The California Wage & Hour Series

The Story Thus Far

As outlined in a previous blog article, the decision in Dynamex Operations v. Superior Court will be extremely important for all companies that use independent contractors, especially those in the emerging “gig economy.” Misclassifying workers can have painful consequences, involving not only liability for unpaid wages and employee benefits but also statutory penalties for each violation considered “willful.”

The Issue

In agreeing to review the case, the California Supreme Court defined the issue on appeal as whether, in a misclassification case, a class may be certified based on the expansive definition of employee as outlined in the California Wage Order language construed in Martinez v. Combs (2010), or on the basis of the common law test for employment set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989). In short, the California Supreme Court focused on whether to continue using the Borello test and on what test, if any, to apply instead.

The definition of employment identified in the California Wage Orders is broader than the prior common law test. California’s Wage Orders define “employ” broadly to mean “to engage, suffer or permit to work.” In contrast, Borello focuses instead on a multi-factor balancing test that depends on the unique facts of each situation and that is more likely to recognize the existence of an independent contracting relationship.

Oral Argument

Dynamex Operations Goes First

In its opening argument, Dynamex praised the Borello test as a tried and true California rule and warned against the danger that uncertainty in the classification of workers would pose to California’s booming “gig economy.” Dynamex raised concerns with any judicial adjustment to the definition of employment that would usurp the legislature role.

Justice Kruger, however, wondered whether judicial adoption of a bright-line rule would not be more instructive for employers, and suggested, as a possibility, adopting the ABC test followed in such jurisdictions as New Jersey and Massachusetts. The ABC test says that three conditions must all concur for a worker to be an independent contractor: (1) freedom from actual control over the work, (2) work beyond the usual course of business and off company premises, and (3) engaging in an independent trade. Unless A, B, and C all concur, then the worker is an employee.

Chief Justice Cantil-Sakauye raised an additional response to Dyanamex’s plea to leave this issue to the Legislature: if the ABC test is a stricter version of the Borello test, then why should the Supreme Court be precluded from adopting a new version of the test to ensure clarity in enforcement when, after all, it was the Supreme Court that had adopted the Borello test in the first place? Finally, Justice Kruger and Dynamex had a robust discussion about adopting a modified rule, where the ABC test would govern for some Labor Code provisions, but a different test may apply to others. Dynamex opined that this result would be confusing for employers and might result in individuals being employees for some purposes but independent contractors for others.

Aggrieved Independent Contractors Respond

In their responsive argument, the workers portrayed what they saw as the sorry plight of California independent contractors. The workers called independent contracts the new “serf-class”: people who work hard while receiving none of the California Labor Code’s basic employee benefits. They argued that the court should adopt a new, broader definition of employee to protect workers from harm. The workers seemed open to several outcomes, including (a) a broader definition for some California Labor Code provisions, (b) the definition outlined in the state’s Wage Orders, or (c) any other new employment test that the California Supreme Court might come to favor.

Justice Liu seemed skeptical about a broader test. He referred to an “Amazon Analogy.” Although most people know Amazon sells goods online, many people also view Amazon Prime (with its delivery services) as within Amazon’s usual course of business. Justice Liu then asked: if the Justices were to adopt a strict interpretation of the ABC test, at what point would Amazon be considered a shipping business, meaning that all drivers who ship Amazon Prime goods would be employees of Amazon under the second ABC prong? This analogy caught the attention of Justices Cuellar and Justice Chin, who both seemed to appreciate how complicated, and blurry, a new test could be.

Dynamex Makes A (Brief) Comeback

In its rebuttal, Dynamex took up Justice Liu’s “Amazon Analogy” to argue why a flexible test is needed to ensure just results. Two justices followed up. The first was Justice Liu, who asked whether other jurisdictions have applied the ABC prongs strictly. The second was Justice Chin, who closed oral argument with a pointed question that represents the concerns of many observers: which employment test best fits the modern economy? Dynamex responded that the body of developing case law as well as the uniformity of Borello’s application has suited California well and that it provides all of the factors needed to fully determine employment relationships.

Our Crystal Ball

Although one cannot read the minds of seven justices, we sense the court will likely reject the call to leave this matter for the legislature and will lean instead toward a judicially fashioned test that, in the view of most justices, will best fit the needs of the modern economy. The court’s decision is expected within the next 90 days.

