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Employee Threatened a Lawsuit?  Received a PAGA Letter?

Before a lawsuit is ever filed, an employer often receives a letter from its employee’s attorney laying out a laundry list of employment law violations and the threat that if a substantial monetary demand is not paid, a lawsuit will ensue.  This type of “demand letter” is common and may be a precursor to a lawsuit. 

A “demand letter” might have a variety of accusations against your business: for example, the employee might accuse you of failing to pay all wages due to him or her; failing to provide meal or rest breaks; failing to pay overtime wages; forcing the employee to work “off-the-clock”; failing to reimburse for business expenses; that the employee was sexually harassed, was discriminated against because of race, religion or a disability, or that he or she was retaliated against because the employee “blew the whistle” on a violation of the law.   Whatever the accusation, the “demand letter” is a threat that an employee may sue your business for his or her individual damages in a civil court, if the matter cannot otherwise be resolved.

An employer may also receive a copy of a letter addressed to the California Labor Workforce Development Agency (“LWDA”).  This letter typically lists alleged wage violations under the California Labor Code and asserts a “Private Attorneys General Act” or “PAGA” claim on behalf of the employee, as well as other “aggrieved employees” (“PAGA” letter).  The alleged violations may include the failure to pay all wages due to him or her; the failure to provide meal or rest or recovery breaks; the failure to pay overtime wages; the failure to reimburse for business expenses; and the failure to provide accurate paycheck stubs.  The PAGA letter is a precursor to a PAGA action and may also indicate that the employee will pursue a class action as well as a PAGA action against your business in civil court.

A PAGA action is an action an employee files in a civil court to enforce most sections of the California Labor Code on behalf of the employee, all other aggrieved employees, and the state.  Such an action allows the employee to recover penalties for violations of the California Labor Code on behalf of the state.  If the employee’s PAGA action is successful, the employee and the other “aggrieved employees” may keep 25 percent of the recovered civil penalties and the employee’s attorneys are paid their fees and costs for bringing the PAGA action.  The remaining 75 percent of the recovered penalties are paid directly to the LWDA.  A class action is similar in that one employee may assert claims on behalf of other “similarly situated” employees, and in the context of wage and hour lawsuits, a class action plaintiff may recover damages (such as unpaid wages) on behalf of him or herself and the class, if the class action lawsuit is successful.

The California Labor Code has myriad technical requirements relating to overtime wage requirements, the provision of meal and rest breaks, premium pay for missed meal and rest breaks, the timing of paychecks, and paycheck stub information.  Many sections of the Labor Code provide for civil penalties (in addition to the recovery of unpaid wages) for each violation.  The PAGA statute covers gaps, by providing for penalties where a Labor Code section does not specify a penalty.  The civil penalty under the PAGA statute is $100 for an initial violation/$200 for a subsequent violation per employee per payroll period basis for each violation.  Assuming the “subsequent” PAGA penalty applied for a single violation, and the employer was assessed with penalties for a one-year period for each of its 100 employees and paid them on a weekly basis, the civil penalty amounts to $1,040,000.   The bottom line: the requirements may not be obvious to business owners and the civil penalties for violating them add up quickly. 

Whether you receive a “PAGA” letter or a “demand” letter, here is what you should do:

Tip 1:  Don’t Ignore It.

A demand or a PAGA letter is often the first notification an employer receives of a threatened lawsuit by an employee.  Responding to the demand or PAGA letter early at the bare minimum will help your business prepare a defense to the accusations.  In the context of a PAGA letter, your business might be able to “cure” certain violations and escape liability (if the violation is addressed within 33 days of receipt of the notice).  Even if the violation may not be “cured” such that your business can escape liability, assessing whether there are potential violations and addressing them quickly will reduce your liability for damages and penalties, if a PAGA or class action is filed. 

Don’t ignore the demand or PAGA letter even if the allegations appear baseless – or completely ridiculous.  A professional response may ward off the employee’s attorney by signifying that your business will vigorously defend the claim and by demonstrating that the employee’s claims are meritless.  

Tip 2: Save Everything!

