PAGA and Paid Sick Leave Notice Requirements – Why California Employers Should Still Be Nervous

April 17, 2018, 12:01 PM

Did the California Legislature enact one of the most significant workplace protections in decades without any means of private enforcement?

California’s Healthy Workplaces, Healthy Families Act (the “HWHFA”) was a landmark bill enacted by the California legislature in 2014. The HWHFA requires employers to provide paid sick leave to nearly all California employees. It also imposes new payroll reporting requirements related to sick leave accrual. Pursuant to Labor Code §246(i), employers must now “provide an employee with written notice that sets forth the amount of paid sick leave available, or paid time off leave an employer provides in lieu of sick leave, for use on either the employee’s itemized wage statement described in Section 226 or in a separate writing provided on the designated pay date with the employee’s payment of wages.” The consequences for violating section 246(i) are set forth in Labor Code §248.5(e), which is the heart of this article. This provision states:

“The Labor Commissioner or the Attorney General may bring a civil action in a court of competent jurisdiction against the employer or other person violating this article and, upon prevailing, shall be entitled to collect legal or equitable relief on behalf of the aggrieved as may be appropriate to remedy the violation, including reinstatement, backpay, the payment of sick days unlawfully withheld, the payment of an additional sum, not to exceed an aggregate penalty of four thousand dollars ($4,000), as liquidated damages in the amount of fifty dollars ($50) to each employee or person whose rights under this article were violated for each day or portion thereof that the violation occurred or continued, plus, if the employer has unlawfully withheld paid sick days to an employee, the dollar amount of paid sick days withheld from the employee multiplied by three; or two hundred fifty dollars ($250), whichever amount is greater; and reinstatement in employment or injunctive relief; and further shall be awarded reasonable attorney’s fees and costs, provided, however, that any person or entity enforcing this article on behalf of the public as provided for under applicable state law shall, upon prevailing, be entitled only to equitable, injunctive, or restitutionary relief, and reasonable attorney’s fees and costs.”

This 207-word sentence, which is the legal equivalent of a duck-billed platypus, has divided employment lawyers across the state. Indeed, while this language clearly borrows from various provisions of the Labor Code permitting the recovery of unpaid wages, penalties for issuing deficient wage statements, and certain anti-retaliation provisions, it does not create a private right of action. To this end, the defense bar interpret this language as expressly precluding representative actions under California’s Private Attorney General Act of 2004 (“PAGA”), Labor Code §§2698-2699.5. The plaintiffs’ bar, in contrast, interpret this language as expressly authorizing PAGA actions. With employers across the state being hit with standalone PAGA claims for purported violations of Labor Code §246(i), some guidance is long overdue.

Under PAGA, an aggrieved employee stands in the shoes of California’s labor law enforcement agencies, as a private attorney general, and can ask a court to impose “civil penalties” for certain Labor Code violations. (Iskanian v. CLS Transp. Los Angeles, LLC (2014) 59 Cal.4th 348, 379). A “civil penalty” is essentially a fine for a violation of the Labor Code, and it is distinct from, and in addition to, any statutory penalties or damages otherwise available. (Villacres v. ABM Indus. Inc. (2010) 189 Cal.App.4th 562, 579) [“Some Labor Code provisions establish penalties that are not expressly denominated ‘civil penalties’ and are therefore not subject to the PAGA. If a penalty under the Labor Code is not a ‘civil penalty,’ it is commonly called a “statutory penalty.”]). All PAGA actions are representative actions brought “on behalf of the state.” (Iskanian, supra, 59 Cal.App.4th at 394). PAGA actions are particularly troublesome for employers, because class action certification requirements do not apply, and there is a separate civil penalty for each employee, for each pay period, and for each derivative Labor Code violation. The resulting exposure, even for technical violations, leaves most employers unbalanced.

Generally, when bringing a PAGA action one first has to determine (1) whether the derivative Labor Code violation is listed within Labor Code §2699.5, and (2) whether the Labor Code has a pre-existing civil penalty. If the derivative provision is listed in section 2699.5, then the exhaustion procedures in section 2699.3(a) may apply. If the derivative provision is not listed in section 2699.5, the requirements set forth in sections 2699.3(b) or (c) may apply. Also, if the derivative provision contains a pre-existing civil penalty, that penalty rate applies. However, if there is no existing “civil” penalty, PAGA applies a default civil penalty under Labor Code §2699(f).

In this case, if PAGA does apply for violations of section 246(i), the procedures set forth in section 2699.3(c) should apply. This is because section 246 is not listed in section 2699.5, meaning section 2699.3(a) should not apply. Also, sections 246 and 248.5 are not listed in Division 5 of the Labor Code, meaning the procedures in section 2699.3(b) should not apply. This is fortunate for employers, because if PAGA does apply there is a 33-day cure window in section 2699.3(c).

