On May 28, 2021, the Ninth Circuit Court of Appeals issued a significant ruling in Magadia v. Wal-Mart Associates, Inc., on both California’s wage statement laws and standing to pursue claims under the Private Attorneys General Act of 2004 (PAGA) in federal court. On the wage statement claims, the Ninth Circuit reversed the trial court, and found no technical wage statement violation for a failure to list the rates and hours of pay associated with adjustments to overtime pay. On the meal period claims, the Ninth Circuit also reversed, finding a plaintiff lacks Article III standing to pursue claims for meal period penalties under PAGA, where the plaintiff suffered no harm on these claims. The reversals overturned a prior $102 million judgment against Walmart. The Ninth Circuit’s ruling has important implications for California wage and hour litigation.

Background

Roderick Magadia was a former Walmart employee. In 2016, he filed a class action alleging violations of the California Labor Code’s wage statement and meal period requirements. He alleged Walmart: (1) violated California’s wage statement law by failing to provide adequate information regarding the applicable rates of pay and hours worked on its wage statements; (2) failed to pay adequate compensation for missed meal periods; and (3) violated the wage statement law by failing to furnish the applicable dates of pay on his final statement of pay. Magadia also sought civil penalties for these claims under PAGA. PAGA authorizes an employee who has suffered Labor Code violations to recover penalties for the violations on behalf of the State of California and other aggrieved employees.

The lawsuit primarily stemmed from Walmart’s payment of quarterly bonuses that employees earned over multiple pay periods. California and federal law require that certain nondiscretionary bonuses be included in the regular rate of pay used to calculate an employee’s overtime rate. This means that if an employee works overtime during a timeframe in which he or she receives a bonus, the employer may need to pay an additional overtime payment taking into account the employee’s bonus in his or her regular rate of pay.

Magadia did not allege that Walmart failed to make this payment; in fact, Walmart paid an overtime adjustment based on the overtime hours worked from prior pay periods when it paid the bonus. Instead, Magadia claimed the display of this bonus overtime adjustment violated California’s wage statement law. He argued the wage statement displayed only the amount of the adjustment and failed to display the corresponding rate of pay and hours worked for the payment.

On the meal period claim, the California Labor Code provides that if an employer prevents an employee from taking a lawful meal period, the employer owes the employee a “meal period premium” of one hour of pay. Magadia argued that Walmart had paid these premium payments at the incorrect rate of pay by paying the hour of pay at the “base” hourly rate, and not the “regular rate of pay” that would account for his bonus payments.

On the final pay claim, Magadia argued that although Walmart had paid all wages owed upon the termination of his employment, it violated the law by failing to list the applicable dates of the pay period on his statement of final pay. Walmart had separately provided Magadia with a final wage statement at the end of the normal semimonthly pay period that listed these dates. Magadia contended that doing so was insufficient and that Walmart needed to include the dates on the statement of final pay.

The district court certified classes for all three claims. After a bench trial, the district court found that Magadia had not suffered a meal break violation and the court decertified the meal period class. However, the court allowed Magadia to pursue PAGA penalties for the alleged meal period violations on behalf of other Walmart employees. The district court then ruled against Walmart on the three claims. It awarded $96 million ($48 million in statutory damages and another $48 million in PAGA penalties) after finding Walmart’s wage statements violated the law because they failed to display the rate of pay and hours worked for the bonus overtime adjustments. It awarded an additional $5.8 million in PAGA penalties for the final wage statement claim and $70,000 in PAGA penalties for the meal period claim. Walmart appealed.

The Ninth Circuit’s Analysis

Meal Period Claim

The Ninth Circuit first evaluated whether Magadia had standing to pursue his meal period claim under PAGA. Federal courts require a plaintiff to have Article III standing, which requires the plaintiff to have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct, and (3) will be redressed by a favorable decision. It was undisputed that Magadia had not suffered a meal period injury himself, but the question was whether he could nevertheless pursue this claim under PAGA. The Ninth Circuit reversed the district court, finding Magadia lacked Article III standing to pursue this claim because he had not suffered the alleged meal period harm himself. Magadia argued he nevertheless could pursue the claims on behalf of other employees under PAGA’s unique structure, which allows an employee to step into the shoes of the state. However, after comparing PAGA to other qui tam actions—“a well-established exception to the traditional Article III analysis”—the Ninth Circuit held PAGA was sufficiently different from a true qui tam action to mandate that a PAGA plaintiff must suffer injury to bring a claim.

