Once Aggrieved, Always Aggrieved: The California Supreme Court Holds an Employee’s Settlement of Labor Code Claims Does Not Bar a PAGA Lawsuit

March 16, 2020

By Jeffrey Wohl and Sarah B. Spiegelman

Settlements are supposed to buy peace. But the California Supreme Court has ruled that is not necessarily the case when it comes to the California Labor Code Private Attorneys General Act of 2004 (“PAGA”), Cal. Lab. Code § 2698 et seq.

In Kim v. Reins International California, Inc., No. S246911, 2020 Cal. LEXIS 1593 (Mar. 12, 2020), the court held that employees who settle their individual Labor Code claims do not lose standing to pursue a claim for civil penalties under PAGA based on the same alleged violations. The court reasoned that whether a plaintiff is an “aggrieved employee” entitled to bring a PAGA claim depends on whether the employer violated the Labor Code, not whether the plaintiff still can seek compensation for the resulting injury. The decision reversed lower court rulings that the plaintiff’s settlement barred his ability to maintain a PAGA lawsuit.

Kim, however, leaves unanswered whether an employee’s pre-litigation release that includes the PAGA claim, and not just the underlying Labor Code claims, will bar the employee from bringing a PAGA lawsuit.

Background

Kim was a training manager for Reins International California, Inc., a restaurant chain. Kim brought a class action against Reins, alleging that he and other training managers were misclassified as exempt from overtime. In addition to his claims under the Labor Code for overtime wages, meal- and rest-period premiums, and statutory penalties, Kim sought civil penalties under PAGA based on the same alleged violations.

As often occurs in such cases, Reins successfully moved to compel arbitration based on Kim’s arbitration agreement, which had a class-action waiver, and stay the PAGA claim until after the arbitration. After months of arbitration, Kim accepted Reins’s offer under California Code of Civil Procedure section 998 to settle all his individual claims for $20,000. The settlement did not include Kim’s PAGA claim (perhaps because the PAGA claim was not part of the arbitration, or perhaps because including it would have been a deal-killer).

Back in court, Reins moved for summary judgment on the PAGA claim, arguing that Kim lacked standing to proceed under PAGA because his rights had been “completely redressed” by the settlement, such that he was no longer an “aggrieved employee” within the meaning of the statute. The trial court granted the motion and the court of appeal affirmed. The California Supreme Court, in a unanimous decision, reversed.

The Supreme Court’s Decision

The Supreme Court first looked at PAGA’s standing requirement: “The plaintiff must be an aggrieved employee, that is, someone ‘who was employed by the alleged violator’ and ‘against whom one or more of the alleged violations was committed.’” Cal. Lab. Code § 2699(c). Reins conceded Kim had standing when he initially filed his PAGA claim, but contended that the settlement ended his standing.

The Supreme Court disagreed. “Aggrieved,” the court reasoned, was not synonymous with having an unredressed injury:

The Legislature defined PAGA standing in terms of violations, not injury. Kim became an aggrieved employee, and had PAGA standing, when one or more Labor Code violations were committed against him. Settlement did not nullify these violations. The remedy for a Labor Code violation, through settlement or other means, is distinct from the fact of the violation itself.

The court distinguished its holding from language in its prior opinions observing that PAGA standing requires the plaintiff to have suffered “harm” (Williams v. Superior Court, 3 Cal. 5th 531, 558 (2017) or “injury” (Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court, 46 Cal. 4th 993, 1001 (2009)) from the employer’s wrongful conduct. “Read in context,” the court explained, “these terms were simply shorthand for the requirement that a PAGA representative be someone ‘against whom one or more of the alleged violations was committed.’”

The court also noted that “PAGA standing is not inextricably linked to the plaintiff’s own injury” and that a plaintiff has PAGA standing if “one or more of the alleged violations was committed” against him.” (Emphasis in original.) The court continued, “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 alleged violation. ... This expansive approach to standing serves the state’s interest in vigorous enforcement.” In that regard, the court cited two recent California appellate decisions holding that a plaintiff’s inability to obtain individual relief under the relevant Labor Code section is not necessarily fatal to the maintenance of a PAGA claim based on violation of the same section: Raines v. Coastal Pacific Food Distributors, Inc., 23 Cal. App. 5th 667, 670 (2018) (PAGA claim may be based on violation of Labor Code section 226 governing wage statements, even if plaintiff did not suffer actual injury from violation); Lopez v. Friant & Associates, LLC, 15 Cal. App. 5th 773, 784-85 (2017) (PAGA claim permissible even if plaintiff cannot establish right to damages or statutory penalty under section 226).

