PAGA Reform: Everything Employers Need to Know About the Recent Changes to One of California's Least Employer-Friendly Laws
Posted July 10, 2024

On June 26, 2024, Governor Newsom announced an agreement among his office, the legislature, and major labor and business groups to reform the California Private Attorneys General Act (commonly referred to as “PAGA”). On June 27, 2024, effective immediately, PAGA reform was signed into law via Assembly Bill 2288 and Senate Bill 92. The bills are the most significant amendments to PAGA since the statute was enacted in 2004 and resulted in the withdrawal of the PAGA repeal initiative that was slated to appear on the November 2024 ballot. Most importantly for employers, these reforms afford a variety of new potential defenses and changes to the statute that curb what have been long perceived as some of PAGA’s greatest excesses.

This reform does not do away with PAGA litigation and penalties completely, however. Diligent implementation and maintenance of legally-compliant policies and procedures, and implementing proactive practices to encourage employee compliance, remains the employer’s best defense.

The revisions only apply to legal actions that commence on or after June 19, 2024, which means they do not apply to any pre-existing PAGA actions, or any actions based on a PAGA notice sent prior to this date.

No Standing Unless Representative Plaintiff Personally Suffered Violations

Until now, a representative employee suing under PAGA could seek penalties on behalf of the state and other allegedly aggrieved employees for all Labor Code violations experienced by any employee within the applicable one-year statute of limitations period, regardless of whether the representative employee experienced the same violations.

This is no longer the case. Going forward, employees bringing PAGA claims must have personally experienced each alleged violation for which they seek penalties on a representative basis. This is a significant limitation on the scope of PAGA claims, and will give employers a powerful new defense against the generically alleged “kitchen-sink” scope of asserted violations in PAGA claims that have become all too common.

As a potential caveat, the revised PAGA statute includes a provision that may permit broader claims to be alleged if certain nonprofit legal aid organizations are acting on behalf of a representative employee.

Manageability Matters

The reforms codify a court’s inherent authority to limit the scope of an employee’s alleged PAGA claims or the evidence that may be presented so as to ensure there can be an efficient trial. These changes are in line with the California Supreme Court’s recent decision in Estrada v. Royalty Carpet Mills, Inc., which held that, although courts cannot entirely dismiss PAGA claims on the ground that trying such claims would be unreasonably difficult or time intensive, courts can and should use all their traditional “case management tools” to efficiently adjudicate PAGA cases.

No More Extra Penalties for Paying Employees Weekly

One of the more frequently criticized portions of PAGA was that its penalty structure was based on total pay periods. This structure resulted in employers with weekly pay periods facing double the penalties as compared to their bi-weekly or semi-monthly pay period counterparts. This particularly unfair outcome is no more, as employers who pay weekly will have their penalties reduced by one-half.

Greater Clarity and Caps on Penalties

Employers now have greater certainty regarding the maximum penalties they may face in a PAGA claim, and additional potential bases for penalty reduction. Previously, employers were generally subject to civil penalties of $100 per pay period for each initial violation, and $200 per pay period for each subsequent violation.

Now with certain limited exceptions, $100 per pay period will be the standard penalty, subject to potential reductions as discussed below. The $200 per pay period penalty will now only apply to employers who willfully or repeatedly violate the Labor Code.

• 15% Cap for Employers Who Proactively Stay in Compliance: Under the new regime, PAGA penalties are capped at 15% of the applicable penalty for employers who proactively take “all reasonable steps” to comply with the Labor Code provisions the employee claims were violated. The statute specifies that such steps include conducting periodic payroll audits and taking action in response to the audit, disseminating lawful written policies, training supervisors on applicable law, and taking appropriate corrective action with supervisors. It is therefore now more crucial than ever for employers to ensure their policies and practices comply with the Labor Code and applicable Wage Orders, and that they educate their people.
  
  Although this limitation is extremely encouraging for employers, keep in mind that what constitutes “all reasonable steps” remains subject to interpretation and may be the subject of continued litigation.

