On January 18, 2024, in a highly anticipated and unanimous decision, the Supreme Court of California barred striking a claim under the Private Attorneys General Act (PAGA) on trial manageability grounds alone, instead authorizing due process defenses to PAGA claims (Estrada v. Royalty Carpet Mills, Inc.). The decision also commented approvingly on representative testimonies, surveys and statistical analyses. As a result of the decision, employers now face a new challenge of marshalling such evidence to their defenses and challenging the misuse of such evidence on due process grounds in future PAGA litigation.

IN DEPTH

QUICK REFRESHER ON PAGA

Enacted in 2004, PAGA authorizes allegedly aggrieved employees to sue their employers for additional civil penalties for various alleged Labor Code violations on behalf of themselves, other employees and the state of California. Allegedly aggrieved employees act as “private attorneys general” seeking remedies against their employer for alleged violations against them and other employees. Unique to PAGA, typical class action requirements such as superiority and the predominance of common issues do not apply. Under PAGA, an allegedly aggrieved employee only needs to demonstrate that a single violation of a particular Labor Code statute was committed against them during the PAGA period to prosecute the case as a representative action and represent other employees as to any and all allegedly violated Labor Code statutes. In other words, a plaintiff need only be aggrieved as to a particular violation (e.g., missed meal periods) to assert that they may represent all other employees as to all other alleged violations (such as wage statement noncompliance, missed rest periods, overtime or failure to pay paid sick leave using the regular rate calculation). This concept has led to trial manageability and due process issues in these cases.

CALIFORNIA COURTS OF APPEAL SPLIT

Prior to the California Supreme Court’s recent ruling, the California Courts of Appeal were split on whether trial courts possess the inherent authority to strike or dismiss a PAGA claim with prejudice by employing manageability requirements. (See Estrada v. Royalty Carpet Mills, Inc. (2022) 76 Cal.App.5th 685, 697 (concluding that trial courts lack such inherent authority.)) (See also Wesson v. Staples the Office Superstore, LLC (2021) 68 Cal.App.5th 746, 766–767 (concluding that trial courts possess such inherent authority.))

ESTRADA LOWER COURT DECISION

Royal Carpet Mills, a California carpet manufacturer, employed Jorge Luis Estrada at one of its two Orange County locations. Estrada filed a complaint against Royalty, alleging various class action claims, including a failure to provide first and second meal periods, and a PAGA claim seeking penalties for various alleged Labor Code violations. Additional plaintiffs later joined as named plaintiffs, and the claims largely remained the same in each iteration of the complaint.

After the meal period class was certified, the trial court held a bench trial where the plaintiffs presented live testimony from a dozen named plaintiffs, deposition testimony from different managers and officers of Royalty, live testimony from two of Royalty’s human resources employees and live testimony from an expert witness. In its defense, Royalty presented testimony from two former employees and a single expert witness.

Following the presentation of evidence, the trial court decertified the class on the basis that too many individualized issues predominated, citing inconsistent testimonies from the plaintiffs and varying reasons why meal periods were late. The trial court also dismissed the PAGA action as unmanageable for trial. The Court of Appeal overturned, leading Royal to petition the California Supreme Court to resolve the conflict among the Courts of Appeal over a trial court’s inherent authority to manage PAGA claims.

TRIAL MANAGEABILITY

Defendants have often successfully argued that the California Supreme Court’s decade-old Duran decision applies to representative actions insofar as the representative action must be manageable for trial. In Duran v. U.S. Bank National Assn., the California Supreme Court reversed a $15 million judgment based on a flawed statistical sample and acknowledged the importance of due process and managing individual issues fairly and efficiently in a class action.

THE DECISION

In the opinion and at oral argument, the California Supreme Court grappled with the source of the trial court’s authority to strike claims, concluding that the inherent authority of trial courts to dismiss claims is limited to circumstances not present in Estrada. The decision is not too surprising considering the US Court of Appeals for the Ninth Circuit recently came to the same conclusion. (See Hamilton v. Wal-Mart Stores, Inc. (9th Cir. 2022) 39 F.4th 575, 590 (“The [manageability] requirement cannot be imposed in PAGA actions under the guise of a court’s inherent powers.”)) Both courts focused on whether trial courts possess the broad inherent authority to dismiss claims.

In its January 18 opinion, the California Supreme Court highlighted structural differences between class and PAGA actions to support its view that imposing class-action-based manageability requirements on PAGA actions is inappropriate, emphasizing that concepts such as superiority and predominance do not apply to PAGA claims. The California Supreme Court went so far as to suggest that manageability is derived from class action requirements:

[M]anageability in the class action context is a factor in demonstrating that class-wide issues predominate and that a class action is superior to individual actions. Given that a PAGA plaintiff need not demonstrate that common issues predominate or that a representative or non-individual PAGA claim is superior to other forms of adjudication, the requirement that a plaintiff demonstrate the manageability of a class claim does not establish a similar manageability requirement for any related PAGA action.