The court next looked to the statutory purpose of PAGA, to “ensure effective code enforcement.” The court quoted Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348, 382 (2014), that the “state can deputize anyone it likes to pursue its claim, including a plaintiff who has suffered no actual injury.” It also noted that “civil penalties recovered on the state’s behalf are intended to ‘remediate present violations and deter future ones,’ not to redress employees’ injuries.” The court characterized Reins’s injury-based view of standing as akin to “[h]urdles that impede the effective prosecution” of PAGA actions, and therefore going against the statutory purpose.

Next, the court looked to the broader context of the statutory scheme, including other PAGA provisions and Labor Code sections that provide for civil penalties without also providing a private right of action. The court opined that “aggrieved employee,” as a term of art in PAGA, also governed who recovers penalties and how the penalties are calculated, and that Reins’s interpretation would “seriously impair the state’s ability to collect and distribute civil penalties.” The court also found that requiring an unredressed injury for PAGA standing conflicts with plaintiffs’ recognized ability to bring stand-alone PAGA claims. Standing in “PAGA-only cases cannot be dependent on the maintenance of an individual claim because individual relief has not been sought.” The court also opined that requiring an unredressed injury for PAGA standing is inconsistent with other Labor Code statutes that authorize PAGA actions, but do not authorize individual damage suits.

The court also concluded that legislative history supported granting standing to plaintiffs who settled or dismissed their individual claims, because the legislators conferred “fairly broad standing” on PAGA plaintiffs, and had “clear intent to deputize employees to pursue sanctions on the state’s behalf.”

Finally, the court rejected Reins’s arguments of claim preclusion—that dismissal of the arbitration operated to bar the PAGA claim as res judicata—because the PAGA claim was brought in the same action as the dismissed Labor Code claims, not a second action.

What Kim Means for Employers

Kim is the latest pronouncement by the California Supreme Court giving broad effect to PAGA. It follows Arias v. Superior Court, 46 Cal. 4th 969 (2009) (PAGA claims do not need to meet class action requirements); Iskanian, supra (arbitration agreements with class action waivers do not preclude PAGA representative actions); and Williams, supra (PAGA plaintiffs may be entitled to contact information of other alleged aggrieved employees statewide without preliminary showing of claim’s merit). To be sure, sometimes the court has been willing to limit PAGA’s reach. See, e.g., ZB, N.A. v. Superior Court, 8 Cal. 5th 175 (2019) (unpaid wages cannot be recovered under PAGA); Amalgamated Transit Union, supra (unions do not have standing to bring PAGA suits, and aggrieved employees cannot assign PAGA claim to another). But the clear import of Kim, decided by a unanimous court, is that PAGA is viewed as an important part of the enforcement scheme of the Labor Code and will be given a generous reading.

Notwithstanding that, Reins was not powerless to reach a settlement with Kim that would have extinguished Kim’s PAGA claim, even on an individual basis. Reins could have negotiated such a settlement, and then brought it to the superior court for approval pursuant to PAGA, Cal. Lab. Code § 2699(l)(2). The court would have had discretion to approve such a settlement if the parties could show that, under the circumstances, it was fair and reasonable. But that settlement was not to be, presumably because Kim was unwilling to accept an individual PAGA settlement. And Reins probably was unwilling to settle with respect to all the Training Managers, at least on Kim’s terms.

What Kim left unanswered is whether an employee may maintain a PAGA action after granting to the employer a release of claims that included the PAGA claim, such as part of a separation agreement. That is a different scenario than the facts in Kim, where the settlement did not include the PAGA claim (and, for that matter, did not include a release of claims). Waiver of an employee’s personal right to bring a PAGA claim should be governed by the usual rules of release. See Waisbein v. UBS Fin. Servs., No. C-07-02328 MMC, 2007 U.S. Dist. LEXIS 62723, at *13 (N.D. Cal. Aug. 15, 2007) (prior class action settlement barred class members from bringing PAGA claim, even though PAGA claim was not made in that action). Further, although judicial supervision is required of settlement of a PAGA action, the statute does not require supervision of release of a PAGA claim not asserted in an action. See Cal. Lab. Code § 2699(l)(2) (“The superior court shall review and approve any settlement of any civil action filed pursuant to this part.”) (emphasis supplied). And Iskanian is not on point because that addressed a pre-dispute arbitration agreement, not a release of existing claims. Indeed, nothing in Iskanian prohibits a plaintiff who is cognizant of a PAGA claim to agree to arbitrate the claim rather than litigate it.

How this issue will be resolved will depend on future court decisions that employers will want to track closely.

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