On February 23, 2021, a unanimous Ninth Circuit panel held in the decision of Bernstein v. Virgin America Inc. (Case No. 19-15382) that employers are not subject to heightened penalties for subsequent violations under the Labor Code unless and until they have been notified of the violation by the Labor Commissioner or a court.  This decision impacts all California employers facing PAGA claims and uncertainty as to whether the alleged violations give rise to heightened civil penalties that would nearly double their potential liability exposure.

The primary issues in Bernstein are unique, relating to the application of California labor laws to interstate transportation workers.  In yesterday’s published opinion, the panel held that California’s overtime, meal and rest break, and wage statement laws applied to the class of Virgin America’s California-based flight attendants.

Notably, the court held that federal aviation laws do not preempt California requirements concerning meal and rest breaks.  The panel rejected Virgin America’s arguments in support of preemption, finding the meal and rest rules do not trigger field or conflict preemption, they “have no direct bearing on the field of aviation safety,” and they are not “related to a price, route, or service.”  As to the last finding, the court did not discuss how, without modifying prices, routes, and service, airlines could provide flight attendants work-duty free, uninterrupted breaks in which they are free to leave the premises while working long flights.

While these issues are unique to some companies with interstate workers, the panel’s discussion about PAGA penalties effects every employer in California. 

The Labor Code’s penalty provisions, including the PAGA’s default civil penalty provisions, establish heightened penalties for “subsequent” Labor Code violations.  These subsequent penalties are typically double the penalty amount for “initial” violations.  For example, the PAGA’s default civil penalties are $100 “for each aggrieved employee per pay period for the initial violation,” and $200 “for each aggrieved employee per pay period for each subsequent violation.” Labor Code § 2699(f).

The Ninth Circuit panel relied on a California appellate court decision from 2008, Amaral v. Cintas Corp. No. 2, which held that a “good faith dispute”—established by the assertion of a defense that, if successful, would preclude any recovery—precludes the imposition of heightened penalties.  And, “Until the employer has been notified that it is violating a Labor Code provision (whether or not the [Labor] Commissioner or court chooses to impose penalties), the employer cannot be presumed to be aware that its continuing underpayment of employees is a ‘violation’ subject to penalties.” 

Applying the reasoning of Amaral, the panel found that Virgin America was first notified of the violations when the district court granted plaintiffs’ motion for summary judgment.  Accordingly, the court held the company could not be subject to heightened civil penalties under PAGA for violations that occurred prior to that point.

On the one hand, the decision is favorable because it provides clarity for employers facing PAGA claims and evaluating potential civil penalty exposure.  In the past, PAGA plaintiffs have advocated for an assessment of heightened civil penalties for violations occurring after (1) the first violation within the limitations period, (2) the employer received the PAGA notice letter, and/or (3) after the employer received the complaint. The Ninth Circuit rulings should close the door on those arguments. 

On the other hand, the bright-line rule will hurt an employer that fails to immediately remediate Labor Code violations, even if the employer plans to appeal the unfavorable trial court decision or Labor Commissioner citation.  If the employer’s appeal is not successful, it will be subject to heightened penalties accruing during the appeal period.  Additionally, the court’s decision could make it more difficult to remove wage and hour lawsuits to federal court based on diversity jurisdiction. Employers removing an action with a PAGA claims have relied on the heightened penalties to meet the amount in controversy requirement.  Depending on the plaintiff’s allegations, the Bernstein decision could make district courts reluctant to consider the heightened penalties in determining whether the amount in controversy exceeds $75,000.

Lastly, while the decision clearly applies to heightened civil penalties, it remains to be seen whether this rule will apply to claims for heightened statutory penalties, like those established by Labor Code section 226(e) for certain wage statement violations.