Private Attorneys General Act

2020 Business Issues Guide

Private Attorneys General Act

State Law Doesn’t Serve Employees; in Dire Need of Reform

California labor and employment laws are known for being complex and burdensome in comparison to the rest of the nation. There is no better example of California’s distinction in this area than the Private Attorneys General Act (PAGA), which allows an aggrieved employee to file a representative action on behalf of himself/herself, all other aggrieved employees and the State of California for alleged Labor Code violations. The California Chamber of Commerce is not aware of any other state that has such a law or is considering a similar proposal—and any state should take pause before seeking to mirror this unique law.

PAGA has had a significant litigation impact in California, with many questions left regarding how effective it has been in encouraging compliance with California’s burdensome labor and employment protections or compensating employees for alleged harm.

Huge Increase in PAGA Lawsuits

PAGA lawsuits have increased more than 1,000% from the law’s first year in effect with the Labor and Workforce Development Agency (LWDA), receiving approximately 4,000 PAGA notices each year since 2014. See 2019 Budget Change Proposal, PAGA Unit Staffing Alignment, 7350-110-BCP-2019-MR (hereinafter PAGA BCP). This number is anticipated to grow to exceed 7,000 by 2022.

The popularity of these lawsuits is likely due to the significant monetary awards that can be leveraged against an employer. For example, in Price v. Uber Technologies, Inc., the plaintiff’s attorneys were awarded $2.325 million, while the average Uber driver was awarded $1.08. (See California Business & Industrial Alliance v. Becerra (Super. Ct. Orange County, 2018, No. 30-2018-01035180-CU-JR-CXC)).

Even the LWDA itself recognizes PAGA abuse. In its PAGA BCP, the LWDA stated “the substantial majority” of proposed private court settlements in PAGA cases reviewed by the PAGA Unit fell short of protecting the interests of workers and the state. The analysis continues: “Seventy-five percent of the 1,546 settlement agreements reviewed by the PAGA Unit in fiscal years 2016/17 and 2017/18 received a grade of fail or marginal pass, reflecting the failure of many private plaintiffs’ attorneys to fully protect the interests of the aggrieved employees and the state.”

Despite this failing grade from the LWDA, proponents of PAGA still maintain that it is an important enforcement tool that encourages compliance and protects employees.

Why Is PAGA So Unfair?

On the other hand, employers and legal counsel claim that PAGA is not working as intended. Rather, they believe the law is being utilized against employers as financial leverage to force employers into costly settlements for minor, innocent mistakes. Some of the most notable issues with PAGA are as follows:

There is no requirement under PAGA that an employee actually suffers harm, such as unpaid wages, as a result of the violation. For example, the Labor Code requires a paystub state the legal entity that is the employer. So, if an employee’s paycheck says “XYZ, Inc.,” but the employer’s name really is “XYZ, LLC,” the employee can recover PAGA penalties even though the employee suffered no harm from this simple mistake.

PAGA has a unique standing requirement. PAGA defines “aggrieved employee” as any person who was employed by the employer and against whom “one or more of the alleged violations” was committed. This language means that the representative employee pursuing a civil action for multiple Labor Code violations needs to have suffered only one of the alleged violations.

However, the employee can collect penalties for all the violations alleged and, under PAGA, retain 25% of those penalties. This means the representative employee receives penalties for Labor Code violations that he/she never encountered, thereby potentially taking away penalties for employees who actually were affected by the Labor Code violation.

PAGA penalties are imposed regardless of intent. Thus, employers are held liable even if they make a good faith error.

PAGA applies to all employers regardless of size.

Legal precedent has established that PAGA provides a “civil penalty.” This means that employees can recover both the statutory penalty associated with the Labor Code provision at issue, as well as civil penalties under PAGA, thereby creating a stacking of penalties against the employer.

