In a recent, pivotal decision, Stone v. Alameda Health System, the Supreme Court of California held that public employers are not subject to civil penalties pursuant to California’s Private Attorneys General Act of 2004 (PAGA) and that the California meal and rest break laws at issue in the case do not apply to public agencies. The court further clarified that Labor Code section 220(b)’s definition of “municipal corporation” includes all public employers.
The court addressed whether a hospital authority, established by a county board of supervisors and authorized by the legislature to manage the county’s public health facilities, can be held liable for wage and hour violations and civil penalties under PAGA. The court concluded that the legislature intended to exempt public employers, including hospital authorities, from the labor code provisions related to meal and rest breaks and the timely payment of wages, unless expressly provided otherwise.
This ruling overturned prior appellate court decisions and clarified that PAGA's statutory framework, legislative history, and underlying public policy collectively support the conclusion that public entities are not subject to PAGA actions for civil penalties.
Relevant Background of the Case
Plaintiffs, a medical assistant and a vocational nurse at Highland Hospital, which is operated by Alameda Health System (AHS), filed a wage and hour class action and claim for penalties under PAGA, alleging failure to provide meal and rest periods in violation of Labor Code §§ 226 and 512, as well as various derivative claims premised on these claims.
AHS demurred on the ground that it was a public entity and not subject to suit for the labor code violations asserted. Relying on Johnson v. Arvin-Edison Water Storage Dist. (2009) 174 Cal.App.4th 729 (Johnson), the trial court sustained the demurrer without leave to amend, holding that “provisions of the Labor Code apply only to private sector employees unless they are specifically made applicable to public employees,” and finding that the statutes and wage order provisions at issue did not do so. The trial court also found that AHS was not a “person” subject to PAGA penalties, the PAGA claim derived from Labor Code violations that had been rejected, and because PAGA penalties are punitive in nature, they are therefore unavailable against public entities.
The Court of Appeal reversed in part based on its analysis of the enabling statute, rather than the Labor Code. The Supreme Court reversed the Court of Appeal.
What Constitutes a Public Entity for Purposes of the Labor Code?
In Stone, plaintiffs disputed that AHS was not a public entity, which the court rejected. Health and Safety Code § 13050.1 defines “public entity” as including “the state, a county, city, district, public authority, public agency, and any other political subdivision or public corporation in the state.” Thus, since AHS’s enabling statute repeatedly described AHS as a “public agency,” the court found that AHS was clearly a public entity. This was also supported by the fact that several provisions of AHS’s enabling statute address AHS’s rights and liabilities under the laws that specifically apply to public entities, and other parts of the enabling statute specifically exempted AHS from laws that generally apply to public entities, indicating that those laws would have otherwise applied to AHS. Further, it was clear from AHS’s enabling statute that AHS’s affairs were intertwined with and dependent upon Alameda County.
A Public Entity Is Not Liable for Meal and Rest Break Violations Under Labor Code Sections 226 and 512
Central to the court’s analysis was what constitutes an “employer” under the Labor Code and wage orders. “[T]he Labor Code and wage order impose meal and rest break obligations on ‘employers,’ and, under the relevant wage order, an ‘employer’ must be a ‘person as defined in Section 18 of the Labor Code.’ (Wage Order No. 5, subd. 2(H).)”
Under Labor Code section 18, “person” “means any person, association, organization, partnership, business trust, limited liability company, or corporation.” The court determined that these descriptions are those most commonly associated with private individuals and entities as opposed to public or governmental entities. The court also noted that, when the legislature intends to include government entities in specific legislation, it does so explicitly. Unlike other Labor Code provisions that expressly apply to public employers, Labor Code §§ 226 and 512 did not. By extension, derivative claims premised on Labor Code §§ 226 and 512 also do not apply to public employers.
Further, the court found that AHS was a “municipal corporation” for purposes of Labor Code section 220(b), which provides the Labor Code sections 200-211 and 2015-219 “do not apply to the payment of wages of employees directly employed by any county, incorporated city, or town or other municipal corporation.” The court clarified that Section 22(b)’s “use of ‘municipal corporation’ signifies a broad reference to ‘public corporations or quasi-municipal corporations’” and that “a public agency 'created or authorized by the Legislature to aid the state in some form of public or state work, other than community government,'” such as AHS, falls into the category of municipal corporation.
PAGA and Public Employers
Relying on the same analysis, the court held that PAGA does not apply to public employers. Since public entities are not a "person" according to the Labor Code, an employee of a public employer would not be able to use PAGA as a means of addressing their grievance. Although a plaintiff need not assert an unredressed injury to have standing under the version of PAGA in effect during this litigation, the statute plainly requires that the plaintiff have “sustain[ed] a labor code violation committed by his or her employer.” Adolph v. Uber Technologies, Inc. (2023) 14 Cal.5th 1104, 1121. Thus, since public entities do not meet the definition of “employer,” as discussed above, PAGA claims do not apply. Further, when liability for this underlying violation has not been established, any PAGA claims seeking penalties for the alleged violation must also fail. See Adolph, at pp. 1123–1124; Rocha v. U-Haul Co. of California, 88 Cal.App. 5th 65 (2023).
The court also recognized that applying PAGA to public entities could impose substantial financial burdens. Since public entities are funded by taxpayers, any penalties imposed under PAGA would ultimately be borne by the public. This could lead to significant budgetary constraints, potentially hindering public employers' ability to fulfill their public duties.
The Impact of the Ruling on Public Employers
This decision is significant for public employers across California. The decision confirms that public employers are not subject to liability for civil penalties under PAGA, reinforces the principle that public entities are not subject to labor code provisions unless the provision expressly so states, and broadens the definition of “municipal corporation” to further limit the applicability of certain labor code provisions to public entities.
However, the court’s analysis reveals that the issue of whether a labor code provision applies to a public employer often depends on each labor code provision, the type of public entity the employer is, and/or the type of employees involved. While the court found that AHS was exempt from meal and rest break obligations under labor code sections 226 and 512 because it is a public employer, the court noted the recent enactment of labor code section 512.1, which requires public employers to provide meal and rest periods, similar to those required by labor code section 226 and 512, to employees in a hospital, clinic, or public health setting.
This article originally appeared on Wood Smith Henning & Berman LLP.
About the Authors:
Ahllam H. Berri is a partner at Wood Smith Henning & Berman LLP.
Keith E. Smith is a managing partner at Wood Smith Henning & Berman LLP.