On Aug. 15, the California Supreme Court substantially limited public employees' ability to sue for wage and hour violations through its ruling in Stone v. Alameda Health System.¹

In a unanimous decision, the high court held that public entities are not employers within the meaning of the California Labor Code's meal and rest break provisions, and that they are exempt from penalties under the California Private Attorneys General Act.

In so holding, the court may have eviscerated the sovereign powers doctrine, which has been applied by the courts in evaluating whether public entities should be held liable under various statutes.

Background

The defendant, Alameda Health System, is a hospital authority established by statute as a "separate public agency" tasked with providing medical care to Alameda County residents. The Alameda County Board of Supervisors established AHS to serve the "indigent, special needs, and general populations of the county."

The plaintiffs, a medical assistant named Tamelin Stone and a licensed vocational nurse named Amanda Kunwar, both working at the AHS-operated Highland Hospital in Oakland, filed a class action against AHS for (1) failure to provide off-duty meal periods, (2) failure to provide off-duty rest periods, (3) failure to keep accurate payroll records, (4) failure to provide accurate itemized wage statements, (5) failure to pay wages, (6) failure to timely pay wages and (7) civil penalties under PAGA.

Specifically, the plaintiffs alleged their positions were subject to the requirements of the Labor Code, particularly Wage Order No. 5; that they were frequently improperly denied or discouraged from taking meal and rest breaks; and that they were automatically deducted 30 minutes of pay each workday, even when they did not take meal breaks.

Prior Court Rulings and the Sovereign Powers Doctrine

At trial in the Alameda County Superior Court, AHS asserted that it was a public entity not subject to suit for the Labor Code violations, and the trial court agreed. Citing a 2009 decision from the California Fourth Appellate District, Johnson v. Arvin-Edison Water Storage District,² the trial court held that "provisions of the Labor Code apply only to private sector employees unless they are specifically made applicable to public employees."

As to the plaintiffs' PAGA claim, the trial court ruled that AHS, a public entity, did not fall under PAGA's scope; that public entities are exempt from punitive damages; and that the underlying Labor Code violations had already been dismissed.

The plaintiffs appealed, and the First Appellate District reversed the trial court's ruling in part. The appellate panel held that the sovereign powers doctrine applied and determined that AHS was not entirely exempt from the California Labor Code's meal and rest period and payroll requirements.

The sovereign powers doctrine is a canon of statutory interpretation that acts as an exception to the traditional rule: Government agencies are excluded from the operation of general statutory provisions — absent express words to the contrary — only if including them would infringe upon sovereign governmental powers. Courts, such as the Stone appellate court, have typically conducted a three-part inquiry:

1. Courts review the relevant statutes for express words that include governmental agencies;

2. If there are no express words, courts look for positive indicia of a legislative intent to exempt such agencies from those statutes; and

3. If no such indicia appear, courts will determine whether applying the statutes to the respondent "would result in an infringement upon sovereign governmental powers."

Applying the sovereign powers doctrine, the appellate court determined that the statute authorizing the establishment of AHS — i.e., its enabling statute — expressed no intent to exempt AHS from the California Labor Code's meal and rest period or payroll requirements, as it was not "considered to be an agency, division, or department of the county." And, the appellate court reasoned, AHS possessed no powers meaningfully distinguishing it from a private institution as a separate public agency.

As to PAGA, the appellate court held that AHS was subject to penalties for violating statutes that provided for the same. Thus, it reversed the trial court as to the plaintiffs' claims for failure to provide off-duty meal periods, failure to provide off-duty rest periods, failure to keep accurate payroll records, failure to pay wages, failure to timely pay wages and civil penalties under PAGA.

The California Supreme Court granted AHS' petition for review.

The California Supreme Court's Ruling and its Impact

The Labor Code

The high court's ruling, authored by Justice Carol A. Corrigan, explained that the California Labor Code only applies to public agencies when they are expressly included in the statutory language. According to the California Supreme Court, "The plain language of the governing wage order thus expressly excludes public employers from most of the wage and hour obligations it places on private employers, including meal and rest break obligations."

