United States: California Court Rules PAGA Plaintiffs Need Not Assert Injury, Or Employer Knowledge, To Collect Penalties For Paystub Violations; Where Do Employers Go From Here?

A California Court of Appeal dealt another blow to employers in a recent ruling interpreting the state's Private Attorneys General Act (PAGA). In Lopez v. Friant & Associates, the court considered the proof required for a PAGA plaintiff to succeed on a claim based on underlying violations of Labor Code section 226(a).1 In short, the court held that PAGA plaintiffs asserting such claims need not show that the violation caused "injury" or resulted from "knowing and intentional" conduct, as required for a penalty award under a related Labor Code provision.

This article reviews the Lopez case, as well as potential ballot initiatives that aim to rein in PAGA actions in the future.

The Bird's Eye View of PAGA

By way of background, PAGA authorizes aggrieved employees to step into the shoes of the state Labor Commissioner to help enforce California's labor laws.2 Under this unique California law, employees may bring actions against employers to recover civil penalties on behalf of the state, themselves, and other aggrieved employees—in addition to any other remedies available to them under state or federal law.

PAGA claims are available through two mechanisms: (1) employees can collect any penalty already established by a Labor Code provision; and (2) employees can seek a penalty, set by PAGA, for violation of certain Labor Code provisions that do not include their own penalties. The default PAGA civil penalty is $100 per employee per pay period for an initial violation and $200 per pay period for any subsequent violations. If a PAGA plaintiff succeeds, 75% of any penalty recovered is paid to the Labor and Workforce Development Agency (LWDA), with the remainder distributed among aggrieved employees.

Since its enactment, PAGA has been the source of much confusion. Among other issues, there are differing interpretations about whether and how PAGA penalties apply to certain types of violations—particularly claims brought under section 226(a). The plaintiff in Lopez raised such claims, requiring the court to dive into these muddy waters.

Labor Code Section 226

Section 226(a) requires employers to provide wage statements (i.e., paystubs) with very specific information. Section 226(a)(7), at issue in Lopez, states that paystubs must include the employee's name along with "only the four digits of his or her social security number or an employee identification number."3

Section 226 includes a penalty provision for certain violations of section 226(a).4 Under section 226(e), an employer guilty of a knowing and intentional failure to comply with section 226(a) must pay employees, who have suffered injury, a penalty totaling $50 for an initial offense and $100 for subsequent offenses.5 Section 226(e) further defines "injury" for purposes of the penalty, along with the term "knowing and intentional failure."6 For example, according to section 226(e), no penalty is warranted for "an isolated and unintentional payroll error due to a clerical or inadvertent mistake."7

Lopez: The Interplay between PAGA and Section 226(e)

The plaintiff in Lopez alleged that his employer failed to comply with section 226(a)(7), and he sought default civil penalties under PAGA, found at Labor Code section 2699(f).8 Notably, the plaintiff did not pursue penalties under section 226(e) or any other provision.

At summary judgment, the defendant-employer argued that plaintiff could not prevail because: (1) he did not suffer "injury" resulting from a "knowing and intentional" violation of section 226(a); and (2) any errors were inadvertent. The employer thus grounded its argument in the text of section 226(e). The trial court agreed with that approach and granted judgment for the employer, finding that it was not aware of the paystub omissions.9

The plaintiff appealed, contending that the limits on recovery found in section 226(e) did not constrain his penalty claim under PAGA. In evaluating that theory, the appellate court considered whether the penalties could be "stacked" or whether they truly overlapped so as to permit only one recovery. The question boiled down to whether penalties under section 226(e) are classified as "civil penalties," like PAGA penalties, or whether they are "statutory penalties" and are therefore categorically different from PAGA recovery.

After reviewing the plain text and legislative history of section 226(e), the Lopez court drew a distinction between PAGA and section 226(e) penalty claims. As the court explained, PAGA deputized employees to seek recovery on behalf of the LWDA and the public, while claims under section 226(e) existed prior to PAGA and serve to benefit only individuals.10 Based on those differing purposes, the court held that "section 226(e) permits an employee to recover statutory damages, not a civil penalty."11 Like other courts that have considered the question, the California appellate court in Lopez concluded that the elements for a private cause of action under section 226(e) do not apply to PAGA claims.12 Accordingly, the court found that to recover PAGA penalties for violation of section 226(a), a plaintiff does not need to "satisfy the 'injury' or 'knowing and intentional' requirements of section 226(e)."13

The court also rejected the employer's argument that its inadvertent mistake could not support a penalty award under the circumstances. The employer pointed to the language of section 2699, which states that courts are authorized to exercise discretion when deciding whether and in what amount to assess a civil penalty under PAGA, particularly if an award would be unjust or oppressive.14 Relying further on section 226.3, the employer asserted that the court had the power to decline to impose a penalty for violations based on clerical or inadvertent error. The appellate court refused to affirm summary judgment on that basis, however, because the trial court had never evaluated those arguments. The appellate court simply reversed the judgment and sent the case back to the trial court to entertain the parties' arguments and assess the appropriate PAGA penalty amount, if any.15

What Now?