Have any courts addressed PAGA in the context of Labor Code §248.5(e)?

Only two federal courts have issued (non-binding) opinions interpreting PAGA in the context of Labor Code §248.5(e). The first decision was Titus v. McLane Foodservice, Inc. (E.D. Cal.) 2016 BL 300414 (“Titus”). Titus concluded that Labor Code §246 simply contained notice requirements, and thus was expressly carved out of PAGA by virtue of Labor Code §2699(g)(2). This provision states that “[n]o action shall be brought under this part for any violation of a posting, notice, agency, reporting, or filing requirement of [the Labor Code], except where the filing or reporting requirement involves mandatory payroll or workplace injury reporting.”

In briefing, the plaintiff argued section 2699(g)(2) only applied to “static” posting requirements (e.g., posters informing employees about their general employment rights) and did not apply to section 246(i). The plaintiff also reminded the court that Labor Code §226, which requires employers to provide employees with itemized wage statements, is also a notice provision yet numerous courts have recognized PAGA applies. In granting the employer’s motion to dismiss, the court never addressed the fact PAGA applies to section 226. Instead, it held there was little case law interpreting section 2699(g)(2), section 246 uses the word “notice,” and the Legislature could have carved out specific notice requirements from section 2699(g)(2). Titus also concluded that the plain language of section 248.5(e) only permits the state to recover penalties.

The second decision was Stearne v. Heartland Payment Sys. LLC (E.D. Cal.) 2018 BL 40260 (“Stearne”). Stearne concluded PAGA did not apply to section 246, because the last clause of section 248.5(e) does not permit individuals seeking to recover on behalf of the public from collecting penalties – relief is limited to equitable and restitutionary remedies. Although the plaintiff in that case also brought an Unfair Competition Law (“UCL”) claim for a violation of section 246, he was a former employee and the court concluded he lacked standing.

Did Titus and Stearne get it right? It seems unlikely.

First, it is more sensible to interpret section 246(i) as a mandatory payroll reporting requirement than an excluded “notice.” While the word “notice” is indeed present in section 246(i), there is also a direct reference to the itemized wage statement requirements of section 226, and PAGA actions are clearly authorized for violations of section 226. While this dichotomy may seem inconsistent at first blush, it should not be. The legislature was clearly aware of section 226 when it crafted PAGA, and because section 226 is identified in section 2699.5, it clearly did not believe pay-period reporting requirements were “notices” within the meaning of section 2699(g)(2). It is also inconsistent to say information on a wage statement is a section 2699(g)(2) “notice” if it is required by section 246(i), but not if the information is required by section 226(a).

The fact that section 248.5(e) only authorizes the Labor Commissioner or the Attorney General to collect penalties should not be determinative; it also incorrectly assumes section 248.5(e) must expressly authorize PAGA actions, even though such actions are authorized by PAGA itself. Indeed, as noted above, PAGA was enacted to allow an aggrieved employee to stand in the shoes of the state (i.e. the commissioner), as a private attorney general, and collect civil penalties. There are many statutes authorized by PAGA which, without PAGA, would only permit the commissioner to impose penalties. (e.g., Labor Code §§226.3, 256, 558, and 1197.1).

Second, if PAGA does indeed apply to violations of section 246(i), the last clause of section 248.5(e) likely does not preclude an award of civil penalties. The original version of section 248.5(e), which was first proposed in 2008 as part of Assembly Bill 2716, authorized civil enforcement actions for violations of section 246 by “a person aggrieved,” “an entity a member of which is aggrieved by a violation of this article,” or “another person or entity acting on behalf of the public.” This language suggests the author was attempting to authorize and distinguish between private actions, actions brought under the UCL, and actions brought by labor organizations on behalf of the their members. (Consumers Union of United States, Inc. v. Fisher Dev., Inc. (1989) 208 Cal.App.3d 1433, 1439 [“The courts in California have consistently upheld the right of both individual persons and organizations under the unfair competition statute to sue on behalf of the public for injunctive relief“].) The last clause of the original version only limited remedies available to a “person or entity acting on behalf of the public,” as it does today.

This history strongly suggests the last clause of section 248.5(e) was only intended to apply to UCL claims; the Legislature was simply clarifying that section 248.5(e) did not enlarge the scope of relief available, which is certainly why the phrase “another person or entity acting on behalf of the public” was removed from the portion of section 248.5(e) preceding the penalty provisions. It would be confusing to suggest UCL claimants can recover penalties only to then limit their remedies. Also, since the legislature can clearly distinguish between private actions, UCL actions, and actions brought by labor organizations on behalf of their members, they could have expressly limited the remedies available under PAGA, which they did not. Instead, the Legislature approved Labor Code §245(b), which states the HWHFA is “in addition to and independent of any other rights, remedies, or procedures available under any other law and do not diminish, alter, or negate any other legal rights, remedies, or procedures available to an aggrieved person.” It is also worth pointing out that entities cannot sue under PAGA – only “aggrieved employees.”

