On May 28, 2021, the Ninth Circuit Court of Appeals delivered a win to Walmart in a lawsuit brought by Roderick Magadia (“Magadia”) alleging violations of California’s wage statement and meal break laws.
The Ninth Circuit overturned a $102 million dollar judgment issued by United States District Judge Lucy H. Koh – comprised of $48 million in statutory damages and $54 million in civil penalties under California’s Private Attorneys General Act (“PAGA”). It did so because it found that Magadia lacked Article III standing because he could not establish that he suffered any alleged meal break violations, and because Wal-Mart had provided compliant wage statements – contrary to the finding of the district court.
Although Wal-Mart completely prevailed as to Magadia’s wage statement claims (judgment reversed and remanded with instructions to enter judgment for Wal-Mart), Magadia’s meal break claims were allowed to proceed in state court (judgment vacated with instructions to remand to state court).
Whatever becomes of the balance of Magadia’s lawsuit, the Ninth Circuit’s opinion dealt a blow to some of the more popular claims and/or theories in modern class action and PAGA litigation, specifically (1) wage statement violations predicated on not listing hours or rates attributable to multi-pay-period contingent compensation, (2) wage statement violations predicated on the timing of final wage statements (i.e., on separation vis-à-vis next regular payday) and the dates listed as the compensable period, and (3) whether PAGA’s single-injury standing can confer Article III standing for harms not suffered (it does not).
1) Background Facts and Claims
Magadia worked as a sales associate for Walmart from 2008 to 2016. On his final day of employment, Walmart provided him his final paycheck and a statement of final pay, which did not include pay-period start or end dates. Walmart provided Magadia his final wage statement on the next regular payday, which listed the pay-period start and end dates as the beginning and end of the established pay period.
Magadia sued Walmart in state court, alleging three types of California Labor Code violations:
- that Walmart’s wage statements violated Labor Code § 226(a)(9) because its adjusted overtime pay does not include hourly rates of pay or hours worked;
- that Walmart violated § 226(a)(6) by failing to list the pay-period start and end dates in its Statements of Final Pay; and
- that Walmart’s meal-break payments violated § 226.7 because it did not account for MyShare bonuses when compensating employees.
Magadia also sought derivative civil penalties for all three claims under PAGA.
Walmart removed the case to federal court.
2) Magadia’s Labor Code Claims
a) Magadia’s 226(a)(9) Claim – Failure to List Hourly Rates of Pay or Hours Worked
Walmart pays employees and issues them corresponding wages statements every two weeks. Each quarter, Walmart rewards high-performing employees with “MyShare” bonuses which are itemized on the corresponding wage statements as “MYSHARE INCT.”
Consistent with California law, Walmart paid bonused-employees retroactive overtime to account for the proportional increase in the quarterly overtime rate from the bonuses. Walmart itemized these payments on the quarterly wage statements as a lump sum labeled “OVERTIME/INCT,” without any corresponding hourly rate or number hours worked. It was the absence of those two data points that Magadia argued was unlawful.
b) Magadia’s 226(a)(6) Claim – Failure to List Pay-Period Start and End Dates on Final Wage Statements
When Walmart separated employees, it issued them a final statement of pay that, among other things, did not list the start or end dates of the pay period. On the next regular payday following separation, Walmart issued the employees their final wage statements, which listed the established pay-period start and end dates. Magadia argued that it was both unlawful to delay the final wage statement until the next regular pay day and that the payperiod end date on the final statement of pay should be listed as the separation date.
c) Magadia’s 226.7 Claim – Failure to Pay Premiums for Non-Compliant Meal Breaks
Walmart paid required statutory premiums whenever it allegedly failed to provide employees with a compliant meal break, but it did so at employees’ base hourly rates of pay. Magadia argued that this practice violated Labor Code § 226.7 because the premiums should have accounted for the MyShare bonuses and thus should have been paid at a higher rate.
d) Magaida’s PAGA Claims
Magadia sought derivative civil penalties under PAGA for all three claims.
