A state labor law passed in 2004 has grown into a financial nightmare for small businesses such as Town & Country Event Rentals. The Van Nuys company recently settled a potential $29 million lawsuit over missed lunchbreaks. The suit was filed by two disgruntled former employees represented by a lawyer who utilized the Private Attorneys General Act, also known as PAGA. The state law “authorizes aggrieved employees to file lawsuits to recover civil penalties on behalf of themselves, other employees and the State of California for labor code violations.” So under PAGA, any employee can sue for breaches – such as missed lunchbreaks or unpaid overtime – even if he or she wasn’t directly affected by them. In the Town & Country case, the employees went to a lawyer to see if they could sue for wrongful termination. Soon after, the company’s meal and break practices were called into question as a separate legal matter. “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 or didn’t get their break,” owner Richard LoGuercio told the Business Journal. “We got called on the carpet for five years of no one in the entire place – nobody – getting lunch. … I didn’t document it, so I had to pay.” Split penalties The law was enacted to punish negligent employers who violate California’s Labor Code, but it has created a financial incentive for plaintiff attorneys to seek out PAGA cases to potentially win millions in a class action suit or settlement. Financial penalties under PAGA are divided. Seventy-five percent goes to the state for education and outreach on the labor code, while 25 percent goes to the employees and their attorneys, who typically take approximately 30 percent. Garin Casaleggio, deputy secretary of communications for the California Labor and Workforce Development Agency, the department that oversees the PAGA process, said the law “was created as a way for the state to handle the large volume of wage and hour claims and delegate some of that enforcement responsibility to private parties.” He said the agency is aware that some frivolous claims are filed and is currently in the process of collecting data to assess the matter. If LoGuercio had lost the $29 million lawsuit, the state would have received $21.8 million, the lawyers would have received approximately $2.2 million, while the remaining $5 million would have been divided up between the 400 people who worked at the company. However, LoGuercio settled for $1.2 million, reducing each employee’s payout significantly. “I was paying these guys (who brought the lawsuit) close to six figures, and they got less than $5,000 each (from the suit)” LoGuercio added. “We pay off the final settlement payment in a month or two.” As a result of the settlement, LoGuercio had to revamp his company practices to better outline and document meal break and overtime procedures. In addition, he had to hire a full-time employee to make sure everyone is clocking in and out and taking their lunches at the appropriate times. Furthermore, now most business decisions have to be vetted by two labor attorneys he keeps on standby. “It has put a big black cloud over what we do,” LoGuercio said. Tom Manzo, president of Timely Prefinished Steel Door Frames in Pacoima, is going through a similar experience with an employee who had a standard workers’ compensation claim that morphed into a PAGA issue. The PAGA claim was brought against Timely for employees not taking meal breaks within the required timeframe and for not properly classifying overtime pay. Now, the company faces the potential of having to shell out millions of dollars as its case is currently under review by the California Labor and Workforce Development Agency. However, Manzo and his team are fighting back by organizing other local companies, business organizations and government leaders to bring awareness to the issue. “We are finding out if you do know about PAGA, that’s because you have been hit with a lawsuit, and the people who have no idea are going to get hit with one pretty soon,” Manzo said. Timely had Congressman Tony Cárdenas of the 29th District visit its Pacoima facility to discuss PAGA and its problems. The company is also working with the Valley Industry & Commerce Association, or VICA, the trade organization in Van Nuys which is advocating against PAGA in Sacramento. The organization’s efforts are in the early stages, with no bills in the pipeline at this time. VICA formed a committee to specifically address the PAGA problem and work with legislators on reforming the law. Since forming the committee, the organization has noticed an uptick in local businesses coming forward to share their PAGA experiences, citing notices from lawyers on labor code violations they oftentimes weren’t aware they were breaking. Many business regulations include a “right to cure” clause, meaning that once a violation is identified, the employer has an opportunity to fix the problem before facing financial penalties. But “under PAGA there is no right to cure,” noted Stuart Waldman, president of VICA. “The PAGA law has created a Wild West atmosphere,” Waldman said. “Businesses may have minor incidental violations, like not having the proper wage and hour sign (posted), who can get substantially fined or in many cases end up settling with a former and disgruntled employee.” Timely’s Manzo has added additional timeclocks and provided a pay raise to employees to remedy the situation, even though a final determination on his company’s claim has not been made. The operational changes and attorneys’ fees have cost the company about $30,000, which could become a much higher amount at the end of the litigation. “Say we weren’t an established company, and we owed a bunch of money, it could literally put us out of business,” Manzo said. Regulatory response Last summer, the Labor and Workforce Development Agency implemented SB836, which changed PAGA policies to improve transparency and data collection. “These changes will bring better tracking of cases and ultimately a better understanding of whether the system is working as intended,” the department’s Casaleggio said. “After we get the data, look at it and see the trends, at that point we may offer up some proposals to further refine the program, but as of right now, we are more interested in getting data than making any tweaks to PAGA.” In the meantime, businesses remain susceptible to legal action and must stay current on the everchanging California Labor Code. Michael Adreani, a partner at Woodland Hills employment firm Roxborough Pomerance Nye & Adreani, advises employers to have their practices signed off by all employees to ensure acknowledgment. “Policies and practices need to be in order, and companies need to keep on top of state law,” he explained. But for employers like Manzo and LoGuercio, the damage has been done and their businesses have suffered. “My big problem is, I don’t think the state should tell us when to take our lunch,” Manzo said. “We are trying to accommodate employees, and we are getting penalized. That’s where the law really has a problem.” “I feel like we are being victimized,” LoGuercio added. “I treat my employees great; I treat people the way I want to be treated. Now I’m afraid to justifiably fire someone. It’s just insane.”
