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Employers Beware! Settling Individual Employee Claims Will Not Bar His or Her PAGA Claims

Posted in Employment Contracts and Agreements, Labor Law, Wage & Hour

On March 12, 2020, in the case Kim v. Reins International California, Inc., the California Supreme Court addressed the issue: “Do employees lose standing to pursue a claim under the Labor Code Private Attorneys General Act (“PAGA”) … if they settle and dismiss their individual claims for Labor Code violations?”  Unfortunately, for employers in California, the California Supreme Court held that an employee could continue to pursue PAGA claims against their employers, even if they have settled and dismissed their individual claims, for Labor Code violations against that employer.

Reins operates a number of restaurants in California, and employed the plaintiff, Justin Kim, as a “training manager.”  Reins had classified its training managers as an exempt position.  Kim sued Reins in a putative class action claiming that he and other training managers had been misclassified.  His complaint brought individual claims, class action claims, and also sought civil remedies under PAGA as a result of the alleged misclassification.

Reins moved to enforce an arbitration agreement it had with Kim, dismiss the class action claims and stay the PAGA claim until the arbitration was complete (Reins acknowledged that it could not force arbitration of the PAGA claim).  The Court granted Reins’ motion.  It dismissed the class action claims and ordered arbitration of the individual claims while staying the PAGA claim pending the outcome of the arbitration.  During the arbitration, Kim accepted a settlement offer from Reins and dismissed his individual claims as a result.  This resulted in the stay of the PAGA claim being lifted.  Reins moved for summary adjudication on the ground that Kim no longer had standing to pursue a PAGA claim given that he had settled and dismissed his individual claims.  The trial court agreed with Reins and granted its motion, finding that Kim, by settling his individual claims, was no longer an “aggrieved employee” under PAGA.

The issue of standing acts as kind of a “gate keeper” to the court system, ensuring that courts are only deciding actual controversies between the parties.  In order to determine whether Kim had standing to pursue the PAGA claim despite his dismissal of his individual claims, the California Supreme Court looked to the language of the PAGA statute, noting that its job was “to ascertain the intent of the legislature so as to effectuate the purpose of the [PAGA statute].”  In looking at the plain language of PAGA as it relates to standing, a plaintiff has to establish two requirements: (1) he or she is someone “who was employed by the alleged violator;” and (2) he or she is someone “against whom one or more of the alleged violations [of the Labor Code] was committed.”  The California Supreme Court held that in applying this plain language, both requirements could be readily ascertained.  Kim was both employed by Reins and that he had alleged “that he personally suffered at least one Labor Code violation on which the PAGA claim was based.”

Reins argued that although this may have meant that Kim had standing under PAGA at the time he brought his claim, he “lost” standing when he settled and dismissed his individual claim.  In particular, Reins argued that once Kim’s “injury” had been settled and thereby “redressed,” it was no longer a “continuing injury” that needed to be addressed under PAGA.  The California Supreme Court rejected this argument.

First, the California Supreme Court held that the language of standing under PAGA focuses on the alleged violations, not the alleged injury.  In essence, to adopt Reins’ argument, the California Supreme Court felt that it would be inserting “expiration” language into the statute, which it did not feel that it could do under the separation of powers theory.  It concluded that the Legislature could have included such language when it enacted PAGA but apparently decided not to.  Thus, in interpreting the PAGA standing requirement, the California Supreme Court held, “employees who were subjected to at least one unlawful practice have standing to serve as PAGA representatives, even if they did not personally experience each and every violation.”

Furthermore, under PAGA, a prospective plaintiff must first notify his or her employer and the Labor and Workforce Development Agency of the alleged violations and supporting facts and theories.  The LWDA then has 65 days in which to investigate, issue a citation, or otherwise respond to the employee’s notice.  If the LWDA fails to do one of these things within that time period, the employee may then bring a PAGA claim.  The California Supreme Court concluded that the statutory purpose of PAGA was to allow private individuals, such as Kim, to seek to enforce PAGA as a means of augmenting “the limited enforcement capability of the [LWDA].”  Thus, the Court noted that focusing on the PAGA plaintiff individual’s claims shifts focus from the proper role of the plaintiff who is instead “acting on behalf of the government.”

Likewise, although a representative of a class action can lose his or her ability to represent the class if he or she settles and dismisses her individual claims, the Court concluded that PAGA is not analogous to a class action.  Rather, the California Supreme Court concluded, “Every PAGA action … is a representative action on behalf of the State” and not on a particular class.

The California Supreme Court also reasoned that allowing an employer to avoid PAGA penalties by settling a representative’s individual claims would frustrate the State’s ability to collect and distribute civil penalties that are supposed to be collected in connection with PAGA claims.  The California Supreme Court was concerned that the State’s ability to recover future PAGA monies “would be diminished” and that “employers could potentially avoid paying any penalties to the state simply by settling with the individual employees.”

California employers need to be aware of the significance of the California Supreme Court’s Kim decision, especially in strategizing how to address alleged Labor Code violations brought by a single employee.  Employers may now be forced to focus more on litigating the PAGA claims rather than trying to avoid those claims by seeking to settle and/or dismiss a representative employee’s individual claims.