California’s Private Attorneys General Act (PAGA) allows aggrieved employees to file lawsuits to recover civil penalties on behalf of themselves, other employees and the state of California for Labor Code violations.

Private employers are well aware of the substantial increase in PAGA litigation that cost businesses across California billions of dollars. But can aggrieved employees sue their public employers?

In a recent PAGA-related case, a hospital authority, which was created by the Alameda County Board of Supervisors and authorized by the Legislature to manage the county’s public health facilities, was sued for wage and hour violations. In the case, the court examined whether the hospital authority, as a public entity, may be held liable for such violations, like Labor Code provisions governing meal and rest breaks, related statutes on the full and timely payment of wages, and civil penalties under the PAGA — just like private entities are.

The California Supreme Court held that public entity employers — including special districts — are not subject to PAGA lawsuits for most civil penalty claims (Stone v. Alameda Health System, No. S279137 (August 15, 2024)). Nevertheless, the case serves as an important reminder that private-sector employers are subject to the PAGA, the rules governing which have recently changed.

Alleging Multiple Labor Code Violations

In the Stone case, Alameda County established the Alameda Health Systems (AHS) as a “separate public agency” under California Health and Safety Code Section 101850 to provide health services. As a “hospital authority,” it was essentially a government entity separate and apart from the county.

At Highland Hospital, an AHS-operated facility, Tamelin Stone was a medical assistant, and Amanda Kunwar was a licensed vocational nurse. In March 2021, Stone and Kunwar filed a class and PAGA representative action in superior court alleging their positions were subject to requirements of the Labor Code and Industrial Wage Commission (IWC) wage orders, in particular Wage Order No. 5-2001.

Their complaint alleged that the AHS frequently denied or discouraged employees from taking meal and rest breaks and “automatically deducted ½ hour from each workday” even when meal periods were not taken — claims that employees have similarly alleged against private employers across the state in recent years.

In all, the plaintiffs’ complaint asserted both class action claims and a claim for civil penalties under the PAGA, for the alleged failure to:

Provide off-duty meal periods;
Provide off-duty rest breaks;
Keep accurate payroll records;
Provide accurate itemized wage statements;
Lawfully pay wages; and
Timely pay wages.

Are Public Employers Subject to Labor Code Violations?

Relying in part on well-established case law, the AHS sought to dismiss the complaint on the ground that it was a public entity not subject to the Labor Code violations asserted.

The trial court agreed, dismissing the complaint’s wage and hour claims. It also dismissed the PAGA claim based on the argument that, as a public agency, the AHS was not an “employer” subject to the PAGA. Notably, the trial court held that PAGA damages are akin to punitive damages, which cannot be awarded against public agencies since they are not “persons” as defined under the law.

After the plaintiffs appealed, the court of appeal ruled they could pursue their claims regarding AHS’s failure to provide off-duty meal periods and rest breaks, and failure to keep accurate payroll records, because they determined that AHS is not a governmental entity exempt from liability. The court reasoned that subjecting the AHS to such liability “would not infringe upon any sovereign governmental powers.” Therefore, since the AHS failed to show any principled distinction between the powers it wielded and those that might be wielded by a private institution delegated a government function, it is not excluded from the Labor Code provisions regarding failure to provide breaks and keep accurate payroll records.

However, the court made an interesting distinction related to the claim that the AHS failed to provide accurate, itemized wage statements. Because the AHS is a “governmental entity” within the meaning of Labor Code section 226, which governs wage statements, the plaintiffs could not pursue this particular wage statement claim.

Finally, in a pivotal finding, the court of appeal held that PAGA remedies could be available against a public entity where the underlying law specifies the amount of the “civil penalty” — meaning the plaintiffs would be able to pursue PAGA remedies for at least two of their claims.

California Supreme Court Weighs In

After agreeing to review the case, the California Supreme Court ultimately sided with the trial court and overturned the court of appeal in a lengthy 66-page decision that explores legislative intent, statutory construction and prior case history.

The court dug deep into the definitions of “employer” and “person,” ultimately concluding that the Labor Code and wage order impose meal and rest break obligations on employers, and, under the relevant wage order, an “employer” must be a “person as defined in Section 18 of the Labor Code.” Labor Code section 18 defines “person” as “any person, association, organization, partnership, business trust, limited liability company, or corporation.”

