Case Name: Justin Scheiber v. Shoe Palace Corporation, et al.
Case No.: 2013-1-CV-254589

This is an action under the Private Attorneys General Act (“PAGA”) arising from defendant’s alleged practice of requiring employees to undergo off-the-clock security checks. Before the Court is plaintiff’s unopposed motion for approval of a settlement.

I. Factual and Procedural Background

In the operative second amended complaint (“SAC”), plaintiff alleges that he worked for Shoe Palace as a non-exempt retail store employee. (SAC, ¶ 7.) After his work shifts and when leaving the store for his meal break, plaintiff was required to clock out. (Ibid.) He was then required to wait to be “checked” and/or patted down by a supervisor/manager before being released from work. (Ibid.) This time was not compensated and resulted in plaintiff routinely receiving less than 30 minutes for his meal breaks. (Ibid.) Based on these allegations, plaintiff brings a single claim under PAGA arising from defendant’s alleged violations of Labor Code sections 201-203, 226.7, 510, 1194, and 1197.

Plaintiff’s original complaint, filed on October 15, 2013, alleged direct claims under the Labor Code in addition to his derivative PAGA claim. In July of 2014, the Court (Hon. Kirwan) granted in part defendant’s motion to compel arbitration of this action, holding that plaintiff’s claims under the Labor Code were subject to arbitration, but his PAGA claim must be litigated in court. The Court stayed the arbitration of plaintiff’s Labor Code claims pending the resolution of the PAGA claim. Shoe Palace appealed. In response, plaintiff dismissed all of his claims other than his PAGA claim, and the Court of Appeal dismissed defendant’s appeal as moot in August of 2016. Plaintiff subsequently filed a first amended complaint asserting a single claim under PAGA. He filed the SAC to correct an error in the PAGA penalty period he had initially alleged.

The parties conducted discovery and participated in a successful mediation on May 21, 2018. Plaintiff’s motion for approval of the parties’ PAGA settlement is now before the Court.

II. Legal Standard for Approving a PAGA Settlement

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. 75 percent of any penalties recovered under PAGA go to the Labor and Workforce Development Agency (“LWDA”), leaving the remaining 25 percent for the aggrieved employees. (Iskanian v. CLS Transp. Los Angeles, LLC, supra, 59 Cal.4th at p. 380.) “[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. 2017) 253 F.Supp.3d 1074, 1075.)

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 a 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, plaintiff received written discovery including the relevant policies related to security checks of employees at defendant’s retail locations. Plaintiff also provided a deposition on May 3, 2017. Based on the discovery provided by defendant, plaintiff determined that defendant changed its policy beginning on January 1, 2014 so that security checks of employees were no longer off-the-clock. “Defendant represented to Plaintiff that there were approximately 2,500 non-exempt employee paid periods [sic] worked” from the beginning of the PAGA penalty period until the policy was changed, and “[i]ndependent investigation by Plaintiff’s counsel based upon the number of stores Defendant had in operation at this time and the staffing level of these stores confirmed that this number was a reasonable approximation.”

After this investigation and discovery, the parties attended a mediation on May 21, 2018. They agreed to settle the case for $200,000, or approximately $80 per estimated pay period. The settlement also provides that $66,000 in attorney fees, a $10,000 enhancement award, and up to $11,000 in litigation costs will be deducted from the settlement, for a net settlement of $113,000 or $45.20 per estimated pay period.

According to plaintiff’s counsel, he discovered after this settlement had been reached that Shoe Palace was not able to identify its employees aggrieved by the off-the-clock security checks due to a change in its recordkeeping system. Counsel “determined that the best course of action was to direct the money that would normally go to the Aggrieved Employees to the State instead,” and to “carve[] all of Defendant’s non-exempt employees out of the settlement.” As a result, the settlement agreement before the Court provides that the entire net settlement will be paid to the LWDA. The PAGA release by “Plaintiff, on behalf of the State of California” encompasses “all claims for PAGA penalties arising out of or directly related to the allegations in the Action …” and does not describe the impact of the settlement upon other aggrieved employees.

