In Kim v. Reins International California, Inc. (B278642, Cal. Ct. App., December 29, 2017), the Court of Appeal for the Second Appellate District addressed for the first time the question of whether an employee-plaintiff, who had settled and dismissed his individual claims under the Labor Code against his employer, was able to maintain a representative action under the Labor Code Private Attorneys General Act (the “PAGA”) on behalf of other “aggrieved employees”.  The Court held that because of the settlement and dismissal of his individual claims, the employee-plaintiff was no longer an “aggrieved employee” and therefore did not have standing to represent other “aggrieved employees” under the law.

Under the PAGA, an “aggrieved employee” may bring a representative action on behalf of him or herself and other “aggrieved employees” for any violation of the California Labor Code. Cal. Labor Code §§ 2698, et seq.  Since the law was first enacted in 2004, many employers around the state have been on the receiving end of PAGA actions, in which employees can seek substantial civil penalties that were previously only recoverable by the State of California.  PAGA cases have become increasingly favored by plaintiffs’ attorneys for a number of reasons, including the fact that PAGA-claims cannot be compelled into arbitration.

This case involves many common elements familiar to experienced class and representative action litigants in California: Kim, a former employee of Reins International, brought a wage and hour class action alleging various violations of the Labor Code as well as a claim for civil penalties under PAGA for the same underlying violations. Kim had also signed an arbitration agreement when he began working for the company.  Reins International responded to the lawsuit with a common countermeasure: it moved to compel arbitration of Kim’s individual claims, dismiss the class claims, and stay the PAGA cause of action until the arbitration was complete.  The trial court granted the motion to compel arbitration, reserved the issue of class arbitrability for the arbitrator, and stayed the cause of action under PAGA.

While the case proceeded in arbitration, the parties reached a settlement of Kim’s individual claims.  Pursuant to the settlement, Kim dismissed his individual claims with prejudice and the class claims without prejudice, leaving only the PAGA cause of action.  As a result, the trial court lifted the stay and the parties proceeded to litigate the PAGA claim back in Superior Court.

Following the lifting of the stay, Reins International filed a motion for summary adjudication of the PAGA cause of action in its favor on the grounds that following the settlement and dismissal of all of his individual claims against his employer, Kim was no longer an “aggrieved employee” and therefore could not maintain the PAGA cause of action. The trial court agreed and dismissed the PAGA cause of action.

The Court of Appeal upheld the trial court’s decision, holding that “where an employee has brought both individuals claims and a PAGA claim in a single lawsuit, and then settles and dismisses the individual employment causes of action with prejudice, the employee is no longer an ‘aggrieved employee’ as that term is defined in the PAGA, and therefore that particular plaintiff no longer maintains standing under PAGA.”

The Court was not swayed by Kim’s arguments that the PAGA claim should have been unaffected by his individual settlement in that it did not release the rights and potential claims of other individual employees nor the State of California, in whose stead Kim was seeking civil penalties. In fact, the Court noted that it agreed with Kim’s arguments that his individual settlement did not impair the ability of the State of California nor another employee from pursuing the same claims individually or in a representative capacity under PAGA; nonetheless, his ability to do so ended the moment he settled and dismissed all his individual claims against Reins International.

The Court stated that its holding is confined to the specific circumstances in the case – involving the voluntary settlement and dismissal of individual claims in arbitration – and declined to opine on what effect an adverse determination in arbitration would have on PAGA standing generally. Nonetheless, the Court’s in-depth application of the standing doctrine to PAGA actions – where previously the California Supreme Court has only made surface-level references – has potentially far reaching implications in cases where employees are seeking PAGA penalties for alleged Labor Code violations that they cannot establish they have suffered individually, in cases where the employee litigates and loses in arbitration, and in cases where they have resolved their individual disputes in private settlements.  These issues and others will undoubtedly be tackled by the Courts of Appeal and the California Supreme Court as they continue to interpret and mold the PAGA.