Private Attorneys General Act is another burden to California small businesses

Original Article:

  • Author: Michael Saltsman

  • Publication Date: June 2017

  • Newspaper: Orange County Register

  • Topics: Paid Sick Leave

No one questions the necessity of basic workplace protections that keep employees safe. But what happens when minor compliance or technical errors, like a missed lunch break or misclassified information on a paystub, become multi-million dollar liabilities for small employers?

Such is the status quo under California’s Private Attorneys General Act, known colloquially as the “sue your boss” law. PAGA allows employees to sue their employer for such minor labor violations — even if they are not the aggrieved party. Passed in 2004 to increase labor enforcement by deputizing employees, the law can leave businesses with six-figure penalties (and seven- or eight-figure liabilities) for retroactive violations that didn’t meaningfully affect employment.

The law requires that three-quarters of penalty payouts go to the state and one-quarter to plaintiffs — but the lawyers’ cut is the real story. Because employers must cover attorney fees, PAGA has become a dream for plaintiffs’ attorneys. A 2013 PAGA lawsuit against Goodyear Tire for allegedly failing to issue wage statements that included the last four digits of employees’ social security or employee ID numbers is representative. The attorneys walked away with $105,000 in fees. The plaintiff? Just $1,000.

Led by “bounty hunter” attorneys, the state receives more than 6,000 PAGA notices to initiate a PAGA lawsuit every year. Claims increased by more than 400 percent between 2005 and 2013. While the list of frivolous PAGA lawsuits is long, among the most ridiculous is a recent suit against Timely Prefinished Steel Door Frames in the San Fernando Valley.

The company was targeted by a disgruntled employee, who claimed it had not provided a lunch break at the appropriate time and had misclassified a safety bonus. The backstory here is instructive. Employees at Timely start their shift at different times, but most prefer to take a common lunch break to share a meal with family members and friends. Put differently, the lunch break “violation” was a consequence of employees’ free choice.

The lunch break lawsuit could cost the company over $1 million dollars, threatening the survival of the business and its 200 employees, many who have worked there for decades. Timely employees took the extraordinary step of launching a letter-writing campaign to California’s Department of Industrial Relations to defend their workplace. Among the dozens of unique letters — many handwritten in Spanish — employees highlighted the job perks and flexibility, and argued that an employer shouldn’t be sued over when an employee freely chooses to take their lunch hour.

The consequences for the employees from the PAGA suit are already being felt. Company president Tom Manzo was forced to eliminate safety bonuses, on which many of his employees depend. He was also forced to become much stricter about lunch breaks, ending the flexibility his employees previously enjoyed to take breaks when it best suited them. As the costs of the complaint grow, he may also be forced to lay off some of his employees.

Timely isn’t the only Valley employer under pressure. In a story profiled by the San Fernando Valley Business Journal, Town & Country Event Rentals was forced to settle a potential $29 million lawsuit for missed lunchbreaks. Whether lunchbreaks were actually missed was beside the point; as the owner told the Business Journal, “I’ve been in business for 35 years, and I’ve never had one person complain to me that they didn’t get their lunch … .” Because the owner hadn’t documented these lunch breaks, two disgruntled former employees were able to sue the company under PAGA. Town & Country settled for $1.2 million, the lion’s share of which went to the state and the attorneys.

In 2015, Gov. Jerry Brown signed a PAGA amendment in an effort to reduce frivolous litigation, but the reforms don’t go far enough. Some employers are fighting back: Manzo is working with lawmakers on a more-meaningful set of reforms, and organizing fellow small business owners to educate the public on the abuse of the law. He’s launched a website called California’s reputation as a business-unfriendly state is well-earned; perhaps PAGA abuse will be the galvanizing event that motivates small business to fight back.

Michael Saltsman is managing director at the Employment Policies Institute.