As always, we will remain vigilant and on the scene. Look for more updates about this case as they come out and in the meantime do not hesitate to reach out to your friendly neighborhood Seyfarth attorney for guidance or with any questions you might have.

Co-authored by Kristen Peters and Simon L. Yang

Seyfarth Synopsis: Last month in Mendoza v. Nordstrom, Inc., the California Supreme Court addressed three questions about California’s “day of rest” statutes that prohibit employers from causing employees “to work more than six days in seven.” California employers can now rest assured that (1) employees are entitled to one day of rest during each workweek, not one day of rest in every rolling seven days; (2) an exception permits employers to require work each day of a workweek if every daily shift in that workweek is no more than six hours; and (3) while employers cannot require employees to forgo a day of rest, employees remain free to choose to work all seven days in a workweek.

California’s “Day of Rest” Provisions

In the beginning (or 80 years ago), the California legislature created the Labor Code. Sections 551 and 552 codified 19th century laws—the “day of rest” provisions—that entitle all in employment to “one day’s rest therefrom in seven” and prohibit an employer to “cause his employees to work more than six days in seven.” Later, the lawmakers said, let there be a six-hour exception, and Section 556 made the day of rest provisions inapplicable “when the total hours of employment do not exceed 30 hours in any week or six hours in any day thereof.”

The Alleged Violations in Mendoza

Two former Nordstrom employees, Chris Mendoza and Megan Gordon, occasionally were asked to fill in for other employees. As a result, they sometimes worked more than six consecutive days. During those weeks, some of their shifts were six hours or less.

Though the day of rest provisions historically lacked a private right of action, Mendoza and Gordon—enabled by California’s private attorneys general statute—sued in federal district court for alleged violations of Sections 551 and 552.

The district court initially rejected the former barista and sales associates’ claims—both because they were not required to work the fill-in shifts and because they had worked some less than six hour shifts during the at-issue weeks. The plaintiffs appealed.

Interpreting the Day of Rest Provisions

Uncertain how California courts would interpret the statutes, the Ninth Circuit asked for the California Supreme Court’s assistance. The Justices addressed and resolved three questions:

  1. Is the “day of rest” calculated by the seven-day workweek, or does it apply on a rolling basis to any seven-consecutive-day period?

A day of rest is guaranteed for each seven-day, employer-established workweek, not for any “rolling” seven-day period.

In reaching this result, the Mendoza court concluded that “the Legislature intended to ensure employees … a day of rest each week, not to prevent them from ever working more than six consecutive days at any one time.” Thus, periods of more than six consecutive days of work that stretch across more than one workweek are not per se prohibited.

Of more general interest, in adopting the workweek as the framework for counting the seven days the California Supreme Court made an observation that could be welcome to employers in future cases by indicating that this interpretation would be the one most congenial to an employer’s administration of time records.

  1. Does the Section 556 exception apply so long as an employee works six hours or less on at least one day of the applicable workweek, or does it apply only when an employee works no more than six hours on each and every day of the workweek?

The “six hour” exception applies only when an employee works no more than 30 hours in the workweek and no more than six hours on each day of the workweek.

  1. What does it mean for an employer to “cause” an employee to go without a day of rest?

“[A]n employer’s obligation is to apprise employees of their entitlement to a day of rest and thereafter to maintain absolute neutrality as to the exercise of that right.” The Court explained that an employer is not liable simply because an employee chooses to work a seventh day; rather, an employer “causes” an employee to go without a day of rest when it induces the employee to forgo an entitled day of rest. In other words, employers cannot coerce employees to forgo a day of rest, but they will not face liability if an employee, who is aware of the rest-day requirements, nonetheless chooses to work seven days in a row.

Again, employers likely appreciate the Justices’ rejection of the plaintiffs’ ambitious argument that the Labor Code should always be interpreted in such a way as to maximize liability. The Court recognized that an expansive interpretation is improper when the legislative intent indicates a narrower reading of the statute.

Moreover, the decision does protect employees and their right to choose. So on the seventh day, let them rest—or work. It’s up to them.

