Labor law: How quickly the post-MacDonald world turns

A look at the doctrine of exhaustion of administrative remedies after MacDonald, as clarified by the legislature in Senate Bill 666

Matthew S. McNicholas
Alyssa Kim Schabloski
2014 January

On August 27, 2013, the Third District Court of Appeal issued its opinion in MacDonald v. State of California (2013) 219 Cal.App.4th 67. The MacDonald court held that plaintiff Aaron MacDonald was barred from bringing a Labor Code section 1102.5 cause of action for failure to exhaust his administrative remedies. The Third District found that by failing to file a claim with the Labor Commissioner under Labor Code section 98.7, MacDonald did not exhaust his administrative remedies as required per Campbell v. Regents of the University of California (2005) 35 Cal.4th 311, 321.

The MacDonald opinion expressly disagreed with the opinion of the Second District Court of Appeal in Lloyd v. County of Los Angeles (2009) 172 Cal.App.4th 320, which, until MacDonald, was the only published California case on point regarding the exhaustion of administrative remedies with the Labor Commis-sioner.

Mere weeks after MacDonald, however, on October 5, 2013, Governor Brown signed SB 666. The legislative analysis of SB 666 unequivocally indicates that the bill clarifies that exhaustion of administrative remedies with the Labor Commis-sioner is not required unless the underlying statutory provision specifically requires exhaustion. Within weeks of the MacDonald decision, then, the rule regarding the exhaustion of administrative remedies with the Labor Commis-sioner went from well-settled under Lloyd, to contested under MacDonald, to clarified by the Legislature.

This whirlwind reflects the continued relevance for both litigants and the courts of the doctrine of exhaustion of administrative remedies. As coined, the doctrine describes in broad terms a rather nuanced area of the law. This doctrine requires that when a remedy before an administrative agency is provided by law – i.e., statute, regulation, or ordinance – a party must seek relief in that forum before the court will act. In practical terms, if a plaintiff fails to exhaust a required administrative remedy, the plaintiff is barred from seeking relief from the courts.

This seemingly simple definition belies a more complicated analysis of whether various “remedies” must be exhausted under this doctrine. To fully analyze this area of law, this article first examines some basic tenets of California administrative law. The article then examines the doctrine of exhaustion of administrative remedies (the “exhaustion doctrine”) in greater detail. The article next evaluates the recently passed SB 666, which clarifies the exhaustion doctrine under the Labor Code. The article concludes with some strategic considerations.

Admin Law 101

Administrative law is the vehicle by which the Legislature delegates authority to public agencies to administer our state statutory schemes. While not known as the most scintillating area of law, some principles of administrative law are nevertheless critical to understanding the exhaustion doctrine. In particular, procedural due-process rights, which are at the core of administrative adjudication, may be determinative of whether the exhaustion doctrine is requisite or excused.

Under federal law, procedural due process applies only if government action deprives a person of “liberty” or “property.” (See, e.g., Board of Regents v. Roth (1972) 408 U.S. 564, 569-570.) In California, however, due process of law also applies to the administrative process itself: “[D]ue process safeguards required for protection of an individual’s statutory interests must be analyzed in the context of the principle that freedom from arbitrary adjudicative procedures is a substantive element of one’s liberty.” (Saleeby v. State Bar (1985) 39 Cal.3d 547, 564 (emphasis added).)

The Saleeby court went on to describe four considerations of due process protection:

Generally, ‘the dictates of due process’ necessitate considering ‘(1) the private interest that will be affected by the official action, (2) the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards, (3) the dignitary interest in informing individuals of the nature, grounds and consequences of the action and in enabling them to present their side of the story before a responsible governmental official, and (4) the governmental interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.’

(Saleeby, supra, 39 Cal.3d at 565 (emphasis added) (internal citations omitted).)

Thus, procedural due process in administrative setting requires, at minimum, notice and the reasonable opportunity to be heard and to respond, with additional safeguards to be determined in the context of the proceeding. In Saleeby, the Bar was required to issue sufficient findings to afford Saleeby the ability to obtain judicial review of the Bar’s decision. (Saleeby, supra, 39 Cal.3d at 566-567) In addition, in Skelly v. State Personnel Board (1975) 15 Cal.3d 194, the court found that at the pre-discharge stage, due process required that the aggrieved employee be given “notice of the proposed action, the reasons therefore, a copy of the charges and materials upon which the action is based, and the right to respond, either orally or in writing, to the authority initially imposing discipline.” (Skelly, supra, 15 Cal.3d at 215.)

