Kim v. Reins: Another PAGA Wrench Thrown Into the Settlement Finish Line for Employers

On March 12, 2020, the California Supreme Court issued its highly anticipated decision in Kim v. Reins. The Court held that an employee does not lose standing to pursue a claim under the Private Attorneys General Act of 2004 (PAGA) if the employee settles and dismisses his or her individual claims for the underlying Labor Code violations.

In light of this decision, employers should consult with their attorneys to discuss their options in dealing with severance and settlement agreements. At a minimum, it may be more difficult for an employer to avoid PAGA penalties after settling individual Labor Code claims with an employee. Prior standard settlement language used by employers may no longer be sufficient and should now be reassessed by employment counsel.

Factual Background

Plaintiff Justin Kim worked as a training manager for a restaurant operating company, Reins International California, Inc. After his employment ended, Kim sued Reins, alleging several wage and hour claims. Kim claimed that Reins misclassified Kim and other training managers as exempt employees, and asserted causes of action for unpaid wages, unpaid overtime, meal and rest break violations, wage statement violations, waiting time penalties, and unfair competition. Last but not least, Kim sought civil penalties under PAGA based on these alleged Labor Code violations.

Based on industry-standard pre-hire agreements, Reins moved to compel arbitration of Kim’s individual claims and to dismiss his class claims. The trial court granted both motions, and also stayed the PAGA claim pending resolution of the arbitration. Reins and Kim settled Kim’s “individual claims.” Their settlement agreement did not address Kim’s PAGA claim.

After the parties settled Kim’s individual claims, Reins moved for summary adjudication on the remaining PAGA action. Reins argued that because Kim had settled the underlying individual claims, he was no longer an “aggrieved employee” qualified to maintain the PAGA claim.ⁱ The trial court granted Reins’ motion for summary adjudication, and the Court of Appeal affirmed. Kim then appealed to the California Supreme Court.

The Supreme Court’s “Reins” In PAGA Dismissals

The California Supreme Court reversed, holding that an employee does not lose his or her status as an “aggrieved employee” under PAGA if he or she settles the underlying Labor Code claims. In reaching this conclusion, the Court dedicated the majority of its opinion to an analysis of the statutory language and legislative history of PAGA.

The Court largely focused on PAGA’s statutory definition of “aggrieved employee”: “any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed.”ⁱⁱ Looking at the plain language of the statute through a very narrow lens, the Court noted that “[b]oth requirements derive from readily ascertainable facts, and both are satisfied here.”ⁱⁱⁱ According to the Court, an individual’s status as an “aggrieved employee” is not defined by injury, but by whether a Labor Code violation occurred. If the individual settles the underlying Labor Code claim and accepts compensation for the injury, the injury may have been absolved, but the violation still occurred. According to the Court, the violation is what matters for PAGA standing.

The Court also considered the statutory purpose of PAGA and explained a critical difference between a PAGA representative action and a traditional class action. While in a class action, the named plaintiff only possesses his or her own individual claims, the same does not hold true in a PAGA claim. Because PAGA plaintiffs bring cases on behalf of the state, there is no “individual component” to a PAGA claim.^iv The Supreme Court also held that equating “aggrieved employee” with someone with an unredressed injury was at odds with the broader statutory scheme of which PAGA is a part. The Court pointed out numerous examples in which PAGA standing was entirely separate from individual standing, and found that linking those two would hinder the enforcement mechanism PAGA was enacted to promote.

Finally, the Supreme Court rejected the argument that claim preclusion and retraxit barred Kim from maintaining the PAGA claim. Claim preclusion applies when a second lawsuit involves the same cause of action between the same parties, after a final judgment on the merits in the first lawsuit. Retraxit refers to the specific application of claim preclusion to a claim that was dismissed with prejudice, like Kim’s individual Labor Code claims. The Court found this argument unpersuasive for two reasons. First, the settlement agreement between Kim and Reins specifically excluded the pending PAGA claim. Second, the PAGA claim was contained within the same lawsuit as the individual claims, and therefore was not part of a second lawsuit as required to show claim preclusion.

Takeaways

The California Supreme Court dealt another blow to employers through this decision. The Court gave broad effect to PAGA, amplifying its role in enforcement of alleged violations of the Labor Code. The Court rejected Reins’ approach of settling the employee’s individual Labor Code claims (in arbitration) and then moving to dismiss the PAGA claim in the related litigation. Still, unlike in Reins, employers may settle with PAGA plaintiffs for their individual PAGA claim (subject to court approval). It remains to be seen whether an employee properly may bring a PAGA action after expressly releasing a PAGA claim in an employment-related agreement, e.g., a separation agreement. Future litigation will test these questions.

Now more than ever, employers should consult with their attorneys on options for potentially extinguishing PAGA claims via severance and settlement agreements.

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ⁱ Lab. Code, § 2699, subd. (c).

ⁱⁱ Lab. Code, § 2699, subd. (c).

ⁱⁱⁱ Kim v. Reins Intern’l (2020) Case No. S246911, Op. at p. 6.

^iv Kim v. Reins Intern’l (2020) Case No. S246911, Op. at p. 6.