Lessons Learned for Employers 

Employers nonetheless should review their scheduling practices to assess whether employees (exempt and non-exempt) work all seven days in any employer-defined workweek. Employers should also ensure that their employment policies notify employees of their right to a “day of rest” so they can establish that an employee made an informed decision to forgo a day of rest. Finally, employers should consider obtaining a written waiver from an employee before agreeing to allow the employee to forgo a day of rest in a given workweek.

Co-authored by Julie Yap and Billie Pierce

Seyfarth Synopsis: A federal court in California recently held that a franchisor cannot be held liable for labor code claims where it did not exercise control directly, or through an actual agency relationship with the employer, over the terms and conditions of the workers’ employment. The decision limits claims against independent businesses based on an “ostensible” or perceived agency relationship between the employer and the independent business.

On March 10, 2017, a federal judge handed a Franchisor—a Fast-Food-Giant (FFG) who franchises with independent restaurant owners—a second straight summary judgment win, ruling that the FFG could not be held liable under an ostensible agency theory for workers’ California wage claims arising out of their employment with the franchise restaurants. As we explained earlier this year, three fast-food workers from Oakland sued a family-owned company that operated eight franchise restaurants in Northern California. They brought the FFG along for the ride under a joint employment theory, serving up a complaint chock full of California Labor Code, Private Attorneys General Act (PAGA), and negligence claims.

Last August, a federal judge dismissed the claims against the Franchisor, in part, after finding that the FFG did not control the workers’ employment directly or through an actual agency relationship with their employer, and was therefore not a joint employer. But the judge didn’t toss out the workers’ claims completely, opining that a jury could be persuaded that the FFG was liable under an “ostensible agency” theory—namely that the franchisee might have created an impression that it was acting as the franchisor’s agent (even if it was not), and the employees may have relied on that impression to their detriment.

Recently, the FFG moved for dismissal of all claims against it, arguing that it could not be held liable for the workers’ wage and labor code claims because—by definition—it is only an “employer” if it exercised “actual” control over their employment (and the court had already ruled that was not the case in its prior grant of summary judgment). The workers countered that liability could be premised on ostensible agency because the California Wage Order defines an employer to include anyone who “directly or indirectly, or through an agency or any other person, employs or exercises control over the wages, hours, or working conditions of any person.”

But the court didn’t buy the workers’ argument, noting that the Wage Order’s second phrase—“exercises control over”—limited the scope of agency liability to actual agency or actual control over their employment. The Wage Order’s specific, limited definition of an “employer” meant that the conflicting ostensible agency provisions were not a viable basis for the workers’ claims. The court was also not persuaded by the workers’ resort to policy arguments that adopting a broader interpretation would advance the protective purpose of the Wage Order, stating “[t]o ignore [lawmakers’] decision to limit the definition of ‘employer’ to those who, through an agent, control workplace conditions would be to rewrite the law.”

This decisions is good news for franchisors and other similar types of entities that do not exercise actual control over employees. This case takes California law at the language of its text and prevents employees from pursuing entities that are not joint employers. However, the take-away order for franchisors continues to be to stay out of the kitchen when it comes to the relationship between franchisees and their employees.

Authored by Kiran A. Seldon

Seyfarth Synopsis: Three decisions issued earlier this month reveal an increasing tension between the Ninth Circuit and California appellate courts on whether representative PAGA actions can be arbitrated. As a result, employers wishing to compel arbitration of representative PAGA claims are likely to be better off in federal court than in state court.

In 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC that pre-dispute arbitration agreements cannot require employees to waive representative claims under California’s Labor Code Private Attorneys General Act (“PAGA”). The following year, the Ninth Circuit agreed with Iskanian and held in Sakkab v. Luxottica Retail North America, Inc. that PAGA representative actions cannot be waived.

While state and federal courts agree that pre-dispute waiver of PAGA actions is prohibited, they disagree on the next logical question: can private arbitration agreements require PAGA claims to be arbitrated on a representative basis? In a pair of recent unpublished decisions, the Ninth Circuit has answered “yes.” Two state appellate courts, in contrast, have expressed the view that representative PAGA claims cannot be arbitrated—even if the employer and employee agreed to do so in a pre-dispute arbitration agreement—unless the State has also consented.

