HOW DOES PAGA EFFECT EMPLOYERS IN CALIFORNIA?

Introduction

This article provides guidance to employers in understanding and defending against claims brought under California’s Private Attorneys General Act of 2004 (“PAGA), Labor Code § 2699 et seq. Under PAGA, aggrieved employees are allowed to step into the State’s shoes, specifically California’s Labor & Workforce Development Agency (LWDA), to bring legal actions against employers for alleged violations of California Labor Code that would otherwise, absent this statute, be limited to the LWDA. It is a unique mechanism through which employees can file suit on behalf of other similarly situated “aggrieved” employees without bringing claims as class actions, which can be a very unwieldy and difficult legal process.

PAGA Claims and Penalties

The potential recovery in a PAGA claim can be mindboggling. PAGA divides Labor Code violations into three categories: 1) Serious Labor Code Violations; 2) Health and Safety Violations; and 3) Other Labor Code Violations. If the Labor Code provision underlying the PAGA claim already provides for a civil penalty, then an employee may seek to collect that penalty for themselves and, on behalf of other aggrieved employees. In cases where the underlying Labor Code section does not already provide a civil penalty, the PAGA penalty is equal to $100 for each employee per pay period for the initial violation, and $200 for each employee per pay period for each subsequent violation, of which an aggrieved employee may keep 25% of the penalties recovered.

Moreover, PAGA provides for the recovery of costs and attorney’s fees, which are often a significant percentage of a judgment in such cases, so there is an incentive to settle such claims promptly if they have any merit. While the statute of limitations period is only one year, that merely dictates what the timeline for filing suit is, and doesn’t limit the damages, which continue to run for any violation that is continuing after suit is filed. In other words, if a wage and hour violation continues to run throughout the course of the litigation, then the recovery will be based on the full period starting from when the violation began to when the finding on behalf of the plaintiff is entered. See Williams v. Superior Court of Los Angeles, CASC, DAR p. 6879.

The legislative intent behind the law is to allow employees to bring to light blatant and broad violations of labor laws by unscrupulous employers. The result though has been to punish employers who may not be aware of their requirements under California Labor Code and regardless of how small, technical, or short-lived the alleged violation. All hope, however, is not lost as there are some technical, in addition to factual, defenses available to employers in a PAGA claim.

Defenses to PAGA Claims

Over and above any factual defense the employer may have, PAGA requires employees to notify the LWDA (and the employer) describing the specific provision alleged to have been violated, including the facts and theories to support the alleged violation.  Then, only if LWDA chooses not to pursue a Labor Code violation claim, or issue a citation against the offending employer, is the employee allowed to proceed with the PAGA suit. Because the notice is required before bringing the PAGA claim to court, a PAGA claim can be dismissed outright if the notice is deficient. In other words, if an employee fails to provide proper notice to the LWDA or fails to file the PAGA claim within the one-year statute of limitation period, then the PAGA case will fail. Additionally, although no specific defenses to this statute are set forth in the law itself, normal defenses to claims of underlying alleged violations of the Labor Code are available. Click here for the notice requirements.

Unfortunately, both the California Supreme Court and the Ninth Circuit Court of Appeals have ruled that PAGA claims may not be waived as a part of an employment arbitration agreement. See Smigelski v. PennyMac Financial Services, Inc., CA3. On the positive side, it is settled in the California courts that the nonparty employees who were included as other “aggrieved” employees, as well as the State (LWDA), are bound by judgments in PAGA claims. In other words, if the original plaintiff settles or obtains a judgement, or there is a dismissal with prejudice, the facts may not be re-litigated by any of the parties. See Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (2009) 46 Cal. 4th 993.

Conclusion

It is imperative, though, that an employer consult our experienced Employment Litigation Defense Attorneys if they have any questions about compliance with California Labor Code or if they receive notice of a PAGA claim in any form. By far, an employer’s best defense in avoiding significant exposure under a PAGA claim is to regularly review and update internal policies, handbooks and procedures, to ensure their business practices comply with the ever-changing California employment and labor laws. The sooner our experienced Attorneys at Gehres Law Group get involved, the more likely we will be successful in assisting your Company in avoiding the worst possible outcome. Contact us today for a complimentary consultation.

