settlement, however, the Court rejected this assertion, drawing attention to terms of Kim’s settlement agreement which explicitly indicated that “Cause of Action Seven for penalties pursuant to Lab. Code § 2699 et seq. (‘PAGA’) for the underlying violations . . . shall remain.”

Takeaway

The history and holding of Kim v. Reins International California, Inc., has significant impact to employees, employers, and their insurers.

California employees, and their attorneys, can find support for legal standing as to PAGA claims, with the knowledge that a Labor Code violation, even without injury, may confer standing as a state representative against an employer. This likely means more litigation, and hopefully, ultimately fewer violations.

As for employers, it goes without saying that Labor Code violations should be avoided. However, of additional significance is the importance of ensuring that a settlement agreement address a potentially problematic issue, the remaining PAGA action. Specifically, an employer should ensure that any individual settlement agreement related to a PAGA plaintiff, or even potential plaintiff, address and include the express provision regarding and releasing status as a PAGA representative.

As for insurers, caution should be heeded as to ultimate litigation costs. Here, Rein’s settlement of Kim’s individual claims for $20,000 is likely a stark contrast to the ultimate cost of litigation in light of the involvement of the Court of Appeal, the California Supreme Court, and now, its current continued litigation in trial court. Indeed, the live PAGA cause of action, and recoverable reasonable attorneys’ fees, may not be insignificant.

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