Ninth Circuit Offers Glimmer of Hope for Employers Against PAGA Suits

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The Ninth Circuit in Magadia v. Wal-Mart Associates, Inc., No. 19-16184 (May 28, 2021) (“Magadia”), recently provided what is perhaps the first hopeful road map for employers to defend themselves against PAGA claims since a California Court of Appeal held that PAGA plaintiffs who may have suffered just one alleged Labor Code violation are allowed to pursue penalties for any number of additional alleged Labor Code violations that affected other employees and not the plaintiff.  Huff v. Securitas Security Services, USA, Inc., 23 Cal.App.5th 745 (2018).

Many “kitchen sink” PAGA actions have been filed in the wake of Huff, where the named plaintiffs may not even claim to have suffered many of the alleged violations.  The Magadia decision sets forth a novel analysis of a plaintiff’s standing under PAGA, which may prevent those purely representative claims.

District Court’s Novel Rulings and Extraordinary Awards

Magadia, a former Walmart employee, brought a putative class action in California state court against Walmart alleging four causes of action based on (1) unpaid meal break premiums, (2) inaccurate itemized wage statements, (3) unfair and unlawful business practices, and (4) PAGA. Walmart removed the case to federal court, and the district court certified three classes on Magadia’s claims.

Ultimately, after numerous proceedings and rulings, and a three-day bench trial, the district court awarded over $48 million in statutory damages and $53 million in PAGA civil penalties based on alleged wage statement violations.

Most of the award arose from wage statements issued to non-exempt employees who, in addition to their regular pay period earnings, were paid a non-discretionary bonus earned over multiple pay periods during which they worked overtime hours.  The district court interpreted the applicable Labor Code provision, section 226, to require such wage statements to show the inclusive dates of bonus period, the overtime hours worked in the bonus period, and the overtime rate of pay for those overtime hours resulting from the bonus payment, in addition to the required information related to the standard pay period. In other words, the court required an itemized bonus wage statement within the itemized standard wage statement.  Wal-Mart’s paystubs did not meet this stringent requirement because it did not show an “overtime rate” resulting from the bonus (which is arbitrary) or the number of overtime hours worked in the bonus period (which were reflected on prior wage statements).  The court awarded over $100 million for this "violation," after using its discretion to reduce the total penalty award.

The district court also found that Wal-Mart was required to pay meal period premiums at the “regular rate of pay,” instead of the straight time rate.  Although the court found that Magadia did not suffer a violation for meal period premiums, and decertified the meal period premium subclass, it awarded $70,000 in PAGA civil penalties based on violations committed against other non-party employees.  The district court found that Magadia had standing to maintain a PAGA claim based on the alleged wage statement violations and, following Huff, allowed him to recover civil penalties for meal period premium violations on behalf of other employees, exclusively.

Wal-Mart’s Sweeping Victory Before the Ninth Circuit

Unsurprisingly, Walmart appealed.  The Ninth Circuit reversed the district court’s judgment and award of over $101 million on the wage statement claims.  The court held that section 226 requires an itemization of information effective in the applicable weekly, bi-weekly or semi-monthly pay period—the requirements do “not apply to an artificial, after-the-fact rate 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.”  All employers who provide non-discretionary bonuses covering multiple pay periods (e.g. monthly or quarterly bonuses) benefit from this analysis.

The Ninth Circuit also reversed the district court’s award based on the alleged meal period premium violations.  However, the court did not address the substantive merits of the claim or the Huff decision.  Instead, the Ninth Circuit found that a PAGA action is not a qui tam action for purposes of Article III standing. The authors deem the Ninth Circuit’s rationale here to be the real takeaway for employers.

The “State’s Shoes” Are Not Enough to Establish Standing Under PAGA

PAGA plaintiffs often assert a single cause of action for civil penalties under PAGA and claim to “stand in the shoes of the state” for all alleged violations against other employees (see Huff).

This oft-repeated argument dates back to the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal.4th 348 (2014), where the court described a PAGA suit as “a type of qui tam action” (i.e. one permitting private plaintiffs to sue in the government’s name for violations of public rights).  See also, Williams v. Superior Ct., 3 Cal.5th 531, 538 (2017) (a PAGA action is “essentially a qui tam action”).  The court has not, however, held that PAGA actions are in fact qui tam actions.

Nonetheless, California courts began treating PAGA actions as qui tam actions and applying jurisprudence related to qui tam actions.  In Huff, the California Court of Appeal made the same assumption, rejecting the employer’s standing argument because it “ignores the distinction between an individual lawsuit and the qui tam action authorized by PAGA” and that the “traditional standing analysis … does not apply in a qui tam action.” Huff, 23 Cal.App.5th at 760.

The Ninth Circuit challenged the “qui tam” assumption in Magadia and determined that PAGA actions “depart from the traditional criteria of qui tam statutes” in several significant respects.  Specifically, the court found that the PAGA does not follow the traditional qui tam assignment theory because (1) PAGA actions implicate the interests of third parties other than the state, and (2) PAGA allows for a full assignment of California’s interest to the aggrieved employee.  The court noted that “several circuit courts have likewise concluded that comparable statues are not qui tam for purposes of Article III, based on the same features we identify in PAGA.”

As a result, the Ninth Circuit departed from Huff and its progeny, and found that Magadia lacked standing to maintain the meal period premium PAGA claim because he suffered no such violation.  In doing so, the court declined to treat Magadia’s stand-alone PAGA cause of action as a single cause of action. Instead, it treated the meal period PAGA claim and the wage statement PAGA claim as separate causes of action, preventing his standing to maintain one PAGA claim from establishing standing to maintain the other.

Call to Action – Removal and Partial Summary Judgment/Summary Adjudication of PAGA Actions

As an initial matter, the Magadia decision highlights the fact that employers should remove PAGA claims to federal courts, if possible. However, removal of PAGA actions has become increasingly difficult due to recent rulings related to the CAFA amount in controversy and anti-aggregation rules.  There are, however, some novel arguments related to diversity jurisdiction that remain unresolved.

Although the Magadia decision is not binding on California state courts, the Ninth Circuit’s decision provides a road map for obtaining early dismissal of meritless PAGA claims and preventing uninjured PAGA plaintiffs from maintaining claims solely on behalf of “other aggrieved employees.”

Employers should (1) ignore the single-PAGA cause of action designation in the complaint, (2) identify each alleged violation of a unique primary right (e.g. right to meal period premiums, the right to compliant wage statements, etc…), (3) treat each distinct violation as a separate cause of action, and then (4) assess the plaintiff’s standing to maintain each distinct cause of action. In other words, was the named plaintiff actually injured by each alleged violation? If not, employers should consider challenging the “PAGA-only” designation and challenge those claims.  To be sure, a cause of action does not depend on the label the plaintiff gives to it. Instead, a cause of action depends on the primary right involved (e.g. the right to meal period premiums).

When employers identify purely representative or meritless PAGA claims, they can more confidently seek early partial summary judgment/summary adjudication of the claims.  That may significantly reduce the cost of subsequent litigation and/or allow for a more reasonable settlement of the claims.

Conclusion

As most California employers know, PAGA cases are can be challenging and costly.  While there now may be some hope to temper PAGA cases, at least in Federal Court, employers should continue to consult with experienced legal counsel who are up to date on recent developments.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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