California has gone to great lengths to protect procedural due-process rights. In addition, when a hearing is not explicitly provided by statute, California courts have read an implied right to a hearing into the statutory scheme. (See, e.g., Fascination, Inc. v. Hoover (1952) 39 Cal.2d 260, 269; Traverso v. People ex rel. Dep’t of Transportation (Caltrans) (1993) 6 Cal.4th 1152, 1163-1164.) Furthermore, even though due process of law applies only to state action, California courts have applied due-process procedures to certain private organizations, such as hospital staff or medical associations (see, e.g., Anton v. San Antonio Comm. Hosp. (1977) 19 Cal.3d 802, 815) or private employment contracts (see, e.g., Coltran v. Rollins Hudig Hall Int’l, Inc. (1998) 17 Cal.4th 93, 107-108).

Thus, knowing the administrative remedies available is critical for understanding when they must be exhausted before coming to court. Due-process rights, and the failure to provide them, may be a key factor in identifying whether the available administrative remedies must be exhausted.

The exhaustion doctrine

The exhaustion doctrine requires that when a remedy before an administrative agency is provided by law, a party must first exhaust that administrative remedy before coming to court. The exhaustion doctrine serves the public policy interests of bolstering administrative agency autonomy and authority, and promoting judicial economy by establishing a record for review and reducing or even avoiding litigation.

Abelleira v. District Court of Appeal (1941) 17 Cal.2d 280 established the exhaustion doctrine in California as one of jurisdiction: “[Exhaustion] is not a matter of judicial discretion, but is a fundamental rule of procedure laid down by the courts of last resort, followed under the doctrine of stare decisis and binding upon all courts . . . Exhaustion of the administrative remedy is a jurisdictional prerequisite to resort to the courts.” (Abelleira, supra, 17 Cal.2d at 293.)

The remedies available may be internal to the party, such as internal procedures of a public employer (see, e.g., Campbell, supra, 35 Cal.4th 311) or external procedures of a public agency (e.g., exhaustion of administrative remedies with the Department of Fair Employment and Housing).

Practically speaking, since exhaustion is a matter of the jurisdiction of the court, if a plaintiff failed to exhaust her administrative remedies, the defense can demur to the complaint, move for summary judgment or summary adjudication, or make a motion for judgment on the pleadings. Exhaustion is a complete defense, and your client’s case will be dismissed for failure to exhaust. (At least one case seems to indicate that unless this defense is raised at the trial court, the defense is waived. (Green v. City of Oceanside (1987) 194 Cal.App.3d 212, 222-223. But cf. Hittle v. Santa Barbara Cty. Employees Retirement Ass’n (1985) 39 Cal.3d 374, 389.)

However, numerous exceptions to the exhaustion doctrine have been developed. These exceptions generally fall within two categories: “faulty procedure” and “irreparable injury.” This article will focus on the “faulty procedure” exceptions, as irreparable injury claims are not often accepted. (For a successful “irreparable injury” case, see Dep’t of Personnel Adm’n v. Sup. Ct. (1992) 5 Cal.App.4th 155.)

“Faulty procedure” exceptions include futility, inadequate remedy, lack of notice, lack of jurisdiction, and constitutional issues. The futility exception balances the purpose of exhaustion with the cost of enforcing it. Imposing the costs of exhaustion on a party is difficult to justify when those costs are certain to be a waste. When a party can show that the agency’s refusal to grant the relief sought is positively certain, then the remedy need not be exhausted. (Ogo Associates v. City of Torrance (1974) 37 Cal.App.3d 830, 834 (seeking relief from a zoning scheme enacted to block the very project the developer wanted to build).) Exhaustion is not excused, though, just because the agency is unlikely to grant the relief sought. (Yamaha Motor Corp. USA v. Sup. Ct. (1986) 185 Cal.App.3d 1232, 1241-1242 (finding that a series of previously decided cases adverse to the litigant’s position is not enough to state with certainty that the agency would continue to take the same position on those facts). But cf. Jacobs v. State Bd. of Optometry (1978) 81 Cal.App.3d 1022, 1030; Dep’t of Personnel Administration v. Superior Court (Greene) (1992) 5 Cal.App.4th 155, 166 (superseded by statute on other grounds); Doster v. Cty. of San Diego (1988) 203 Cal.App.3d 257, 261-262.)

