The Private Attorneys General Act (PAGA) allows plaintiffs to pursue a PAGA claim even after settling their individual claims for the same underlying conduct. “PAGA-only” actions are nearly impossible to remove to federal court and PAGA penalties may largely survive bankruptcy.
Under PAGA, 75% of any penalties awarded are paid to the Labor and Workforce Development Agency (LWDA) for “enforcement of labor laws” and “education of employers and employees about their rights and responsibilities” under the Labor Code. In the Easter District of California bankruptcy case, In re Patacsil, decided June 9, 2023, the court held that these amounts, payable to the LWDA, fall within a statutory exception that makes certain penalties “payable to and for the benefit of a governmental unit” non-dischargeable in bankruptcy. 11 U.S.C. § 523(a)(7). Under this reasoning, employers will remain on the hook for 75% of any PAGA penalties awarded against them even after emerging from bankruptcy.
The court held that the other 25% of the penalty (payable to the “aggrieved employees”) and any statutory attorneys’ fees awarded do not fall within the Section 523(a)(7) exception, because they are payable to private individuals or entities,
not the government. It also held that the PAGA judgment did not fall within Section 523(a)(6), which does not permit discharge of debts for “willful and malicious injury.”
As a practical matter, it may be difficult for plaintiffs to recover PAGA penalties from employers forced into bankruptcy. However, bankruptcy for small businesses usually marks the end of the business. Therefore, when an employee makes a claim, it is imperative that the company immediately hire employment counsel to resolve the claim before it becomes a PAGA action that places the company’s continued existence at risk.
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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