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Corporate Leaders’ Duty of Loyalty and Conflicts of Interest in California

This article outlines the duty of loyalty imposed on corporate leaders, how the business judgment rule provides protection against liability for directors if they act with reasonable care, and how conflicts of interest should be handled by corporate leaders.

I. Duty of Loyalty

California law imposes certain fiduciary duties on officers and directors of a corporation, duties which are owed to the corporation’s shareholders and to the corporation itself. One such duty is referred to as the duty of loyalty, which requires that officers and directors act in the best interests of the corporation and its shareholders. Any breach of this duty by corporate leaders exposes them to civil liability, and can expose them to criminal charges as well, depending on the circumstances.

Guidance on how to interpret this duty of loyalty is provided by the California Corporations Code, which provides, in part, that a director of a corporation operating in California has a duty to act “in good faith…in the best interests of the corporation and its shareholders,” with a level of care, “including reasonable inquiry, that an ordinarily prudent person in a like position would use.” Cal. Corp. Code § 309(a). See also Small v. Fritz Companies, Inc., 132 Cal.Rptr.2d 490, 499 (2003).

II. Conflicts of Interest

Self-dealing, such as when an officer or director has a conflict of interest with the corporation and acts in his or her own interest, and against the corporation’s interests, is a frequent example of a breach of the duty of loyalty. California law states that an interested director can avoid violating the Corporations Code if he or she discloses to the other directors the material facts of any transaction in which they have a conflict of interest, and a majority of the non-conflicted directors approves the transaction. Cal. Corp. Code § 310. It is important to note that the fact that a conflict of interest is present does not prevent a director from fulfilling his or her obligations to the corporation, but the director should act with the utmost candor concerning the facts of such transactions and abstain from voting on such matters.

III. Business Judgment Rule

Where a conflict of interest is alleged to have occurred, the business judgment rule will often come into play as well. Courts will not typically intervene in corporate decisions if the decision-makers acted in good faith and with the reasonable belief that their actions were in the corporation’s best interest. However, pursuant to long-standing legal precedent, this protection is NOT extended to corporate officers, who must act with a higher level of prudence and should carry adequate insurance to protect against the possibility of civil liability being imposed for their business decisions. See Gaillard v. Natomas Co., 208 Cal.App.3d 1250 (1989)

For further discussion on the business judgment rule, both statutory and common law, see our article:How Does the Business Judgement Rule Protect Corporate Executives?

Summary

In determining whether a decision-maker has violated his or her duty of loyalty or otherwise engaged in conduct for which legal action may be instituted, the interplay between the various legal duties and protections often involves a complex analysis in applying the law to the facts of each case. As such, it is important to reach out to an experienced business attorney to assess such situations. The trusted team of lawyers at Gehres Law Group, P.C. has the expertise to advise corporations of all sizes on such matters. Contact us today for a complimentary consultation.

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PROTECTING PERSONAL ASSETS AGAINST LIABILITY FOR BUSINESS DEBTS IN CALIFORNIA

Although no business owner ever wants to consider the likelihood of being sued for unpaid business debts, breach of contract, or damages caused by their employees, business activities, or the like, these events do happen. What’s more, if businesses do not plan properly, owners may become personally liable for the debts of the business. This article discusses some ways to avoid personal liability in the unfortunate case that a business’s activities results in litigation.

The business attorneys at Gehres Law Group often recommend a three-pronged approach to aid clients in ensuring they are protected from personal liability for their company’s debts. The first step is to make sure that the business itself is structured as a business entity that protects and separates personal assets/liability from business assets/liability. The second step is to enter into agreements in a manner which will limit a business owner/officer/director’s personal liability. As a final step, obtaining appropriate insurance coverage, over and above what is required by law, that covers common business risks in the company’s specific industry, is also important in controlling personal liability exposure.

BUSINESS ENTITY CONSIDERATIONS

If you’re operating a business as a sole proprietorship, you and your business are, from a legal perspective, the same entity. That means that you personally, in addition to being entitled to the income of the business, are liable for all of your business debts. It also means that all, or most, of your personal assets can be attached, or considered for collection, by your creditors. Likewise, in a general partnership each partner is personally liable for 100% of the business’s debts. Therefore, if there aren’t enough business assets to pay the partnership’s debts, and your partner is broke, creditors can come after your personal assets to pay all of the business’s debts, not just your pro rata share of the debts.

