PAGA: Funny Name, Dire Results

If you do business in the Valley area, you don’t have to look far to see some of the horror stories created by PAGA. PAGA is the California law that stands for the Private Attorney General Act. It allows private citizens to sue companies for labor code violations – the kinds of suits normally filed by attorneys general and off-limits to the public. The wonky name makes the whole thing seem kind of banal and even funny. Just say it: “PAGA.” It sounds clownish and friendly, no? And the suits filed under PAGA often are laughably nitpickish: failure to specify the dates of the pay period on the check stub, failure to include the employee’s address in the proper place on the paycheck, etc. But don’t be fooled; a PAGA suit can lead to a stupendous payout. Consider the two local examples cited in the May 1 issue of the Business Journal: • An employee at a Pacoima company named Timely Prefinished Steel Door Frames had what was described as a standard workers’ grievance: employees allegedly did not always take meal breaks within the legal time frame and some employees were improperly classified for overtime pay. You’d think that, if found in violation, the company could be looking at a penalty measured in the tens of thousands of dollars. But the aggrieved employee filed the complaint under PAGA, and now the company is facing a penalty that could run into the millions. The company president was quoted as saying that a less substantial company could be shuttered by such an assessment. • The chief of Town & Country Event Rentals in Van Nuys fired two employees who, he claims, lawyered up and brought a suit under PAGA that claimed the company didn’t document lunch periods or other breaks. Again, you might assume that could result in a fine that would be the equivalent of a speeding ticket. Instead, the lawsuit sought the equivalent of the death penalty: an astounding $29 million. The chief, Richard LoGuercio, said he settled for $1.2 million – still a shocking amount considering the picayune violation. (LoGuercio claimed no employee said they didn’t get a lunch break, just that the times of the breaks weren’t officially recorded.) So why are PAGA payouts so big? Because of the liberal way California racks ups fines. A violation can be $100 for each employee per pay period for the first violation and then $200 for subsequent violations. If you multiply several violations times numerous employees times numerous pay periods times several years, well, you’ll need a really long check to fit all the zeroes. Now, an actual attorney general might cite the big number – say, $29 million – as a threat to the business but negotiate it way down to, say, $20,000 for a smaller company or maybe $200,000 for a bigger company. Regardless of the final figure, the attorney general is not incentivized to kill the business; he doesn’t want to answer uncomfortable questions about why his actions caused so many layoffs. The attorney general is trying to make a point and assess a fine and put out a self-congratulatory press release. But those who bring suit under PAGA have completely different incentives. They want the fine as big as it can be, the company be damned. For one thing, they may be motivated by anger and revenge more than anything. For another, consider this: Under PAGA, the state gets 75 percent of the payout, and the remaining 25 percent gets spread among the lawyers and the individual employees – not just those who press the complaint. That means the aggrieved employees stand to get a piddling payout, unless they shoot for a really big number. This is yet another example of the Law of Unintended Consequences. When PAGA was passed, it apparently was assumed that the 75 percent-payout-to-the-state rule might dampen the desire of aggrieved employees to bring frivolous PAGA claims. Instead, it has incentivized them to push the payouts as high as they can go. But wait, you might be asking. The payouts are still low, so why do employees file PAGA suits? Well, for one thing, as mentioned previously, the employees may be motivated by revenge. For another, a PAGA suit may be the best – maybe the only – suit they can bring. What’s more, lawyers encourage PAGA suits. That’s because a PAGA claim is kind of like a class action suit but does not have to go through the onerous certification process. Also, PAGA claims are exempt from arbitration agreements, and they typically can’t be removed to federal court, the venue considered more sympathetic to employers. In short, they’re a lawyer’s dream. Beyond all that, the payouts to employees and lawyers don’t have to be low. At least one lawyer was quoted last year as saying that sometimes during settlement negotiations, a portion of the payout is deemed to be PAGA and a separate portion is deemed to be non-PAGA and goes directly to the plaintiffs and lawyers. Creative types can find a way to sidestep that 75-percent-to-the-state rule. The result: PAGA is a surprisingly popular way to shake down companies. An average of about 30 PAGA suits are filed every day in California, according to one report last year. There’s irony in this, too. PAGA was intended to lighten the load of the attorney general’s office, but it has ended up burdening the court system. About this time, you may be asking yourself why the state doesn’t put an end to this outrage. But if you asked, you probably slapped your forehead. It’s that 75-percent-to-the-state rule. That’s money for nothing. It’s just too tempting for state lawmakers. PAGA makes lawyers happy; they’re important constituents for legislators. And PAGA is easy money for the state. Real easy money. Companies be damned. Charles Crumpley is editor and publisher of the Business Journal. He can be reached at [email protected].