While the Lopez court did not announce any truly novel interpretation, the ruling reaffirms California courts' expansive construction of PAGA. Precedent like Lopez, in conjunction with lingering ambiguities about the law's operation, can make it difficult to defend PAGA claims—even for unintentional or clerical mistakes by employers.

In response to concerns about PAGA's breadth, the California General Assembly frequently explores amendments to the statute during its legislative sessions. For example, AB 1429 and 1430 (Fong), introduced in 2017, would limit PAGA recoveries. Those bills stalled in committee and will be carried over to 2018. Accordingly, while bills to limit PAGA penalties did not make much headway in 2017, perhaps 2018 will bring some sort of legislative clarification.

In addition, three potential ballot initiatives concerning PAGA have been proposed. These initiatives may offer California voters the opportunity to amend PAGA themselves at the polls in November 2018. One initiative would repeal PAGA altogether and leave the imposition of penalties to the discretion of the Labor Commissioner. A second proposal would: (1) require a plaintiff to have suffered an injury to make out a PAGA claim; (2) limit discovery in PAGA actions to only those employees with the same job classification at the same location; and (3) require all complaints alleging a Labor Code violation to be filed under penalty of perjury. Finally, another potential ballot initiative includes those three elements and also would eliminate the "stacking" of penalties and would limit recovery to only "willful" violations.

While the California legislature and stakeholders continue to debate the proper scope of PAGA, the number of PAGA claims filed continues to rise. For example, the LWDA received roughly 4,400 claims in 2010, and about 6,300 claims in 2014, representing a nearly 50% increase over those four years.16 As the popularity of these claims shows no sign of subsiding, California employers should stay tuned for further developments concerning interpretation and enforcement under PAGA.

Footnotes

1 15 Cal. App. 5th 773 (Cal. Ct. App. 2017).

2 Cal. Lab. Code §§ 2698 et seq.

3 Cal. Lab. Code § 226(a)(7).

4 Relatedly, Labor Code section 226.3 includes a civil penalty provision that applies to violations of section 226(a). Courts have disagreed, however, as to whether section 226.3 penalties remedy some, or all, violations of section 226(a). Due to this dispute, some courts recognize PAGA claims to plug perceived penalty gaps left open by section 226.3, while others do not. For example, at least one court has held that section 226.3 does not provide a penalty remedy for all violations of section 226 and that, as a result, plaintiffs in theory could recover: (1) civil penalties under section 226.3 for some violations; (2) PAGA default penalties for violations not covered by section 226.3; and (3) statutory penalties under section 226(e) via PAGA. York v. Starbucks Corp., No. 08-7919, 2012 WL 10890355, at **7-9 (C.D. Cal. Nov. 1, 2012) (concluding that "that section 226.3 does not provide a penalty for a violation of section 226(a)(9)–failure to provide specified information on wage statements–and that damages for a 226(a)(9) violation should therefore be available under fallback provision" of PAGA); see, e.g., Azpeitia v. Tesoro Ref. & Mktg. Co. LLC, No. 17-0123, 2017 WL 3115168, at *11 (N.D. Cal. July 21, 2017). Yet in a recent federal case, a district court limited recovery to penalties under sections 226.3 and 226(e) and disallowed a PAGA default award. Culley v. Lincare Inc., 236 F. Supp. 3d 1184, 1194 (E.D. Cal. 2017) (holding that because section "226.3 sets out a civil penalty for all violations of § 226, PAGA's default civil penalties do not apply to wage statement violations"). The court in Lopez acknowledged this open question in a footnote but did not address it. 15 Cal. App. 5th at 784 n.6.

5 Cal. Lab. Code § 226(e).

6 Cal. Lab. Code § 226(e)(2)-(3).

7 Cal. Lab. Code § 226(e)(3).

8 Cal. Lab. Code § 2699(f).

9 15 Cal. App. 5th at 776-77.

10 Id. at 779-84.

11 Id. at 784.

12 Id. (citing to several federal cases in agreement, including McKenzie v. Federal Express Corp., 765 F. Supp. 2d 1222 (C.D. Cal. 2011)).

13 15 Cal. App. 5th at 788.

14 See Cal. Lab. Code § 2699(e).

15 15 Cal. App. 5th at 787-88 & n.10.

16 Cal. Legislative Analyst's Office, Budget & Policy Post, 2016–17 Budget: Labor Code Private Attorneys General Act Resources, Figure 2 (Mar. 25, 2016).

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.

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