Case Name: Andres Alejandro Mercado v. Security Industry Specialists, Inc., et al.

Case No.: 17CV320059

This is a representative action under the Private Attorneys General Act (“PAGA”) by an employee of defendant Security Industry Specialists, Inc. (“SIS”). Before the Court is plaintiff’s motion for approval of a settlement, which is unopposed.

I. Factual and Procedural Background

According to the operative First Amended Complaint (“FAC”), defendant provides security services including executive protection, special event, investigation, risk/threat assessment, retail loss prevention, and uniformed services. (FAC, ¶ 2.) Plaintiff has been employed by defendant as a non-exempt security guard since February 2016. (Id. at ¶ 3.) He alleges that defendant fails to compensate security guards for missed meal and rest periods and for overtime worked. (Id. at ¶¶ 8-14.) In addition, wages paid pursuant to defendant’s non-discretionary incentive pay program are not included in employees’ pay rates for purposes of calculating overtime pay. (Ibid.)

On December 5, 2017, plaintiff filed the original complaint in this action, alleging claims for (1) unfair competition in violation of Business & Professions Code section 17200 et seq.; (2) failure to pay overtime in violation of Labor Code sections 204, 510, 1194, and 1198; (3) and (4) failure to provide meal and rest periods in violation of Labor Code sections 226.7 and 512; and (5) failure to provide accurate itemized wage statements in violation of Labor Code section 226. Defendant answered the original complaint on December 29, 2017.

On January 24, 2018, plaintiff moved for leave to file the FAC, which omits all of his original claims and sets forth a single PAGA claim based on the same factual allegations and Labor Code provisions underlying the original complaint. SIS opposed plaintiff’s motion for leave to file the FAC and moved to compel arbitration of the claims in the original complaint. On February 23, the Court granted leave to file the FAC and denied as moot defendant’s motion to compel arbitration. The FAC was deemed filed on that date, and defendant filed its answer on March 20, 2018.

The parties proceeded to engage in discovery, including participating in four informal discovery conferences with the Court and distributing a Belaire-West notice to aggrieved employees. On August 10, 2018, defendant filed a second motion to compel arbitration addressed specifically to the FAC, which the Court denied.

On March 22, 2019, SIS filed a motion for judgment on the pleadings based on plaintiff’s discovery response indicating that his incentive pay theory is based solely on defendant’s failure to include accrued paid time off in the regular rate of pay for purposes of calculating overtime. SIS contends that this theory fails as a matter of law, and plaintiff accordingly does not state a claim based on overtime or derivative wage statement violations. Plaintiff opposed SIS’s motion on evidentiary and procedural grounds, but did not defend the viability of his incentive pay theory—indeed, he offered to stipulate that he “no longer seek[s] civil penalties based on the allegation that Defendant failed to include ‘PTO Cash Out’ in the regular rate of pay.” In an order filed on July 2, 2019, the Court denied the motion on procedural grounds.

The parties have now reached a settlement. Plaintiff now moves for an order approving the parties’ PAGA settlement.

II. Legal Standard for Approving a PAGA Settlement

Under PAGA, an aggrieved employee may bring a civil action personally and on behalf of other current or former employees to recover civil penalties for Labor Code violations. (Iskanian v. CLS Transp. Los Angeles, LLC (2014) 59 Cal.4th 348, 380.) 75 percent of any penalties recovered go to the Labor and Workforce Development Agency (“LWDA”), leaving the remaining 25 percent for the employees. (Ibid.) PAGA is intended “to augment the limited enforcement capability of [LWDA] by empowering employees to enforce the Labor Code as representatives of the Agency.” (Id. at p. 383.) A judgment in a PAGA action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government. (Id. at p. 381.)

Labor Code section 2699, subdivision (l) provides that “[t]he superior court shall review and approve any penalties sought as part of a proposed settlement agreement pursuant to” PAGA. “[T]here is no requirement that the Court certify a PAGA claim for representative treatment” as in a class action. (Villalobos v. Calandri Sonrise Farm LP (C.D. Cal., July 22, 2015, No. CV122615PSGJEMX) 2015 WL 12732709, at *5.)

There is little case law addressing the standard for approving a PAGA settlement. (See Syed v. M-I, L.L.C. (E.D. Cal., Feb. 22, 2017, No. 112CV01718DADMJS) 2017 WL 714367, at *13, fn. 8.) As one federal court recently noted, “aside from [the] bland mandate” that courts “review” PAGA settlements, “the Act is surprisingly short on specifics. … [N]either the California legislature, nor the California Supreme Court, nor the California Courts of Appeal, nor the [LWDA] has provided any definitive answer to th[e] vexing question” of what standards govern the courts’ review. (Flores v. Starwood Hotels & Resorts Worldwide, Inc. (C.D. Cal., May 19, 2017, No. SACV1401093AGANX) 2017 WL 2224265, at *1.)