Citing prior case law and the legal definitions of “person” used by the Legislature in other contexts, the California Supreme Court noted that all words and phrases used to describe a “person” in these contexts are most commonly associated with private individuals and entities versus public or governmental agencies. In addition, the court stated that in the Labor Code’s definition, which is more precise, the word “person” means the typically private entities listed.

Therefore, the court concluded that the wage order’s reliance on the term “person” as defined in Labor Code section 18 communicates that government employers are not — and therefore the AHS is not — subject to wage and hour liability.

But What About PAGA Penalties?

The California Supreme Court then reviewed whether quasi-public employers — such as the hospital authority — are subject to PAGA penalties.

Prior case law on whether public employees could pursue PAGA claims for some Labor Code violations had relied on the Legislature’s intent when creating the laws plus its silence in addressing public entities within the laws — and it was presumed that the Legislature intended to allow public employees to pursue PAGA claims for some Labor Code violations.

In this decision, however, the court made it very clear that the Legislature could have directly addressed public employers and, in fact, was “well aware of the staffing and budgetary constraints that hindered the [Labor and Workforce Development Agency’s] LWDA’s ability to investigate labor violations and enforce penalties.”

To justify its reasoning, the court noted that the Legislature declared the PAGA’s purpose was to “achieve maximum compliance with state labor laws in the underground economy and to ensure an effective disincentive for employers to engage in unlawful and anticompetitive business practices.” Furthermore, if government employers were subject to civil penalties under the PAGA, the Legislature likely would have also noted the potential costs these employers would incur if penalized. The omission of any mention of costs points to a lack of intent to impose PAGA penalties on public employers.

Ultimately, the court concluded that because the underlying Labor Code claims failed, the plaintiffs could not be “aggrieved employees” for PAGA purposes.

Wait … PAGA Can Cost Employers A Lot of Money?

In its decision, incredulously, the court states that the costs public entities could incur if subject to PAGA suits are potentially quite large.

“In addition to penalties, which can be sizable in cases involving numerous employees or lengthy time periods, PAGA provides for one-way fee-shifting,” the court wrote in its opinion. “While subjecting public entities to civil penalties might serve PAGA’s goal of augmenting the LWDA’s enforcement of the Labor Code, the result would simply rob Peter to pay Paul. Even though 75 percent of penalties recovered would go to the LWDA for its enforcement efforts, those penalties would be paid from the coffers of other taxpayer-funded public institutions.”

Rather than recognizing something is wrong with the PAGA, however, the court simply ensures that public employers were not subject to such overly burdensome litigation. Private employers, though, remain fully subject to PAGA liability for violations such as failure to provide compliant meal and rest breaks, paying timely wages, providing required reimbursements and maintaining accurate payroll records.

Fortunately, recent PAGA reform expands the ability for employers to cure Labor Code violations and includes the possibility for a significant reduction in penalties if employers have taken all “reasonable steps” to comply with applicable laws.

Employer Takeaways

This California Supreme Court decision not only provides a much needed bright-line guidance that public entities are not subject to PAGA lawsuits, but it also highlights that even the state’s highest court recognizes just how onerous and costly PAGA penalties have become. As such, private employers must stay vigilant by monitoring their wage and hour compliance and providing their HR teams with tools to accomplish those goals. Steps employers can take immediately include:

Review and update policies related to meal and rest breaks, clock in/out procedures, calculating overtime and regular rate of pay, proper reimbursement, cell phone use, and paid sick leave.
Conduct training for all employees, but start with your front-line supervisors. They are your eyes and ears. They are also the first who will cause you problems if they don’t truly understand and enforce the company’s policies. Policies are no good if they don’t become practices.
Regularly review your wage and hour practices to understand if your policies are actually being practiced. For example, do you see any late meal break issues on timecards? Any problems with short meal periods? If you have field crews, has anyone physically gone on site to visit your crews and find out how breaks are scheduled and actually taken? Do you conduct exit interviews and ask about any issues with expense reimbursements or overtime? Document those checks and conversations as it is good evidence of the employer’s due diligence to ensure compliance with your policies.
Conduct a wage and hour audit. Even if you think your business is doing everything right, it’s helpful to conduct a thorough review of your wage and hour practices. This can be done internally or with the assistance of legal counsel. An audit can show that your company took affirmative steps following passage of these recent PAGA reform measures to stay on top of California’s ever-changing wage and hour laws.

If there is one acronym that should strike fear of anyone doing business in the state of California in 2020 it is PAGA.

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