The Private Attorneys General Act (PAGA) of 2004

Introduction:

To understand the Private Attorneys General Act (PAGA) as it is utilized in the State of California from a high level is simple enough. In accordance with the Act, employees who meet specific criteria to be aggrieved can act as representatives of the state, taking their employer to court for violations to the California Labor Code. In the event a settlement is awarded to cover penalties, the majority goes to the state, while the group of represented employees split the remainder. The caveat for attorneys representing a group of aggrieved employees is the coverage of their legal fees and litigation costs.

In many ways, the institution of the Labor Code Private Attorneys General Act (PAGA) of 2004 ushered in a new era for California employees and employers. With its installment, aggrieved employees have gained the ability to function similarly to an attorney general, pursuing fines for explicit California Labor Code violations committed by a California employer6. It is requisite for all PAGA claims to be channeled through the Labor and Workforce Development Agency (LWDA) pursuant to Labor Code sections § 2698-2699.5³. PAGA is a multifaceted entity; the more serious claims resultant of the misapplication of Labor Code section § 2699.5, but a multitude of Health and Safety violations outlined in section § 6300, as well as other less serious violations to the California Labor Code that do not fall under the umbrella of the first two categories, are covered by the Act⁵.

Initial litigation in PAGA cases is channeled through the LWDA; in some instances, the employers are afforded the opportunity to cure employee complaints before civil actions are filed. This imposes a multitude of implications for employee and employer, which have been amplified in recent years. PAGA cases have grown exponentially in number over the last decade, so it should come as little surprise the impact to employees and California businesses have also been on the rise; with settlements increasing four-fold since its inception and doubling over the last five years⁵. How exactly a given settlement will manifest depends in entirety on an ever-shifting PAGA backdrop.

The PAGA landscape, as with other key pieces of legislation, is continually shaped at the hand of benchmark cases. Whether it be the Khan v. Dunn-Edwards Corporation case driving home the importance of filing on behalf of more than the individual in PAGA, the way an individual settlement in Kim v. Reins has presented the employers ability to forgo pending arbitration in PAGA by utilizing an offer to compromise, or the decision cast by Iskanian v. CLS Transportation which concluded agreements waiving future PAGA claims before a dispute are invalid. This last notion, as noted in Iskanian v. CLS Transportation, of abridged resolve of arbitration agreements, played a major role in the recent O’Connor v. Uber Technologies judgement¹¹.

Definition/Explained:

Born from budgetary duress in 2003, California’s Private Attorneys General Act (PAGA) went into effect January 1st, 2004 in the form of California Labor Code § 2698 et seq.⁵. At its core, PAGA is an attempt by the California Legislature to deal with the inability of a small and declining regulatory staff to better handle Labor Code violations that come coupled with an exponentially growing California workforce¹⁰. It is a process by which one ‘aggrieved employee’ may act as a representative of the regulatory agency, recouping penalties ‘on behalf of himself or herself and other current and former employees’ impacted by a given labor code violation (Khan). The process is set into motion differently for each of PAGA’s three facets. The first requires the proper execution of section § 2699.3(a)(1),(2), where both the LDWA and employer are notified of the grievance and the employer is given the opportunity to rectify said wrong. In the case of Health and Safety violations outlined in section § 6300, the California Occupational Safety and Health Act of 1973 must be withheld⁵. In the case of other miscellaneous, less serious Labor Code discretions, they follow a similar but abbreviated path to a resolution over those outlined for section § 2699.5¹.

While PAGA shares many similarities with class action, there are key differences to differentiate the two, such as the preemption from arbitration agreements PAGA entails¹¹. In addition to providing an exclusion from the binds of arbitration agreements, PAGA settlements are separated from a class action in the distribution of rewarded settlements. In an attempt to quell the decline in the regulatory ability of the State of California, and to allow the individual to effectively arbitrate on behalf of violations to the state-mandated Labor Code, three-quarters of any PAGA reward for labor code violations go to the LWDA⁶. The leftover quarter is bestowed upon the lot of aggrieved employees¹. When awarded, PAGA settlements also covers the full amount of the victorious plaintiff's attorney fees which can often reach in excess of six figures and have the ability to reach into the multi-million dollar range⁵.