3) District Court and Ninth Circuit Rationale on Magadia’s Standing for Wage Statement Claims
Both the district court and Ninth Circuit agreed that the omission of statutorily required information can constitute distinct and concrete injury sufficient to confer Article III standing. Where the district court and Ninth Circuit differed is whether Walmart’s paystubs practices actually violated the applicable subsections of Labor Code 226(a), as explained below.
4) District Court and Ninth Circuit Rationale Regarding Walmart’s Compliance with Labor Code Section 226(a).
a) District Court’s Rationale In Finding Walmart Had Violated Labor Code § 226(a)(9)
In a May 11, 2018 summary judgment order, the district court held that Walmart’s failure to include any hourly rates or hours worked on the wage statements accompanying the MyShare bonus payments violated Labor Code § 226(a)(9); however, the district court’s order did not provide any analysis or guidance on how Walmart should have (or could have) reflected those data points. Moreover, because Walmart took no steps to include the additional data points after the summary judgment order, the district court found that Walmart had “knowingly and intentionally” violated Labor Code § 226(a)(9).
b) Ninth Circuit’s Rationale In Finding Walmart Had Complied Labor Code § 226(a)(9)
The Ninth Circuit found the district court’s conclusions to be in error, reasoning that the retroactive overtime payments were “artificial, after-the-fact rate[s] calculated based on overtime hours and rates from preceding pay periods that did not even exist during the time of the pay period covered by the wage statement.” Citing Magadia himself as an example, the Ninth Circuit explained that his overtime adjustment “rate” was $.20, but there was no pay period in which Magadia worked at an overtime rate of $.20. Thus, the Ninth Circuit concluded that retroactive overtime payments were not an hourly rate “in effect” during the MyShare pay periods for purposes of § 226(a)(9).
c) District Court’s Rationale In Finding Walmart Had Violated Labor Code § 226(a)(6).
In its summary judgment order, the district court agreed with Magadia’s interpretation of Labor Code section 226(a)(6) (i.e., final wage statements must be issued on the day of separation and that it should list (1) the start of the pay period and (2) the separation date as the pay period start and end dates – because those were “the dates for which the employee is being paid”).
Walmart did not change its practices after the summary judgment order, and thus the district court found that each final wage statement thereafter “knowingly and intentionally” violated the statute and that Walmart had no “good faith dispute” defense to liability.
d) Ninth Circuit’s Rationale In Finding Walmart Had Complied Labor Code § 226(a)(6)
The Ninth Circuit found that it was lawful for Walmart to issue final wage statements to separating employees on the next regular payday. Because the statutory language is framed in the disjunctive (i.e., either/or), employers thus have the option to issue final wage statements either “semimonthly or at the time of each payment of wages[.]” Therefore it was both lawful for Walmart lawfully chose the latter option and to list the pay-period start and end dates as the established pay-period start and end dates.
District Court and Ninth Circuit Rationale on Magadia’s Standing to Pursue Meal Period Penalties Under PAGA
a) District Court’s Rationale In Finding That Magadia Had Standing to Pursue Meal Period Penalties Under PAGA
Magadia was unable to establish that he personally suffered any meal break violations. However, he was able to establish that other employees had suffered non-compliant meal breaks (due to Walmart’s own records). And because the district court had previously accepted Magadia’s position that meal premiums must be paid at a rate that accounted for, among other things, the MyShare bonuses, it found that those bonused-employees had been harmed.
Note: The California Supreme Court is reviewing the California Court of Appeal’s decision in Ferra v. Loews Hollywood Hotel, LLC, which held that such premiums may be paid at the base hourly rate.
