Joseph E. Herman, Esq.

(323) 937-1400

I.    INTRODUCTION

II.   BACKGROUND

III.  BASIC PROVISIONS

IV.  ANALYSIS

V.  EMPLOYER RESPONSE

VI.  CONCLUSION

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I. INTRODUCTION

January 1, 2004, marked the opening of hunting season on California employers. On that date, The Labor Code Private Attorney Generals Act of 2004, went into effect. Enacted as SB 796 (Labor Code §2698 et seq.), this law authorizes employees to bring private actions to enforce existing penalties for all Labor Code violations (except workers’ compensation claims) and creates new penalties for violations when the Labor Code does not establish a specific penalty. The new law provides for representative actions and creates powerful financial incentives to bring such actions by giving employees 25% of any penalties awarded plus attorney’s fees. SB 796 has no counterpart in any other state or federal labor law and was quickly dubbed the “bounty hunter” law, casting California employers in the role of “wanted” outlaws.

The bounty hunter law was jointly sponsored by the California Labor Federation, AFL-CIO, and the California Rural Legal Assistance Foundation. It was signed by Governor Davis in his last few days in office, after his defeat in the recall election. According to the Senate’s Analysis, the rationale for SB 796 was that, despite having the largest government labor law enforcement mechanism in the country, “the DIR [Department of Industrial Relations] was failing to effectively enforce labor law violations.” According to the Bill’s sponsors, in view of its budgetary problems, California needed “a creative solution that will help the state crack down on labor law violators.” Their “creative solution” is SB 796. Of course, the judiciary also is part of the State government, and the SB 796 will dump a large new class of cases on an already overburdened judicial system.

II. BACKGROUND

Employees in California long have enjoyed more legal protection than employees in any other state. The main source of these protections is the California Labor Code, which regulates almost every aspect of the employment relationship, from major areas such as wages and hours, and worker safety and health, to housekeeping items such as the placement of informational posters. Where the Labor Code and federal law overlap (e.g., in laws governing employee wages and working hours), the more favorable-to-employees provisions of the Labor Code govern.

The Labor Code is a voluminous hodgepodge of obscure and often ignored laws, many of which were enacted under very different circumstances than exist today and which have been neither enforced nor repealed. For example, Labor Code §431, enacted in 1937, provides that employers who require job applicants to sign employment applications (which all employers do) must file a copy of the application with the Division of Labor Standards Enforcement (“DLSE”), something that is rarely, if ever, done. In addition to dealing with the minutiae of employment relations, the Labor Code regulates whole areas of employment relationships that are not regulated by federal law or the laws of most other states, such as agricultural labor relations. It is enforced by the Labor and Welfare Development Agency (“LWDA”), which consists of a number of sub-agencies that make it the largest state labor law enforcement agency in the country.

The Labor Code is supplemented by: (a) voluminous regulations issued by the numerous agencies established by the Labor Code; (b) employee rights established in other California Codes (e.g. the prohibition of many kinds of employment discrimination in the Government Code); (c) local ordinances; (d) the California Unfair Competition Law (Business and Professions Code §§17200 et seq.), which enables employees to enforce many federal labor laws in state court; and (e) an extensive web of pro-employee state court decisions.

The necessary corollary of all the rights created by the Labor Code is that California employers are subject to unparalleled obligations to their employees, creating an almost European situation of detailed government regulation of private employment relationships. Indeed, the position of employers in California vis-à-vis their employees is more precarious than that of European employers because many employment laws in California are enforced through the civil litigation system, which greatly increases both the exposure of employers and the cost of resolving claims.

Fortunately, many of the provisions of the Labor Code have not imposed penalties for their violation, and where the Labor Code has established penalties for violations other than those dealing with the payment of wages, they have been enforceable only by the various specialized agencies created by the Labor Code. [1] Employees long have had the right to pursue claims for unpaid wages, including overtime and wage payment-related penalties, directly in court or to pursue their claims through the Labor Commissioner.

Vesting exclusive authority to enforce all other penalties under the Labor Code (e.g. for unsafe working conditions) in these agencies has operated both to filter out spurious claims and to provide simplified and expedited procedures for resolving employee claims at no cost to the employee. California employers also have been protected from private enforcement of penalty claims under the Unfair Competition Law, which most observers agree has fostered abusive litigation against businesses.[2] SB 796 eliminated this limitation on private enforcement of penalty claims, thereby opening the door to the same kind of “shakedown” litigation against employers that has been rampant under the Unfair Competition Law.