Moreover, the entire purpose of PAGA is to permit an aggrieved employee to sue on a representative basis, “on behalf of the state,” and impose civil penalties. It is hard to imagine that the Legislature, being fully aware of PAGA and enacting section 245(b), then decided it would contradict both provisions in the last clause of section 248.5(e) by cutting off civil penalties.

If Titus and Stearne were wrong, does PAGA apply?

There are compelling arguments in favor of PAGA. For instance, the HWHFA was introduced in 2014 as Assembly Bill 1522, and that version authorized individual enforcement actions. The individual enforcement language – which was opposed by numerous interest groups – was stricken from section 248.5(e) in late May of 2014. Just prior to this amendment, on May 5, 2014, the Civil Justice Association (“CJA”) sent an opposition letter to the Chair of the Assembly Appropriations Committee. The CJA made the following observation: “Moreover, should the legislature decide that employers must provide paid sick leave, there is an existing mechanism for an aggrieved employee to sue (PAGA, Labor Code §2699). Therefore, we would respectfully request that the above provisions allowing new civil lawsuits be removed.” This history suggests the Legislature removed individual actions from section 248.5(e) in recognition PAGA would apply.

The fact an employee cannot file an individual suit for violations of section 246(i) should not be determinative. Several courts have held PAGA applies even where there is no private right of action for the derivative claim. (e.g., Noe v. Superior Court (2015) 237 Cal.App.4th 316, 339 [though there is no private cause of action for a violation of Labor Code §226.8, “where, as here, a Labor Code provision provides for a ‘civil penalty’ and contains no language suggesting the penalty is recoverable directly by employees, no private right of action is available other than through a PAGA claim”]; Parson v. Golden State FC, LLC (N.D. Cal.) 2016 BL 139340, at *4 [concluding PAGA civil penalties are available for a violation of Labor Code §204 even though this provision does not authorize a private right of action]; Jeske v. Maxim Healthcare Servs., Inc. (E.D. Cal.) 2012 BL 10769, at *17 [noting the plaintiff alleged a viable PAGA claim for alleged Labor Code §2350 violations even though it contains no private right of action].)

If PAGA applies, what is the penalty for a violation?

The answer is somewhat unclear. As noted above, PAGA allows an aggrieved employee to sue for “civil” penalties. In this case, the word “civil” is not present in section 248.5(e), which may just suggest that section 248.5(e) does not create a new civil penalty. The word “civil penalty” is also present in Labor Code §247, which could suggest the Legislature made a deliberate decision to exclude this PAGA term of art from section 248.5(e). If this is the case, the default penalty under Labor Code §2699(f)(2) may apply to a violation of section 246(i).

On the other hand, the Legislative Counsel’s Digest to the enacted version of A.B. 1522 states the bill authorizes the Labor Commissioner or the Attorney General to recover specified “civil penalties.” Section 248.5(e) is the only provision of the HWHFA that authorizes the Attorney General to recover penalties. This suggests the Legislature intended the penalties in section 248.5(e) to be “civil” penalties. To be sure, there is nothing in the language of PAGA itself that expressly requires the word “civil” to be present, and there appears to be no actual distinction between an administrative penalty and a penalty that happens to use the word “civil.”

While it is enticing to suggest the penalties in section 248.5(e) apply, this provision is more remedial than punishing. PAGA is about punishing employers who violate the Labor Code. And since the Legislature made a deliberate decision to exclude the word “civil” from section 248.5(e), the stronger argument seems to be that PAGA’s default penalty would apply.

So what should employment lawyers take away?

1) There are some compelling reasons to question the analysis in Titus and Stearne, and there is still no clear guidance at the state level regarding violations of section 246(i);

2) Until there is better guidance from state courts, employers may want to exercise caution and assume PAGA applies to violations of the HWHFA. This means employers should have their wage statements, or pay-period sick leave notices, reviewed by competent employment counsel in order to ensure they comply with the HWHFA; and

3) When faced with a PAGA lawsuit alleging a violation of section 246(i), defense lawyers should consider curing the violation in compliance with section 2699.3(c)’s safe harbor provision, rather than ignoring it and gambling on a demurrer. At worst, if PAGA applies, curing may be helpful when asking the court to reduce the award.

Nathan T. Jackson is a litigation associate in Murphy Pearson Bradley & Feeney’s Sacramento office where he practices employment law, professional liability, and related business litigation. He can be reached at njackson@mpbf.com or 916.565.0300.

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