The Private Attorneys General Act of 2004 (“PAGA”) is arguably the most impactful and draconian legislation ever added to the California Labor Code’s wage and hour provisions. It was purposely designed by pro-plaintiff advocates in 2003 to make the playing field uneven with a stacked deck of lopsided anti-employer rules. Without adding a single new substantive legal requirement, like new meal period, rest period or overtime rules, it created new enforcement and procedural standards that are fundamentally unfair to employers of all sizes and include enormous financial burdens for employers to defend themselves even if they have committed no violations of state law.
1. PAGA’s One-Sided Approach To Wage-Hour Enforcement
By creating a stacked deck that includes formulaic statutory penalties, a one-sided attorneys’ fee provision that allows employees to recover fees whenever they prevail while preventing employers from doing the same, PAGA is a poster child for oppressive California employment laws. It creates obvious impediments to fair and just outcomes while providing plaintiffs’ lawyers a simple means to file thousands of boilerplate PAGA claims to suck millions of dollars in fees from employers, often based on hyper-technical or made-up claims. Thus, while employees individually receive modest recoveries under the statute, often when employers are bludgeoned into compromising claims to avoid disastrous defense costs, the lion’s share of every recovery goes to plaintiffs’ attorneys and the State of California. Yes, the State has an incestuous relationship with plaintiffs’ lawyers bringing PAGA actions because it receives 75% of all penalties awarded. Employees typically receive a small portion of the balance because much of the remaining 25% pot, often 30% of the settlement or more, is paid to attorneys and third parties that administer settlements.
2. The Supreme Court’s Decisions Uniformly Support Aggressive PAGA Litigation
The California Supreme Court has repeatedly aligned itself with anti-business and anti-employer factions that have used PAGA, a unique California law that has not been copied in any other state, to savagely attack small and giant companies alike. Plaintiffs’ lawyers file an average of one to three dozen new PAGA claims every day in California. The cost of defense, even for tiny employers, can spell economic death for a company, even if no violation has ever been proven or has ever been committed. The Supreme Court’s anti-business bias is so apparent that it has never issued a decision interpreting PAGA that favors a business or employer.
The most recent example of this pattern appears in the Supreme Court’s January 18, 2024 decision in Estrada v. Royalty Carpet Mills, Inc., Cal.5th (2024), ironically a case that quotes from the authors’ publication (California’s Private Attorneys General Act (PAGA) – Litigation and Compliance Manual, by Richard J. Simmons, Ryan J. Krueger and Tyler J. Johnson) criticizing the one-sided features of PAGA that make the defense of PAGA claims prohibitively expensive for employers.
Estrada itself examined conflicting decisions of two California courts of appeal that reached contrary conclusions as to whether trial courts have the inherent authority to strike a PAGA claim on manageability grounds. Compare Estrada v. Royalty Carpet Mills, Inc., 76 Cal.App.5th 685 (2022), with Wesson v Staples the Office Superstore, LLC., 68 Cal.App.5th 746 (2021). After granting review to consider the conflict, the Supreme Court concluded that, unlike the authority that exists to bar class action claims, ‘trial courts lack inherent authority to strike PAGA claims on manageability grounds.” It added, “while trial courts may use a vast variety of tools to efficiently manage PAGA claims, given the structure and purpose of PAGA, striking such claims due to manageability concerns – even if those claims are complex or time intensive – is not among the tools trial courts possess.”
In conducting this analysis, the Supreme Court also addressed due process considerations raised in the lawsuit while declining to decide the hypothetical questions of whether a defendant’s right to due process can ever support striking a PAGA claim and, if so, the narrow circumstances under which such striking would be appropriate.
3. Background In Estrada Case
The employer, Royalty Carpet Mills (“Royalty”), operated two facilities. An employee who worked at one of those facilities, Estrada, filed a complaint alleging various claims, including claims relating to meal periods and PAGA penalties for various alleged Labor Code violations. The trial court initially certified a class of non-exempt employees. Following a bench trial, the trial court decertified two meal period subclasses because there were too many individualized issues to support class treatment. The trial court also dismissed the PAGA claim seeking penalties for alleged meal break violations with respect to persons other than the named plaintiffs, finding it was unmanageable. The court of appeal then reversed the order dismissing the PAGA claims and directed the trial court to hold a new trial on the claims. It left it to the trial court’s discretion to determine whether additional witnesses or other evidence should be allowed.