When a procedure fails to provide clearly defined mechanisms for the submission, evaluation, and resolution of complaints, the remedy is inadequate and exhaustion is not required. (Santa Teresa Citizen Action Group v. City of San Jose (2003) 114 Cal.App.4th 689, 701-702.) Whether a party must exhaust an available administrative remedy, and whether that remedy is adequate under the law, is necessarily a fact-specific question pertaining to the administrative procedure in question. (See, e.g., Azusa Land Reclamation Co. v. Main San Gabriel Water Basin Watermaster (1997) 52 Cal.App.4th 1165, 1211.) Again, however, at minimum the procedure must provide for notice and the reasonable opportunity to be heard.

Note, however, that even if an administrative remedy will not resolve all of the plaintiff’s issues or the remedy is incomplete – e.g., the remedy does not provide for money damages – some courts still require exhaustion when exhaustion serves the doctrine’s purposes. (Edgren v. Regents of the University of California (1984) 158 Cal.App.3d 515, 521-522. But cf. Rojo v. Kliger (1990) 52 Cal.3d 65, 80-81 (exhaustion not required where agency cannot provide compensatory damages); Andrews v. County of Orange (1982) 130 Cal.App.3d 944, 968 at n.19 (disapproved of on other grounds by People v. Nesler (1997) 16 Cal.4th 561.)

Lack of notice arises when a party lacks minimally adequate notice – exhaustion is not required. (Horn v. County of Ventura (1979) 24 Cal.3d 605, 616-618.) This exception typically arises in local land use planning cases.

The lack of jurisdiction exception is poorly developed in the case law. According to some cases, a party does not have to exhaust if the subject matter of the dispute lies beyond the agency’s jurisdiction. (See, e.g., Keiffer v. Bechtel Corp. (1998) 65 Cal.App.4th 893, 899.) How-ever, any legal issue could be framed as a dispute about jurisdiction, and the exhaustion doctrine normally applies to both legal and factual issues.

Finally, a plaintiff is excused from the exhaustion doctrine when the plaintiff makes a constitutional challenge to the statutory scheme upon which the agency or its procedures are based, on its face. (State v. Superior Court (1974) 12 Cal.3d 237, 251 (challenging the underlying statute); Horn, supra, 24 Cal.2d at 611 (challenging the procedure).) The constitutional exception does not apply to the application of the statutes or regulations as to particular facts. (Security-First Nat’l Bank v. County of Los Angeles (1950) 35 Cal.2d 319, 321.)

The exhaustion doctrine is not…

The exhaustion of administrative remedies doctrine is often confused with the requirement of exhaustion of judicial remedies and the primary jurisdiction doctrine. Be careful! Although they are related concepts, both are distinct from the administrative remedies’ doctrine.

The exhaustion of judicial remedies rule generally states that once a party avails herself to administrative proceedings, the only way to challenge the factual findings and/or decisions of those proceedings is by seeking relief from the courts. The importance of the adequacy of the administrative remedies is highlighted here: without an adequate underlying factual record in the administrative proceedings, the court will not be able to determine whether to grant judicial relief from those factual findings! The judicial-exhaustion rule is based on the doctrine of res judicata and the issue preclusion of collateral estoppel. (Risam v. County of Los Angeles (2002) 99 Cal.App.4th 412, 419-420.)

The primary jurisdiction doctrine is distinct from the exhaustion doctrine in that the exhaustion doctrine applies where the administrative agency is the exclusive forum in which a party may bring a claim. (City of Industry v. City of Fillmore (2011) 198 Cal.App.4th 191, 210.) On the other hand, the primary jurisdiction doctrine contemplates original jurisdiction by the courts, but the case may be shifted to an administrative agency which also has the power and special competence to resolve the case. In this situation, the agency makes the initial decision in the case, but typically the court retains the power of judicial review of the agency’s action. (Farmers Insurance Exchange v. Superior Court (1992) 2 Cal.4th 377, 390-391.)