Figure A. How are settlements awarded in PAGA? Of the awarded settlement, the attorney’s fees are covered in whole, then the LWDA and aggrieved employees split the remains with 75% going to the former and 25% awarded to the latter.

When stepping back and looking at the numbers, the immense size of the California workforce in comparison to the LWDA is staggering. For every 1400 employees, there is only one member of the LWDA, rounding out to a workforce 19.4 million strong while the number of regulatory agents doesn’t even break 15,000. This disproportion shines a light on the need for an Act such as PAGA, while its statutory right to attorney fees and the ability for aggrieved employees to make monetary gains incentivizes filing for all but the employer².

Figure B. The California Labor and Workforce Development Agency (LWDA) is only made up of 14,000 employees while the California Workforce rounds out to 19.5 million, illustrating the need for an Act such as PAGA.

Employers in the state of California with large workforces stand to lose the most from violating PAGA. This comes down to the way in which penalties are fulfilled by the employer. In many instances, there may not be a specified penalty for a given PAGA violation, which results in the employer paying $100 for the first violation, and $200 the second, per pay period for each employee².

Example Infringements:

Category 1: Serious Violations

While PAGA is one of the more comprehensive pieces of legislation enacted in the realm of the California Labor Code over the last few decades, it can be broken down into three primary facets and workflows. The first grouping of violations is the most serious and pertain most comprehensively to Labor Code section § 2699.5, while also including sections § 203, § 226.7, § 1196, and portions of § 226¹. While there are numerous infringements in this facet of PAGA, the more notable areas for class action litigation related to unpaid overtime hours for non-exempt salaried employees, and erroneously classified independent contractors2. Yet, while these infractions are not uncommon, and are often committed unbeknownst to the employer, they are serious.

As is the case, the contingency of a valid PAGA violation is bestowed upon the LWDA, which must be notified of a complaint in concert with the employer of the current, or former, aggrieved employee. After a period of thirty-three days, if there is no action on the side of the LWDA, the employee may choose to engage a civil action⁵.

Figure C. In the benchmark Boyd v. Bank of America (2015) case, staff appraisers served as the aggrieved employees, asserting they were not compensated for overtime when forced to work longer than 8-hour days, weekends, and holidays², ⁴.

Category 2: Health and Safety Violations

The second category for PAGA violations, which relate to the California Occupational Safety and Health Act of 1973 have differed contingencies than both the first and third categories of the Act⁵. Where the first and third categories of PAGA violations relate to the labor code, the second fills in the gaps that relate to health, safety, and workplace conditions. Further, the second category follows a path of its own through the litigation process. Most notably, category two claims must transcend the decision of the LWDA to investigate, or not investigate a claim, and requires the inspection, and subsequent citation, of a given workplace to be administered by the Department of Occupational Safety and Health (DOSH)⁵. This provides a clear division from category one violations, exacerbated by the lack of support for private lawsuits⁵.

Category 3: Nonserious Violations

Category three PAGA violations are the nonserious spillover of Labor Code violations not covered by either of the first two categories¹. The most common transgressions of this third arm of PAGA often relate to inadequate, incomplete, or simply incorrect paystub information as outlined in § 226. The course of action to file a claim follows a very similar path to the first category of PAGA violations; however, employers have the opportunity to ‘cure’ offenses of the third category following their notification of said violation⁵. The employer in question is allotted a thirty-three-day window to attempt to rectify the issue which was reported. Yet, regardless of an attempt by the employer to cure the digressions, the employee has the opportunity, given they do not feel the issue has been ‘cured’, to object to the LWDA and are still afforded the option to file a class action suit¹. In effect, the attempt to cure may weigh little on the end result but does qualify the violations of category three as nonserious.