The Ninth Circuit. Earlier this month, Wulfe v. Valero Refining Co. California considered a pre-dispute arbitration agreement that was silent regarding waiver of PAGA claims. The Ninth Circuit held that “the district court’s order compelling arbitration did not run afoul of Sakkab and Iskanian because the order did not prevent [the employee] from bringing a representative PAGA claim in arbitration.” It is only “pre-dispute agreements to waive the right to bring a representative PAGA claim [that] are unenforceable,” the Court held.

Two days later, in another unpublished decision, the Ninth Circuit reached the same result. In Valdez v. Terminix International Company Limited Partnership, it reversed a district court, which had held that PAGA claims categorically cannot proceed to arbitration.” The Ninth Circuit again concluded that “Iskanian does not require that a PAGA claim be pursued in the judicial forum; it holds only that a complete waiver of the right to bring a PAGA claim is invalid.” It also interpreted Sakkab as “likewise recogniz[ing] that individual employees may pursue PAGA claims in arbitration.”

California appellate courts.  Days after Wulfe and Valdez, a state appellate court opined in Betancourt v. Prudential Overall Supply that PAGA claims cannot be arbitrated without the State of California’s consent. The “fact that [the employee] may have entered into a pre-dispute agreement to arbitrate does not bind the state to arbitration,” the court concluded. However, these statements arguably were not necessary to the Court of Appeal’s ultimate holding, which was that the arbitration agreement was unenforceable because it contained a PAGA waiver in violation of Iskanian.

Betancourt is in line with Tanguilig v. Bloomingdale’s, Inc., another state appellate court opinion issued in November 2016. Tanguilg also opined that “a PAGA plaintiff’s request for civil penalties on behalf of himself or herself is not subject to arbitration under a private arbitration agreement between the plaintiff and his or her employer. This is because the real party in interest in a PAGA suit, the state, has not agreed to arbitrate the claim.” As in Betancourt, however, the arbitration agreement had a PAGA waiver in violation of Iskanian, arguably making the Court of Appeal’s broader discussion unnecessary to its holding.

As a result of the current tension between state and federal courts, employers who wish to compel arbitration of a PAGA claim on a representative basis should pay careful attention to the forum in which they are litigating. Though Wulfe and Valdez are unpublished, they are persuasive Ninth Circuit authority, making the chances for success higher in federal court than in state court. Unless the issue is resolved by the California Supreme Court, the uncertainty surrounding arbitration of PAGA representative claims is likely to continue.

Authored by Simon L. Yang

Seyfarth Synopsis: Sometimes, plaintiffs’ attorneys have circumvented a key aspect of the California Legislature’s intent in enacting PAGA: limiting standing to pursue penalties for Labor Code violations to those employees who were actually harmed. Though a new California bill could halt those attempts, PAGA plaintiffs’ wiliness warrants a cautionary comment to the Legislature to ensure that any amendment furthers—rather than further frustrates—the original legislative intent.

A New PAGA Bill: Employers should be optimistic that the California Legislature continues to propose bills seeking to curtail PAGA abuse. One recently introduced bill would advance three laudable goals, to close loopholes and preclude arguments that have encouraged absurd interpretations of the original PAGA statute. But the Legislature should mindfully proceed. While one proposed change is straightforward, a second creates confusion absent a quick fix, and a third requires revisiting PAGA’s legislative intent to consider what amendment would be best.

Extension of Time for Employers to Exercise Right to Cure Violations: The first part of the pending bill proposes a clearly needed fix of an oversight within the 2016 amendment. As previously noted, 2016 legislation provided the LWDA with more time to respond to PAGA letters, but failed to also extend the employer’s time to respond. The pending bill would provide employers with 65 days to cure certain Labor Code violations.

Expansion of Scope of Violations Subject to Right to Cure: The proposed bill would also broaden the availability of the right to cure. Currently, many violations are specifically excluded from the cure provisions. According to the bill, an amendment would “exclude only the health and safety violations from the right to cure provisions.” The proposed text within the bill, however, falls short and would create confusion.

A quick fix is all that would be needed, though. To achieve the declared intent, the proposed amendments within Labor Code section 2699.3(c) (providing procedures for curable violations) should be accompanied with deletion of section 2699.3(a), which currently provides procedures lacking any right to cure but applying to some of the Labor Code violations the bill intends to make curable.

Reemphasis on PAGA’s Standing Requirement: The third proposal is the most interesting. The bill’s suggested amendment would reemphasize that “an aggrieved employee may be awarded civil penalties based only upon a violation by the employer actually suffered by that employee.”

