As employers doing business in California know, California's employment regulatory scheme is the most comprehensive of any US state. California's wage and hour laws are embodied in the extensive California Labour Code and highly detailed occupational and industry-based wage orders.

California also has its own equal employment statute, fair pay law and version of the Family and Medical Leave Act, among many other state employment statutes and local ordinances.

Overview of PAGA

The California Private Attorneys General Act (PAGA) is set out in Sections 2698 to 2699.5 of the California Labour Code. It gives employees the right to recover civil penalties for specific violations of the code.

PAGA allows employees to sue employers for civil penalties on behalf of themselves and other employees. PAGA suits are filed to collect penalties on behalf of the California Labour and Workforce Development Agency. PAGA requires that 75% of any penalties collected be paid to the state, with the remaining 25% distributed to affected employees.

Most significantly, PAGA provides for the reimbursement of attorneys' fees to employees who successfully bring suit, which means that the greatest money recovered from a PAGA claim may go to the attorneys who file the suit. As such, as with wage and hour class actions, whether brought in court or arbitration, plaintiffs' attorneys are incentivised to file PAGA claims. Further, multiple law firms often file a case – typically, the firm that found the plaintiff and a firm with expertise in prosecuting such claims will act jointly.

A court must review and approve any proposed PAGA settlement and PAGA claims were previously often brought along with other causes of action and settled as part of the overall case. However, Epic Systems may mean a change in favour of standalone PAGA cases.(1)

Impact of Epic Systems

In the well-known 2014 case Iskanian v CLF Transportation, the California Supreme Court held that an arbitration agreement that requires an employee to give up their right to bring a representative PAGA action is contrary to public policy. The court held that the Federal Arbitration Act does not pre-empt a state law that prohibits waiver of PAGA representative actions in an employment contract, and that a law like PAGA, established for a public reason, cannot be contravened by a private contract (eg, an employer-employee arbitration agreement).

Subsequently, the California State Court of Appeals held in Haas that a PAGA plaintiff is not limited to pursue penalties under the California Labour Code that have affected them personally. Rather, as long as a plaintiff is affected by at least one California Labour Code violation, penalties can be pursued for unrelated violations affecting other employees.

Attorneys in California are already beginning to market their services to employees that are considering filing PAGA claims. One of the most prolific attorneys has stated as follows:

We are not ready to throw in the towel, in our crusade for the right of California employees. The silver lining is that, we don't think we need to. While the practical effect of Epic will be to force many claims into arbitration without class claims. Epic has a significantly smaller impact in California.

The same attorney has stated that:

For ease of explanation PAGA operates as a class action. A PAGA claim cannot be forced to be resolved through arbitration. Since most common Labour Code violations may be brought under PAGA in California, Epic does not represent a massive step backward in California like it does in other states.

These statements demonstrate that PAGA is alive and well; Epic Systems has in fact made this act more significant than ever. Further, legislatures in other states wanting to allow employees to sue in court may enact PAGA-like statutes.

For example, Make the Road New York is backing a bill to give New York employees a PAGA option, and the Centre for Popular Democracy plans to campaign for PAGA bills in four states in 2020.

It remains to be seen whether Epic Systems will unleash state and city regulations to continue to allow collective suits. It also remains to be seen whether the US Supreme Court will agree with the California Supreme Court's refusal to require an employee to give up the right to bring a representative PAGA action in court. However, such a Supreme Court decision could be many years away. For now, PAGA remains alive, allowing employees to bring representative actions on behalf of other employees without being required to go through mandatory arbitration or waive the right to represent other employees.

Takeaways for employers

Every employer doing business in California should be familiar and comply with the California Labour Code and the wage order which applies to their business. California employees are highly litigious, and one violation of a California law (eg, a failure to properly include small bonuses in the calculation of overtime pay, a failure to properly record the beginning and end of lunch breaks – which is required in California and not elsewhere in the country – or a record-keeping violation) could lead to multiple penalties calculated by pay period per employee.

The misclassification of employees as contractors is another area rife with potential legal problems for employers. As such, employers must ensure that they properly classify employees as exempt or non-exempt and classify employees as employees, not as contractors.


California employers must bear in mind that it is not only wage and hour cases that may cause potential problems, but also many other types of employment-related claim. California-based claims and other employment suits are most often filed by terminated employees. Employers are often subjected to very expensive suits simply because of a lack of earlier planning in relation to terminating an employee or due to a delay in terminating a problem employee for poor work performance or misconduct. The employee may later make a protected claim, which means that if they are eventually terminated, the employee may have a potential lawsuit alleging retaliatory termination.

In light of this, it is paramount that employers proactively address employee problems and provide termination letters stating the business reason for termination. A well-drafted termination letter makes it less likely that an attorney will want to take the employee's case. Even if a suit is filed, such letters may allow an employer to request summary judgment or, at the very least, serve as a strong trial exhibit.

The final consideration is whether terminated employees should be provided a release or not. Providing a release may flush out a claim early but could also incentivise the filing of a claim. There are many considerations that come into play when attempting to minimise the likelihood of litigation or arbitration. However, to avoid litigation and arbitration (if an arbitration provision is in place), it is paramount that these considerations and the strategy for dealing with problem employees be carefully analysed in the context of employees' rights under California law, federal law and the laws of other states.


(1) This article is part of a series on the impact of Epic Systems throughout the United States. For previous articles in the series, please see "Practical insights for employers considering mandatory arbitration programmes following Epic Systems".

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.