California’s Legislature has long prided itself on being at the forefront as the most employee-friendly state in the union, passing scores of new laws that affect employers every year. The sands are always shifting for California employers, which need to somehow stay ahead of the curve in this rapidly evolving legal environment to survive to reap the benefits of doing business in the fifth largest economy in the world.

As we glide into 2019, employers are confronting a host of major developments in the Golden State’s employment landscape, including a radical alteration of the rules for classifying workers, enormous growth in actions under the Private Attorneys General Act, and an overall trend away from everything but a straight hourly method of compensating nonexempt employees, even in industries which traditionally relied upon piece-rate and commission-only models.

In the face of this onslaught, there is perhaps no more critical issue facing employers than the threat of collective actions known as PAGA claims. PAGA actions are a form of collective action in which one employee may sue his or her employer on behalf of the state of California and any “similarly aggrieved” employees in the workforce for violations of any of the 150 or so separate Labor Code statutes that govern California employment and wages. PAGA “deputizes” every current and former “aggrieved” employee to sue to recover civil penalties on behalf of the State.[1]

PAGA claims have become a veritable tsunami overwhelming California employers, so much so that late last year, a recently formed business group actually sued the state of California, asserting that the PAGA law is an “unconstitutional tool of extortion” used by employees and their attorneys.[2]

Although conceived as a means to help employees against deadbeat employers, the law has become a tool to line the pockets of attorneys while in many cases doing very little for employees; Some of the facts and statistics cited in the California Business & Industrial Alliance v. Xavier Becerra complaint to bolster the claims are staggering:

  • In Price v. Uber Technologies Inc. (case number BC 55451), where a $7,750,000 settlement reaped $2,325,000 for plaintiffs counsel, and just over one dollar ($1.08) for the average Uber driver;[3]
  • An employee alleging a mere two minutes of working off the clock each pay period for a 30-person company can allege claims stemming from unpaid minimum wages and overtime of more than $69,508 per employee and $2 million in total damages, which is some 2,430 times the alleged actual damages suffered by the employee of $28.61[4];
  • More than 100 law firms have sent more than 50 PAGA notices (claims) each to the state agency,(Labor and Workforce Development Agency), since the law’s inception in 2004, and one firm has sent 753 PAGA letters.[5]

How Did We Get Here?

The PAGA statute was enacted in 2004 as a way to enlist plaintiffs attorneys to work on behalf of the state to enforce the Labor Code statutes, in light of California’s lack of resources to do so. But the statute did not really catch on with plaintiff lawyers initially.

Since the PAGA statute permitted recovery to employees of only 25 percent of damages, and permitted recovery of civil penalties ($100 for first violation, $200 for each pay period thereafter), it made little sense to plaintiffs’ lawyers to sue for small penalties and collect only a maximum of 25 percent of the recovery, when they could bring a full-fledged class action for actual damages, and keep 100 percent of amounts recovered. PAGA claims became simply a throw-in to class actions that were rarely litigated, and with a somewhat convoluted statutory framework and a requirement of exhausting administrative remedies by serving a demand letter before suing, PAGA cases were an untapped anomaly for nearly the first decade after enactment of the statute.

However, in 2014, the California Supreme Court decided Iskanian v. CLS Transportation, Los Angeles,[6] holding that PAGA claims cannot be waived by an arbitration agreement. Because the validity and use of class action waivers precluding workers from participating in class actions had been reinforced by the U.S. Supreme Court in AT&T Mobility v. Concepcion[7] three years earlier, employers had gained a powerful tool in which to avoid becoming embroiled in a class action. However, when the California Supreme Court held in Iskanian that PAGA claims cannot be waived by employees like class claims, because they are technically considered actions on behalf of the state of California, use of the PAGA statute picked up steam.

Still, PAGA claims did not initially seem to pose as great a danger as standard class actions, especially since the statute of limitations was only one year, as opposed to the three- to four-year statute of limitations applicable to most wage-and-hour claims and the remedies of civil penalties seemed less onerous for employers. But with companies of any size or sophistication legally requiring their employees to waive class action participation in favor of individual arbitration, class actions have gradually become far less available to plaintiffs attorneys. PAGA claims have now skyrocketed, filling the class action void created by mandatory class action waivers.

Why PAGA Claims Are Potentially More Dangerous Than Standard Class Actions

While it was predictable that the Iskanian decision would herald a new popularity for the previously dormant PAGA statute for plaintiffs attorneys, what employers and their counsel are now discovering is that PAGA claims may hold even greater perils for businesses than class actions. Why is this so?