As an example: Employer provides its 100 employees with a quarterly bonus of $500, but fails to include that bonus as a part of its regular rate of pay calculation for purposes of overtime. This one mistake by the employer would create potential liability for: 1) unpaid overtime for the prior four years; 2) statutory penalties for incorrect paystubs; 3) interest; and 4) attorney fees. Under PAGA, the employer could also face the following statutory penalties (per alleged Labor Code violation):

$100 for the first violation x 100 employees = $10,000

$200 x 25 for each subsequent violation/pay period x 100 employees = $500,000

Total: $510,000 penalties

Due to one mistake by the employer of calculating a quarterly bonus into the hourly rate for overtime purposes, the employer could face a devastating lawsuit in which the penalties alone exceed half a million dollars for just one, alleged Labor Code violation. If this one mistake results in the violation of multiple Labor Code sections (incorrect paystubs, miscalculation of meal period or rest break premiums, payment of wages upon termination, etc.), this half million dollars in penalties can be doubled, tripled, etc.

PAGA lawsuits are a “representative action” rather than a class action and, therefore, the aggrieved employee does not have to satisfy class action requirements. Thus, PAGA actions are much easier to file and it is easier to include much larger groups of employees than a class action. Additionally, the employee often files a PAGA action and a class action simultaneously so the employee can recover the PAGA penalties, but not allocate the correct amount owed to the LWDA.

As a result, critics allege the LWDA is not receiving its fair share of PAGA settlements, as the employees’ attorneys often allocate a small monetary amount for PAGA in the settlement agreement to minimize the amount of the settlement they have to share as penalties with the LWDA.

Governor Edmund G. Brown Jr. sought to address these issues in a budget “trailer bill,” SB 836 (2016–17). SB 836 requires that a copy of a proposed settlement be submitted to the LWDA. It is still too soon to determine the success of SB 836; hopefully, SB 836 will continue to raise awareness of this issue like those noted above in the PAGA BCP.

• Another issue is the abuse of “draft” PAGA complaints. Plaintiffs’ attorneys create draft PAGA complaints and send them to the employer. These litigation threats compel settlement before a PAGA complaint is filed. Since a PAGA complaint is not formally filed in these situations, and is probably never intended to be filed, the LWDA is not made aware of the dispute and never receives its share of the settlement.

PAGA also provides a statutory right to attorney fees for the employee’s attorney only, thereby adding another layer of cost onto employers and providing an incentive for plaintiffs’ attorneys to file the case.

PAGA claims cannot be waived by an arbitration agreement; thus, the employer is forced to settle the case or litigate the case in civil court.

Although there appears to be acknowledgment of PAGA abuse as noted by the LWDA in the PAGA BCP, there still is no appetite in the Legislature for major reform. A very small carve-out was created in 2018 when Governor Brown signed AB 1654 (B. Rubio; D-Baldwin Park), preventing employees in the construction industry from filing PAGA claims in which the employee is covered by a collective bargaining agreement that includes a grievance procedure and binding arbitration.

Nonetheless, bills introduced in 2019 proposing a more holistic approach to PAGA reform were never heard in the Assembly Labor and Employment Committee. See AB 443 (Flora; R-Ripon) and AB 789 (Flora; R-Ripon). Since PAGA reform proposals have been unsuccessful with the Legislature, business organizations have gone as far as suing the state over PAGA. See California Business & Industrial Alliance v. Becerra (Super. Ct. Orange County, 2018, No. 30-2018-01035180-CU-JR-CXC)). While the success of the lawsuit is unknown and the case could take years to resolve, the last decade of legal decisions, as well as numerous examples of abuse, indicate that the current state of PAGA is in need of significant reform.

CalChamber Position

PAGA is a primary concern of the employer community due to the financial leverage it provides to plaintiffs’ attorneys to pursue claims for minor violations of the California Labor Code. Questionable litigation that results in significant monetary settlements wherein the plaintiffs’ attorneys retain a majority of the money for fees and employees are provided a minimal amount is not fulfilling the stated intent of PAGA.

The CalChamber is supportive of any efforts to reform PAGA to ensure the goals of labor law enforcement are satisfied, and that it is not used as a vehicle to enrich trial attorneys.

January 2020

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Jennifer-Barrera-2010-300x300Jennifer Barrera
Executive Vice President