Public Entities Not Liable for PAGA Penalties

The Private Attorneys' General Act (PAGA) is continuing to make news as a decision from the California Supreme Court - amongst other holdings - determined that the Legislature's overall PAGA design exempted public entities from its enforcement (Stone v. Alameda Health System, S279137 (Aug. 15, 2024)).

This comes on the heels of a flurry of previous PAGA-related court activity and a major legislative reform package.

The PAGA's primary design allows aggrieved employees to recover civil penalties from employers for Labor Code violations. However, a common California Labor Code principle is that if a Labor Code section does not expressly apply to public entities, then public entities are exempt from its rule. This principle has never been applied to a PAGA action until now.

Alameda County, like all California counties, has a duty under the law to provide medical services for its indigent populations. After a period of managing this duty itself, the Alameda County Board of Supervisors asked the California Legislature for permission to create a separate public entity to perform this duty. The Legislature agreed, and the Alameda Health System (AHS) was created as a "separate public agency" for this purpose.

Tamelin Stone and Amanda Kunwar worked at Highland Hospital, an AHS-run facility. They brought suit against AHS for several Labor Code violations and a representative PAGA action on behalf of themselves and other aggrieved AHS employees. The trial court dismissed the individual Labor Code claims because the AHS was a public entity and not expressly subject to those claims. The trial court also dismissed the PAGA action because the AHS, as a public entity, is not defined as a "person" subject to PAGA penalties. On appeal, the Court of Appeal reversed several trial court rulings including that certain PAGA actions will apply to public entities.

On appeal to the California Supreme Court, a primary issue was whether public entities can be subject to PAGA penalties. Complicating the issue are the two types of penalties described in the PAGA - default and nondefault. Default penalties are the statutory penalties found within PAGA itself and apply when an underlying Labor Code violation does not have its own penalty (e.g., Labor Code section 2802 expense reimbursement claims). Conversely, nondefault penalties are those penalties where the underlying Labor Code violation does have its own penalty provision (e.g., Labor Code section 226 pertaining to wage statements).

On review of the PAGA statute, it is clear that default penalties do not apply to public entities because public entities are not part of the definition of "person" who can be liable for default PAGA penalties. However, the same statute is silent on which employers are liable for the nondefault penalties contained in the underlying Labor Code sections. Reviewing the legislative drafting history and language choice throughout the statute, the California Supreme Court determined that it is much more likely that the Legislature intended to exempt public entities from either set of penalties under the PAGA and to attribute it's silence in this section to liability for nondefault penalties would be inconsistent with the rest of the statute's language.

Of course, this is a huge win for public entities as they don't have to worry about the PAGA at all. Unfortunately, private entities don't have this luxury and do need to ensure its procedures comply with the law to avoid PAGA claims. The good news is that private entities got a huge win earlier this year with the aforementioned PAGA reform.

Under PAGA reform, private employers have many new benefits to limit PAGA liability, including the ability to drastically limit their exposure to PAGA penalties by taking "reasonable steps" to avoid or correct Labor Code violations. The beauty of this reform is that even after receiving a notice of violations, employers may still take specific "reasonable steps" related to the alleged violations to limit penalties. "Reasonable steps" may include:

• Payroll audits;
• Implementation and dissemination of lawful policies related to labor code issues, such as, meal and rest breaks, overtime and timely payment of wages; and
• Supervisor training and discipline for failure to follow policies or procedures.

Take advantage of CalChamber's PAGA Wage and Hour Compliance toolkit to help execute reasonable steps and take full advantage of all the new employer-friendly changes to PAGA.

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