Retaliation claims

Is exhaustion of administrative remedies mandatory or permissive?

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Offered the granting of a wish, many employers—especially those who are about to fire someone—might wish that their employees could not easily sue them. In MacDonald v. State of California (2013 WL 5422792), the California Court of Appeal last week went some way toward making that wish come true. In an opinion that is clear, forceful, and direct, the court held that employees alleging labor code violations cannot sue, but must instead file an administrative claim with the state labor commissioner. Unfortunately for employers, it is not at all clear that the opinion is correct.

California law guarantees employees the right to a smoke-free work environment. Another state statute makes it illegal to smoke in a government building, additionally guaranteeing a smoke-free environment for public employees. Employees who wish to enforce these guarantees are protected by the state’s labor code, which protects whistle-blowers generally, and also outlaws retaliating against an employee who complains about health-related workplace violations specifically. So when Aaron MacDonald, who worked for the California State Assembly in a state office building, complained to his managers that his supervisor was smoking in the office, he thought that he was protected as a whistle blower. The state thought otherwise, and promptly fired him.

So far, it has not been decided whether MacDonald’s firing was lawful. When he sued to challenge the firing in court, the state immediately moved to have the case dismissed. According to the state’s lawyers (the Attorney General and the state Legislative Counsel), Labor Code § 98.7 requires employees with whistle-blower claims to file an administrative complaint with the state labor commission, rather than suing in court. The trial court agreed and dismissed MacDonald’s complaint without considering its merits.

On appeal, MacDonald argued that, while he had the right to file an administrative complaint, he wasn’t required to do so. In making this argument, he relied on Section 98.7’s plain language, which says that, “Any person who believes that he or she has been discharged … in violation of any law under the jurisdiction of the Labor Commissioner may file a complaint with the division….” MacDonald also pointed to Lloyd v. County of Los Angeles, a 2009 case in which a different Court of Appeal panel (for the second district, which includes metropolitan Los Angeles), held that “[t]here is no requirement that a plaintiff pursue the Labor Code administrative procedure prior to pursuing a statutory cause of action.”

In rejecting MacDonald’s arguments, the Court of Appeal acknowledged that Labor Code § 98.7 says that employee plaintiffs “may” (not “must”) pursue their labor-code-violation claims administratively rather than in court. It also acknowledged that, in the Lloyd case, its judicial colleagues had recently interpreted that language to mean that employees need not pursue administrative remedies, but may instead file directly in court. But the MacDonald court concluded that Lloyd was wrong when it was decided because the California Supreme Court had held in 2005 that exhaustion of administrative remedies with the Labor Commissioner is mandatory before any judicial consideration of a labor code violation.

For an appellate court, in which disagreement with judicial colleagues is expressed with scrupulous politeness, the MacDonald court’s rejection of Lloyd was unusually blunt. In footnote 4, the court first notes that “no published California decision” has agreed with Lloyd (because it could not properly do so, it did not mention that at least one unpublished California decision followed Lloyd), then goes on to say that “the majority of federal district courts have agreed that, under Campbell, a plaintiff [making a whistle-blowing claim] is required to allege exhaustion of administrative remedies with the Labor Commissioner before bringing suit,” citing no fewer than fourteen federal decisions in support of its position. This is surely overkill.

But as the MacDonald court also acknowledged at the end of footnote 4, a number of federal courts have held that whistle-blower plaintiffs are not required to file administrative claims with the Labor Commissioner before being allowed to sue, and have cited Lloyd in support of that conclusion. What the court did not acknowledge was the firmness and depth of those courts’ analysis. In one opinion, for example (Creighton v. City of Livingston), the federal District Court found that “no California decision requires as a prerequisite to suit … exhaustion of administrative remedies before the Labor Commissioner,” and analyzed over the course of several pages why, in the court’s view, they would be wrong to do so. Three other federal courts, in decisions issued this year and last year, reached the same conclusion and included similarly searching analysis. Perhaps most surprisingly, the Court of Appeal failed to acknowledge a 2007 letter by the Labor Commissioner’s own lawyer, included in the record in Creighton, which said that “the [Labor Commissioner’s] position is that the wiser course is not to require exhaustion of Labor Code § 98.7 procedures prior to raising a statutory claim in a civil action.”

The MacDonald court suggests that those decisions (including Lloyd) that have held exhaustion of administrative remedies unnecessary did so only by eliding the Supreme Court’s Campbell opinion. But a review of those decisions suggests that that charge is unfair. Far from ignoring Campbell, those decisions closely analyze Campbell’s holding and conclude from it that when an agency provides its own internal remedy for violation of its own statute, exhaustion of that remedy is mandatory. Because Labor Code § 98.7 provides only a permissive remedy for state-wide statutes, Lloyd and the courts that have followed it hold, Campbell simply does not apply.

The California Supreme Court has not yet ruled on Campbell’s full reach. Maybe, as the MacDonald court has concluded, it stands for the broad proposition that, whenever an administrative remedy is available, that remedy must be exhausted before suit can be filed in court. Or maybe, as Lloyd and other courts have held, it stands for the much narrower proposition that an agency’s internal remedies must be exhausted before suit may be brought over that agency’s internal policy or regulation. Given the decisive split in authority, the Supreme Court may well decide that the time has come to answer that question, should MacDonald seek that court’s review.

But until the Supreme Court rules on this question—in this case or a future one—it is too early for employers to believe that their wish has been granted.