West L.A.’s Professional Security Consultants provides guards for upscale events such as Elton John’s Academy Awards party, and it expects its uniformed guards to show up looking sharp.
But those expectations came at a price: $475,000.
That’s what the company had to pay a couple of years ago to settle claims that it allegedly violated labor laws by not reimbursing employees for the cost of cleaning their uniforms.
Traditionally, such a regulatory enforcement action would be brought by the state attorney general. But in PSC’s case, it was brought by employees and their lawyers under 2004’s Private Attorney General Act.
PSC is certainly not alone. Thousands of California companies have faced similar actions under the act. Businesses, which have long complained that the act is widely abused, might be pleased that the state act could be gutted by the U.S. Supreme Court. But in the meantime, lawyers are rushing to beat any decision by the high court – resulting in a rash of actions under the act, often called PAGA.
Todd Scherwin, managing partner at the downtown L.A. office of Fisher & Phillips who defends employers, said he’s certainly seen the surge.
“In the last 90 days, I would say I’ve had eight to 10 PAGA claims that I’m handling right now,” he said. “It’s probably the most hotly contested or litigated issue now, or certainly the most popular wage-and-hour claim.”
The law, businesses argue, is a clear path for workers to amplify any disputes they might have against their employers, and there’s little oversight. What’s more, the law allows employees to file complaints on behalf of larger groups without the hassle of obtaining a class-action certification.
Stung by the frequency and potential exposure they see in claims brought under PAGA, employers years ago began asking workers to sign arbitration agreements, requiring them to settle disputes through mediation or arbitration rather than filing costly lawsuits.
But that didn’t work.
The California Supreme Court ruled in June that employers cannot legally use arbitration requirements to prevent workers from filing PAGA lawsuits.
“Because PAGA is the Private Attorney General Act, these plaintiffs stand in the shoes of the attorney general,” said Kenneth Sulzer, president of the L.A. chapter of the Federal Bar Association. “You can’t bind the attorney general to arbitration. That’s the logic the state court used.”
But federal district court justices in four other PAGA disputes have taken another view, all ruling that the Federal Arbitration Act protects employers’ rights.
A petition has been filed in the U.S. Supreme Court to resolve the diverging views, and, hedging against a win by the feds, many plaintiffs’ attorneys have rushed to file claims before the Supreme Court takes up the matter.
The number of PAGA cases filed each year has already increased exponentially. More than 3,100 claims were filed last year, up from 759 in 2005. The flurry of cases filed in the last few months indicates that workers are on track to file even more complaints before year’s end.
Businesses, as a result, now face allegations of all manner of labor code violations. Common alleged violations can be as simple as issuing paychecks that don’t include pay period start and end dates, said Sulzer.
“It’s like receiving the death penalty for a parking violation,” he said.
The business community, in general, has opposed PAGA from the outset, said Jennifer Barrera, a California Chamber of Commerce policy advocate for labor and employment issues.
“Certainly California is unique with its labor code requirement anyways, but PAGA itself is detrimental to businesses,” she said. “For our members, one of the most consistent complaints is PAGA.”
When PAGA was signed into law by then-Gov. Arnold Schwarzenegger, California was strapped for cash and the Attorney General’s Office had too few resources to adequately review every claim brought by disgruntled employees. The law was intended to shift some enforcement of labor code regulations to the private sector. It was also seen as a revenue source for the state.
When a business is found to have committed a labor code violation, PAGA calls for a $100 fine for each employee affected by the violation. If an alleged offense continued through multiple pay periods, the fine jumps to $200 an employee for each period until the matter was resolved.
At that rate, PSC, an $80 million-in-revenue business, could have faced fines of up to $20.7 million.
PAGA requires that 75 percent of the proceeds – after attorneys’ fees – from a verdict in favor of plaintiffs be paid to the state’s Industrial Relations Department. The balance would be distributed among affected employees.
Indeed, the state has benefited from the law, collecting at least $26.7 million in PAGA penalties over the last decade, according to statistics from the department. (The state’s Labor Workforce and Development Agency was the recipient of PAGA proceeds until March.)
But that number could potentially be far higher.
Loopholes in the law have opened the door for bigger personal payouts but less money delivered to the government, said employment litigator Keith Jacoby, a shareholder at Century City office of Littler Mendelson. Oftentimes, the state sees a mere 1 percent of a settlement.
Should a complaint, for instance, allege violations of other laws in addition to those covered by PAGA, plaintiffs’ attorneys will fight to allocate the majority of the payout to fall under statutes that don’t require payments to the government.
In the case against PSC, for example, California collected just under $45,000, roughly 9 percent of the $475,000 settlement.
“Almost all of the money goes to those other claims,” Jacoby said. “The court wants to see the money go to the employees, so there usually isn’t much jockeying around when it comes to PAGA.”
Plaintiffs’ attorneys, Sulzer said, see the opportunity to cash in and often take advantage of PAGA.
“Most of these cases are attorney driven,” Sulzer said, “not someone who’s trying to vindicate their rights. From a business standpoint, there’s no question it’s been abused.”
Calls to attorneys who represented plaintiffs in the PSC matter and other lawyers who frequently represent plaintiffs in PAGA cases were not returned.
Likewise, representatives of PSC did not want to talk.
Regardless of the size of a business, no employer is exempt from PAGA claims. In the last few weeks alone, L.A.’s Frida Restaurant Americana – which owns Mexican eateries in Beverly Hills and Westwood – and Commerce wholesale grocery chain Smart & Final Stores Inc. were slapped with PAGA complaints. Smart & Final, which operates 188 stores and has nearly 2,500 employees, was dragged into its own PAGA battle after a former employee filed a lawsuit last month in L.A. Superior Court.
Brian Holloway accused Smart & Final of a dozen labor code violations, including failing to reimburse him for meal and rest periods he allegedly wasn’t given, not compensating him for overtime and providing inaccurate wage statements.
Representatives of Smart & Final declined to comment.
Under PAGA rules, Holloway could receive compensation on behalf of himself and “current or former employees affected by the labor code violations alleged.”
As a result, Holloway’s claim could potentially extend to hundreds of employees and, depending on the frequency of the alleged violations, run into the millions of dollars.
While Jacoby, who isn’t involved in the case, said he has seen a number of large corporations face penalties that top $1 million, Superior Court judges often reduce fines to limit harm to employers. In some instances, he said, a judge has lowered penalties by 80 percent.
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