III. BASIC PROVISIONS

1. Private right of action.
Any “aggrieved employee” (i.e. “any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed”) is authorized to sue his or her present or former employer in Superior Court for violation of any provision of the Labor Code, except those relating to workers’ compensation. Under prior law, only agencies under the LWDA, such as the Labor Commissioner and the DLSE, could sue to enforce penalties under the Labor Code. This new right of action is in addition to any other pre-existing remedies and does not preclude separate or concurrent pursuit of these other remedies. Like the Unfair Competition Law: (1) there is no requirement that the employee actually have suffered any damages or injuries in order to sue , [3] and (2) even if the underlying Labor Code provision does not create a private right of action, SB 796 does. Interestingly, SB 796 also creates liability for labor unions committing unfair labor practices under the Agricultural Labor Relations Act (the “ALRA”), which is part of the Labor Code, but only employees can sue for union unfair labor practices under the new law even where it is an employer that has been the victim of a union unfair labor practice (e.g. a secondary boycott).

2. Amount of claim.
The amount of the claim is either the amount of the civil penalty
established in the Labor Code or, if none is specified:
(1) $500 for employers with no employees at the time of the violation;
(2) $100 for employers with one or more employees for the “initial” violation for each aggrieved employee per pay period and $200 according to the same formula for each “subsequent” violation.

As a result, employers will be exposed to substantial liability for Labor Code violations
that previously had no penalties, and the penalties will bear no relation to the seriousness of the employer’s violation.

For example, if an employer with 500 employees fails to post a required informational poster for one year (assuming a semi-monthly payroll with 24 pay periods), it would be liable for a fine of $1,200,000, plus attorneys fees and costs. If the employer used a weekly payroll, the penalty would more than double to $2,600,000 over one year. It is unclear what constitutes an initial violation. [4] If the failure to post in each payroll period is treated as a separate violation, the penalty for the first year would almost double to $2,350,000 (assuming 24 pay periods per year). With a weekly payroll, the yearly toll would be $5,150,000).

It also is unclear whether violations of the Labor Code must be related (i.e. violate the same provision of the Labor Code) in order for the doubled penalty of $200 per employee to apply. If not, an employer that committed two completely unrelated minor violations would be subject to the doubled penalty for each subsequent violation.

3. Attorney’s fees.
A prevailing employee is entitled to an award of “reasonable attorney’s fees” and costs. There is no provision for attorney’s fees for employers who successfully defend these claims.

4. Distribution of penalties.
50 percent goes to the State General Fund; 25 percent to the LWDA; and 25 percent to the aggrieved employees (the “bounty”).

5. Exhaustion.
There is no requirement that employees exhaust their administrative remedies before filing suit. Nor are employees bringing suit required even to notify any government agency responsible for enforcing the section of the Labor Code under which they are suing. (California’s other “bounty hunter” law, Proposition 65, The Toxic Enforcement and Safe Water Act of 1986, requires such notice, thereby providing at least some minimal connection between government and private enforcement of the environmental laws. SB 796 contains no such requirement). The result is to create two separate and unrelated schemes for enforcing the Labor Code.

6. Limitations.
No private action may be filed if the appropriate agency has “cited” an employer for the same Labor Code violation that is the basis for the action. Otherwise, an employee is free to pursue any other remedy under state or federal law based upon the same claimed employer misconduct. It is unclear what “cited” means. For example, if a Complaint has been issued against an agricultural employer for an unfair labor practice but the ALRB has not made a finding that the employer has committed the claimed unfair labor practice, is a private suit barred?

7. Scope of claims.
Claims may be brought for violations of any provision of the Labor Code (except those relating to workers’ compensation) including claims for violations of wage-hour provisions, CAL-OSHA, and the ALRA. Thus, in addition to giving employees a private right of action to enforce existing penalties, SB 796 creates whole new categories of Labor Code provisions that subject employers to liability for penalties. Since many employment discrimination claims (such as race and age discrimination claims) are governed by the Government Code, they are not subject to SB 796. But twenty-five forms of employment discrimination are covered by the Labor Code and subject to SB 796. For example, discriminating against employees because of their sex in determining their pay violates Labor Code §1197.5, so that, in addition to other remedies (e.g. recovering back pay and liquidated damages), employees subject to gender-based pay discrimination may recover penalties under SB 796.

8. Penalties Discretionary.
Even if an employer is found to have violated a provision of the Labor Code, the assessment of penalties is discretionary if the LWDA or its subdivisions had discretion as to whether to impose a penalty. It is unclear whether that same discretion operates where the Labor Code did not previously establish a penalty for a violation, so that for such violations, the penalties established by SB 796 either would be mandatory or not subject to any legislative standards as to how the court should exercise its discretion. Moreover, SB 796 does not permit a court to exercise any discretion as to the amount of the penalty.

