PAGA Claims: A Growing Threat for Employers

Directors and Officers beware: PAGA claims in California are taking off, and other states want to get in the game as well. My colleagues Jesse Attix and Jon Janes explain this trend and break down the coverage issues in this week’s D&O Notebook. –Priya Huskins

California’s Private Attorney General Act (PAGA) deputizes employees to enforce labor and health and safety laws and regulations on behalf of the state. Plaintiff lawyers acting on behalf of employees and aided by favorable court decisions are utilizing PAGA actions to sidestep common hurdles faced by employees when pursuing lawsuits like arbitration agreements or class certification. As a result, California employers face increasing litigation uncertainty—uncertainty that traditional insurance may do little mitigate.

What is a PAGA Claim?

California, like all states, has an extensive set of laws and regulations governing the workplace. State agencies tasked with enforcing these laws and regulations can’t investigate each alleged violation. To aid with enforcement, in 2004, California enacted PAGA, which allows an aggrieved employee to stand in the shoes of the agency to seek civil penalties against their employer for them and other aggrieved employees.

PAGA requires that the aggrieved employee first file a claim with the California Labor and Workforce Development Agency and serve the filing on the employer. If the Labor and Development Agency does not act within 65 days of the filing, the employee has one year from the last alleged California labor law violation to file a PAGA lawsuit.

A PAGA lawsuit is a representative action—the aggrieved employee is representing all other employees that have suffered harm. But unlike a class action, PAGA claims do not need to meet the strict certification requirements for bringing a class action. An employee’s right to bring a PAGA claim cannot be waived in an arbitration agreement. Discovery can also be more burdensome for the employer as PAGA plaintiffs are entitled to request and receive a significant amount of information from the employer early in the process.

Some recent favorable decisions have resulted in an explosion of PAGA filings. The CABIA Foundation estimates that over 8,000 PAGA cases have been filed and resolved as of 2018.

PAGA Claim Examples

There are three types of violations that can be the subject of a PAGA claim:

1. Violations of the California Labor Code that are specifically listed in the statue
2. Violations of California’s health and safety regulations
3. Any other violation California’s labor laws.

These violations can arise in a variety of ways. The most common example of a PAGA claim has been against employers that allegedly fail to pay wages in accordance with California’s wage and hour laws.

PAGA claims, however, are not limited to wage and hour claims. They can involve allegations of discrimination, retaliation, misclassifying employees, and failure to protect the health and safety of employees. There are even COVID-19-related claims.

In one COVID-19-related PAGA claim, an employee alleged that she was not properly reimbursed for business expenses or compensated for time spent related to COVID-19 preparation. The basis of the business expense allegation was the use of a personal cell phone to complete a mandatory COVID survey. The basis for the time-spent allegation was waiting to receive temperature checks for COVID-19 screening prior to clocking in. (Atienza v. Homegoods, Inc.)

While the underlying allegations of a PAGA claim could also support the filing of an individual lawsuit, there are advantages to filing a PAGA claim. The first is that the aggrieved employee’s individual harm may not be sufficient to file a lawsuit for damages. In a successful PAGA claim, the aggrieved employee recovers civil penalties instead of damages. The civil penalties can add up quickly given the representative nature of PAGA claims and the potential to include a large of number of similarly impacted employees even though the civil penalties awarded are split between the state (75%) and aggrieved employees (25%). The aggrieved employee can also recover court costs and attorneys’ fees.

Insurance Considerations

Employers naturally would want to look to insurance to mitigate the impact of PAGA claims, particularly given the potential for a significant penalty award. The unfortunate reality is that coverage in most insurance policies may be quite limited. The reasons may include:

• Wage & Hour Claims: Most PAGA claims allege violations of wage and hour-related laws and regulations. Employment Practices Liability Insurance (EPL) policies typically exclude wage and hour claims or significantly sublimit the amount of coverage available for defense costs only. Directors & Officers Insurance (D&O) policies are also typically unhelpful. Most private company D&O policies also exclude wage and hour claims. In public company D&O policies, coverage for the corporate entity is limited to securities claims only, which a PAGA claim is not.
• Definition of Loss: Many EPL and D&O policies typically exclude coverage for penalties. This can be either through an express exclusion or through a carveout from covered amounts in the definition of Loss. PAGA awards, unfortunately, are usually in the form of penalties. For example, an aggrieved employee cannot seek lost wages or damages via a PAGA action, only penalties. PAGA even has a default penalty scheme for Labor Code sections that do not otherwise specify a penalty for a violation.
• Willful Violation of Law Exclusion: Some EPL and many D&O policies also contain an exclusion for claims where the insured has been found by a court or arbitrator to have willfully violated a law. Depending on the language of the particular policy in question, this exclusion can come into play given that PAGA claims must allege a violation of the California Labor Code, California health and safety regulations, or other California labor laws.
• Retention: It is not uncommon for EPL policies to have different retentions (similar to a deductible) for single plaintiff and multi plaintiff claims, with the latter often being multiples higher than single plaintiff retention. In most cases, insurers are likely to assert that PAGA claims fall under the higher multi-plaintiff retention as PAGA claims are representative actions. A high retention may be too high a bar to clear for coverage, especially given the potentially narrow breadth of coverage available in an EPL or a D&O policy.

