On December 29, 2017, in Kim v. Reins International California, Inc., the Second District Court of Appeal in Los Angeles ruled that a plaintiff no longer has standing to assert PAGA claims once the plaintiff has settled and dismissed his individual claims against his employer. This decision could have far-reaching implications in PAGA litigation, changing the way both plaintiff’s attorneys and defense attorneys approach PAGA lawsuits.
PAGA, officially known as the Labor Code Private Attorneys General Act of 2004, allows an “aggrieved employee” to act as a private attorney general and sue her employer for violations of the California Labor Code. PAGA allows one aggrieved employee to act on behalf of all aggrieved employees, which can multiply the number of violations, and the associated penalties, an employer faces tens or hundreds of times over. If the employee wins the lawsuit, the aggrieved employees collect 25% of the penalty imposed by the court, and the rest goes to the State of California.
PAGA says that “‘aggrieved employee’ means any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed.” The Second District’s decision turned on this statutory definition of “aggrieved employee.”
The plaintiff, Justin Kim, started out as an aggrieved employee by alleging that his employer, Reins, had misclassified training managers like himself as exempt from overtime requirements, and therefore had failed to pay overtime wages, to allow proper meal and rest periods, to provide adequate wage statements, and to pay for waiting time. Kim had signed an arbitration agreement when he began working for Reins, so the trial court granted Reins’s request to send Kim’s individual claims under the Labor Code to arbitration and put the PAGA claims on hold until the arbitration was complete. While waiting for the scheduled arbitration, Reins offered to settle the case with Kim, and Kim accepted.
After settling Kim’s individual claims, Reins asked the trial court to decide, as a matter of law, that Kim could not maintain his PAGA claims because he was no longer an “aggrieved employee” under the law. The trial court granted judgment in Reins favor on the PAGA claims, saying that once Kim dismissed his individual claims pursuant to the settlement agreement, he “was no longer suffering from an infringement or denial of his legal rights,” and therefore was no longer “aggrieved.”
Kim appealed, but the Second District agreed with the trial court’s reading of the statute, stating “PAGA was not intended to allow an action to be prosecuted by any person who did not have a grievance against his or her employer for Labor Code Violations.” Despite this broad statement of policy, the Court of Appeal, likely foreseeing the upheaval its decision could cause, attempted to confine its decision to the “specific circumstances at issue in this case: Kim asserted both individual Labor Code claims and a PAGA claim in the same lawsuit, and he voluntarily chose to settle and dismiss his individual Labor Code claims with prejudice.” The consequences of this decision will be left for future litigants to fight out.
What Comes Next
After the Court of Appeal handed down its decision, Kim’s attorney was paraphrased predicting how plaintiff’s attorneys will respond to the decision: “the decision essentially tells plaintiffs’ lawyers to either not bring individual claims, which would raise various ethical concerns if the plaintiffs have authorized such claims, or not settle such claims to protect a PAGA claim.” Of course, clients, not attorneys, have the final say as to whether to settle lawsuits, so this decision does seem to give employers the ability to fight off PAGA liability by buying off aggrieved employees. Note, however, that this process could take some time, as any aggrieved employee can seek the full amount of PAGA penalties, and each settlement will only remove one potential plaintiff.
Looking further ahead, even if a plaintiff does not bring an individual claim or refuses to settle their individual claims, defense attorneys can seek to challenge the plaintiff’s standing by challenging whether the underlying Labor Code violations actually occurred. This could allow employers to essentially bifurcate the proceedings, challenging Labor Code violations without having the immediate threat of PAGA penalties hanging over them. Given that a different district of the Court of Appeal recently issued a decision allowing employees bringing PAGA claims to bypass defenses available to employers for the underlying Labor Code violations, the Kim decision may offer employers a way to fight back by challenging the plaintiff’s standing.
Takeaways for Employers
It remains to be seen whether Kim will ask the California Supreme Court to review the Court of Appeal’s decision, but in the meantime, any employers facing PAGA lawsuits should consider challenging the employee’s standing. The Kim case also underlines the importance of arbitration agreements and of California’s “offer to compromise” law, which together can put some pressure on plaintiffs to accept settlement offers, even if plaintiff’s attorneys are pushing their clients not to settle to preserve the PAGA claims that are more valuable to the attorney. Talk to an employment lawyer to determine whether your employment agreement offers the sort of protection that Reins took advantage of in this case.