Your business may already maintain and preserve records of well written employment policies, signed acknowledgements of those policies, personnel files, and documentation of past disciplinary/performance issues with the employee threatening the lawsuit.  It is important to preserve those records as well as electronic communications and other business records that might be helpful to your business’s defense.  Locate those records and save them as soon as possible.

Tip 3: Insurance Coverage?

Check your insurance policies.  Employment practices liability insurance and other types of insurance might provide partial or full coverage for the claim and provide an attorney for defense of the litigation of covered claims.  Insurance policies also may have requirements regarding when the insurer must be notified of a claim. 

Tip 4: Hire Employment Defense Lawyer.

Experienced employment defense lawyers have a deep knowledge of California and federal wage and hour requirements and other employment law requirements.  An attorney will be able to spot a violation and know how to address it.  Litigators of employment lawsuits have the skill set required to investigate the threatened claims and negotiate settlements.  Again, hiring an attorney early before litigation begins may help your business to avoid litigation altogether, and if litigation cannot be avoided, an attorney will help your business prepare for it.

Tip 5: Investigate the Accusations

Investigating and assessing threatened claims--even those that seem frivolous at first blush--is important.  Your attorney should guide you in this effort and will likely point out additional information and documents that strengthen your business’s defense.  Equally important, your investigation should identify key witnesses to your defense.  Depending upon the circumstances and alleged violations, it may be very helpful to interview those witnesses as soon as possible.  With respect to allegations of harassment, your business may be required to conduct an investigation in circumstances where the demand letter is the first notice of such alleged conduct.  If the investigation reveals that harassment is occurring or did occur in the workplace, it is your business’s obligation to take corrective action. 

Tip 6: Advise Employees of Potential Inquiries.

Your business’s employees might be contacted by the employee threatening the lawsuit or by the employee’s attorney.  Your business’s employees are not required to communicate with that employee or his or her counsel.  In the case of certain managers, the manager may have an obligation not to communicate with such an employee and/or his or her counsel.  You should advise your managers and key employees that they are under no obligation to communicate with the employee threatening the lawsuit or that employee’s attorney and you should ask them to report any such contacts to you.

Your business can not require the employees to report any such contact by the potential plaintiff’s counsel and cannot prohibit such contact, as such an instruction or demand might infringe on your employees’ rights.

Tip 7: Claims Against the Employee Threatening the Lawsuit?

With your attorney’s guidance, investigate whether your business has any claim against the employee threatening the lawsuit.  The more common claims against employee are the failure to repay an employee loan or overpayment of wages, the violation of a confidentiality provision in an employment agreement, a breach of fiduciary obligations, or more seriously, embezzlement or fraud.  A claim against the employee threatening the lawsuit may provide leverage in pre-litigation settlement discussions or again ward off the employee or his or her counsel from engaging in a legal battle with your business.

Tip 8: Pre-Litigation Settlement?

After an investigation, an assessment of potential violations, and a consultation with counsel, it may be advisable to negotiate a settlement with the employee threatening a lawsuit or pursuing a PAGA or class claim before any lawsuit is ever filed.  Litigation is costly, time-consuming, and distracting.  Assessing these factors is important regardless of the merit of the employee’s accusations.

Tip 9: No Retaliation.

Occasionally, a current employee threatens a lawsuit against your business.  Employees have the right to assert claims, even if those claims are ultimately found to be invalid.  Make sure your managers and employees understand that the current employee threatening the lawsuit has the right to do so and cannot be retaliated against.  This tip applies even against the current or formers employee’s relatives who may be currently working at your business.

Tip 10: Consider an Arbitration Agreement

If your business has not already considered whether an arbitration agreement with employees is or would be useful, it should re-consider this option upon receiving a demand or PAGA letter.  A well written arbitration agreement is enforceable, avoids trials of all employment claims, except PAGA claims. 

Eileen P. Kennedy is a Senior Attorney with Berliner Cohen LLP with twenty years of experience defending employment lawsuits.  Should you have questions or concerns about threatened lawsuits or employment law advice, please feel free to reach out to Ms. Kennedy at or 408.286.5800.