Royalty appealed the decision, claiming that California trial courts have inherent authority to strike PAGA claims on manageability grounds. It also argued that retrial of the plaintiffs’ representative PAGA claim would violate its right to due process. Royalty asserted that trial courts must have discretion to strike PAGA claims in order to preserve the due process rights of defendants.
4. Supreme Court’s Review Of PAGA
The Supreme Court provided a general overview of some of PAGA’s provisions along with a description of its purpose. It began by noting that PAGA provides for civil penalties for various Labor Code violations and authorizes “aggrieved employees,” acting as private attorneys general, to recover those penalties, i.e., in “representative” enforcement actions. Notably, a PAGA plaintiff may seek penalties for violations involving aggrieved employees other than the plaintiff.
Without commenting on the inherent problems raised by the State of California’s enormous financial stake in large recoveries, the Supreme Court observed that civil penalties recovered on a PAGA claim are split between the state and aggrieved employees, with 75% of civil penalties going to the state and 25% going to aggrieved employees. While suggesting that employers should take any gripes to the California Legislature regarding PAGA’s unfair provisions, it overlooked the fact that the state reaps hundreds of millions of dollars from PAGA lawsuits.
5. Comparison Of PAGA Actions With Class Actions
Few in California understand the significant differences between PAGA litigation and class action litigation as many assume PAGA actions are simply a type of class action. One of the most valuable passages in the Estrada decision entails the Supreme Court’s explanation that there are material differences between class actions and PAGA actions that the public fails to understand.
It explained that a class action plaintiff can raise a multitude of claims because he or she represents a multitude of absent individuals. In contrast, a PAGA plaintiff represents a single principal, the California Labor and Workforce Development Agency (“LWDA”), that has a multitude of claims. Because PAGA actions do not adjudicate individually held claims, the Supreme Court observed that due process rights of third parties are not paramount. While non-party employees as well as the government are bound by the judgment in a PAGA action as to a claim for civil penalties, non-party employees are not bound with respect to remedies other than civil penalties.
And PAGA does not make other potentially aggrieved employees parties or clients of a plaintiff’s counsel, does not impose on a plaintiff or plaintiff’s counsel any express fiduciary obligations, and does not subject a plaintiff or plaintiff’s counsel to scrutiny with respect to the ability to represent a large class. On the other hand, the adequacy of a plaintiff and plaintiff’s counsel raise important considerations germane to class certification. As a bottom line, while plaintiffs must meet the burden of demonstrating they satisfy the requirements of Section 382 of the Code of Civil Procedure to certify a class claim, those requirements need not be satisfied to pursue a PAGA action. This is one reason why PAGA actions are easier for plaintiffs’ attorneys to bring and litigate. And employees cannot be hit with attorneys’ fee awards under PAGA, even if their case is baseless.
Manageability issues frequently receive significant attention in cases where plaintiffs seek to certify a proposed class action. As explained by the Supreme Court, the term “manageability” encompasses two related but distinct concepts. First, the term refers generally to the degree to which techniques may be used before and during trial to fairly and efficiently adjudicate an action.
Second, the term may be used more specifically to refer to a factor utilized in determining whether a class may be certified. This factor looks to whether issues pertaining to individual proposed class members may be fairly and efficiently adjudicated. Under federal law, manageability refers to the rule that a court consider “the likely difficulties in managing a class action” in determining whether the class action certification requirements of predominance and superiority are met. The Supreme Court has instructed courts to consider the manageability of a class action in determining certification, as in Duran v. U.S. National Ass’n., 59 Cal.4th 1 (2014).
a. Affirmative Defenses Must Be Addressed
In certifying a class action, a court must conclude that litigation of individual issues, including those arising from affirmative defenses, can be managed fairly and efficiently. Whether in a given case affirmative defenses should lead a court to approve or reject certification will hinge on the manageability of any individual issues. The Supreme Court reiterated the importance of this principle in wage and hour cases. Where a plaintiff “seeks class certification based on allegations that the employer consistently imposed a uniform policy or de facto practice on class members, the party must still demonstrate that the illegal effects of this conduct can be proven efficiently and manageably within a class setting.”
b. The Power Of Trial Courts To Dismiss Claims Is Very Narrow
Royalty argued that the power to strike a claim is an inherent power of the court in every case. The Supreme Court rejected this assertion, stating that a trial court’s power to dismiss claims in the name of judicial economy is limited and operates in circumstances that were not present in the case before it. This led the Supreme Court to state that trial courts possess only a narrow inherent authority to dismiss claims based on limited circumstances such as cases (1) involving a failure to diligently prosecute an action, (2) where the complaint has been shown to be fictitious or a sham such that the plaintiff has no valid cause of action, i.e., frivolous claims, or (3) where there is egregious misconduct. While these scenarios recognize that courts may dismiss some types of egregiously inappropriate claims, the circumstances where that is allowed are tightly constrained and narrow.
