United States: Schwarzenegger´s Efforts Are Not Enough To Curb "Bounty Hunter Law"

Earlier this year, the "Labor Code Private Attorneys General Act of 2004" ("PAGA", but commonly called the "Bounty Hunter Statute" or the "Sue Your Boss Law") became effective. When signed into law by then Governor Davis (five days after he lost the recall election), the law, codified as Labor Code Sections 2698 and 2699, gave present and former employees the right to bring a private civil action to enforce any violation of the California Labor Code, no matter how trivial, technical, or short in duration. The PAGA did not require that the employee be harmed or damaged, or that the employee exhaust any administrative remedies (or provide the employer with any warning) before filing a lawsuit.

Almost immediately, the plaintiffs’ bar recognized the potential bonanza. For example, as passed into law, if an employer failed to file a copy of its employment application(s) (Labor Code Sec. 431) with the Department of Labor Standards Enforcement ("DLSE") or failed to post the applicable Industrial Welfare Commission ("IWC") Wage Order (Labor Code Sec. 1183) in its place of business, the employer would be on the hook for stiff fines and also for mandatory attorneys’ fees. Indeed, as passed into law and today, the PAGA incentivizes employees to bring claims, because of the potential to recover penalties not only on their behalf, but also on behalf of other past and present employees who were the subject of Labor Code violations.

One of the most remarkable aspects of Bounty Hunter law is that it permits a suit to be commenced without anyone being injured. For example, when an employer fails to include on an employee’s paycheck the total hours worked by the non-exempt employee, as required by Labor Code Sec. 226(a), it is questionable whether the employee has really been injured. Nevertheless, the PAGA provides penalties in the amount of $100 for the first such violation and $200 for each subsequent violation. These penalties continue to mount during each and every pay period in which the violation occurs. Moreover, if there is more than one Labor Code violation, penalties accrue for each separate violation. The penalties begin to multiply as the size of the employer’s workforce increases. They are calculated based on the number of present and past employees who were affected by such (technical) violation. For example, if an employer has 100 employees in California, the employer could be liable for $10,000 in penalties for each pay period during which the employer failed to place the correct information on its employees’ pay stubs. Assuming that the employer failed to correct the pay stub error during each of its 25 remaining pay periods, the employer could potentially be liable for an additional $500,000 in penalties for what is no doubt a mere technical violation. Moreover, if the employer has violated additional provisions of the Labor Code, the penalties double.

Not all of the penalties which may be awarded against employers go to the employees themselves. In fact, only 25% of the penalties awarded in litigation go to the aggrieved employees. The State recovers the balance (with 50% going to California’s General Fund and 25% going to the Labor and Workforce Development Agency ("LWDA"), formerly known as the Department of Industrial Relations). As with the recent onslaught of wage and hour class actions, the real winners will be, most certainly, the attorneys. So long as there has been a violation, the courts have no choice but to award reasonable attorneys’ fees to the prevailing plaintiff’s attorneys. And there is no dollar cap on the amount of attorneys’ fees that can be recovered. Not surprisingly, the fee recovery is one-sided; if an employer defeats a PAGA lawsuit, it is not entitled to any attorneys’ fees.

Bounty hunting attorneys are actively advertising the new law. One attorney is advertising the law on the internet under the California Labor Commissioner search mode and is offering a book on how to use "California's Sue Your Boss Law."

No more than a few months after the PAGA went into effect, Amgen Inc., which employs approximately 6,000 employees, was hit with a suit seeking more than $170,000,000. The lawsuit, filed in Ventura County Superior Court, alleged that Amgen violated the PAGA by (1) failing to send its form application to the DLSE (Labor Code Sec. 431), (2) requiring its employees to agree to an arbitration agreement that was unlawful under California law (as it provided that the parties split the costs of arbitration) (Labor Code Sec. 432.5), (3) failing to post the applicable IWC Wage Order (Labor Code Sec. 1183), (4) failing to post rights regarding workers’ compensation claims (Labor Code Sec. 3550), and (5) failing to comply with a California law, which as of just this past January, now requires that employers post a hotline number to the State so that they may more easily report what they reasonably believe to be violations of California law (Labor Code Sec. 1102.8). According to the complaint, all 6,000 Amgen employees are entitled to recover penalties and the penalties are recoverable for some violations for several years prior to the effective date of the PAGA. Nowhere in his complaint does the Plaintiff allege that he or any other Amgen employee has been injured by Amgen’s failure to comply with these sometimes obscure provisions of the Labor Code.

Not surprisingly, the Amgen suit is stuck at the very beginning of the litigation (or pleading) stage. When Amgen attempted to throw the suit out on Constitutional grounds, the trial court denied Amgen’s motion. However, the trial court did stay the case, explaining that there are substantial grounds for differences of opinion, and the "appellate resolution … may materially advance the conclusion of the litigation." Every industry and every size of business can be sued under SB 796 because the Labor Code is very broad and complex. In addition to the Amgen suit, multi-million dollar lawsuits have been filed against movie and television studios. No employer is immune. The University of California has also been sued.

Not long after Amgen’s motion to dismiss the lawsuit was denied, Governor Schwarzenegger signed SB 1809, amending the PAGA. The new bill, SB 1809, signed by the Governor on August 11, 2004, is deemed "urgency" legislation. In other words, it was effective on Schwarzenegger’s signature.

