A unanimous Ninth Circuit panel held in Bernstein v. Virgin America Inc. that employers are not subject to heightened penalties for subsequent violations under the Labor Code unless and until they have been notified of the violation by the Labor Commissioner or a court. This decision impacts all California employers facing PAGA claims and uncertainty as to whether the alleged violations give rise to heightened civil penalties that would nearly double their potential liability exposure.
Although the primary issues in Bernstein are unique to some companies with interstate workers, the Court’s discussion concerning penalties under the Private Attorneys General Act (PAGA) affects every employer in California.
The Labor Code’s penalty provisions, including the PAGA’s default civil penalty provisions, establish heightened penalties for “subsequent” Labor Code violations. These subsequent penalties are typically double the penalty amount for “initial” violations. violation.” Labor Code § 2699(f).
The Ninth Circuit panel relied on a 2008 California appellate court decision, Amaral v. Cintas Corp. No. 2, which held that a “good faith dispute”—established by the assertion of a defense that, if successful, would preclude any recovery—precludes the imposition of heightened penalties. and, “[u]ntil the employer has been notified that it is violating a Labor Code provision (whether or not the [Labor] Commissioner or court chooses to impose penalties), the employer cannot be presumed to be aware that its continuing underpayment of employees is a ‘violation’ subject to penalties.”
The Bernstein appellate panel found that Virgin America was first notified of the violations when the district court granted plaintiffs’ motion for summary judgment. Accordingly, the court held the company could not be subject to heightened civil penalties under PAGA for violations that occurred prior to that point.
The decision clarifies exposure for employers facing PAGA claims and specifically helps in evaluating the potential for heightened civil penalties. Yet, the holding will hurt an employer that fails to immediately remediate Labor Code violations, even if the employer plans to appeal the unfavorable trial court decision or Labor Commissioner citation. If the employer’s appeal is not successful, it will be subject to heightened penalties accruing during the appeal period. Additionally, the court’s decision could make it more difficult to remove wage and hour lawsuits to federal court based on diversity jurisdiction. Employers removing an action with a PAGA claims have relied on the heightened penalties to meet the amount in controversy requirement. Depending on the plaintiff’s allegations, the Bernstein decision could make district courts reluctant to consider the heightened penalties in determining whether the amount in controversy exceeds $75,000.
It remains to be seen whether this rule will apply to claims for heightened statutory penalties, like those established by Labor Code section 226(e), for certain wage statement violations. Therefore, it is imperative that employers immediately contact their attorneys upon receipt of notification of the violation of the Labor Code from the Labor Commissioner.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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