At first glance, the proposal restates a given, but it likely responds to some plaintiffs’ efforts to obliterate PAGA’s standing requirement. These plaintiffs have misled courts into believing that an employee aggrieved by one Labor Code violation can invoke PAGA to seek penalties for other violations that the employee never experienced.

That isn’t right. Even PAGA’s initial proponents, in 2003, explained that a standing requirement meant that a PAGA plaintiff could only be someone who had been subjected to the Labor Code violation for which that plaintiff sought to recover penalties:

Only Persons Who Have Actually Been Harmed May Bring An Action to Enforce The Civil Penalties. Mindful of the recent, well-publicized allegations of private plaintiff abuse of [California’s unfair competition law (the “UCL”)], the sponsors state that they have attempted to craft a private right of action that will not be subject to such abuse. Unlike the UCL, this bill would not permit private actions by persons who suffered no harm from the alleged wrongful act. Instead, private suits for Labor Code violations could be brought only by an employee or former employee of the alleged violator against whom the alleged violation was committed. This action could also include fellow employees also harmed by the alleged violation.

The legislative history is consistent throughout, and the final bill analysis preceding PAGA’s enactment maintained that PAGA plaintiffs must have suffered harm from an alleged violation. Those individuals could seek penalties on behalf of “other current or former employees against whom one or more of the alleged violations was committed.” Simply put, someone who was aggrieved by certain Labor Code violations could be a PAGA plaintiff and could sue on behalf of others who also were subject to any of those violations.

But PAGA plaintiffs argue that the enacted statute is contrary. They seize upon PAGA’s definition of an “aggrieved employee,” which they read to comingle concepts. Specifically, they argue that PAGA confers standing not only on those plaintiffs whom the Legislature intended to have standing to be a PAGA plaintiff (i.e., those “against whom the alleged violation was committed”) but also on those employees on whose behalf the PAGA plaintiff could sue (i.e., those “against whom one or more of the alleged violations was committed”).

The result is that absurd arguments abound. For example, some PAGA plaintiffs assert that a non-exempt employee who suffered an expense reimbursement violation can recover penalties on behalf of employees who have been misclassified as exempt!

Two Cents for the Legislature: The proposed amendment—a new Labor Code section 2699.4 establishing that “an aggrieved employee may be awarded civil penalties based only upon a violation by the employer actually suffered by that employee”—is a welcomed attempt to put an end to the silliness. But the proposal restates what was intended to be an evident truth.

Adding a provision to clarify original intent could be argued is unnecessary, especially since the Legislature could simply revisit the definition of an “aggrieved employee.” The definition presently can and should be read without absurdity, but PAGA plaintiffs contort statutory language to assert illogical arguments (like the ability to recover penalties as being irrelevant to standing).

In sum, enacting section 2699.4 to preclude an award of penalties for a violation that a PAGA plaintiff has not suffered merely restates the standing requirement that precludes such an award in the first instance. To the extent the Legislature finds a need to respond to PAGA plaintiffs’ tactics, enacting section 2699.4 might be unnecessarily complicated. A simple amendment to the definition of an aggrieved employee would have the same result.

Authored by Simon L. Yang

Seyfarth Synopsis: When the California Supreme Court said no to PAGA waivers in its 2014 Iskanian ruling, we asked whether employers would boldly go where few have gone before and implement arbitration agreements requiring arbitration of PAGA claims. A recent California Court of Appeal decision issued in Perez v. U-Haul Company of California warrants revisiting that question.

Many employers stayed the course in 2014 and continued including PAGA waivers within their arbitration agreements, since numerous federal district courts continued disagreeing with and refusing to apply Iskanian’s logic.

And even when in 2015 the Ninth Circuit instructed federal district courts to apply Iskanian, many employers continued using arbitration agreements with PAGA waivers, since PAGA litigation could be severed and stayed while a plaintiff’s individual claims were arbitrated. If the employer prevailed on the individual claims in arbitration, the plaintiff would not be an aggrieved employee, would not have standing under PAGA, and would thus be unable to pursue mooted PAGA claims.

By 2016 plaintiffs have made the availability of that option scarcer. To avoid having to prove standing by prevailing on their individual claims before pursuing otherwise stayed PAGA claims, plaintiffs now commonly prefer to file PAGA-only lawsuits, without alleging individual claims.