There are several key aspects of PAGA claims that make them especially inviting to plaintiffs counsel. As with class actions, plaintiffs counsel is entitled to attorneys’ fees as part of the recovery in PAGA claims. And despite the fact that individual penalties measured per pay period seem at first blush somewhat modest, and usually amount to $100 to $200 per employee per pay period, these damages can quickly add up based upon the size of a work force and based upon the additional penalties that attach to each violation. Thus, even when the recovery per plaintiff is modest, the overall recovery, from which plaintiffs counsel extracts a contingency fee, can be enormous.

Secondly, unlike class actions, PAGA claims do not require class certification. Thus, the greatest hurdle and most costly and laborious procedural aspect of class claims do not exist in PAGA claims. Indeed most class action litigation centers on the costly and time-consuming certification process, and if class claims can be certified, most class actions settle before trial. If class certification is defeated, it usually spells the “death knell” for the case and can already be appealed.[8]

But in PAGA claims, the biggest hurdle facing plaintiffs, certifying a class, is gone. This also means that there is no mandatory requirement for a minimum number of plaintiffs, or similarly aggrieved employees necessary to create a PAGA claim. Unlike a class claim, which must establish the requisite numerosity, (usually at least 40 or so employees to comprise a class), PAGA claims have no such restraint, and can consist of two or 2,000 employees.

Additionally, PAGA claims are also limited to bench trials, and no jury trial is permitted because they are considered equitable claims.[9] This might be detrimental to plaintiffs in discrimination or wrongful termination suits, but it is a plus for plaintiffs in wage-and-hour claims, which center primarily on legal issues, and not factual issues. Again, bench trials are far less costly and time-consuming for plaintiffs counsel.

Combine these attributes with the fact that full unlimited class action discovery is also available in PAGA claims, and you have the makings of nightmarish litigation for California companies.[10] The bottom line is that PAGA claims are less labor-intensive and more plaintiffs attorney-friendly than class claims.

What Can Employers Do to Protect Themselves?

Shoring Up Company Wage-and-Hour Practices as to “Usual Suspect” Claims

The primary line of defense for employers is to shore up their wage-and-hour practices pertaining to their nonexempt employees, especially as to what can be described as the 10 “usual suspect” wage claims.

First and foremost, this means making sure that the company:

1. Keeps accurate time records for nonexempt employees;

2. Pays for all “on-the- clock” or other worktime of employees;

3. Pays at least minimum wage for all hours worked, not merely by averaging the amount paid over the month or year;

4. Pays any overtime at 1.5 times the normal hourly rate;

5. Classifies employees properly as exempt or nonexempt;

6. Classifies workers properly as employees or independent contractors;

7. Has a code-compliant policy for permitting uninterrupted meal periods and rest and recovery breaks;

8. Provides paycheck stubs that comply with the nine requirements of Labor Code Section 226(a);

9. Eliminates commission-only compensation, unless sales employees are properly classified as exempt; and

10. Eliminates all piece-rate compensation (including payment by-the-mile of drivers) unless minimum wage and overtime are properly accounted for and paid.

Of all of these “usual suspect” claims, meal period and rest break claims are perhaps the most insidious for employers. As noted by the plaintiff in California Business & Industrial Alliance v. Becerra, “there is no policy, practice, or combination thereof that can achieve full and irrefutable compliance with California meal period rules,” which is why hundreds of meal period class and representative actions are filed each year.[11] And there is no method by which an employer can have “perfect foresight” as to how long each shift for each employee will last.[12]

The best ounce of prevention, to avoid the pound of cure meted out by PAGA claims, is to require nonexempt employees to record their time, either by computer sign in and out, clock-punching, daily time sheets, or any other method that creates accurate time records. This practice implicates nearly every type of claim that can be brought under the California Labor Code.

Procedural Defenses

Because claims under the PAGA statute were seldom fully litigated until recent years, we are still in the “Wild West” period for determining how courts will interpret many of the procedural aspects of the statute. But now that PAGA claims have skyrocketed, appellate courts are deciding and filling in holes regarding PAGA case procedures at an almost furious pace. Some procedural defenses that have developed for PAGA lawsuits include the following:

  • Failure to exhaust the administrative remedy of serving a PAGA demand letter before filing the lawsuit which sufficiently details the claims and theories of recovery;[13]
  • Lack of standing to bring PAGA action where a representative plaintiff has already settled their individual claim in arbitration;[14]
  • Failure to present evidence of any similarly aggrieved employees;
  • Unmanageability of the collective class or group’s claims because of too many individualized inquiries[15]
  • Curing of some Labor Code pay stub violations;[16]
  • One-year statute of limitations.[17]

PAGA claims remain highly dangerous to California companies, and in the face of the rapidly changing California employment laws, employers should audit their employment policies and practices on a yearly basis to maintain compliance and steer clear of what can become bet-the-company lawsuits.