The confusion of the primary jurisdiction doctrine may be evident in Rojo v. Kliger (1990) 52 Cal.3d 65. Rojo brought a claim for wrongful termination based on sex discrimination in the common law, rather than under the Fair Employment and Housing Act (FEHA). The defendant moved for summary judgment based in part on the failure to exhaust administrative remedies under FEHA. Although the court determined that Rojo was not required to exhaust external administrative remedies under FEHA, the court did not specifically frame the issue as a question of primary jurisdiction. Instead, the court went through a lengthy analysis on whether the exhaustion should apply to Rojo’s common-law – not statutory – claims.

This area of the law is easily confused by the unwary. Understanding the difference between the exhaustion of administrative remedies, exhaustion of judicial remedies, and the primary jurisdiction doctrine may give you additional ammunition to defeat a demurrer or overcome summary judgment.

MacDonald created conflict regarding exhaustion under the Labor Code

On March 19, 2009, the Second District issued its opinion in Lloyd. The opinion specifically concluded that plaintiffs seeking relief pursuant to Labor Code section 1102.5 were not required to exhaust administrative remedies with the Labor Commissioner under Labor Code section 98.7. “Labor Code section 98.7 merely provides the employee with an additional remedy, which the employee may choose to pursue. [¶] Further, case law has recognized there is no requirement that a plaintiff proceed through the Labor Code administrative procedure in order to pursue a statutory cause of action.” (Lloyd, supra, 172 Cal.App.4th at 330-31 (emphasis added, internal citations omitted).)

Until MacDonald was published more than four years later, Lloyd was the only published, binding decision on the exhaustion issue.

On August 27, 2013, however, the Third District concluded in MacDonald that Lloyd’s holding that exhaustion under Labor Code section 98.7 was not required was wrong because it was supposedly inconsistent with the California Supreme Court’s opinion in Campbell. In Campbell, the plaintiff was employed by the University of California. She alleged that she was fired in retaliation for whistle-blowing activities. The UC had a detailed set of regulations, promulgated by the Board of Regents, specifically requiring that such retaliation claims be submitted to an internal administrative body, which was empowered to provide appropriate relief. Rather than availing herself of that remedy, the plaintiff filed suit. The Campbell court concluded:

The present action involves a policy the Regents established to handle complaints of retaliatory dismissal for whistleblowing in an orderly manner. Because we may treat such a policy as equivalent to a statute in this action, and because that policy required Campbell to resort initially to internal grievance practices and procedures, Campbell had an administrative remedy within the meaning of Abelleira and its progeny.

(Campbell, supra, 35 Cal.4th at 324.)

At no point did the court in Campbell reference Labor Code section 98.7 in concluding that the plaintiff failed to exhaust administrative remedies. The court relied entirely upon the mandatory administrative remedies directly applicable to whistleblower claims, which the court concluded were the equivalent of a statute. If the court had concluded that exhaustion under section 98.7 was required, then the court need not have engaged in the extended analysis of the Regent’s internal administrative remedies available to the Campbell plaintiff. It would simply have concluded that the plaintiff’s failure to exhaust remedies under Labor Code section 98.7 was fatal to her claim. The court did not rely on section 98.7 because by its express terms, exhaustion is not required under that section. Section 98.7(f) states, “The rights and remedies provided by this section do not preclude an employee from pursuing any other rights and remedies under any other law.” (Lab. Code, § 98.7(f).)

Thus, the Legislature expressly affords employees the option of either filing a claim with Labor Commissioner or directly proceeding to court to pursue their rights and remedies. This express provision negates the need to exhaust administrative remedies under Labor Code section 98.7. The California Supreme Court explained more than half a century ago:

It is, of course, well settled that where an administrative remedy is provided by statute relief must be sought from the administrative body and the remedy exhausted before the courts will act; and that a court violating the rule acts in excess of jurisdiction. (Abelleira v. Dist. Ct. of Appeal, 17 Cal.2d 280, 292.) It is equally well settled that where a statute provides an administrative remedy and also provides an alternative judicial remedy the rule requiring exhaustion of the administrative remedy has no application if the person aggrieved, and having both remedies afforded him by the same statute, elects to use the judicial one.