Enforcement, Financial Considerations, and Litigation Potential

Most enforcement of PAGA is routed through the Labor and Workforce Development Agency (LWDA), especially as it relates to serious and nonserious offenses to the Labor Code. For other offenses, such as those involving violations of the California Occupational Safety and Health Act of 1973, there is requisite coordination with the Division of Occupational Safety and Health (DOSH) ². In the realm of litigation threats to California employers, PAGA has ranked among the top three for the better part of the last decade. Further, representative actions have exploded in recent years and it is suggested this increase serves to limit growth potential for some California employers^5.

Case Law/Cases Citing PAGA

I. Khan v. Dunn-Edwards Corporation⁸

In the recent case of Khan v. Dunn-Edwards, the importance of filing on behalf of the group over the individual is highlighted. As it relates to most arbitration, and especially to PAGA violations, it is of the utmost importance to follow the path laid out by the LWDA when filing a claim, so as to affirm all requisites are accounted for. In the case of Khan, required administrative procedures were not properly followed and the judgment laid out by the court ruled accordingly. In PAGA cases, the verbiage utilized to define a grievance is of the utmost importance. Failing to seek action representative of the whole, or at least multiple other employees, in lieu of the representation of a sole aggrieved employee, as Khan chose, disqualifies the action on the grounds that it did not meet the need for adequate notice. This faction emanates from the stipulation that PAGA class actions are brought as violations to the Labor Code that the LWDA needs to uphold. As such, they are not singular in nature. This stipulation of Khan’s singular filing, in turn, failed to give Dunn-Edwards adequate opportunity to respond. The judgment shines a light on the need to comply with all requisites when filing PAGA violations.

II. Kim v. Reins International California, Inc.⁹

Another recent, and important, judgment was bestowed by the Court of Appeal of the State of California in Kim v. Reins. While differing in the motive for dismissal, the ultimate result in Kim was a dissolution of the brought PAGA claim. The initial, serious claim against Reins was for wage and hour violations. Unlike Khan, however, Kim alleged both individual and class entitlements, meeting the requisite that PAGA claims be brought as a representation of the whole. Yet, during the course of arbitration, Kim accepted an offer to settle his individual claims, effectively dismissing that claims on account of the whole with prejudice. Post acceptance, Reins moved for immediate resolution of the PAGA claim, under the assertion that Kim was no longer an "aggrieved employee". In the acceptance of the offer to resolve, he had dismissed his individual claims against Reins, and therefore he no longer had the standing to assert a claim under the PAGA. The trial court sided with Reins' motion and entered judgment. While still fresh, the judgment provides a window into a potential avenue for employers to circumvent costly PAGA litigation.

III. Iskanian v. CLS Transportation7 and implications for the recent O’Connor v. Uber Technologies¹¹

Iskanian v. CLS Transportation serves as a benchmark PAGA decision and defines the viability of arbitration agreements in the PAGA landscape. In the case, Iskanian claimed a suite of Labor Code violations, such as the failure to pay overtime, lack of meal breaks, and missing information on pay stubs. Notably, Iskanian had signed an arbitration agreement with CLS refuting his right to pursue class actions against CLS. While not an uncommon practice to have new-hires sign such documentation, the viability of such agreements is lost in the functionality of PAGA. The devil is in the details with PAGA, and the preemption that in PAGA the ‘aggrieved employee’ is seeking penalties on behalf of the state must not be overlooked. Further, it is in this light of the stewardship of public policy, that arbitration agreements do not recuse employers from being indebted to upholding the Labor Code. The decision in Iskanian v. CLS Transportation, suggests the importance the court places on the PAGA functionality by which, on account of the state, deputized employees prosecute transgressions of the Labor Code.

• Graph showing a timeline of PAGA cases steadily increasing to the point of Iskanian v. CLS (from 2004 w/PAGA born to 2012’s Iskanian decision), then booming with a 400% increase from 2012 to now.

