On March 12, 2020, the California Supreme Court held in Kim v. Reins International California, Inc. that employees who settle and release their individual wage and hour claims still have standing to bring a representative action for civil penalties based on the same legal violations under the California Private Attorney General Act (PAGA), which deputizes “aggrieved employees” to act as private attorneys general and pursue civil penalties on behalf of similarly “aggrieved” current and former employees.
In Reins, plaintiff Justin Kim brought a putative class action against his employer, alleging that he and other training managers were misclassified as exempt employees. The lawsuit included claims for unpaid wages and overtime, meal and rest break violations, inaccurate wage statements and waiting time penalties. Kim also asserted a PAGA representative action claim for civil penalties premised entirely on the same alleged statutory violations on which Kim based his individual wage and hour claims.
Because Kim and his employer had entered into an arbitration agreement with a class action waiver, the employer successfully moved to compel Kim to arbitrate his individual claims. This precluded the class action claims from proceeding at all, but the court also stayed Kim’s PAGA representative action claim until the arbitration of his individual claims was completed. Kim subsequently settled and agreed to dismiss with prejudice his individual claims. Notably, not only did the settlement not include the PAGA claim, but the parties expressly agreed that it was carved out of the release and the subsequent dismissal with prejudice.
Based on the settlement, the court lifted the stay on the PAGA claim. The employer, in turn, moved for summary judgment on the grounds that Kim lacked standing to pursue a PAGA representative claim because he had released his individual claims that were based on the same violations. The trial court agreed with the employer and determined that Kim’s settlement with his employer had “completely redressed” his individual claims, and, therefore, he was no longer an aggrieved employee with standing to pursue his PAGA claim. The California Court of Appeal affirmed, and the California Supreme Court then granted review.
California Supreme Court Ruling
On review, the California Supreme Court reversed, holding that a settlement of an employee’s individual wage and hour claims does not strip the employee of standing to pursue a PAGA claim as the state’s “authorized representative.”
In reaching this conclusion, the Supreme Court relied on a number of characteristics of a PAGA claim. In particular, the court noted that a PAGA claim is “legally and conceptually” different from an employee’s individual claim because an employee bringing a PAGA claim does so as the proxy or agent of the state. In other words, a PAGA claim is one between the employer and the state. The court also noted that the civil penalties recoverable under PAGA are not available to employees who sue on their own, individual behalf, and that, in many circumstances, employees do not even have a private right of action to pursue individual damages for certain Labor Code violations.
The court held that PAGA’s statutory language sets forth only two requirements for a current or former employee to have standing as an “aggrieved employee” who can bring a representative action for civil penalties: (1) an employment relationship with the alleged violator; and (2) suffering one or more wage and hour violations. The Supreme Court found that Kim satisfied both of these requirements and thus had standing to pursue his PAGA representative action, notwithstanding his release of his individual claims.
The court also explained that its decision was supported by PAGA’s statutory purpose, which is to “empower employees to enforce the Labor Code as representatives” of the state, and to “remediate present violations and deter future ones” — not to redress past injuries. Thus, the court reasoned that standing under PAGA, which is linked mainly to the fact that a violation has occurred, is not lost when the underlying injury has been remedied through a monetary settlement.
In rejecting the employer’s position that Kim’s settlement extinguished his PAGA claim, the court reasoned that such an interpretation was contrary to the statutory scheme because it would allow employers to diminish (or eliminate) their liability for civil penalties without the settlement safeguards afforded under PAGA — namely, notice to the California Labor and Workforce Development Agency and court approval. The court further reasoned that PAGA does not require that individual claims be brought in the same action, and nothing in the statute or its legislative history requires that the plaintiff have a separate, unresolved claim or unredressed injury. Rather, according to the court, PAGA’s broad remedial purpose was intended to deputize any employee who experienced at least one violation. Therefore, allowing the settlement of an employee’s individual claims to preclude that employee’s ability to pursue a PAGA representative action (or claim) would “thwart the Legislature’s clear intent to deputize employees to pursue [PAGA penalties] on the state’s behalf.”
Consequences for Employers
Reins presents new challenges in bringing finality to an employee’s individual wage and hour claims without exposing the employer to civil penalties under PAGA. Note, however, that the procedural landscape that allowed for this unfortunate ruling was that Kim had already brought a PAGA representative action and the parties’ settlement agreement expressly carved out that PAGA claim. In fact, the Supreme Court expressed concern as to why, under those circumstances, the employer would even have attempted to assert that Kim’s standing to continue pursuing the PAGA claim was extinguished, when that is exactly what it had agreed to permit. Thus, Reins may be viewed as an example of bad facts truly making for bad law.
Because of that unique procedural posture, employers need not necessarily be concerned that individual settlements with former employees will result in the same employees bringing PAGA representative action claims. In most cases, those former employees will be time-barred under the applicable one-year statute of limitations and/or will not have timely exhausted their administrative notice requirement for bringing such claims. Individual settlements with current employees, particularly in connection with remediating compliance issues, present greater challenges in terms of employers being able to preclude a subsequent PAGA claim. Employers will need to develop creative settlement agreement provisions and/or mechanisms to find a new path to achieving total closure without a court-approved PAGA representative action settlement. Ultimately, of course, the best protection for employers is still to take proactive measures to ensure compliant employment policies and practices, especially in the wage and hour area.
For additional information regarding Reins and its impact on employer policies in California, please contact the authors or any other member of McGuireWoods’ Labor & Employment Department.