What guidance there is comes largely from federal cases. In connection with one such case, the LWDA indicated that “when a PAGA claim is settled, the relief provided for under the PAGA [should] be genuine and meaningful, consistent with the underlying purpose of the statute to benefit the public ….” (Villalobos v. Calandri Sonrise Farm LP, supra, 2015 WL 12732709, at *13.) The PAGA settlement must be reasonable in light of the potential verdict value (see O’Connor v. Uber Technologies, Inc. (N.D. Cal. 2016) 201 F.Supp.3d 1110, 1135 [rejecting settlement of less than one percent of the potential verdict]); however, it may be substantially discounted given that courts often exercise their discretion to award PAGA penalties below the statutory maximum even where a claim succeeds at trial (see Viceral v. Mistras Group, Inc. (N.D. Cal., Oct. 11, 2016, No. 15-CV-02198-EMC) 2016 WL 5907869, at *8-9).

III. Settlement Process and the Parties’ Agreement

According to a declaration by plaintiff’s counsel, following the denial of defendant’s motion for judgment on the pleadings, the parties agreed to mediate with Antonio Piazza, an experienced employment law and class action mediator. They participated in an all-day mediation on October 29, 2019. Prior to the mediation, defendant provided data to plaintiff so that counsel could evaluate the potential value of his claims. The parties reached a settlement facilitated by Mr. Piazza and continued to negotiate the terms of the formal settlement agreement now before the Court.

The settlement requires defendant to pay a total of $500,000, with $400,000 allocated to a PAGA settlement and $100,000 to the settlement of individual claims. $131,668 in attorney fees and costs not to exceed $66,000 will be deducted from the gross settlement, along with $8,000 in administrative costs. The net settlement of $194,332 will be distributed 75 percent ($145,749) to the LWDA and 25 percent ($48,583) to the aggrieved employees, based on the number of “Active Workweeks” attributed to each employee during the PAGA period. The 998 aggrieved employees will thus receive an average payment of approximately $48.68.

In exchange for the settlement, aggrieved employees will release “any and all causes of action[] or claims under PAGA for civil penalties that (1) arose or may be alleged to have arisen at any time at Apple’s Cupertino facilities from December 11, 2016 through June 1, 2018, or at any time at Amazon’s Lab 126 facilities from September 25, 2018 through December 15, 2018; and (2) were asserted or could have been asserted based on the facts and/or allegations in the [FAC], including but not limited to alleged violations” of specified Labor Code provisions. The release expressly excludes “potential individual claims for alleged Labor Code violations (if any), which do not arise under PAGA.”

IV. Analysis of Settlement and the Penalties It Provides

As an initial matter, counsel’s declaration states that the settlement presented to the Court resolves not only the action before it, but three related PAGA actions pending in Orange County and three individual arbitrations. However, the settlement agreement does not address the Orange County actions, which all name Automobile Club of Southern California as defendant. The Court assumes the reference to the Orange County actions was in error, which is confirmed by the notice of errata filed by plaintiff on February 28, 2020.

The Court also wishes to understand the claims involved in the individual arbitrations and the reasoning supporting the allocation of $100,000—one-fifth of the total amount defendant has agreed to pay pursuant to the agreement before the Court—to the individual claims of plaintiff and the three employees who have pursued arbitration (Oleg Golovin, Zikia Haywood, and Tanisha Ellis). In addition—in a limitation not suggested by the FAC—the PAGA settlement group is defined to encompass only individuals who were “employed by Defendant in the position of Specialist at (i) Apple’s Cupertino location in California at any time from December 11, 2016 through June 1, 2018; and/or (ii) the Amazon’s Lab 126 location in California at any time from September 25, 2018 through December 15, 2018.” Prior to the hearing on this matter if possible, plaintiff’s counsel shall file a supplemental declaration addressing these issues.

With regard to the dollar value of the settlement, the Court is not able to determine whether the parties’ agreement merits approval based on the record currently before it. Counsel for plaintiff estimates the maximum value of the case to be $11.2 million, based on 15,000 eligible pay periods. However, counsel does not explain why this valuation assumes there was only one violation per pay period and assumes a maximum penalty of less than $100 per pay period.

