Please Sit Down: Ninth Circuit Limits Federal Court Standing for Claims Under California’s PAGA

On May 28, 2021, the Ninth Circuit Court of Appeals issued its ruling in Magadia v. Wal-Mart Associates, Inc.,[i] which places new limits on employees’ standing to pursue claims under California’s Private Attorneys General Act of 2004 (“PAGA”) in federal court. The opinion also provides significant guidance on what information must appear on California employee wage statements.

Key aspects of the Ninth Circuit’s ruling are:

• As to federal court standing in PAGA cases, the Ninth Circuit held that, to demonstrate standing to assert such a claim in federal court on behalf of other “aggrieved employees,” a plaintiff must show that he or she personally suffered the alleged violation.[ii]
• As to wage statements, the Court held that California employers are not required to display the rate of pay and hours worked on employee wage statements for overtime adjustment payments retroactively made due to nondiscretionary bonuses earned over multiple prior pay periods.[iii]
• Employers can comply with California law regarding wage statements reflecting final pay by providing a legally-compliant statement either at the time final pay is provided, or at the end of their next regular pay period.[iv]

These holdings are significant and will affect future PAGA litigation and wage statement claims under California Law.

Background

Plaintiff Roderick Magadia, a former Walmart employee, filed a class action lawsuit in California state court against Walmart on behalf of himself and other Walmart employees working in California, alleging that Walmart violated the California Labor Code’s wage statement and meal period requirements. Specifically, Magadia alleged that Walmart: (1) did not pay adequate compensation for missed meal periods, (2) did not provide accurate pay rate information on its wage statements, and (3) failed to furnish the pay-period dates on statements provided with employees’ last paychecks.[v]  Magadia also sought civil penalties for each of these alleged Labor Code violations under PAGA, which authorizes employees who have suffered Labor Code violations to recover civil penalties for the violations on behalf of other “aggrieved employees” and the State of California.[vi]

For his meal period claim, Magadia argued that Walmart had paid employees “meal period premiums”[vii] at the incorrect rate of pay, because it paid employees the hour of pay at their “base” hourly rates, and not the “regular rate of pay” that would account for the bonus payments detailed below.[viii]

For his first wage statement claim, Magadia argued that Walmart failed to properly display an overtime adjustment it included on certain employee wage statements, in violation of the informational requirements for wage statements provided by California Labor Code section 226. Walmart maintained a bonus program in which it would pay quarterly incentive bonuses to high performing employees. Because California law mandates that such bonuses be included as part of employees’ “regular rate of pay” for purposes of calculating overtime pay rates,[ix] Walmart was required to adjust the rate of overtime pay it paid to employees for the preceding quarter, and to retroactively pay the increase in overtime pay for that period caused by the performance bonus. At the end of each quarter, Walmart adjusted overtime rates for employees receiving the bonus, and paid out as a lump sum the increased overtime pay owed to employees as a result of the bonus. Walmart displayed this lump sum payment on employee wage statements under the heading of “OVERTIME/INCT.”  Walmart’s wage statements containing this adjustment displayed only the amount of the adjustment, but did not display the corresponding rate of pay and hours worked for the payment, which Magadia contended violated Labor Code section 226.

For his second wage statement claim, Magadia argued that Walmart failed to display the pay-period dates on statements provided with employees’ last paychecks. Walmart separately provided Magadia and other employees with a final wage statement at the end of the next normal pay period that listed those dates, but Magadia contended that doing so was insufficient because Walmart needed to include that information on statements included with final pay.[xi]

After Magadia filed suit, Walmart removed the case to federal court. There the district court certified a class for each of Magadia’s three claims. Following summary judgement and a bench trial, the district court ruled in favor of Magadia on his two claims for inaccurate wage statements, but found that he did not personally suffer any meal period violations. The district court determined that the latter finding precluded Magadia from asserting a class action claim for meal period violations, but still permitted him to pursue his PAGA claim based on meal period violations allegedly suffered by other Walmart employees. In ruling in favor of Magadia, the district court entered a nearly $102 million judgement against Walmart.[xii]  Walmart appealed the district court’s ruling to the Ninth Circuit Court of Appeals.

Ninth Circuit’s Analysis and Holdings

Standing for PAGA Claims in Federal Court

The Ninth Circuit first addressed whether Magadia had standing under Article III of the federal Constitution to assert his meal period claim under PAGA given that he had not personally suffered the alleged meal period violations. The Court found that Magadia lacked standing to assert his meal period claim; it determined that he needed to have personally suffered the alleged meal period violation to have standing to assert that claim on behalf of other employees.[xiii] The Ninth Circuit first determined that Magadia lacked traditional Article III standing because he did not suffer an “individualized harm.”[xiv]  It next assessed whether Magadia’s PAGA claim fell within the “well-established exception” to that traditional rule that courts have permitted for claims under statutes that permit qui tam actions—actions brought by private parties on behalf of the government. The Ninth Circuit noted that while PAGA is a “type of qui tam action,” in that it permits private parties to assert claims on behalf of the State of California, it is unlike other qui tam statutes that fall within the standing exception because it also permits a plaintiff to assert claims on behalf of other “aggrieved employees.”[xv]  The Court noted that the ability for a PAGA plaintiff to vindicate the rights of other non-party employees, among other characteristic unique to PAGA, means that PAGA does not fall within the standing exception afforded to other qui tam statutes.[xvi]  Because Magadia did not personally suffer harm, and the qui tam exception for Article III standing does not apply to PAGA claims, the Ninth Circuit held that Magadia did not have standing to pursue his PAGA claim for meal period violations in federal court.[xvii]