c. Class Action Manageability Requirements Cannot Be Grafted Onto PAGA Claims
The Supreme Court specifically rejected Royalty’s argument that trial courts possess the power to dismiss PAGA claims on manageability grounds – just as they do with class claims. It recognized, once again, that class claims differ significantly from PAGA claims in ways that make it inappropriate to impose a class action-based manageability requirement on PAGA actions.
First, it explained that manageability bears upon questions of superiority and the predominance of common issues. These are requirements unique to the class action context. In determining whether a class action may be maintained, courts consider whether common issues predominate and whether a class action is a superior method of adjudication. However, an employee’s representative action seeking penalties under PAGA need not satisfy class action requirements. For instance, there is no authority suggesting that superiority is a requirement for a representative PAGA action.
Second, unlike class claims, PAGA claims are effectively administrative enforcement actions and imposing a manageability requirement would impede the effectiveness of such actions. In response to Royalty’s contention that different incentives exist in privately brought PAGA actions as compared to government enforcement actions, the Supreme Court showed little agreement or sympathy, noting, for example, that the one-way attorney’s fee provision in PAGA incentivizes litigation.
The Supreme Court responded that such a concern is better addressed to the Legislature, citing Simmons, et al, California’s Private Attorneys General Act (PAGA) – Litigation and Compliance Manual, § 1.2, published by Castle Publications, LLC. It noted that the book discusses PAGA’s attorney’s fees provision and stated, “The perception of PAGA thus varies based on the prism through which it is examined.” It was further quoted to observe, “plaintiffs are able to leverage PAGA’s one-way attorney’s fee provision and penalty structure to their advantage because they have no concern regarding an adverse fee award,” and “as a result, many employers encounter pressure to settle PAGA cases, even when they believe they have done nothing wrong, because they wish to avoid the substantial costs of defending litigation that presents a risk of paying both sides’ attorney’s fees.”
Third, unlike with class actions, PAGA’s specific statutory provisions make it inappropriate to impose a manageability requirement on PAGA claims.
7. The Due Process Issues Raised In PAGA Actions Will Be Resolved In Future Cases
The Supreme Court identified the due process issues raised by Royalty, but declined to resolve them because they were “hypothetical” due process claims that were not presented by the facts of the case before it. It did, however, stakeout certain ground and remark generally about some due process rights.
In a significant passage, it responded to Royalty’s argument that defendants, including employers in class and representative actions, have a due process right to present their affirmative defenses. The Supreme Court agreed, stating that “defendants must have an opportunity to present proof of their affirmative defenses.” It then pointed out there are limitations, noting that the right to present an affirmative defense does not carry with it a concomitant right to present the testimony of an unlimited number of individual employees in support of such affirmative defense. Rather, such adjudication is to occur “within whatever method the court and the parties fashion to try these issues.” The defendant must be permitted to introduce its own evidence, both to challenge the plaintiffs’ showing and to reduce overall damages. No case has yet addressed the right to litigate an affirmative defense as to each individual class member in a class claim.
The Supreme Court declined to express any opinion as to the hypothetical questions of whether, and under what circumstances, a defendant’s right to due process might ever support striking a PAGA claim. It thus left open the possibility that it could.
8. While Trial Courts Cannot Strike A PAGA Claim Entirely On Manageability Grounds, They Do Have Other Tools To Manage PAGA Cases
The Supreme Court explained that trial courts have “numerous tools” to manage complex cases generally, and PAGA cases in particular, that do not involve striking a PAGA claim. It also made clear that all of those case management tools remain undisturbed by the Estrada decision. It pointed out that the Judicial Council has described many of the tools that courts may use in managing discovery, other pretrial proceedings, and the trial of complex cases, including cases involving PAGA claims.
The Supreme Court also emphasized that the holding that trial courts lack inherent authority to strike a PAGA claim on manageability grounds does not preclude trial courts from limiting the types of evidence a plaintiff may present or using other tools to assure that a PAGA claim can be effectively tried. It also intimated that a trial court can limit the evidence to be presented at trial or otherwise limit the scope of the PAGA claim without striking the claim altogether.
