Swept under the rug - the California Supreme Court’s Flooring Decision for Employers in Estrada v. Royalty Carpet Mills, Inc.

Last week, the California Supreme Court made life harder for employers yet again with its much-anticipated decision in Estrada et al. v. Royalty Carpet Mills, Inc.

On January 18, 2024, the California Supreme Court tackled a divergence in appellate opinions regarding whether trial courts have inherent authority to dismiss a PAGA claim based on “manageability.” The Court determined that although trial courts can utilize several methods to effectively manage PAGA claims, they do not have the authority to dismiss such cases outright if they are deemed to be too intricate or time-consuming.

Read on to learn how this ruling affects PAGA cases and why this is another disappointing outcome for California employers.

What is the Private Attorneys General Act (PAGA)?

The Private Attorneys General Act (“PAGA”) is a plague to employers in California. PAGA allows employees to act as private attorneys general to represent California’s Labor and Workforce Development Agency in seeking civil penalties for alleged violations of the California Labor Code on behalf of all non-exempt employees in California for a minimum time period of one year and 65 days. These penalties are essentially “strict liability,” meaning your intent doesn’t matter, nor does how close you came to compliance—your business was either 100% in compliance or it was not. These crushing penalties are assessed on a per-employee basis per pay period and can add up to hundreds of thousands or even millions of dollars in potential penalties.

History of PAGA Defenses

Historically, employers have had very few tools to defend themselves from these PAGA claims. The California Supreme Court, in another blow to employers, eliminated one of these tools last week in the Estrada v. Royalty Carpet Mills, Inc. decision. PAGA claims are not class action claims and are not subject to the same procedural limitations of class action claims (which require a court to “certify” claims for class treatment). Despite this, some courts have held that representative PAGA claims (claims arising from Labor Code violations arising from employees other than the plaintiff) can only go forward if the plaintiff can show that these claims can be tried in a manageable way.

Manageability is traditionally a class action requirement. Some courts have gone so far as to dismiss representative PAGA claims because the plaintiff was unable to show how s/he could prove all the potential Labor Code violations in a manageable way. Some courts have held that where there is no manageable or feasible way to prove all the alleged Labor Code violations, the court could dismiss the PAGA claims. This provided a potentially helpful line of defense in cases that also could be used as leverage in settlement negotiations and mediations.

Say Goodbye to Manageability Arguments

Manageability arguments are no more! The California Supreme Court in Estrada rejected the argument that courts have inherent authority to strike PAGA claims if the court finds that they cannot be tried in a manageable way. The Court highlighted that PAGA claims are not class claims, and therefore, imposing a manageability requirement that exists for class actions is improper for PAGA claims. Further, because the PAGA statute itself does not contain a manageability requirement, the Court was unwilling to allow employers to rely on one. The Court also found that imposing a manageability requirement on representative PAGA claims would thwart the purposes of the PAGA statute, which is to facilitate the investigation of potential Labor Code violations and recover civil penalties on behalf of the State of California.

As if eliminating the manageability argument wasn’t enough, the California Supreme Court also reiterated its groundbreaking holding in Donohue v. AMN Services, LLC (2021) 11 Cal.5th 58, where it held that employer records that show potential Labor Code violations create a rebuttable presumption that the Labor Code violations did in fact occur. (Medina McKelvey previously held a webinar on Donohue, which we can share on request, where we also talk about the Supreme Court’s mandate that employers treat meal and rest breaks like a health and safety issue).  In other words, instead of the employee having the burden to prove that violations occurred, employers are guilty until proven innocent and must instead prove that violations did not occur, which is an onerous burden to bear.

What Can Employers Do?

Where does this leave employers? While there is no potential silver bullet to get out of representative PAGA claims, the Estrada case does leave open the question of how courts will manage representative PAGA claims. Does an employer need to call every employee to testify whether they took a compliant meal break when the records show that the meal breaks may not have been compliant? Probably not, but trial courts will need to wrestle with how much (or how little) evidence to allow to disprove the PAGA claims. Employers can continue to assert their due process rights to refute PAGA claims brought against them, but they can no longer seek an early exit from representative PAGA claims based on the difficulty in proving each of the Labor Code violations.

PAGA claims were incredibly difficult to defend before Estrada, but they are even harder to defend now. The Estrada case makes compliance efforts even more important, and compliance improvements are one of the only tools employers have left to fight off PAGA claims.

Medina McKelvey has developed a first-of-its-kind streamlined four-step Compliance Plan process that culminates in a wage and hour certification that helps prevent future lawsuits and has been proven to reduce liability in existing litigation, including defending against the PAGA claims that are inevitably coming.

If you would like to explore a Compliance Plan with Medina McKelvey, please contact us at 916-960-2211 or reply to this email.