Clarification of California Wage Statement Requirements

Second, the Ninth Circuit addressed the merits of Magadia’s wage statement claims.[xviii]  The Court first determined that Magadia’s claim that Walmart’s non-inclusion of an applicable rate or hours for the bonus overtime adjustment on employee wage statements did not violate the informational requirements of California Labor Code section 226.[xix]  In coming to this conclusion, the Court looked to the plain language of the statute, which requires that an itemized statement list “all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee.”[xx]  It reasoned that, unlike typical compensation for overtime hours, there was no “hourly rate in effect during the pay period” for the overtime adjustment, because Walmart had to retroactively calculate and make that payment at the end of every quarter “based on the preceding six pay periods of work.”[xxi]  Thus, the Court held that Walmart’s omission of an applicable rate and hours for that payment complied with California law.[xxii]

Finally, The Ninth Circuit turned to the merits of Magadia’s wage statement claim related to final pay. The Court again looked to the language of California Labor Code section 226, which “requires employers to furnish employees ‘semimonthly or at the time of each payment of wages’ with ‘an accurate itemized statement in writing showing … the inclusive dates of the period for which the employee is paid.’”[xxiii]  The Court determined that the use of “or” in this provision means that an employer can provide a departing employee a wage statement for final pay that accurately includes all information mandated by Section 226 either at the time final wages are paid, or at the end of its next regular pay period.[xxiv]  Accordingly, the Ninth Circuit held that Walmart’s omission of the pay-period dates on statements provided with employees’ last paychecks was not a violation of Section 226, because the company later provided departing employees with another wage statement that included such information at the end of its next regular pay period.[xxv]

Takeaways

Magadia will have going forward implications for PAGA actions and wage statement claims under the California Labor Code:

• It will bring the issue of standing into sharper focus in PAGA actions. An early audit of a plaintiff’s pay and time records to assess potential violations becomes even more critical for employers in PAGA actions in federal court—it may reveal prior to or at an early stage of the litigation that the plaintiff did not personally suffer certain alleged violations. This may allow an employer to significantly limit the scope of a PAGA action and perhaps seek early dismissal of any PAGA claims for which the plaintiff lacks standing.
• The standing requirements in Magaia contrast with the standards applied in California state courts, which recently suggested that a PAGA plaintiff subjected to at least one unlawful practice has standing to serve as a PAGA representative in California state courts even if he or she did not personally experience each and every alleged violation.[xxvi]
• California employers required to make retroactive overtime adjustments due to payment of periodic nondiscretionary bonuses are not required under Labor Code section 226 to provide a “rate in effect” for such adjustment payments when detailing them on employee wage statements.
• An employer may satisfy the wage statement requirements of California Labor Code section 226 in the context of final pay by providing a compliant wage statement either at the time final pay is provided, or during its next regular pay period. Further, employers that provide statements both at the time of final pay and the next regular pay period seemingly should not be penalized if only one of those statements meets all the informational requirements of Section 226.
• Magadia addressed a nine-figure judgment flowing from technical wage statement claims. Such claims can create very significant financial exposure for California employers, particularly when PAGA penalties are involved.
• California employers should consider taking a proactive approach by regularly auditing their employment practices and policies with experienced employment counsel to help ensure compliance and avoid future liability.

[i] Magadia v. Wal-Mart Associates, Inc., 999 F.3d 668 (9th Cir. 2021).

[ii] Id. at 678.

[iii] Id. at 680-82.

[iv] Id. at 682.

[v] Id. at 672.

[vi] Id.

[vii] The California Labor Code requires an employer to pay an employee an hour of pay as a meal period premium if the employer prevents the employee from taking a lawful meal period. Cal. Lab. Code, § 226.7, subd. (c).

[viii] Magadia, 999 F.3d at 673.

[ix] See id. at 680-81 (citing Cal. Lab. Code, § 510).

Magadia, 999 F.3d at 673.

[xi] Id.

[xii] Specifically, the district court awarded Magadia $101,947,700 for his three claims: $70,000 in PAGA penalties for the meal period violation claim; $96 million award for the overtime adjustment wage statement claim ($48 million in statutory damages and another $48 million in PAGA penalties); and $5.8 million in PAGA penalties for the final pay wage statement claim. Id.

[xiii] Id. at 678.

[xiv] Id. at 674.

[xv] Id. at 674-78.

[xvi] Id.

[xvii] Id. at 678.

[xviii] Before turning to the merits of Magadia’s wage statement claims, the Ninth Circuit first addressed whether Magadia had standing to assert those claims given the procedural nature of the injury alleged. It determined that he did, and held that an alleged failure to meet the informational requirements of California Labor Code section 226 is sufficient to demonstrate the sort of “concrete harm” required for Article III standing, because wage statements missing or containing an inaccurate statement of such information would prevent employees from adequately assessing whether Wal-Mart’s payments to them were accurate. Magadia, 999 F.3d at 678-80.

[xix] Id. at 682.

[xx] Id. at 680-82.

[xxi] Id.

[xxii] Id. at 682.

[xxiii] Id.

[xxiv] Id.

[xxv] Id.

[xxvi] Kim v. Reins Int’l California, Inc., 9 Cal. 5th 73, 85 (2020).