In a most notable, recent decision pitting 160,000 current and former Uber drivers against the rideshare giant, the District Court Judge issued an order stating that, given the precedent in Iskanian and Luxottica, Uber’s blanket PAGA waiver in its contract was not only unenforceable but also inseverable. As such, the whole arbitration agreement was also unenforceable. Because simply signing an arbitration agreement is no green flag to not follow the rules laid out in the California Labor Code.

Conclusions

Indeed, a sweeping piece of legislation, PAGA has ushered in a new era of California class action. In this new vein, savvy employees are given the tutelage to hold employers accountable, forcing the upholding of the California Labor Code. Further, it has given institutions, like the Labor and Workforce Development Agency the ability to manage California’s massive, and ever-growing workforce in a more hands-off capacity. It can be argued that the distribution of settlements serve as an incentive to lawyers to take and file claims, though the more expansive increases in case volume came after specific decisions.

While there is certainly room for proponents of either side of the PAGA aisle, the three facets that make it up are fairly straightforward. The first subset of violations is indeed the most serious with the more notable areas for class action litigation within it relating to unpaid overtime hours for non-exempt salaried employees and erroneously classified independent contractors. The second subset strays far from the first, encompassing violations to the California Occupational Safety and Health Act of 1973, and also incorporates the Department of Occupational Safety and Health (DOSH) into the arbitration process. The third and less serious violations offer an olive branch to employers via the ability to cure their transgressions. Further, and in spite of their differences, all three facets fall under the umbrella that is the LWDA.

The landscape that defines PAGA is in a state of constant flux at the hand of key decisions brought by the courts. Whether it be the importance of representing a number of aggrieved employees, as shown in Khan v. Dunn-Edwards, the potential for employers to forgo PAGA arbitration by settling singular civil cases, as in Kim v. Reins, or the way in which arbitration agreements have been shown to hold little weight in obstructing PAGA class action in Iskanian v. CLS Transportation.

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2. Barrera J. 2016.Employment Litigation on the Rise. CalChamber. https://advocacy.calchamber.com/wp-content/uploads/policy/issue-reports/Employment-Litigation-Issue-Summaries-2016.pdf

3. Division of Workers' Compensation - Injured worker information.Private Attorneys General Act (PAGA) – Filing. State of California Department of Industrial Relations. https://www.dir.ca.gov/Private-Attorneys-General-Act/Private-Attorneys-General-Act.html

4. First Class Relief 2017: How Class Actions Benefit Those Who Are Injured, Defrauded And Violated. 2017. Center for Justice & Democracy at New York Law School. https://www.centerjd.org/system/files/FirstClassRelief2017F4.pdf

5. Goodman MJ. 2016. The Private Attorney General Act: How to Manage the Unmanageable.Santa Clara Law Review. 56(2):413–55

6. Grover M. 2017.Recent Developments in Paga Litigation. Contra Costa Lawyer Online RSS. https://cclawyer.cccba.org/2017/07/recent-developments-in-paga-litigation/

7. Iskanian v. CLS Transporttion LLC., Cal: Court of Appeal, 2nd Appellate Dist., 4th Division 2012 (Los Angeles County Super. Ct. No. B235158 June 4, 2012)

8. Khan v. Dunn-Edwards Corporation, Cal: Court of Appeal, 2nd Appellate Dist., 4th Division 2018 (Los Angeles County Super. Ct. No. BC477318 January 4, 2018)

9. Kim v. Reins International California, INC., Cal: Court of Appeal, 2nd Appellate Dist., 4th Div. 2017 (Los Angeles County Super. Ct. No. B278642 December 29, 2017)

10. Micheli C. 2018. Private Attorneys General Act Lawsuits in California: A Review of PAGA and Proposals for Reforming the “Sue Your Boss” Law .The University of the Pacific Law Review. 49:265–89

11. Shaikh AA. 2017. The Post-Concepcion Contract Landscape: The Role Socially Conscious Business Can Play.Santa Clara Law Review. 57(1):223–57