(Scripps Memorial Hosp., Inc., v. Cal. Emp. Comm., 24 Cal.2d 669, 673.) (City of Susanville v. Lee C. Hess Co. (1955) 45 Cal.2d 684, 689 (emphasis added, internal citations truncated).)

Although the Supreme Court [in City of Susanville] referred to the alternative remedies being afforded by the “same statute,” cases have applied the alternative judicial remedy exception where the administrative remedy and alternative judicial remedy are provided by different statutes within the same statutory scheme. (Coastside Fishing Club v. Cal. Fish & Game Comm’n (2013) 215 Cal.App.4th 397, 415-16, citing, inter alia, San Elijo Ranch, Inc. v. Cty. of San Diego (1998) 65 Cal.App.4th 608, 613-614 [exhaustion doctrine did not preclude city from pursuing judicial remedy to enforce its conditional use permit issued to county for expansion of county’s landfill because California Integrated Waste Management Act gives local governmental entities both an administrative and a judicial remedy to enforce their reasonable land use conditions or restrictions on solid waste management facilities]; and Muir v. Steinberg (1962) 197 Cal.App.2d 264, 269-270 [exception applied where administrative remedy and judicial remedy were in different sections of the Water Code].)

Since the Legislature expressly stated that section 98.7 does not preclude plaintiffs from pursuing their existing rights, and since one such existing right is a claim for retaliation under Labor Code section 1102.5, the Third District incorrectly concluded that exhaustion under section 98.7 was required before a section 1102.5 whistleblower action could be prosecuted.

Furthermore, the permissive language used by the Legislature in Labor Code section 98.7 bolsters this conclusion, which section provides: “[A]ny person who believes that he or she has been discharged or otherwise discriminated against in violation of any law under the jurisdiction of the Labor Commissioner may file a complaint with the division within six months after the occurrence of the violation . . . .” (Lab. Code, § 98.7 (emphasis added).)

The definitions of these terms comes from Section 15 of the Labor Code which specifically notes that, as used in the Labor Code, the term “‘shall’ is mandatory and ‘may’ is permissive.” (Lab. Code, § 15.) Thus, according to the Labor Code’s own definitions, exhaustion under section 98.7 is not mandatory. The court must presume that the Legislature intended to use the permissive wording in the statute, given that the Legislature specifically codified the differentiating verbiage. (Janken v. GM Hughes Electronics (1996) 46 Cal.App.4th 55, 60 (holding that the “primary determinant” of legislative intent are the words used by the Legislature).) The Legislature, though it defined both the mandatory “shall” and the permissive “may” in section 15 of the Labor Code, specifically chose to use ‘may’ in section 98.7. The Legislature’s chosen language is the most reliable indicator of its intent because “‘it is the language of the statute itself that has successfully braved the legislative gauntlet.’” (Cal. School Employees Assn. v. Governing Board (1994) 8 Cal.4th 333, 338.) When, as here, the statutory language is clear and unambiguous, there is no need for judicial construction, as there is nothing for a court to interpret. (Cal. School Employees Assn., supra, 8 Cal.4th at 340.)

Finally, the MacDonald court’s conclusion is further undermined by the California Labor Commission, Division of Labor Standards Enforcement (DLSE). The DLSE is the office of the Executive Branch tasked with interpreting and enforcing all provisions of the Labor Code. (Lab. Code, §§ 21, 79, 82.) The DLSE has issued myriad opinion letters stating that administrative exhaustion pursuant to Labor Code section 98.7 is not a mandatory prerequisite to filing whistleblower claims under provisions of the Labor Code. The Labor Commissioner has expressly advised that an employee does not have to first file a claim under section 98.7 before filing a whistle-blower action. The Commissioner has concluded: “The DLSE’s position is that the wiser course is not to require exhaustion of Labor Code section 98.7 procedures prior to raising a statutory claim in a civil action.” The Commissioner continued that “[u]nlike the procedures in Campbell, the Labor Commissioner’s procedures under Section 98.7 are not quasi-judicial in nature” and provided a detailed analysis supporting its conclusion that exhaustion was not required. The views of this agency tasked with implementing section 98.7 is entitled to consideration. (Am. Nurses Ass’n v. Torlakson (2013) 57 Cal.4th 570, 611 (stating “An agency interpretation of the meaning and legal effect of a statute is entitled to consideration and respect by the courts . . .”).)

