Ninth Circuit Decision Provides Potential Defense Strategy for Employers Facing PAGA Suits

Overview 

Recently, the Ninth Circuit Court of Appeals reversed a nearly $102 million judgment against Walmart in Magadia v. Wal-Mart Associates, Inc., No. 19-16184, holding that:

1. Employees lack standing to bring a claim under California's Private Attorneys General Act (PAGA) for labor code violations that they themselves did not suffer.
2. California's wage-statement law does not require employers to list a corresponding hourly rate when making a lump sum overtime adjustment payment.

The Ninth Circuit's decision represents a significant victory for Walmart and is one employers litigating wage-and-hour class and representative actions should be mindful of.

Case Background

In January 2017, Roderick Magadia, the named plaintiff and former Walmart employee, filed a putative class action suit against Walmart in state court, alleging that:

1. Walmart did not provide adequate pay rate information on its wage statements in violation of Labor Code § 226(a)(9).
2. Walmart failed to furnish the pay period start and end dates with his last paycheck in violation of Labor Code § 226(a)(6).
3. Walmart failed to pay adequate compensation for missed meal breaks in violation of Labor Code § 226.7.

Magadia also sought penalties for all three claims under the PAGA, which authorizes aggrieved employees to recover penalties for labor code violations on behalf of themselves and other current or former employees.

After Walmart removed the case to federal court, the district court certified a class for each of Magadia's three claims. After summary judgment and a bench trial, the district court ruled for Magadia on his two wage-statement claims, but found that Magadia did not establish that he personally suffered any meal-break violation; as a result, the district court decertified the class based on that claim. Even so, the district court permitted Magadia to recover PAGA penalties on that claim because Magadia had established that other Walmart employees had sustained meal-break violations. The district court then ruled against Walmart on the three claims and awarded Magadia nearly $102 million in damages and penalties. Walmart appealed.

The Ninth Circuit's Decision

Employees Lack Article III Standing to Bring a PAGA Claim for Labor Code Violations They Did Not Suffer Themselves

On appeal, the Ninth Circuit first addressed whether Magadia had Article III standing to bring a PAGA claim for the meal-break violations given the district court's finding that he did not suffer a meal-break injury himself. To have standing, a plaintiff must show, among other things, that he suffered an "injury in fact." To show an injury in fact, the plaintiff "must show that he or she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical."

Magadia argued that because the PAGA is a qui tam statute (i.e., a statute which permits private plaintiffs, known as relators, to sue in the government's name for the violation of a public right), he had standing to pursue a PAGA claim irrespective of whether he suffered a meal-break injury himself. The panel disagreed, reasoning that while the PAGA has several features consistent with traditional qui tam actions, it also has many that are not. Listing the features the PAGA has in common with qui tam statutes, the panel noted that the PAGA:

• Operates as an assignment from California to a relator-type plaintiff in that a PAGA plaintiff serves as a "proxy or agent" of the state's labor law enforcement agencies and represents the same legal right and interest as those agencies.
• Requires private-party plaintiffs to share a monetary judgment with the government, with the government receiving the lion's share (75%).
• Permits the government to dictate whether a private plaintiff may bring a claim in the first place (by mandating that a putative PAGA plaintiff give written notice of the alleged labor code violation(s) to the California Labor and Workforce Development Agency (LWDA) and wait for the LWDA to either provide notice that it does not intend to investigate the alleged violation in the plaintiff's notice or not respond at all before he/she can initiate suit).

As far as the significant respects in which the PAGA differs from traditional qui tam statutes, the panel explained that:

1. The PAGA explicitly involves the interests of others besides California and the plaintiff-employee (i.e., nonparty aggrieved employees).
2. The PAGA requires that a portion of the penalty goes not only to the citizen bringing the suit, but to all employees affected by the labor code violation(s).
3. A judgment under the PAGA binds California, the plaintiff and the nonparty employees from seeking additional penalties under the statute.

This last feature, the panel explained, is atypical for qui tam statutes and conflicts both with qui tam's underlying assignment theory — that the real interest is the government's, which the government assigns to a private citizen to prosecute on its behalf — as well as with Article III's core principle that each plaintiff "must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." The panel also noted that unlike a traditional qui tam action, which acts only as a partial assignment of the government's claim, conferring on the government the ability to take complete control of the case if it wishes, the PAGA represents a permanent, full assignment of California's interest to the aggrieved employee. In other words, once California elects not to issue a citation, the State has no authority under the PAGA to intervene in a case brought by an aggrieved employee. The PAGA thus lacks the "procedural controls" necessary to ensure that California — not the aggrieved employee (the named party in PAGA suits) — retains "substantial authority" over the case.

