OVERVIEW

In September 2017, the First Appellate District of the California Court of Appeal rocked the status quo with a brutal holding for employers.

The case, Lopez v. Friant & Associates, LLC, involved the commonplace claim of failure to provide wage statements required by law. The Court of Appeal held that an employer who issues deficient wage statements is subject to liability for civil penalties under the Private Attorneys General Act of 2004 (“PAGA”), regardless of whether the deficiency was “knowing and intentional” and irrespective of whether the employee suffered any actual injury.

Here’s what you need to know about what this holding means for employers and what steps employers should take towards compliance in the immediate future.

BACKGROUND

On April 1, 2015, Lopez filed a complaint against his employer, alleging that his employer violated California Labor Code Section 226(a) in failing to state the last four digits of Lopez’s social security number or employee identification number on his paystubs.

Labor Code Section 226(a) requires employers to provide employees with an accurate, itemized wage statement that includes nine particular pieces of information. Where an employee “suffer[s] injury” due to his/her employer’s “knowing and intentional failure” to comply with Labor Code Section 226(a), the employee may recover actual damages under Labor Code Section 226(e). Pursuant to Labor Code Section 226(e), an employee’s recovery is limited to the greater of all actual damages or fifty dollars ($50) for the initial pay period in which a violation occurs and one hundred dollars ($100) per employee for each violation in a subsequent pay period, not to exceed four thousand dollars ($4,000). An aggrieved employee is also entitled to costs and reasonable attorney’s fees. Moreover, under Labor Code Section 226.3, an employer who violates Labor Code Section 226(a) is subject to a civil penalty.

Instead of seeking damages under Labor Code Section 226(e), however, Lopez brought his action for civil penalties under PAGA – a means by which an individual can bring an action against an employer to collect civil penalties (and recover attorney’s fees) on behalf of the State for not just the named individual, but all other current and former employees who are similarly aggrieved, without satisfying class action procedural requirements.

The trial court concluded that Lopez had to have shown not only a violation of Section 226(a) to obtain civil penalties under PAGA, but also that the violation was “knowing and intentional.” Determining that Lopez’s employer had no awareness of paystub omissions, the trial court dismissed Lopez’s complaint on summary judgment.  Lopez appealed the trial court’s decision.

WHAT HAPPENED ON APPEAL?

On appeal, Lopez’s employer argued that because Lopez could not show that his alleged wage statement omissions were “knowing and intentional,” as would be required to recover statutory penalties under Labor Code Section 226, his PAGA action for civil penalties based on the same alleged error must fail. The First Appellate District Court disagreed.

Reversing the trial court’s decision, the Court of Appeal found that Lopez was not required to show either a “knowing and intentional” violation or even an injury to prevail on his PAGA claim. The Court reasoned that the prerequisite of injury to the employee as a result of an employer’s knowing and intentional failure to comply with Section 226(a) applies only to an action for statutory damages under Section 226(e), not to an action for civil penalties sought pursuant to PAGA.  In reaching this decision, the Court explored both legislative intent and history, highlighting that PAGA was designed to enfranchise private citizens with the means to enforce the Labor Code.

WHAT DOES THIS HOLDING MEAN FOR EMPLOYERS?

Lopez does not take a position on whether plaintiffs bringing paystub-based PAGA actions recover the default PAGA penalty and/or the civil penalty for paystub violations provided by Labor Code Section 226.3. In either case, employers face significant financial exposure for technically deficient paystubs regardless of harm suffered by employees.

Under PAGA, the default civil penalty for an employer’s initial violation is one hundred dollars ($100) per employee per pay period, and two hundred dollars ($200) per pay period for any subsequent violations (though PAGA plaintiffs are required to remit 75% of recovered penalties to the Labor and Workforce Development Agency). While courts have the discretion to reduce civil penalties under certain circumstances, there is no requirement to do so, which could mean a devastating financial impact on an employer sued under PAGA for violation of Labor Code Section 226.

Under Labor Code Section 226.3, an employer who violates Labor Code Section 226(a) is subject to a civil penalty in the amount of two hundred fifty dollars ($250) per employee per violation in the first instance and one thousand dollars ($1,000) per employee for each subsequent violation. In tension with the Lopez holding, Section 226.3 provides that the Labor Commissioner may take into consideration whether an employer’s violation was inadvertent, and in his or her discretion, may decide not to penalize an employer for a first violation when that violation was due to a clerical error or inadvertent mistake.

Given the current climate, employers should take IMMEDIATE steps to verify that all itemized wage statements are in compliance with Section 226(a). Those who use outside payroll service providers must not assume that those companies are issuing compliant paystubs.