On the other hand, if your business is formed as a corporation or LLC, you and your business are separate legal entities. As such, assuming that you do not otherwise expose yourself to personal liability, and your corporation or LLC is properly formed and maintained, you would have no personal liability for the debts of the business, even if the business can’t pay them. Our highly experienced San Diego Business Attorneys can assist you in determining not only the best type of entity structure for your specific needs, but also in preparing your corporate and other legal documents in a manner which provides you with maximum protection against personal liability for business obligations.

Maintaining corporate compliance once an entity is formed is also critical, such as preparing annual corporate minutes, ensuring the entity is adequately capitalized as required by the California Corporations Code, as well as addressing other compliance issues is also critical to ensure business owners are well protected. See our related articles on this topic here and here.

ENTERING INTO AGREEMENTS ON BEHALF OF YOUR BUSINESS

Once you have settled on the proper structure of your business ventures, it is important to also be cognizant of potential situations where your actions might undermine the protection you have tried to maintain by that formation against personal liability for the business’s debts.

One way that you may inadvertently waive your right to personal liability protection is to sign a personal guarantee for a business loan or line of credit. Any debt that you obtain using this method is yours personally should your business assets not be sufficient to satisfy the debt.

The next way that you might unknowingly expose your personal assets to attachment for business debts is by signing a contract or agreement in your personal name versus on behalf of the Company. For example, John Smith, who is President of ABC Corporation, would need to sign John Smith, President, on any documents related to the business/corporation when he is representing that business. If he simply signs John Smith, without including his capacity as an officer or agent of the Company, he may have just set himself up for personal liability for that debt. Seems harmless, but it could be an expensive mistake.

An additional way for a business owner/officer to subject themselves to personal liability is to use personally owned collateral or credit cards (not in the business’s name) to underwrite or accumulate debt on behalf of the Company. It is very important to remember not to comingle personal assets and debts with business debts.

Finally, along these same lines, if a business owner personally misrepresented or lied about any facts when applying for a loan or credit on behalf of the corporation or LLC, they could be held personally liable for the debt, as well as potential personal exposure for fraud, both civil and criminal. Also, as touched on previously, if a business fails to maintain a formal legal separation between the business’s and the owner/officer’s personal financial affairs, creditors will likely try to have a court hold those owners/officers personally responsible for the business’s debts under a theory known as “piercing the corporate veil.”  

INSURANCE CONSIDERATIONS IN PROTECTING THE ASSETS OF THE BUSINESS AND THE OWNERS/OFFICERS

Over and above the necessity to ensure that a business entity is complying with both statute and contract by maintaining the required insurance coverage, such as workers compensation, vehicle coverage, general liability, including “acts and omissions” when appropriate, and property (real and business). An umbrella policy is often a good choice when underlying liability insurance may not be enough to cover a catastrophic loss or claim. This provides an added layer of protection for your company, and potentially the owners/officers if there is an attempt to obtain personal liability against them for the company’s debts.

Along those lines, obtaining a management liability policy could be invaluable for the following types of situations: 1. Directors and officers — basically this protects directors and officers, as well as the business entity, when there are allegations that their decisions resulted in the mismanagement of the company, causing a loss to others. 2.  Employment practices liability —coverage that protects the directors, officers and the entity when there are allegations of discrimination, harassment and failure to promote and similar employment legal issues. 3. Fiduciary liability — If an officer or director acts in a role for example, the entity’s investment advisory board and there is a loss for the investors or employees, as in the case of a 401(k) plan, this type of insurance generally operates to protect the plan fiduciaries when there are allegations that they failed to fulfill their duties to the plan participants, assuming that there was no fraudulent intent or gross negligence.

In summary, taking steps to limit personal liability when starting and running a business provides peace of mind for a business owner and it is vital to consider at the beginning of the business cycle. Our San Diego Business Attorneys can discuss your concerns and options with you as well as assist you in setting up and maintaining your business entity in a manner designed to ensure the least amount of personal financial exposure possible in your circumstance. Contact us today for your complimentary consultation.

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