The two putative Perez class representatives, however, had pursued both individual and PAGA claims. Predicting and seeking to avoid a stay of their PAGA claims, the Perez plaintiffs hopped onto the PAGA-only bandwagon by amending their complaints to allege a PAGA cause of action only—abandoning their individual claims, their roles as potential class representatives, and putative class members’ individual rights.

U-Haul fought back and sought to require arbitration of the predicate issue of whether the plaintiffs themselves had been subject to any Labor Code violations. Even though U-Haul was not seeking to preclude the PAGA cause of action but only to arbitrate the individual issues determinative of plaintiffs’ standing for their PAGA claims, the Court of Appeal rejected U-Haul’s argument. It reasoned that no individual issues remained at issue and that U-Haul’s arbitration agreement explicitly precluded arbitration of any representative issues.

Though Iskanian explicitly acknowledged that PAGA claims might be arbitrated, the Perez court then went full dictum. It opined that even if U-Haul’s arbitration agreement did not preclude its argument for arbitrating the plaintiff-specific issues determinative of PAGA standing, the PAGA cause of action could not be split between arbitration and litigation. But Iskanian doesn’t preclude this. What it precluded was the waiver of the right to pursue PAGA claims at all.

While it may be the case that an arbitration agreement cannot specify that an individual claim be created in a PAGA-only lawsuit, an arbitration agreement should be able to specify that representative claims be arbitrated—and specify that streamlined procedures be applied. Once again, will some enterprising employers consider going boldly where few have gone before?

Authored by Daniel C. Whang and Simon L. Yang

Seyfarth Synopsis: When an allegedly aggrieved employee attempts both to seek compensatory relief as an individual and to impose penalties as a proxy for the California Labor Commissioner under the Private Attorneys General Act of 2004 (“PAGA”), the resulting comingling of the plaintiff’s interests as an individual and as a representative in the shoes of the State of California is another unsurprising byproduct of the PAGA statutory scheme. Some plaintiffs try to argue that results in one role don’t affect the other, but another court recently reminded plaintiffs that resolving their individual claims also resolves their ability to pursue representative PAGA claims.

Judge Kenneth Freeman recently confirmed that a representative plaintiff’s role as a proxy for the State of California is not unconditional and requires that the plaintiff be an “aggrieved employee.” In the recent case, the plaintiff had originally filed both class action claims as well as a representative PAGA claim alleging exempt misclassification against his employer. After being compelled to arbitrate individual wage and hour claims while the representative PAGA claim was stayed, the plaintiff accepted a statutory offer to compromise under California Code of Civil Procedure Section 998, which dismissed all but his PAGA claim with prejudice.

In refusing to dismiss his PAGA claim, the plaintiff argued that his dual role as an individual and representative of the State of California meant that the dismissal of his individual claims had no impact on his ability to continue as a PAGA representative. The defendant disagreed and filed a motion for summary adjudication. Judge Freeman sided with the employer and made clear that once the plaintiff settled his individual claims, he was no longer an “aggrieved employee” under PAGA and, therefore, no longer had standing to bring a representative claim.

Judge Freeman is not alone in his view. The California Court of Appeal has previously concluded that a plaintiff who released any individual wage and hour claims he may have against his employer as part of a class action settlement cannot subsequently bring a PAGA claim based on the same alleged violations.

Since a PAGA claim can only be brought by and on behalf of “aggrieved employees,” Judge Freeman’s decision is helpful beyond just resolving claims with a PAGA representative. It also suggests “Pick Up Stix” campaigns—where an employer settles claims with individual putative class members to reduce the potential liability in the class action itself—should also be viable in PAGA lawsuits. Settling non-parties’ underlying wage and hour claims should mean that current or former employees who have chosen to participate in the campaign would no longer be “aggrieved employees” for purposes of PAGA.

Considering that PAGA claims cannot be waived in arbitration agreements and are not subject to class certification requirements, employers facing PAGA claims may feel that the courts stack the odds against them. But the recent decision from Judge Freeman provides an encouraging reminder that employers may be able to use settlements as an effective litigation strategy in PAGA actions.