Moreover, as a matter of first impression, the court reasoned that the definition of the term "person" was "central to resolving the issues" of the case. It found that the definition in Section 18 of the Labor Code "communicates that government employers are not subject to the meal and rest break obligations it prescribes." The court cited legislative history, agency interpretations and case law supporting its interpretation.

The court's ruling is a significant blow to the sovereign powers doctrine. Although the court recognized the sovereign powers doctrine, it substantially minimized the import it was given in the appellate court, stating that "although interpretive maxims may aid in that analysis, the fundamental question is always one of legislative intent." And, as mentioned above, the high court found that the legislative intent to exclude public entity employers from the Labor Code is clear.

Without concluding that the First Appellate District's sovereign powers analysis was incorrect, the high court concluded that the doctrine is merely a "helpful aid" to statutory construction, although the court did not find it helpful in Stone. Moreover, under the high court's reasoning, the sovereign powers doctrine is unlikely to be helpful in most circumstances.

The court reaffirmed the general presumption that statutes are understood not to apply to government entities unless the legislative intent to do so is plain. Under the court's reasoning in Stone, the burden of establishing "contrary legislative intent" appears to be extremely high and may require an affirmative statement from the California State Legislature that public entities should be covered under the general words of a statute.

Additionally, the court broadened the range of the general presumption that government bodies or separate public agencies are not included within the general words of a statute.

The court seems to have moved further toward the general assumption that government agencies of any kind are exempt from general statutes, absent clear contrary legislative intent, stating California agencies' lack of full autonomy does not nullify their governmental status. Indeed, the court rejected the plaintiffs' argument that "an employer can be considered a public entity exempt from Labor Code requirements only if it has the same sovereign powers as a city or county."

The Private Attorneys General Act

Regarding PAGA, the court held that the Legislature did not intend that public employers be subject to penalties. In so holding, the court explained that exposing public entities to PAGA penalties would be untenable.

As with the Labor Code statutes discussed above, the PAGA statute incorporates Section 18 of the Labor Code. As a result, the court concluded that public employers are not subject to PAGA and, thus, no penalties may be exacted from public employers under PAGA.

Relevant to the sovereign powers doctrine, the court seemed particularly concerned that there is no statutory ceiling on the amount of PAGA penalties an entity could be required to pay.

Citing PAGA's requirement that 75% of any penalties be paid to the California Labor and Workforce Development Agency, Justice Corrigan noted that, under the plaintiffs' theory, "those penalties would be paid from the coffers of other taxpayer-funded public institutions."

Indeed, in an amicus curiae briefing in support of the Alameda Health System, the board of the California State University system asserted that "unfunded PAGA liability is one reason for a recent tuition increase affecting all students."

The Stone court's concern is consistent with prior California Supreme Court opinions on the sovereign powers doctrine, such as 2006's Wells v. One2One Learning Foundation, which stated that exposing public entities to liability "would interfere significantly with government agencies' fiscal ability to carry out their public missions."³

As a result of the California Supreme Court's repeated concern regarding the depletion of public funds, public entities are likely to have a potent defense relevant to, and also independent of, the sovereign powers doctrine.

Implications

Significantly, the Stone decision augments a crucial defense for public employers and, conversely, weakens an exception thereto. As detailed above, Stone provides a robust deterrent against plaintiffs seeking to sue their public employers for wage and hour violations in California and is likely to provide cover for public entities regarding many other statutes.

Moreover, many government employers no longer face the threat of PAGA penalties, which the court recognized would place a severe burden on public finances.

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The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

1. Stone et al. v. Alameda Health System. , 553 P.3d 783 (Cal. 2024).

2. Johnson v. Arvin-Edison Water Storage District, 174 Cal.App.4th 729 (2009).

3. Wells v. One2One Learning Foundation, 39 Cal. 4th 1164, 1193 (2006).