Moreover, plaintiff provides no substantive discussion of the merits of his claim. While the Court is aware of and gives weight to the possibility that the maximum penalties may not be awarded even in a successful PAGA action, particularly in view of the 3.5 percent recovery that the settlement represents, the Court wishes to understand plaintiff’s views regarding how well-settled the applicable law is, as well as regarding how clear defendant’s liability is in this case.

Plaintiff’s counsel shall file a supplemental declaration addressing these issues prior to the hearing on this matter if possible. Counsel’s declaration shall also address the results of the Belaire-West process that has been completed in this action, and shall state whether the aggrieved employees who received a Belaire-West notice are the same individuals who are included in the PAGA settlement group.

V. Attorney Fees and Other Deductions from the Gross Settlement

There is no guidance to be found in the case law regarding the Court’s role in reviewing attorney fees associated with a PAGA settlement. However, it is difficult to imagine that courts can fulfill their statutory duty to review the penalties associated with PAGA settlements while turning a blind eye to the economically critical issue of attorney fees. The Court thus finds that it must scrutinize the attorney fee arrangement associated with a PAGA settlement. This is consistent with the observation of many courts that PAGA claims are analogous to “qui tam” suits like those under the federal False Claims Act: in reviewing settlements of qui tam claims, courts do consider any associated attorney fee arrangement. (See U.S. v. Texas Instruments Corp. (9th Cir. 1994) 25 F.3d 725, 728 [attorney fee award must be considered by the trial court as part of its review of the “entire settlement arrangement”].)

The conclusion that the Court must review an attorney fee arrangement associated with a PAGA settlement begs the question of what standard should be applied to this analysis. (See Rodriguez v. RCO Reforesting, Inc. (E.D. Cal., Jan. 25, 2019, No. 2:16-CV-2523 WBS DMC) 2019 WL 331159, at *6 [the PAGA statute does not “provide[] a standard for evaluating attorneys’ fees related to a settlement”; applying lodestar method].) Plaintiff appears to take the position that the common fund doctrine should apply, and the Court agrees. The main advantage of the settlement at issue is that it creates a significant fund to benefit the LWDA and the aggrieved employees. As noted by the trial court in Harrington v. Payroll Entertainment Services, Inc. (2008) 160 Cal.App.4th 589, 594, plaintiff’s attorneys should share in this recovery. These circumstances are analogous to cases, like wage and hour class actions, where the common fund doctrine is applied. (See City and County of San Francisco v. Sweet (1995) 12 Cal.4th 105, 110-111 [California recognizes and consistently applies the common fund doctrine, recognizing the historic power of equity to permit a party recovering a fund for the benefit of others in addition to himself to recover costs including attorney fees from the fund itself].) The Court finds that the common fund approach is the most reasonable one here, given the nature of the case and of the parties’ settlement.

Here, counsel requests a fee award of $131,668, or 1/3 of the settlement fund. This percentage is typical for wage and hour cases, and the Court finds it is reasonable considering counsel’s lodestar of $411,952 (resulting in a negative multiplier). (See Laffitte v. Robert Half Intern. Inc. (Cal. 2016) 1 Cal.5th 480, 488, 503-504 [trial court did not abuse its discretion in approving fee award of 1/3 of the common fund, cross-checked against a lodestar resulting in a multiplier of 2.03 to 2.13].)

Counsel’s request for litigation costs of $66,000 (which appears to include costs associated with the individual arbitrations discussed above) also appears reasonable based on the summary provided. The $8,000 allocated to administrative costs is also appropriate.

The Court thus finds the attorney fees and other proposed deductions from the gross settlement to be fair and reasonable.

VI. Administration Process

Attached to plaintiff’s motion is a form of notice to the PAGA settlement group, which describes the lawsuit and explains the settlement. Group members’ payments will be enclosed with the notice in the form of a check valid for 180 days. The settlement administrator will issue and distribute group members’ payments within 20 days of the funding of the settlement. Any payments returned as undeliverable will be re-mailed to any updated address located through a skip trace or similar search. Any funds associated with checks uncashed after 180 days will be submitted to the California State Controller’s Office’s Unclaimed Property Fund in the name of the group member. The proposed form of notice and administrative procedures are appropriate and are approved.

VII. Conclusion and Supplemental Filing Required

To enable the Court to evaluate whether the settlement is “genuine and meaningful, consistent with the underlying purpose of the [PAGA] statute to benefit the public,” plaintiff’s counsel shall file a supplemental declaration addressing the issues raised in section IV of this tentative ruling, prior to the hearing on this matter if possible.

The Court will prepare the order and judgment.