Co-authored by Monica Rodriguez and Justin Curley

Seyfarth Synopsis: The California Supreme Court holds that employers must promptly pay final wages owed to employees who quit, including those who retire, or risk paying steep statutory penalties under California Labor Code section 203.

What Were the Plaintiff’s Claims?

Janis McLean worked as deputy attorney general for the California Department of Justice. In November 2010, McLean retired and filed suit in an individual and representative capacity against the State of California shortly thereafter. She alleged that the State Controller’s Office failed to pay her final wages on her last day of employment or within 72 hours of her last day after she retired.

What Do California Labor Code Sections 201 and 202 Require of Employers?

California Labor Code sections 201 and 202 require employers to pay final wages owed to employees who are fired or quit. Depending on how the employment comes to an end, final wages are due immediately or within 72 hours after the last day of employment. Failure to timely pay final wages subjects employers to penalties of up to 30 days’ wages.

What Did the California Supreme Court Decide?

The California Supreme Court agreed with McLean that the prompt payment provisions of California Labor Code sections 201 and 201 included protections for employees who retire. The State had demurred to the complaint, arguing that because McLean had retired from her job, she had not stated a claim for statutory penalties which applies only when employees “quit” or are “discharged.” While the trial court sustained the demurrer, the California Court of Appeal and California Supreme Court disagreed.

The California Supreme Court looked to the legislative purpose of the statute and noted that the statute is meant to be “liberally construed with an eye to promoting such protection” of employees. The court also considered the ordinary meaning of the word “quit” to determine whether it encompasses the word “retire,” and concluded that the word “quit” is broad enough to cover a voluntary departure through retirement.

Lessons Learned for Employers?

This decision serves as a reminder to California employers to promptly pay wages owed to their employees after termination, regardless of the method in which the employment ends–through discharge, retirement, or resignation. For those who are interested, a more in-depth review of the case is available here.

Authored by Simon L. Yang

Seyfarth Synopsis: PAGA was amended earlier this week, in connection with the California legislature’s approval of the state’s annual budget. The legislation did not implement any of the more substantive changes that Governor Brown’s proposed budget had previously suggested—e.g., requiring PAGA plaintiffs to provide additional information when submitting pre-filing written notice to the LWDA or permitting the LWDA an opportunity to object to PAGA settlements. While some procedural changes are worth noting, they don’t alleviate any of employers’ main concerns with PAGA.

And that’s to be expected, since the Legislative Analyst’s Office previously recommended rejecting any substantive changes. In its view, such amendments should be considered only after (i) requiring additional information be provided to the LWDA about the actual results of PAGA litigation and (ii) increasing funding to the LWDA so that it could actually fulfill its role in PAGA enforcement. This week’s alterations to PAGA procedure attempt to address these two preliminary objectives.

First, California employees used to be able to threaten employers with the prospect of PAGA litigation for the mere $3 cost of sending a written notice via certified mail. Effective today, hopeful PAGA plaintiffs must now pay a $75 filing fee and submit written notice via online filing. The filing fee and online system aim to assist the LWDA manage its PAGA burdens. But the 25x filing-fee increase likely won’t curb employers’ PAGA burdens, since employees often demand PAGA settlements that are 2,500x greater than even the new filing fee.

Second, courts now have to approve all settlements in PAGA actions—and not just settlements involving PAGA penalties. Contrary to some rumors, the amendments do not provide the LWDA an opportunity to object to PAGA settlements. The amendments do require PAGA plaintiffs to provide the LWDA with copies of any filed PAGA complaint, proposed settlements, and final judgments, but this week’s revisions merely assist the LWDA in being informed of PAGA litigation.

Third, employees also now have to wait 65 (as opposed to 33) days after sending their written notice before filing suit, as the LWDA has 60 (instead of 30) days to potentially respond. Both employees and the LWDA generally do nothing during this period, so employers may be further annoyed that they still have but 33 days to potentially cure certain Labor Code violations.

Still, maybe the LWDA will become more involved in PAGA enforcement. The LWDA has launched a new PAGA website, though it notes that the statutorily required online filing system is not yet developed. It also notes the prior reality about the LWDA’s role in PAGA enforcement—that employees and employers ordinarily won’t hear anything from the LWDA.

Only time will tell if the LWDA is ready to become more involved. What remains certain—and what the PAGA amendments do not alter—is that California employers will continue to face an abundance of PAGA litigation.