Because the PAGA's features depart from the traditional criteria of qui tam statutes, the panel explained, Magadia could not rely on the PAGA's qui tam label to show that he had standing to bring a PAGA claim for Walmart's alleged meal-break violations since he himself did not suffer a meal-break violation. As a result, the Ninth Circuit remanded this claim to the district court with instructions to return it to state court.

California's Wage-Statement Law Does Not Require Employers to List a Corresponding Hourly Rate When Making an Overtime Adjustment Payment

Magadia's wage-statement claim was based on quarterly "MyShare" bonuses Walmart awarded to high-performing employees. Besides the bonus itself, California law requires Walmart to adjust the rate of overtime pay it awards employees to account for these bonuses.¹  That's because California considers an employee's nondiscretionary bonus, and other incentives, to be part of the employee's regular rate of pay when calculating overtime rates. Thus, if a Walmart employee receives a MyShare bonus and worked overtime during that quarter, the employee must receive adjusted overtime pay because of that MyShare bonus. That adjusted overtime pay appears as a lump sum on the wage statement issued at the end of the quarter.

Section 226 of the California Labor Code requires an itemized wage statement with "all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee." Cal. Lab. Code § 226(a)(9). The district court held that Walmart's wage statements did not comply with Section 226(a)(9) because they did not include the hourly rates and hours worked associated with the adjusted overtime pay.

The Ninth Circuit held that the district court erred in reaching this result. Walmart did not violate the wage-statement law, the panel explained, because there was no "hourly rate in effect during the pay period" for the adjusted overtime pay. Walmart awarded the MyShare bonus at the end of quarter (encompassing six pay periods) based on performance, sales, profits and store standards from that entire quarter. Walmart then made an after-the-fact adjustment to overtime pay by retroactively calculating the difference between the employees' overtime pay rate over the quarter and the employees’ overtime rate as if the bonus had been paid as part of the base rate of pay. After calculating the required overtime pay adjustment, Walmart reported both the bonus and the adjusted overtime pay as lump sums on the wage statements at the end of the quarter. "Under these facts, the MyShare overtime adjustment is no ordinary overtime pay with a corresponding hourly rate," the panel held. "It is a non-discretionary, after-the-fact adjustment to compensation based on the overtime hours worked and the average of overtime rates over a quarter (or six pay periods)."

Citing two recent unpublished California state court decisions – Morales v. Bridgestone Retail Operations, LLC, No. G057043, 2020 WL 1164120 (Cal. Ct. App. Mar. 11, 2020) and Canales v. Wells Fargo Bank, N.A., 23 Cal. App. 5th 1216 (2018) – the panel explained that the supposed "hourly rate" for the adjusted overtime pay "is a fictional hourly rate calculated after the pay period closes in order to comply with the Labor Code section on overtime"; "it appears as part of the calculation for an overtime bonus and then disappears, never to be seen again. Morales, 2020 WL 1164120, at *1. The panel added, "[A]s a result, we do not consider the calculation to be an 'hourly rate in effect during the pay period,'" as required under Section 226(a)(9) of the California Labor Code. In so holding, the panel focused on the term "in effect" in the statute, which is defined as "the state or fact of being operative or in force," as well as the term "during," which means "throughout the whole continuance of," or "in the time of." To be "in effect during the pay period," the panel explained, "the hourly rate must have been 'operative' or 'in force' 'throughout the whole continuance of' or 'in the time of' the pay period in the wage statement." "It does not apply to an artificial, after-the-fact rate calculated based on overtime hours and rates from preceding pay periods that did not even exist during the time of the pay period covered by the wage statement.”

In so holding, the Ninth Circuit reversed the judgment and award of damages on Magadia's wage-statement claims and remanded with instructions to enter judgment for Walmart. 

Takeaways for Employers

The Ninth Circuit's decision substantially restricts the scope of PAGA claims in federal courts, increasing the incentive for employers to remove PAGA claims to federal court when removal is a viable option, just like Walmart did in response to Magadia’s lawsuit. It remains to be seen how the Ninth Circuit’s decision shapes PAGA cases in California state courts, since unlike in federal court, in California state courts, employees may bring suits under the PAGA for labor code violations not personally affecting them, as long as other employees experienced those violations, making it much easier for employees to maintain PAGA actions in state court. See Huff v. Securitas Security Services USA, Inc., 23 Cal. App. 5th 745 (2018). The Ninth Circuit did not address the Huff case. In addition, employers with similar bonus schemes to Walmart can rely on the Ninth Circuit's decision when defending claims that they've violated California's wage-statement law by failing to list the hourly rate or hours worked when making a lump sum overtime adjustment payment.

Employers should consult with legal counsel to ensure their wage-and-hour practices and policies are compliant.