IV. Analysis

The Court is disinclined to approve this settlement based on the record before it. First and foremost, PAGA provides for the distribution of 25 percent of the penalties recovered “to the aggrieved employees,” and the Court has never been presented with a PAGA settlement that did not achieve this distribution. Plaintiff cites no authority supporting the approval of such a settlement, and his suggestion that the settlement will not bind the other aggrieved employees is incorrect.

Moreover, the Court is unconvinced that the parties cannot identify the aggrieved employees. The only evidence submitted on this point is a declaration by defendant’s litigation counsel, John F. McIntyre, Jr., who declares that Shoe Palace “changed and updated its computer and data infrastructure” at an unspecified point in time “such that the system it has in place today is not the same it had back in 2012 and 2013.” Counsel declares that “[w]hile vast amounts of data was [sic] archived, much of the payroll data from 2012-2013 has become inaccessible.” Based on conversations with Shoe Palace “management,” counsel does “not believe that there is realistically any economical means available to accurately identify the number of workweeks each of its retail store employees worked” during the covered period “nor the number of paychecks issued to each of them.” Counsel explains that the 2,500 pay period estimate that formed the basis of the settlement was tied to the number of stores operated by Shoe Palace during the penalty period and the staffing level for its stores at the time. Counsel maintains that this continues to be a “good estimate.”

It is not apparent how defendant’s litigation counsel would have personal knowledge of most of facts described in his declaration. Even setting aside this issue, counsel does not state that Shoe Palace cannot identify its non-exempt employees during the penalty period, only that it cannot “economical[ly]” identify the number of workweeks or paychecks at issue. This does not explain why the parties cannot distribute penalties to the aggrieved employees on, for example, a simple pro rata basis. If the parties maintain that they cannot distribute penalties to the employees, counsel must obtain more information from Shoe Palace about its payroll records, and must present this information to the Court in the form of a supplemental declaration executed by an individual with personal knowledge of the relevant facts. Alternatively, the parties should modify their settlement so that the aggrieved employees receive their portion of the penalties recovered, whether based on defendant’s records or through self-identification and reporting.

Either way, the Court requires more information about the value of this action to evaluate the settlement. If the parties maintain that the 2,500 pay period estimate is the best they can formulate under the circumstances, they must state the facts it is based on—for example, the number of stores and the staffing levels it assumes. Plaintiff must also provide his analysis of the maximum value of the case based on these assumptions. At a minimum, he must address whether he found evidence of multiple categories of violations per employee, per pay period—for example, meal period and overtime violations—as well as the penalty that would likely be applied to each category of violation and the number of penalties that would be assessed as to a given pay period. Plaintiff must clearly state his estimate of the maximum value of the case and explain why the settlement is reasonable in light of this estimate.

V. Conclusion and Order

The Court is disinclined to approve the parties’ settlement based on the record before it, primarily because the settlement does not provide for the distribution of 25 percent of the recovered penalties to the aggrieved employees as required under PAGA.

If the parties maintain that they cannot identify the aggrieved employees, counsel must file a supplemental declaration executed by an individual at Shoe Palace with personal knowledge of the relevant facts. Specifically, the supplemental declaration must address (1) whether Shoe Palace can identify the nonexempt employees who were subject to off-the-clock security checks during the penalty period, (2) whether it can identify the number of pay periods during which each aggrieved employee was subject to this policy, and (3) the time and expense it estimates that retrieving this information would require. In addition, plaintiff must submit a supplemental brief of no more than ten pages providing his analysis of the maximum value of the case and the reasonableness of the settlement as described above. Any proposed modifications to the settlement should be submitted with a supplemental declaration explaining the changes.

In the event that any supplemental filings are submitted before the scheduled hearing on this matter, the Court will endeavor to address them on October 19. If the matter cannot be resolved at that time, the hearing on plaintiff’s motion will be CONTINUED TO JANUARY 4, 2019 at 9:00 A.M. in Department 1. The supplemental submissions described above shall be filed by December 7, 2018.

The Court will prepare the order.