In a recent development, a bankruptcy court ruling has determined that specific portions of employer liability in California Private Attorneys General Act (PAGA) actions can be discharged in bankruptcy. As stated by Fox Rothschild LLP, those specific portions include the 25% share of PAGA penalties designated to be paid to aggrieved employees, as well as the attorneys’ fees accruable to prevailing plaintiffs.
Succinctly, the ruling infers that if a company is bankrupt, its compulsory financial obligations under PAGA may, to a certain extent, be discharged within the bankruptcy proceedings. Specifically, if the company ends up on the winning side of a PAGA lawsuit, the legal fees it would typically be required to pay the plaintiffs’ attorneys can be written off. Additionally, the 25% portion of PAGA penalties that are customarily paid to aggrieved employees can also be discharged in the event of bankruptcy.
This new ruling considerably increases the leverage for employers negotiating settlements under the California Labor Code Private Attorneys General Act (PAGA). As a result, corporate entities facing PAGA actions now have the provisions of possible bankruptcy as a strategic factor when formulating their response to these legal issues.
It’s crucial to note, however, that the ruling may not apply to every situation. The bankruptcy court decision focuses on ‘the right circumstances,’ implying that the scope of dischargeability could vary based on specific aspects of each case. Therefore, it remains seen how this new development will be interpreted and adopted in subsequent legal instances involving PAGA actions.