Interestingly, the Court observed the implications of the fact that the plaintiff has the burden of proving a PAGA claim. Because of this burden and the ability of a trial court to limit the presentation of evidence, “it behooves the PAGA plaintiff to ensure that trial of the action is manageable so the maximum number of potential violations may be established.” The trial court’s power to limit the presentation of evidence may encourage plaintiffs’ counsel to be prudent in their approach to PAGA claims and ensure they can efficiently prove alleged violations to unrepresented employees. “If a plaintiff alleges widespread violations of the Labor Code by an employer in a PAGA action but cannot prove them in an efficient manner, it does not seem unreasonable for the punishment assessed to be minimal.” Further, a trial court may issue substantive rulings, including those on demurrer, or on motions for summary judgment or judgment notwithstanding the verdict to efficiently adjudicate an action in cases in which a plaintiff pleads the claim in such an overbroad or unspecific manner that the plaintiff is unable to prove liability as to all or most employees.
The Supreme Court summed up this discussion by stating it did not foreclose the possibility that a defendant could demonstrate that a trial court’s use of case management techniques “so abridged the defendant’s right to present a defense”, that its right to due process was violated. However, that showing had not been made in the case before it.
Finally, the court offered a gratuitous statement regarding the impact of PAGA actions on judicial resources. It stated: “In considering the potentially large amount of judicial resources that it may take to manage a single representative PAGA action, one must also bear in mind that such action may reduce the judicial resources that would otherwise be expended to manage many individual PAGA claims and prevent the underenforcement of California law.”
The Supreme Court’s conclusion acknowledged the challenges presented by complex cases, including representative PAGA actions. It left undisturbed various case management tools designed to ensure that such cases are efficiently, fairly, and effectively tried. It affirmed the court of appeal’s judgment and confirmed it had properly reversed the trial court’s order dismissing, on manageability grounds, the PAGA claim.
There is no question that plaintiffs’ attorneys will herald the Estrada decision as yet another victory in a long line of California Supreme Court decisions that exhibit an anti-business bias. The suggestion that employers direct any concerns regarding state laws to the Legislature is tantamount to asking Stephen King, the author of horror and suspense novels, to compose children’s bedtime stories. Fixing California laws to reduce hardships for employers is not what the Legislature does. That is why businesses have initiated a protracted referendum process in hopes of achieving some relief. In the meantime, Estrada will have the predictable effect of increasing PAGA litigation, driving up settlement costs, and placing greater burdens on employers. This will, in turn, discourage businesses from coming to or growing workforces in California.
While the proponents of PAGA steadfastly maintain it is deigned to benefit employees and reduce the burdens of government enforcement agencies created and heavily funded to enforce state laws, the 20-year history of PAGA demonstrates beyond question that the primary beneficiaries are plaintiffs’ attorneys. For those naively suggesting that requests for relief from PAGA’s one-sided rules should be directed to California’s Legislature, that has proven to be an act of futility for employers. Sadly, it has become clear that the plaintiffs’ bar, state appellate courts, and Legislature are aligned in their efforts to use PAGA as one of many platforms to undermine businesses, not afford them relief. One must wonder whether the gigantic revenue PAGA provides the State of California obscures any objective assessment of its overall impact on the business communities’ interest in growing California’s economy.
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About The Author
Richard J. Simmons is a Partner in the law firm of Sheppard, Mullin, Richter & Hampton LLP in Los Angeles. He represents employers in various employment law matters involving litigation throughout the country and general advice regarding state and federal wage and hour laws, employment discrimination, wrongful discharge, employee discipline and termination, employee benefits, affirmative action, union representation proceedings, and arbitrations. Mr. Simmons received his B.A., summa cum laude, from the University of Massachusetts, where he was a Commonwealth Scholar and graduated in the Phi Kappa Phi Honor Society. He received his J.D. from Berkeley Law at the University of California at Berkeley where he was the Editor-in-Chief of the Industrial Relations Law Journal, now the Berkeley Journal of Employment and Labor Law.
Mr. Simmons argued the only case before the California Supreme Court that produced a victory for employers and business in 2018. He was recently recognized as the Labor and Employment Attorney of the Year by the Los Angeles Business Journal and was inducted into the Employment Lawyers Hall of Fame. He has lectured nationally on wage and hour, employment discrimination, wrongful termination, and other employment and labor relations matters. He is a member of the National Advisory Board to the Berkeley Journal of Employment and Labor Law, published by Berkeley Law at the University of California at Berkeley. He was also appointed by the California Industrial Welfare Commission as a member of three Minimum Wage Boards for the State of California.