With SB 1809, a plaintiff seeking PAGA penalties must give written notice by certified mail to the Labor and Workforce Development Agency and to the employer prior to initiating legal action. Prior to SB 1809, no such notice was required. The notice must also be specific, identifying the provisions of the Labor Code alleged to have been violated, including the facts and theories to support the alleged violation. The LWDA then is required to notify the employer and employee (or his/her representative) by certified mail whether it intends to investigate the alleged violation. If the LWDA does not do so within a relatively short (33-day) period of time, the employee is free to file a civil lawsuit. If the LWDA decides to investigate, it has 120 days to do so. If the LWDA does investigate and decides not to issue a citation, the employee may still commence a PAGA action (even though the LWDA has found no violation or for some other reason decides not to issue a citation). A private PAGA action is barred only if the LWDA, or one of its subordinate agencies (including DLSE) issues a citation.

Section 5 of SB 1809, now codified as Labor Code Sec. 2699.5, provides that employers may cure certain Labor Code violations and, thus, be immune from a PAGA civil action. However, upon close reading of the new amendment to the PAGA, none of the alleged violations that employers frequently encounter in civil actions are subject to the cure provisions. For example, PAGA liability may not be avoided for violations of 157 sections of the Labor Code, including those pertaining to overtime liability (Sec. 510, et seq.) and meal and rest breaks penalties (Labor Code Sec. 226.7). Similarly, violations of the Cal OSHA provisions of the Labor Code (Sec. 6300, et seq.) are not affected by the employer’s cure.

Unlike the rather illusory cure provisions, SB 1809 comes to the aid of employers, repealing Labor Code Sec. 431 -- the requirement that employers file a copy of their employment applications with the DLSE. SB 1809 also prohibits PAGA suits premised on so-called posting requirements. This includes the requirement that employers post the number to the State’s "whistleblower hotline" (Labor Code Sec. 1102.8). It was two such posting obligations that the plaintiff in the Amgen suit, referenced above, asserted Amgen had violated and thus, that he and the class of plaintiffs he represented were due over one hundred million dollars.

As originally enacted, the PAGA gave the courts no discretion to deviate from the statutory penalties in the amount of $100 for the first violation and $200 for each subsequent violation. Now, courts have such discretion, although just when and how they are to exercise it remains unclear. For example, based in part on SB 1809, courts are now authorized to exercise the same discretion to deviate from the standard penalties where the law provided that the LWDA would have been authorized to exercise discretion. However, because not all Labor Code penalty provisions vest the DLSE or the LWDA with discretion to deviate from standard penalties, courts, in turn, confronting certain PAGA violations, may not actually have the authority to deviate from the stated maximum penalty. Creating more uncertainty, the PAGA was amended to include a section which provides a court "may award a lesser amount than the maximum civil penalty … if based on the facts and circumstances of the particular case, to do otherwise would result in an award that is unjust, arbitrary and oppressive, or confiscatory." Commentators suggest that this provision trumps the earlier discretionary penalty provision, giving courts broader discretion to reduce penalties than otherwise had been vested in the LWDA or the DLSE. They reason that, otherwise, the inclusion of that provision would be unnecessary.

One widely publicized provision of SB 1809 requires the court to "review and approve any penalties as part of a proposed settlement" in a PAGA class. Much like the requirement that the courts preliminarily approve class action settlements, this is a Due Process-based argument and is meant to ensure that the penalties are reasonably imposed to secure obedience with the Labor Code and that any penalties issued are not disproportionate to any discernable and legitimate legislative goal or that the penalties are not considered "oppressive" or "unreasonable." Whether or not the courts will attempt to shape decisions on their perceptions of the harm suffered or on deterring the employer from committing any further Labor Code violations remains to be seen.

In the Amgen case, and other pending PAGA cases, SB 1809 contains a provision specifying that the bar on PAGA actions for posting and filing violations, and the requirement that the courts review and approve all penalties, are both made expressly retroactive to January 1, 2004. In what may be another piece of good news, the LWDA and its departments and agencies are authorized by SB 1809 to implement and promulgate regulations under PAGA.

Even as amended, employers still face significant liability and possible financial ruin under the PAGA. What can employers do to decrease the risk of being subjected to a suit alleging a violation of Labor Code Section 2698? The answer is simple: ensure that your company is in full and complete compliance with the California Labor Code (and the attendant wage orders). Some employers may believe that they are already in compliance, as they have recently updated their employee handbook or asked their Human Resources manager to ensure the required postings are on the lunchroom wall. While this is a great start, the policies and procedures set forth in the employee handbook are only a small part of the steps employers should be taking. Creative plaintiffs’ lawyers will be looking for other violations of the Labor Code and Wage Orders, no matter how technical they may be, with the objective of recovering significant penalties and attorneys’ fees.

Employers must ask themselves when was the last time we have had someone objectively audit each job classification to determine whether or not each employee is properly classified as exempt from overtime? How about employee meal and rest periods? Is every single non-exempt employee receiving meal and rest periods in accordance with the rigid standards of the Labor Code and the applicable Wage Orders?

The bottom line is that employers operating in California must be proactive. They must have an internal audit performed or use an employment law firm or human resources consulting firm to conduct an objective external audit. While the PAGA has been on the books for several months, there is still time to do what is necessary to reduce the risk of being sued for high-dollar penalties and attorneys’ fees. Pillsbury Winthrop’s California Employment and Labor attorneys have defended many companies in wage-hour litigation, are well-versed in the PAGA and the strategies necessary to prevent claims under this new statute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.