Employers can take the following steps to assess the level of coverage available to them should they be faced with a PAGA claim:

• Wage & Hour Insurance: It may be possible to place a Wage & Hour Insurance policy that will provide defense and indemnity coverage for PAGA claims that allege violations of wage and hour laws and regulations. Note that these are separate from EPL policies. These policies are expensive and usually have very high retentions, so smaller employers may find them to be less effective given the exposure.
• Express Defense Costs & Plaintiffs Attorneys’ Fees Coverage: It may be possible in some circumstances to amend an EPL and D&O policies’ definitions of Loss to expressly includes defense costs in circumstances where a loss would not be covered. So, for example, a policy might specify that “Loss, other than Defense Costs, does not include fines or penalties.” In some cases the definition of Loss can be defined to include plaintiffs’ attorneys’ fees awarded by a court or included in a settlement.
• Remove / Narrow Conduct Exclusion: If your EPL or D&O policy’s Conduct Exclusion includes “willful violation of law” wording, attempt to have this removed or modified so that it is only triggered upon a final, non-appealable adjudication and not by an admission or lower trigger. While D&O carriers are unlikely to completely remove the conduct exclusion, some may agree to remove the willful violation wording or replace with “criminal acts” wording.
• Protect Your Directors and Officers—Side A Coverage: California law allows the state’s Labor and Workforce Development Agency to recover penalties associated with unpaid wages from individual directors and officers. A PAGA claim can be used by an aggrieved employee to stand in the shoes to recover the same penalties. If such a claim were successful, the employer may be able to indemnify the impacted directors and officers depending on the scope of indemnification provided and the employer’s wherewithal to indemnify. The Side A coverage in a D&O policy for non-indemnified loss can be utilized as a backstop to the employer’s indemnification obligations. Attention will need to be paid to the wage and hour exclusion in the D&O coverage section and the treatment of civil penalties in the definition of Loss to see if there is a Side A exception. In many cases, purchasing separate Side A DIC coverage may be the simplest and most efficient way to address any limitation in the underlying D&O policy.

Recent PAGA Developments

There have been several recent developments regarding PAGA. Notably, PAGA plaintiffs have suffered a few setbacks in the Ninth Circuit. The Ninth Circuit found that an employee must suffer an injury personally to have standing to bring a PAGA claim. An earlier California Court of Appeal’s decision had found the opposite, that the PAGA plaintiff did not have to suffer the violation. The Ninth Circuit also limited the potential penalties employers and management could face under PAGA by finding that higher subsequent violation penalties could not be imposed until after the employer had been notified of the violation by the California Labor Commissioner or any court that its conduct violated the California Labor Code.

These wins for employers have been at the federal level, still leaving employers very much exposed in the state courts. But that may also be beginning to change. On September 9th, 2021, in Wesson v. Staples the Office Superstore, LLC, the California Court of Appeal issued the first published California appellate decision that expressly confirms that trial courts can strike unmanageable Private Attorneys General Act (“PAGA”) claims. The court held that trial courts have inherent authority to manage complex litigation, which allows the court to evaluate whether PAGA claims can be manageably adjudicated at trial. If the PAGA claim cannot be manageably tried, the court may strike the claim.

Wesson involved a PAGA claim on behalf of over 300 store managers who asserted that Staples had misclassified them as exempt executive employees. Staples, having already defeated class certification of the same matter, asked the court to strike the PAGA action arguing that the court would have to hold over 300 mini trials to hear relevant evidence to each manager’s case, rendering the PAGA claim unmanageable. In what many view as a significant win for California employers, the trial court agreed, and the Court of Appeal affirmed the trial court’s decision.

Historically, PAGA has been a problem for California employers—companies that employ individuals in the state of California whether the company is domiciled or has a location in the state. Other states, however, are catching PAGA fever and introducing PAGA-like legislation:

States with Proposed PAGA-like Regulations

• Maine: On June 18th, 2021, Maine became the first state outside of California to pass PAGA-type legislation, only to have it vetoed by the governor. An Act to Enhance Enforcement of Employment Law was PAGA-like in that it deputized workers (defined as “Whistleblowers” in the bill), to bring private enforcement actions alleging violations of certain labor laws, most notably for wage and hour violations, in the name of the state. The law also allowed advocacy groups and other organizations to sue on behalf of workers, greatly expanding who would have standing.
• New York: The Empowering People in Rights Enforcement Worker Protection Act, or EMPIRE Act, would allow employees, whistleblowers, or organizations selected by the employee to initiate public enforcement on behalf of the state. Such organizations would include unions and other employee advocacy groups. The bill is currently in committee in the State’s Senate and Assembly.
• Washington: A proposed law allows for representative recovery of traditional damages, in addition to civil penalties. The bill died in the state’s Senate committee, but not before it passed the state’s House with majority approval. For this reason, it will likely be reintroduced.
• Oregon: A proposed bill would also allow individuals and certain representative organizations to bring an enforcement action for alleged violations. The current bill also permits the individuals and organizations to receive up to 40% of the penalties recovered, including attorney fees.
• New Jersey: This bill is narrower than PAGA and focused on promoting a “fair workweek.” It would establish employee scheduling rules for large chains of retailers, hotels restaurants, and warehouses, and give workers the right to sue on behalf of the state to enforce those rules.
• Connecticut: A proposed bill would let labor unions and other advocacy groups file claims over workplace violations, but this bill has stalled in the State’s Senate committee.

California has always been a tough state for employers. Plaintiffs’ lawyers are using PAGA to make the environment even tougher. While there are green shoots of hope in recent court decisions, PAGA claims will continue to be a considerable exposure for California employers for the foreseeable future and may become a considerable exposure for employers in other states as well. This is an exposure that in many cases is not addressed by traditional EPL insurance. As a result, employers will need to be extra vigilant both when it comes to potential PAGA claims as well as understanding what insurance coverage may be available to them should a PAGA claim arise.