Op. at 23.

The Estrada court was quick to highlight that PAGA actions are not class actions and the California legislature declined to add class action requirements to the statute.

While the California Supreme Court found that PAGA claims cannot be stricken, it is important to note that “striking” PAGA claims is only one defense of many, including showing that the individual employee is not aggrieved (on summary judgment, which if successful precludes the PAGA representative action), due process issues, dispositive evidence related to the allegedly aggrieved employees and, of course, a host of legal arguments related to the various Labor Code claims. Estrada suggests that the use of representative testimonies, surveys and statistical analyses is allowable to streamline evidence presented at trial, and that statistical analysis can be used to “estimate the number of aggrieved employees, even if the evidence cannot demonstrate the extent of any particular injury.” (Op. at 42.) This battle of the experts and testimonies typically becomes a question of whether the sampling is statistically sound and can be used to demonstrate that employees were aggrieved and to estimate damages, or – conversely – whether the employer’s statistics and analysis show otherwise. The answer is case specific and depends on the claims, data and evidence. (For example, a standalone wage statement violation may lend itself to a sound statistical sample, but a missed meal periods claim may not.)

The California Supreme Court expressly made the important distinction that striking claims may be an option to preserve a defendant’s due process rights but declined to comment on the hypothetical situation where that may be necessary.

OTHER TOOLS AND CONSIDERATIONS TO LIMIT NEEDLESS, EXPENSIVE PAGA CASES

While many in the plaintiff’s bar may argue that Estrada is a death knell to employers defending against PAGA claims, such is not the case. Many tools remain at the disposal of employers (no two being the same) that warrant individual consideration by each employer facing the threat of PAGA claims:

• Proactive Compliance Measures. Employers should review and ensure compliant wage and hour policies and practices. Estrada demonstrates the importance of having Labor-Code-compliant timekeeping and meal and rest break policies and practices. Employers should ensure that employees are accurately reporting their time worked, completing attestations affirming their time and meal break records, and training their managers and employees regularly on wage and hour policies.
• Review Existing Arbitration Agreements or Consider Whether Implementing One Makes Sense. While employers are still reeling from the California Supreme Court’s rejection of the Viking River case in Adolph v. Uber Technologies Inc. (holding that an employee can pursue their individual claim under PAGA in arbitration without losing standing to serve as the plaintiff of the representative PAGA case as it moves forward in court), reviewing or implementing arbitration agreements with mandatory class action waivers should also be top of mind. These can be used to successfully compel plaintiffs’ individual claims to arbitration, avoid class actions and limit representative cases to PAGA only until the Supreme Court of the United States decides to weigh in.
• Plaintiff Must Still Meet Their Burden. For employers already facing PAGA claims, Estrada leaves undisturbed the requirement that a plaintiff prove that they are an aggrieved employee – meaning that the plaintiff must be able to show a Labor Code violation against them. A plaintiff also has the burden to show that all aggrieved employees suffered violations. Where employers are dedicated to compliance and documentation, this becomes a much more difficult burden for an allegedly aggrieved employee. The plaintiff also has the burden to produce a “trial plan” – explaining how they will seek to adjudicate their claims at trial. A PAGA plaintiff must set forth some type of trial plan demonstrating how the defendant’s due process rights won’t be infringed if they go to trial on behalf of the entire PAGA class.
• Narrowing PAGA Claims in Litigation. Estrada affirmed that where a PAGA case is unwieldy, a court may still limit the scope of the PAGA claims and the evidence presented at trial, including witness testimony, and may limit penalties when a plaintiff who has alleged widespread violations is unable to prove PAGA claims in an efficient manner. The Estrada plaintiff limited his claim to two Royalty locations with largely similar policies and practices. PAGA defendants with varying work locations and practices should highlight the challenges presented by a large and complex PAGA action and the potential for dozens, hundreds or thousands of mini trials involving diverse questions, depending on the breadth of the plaintiff’s claims. This can be done using tools such as a demurrer, summary judgment/adjudication and judgment notwithstanding the verdict.
• Protecting Due Process. A PAGA action may cover a vast number of employees, each of whom may have a markedly different experience relevant to the alleged violations. Under those circumstances, determining whether the employer committed Labor Code violations with respect to each employee may raise practical difficulties and lead to due process violations. While the California Supreme Court declined to opine in its Estrada decision on the circumstances in which due process violations may exist, it left open the possibility that PAGA claims could be stricken where a defendant’s due process claims were infringed.
• Repealing PAGA. In November 2024, California voters will have an opportunity to vote on the future of PAGA directly by choosing whether to repeal it and replace it with the California Fair Pay and Employer Accountability Act of 2024 (CFPEAA). The purpose of the CFPEAA is to streamline the current enforcement system and help employees collect any amounts they are owed quickly without the need for a private lawyer. Most importantly, a private right of action and attorneys’ fees would cease to exist under the proposed CFPEAA.

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