In a significant victory for California employers, the U.S. Court of Appeals for the Ninth Circuit reversed a $102 million award against Walmart in a suit alleging that the retailer violated the California Labor Code’s wage statement and meal-break provisions. The decision is Magadia v. Wal-Mart Associates, Inc., May 28, 2021, No. 19-16184.

The Ninth Circuit’s opinion is an important clarification of the cognizable harm required to establish Article III standing under the Private Attorneys General Act (“PAGA”) and the Labor Code’s wage statement requirements.

The critical takeaways:

• An employee does not have standing to bring PAGA claims in federal court for alleged Labor Code violations that the employee themselves did not suffer.

• An employer may make lump-sum payments as a retroactive adjustment to employees’ overtime rate to factor in bonus payments without identifying a corresponding “hourly rate” for the payment on employees’ wage statements.

Performance bonuses

Walmart provides “MyShare” performance bonuses to certain employees at the end of each quarter. Because the bonus must be included in the regular rate of pay for overtime wages under California law, Walmart makes a retroactive adjustment to employees’ overtime pay by calculating the difference between employees’ overtime rate over the quarter and the overtime rate that would have been in effect if the MyShare bonus had already been factored in. The employer then reports both the bonus and the adjusted overtime pay as lump sums on the wage statements issued to employees at the end of each quarter.

The lawsuit and the $102 million award

In a California class action and PAGA action that was removed to federal court, the plaintiff alleged that Walmart violated Labor Code section 226(a)(9) by failing to identify the hourly rates and hours worked associated with the retroactive overtime payment on employees’ wage statements and violated section 226(a)(6) by failing to identify the start and end dates of these pay periods in its final pay statements.

The plaintiff also asserted that the employer violated Labor Code section 226.7 by failing to factor in the MyShare bonus into the employees’ “regular rate of compensation” when paying employees meal break premiums for missed or untimely meal breaks.

After a bench trial, the district court determined that the plaintiff did not suffer a meal-break violation. And, because the plaintiff could not show his claims were typical of class members who suffered meal-break violations, the court decertified the meal-break class. However, the district court allowed the plaintiff to seek PAGA penalties, based on the meal-break violations incurred by other employees. In addition, the court held that Walmart’s semi-monthly and final pay wage statements violated sections 226(a)(6) and 226(a)(9). The court awarded the plaintiff nearly $102 million: $48 million in statutory penalties and an additional $48 million in PAGA penalties for the section 226(a)(9) violation; $5.8 million in PAGA penalties for the final-wage-statement claim; and $70,000 in PAGA penalties for the meal-break claim.

The Ninth Circuit reversed the judgment and remanded the wage statement claims with instructions to enter judgment for Walmart. The Ninth Circuit also vacated the judgment and penalties against Walmart on the meal-break claim and remanded with instructions to remand the claim to state court.

Meal-break claims: no injury, no standing

The Ninth Circuit held that the plaintiff lacked Article III standing to bring a PAGA claim for meal period violations because he did not personally suffer a meal period injury. The appeals court rejected the plaintiff’s contention that he did not have to suffer an individual injury because PAGA is a qui tam statute (in which a private individual sues on behalf of the government to vindicate a public right). Despite numerous similarities, PAGA claims are not traditional qui tam actions, the court explained. PAGA claims involve the interests of nonparty individuals (not just the state and the plaintiff) who are entitled to a portion of the penalties and also are bound by the PAGA judgment. Also, in a PAGA action, the State of California fully assigns the claims to the employee who is deputized under the statute to bring the claims.  In contrast, in qui tam actions, the government is the real party in interest, and merely partially assigns the claim to a private individual acting in the state’s interest.

Wage statement claims: standing, but no violation

The Ninth Circuit concluded that the plaintiff did have standing to bring his wage-statement claims, finding that a violation of section 226(a) creates a cognizable (i.e., “concrete and particularized”) Article III injury.  In reaching this conclusion, the court undertook a two-part inquiry. The court first found that section 226(a) protects a concrete interest in receiving accurate information about wages in employee pay statements and that Walmart could violate a “concrete interest” if it did, in fact, fail to disclose statutorily required information on the wage statements The court wrote, “Even if Walmart pays its employees every penny owed, those employees suffer a real risk of harm if they cannot access the information required by § 226(a).”

Nonetheless, on the merits, the Ninth Circuit held Walmart’s wage statements and final pay statements provided all the information required under the statute. Rejecting the district court’s holding that the wage statements violated section 226(a) because they did not include the requisite “hourly rates” and “hours worked” associated with the overtime adjustment, the Ninth Circuit found there was no “hourly rate in effect” for the bonus-based overtime pay adjustment. Rather, “[i] is a non-discretionary, after-the-fact adjustment to compensation based on the overtime hours worked and the average of overtime rates over a quarter (or six [semi-monthly] pay periods).” Thus, Walmart’s pay statements satisfied the Labor Code requirements.

Nor did Walmart’s final pay statements run afoul of the statute. The plaintiff alleged that Walmart violated section 226 because it did not include “the dates of the period for which the employee is paid” on the plaintiff’s “Statement of Final Pay,” which he received upon being discharged mid-pay period.  However, under the plain language of the statute, Walmart had the option of furnishing a separate final pay wage statement with the required pay-period dates to terminated employees in the ordinary course of business at the end of the next semimonthly pay period.

What it means for employers

The Magadia decision is a welcome relief for California employers facing a barrage of claims alleging technical violations of the state’s wage statement laws.  In particular, although the Ninth Circuit found that “informational injury” may be cognizable for Article III standing in federal court, it clarified that employers, in rewarding incentive bonuses to employees, need not undertake rigorous computations to identify a fictional “hourly rate” when awarding after-the-fact overtime premiums based on those bonuses.