California Supreme Court Holds That Settling Underlying Labor Code Violations Does Not Necessarily Block PAGA Suits

I. Introduction

On March 12, 2020, the California Supreme Court issued its opinion in Kim v. Reins International California, Inc. (Case No. S246911)—holding that an employee’s settlement and dismissal of their individual Labor Code claims does not deprive them of standing to later assert a representative action under the Labor Code Private Attorneys General Act, Labor Code §§ 2698 et seq. (PAGA), for the same underlying conduct.  The Court based its decision on the view that PAGA standing is predicated on “violations” of the Labor Code, not individual injuries.  Thus, even if an employee’s injury has been redressed through settlement with an employer, the employee may still prosecute Labor Code violations on behalf of the State through a representative PAGA action.  Despite the Court’s broad reading of PAGA’s standing requirements, the decision does not directly address whether an individual settlement or release that explicitly includes PAGA claims (the agreement at issue in Reins explicitly excluded them) may be enforceable.  Employers should carefully review the settlement agreements they use and should consider seeking court approval or implementing other measures for every settlement or release where the underlying suit or allegation is premised on the California Labor Code.

II. Discussion

A. Legal Background

PAGA empowers aggrieved employees to bring representative claims on the State’s behalf, seeking penalties for violations of the California Labor Code.  If a court finds there has been a violation, the employees keep a portion of the penalties recovered, but the bulk—75%—goes to the State.  Representative PAGA claims cannot be compelled to individual arbitration, see Iskanian v. CLS Transportation, 59 Cal. 4th 348, 382-84 (2014), nor are they subject to standard class action requirements, see Arias v. Superior Court (Angelo Dairy), 46 Cal.4th 969, 988 (2009).

B. Factual and Procedural Background

In this case, plaintiff Justin Kim filed a putative class action claiming that he and other training managers at Reins’ restaurants were misclassified as exempt from overtime laws.  The complaint contained other causes of action for Labor Code violations based on the alleged misclassification as well as a PAGA claim.  Since Kim had signed an arbitration agreement when he was hired, the employer moved to compel arbitration of all Kim’s causes of action except the PAGA claim.  The trial court granted that motion and stayed the PAGA claim pending arbitration.  Several months later, the employer offered to settle Kim’s individual claims for $20,000 and attorneys’ fees and costs.  Kim accepted the offer and dismissed his individual claims, leaving only his PAGA claim for resolution.  The employer moved for summary adjudication of the PAGA claim on the ground that Kim lacked standing.  The trial court and intermediate appellate court both held that Kim was no longer an “aggrieved employee” and hence no longer had standing to bring a PAGA claim because he had settled his individual claims.

C. The California Supreme Court’s Opinion

The California Supreme Court reversed the appellate court’s grant of summary adjudication for the employer, holding that settlement of individual claims does not strip an employee of standing to pursue a PAGA action.

Most of the Court’s opinion focuses on the language, purpose, and history of PAGA’s standing provision.  The Court held that the Legislature defined PAGA standing in terms of violations, not injury.  Echoing earlier reasoning in Kirby v. Immoos Fire Protection, Inc., 53 Cal.4th 1244, 1256 (2012), the decision adopts the rationale that “[t]he remedy for a Labor Code violation, through settlement or other means, is distinct from the fact of the violation itself.”  Being an “aggrieved employee” was therefore not synonymous with having an unredressed injury in the eyes of the Court.  The Court also noted the differences between traditional class actions and PAGA actions—while a class action is a collection of individual claims for relief, a PAGA action is meant to be an enforcement action between the State and an employer.  If the ability to bring a PAGA claim is predicated on a remedy rather than violation, the Court argued, many employees would be deprived of the ability to prosecute PAGA claims—which would, in the Court’s opinion, conflict with PAGA’s broader enforcement purposes.  The Court also expressed concern that employers would seek to individually settle all individual claims to avoid PAGA liability.

Finally, the Court rejected the employer’s argument that claim preclusion should bar the PAGA claim.  The Court emphasized that Kim’s settlement agreement specifically excluded the pending PAGA claim.  Moreover, the Court reasoned, Kim did not attempt to litigate his different claims in a piecemeal fashion.  The Court used this fact to distinguish Villacres v. ABM Industries Inc., 189 Cal. App. 4th 562 (2010), where a class settlement of Labor Code claims precluded a class member from later bringing a PAGA claim because the PAGA claim could have been raised in the prior action.  Here, the Court noted, all of Kim’s claims—including the one for PAGA penalties—were part of a single action and claim preclusion typically applies to a second action.

III. Takeaways

Employers in California should keep the following in mind:

• Settling an employee’s individual Labor Code claims does not preclude that employee from subsequently litigating a PAGA claim.
• The decision does not directly address the enforceability of an individual settlement or release agreement that expressly releases PAGA, given that the settlement in this case specifically excluded the plaintiff’s PAGA claim.  But employers should expect that the plaintiffs’ bar will argue that this decision makes it impossible to release PAGA claims without court approval and some form of notice and payment to aggrieved employees (somewhat akin to existing law under the federal Fair Labor Standards Act).
• Reins does not change the fact that filed PAGA claims can be settled with court approval.  See Labor Code § 2699(l)(2) (“The superior court shall review and approve any settlement of any civil action filed pursuant to this part.”).  Where at all possible, out of an abundance of caution, employers should consider seeking court approval of every settlement or release agreement where the underlying suit or allegations is premised on the California Labor Code.
• Alternatively, PAGA actions are subject to a one-year limitation period.  In the case of settlements with former employees outside the active litigation context, employers could thoughtfully consider delaying the effective dates of settlements until after this period has expired (or bifurcating the settlement into portions that apply before and after the one-year period).
• In situations where the underlying dispute is not rooted in the Labor Code, employers should also consider including a provision in any settlement or release document in which the employee represents and acknowledges that s/he has not experienced any alleged violations of the Labor Code.
• Not every private citizen can bring a PAGA representative action.  The statute’s standing provision still requires that an employee have suffered an alleged Labor Code violation.

If you have any questions regarding the California Supreme Court’s decision or how it may impact your company’s policies or practices, please contact the authors of this alert or your O’Melveny advisor.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Apalla U. Chopra, an O'Melveny partner licensed to practice law in California, Susannah K. Howard, an O'Melveny partner licensed to practice law in California and New York, Adam Karr, an O'Melveny partner licensed to practice law in California, Adam P. KohSweeney, an O'Melveny partner licensed to practice law in California and New York, and Alexa A. Graumlich, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

© 2020 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000.