June 2, 2021

Ninth Circuit Restricts Scope of PAGA Claims in Federal Court and Clarifies California Wage Statement Requirements

On May 28, 2021, the Ninth Circuit Court of Appeals handed Walmart a groundbreaking win in a wage-and-hour class and California Labor Code Private Attorneys General Act (“PAGA”) action.  Reversing a nearly $102 million verdict against Walmart, the Ninth Circuit held in Magadia v. Wal-Mart Associates, Inc., No. 19-16184, (1) that an employee does not have standing to bring a PAGA claim in federal court for a Labor Code violation that he or she did not suffer personally, and (2) that employers may true up overtime rates later affected by bonus or incentive payments by making lump sum payments on wage statements without specifying a corresponding hourly rate.

The Facts

Plaintiff Roderick Magadia brought a class and representative PAGA action against Walmart alleging that Walmart did not provide accurate pay rate information on its wage statements, failed to furnish the pay-period dates with his last paycheck, and did not pay adequate compensation for missed meal breaks.

Walmart removed the case to federal court, and the district court certified a class for each of Magadia’s three claims.  After summary judgment and a bench trial, the district court ruled in favor of Magadia on his two wage-statement claims, but found that Magadia did not suffer any meal-break violations.  Though this finding doomed Magadia’s ability to assert a class claim for meal-break violations, the court still allowed Magadia to pursue his PAGA claim based on meal-break violations allegedly incurred by other Walmart employees. 

The district court ultimately awarded Magadia nearly $102 million for the three claims: $96 million for the adjusted-overtime-rate claim, $5.8 million in PAGA penalties for the final-wage-statement claim, and $70,000 in PAGA penalties for the meal-break claim. 

The Ninth Circuit’s Decision

Walmart appealed.  On appeal, the Ninth Circuit addressed two fundamental questions.  First, did Magadia have standing under Article III of the United States Constitution to pursue a PAGA claim for alleged meal-break violations that he never suffered personally?  Second, did Walmart violate California Labor Code section 226(a) by making overtime adjustment payments in lump sums without listing a corresponding hourly rate?  The court answered “no” to both questions.

An Employee Does Not Have Constitutional Standing to Pursue a PAGA Claim in Federal Court for Labor Code Violations He or She Did Not Suffer

To maintain a cause of action in federal court, a plaintiff must have “standing” under Article III of the United States Constitution.  To have standing, a plaintiff must show, among other things, an “injury in fact.”  That is, 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.” 

Though the district court found that Magadia had not suffered a meal-break injury himself, which would normally preclude a finding of “injury in fact,” Magadia argued that he could satisfy the “injury in fact” element because PAGA is a qui tam statute.  A qui tam statute allows a private plaintiff to sue in the government’s name for the violation of a public right.  The private plaintiff need not have suffered an individualized injury to establish Article III standing because he or she is deemed the assignee of the government’s injury.

The Ninth Circuit rejected Magadia’s plea.  Even though the California Supreme Court has long treated PAGA as “a type of qui tam action,” the Ninth Circuit held that PAGA is too different from a traditional qui tam action to benefit from the exception to the Constitution’s “injury in fact” requirement.  First, unlike a traditional qui tam action, PAGA implicates the interests of nonparty aggrieved employees.  Second, PAGA represents a permanent, full assignment of California’s interest to the aggrieved employee, unlike traditional qui tam actions which represent only a partial assignment of the state’s interest.

Because Magadia could not take advantage of the qui tam exception, he lacked standing under Article III to bring a PAGA claim based on alleged meal-break violations.  Accordingly, the court remanded this claim back to state court. 

Labor Code Section 226 Does Not Require Employers to List a Corresponding Hourly Rate When Making an Overtime Adjustment Payment

Many employers (including Walmart) pay overtime based on whatever regular rate is calculable as of the end of the pay period; and then later—after a bonus or incentive payment has been calculated and paid that requires an adjustment to the calculation of the regular rate for overtime hours worked during a past period—the employer calculates that difference and makes a lump sum payment on a later wage statement for the additional amount.  The district court found that this type of true-up payment structure violated the Labor Code’s wage-statement requirements because the wage statements reflecting the adjustment payments did not list all applicable hourly rates and an employee would not be able to determine those rates through the application of simple math.

The Ninth Circuit disagreed, and reversed the district court.  The court concluded “the wage statement law did not require Walmart to list the ‘rate’ of the overtime adjustment on employees’ wage statements,” because the “overtime adjustment is no ordinary overtime pay with a corresponding hourly rate.  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).” 

What Employers Should Know

Since the California Court of Appeal’s decision in Huff v. Securitas Security Services USA, Inc., 23 Cal. App. 5th 745 (2018), a PAGA plaintiff has had license to pursue penalties for alleged Labor Code violations affecting other employers, even if she did not suffer those violations herself (so long as she has suffered a Labor Code violation).  With the Ninth Circuit’s decision in Magadia, the Huff decision’s expansive grant of authority to PAGA plaintiffs is now inapplicable in federal court.  This holding substantially restricts the scope of PAGA claims in federal court, and increases the incentive for defendant-employers to find ways to remove PAGA claims brought in state court to federal court. 

The Ninth Circuit’s decision regarding Walmart’s overtime adjustment payment structure is the first published appellate court decision to address this issue under California law.  While there are two California Court of Appeal decisions that have reached the same conclusion as the Ninth Circuit in Magadia (both of which the Ninth Circuit cites in Magadia), they are unpublished.  The Magadia decision accordingly represents the strongest authority to date, and provides solid support for the idea that employers are not required to list corresponding hourly rates when making a lump sum overtime adjustment payment.  

Disclaimer: Please contact your Payne & Fears attorney for current guidance on the subject matter of this article.