The Unintended Consequences Of ‘PAGA-Only’ Lawsuits

by | Apr 23, 2020 | Uncategorized

PAGA-Only-Lawsuits
California’s Private Attorneys General Act of 2004 permits an “aggrieved employee” to act as a proxy for the state and bring a representative civil action to recover civil penalties available under the Labor Code.[1] Over the last decade, PAGA claims have become a powerful tool for the plaintiffs’ bar to pursue multiple litigation objectives, including bringing a broad representative action while avoiding the rigorous class action certification requirements under California Code of Civil Procedure § 382 and Federal Rule of Civil Procedure 23, and leveraging the potential for a large civil penalties award to extract more favorable settlement terms from defendant employers.

More recently, two new objectives have become prominent features of PAGA litigation: obtaining expansive class action-style discovery and sidestepping the terms of employees’ arbitration agreements. While the California Supreme Court will be providing some much needed guidance on the permissible scope of PAGA discovery in the coming months,[2] it has already decided in Iskanian v. CLS Transportation Los Angeles LLC that it is contrary to public policy and beyond the scope of the Federal Arbitration Act for an employee to waive the right to bring a representative PAGA action in court seeking civil penalties.[3]

The New Trend of “PAGA-Only” Lawsuits

This brings us to a new trend in PAGA litigation driven largely by the Iskanian decision: the strategic decision by plaintiffs counsel to file “PAGA-only” lawsuits. A PAGA-only lawsuit is not a term that has been adopted in caselaw yet, but is shorthand for a complaint that sets forth all of the alleged underlying Labor Code violations suffered by the named aggrieved employee (e.g., overtime wage violations, meal period and rest break violations) but only asserts one representative cause of action under PAGA and seeks one form of relief, civil penalties.

The strategy of filing a PAGA-only case is apparent. It avoids class certification requirements. It (arguably) permits expansive discovery that is typically reserved for a labor commissioner investigation or representatives of an already-certified class action. It avoids enforcement of any bothersome arbitration agreement the employee may have signed. And it creates leverage for settlement purposes. Perhaps most importantly, if the employee obtains summary judgment or wins at trial, it offers the prize of one-way collateral estoppel where the employer is bound by the adverse ruling for every follow-on lawsuit brought by individual aggrieved employees to recover individualized relief such as unpaid wages and other damages.[4]

Unintended Consequences

At first blush, it may seem that there is little downside to pursuing a PAGA-only litigation strategy. However, there is at least one unintended consequence that plaintiffs counsel could face if this trend continues: a legal malpractice suit for failing to file individual causes of action against the employer and letting the employee’s statute of limitations continue to run during the pendency of the PAGA-only case.

One of the most important professional duties every attorney has — one that is pounded into every law student’s and associate’s head — is to preserve a client’s rights and remedies by timely filing an appropriate lawsuit. Courts have recognized that the loss or diminution of a client’s right or remedy is a cognizable injury that can support a claim for legal malpractice.[5] Indeed, in the class action context, the court in Janik v. Rudy, Exelrod & Zieff determined that there is a colorable claim for legal malpractice where class counsel limited the (successful) wage-and-hour claims to a three-year class period under the Labor Code but failed to plead a four-year class period under the Unfair Competition Law.[6]

Following the Janik court’s reasoning, plaintiffs counsel has a duty to preserve as much of an employee client’s four-year limitations period as possible and may breach that duty by strategically delaying filing individual causes of action in favor of pursuing a representative PAGA cause of action that generates high attorneys’ fees but limits the client’s recovery solely to penalties that must be shared 75 percent with the state.

PAGA-Only Fact Pattern

Consider this hypothetical (but common) wage-and-hour fact pattern:

Employee A is hired by Company in January 2012. Company terminates Employee A in January 2016. Shortly thereafter Employee A is referred to Lawyer who advises her that she has potential claims for unpaid minimum and overtime wages and for not being provided proper meal periods and rest breaks based on the legal theory that Company misclassified her position as “exempt.” Employee A hires Lawyer to file a lawsuit to pursue her claims. Lawyer discovers she has an arbitration agreement that is likely to be enforced and advises her to avoid arbitration by filing a PAGA lawsuit on behalf of herself and Employees B to Z based on the same underlying wage-and-hour claims.

Employee A consents and her PAGA-only litigation lasts until December 2018 where, after trial, Employee A and her 25 former coworkers are found to be aggrieved employees on all underlying wage-and-hour claims and awarded 25 percent of $312,000 in civil penalties ($3,000 for each employee). All 26 employees hire Lawyer after the trial is over to file individual claims and recover wages, damages and other forms of individualized relief.
In the wake of Iskanian, an increasing number of employees who signed arbitration agreements are (presumably) advised to avoid arbitration by filing a PAGA-only case based on the same allegations as their individual claims.

The unavoidable problem with this PAGA-only strategy is that it lets the statute of limitations continue to run on the employee’s individual claims while plaintiffs counsel is pursuing broad civil penalty relief on behalf of the state and other potential aggrieved employees.

In the above fact pattern, Employee A had viable claims for four years’ worth of wages and other damages. Assuming that Employee A was paid a salary of $50,000 per year and estimates that she worked 10 hours of overtime per week, the unpaid wages alone could be in excess of $75,000. However, based on Lawyer’s PAGA-only strategy, Employee A lost three years’ worth of individualized wages and damages (approximately $56,000 of overtime wages alone, not counting premium wages for missed meal periods and rest breaks). She would have recovered 100 percent of those wages and damages if she filed her individual claims in January 2016 when she initiated the PAGA action. The diminution of Employee A’s individualized recovery constitutes a cognizable injury, and Lawyer’s litigation strategy that prioritized representative relief over individualized relief is the proximate cause of Employee A’s injury.

