Can an aggrieved employee continue to pursue a Private Attorney General Act (PAGA) lawsuit against his or her former employer even after settling claims in arbitration? Yes, according to the California Supreme Court, overruling two lower court decisions. This ruling has serious implications for California employers, and a revision to separation and release agreement language may be in order in an attempt to preempt similar situations in the future.

Plaintiffs’ attorneys increasingly favor “PAGA-only” lawsuits in part because such claims can’t be compelled into arbitration, due to a 2014 California Supreme Court decision that PAGA claims are brought on behalf of the public as a “private attorney general.” In Kim v. Reins International California, Inc., the case hinged on plaintiff Justin Kim continuing a PAGA-only lawsuit against his former employer, restaurant owner Reins International California, even though he had settled his Labor Code claims that were compelled to arbitration. Reins had successfully compelled arbitration and succeeded in dismissing Kim’s class action claims based on an arbitration agreement and enforceable class action waiver he had signed when starting his employment. The trial court ordered arbitration on all claims except the PAGA claim and the injunctive relief portion of the unfair competition claim, and stayed the PAGA action until arbitration was completed.

Following the settlement of Kim’s individual California Labor Code claims, he continued with his PAGA-only lawsuit. Reins moved for summary adjudication in the PAGA action on the ground that the settlement completely redressed Kim’s individual claims and, thus, Kim was no longer an “aggrieved employee” with “standing” to sue under the PAGA. The trial court agreed, and the Court of Appeal affirmed, ruling that Kim’s decision to settle his individual claims precluded him from maintaining the PAGA claims because he no longer qualified as an “aggrieved employee” under the PAGA. The Court of Appeal (logically) found that “by accepting the settlement and dismissing his individual claims against Reins with prejudice, Mr. Kim essentially acknowledged that he no longer maintained any viable Labor-Code-based claims against Reins.”

Reversing both the trial court and the Court of Appeal, a unanimous Supreme Court of California ruled that a PAGA plaintiff like Kim could continue to litigate his PAGA action despite settling his individual claims. The High Court framed the issue as follows: “Do employees lose standing to pursue a claim under the Labor Code Private Attorneys General Act of 2004 (PAGA; Lab. Code, § 2698, et seq.) if they settle and dismiss their individual claims for Labor Code violations?” In answering that question in the negative, the Supreme Court took a narrow, strict view of the statutory language defining who can bring a PAGA claim. Because at one time Kim was employed and may have suffered a violation, the fact that he “settled” his claims did not remove him from the “aggrieved employee” definition simply because he now has no damages as a result of his settlement.

In addition, the Supreme Court explained that representative actions differed from class actions in that the latter are merely procedural devices for individual claims, while PAGA representative actions are brought on behalf of the State of California.

Of note was that the settlement occurred after Mr. Kim had filed his PAGA claim. The Court pointed out that Reins conceded Mr. Kim’s PAGA claim had to be stayed in the trial court while arbitrating the other claims; settled the arbitral claims with an offer that encompassed only Mr. Kim’s “individual claims”; then, when Kim tried to litigate the remaining PAGA claim, argued that Kim had lost standing. These facts seemed to upset the Court, which noted: “Reins’s conduct below is troubling.”

It remains unclear whether a plaintiff who settled his or her potential Labor Code claims, all of his or her “known and unknown” claims, and other potential claims before filing a PAGA-only lawsuit would still be an “aggrieved employee” under PAGA. Many employers settle claims pre-litigation to obtain a general release of all claims and expect to not hear again from the employee. In light of Reins, that may no longer be possible, at least not in the context of a threatened PAGA claim.

In an effort to navigate the Reins decision, California employers might consider adding language to their separation/severance and release agreements, although it is worth noting that no California court has yet approved any such language as a defense to a PAGA claim. Procopio’s Labor and Employment Law team can assist with these revisions and other possible steps to take in light of this decision.