Notwithstanding Magadia’s failure to establish that he suffered any meal break violations, the district court nonetheless found that Magadia had standing to pursue PAGA penalties for meal break violations suffered by other Walmart employees. It did so, in large part, due to the California Court of Appeal’s decision in Huff v. Securitas Sec. Servs. USA, Inc., which held that so long as an employee has suffered one Labor Code violation, he or she has state-proxy status to pursue PAGA penalties for alleged Labor Code violations not personally suffered but allegedly suffered by others.
b) Ninth Circuit’s Rationale In Finding That Magadia Did Not Have Standing to Pursue Meal Period Penalties Under PAGA
While acknowledging that qui tam actions are “well-established exception[s]” to traditional Article III standing, and that the California Supreme Court has categorized PAGA as “a type of qui tam action,” (quoting Iskanian v. CLS Transp. Los Angeles, LLC), the Ninth Circuit explained its obligation to “look beyond the mere label attached to the statute and scrutinize the nature of the claim itself.”
The Ninth Circuit explained how PAGA does, and does not, “hew closely to the traditional scope of a qui tam action for an uninjured plaintiff to maintain suit under Article III.” On the one hand, the Ninth Circuit found that PAGA shares the following characteristics with traditional qui tam actions: (1) PAGA plaintiffs serve as a “proxy or agent of the state” and represent the “same legal right and interest as state labor law enforcement agencies[,]” (2) PAGA plaintiffs “share a monetary judgment with the government[,] . . . with the government receiving the lion’s share[,]” and (3) “PAGA permits the government to dictate whether a private plaintiff may bring a claim in the first place.”
On the other hand, the Ninth Circuit found that PAGA is dissimilar to traditional qui tam actions in the following ways: (1) PAGA explicitly involves the interests of others besides California and the PAGA-plaintiff (i.e., nonparty “aggrieved employees”), (2) PAGA distributes non-state penalties to all “aggrieved employees,” not just the PAGA-plaintiff, (3) the collateral estoppel aspects of PAGA (which bind non-party aggrieved employees in addition to the state and PAGA-plaintiff) create an interest in the penalties for the non-party aggrieved employees, and (4) PAGA represents a full and irrevocable assignment of California’s rights to the PAGA-plaintiff. That is because PAGA lacks any procedural controls, right to intervene, or other mechanism to ensure that California retains the right to control the action if the state does not exercise its “right of first refusal” within the administrative exhaustion period that begins with filing a PAGA Notice.
On balance, the Ninth Circuit held that PAGA’s features diverge too substantially from the traditional criteria of qui tam statutes, and thus PAGA could not confer Article III standing on Magadia because he did not personally suffer any meal period violations.
Lacking Article III standing, the Ninth Circuit instructed the district court to remand Magadia’s meal period claims to California state court.
6) Take-Aways For the Employer From the Magadia Opinion
The Magadia opinion has numerous implications for California employers. First, it generally reinforces the widely held opinion that federal court is a more favorable venue for PAGA litigation than state court. That is, Magadia makes clear that claims for failing to list “fictional” hourly rates or the number of hours worked when paying retroactive overtime (spanning several pay periods) have no legs in federal court; and because Magadia’s denial of Article III standing to injury-free plaintiffs could provide employers the chance to defeat certain claims for which a plaintiff does have Article III standing before the balance of a case is remanded to state court, as Walmart did in this matter.
Second, the Magadia opinion contains powerful and persuasive arguments as to how California state courts should interpret California’s highly-technical wage statement laws, which may be useful if a defendant is unable to remove a case to federal court.
Third, the Magadia opinion’s rationale that PAGA is not a traditional qui tam statute, and thus cannot confer Article III standing on an injury-free plaintiff reinforces certain arguments regarding the constitutional infirmity of PAGA – including some arguments that Epstein Becker & Green, P.C. is arguing before the California Court of Appeal in CABIA v. Becerra.
Finally, Magadia highlights the increasing complexity of PAGA litigation and the corresponding necessity of vigilant and competent counsel to prevent (if possible) or defend (if necessary) a PAGA lawsuit. And given the thousands of PAGA notices filed each year, for most California employers, finding themselves in the PAGA-crosshairs is not a matter of if, but when.
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