Importantly, the Ninth Circuit remanded the meal period claim to the district court with instructions to return it to state court. State courts are subject to their own body of standing law. The court vacated the judgment and award of damages.

Wage Statement Claims

After confirming Magadia had standing to bring the wage statement claims, the Ninth Circuit addressed the merits of those claims. The Ninth Circuit reversed the district court, concluding that Walmart was not required to list the applicable rate or hours of the bonus overtime adjustment on the wage statements. In reaching its conclusion, the Ninth Circuit began with a review of the relevant statutory language. The Labor Code requires only that an itemized statement list “all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee.” [Emphasis added.] The Ninth Circuit reasoned that the bonus overtime adjustment payments were adjusting the overtime rate “calculated after the close of the pay period based on the preceding six pay periods of work,” when the bonus was actually earned. [Emphasis in the original.] In other words, the payment was an after-the-fact adjustment to compensation from a longer period of time. As a result, the Ninth Circuit found that not listing the rates and hours worked complied with the law because there was not an “hourly rate in effect during the pay period” for the bonus overtime adjustment.

The Ninth Circuit also reversed the district court on the final pay statement issue. It again started with the statutory language, finding the Labor Code “requires employers to furnish employees ‘semimonthly or at the time of each payment of wages’ with ‘an accurate itemized statement in writing showing … the inclusive dates of the period for which the employee is paid.’” [Emphasis in the original.] Given the statute’s use of the disjunctive word “or,” the Ninth Circuit found employers have “the option of furnishing the pay statement either semimonthly or at the time of each wage payment.” [Emphasis in the original.] Since Walmart provided the information listing the applicable dates of pay semimonthly, even after issuing Magadia’s final pay statement, the Ninth Circuit found Walmart had complied with the law.

Based on its findings, the Ninth Circuit reversed the judgment and award of damages on the wage statement claims and remanded with instructions to enter judgment for Walmart.

Key Takeaways

The Magadia ruling is a significant one with several key takeaways.

First, this case—like many others—serves as a reminder of the potential for high penalties under PAGA. PAGA allows an employee to pursue penalties on behalf of the employee and all other aggrieved employees, and the penalties may be assessed for each California Labor Code violation for each pay period. The court also has discretion to reduce such penalties if they would be unjust, arbitrary, oppressive, or confiscatory. As a result, hyper-technical claims can potentially lead to millions in liability, which was the case here at the district court level. Employers may want to audit employment practices and procedures regularly to avoid such penalties.

Second, the case has significant implications for the issue of standing under PAGA, particularly in federal court. Prior California appellate court cases had suggested an employee aggrieved by one or more California Labor Code violations could pursue PAGA claims based not only on those violations, but on other violations he or she had not suffered directly. The Magadia court held the opposite, finding that under Article III, Magadia lacked standing to pursue meal period claims he did not personally suffer. Although the Ninth Circuit remanded the meal period claim to state court for further proceedings, the ruling will have significant implications and may limit standing to pursue PAGA claims.

Third, the ruling provides important guidance limiting the scope of technical wage statement claims. It indicates that employers issuing overtime adjustment payments for bonuses earned over multiple pay periods need not display the hours or rate for such payments. This has been a hotly contested issue since the original district court ruling, and the Ninth Circuit’s ruling is likely a welcome sight for employers facing similar technical allegations of wage statement violations. Unfortunately for California employers, it also demonstrates that proving compliance may require a long journey through the appellate process.

Ogletree Deakins will continue to monitor and report on developments with respect to this area of law on the firm’s California blog.