MacDonald’s conclusion is at odds with the express terms of Labor Code section 98.7, longstanding decisions by this Court, and the California Labor Commissioner. [Editor’s note – on the day that this article was submitted to the publisher, the California Supreme Court ordered that MacDonald be depublished.)

SB 666 clarified the confusion MacDonald created: Exhaustion is not required

On October 5, 2013, Governor Brown signed SB 666, which states, in pertinent part:

An individual is not required to exhaust administrative remedies or procedures in order to bring a civil action under any provision of this code, unless that section under which the action is brought expressly requires exhaustion of an administrative remedy. This subdivision shall not be construed to affect the requirements of Section 2699.3.

The legislative counsel’s digest of SB 666 indicates that the bill clarifies that exhaustion of administrative remedies is not required unless the underlying statutory provision specifically requires exhaustion. The Senate Judiciary Committee analysis, in three separate places, states:

• This bill would clarify that an employee is not required to exhaust administrative remedies before filing a civil action under the Labor Code, unless otherwise expressly statutorily required to exhaust administrative remedies.

(p. 1.)

• This bill would clarify that an employee or job applicant is not required to exhaust administrative remedies or procedures in order to bring a civil action under any provision of the Labor Code, unless the provision under which the action is brought expressly requires exhaustion of an administrative remedy.

(p. 4.)

• This bill would also clarify that an employee or job applicant is not required to exhaust administrative remedies or procedures in order to bring a civil action under any provision of the Labor Code, unless the provision under which the action is brought expressly requires exhaustion of an administrative remedy.

(p. 7.)

The legislative analysis by the Assembly Committee on Judiciary is in accord with the Senate Judiciary Committee:

this bill . . . [¶] 5) Clarifies that an employee . . . is not required to exhaust administrative remedies or procedures in order to bring a civil action under any provision of the Labor Code, unless the provision under which the action is brought expressly requires exhaustion of an administrative remedy.

The Senate and Assembly Judiciary Committees’ use of “clarifies” indicates that any ambiguity regarding whether exhaustion of administrative remedies is required must be resolved by turning to the statutory provision of the Labor Code section under which the action is filed. Only if the underlying provision expressly requires exhaustion of administrative remedies is exhaustion in fact required.

Strategic considerations

Although SB 666 cleared up any conflict about the exhaustion doctrine under the Labor Code, understanding the exhaustion doctrine is an important consideration from the time of your first interview with a potential client. Knowing if your client’s case is subject to demurrer or summary judgment for failure to exhaust is critical before you invest your time and resources into a case. Give close scrutiny to matters involving complaints about public agencies. Obtain the necessary documents you need about an agency’s procedures to determine whether the remedy is adequate, or if some other exception applies. Making this determination early will save you substantial headaches later on.

Matthew S. McNicholas Matthew S. McNicholas

Matthew S. McNicholas is a partner with McNicholas & McNicholas, LLP in Los Angeles. Mr. McNicholas has been practicing law for approximately sixteen years, spending nearly his entire career doing plaintiff’s litigation. Mr. McNicholas graduated from Loyola Law School and the University of California, Los Angeles. Mr. McNicholas is a member of the American Board of Trial Advocates and the American College of Trial Lawyers, among other professional associations. 

Alyssa Kim Schabloski Alyssa Kim Schabloski

Alyssa Kim Schabloski is a trial attorney with The deRubertis Law Firm, APC. A plaintiff’s lawyer for her entire career, she practices in employment law with experience in medical malpractice and catastrophic personal injury. Alyssa graduated from Barnard College and obtained her JD and MPH from the UCLA Schools of Law and Public Health. She is committed to the profession and community, serving as Secretary of the Los Angeles Trial Lawyers’ Charities (LATLC), a member of the CAALA Board of Governors, and Vice Chair of the New Lawyers Committee. Alyssa is admitted to practice in California and Arizona.

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