California Supreme Court Deals Another Blow To Employers: Individual Employee’s Settlement of Labor Code Violation Claims Does Not Extinguish “Aggrieved” Status for PAGA (Civil Penalty) Purposes

03.30.2020

On March 12, 2020, the California Supreme Court handed down a landmark decision in Kim v. Reins International Calf., Inc. (Case No. S246911) (link) (“Kim”).  In Kim, the California Supreme Court held that employees who have settled their individual claims against their employer for alleged California Labor Code violations do not lose standing as an “aggrieved” employee, as required to bring - and maintain - an action under the Private Attorneys General Act of 2004 (“PAGA”). The Court’s decision reversed the trial court and appellate court rulings which were both in favor of the employer.

When PAGA was enacted in 2004, the concept was to help the overburdened State enforcement agencies keep pace with the expanding labor market by creating an enforcement mechanism allowing employees to stand in the place of the State of California (as private attorneys general) to pursue civil penalties from employers for Labor Code violations. The Act imposes several requirements in order to use the private enforcement mechanism. Most notably, the employee must provide a formal, written notice to the Labor and Workforce Development Agency (“LWDA”) before being able to proceed with a court action; and any civil penalties collected in a PAGA action must be allocated 75 percent to the State of California, and 25 percent to the aggrieved employees. PAGA also allows for the recovery of attorneys’ fees and costs for a prevailing plaintiff. Because PAGA actions cannot be compelled to arbitration even where arbitration agreements exist between an employer and employee, the number of PAGA actions is increasing.

The issue before the Court in Kim was whether an employee loses standing to pursue a claim under PAGA when they settle and dismiss their individual claims for alleged Labor Code violations committed by the employer. By way of brief background, the plaintiff in this matter, Justin Kim, was a training manager for Reins, which classified him as an exempt employee. Reins operates restaurants in California. Kim filed a class action lawsuit against Reins alleging he and other training managers were misclassified as exempt employees. In his complaint, Kim asserted that Reins failed to pay all regular and overtime wages due to him; failed to provide meal and rest breaks; failed to provide accurate wage statements; owed him waiting time penalties; and engaged in unfair competition. Kim sought compensatory and statutory damages for these violations, plus civil penalties under PAGA.

However, Kim signed an arbitration agreement at the time he was hired by Reins, thus, Reins moved to compel arbitration of Kim’s individual claims, dismiss the class claims, and stay the PAGA claims, which are not subject to private agreements to arbitrate under the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 382-384. Accordingly, the trial court ordered arbitration of Kim’s individual claims, dismissed the class claims, and stayed the PAGA claim and the unfair competition claim’s injunctive relief aspect until the parties’ arbitration was completed. Several months thereafter, Kim was served a settlement offer from Reins under Code of Civil Procedure section 998, which included and called for the dismissal of Kim’s individual claims. Kim accepted, leaving only the stayed PAGA claim to be resolved. When the parties returned to court and the stay was lifted as to the remaining PAGA cause of action, Reins moved for summary adjudication based on Kim settling his individual claims and claimed Kim therefore lacked standing to maintain a PAGA action. The trial court granted the motion, and the decision was affirmed on appeal.

In its decision, the Court distinguished the concepts of damages (compensatory and statutory penalties) versus civil penalties, and individual injury versus the enforcement capabilities of the State’s Labor and Workforce Development Agency (on whose behalf an aggrieved employee is acting when s/he brings a PAGA action). First, the Court stated damages (of the compensatory and statutory penalty variety) are intended to make a party whole, whereas civil penalties, such as those recoverable in a PAGA action, are intended to punish and deter future conduct, akin to punitive damages. Therefore, requiring an inquiry into whether an aggrieved employee still had an “injury” — which is to say they had not been made whole for any damages — would create a standing requirement for PAGA claims that was not originally imposed by the Legislature or in the PAGA statute. This was a critical blow to Reins’ position.

The Court further justified its decision, despite the fact that the PAGA claims relied on the same underlying Labor Code violations Kim had already settled for himself and been compensated, by reasoning there are differences in the types of violations an employee is able to allege and seek recovery for as an individual as compared to violations that may be maintained in a PAGA action – the latter of which may lack a private right of action and ability to recover damages. For example, in a PAGA action for unpaid wages under Labor Code section 558, an aggrieved employee is able to recover civil penalties, but not able to recover unpaid wages. On the other hand, an individual bringing a claim for damages under section 558 would be able to recover unpaid wages. The Court justified its decision by illustrating there are some claims for which injury is a required element for an individual action, but no such requirement exists for statutory penalties. The Court used wage statement violations as an example because under Labor Code section 226(a), an employee must show an injury to maintain a claim and recover statutory damages, but the same employee—through a PAGA action—is not required to show injury related to the violation under section 226(e) to recover penalties. 

The Court also opined that the State’s ability to recover civil penalties, either directly by State action or through a PAGA action, would be diminished if an employer was able to reduce the number of “aggrieved” employees by settling the employees’ actual grievances on an individual basis. If individual settlements caused employees to no longer be considered aggrieved (which it would as to each of them), the civil penalties an employer might have to pay would be reduced because civil penalties under PAGA are calculated on a per pay period, per employee, basis. Of course, from a logical standpoint, this does not sound problematic—the employer would be paying money to aggrieved employees, their claims would be resolved, and that is what is supposed to happen. Accordingly, the Court took the extra step here to project that employers and aggrieved employees, left to their own devices, would not be capable of resolving these claims and it could conceivably result in employers reducing or avoiding civil penalties altogether by settling with employees individually, with no state or judicial oversight. This part of the Court’s analysis leaves much to be desired, but it reflects the Court’s intention and path to imparting a decision that operates to create significant risk and costs for employers, with virtually no practical, efficient off–ramp by which to exit the ever–costly and heavily cluttered California litigation highway.

While the Court’s decision means that an individual settlement does not operate to extinguish an employee’s “aggrieved” status in a pending PAGA action, the Court did not opine as to whether individuals may resolve all of their individual claims and, as part of that intended global resolution, agree that they will not seek additional or different civil penalties as an aggrieved employee for the purposes of any future action (as was done in Villacres v. ABM Industries Inc. (2010) 189 Cal.App.4th 562, 584-585).  This is an area that may continue to be focused on, litigated, or subject to appeal.

What this means for California employers

California employers using settlement agreements with employees to resolve California Labor Code violation claims will no longer be able to definitively extinguish the employee’s “aggrieved” status as it concerns potential PAGA claims, and they may (or may not) be able to do so even for an intended global resolution where no PAGA action is pending. The California high court did employers no favors with this decision, and seemingly went out of its way to preserve duplicative/punitive penalties (mostly for the State, and of course a right to recover attorneys’ fees for Plaintiff’s attorneys) under PAGA. Employers must take this into consideration when assessing whether and how to settle claims, as well as assessing the potential settlement value and downstream risk. 

Employers with questions regarding the applicability of the Kim decision may contact the authors or their usual employment law counsel at Atkinson, Andelson, Loya, Ruud & Romo.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.