IV. ANALYSIS

SB 796 is a significant step in a process that has been ongoing for many decades: increasing legal regulation of the employment relationship. While SB 796 itself does not impose any new workplace rules, it is certain to increase the burden of existing rules by creating powerful financial incentives, both for California employees and their lawyers, to initiate litigation in response to even the most trivial violations of the Labor Code. By encouraging employees to seek “bounties” against the employers who generate their jobs, SB 796 is certain to be corrosive of the kind of cooperative employer-employee relations necessary for a productive, competitive economy.

Moreover, SB 796 undermines the basic tenet of modern administrative law, which is to have specialized, expert government agencies regulate complex areas of our economy based on legislative standards, with the judiciary’s role limited to reviewing whether the agency’s action complied with the standards established by the legislature. Vesting the courts with initial jurisdiction to enforce regulatory legislation vitiates the well-established doctrines of primary jurisdiction and abstention. It puts courts of general jurisdiction in the position of having to interpret and apply legislative standards that were intended to be interpreted and applied initially by agencies established specifically to deal with what are often deliberately vague standards, based on the agencies’ expertise.

For example, Labor Code §6400 requires employers to “furnish employment and a place of
employment that is safe and healthful for the employees therein.” The Legislature went on to
establish a specialized agency, the Division of Occupational Safety and Health (the “Division”),
to develop and enforce detailed regulations as to what “safe and healthful” means. Under SB
796, any employee will be able to go directly to court and sue on behalf of all affected
employees to recover penalties for working conditions alleged not to be “safe and healthful,”
even if the Division has not determined them to be so. Similarly, under Labor Code §1153(f),
an employer of agricultural workers is obligated to bargain “in good faith” with a union
representing its employees. The Legislature established the Agricultural Labor Relations Board
(“ALRB”) to interpret and apply this broad statutory command, but under SB 736, if an
employee claims that his employer is not negotiating in good faith, he can sue and a Superior
Court Judge, not the ALRB, will determine how this vague language is to be applied.

V. EMPLOYER RESPONSE

What should employers do in response to SB 796? The new legislation makes it even more
important for employers to practice preventive law by:

1. converting as many employees as possible to a semi-monthly rather than a weekly payroll
so as to reduce the number of pay periods that are the basis for computing liability;

2. educating themselves as to all provisions of the Labor Code that are effective as of
January 1, 2004;

3. auditing their employment practices and policies to ensure that they are in
compliance with even the most minor requirements of the Labor Code;

4. training foremen and supervisors as to Labor Code requirements; and

5. providing an employee complaint procedure that encourages employees to bring possible Labor Code violations to the employer’s attention as soon as possible, thereby minimizing the employer’s liability. While it is unclear whether an employer’s good faith or an employees’ deliberate delay in asserting a claim under the Labor Code will be defenses to suits under SB 796, such a complaint procedure would go a long way towards establishing an employer’s good faith in attempting to comply with the Labor Code. This complaint procedure should be a part of an Employee Handbook that spells out the company’s commitment to comply with the Labor Code.

VI. CONCLUSION

As with any new legislation, there are many unanswered questions about SB 796, especially since there is nothing like it in other state or federal labor laws. For example, does it apply to the violation of regulations adopted by agencies pursuant to authority vested in them by the Labor Code, or only to provisions actually appearing in the Labor Code? There may even be constitutional challenges. But one thing is certain: there will be a significant increase in litigation against employers by “bounty hunting” lawyers and “bounty” seeking employees.

VII. FOOTNOTES

[1] See Labor Code §§ 218 and 1194. It should be noted that prior to the enactment of SB 796, the Division of Labor Standards Enforcement took inconsistent positions as to whether the amounts employers must pay for a failure to provide rest and meal periods under Labor Code §226.7 are “penalties” (and therefore not enforceable through a private right of action) or are “wages” (and therefore enforceable in a private action).[5]

[2] Kasky v. Nike, Inc., 27 Cal. 4th 939, 950 (2002). See, e.g. Hiltzik, “Consumer-Protection Law Abused in Legal Shakedown”, Los Angeles Times, July 21, 2003, p. C.1.

[3] Contrast this with Labor Code §2810, also enacted in 2003, which requires that an employee be “injured as a result of a violation of a labor law or regulation” in order to be able to sue. SB 796 in effect eliminates this requirement in so far as employees seek to recover penalties. Thus, the combined effect of those two new laws is to enable employees to sue under Labor Code §2810 for penalties on behalf of all affected employees, even if none suffered any injury. SB 796 will have this same kind of “multiplier” effect on many other Labor Code provisions.

[4] Labor Code §22 defines “violation” as “a failure to comply with any requirement of the code.”

[5] Labor Code §204 specifically authorizes semi-monthly payments.

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