• 30% Cap for Employers Who Timely Comply: In a similar vein, PAGA penalties are now capped at 30% of the applicable penalty for employers who, within 60 days of receiving notice of purported Labor Code violations, take “all reasonable steps” to comply with the purported violations identified in the PAGA notice. In most cases, this notice of purported violations will come in the form of the representative’s pre-lawsuit letter (or PAGA notice letter) to the LWDA. Again, whether the employer’s actions are sufficient to constitute “all reasonable steps” remains debatable. Upon receipt of a PAGA notice letter, employers should promptly audit the complained-of practices, and seek to remedy potential violations exposed.
• $200 Penalty for Repeated or Willful Violations: The $200 penalty is now reserved for violations that recur within five years of a prior finding against the employer that the same policy or practice was unlawful or for violations found to be the result of “malicious, fraudulent, or oppressive” conduct. In addition, courts are also empowered under the amended PAGA statute to disregard the caps that might otherwise apply for employers whose conduct is particularly egregious. The precise nature of conduct rising to these standards is certain to be the subject of much future debate, but appears to at the least preserve larger penalties for employers found to have engaged in significant wage theft.
• Additional Caps on Wage Statement Claims and Isolated Errors: The amendments also cap liability for claims that an employer failed to list all items of information on employee wage statements as required under Labor Code section 226. Penalties for wage statement claims are now limited to $25 per pay period if the violation(s) did not actually injure employees by preventing them from promptly and easily determining the required information. The amendments also clarify that so long as the wage statement violations are not knowing or intentional, these are the only penalties available to employees raising wage statement claims under PAGA, preventing plaintiffs from arguing that the much steeper penalties of Labor Code section 226.3 should apply under PAGA.
• No “Stacking” of Derivative Penalties for the Same Underlying Claim: Another major win for employers is the statute’s clarification that penalties may not be “stacked.” Previously, there was ambiguity as to whether liability for one underlying Labor Code violation, such as failure to pay overtime, could lead to derivative liability and additional penalties under other sections such as those that provide for waiting time penalties and wage statement violations for the failure to pay overtime. This meant singular violations could potentially lead to massive “stacked” penalties.

Possibility of Timely Curing Alleged Violations

Another avenue for employers to approach PAGA cases has arrived in the form of greatly expanded “cure” provisions allowing employers to fix the Labor Code violations alleged in an employee’s PAGA notice. To “cure” generally means that the employer made the employees whole by such actions as re-issuing corrected wage statements and/or paying all wages due in addition to interest, liquidated damages and attorneys’ fees, where applicable. There are different procedures for large employers (having 100 or more employees) and small employers (less than 100 employees), including:

• Small Employers: Small employers have the option to engage in a confidential process with the LWDA to cure the violations alleged in the PAGA notice. This new process includes submitting a proposal to the LWDA setting forth how the employer intends to cure the alleged violation(s), and engaging in a multi-step process to facilitate possible settlement.
• Large Employers: Large employers have access to a similar confidential, multi-step process facilitated by the court. This starts by filing a request for an early evaluation conference. This stays the proceedings while the parties engage in a confidential process of submitting their claims and defenses to a neutral evaluator for their determination of whether the employee’s PAGA claims have merit, and whether the employer has successfully cured any meritorious claims.

There is a relatively short period of time in which employers can exercise options to cure depending on the size of the employer and the type of violation. The time to cure or “take all reasonable steps” to comply with the Labor Code generally ranges from 33 days (for employers seeking to “cure” alleged violations) to 60 days (for employers seeking to limit their potential liability by taking steps to comply with the Labor Code) of the PAGA notice postmark date. Curing violations is often a time- and labor-intensive process. Albeit important options to consider, it is noteworthy that these are entirely new processes. There remains much uncertainty as to what will be found to constitute a “successful cure” or having taken “all reasonable steps.”

The above is a brief, non-comprehensive overview of the new cure options. Employers need to promptly consider their options on a case-by-case basis with qualified counsel upon receiving a PAGA notice letter.

Injunctive Relief Now Possible

Employees are now able to pursue injunctive relief under PAGA, meaning they can seek an order from the court requiring the employer to take some immediate action to comply with the Labor Code.

The Bottom Line

Although these reforms are a major step forward for employers facing PAGA claims, it remains to be determined how the amendments will play out in courtrooms throughout the state. What constitutes a compliant cure of an alleged violation is likely to remain highly contested and unclear for some time. Similarly, expect significant disputes about whether the employer’s efforts to comply with the Labor Code constitute “all reasonable steps” under the new law.

Most of all, these new provisions highlight the importance to employers of taking steps to proactively comply with the Labor Code and all relevant Wage Orders. Now is the time to audit your policies and practices and take action to not only correct potentially noncompliant practices revealed, but to also institute good-faith measures recognized by the courts as encouraging employee compliance. Employers should proactively take steps to minimize any potential liability.

The above summary is for general information purposes only. This information is not meant to substitute for legal counsel as to any specific facts or circumstances.

For questions regarding wage and hour issues or other employment law needs, contact the attorneys at LightGabler LLP.

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