California Supreme Court Recognizes Expansive Wage and Hour Exemptions for Public Entities from PAGA Penalties and Certain Labor Code Provisions

08.30.2024

On August 15, 2024, the California Supreme Court fortified a common defense for public employers facing wage and hour disputes.  In the Stone et al., v. Alameda Health System case (“Stone”), the Court held that qualifying public entities remain exempt from certain statutory requirements within the Labor Code.  The Court also reached a novel issue by finding that Private Attorneys General Act (“PAGA”) penalties do not apply to public entities.  While public employers have raised this defense in the past, there has been sporadic and limited authority on this issue.  The Stone decision settled the matter and highlighted the limited reach of state wage and hour provisions against public employers.

Case Background

The Alameda County Board of Supervisors established the Alameda Health System (“AHS”) under state law, which is dedicated to providing medical care in Alameda County.[1]

A group of AHS employees, fronted by lead class members Tamelin Stone and Amanda Kunwar (“Plaintiffs”), filed a class action against AHS alleging violations of the Labor Code and PAGA. Specifically, Plaintiffs alleged that AHS had failed to provide meal periods and rest breaks, failed to provide accurate wage statements, and failed to provide full and timely wage payments. Plaintiffs sought civil penalties under PAGA.

AHS filed a motion to dismiss on two grounds.  First, AHS contended that the agency was exempt from the Labor Code provisions at issue unless each provision explicitly states that it applies to a public agency.  AHS relied chiefly on a 15-year-old appellate case, Johnson v. Arvin-Edison Water Storage Dist. (2009) 174 Cal.App.4^th 729.[2]  In the case, the court held that the Labor Code does not apply to public sector employees unless the code section explicitly provides that the section applies to a public entity or public employees, or applies by “necessary implication.”  Second, AHS argued that PAGA penalties did not apply because (a) AHS did not fall under PAGA’s “employer” category and (b) as public entities are exempt from punitive damages, they should also be exempt from PAGA penalties (which are akin to punitive damages).  The trial court concurred with AHS’ arguments and dismissed the case.

Plaintiffs appealed and persuaded the Court of Appeal to partially reverse the trial court’s decision.  The Court of Appeal reasoned that the Labor Code provisions did not infringe on AHS’ governmental powers since there was no legislative intent in the operative enacting statute for the agency (i.e. Health & Safety Code, section 101850) to exempt it from the Labor Code provisions.  Further, the appellate court observed that AHS was not a municipal corporation, and that the agency only had powers that could be wielded by a private entity (i.e. no authority to impose taxes or use eminent domain).  While AHS was not a person, and thus not subject to default penalties without a specific statutory penalty, the court found that AHS was still liable for PAGA's statutory penalties as they were not punitive in nature.  The Supreme Court granted AHS’ petition for review.

California Supreme Court Decision

The California Supreme Court considered each of these issues in turn.  First, the Court assessed whether AHS was exempt as a matter of law from the Labor Code provisions underlying each of Plaintiffs’ class claims.  While the Court expressly observed that the Plaintiffs “largely conceded” that public entities were exempt from many of the wage and hour requirements in the Labor Code, including all of the statutory bases at issue in the case, the Court nonetheless began with a thorough summary of these public entity-based exemptions.

The Court began by citing its earlier holding in a related case, that “provisions of the Labor Code apply only to employees in the private sector unless they are specifically made applicable to public employees.”[3]  The Court then turned to the statutory language at issue in Plaintiffs’ class claims, both in the Labor Code and California Wage Orders.  As to the primary claim in the dispute (failure to provide meal periods and rest breaks), these provisions relied on the definition of a covered “employer,” namely, “any person as defined in Section 18 of the Labor Code.”  The Court squarely found that as Section 18 excludes public entities from its definition of “person,” public entities such as AHS are exempt from these meal period and rest break provisions.    

Second, the Court cited extensive legislative history to buttress its finding that public entities are exempt from these statutory wage and hour requirements.  For instance, in chronicling the Legislature’s elimination and subsequent readoption of the California Wage Orders, the Court observed that the Legislature chose to retain unchanged many of the exemptions in those orders for public entities.  This decision reflected particular intent to leave this exemption unchanged.  Further, the Court observed that the Legislature had recently taken action to amend the Labor Code to subject other public employers to particular wage and hour requirements.  This choice was “telling because it indicates the Legislature did not believe public employers were required” to follow these wage and hour requirements prior to this enactment.  Finally, the Court noted that agency interpretations (including from the DLSE) and appellate case law (namely, the aforementioned Johnson case) reached similar conclusions.

The Court found unpersuasive Plaintiffs’ argument that AHS was nonetheless not entitled to this exemption (and thus, subject to these wage and hour class claims) as it did not qualify as a public entity.  The Supreme Court explained that per numerous references in the enacting statute for the agency, AHS clearly qualified as a public entity -- even if it was not an acknowledged division of a local governing body.  Further, there was no evidence that the Legislature intended AHS to be treated similarly to a private entity.  Given that AHS had no obligation to provide meal periods and rest breaks, there was no need to compensate class members and the other derivative wage and hour allegations (which relied on meal periods and rest breaks) necessarily failed.

Finally, the Supreme Court broke new ground in ruling that public entities were exempt from PAGA’s statutory penalties.  The Court found that public entities do not fit the definition of a “person” under Labor Code Section 18, such that PAGA’s default penalties against “the person [who] employs one or more employees” could not be brought against public entities (per California Labor Code Section 2699(f)(2)).  Legislative history also did not reflect clear intent to apply PAGA’s statutory penalties to public entities.  The Court also acknowledged that subjecting public entity liability to PAGA attorney fee shifting would create a substantive financial burden on public entities.  Due to lack of legislative intent to subject public entities to PAGA penalties, the Supreme Court concluded that AHS was exempt from them as a public entity. 

Implications of Decision

This decision is noteworthy for two reasons.  First, it provides a clear and authoritative approach to examining a defense doctrine which previously lacked such robust discussion – namely, public entity exemption from particular wage and hour requirements in the Labor Code.  While prior case law had addressed isolated Labor Code statutory provisions (such the meal period and rest break requirements), this authority was rare and offered limited instruction.  This decision buttresses this argument and offers a potent defense for government employers facing wage and hour litigation under state law.

Additionally, the decision that PAGA penalties do not apply to the public entity on these allegations is significant.  The Supreme Court recognized the severe financial implications that could and would occur if PAGA penalties were applied to public entities.  PAGA penalties have no monetary cap and would take revenue from public finances and taxpayers without imposing a true penalty on the specific bad actors in the public entity.  Public entities are exempt from punitive damages to keep public revenues protected from excessive monetary judgments.  PAGA penalties seek the same goals of retribution and deterrence that punitive penalties do, and the logic behind public agency exemption applies equally.  The Supreme Court supported this public interest by excluding public entities from PAGA penalties of all kinds.

[1] Specifically, Health and Safety Code section 101850.

[2] AALRR served as defense counsel in this case.

[3] Specifically, the Stone Court cited its earlier decision in Campbell v. Regents of the University of California (2005) 35 Cal.4th 311. This case had chiefly relied on legislative history in reaching this conclusion.

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