Even collateral estoppel would not help Employee A recover the full amount of relief that would have been available had Lawyer pursued her individual claims at the same time as the PAGA claims.

PAGA-Only Cases Will Not Preserve Employees’ Rights and Remedies

Because the PAGA-only trend is so new — Iskanian was not decided until June 2014 — there is no caselaw that directly analyzes the potential consequences of a PAGA-only litigation strategy or the inherent conflict of interest that exists when plaintiffs counsel represents an employee client’s interests at the same time as he represents and the interests of the state and other nonclient employees.

However, existing case law shows that it is unlikely that a PAGA-only case will equitably toll the running of the applicable limitations period or permit reliance on the relation-back doctrine for purposes of preserving the full scope of an employee’s rights and remedies.

Equitable Tolling Will Not Apply

In order for a PAGA-only case to equitably toll an employee’s underlying individual claims, the employee must establish (1) timely notice to the employer of the factual basis of the her claims, (2) lack of prejudice to the employer, and (3) reasonable and good faith conduct by the employee.[7] While most PAGA-only cases will satisfy the first element by pleading sufficient facts to support the employee’s individual claims, the second and third elements will be far more difficult to satisfy.

The prejudice analysis generally focuses on whether the employee’s pursuit of an “alternate legal remedy” prejudices the employer’s ability to defend itself. There is a very real question whether a PAGA-only case can constitute an employee’s pursuit of an alternate legal remedy because a PAGA-only case follows the labor commissioner’s rejection of the employee’s request to investigate potential violations and constitutes an action brought on the state’s behalf to recover civil penalties. A PAGA-only case is not an action by the employee herself to recover individualized relief, nor is it the functional alternative of an administrative action.

Additionally, an employer suffers unfair prejudice if it is denied the right to arbitrate the question of its liability on the underlying labor code. If equitable tolling applies, an employee’s individual claims would extend the employer’s liability period and then leave nothing for the arbitrator to do except impose collateral estoppel and issue an award for individualized wages and damages.

The good faith analysis also weighs against equitable tolling. By pleading underlying Labor Code violations in the complaint but intentionally omitting individual causes of action that arise thereunder, plaintiffs counsel will be hard-pressed to argue that the delayed pursuit of individualized relief was reasonable and in good faith rather than a pure strategic play to gain a tactical advantage over the employer.

Ultimately, the equitable tolling doctrine is a difficult argument for plaintiffs counsel to make after choosing to pursue a PAGA-only strategy.

Relation-Back Doctrine

Similar to the equitable tolling doctrine, plaintiffs counsel will have difficulty relying on the relation-back doctrine to preserve a longer period of liability and damages after choosing to file a PAGA-only case in the first instance.

In order for the relation-back doctrine to apply to individual causes of action added via an amended complaint, plaintiffs counsel needs to establish that the new causes of action (1) involve the same general set of facts, (2) involve the same injury, (3) refer to the same instrumentality, and (4) do not seek to enforce an independent right or impose greater liability upon the employer.[8] While the “same facts” element will almost certainly be satisfied (and the “instrumentality” element will be inapplicable), it will be nearly impossible for plaintiffs counsel to establish the other two elements.

A PAGA-only case does not seek to redress an individual injury suffered by an employee; rather, it seeks to obtain civil penalties on the state’s behalf and shares 75 percent of any recovery with the state. The state’s purpose (funding its coffers and deterring employers from future violations) is very different from an employee’s purpose of recovering unpaid wages and other specific damages. Additionally, by asserting individual causes of action and seeking compensatory forms of relief, the employee asserts individual rights that are independent from the state’s governmental right to recover civil penalties (and share them with an employee as an incentive payment). Moreover, individual causes of action seek to impose far greater liability on the employer than simply civil penalties.

Because a PAGA claim and individual claims are designed for different purposes and impose different forms of liability, the relation-back doctrine will be difficult for plaintiffs counsel to rely upon if he chooses to pursue a PAGA-only strategy in his original complaint.

Only Time Will Tell If PAGA-Only Cases Are a Good Strategy

Most commentators and practitioners seem to believe that the recent trend of filing PAGA-only cases will become even more common in coming years. If that prediction is correct, new caselaw will begin to clarify aspects of PAGA-only cases that today are still uncertain. Until the courts determine the availability (or lack thereof) of the equitable tolling and relation-back doctrines, however, plaintiffs counsel will be vulnerable to a legal malpractice suit every day they delay filing individual claims in favor of pursuing PAGA-only relief.

—By Jamin S. Soderstrom, Call & Jensen

Jamin Soderstrom is an associate at Call & Jensen in Newport Beach, California. His practice includes commercial, employment, intellectual property, and consumer litigation. Soderstrom regularly defends employers in individual, class, and representative actions brought by employees, including PAGA-only cases.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See Cal. Labor Code § 2699.

[2] See Williams v. Superior Court, 236 Cal. App. 4th 1151 (May 15, 2015), petition for review granted, 354 P.3d 301 (Aug. 19, 2015).

[3] 59 Cal. 4th 348 (2014).

[4] Arias v. Superior Court, 46 Cal. 4th 969, 985-87 (2009).

[5] See Adams v. Paul, 11 Cal. 4th 583, 589-91 (1995) (citing cases).

[6] 119 Cal. App. 4th 930 (2004).

[7] See McDonald v. Antelope Valley Community College District, 45 Cal. 4th 88 (2008).

[8] See Quiroz v. Seventh Avenue Center, 140 Cal. App. 4th 1256 (2006).

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