PAGA Reformed: Draft Legislation Shows Way Forward For California Employers

After two decades and billions of dollars in penalties, on June 18 California Gov. Gavin Newsom, various labor and business groups, and legislative leadership reached a compromise agreement to reform California's Private Attorneys General Act (PAGA). The two pieces of legislation were proposed on June 21 – AB 2288 amends Labor Code Section 2699 and SB 92 amends Section 2699.3. Assuming the legislation is passed and signed into law, the PAGA ballot initiative set for the November election will be withdrawn. If passed, the amendments will apply, with some exceptions, to civil actions brought on or after June 19, 2024.

The key elements of the reform legislation are as follows:

Standing: A PAGA plaintiff will now be required to have personally experienced all of the alleged labor code violations they seek to pursue on behalf of allegedly aggrieved employees in order to have standing to pursue the litigation. Moreover, the amendments expressly provide a one-year limitations period in which a PAGA plaintiff must have personally suffered each violation in order to have standing. This standing provision is a welcome change for employers, effectively abrogating the California Supreme Court’s decision in Huff v. Securitas Security USA Services, Inc., which held a representative plaintiff has standing to bring a PAGA lawsuit on behalf of all other allegedly aggrieved employees for any violation of the labor code as long as the plaintiff suffered at least one labor code violation on which the lawsuit was based.

Manageability: The amendments also give California courts the authority to limit both the scope of claims and the evidence presented at trial to ensure the claims can be effectively and manageably tried. Additionally, the legislation states that nothing shall prevent a court from consolidating PAGA claims alleging overlapping violations against the same employer. These manageability provisions seem to nullify recent California Supreme Court precedent in Estrada v. Royalty Carpet Mills, Inc., which held that trial courts lack inherent authority to strike PAGA claims on manageability grounds, even if those claims are complex or time intensive. Granting the trial court a greater ability to manage PAGA claims in this manner may offer an avenue for employers for limiting the universe of allegedly “aggrieved employees.”

Caps on Employer Penalties: The legislation makes clear that, subject to certain exceptions, the per pay period penalty for a violation is $100. The legislation also includes provisions capping employer penalties at either 15 percent or 30 percent.

15 Percent Cap – For employers who demonstrate they have “taken all reasonable steps to be in compliance” with the labor code before receiving a PAGA notice or request for personnel records, the maximum penalty will be 15 percent of the penalties sought.

30 Percent Cap – For employers who, within 60 days of receiving a PAGA notice, take “all reasonable steps” to comply with the noticed Labor Code violations, the maximum penalty will be 30 percent of the penalties sought.

All Reasonable Steps – All reasonable steps may include but are not limited to conducting an audit and taking action in response to the results of the audit, having lawful written policies, training supervisors on applicable labor code and wage order compliance, or taking appropriate corrective action with regard to supervisors. Whether the employer’s conduct was reasonable shall be evaluated by the totality of the circumstances and take into consideration the size and resources available to the employer, and the nature, severity and duration of the alleged violations. Importantly, the existence of a violation, despite the steps taken, is insufficient to establish an employer failed to take all reasonable steps. Whether or not the employer took reasonable steps will be a decision left to a court’s discretion. 

Standard for $200 Penalty: The legislation sets two scenarios in which a $200 per pay period fine is appropriate. First, this greater penalty is appropriate if at any time within the five years preceding the alleged violation a court or agency determined the employer’s policies or practices violated the labor code. Second, a $200 penalty may be imposed if the court determines an employer acted maliciously, fraudulently, or oppressively. 

Other Penalty Reductions: Pay statement violations are capped at $25 per pay period where such violation did not cause economic harm to the employee. Further, the penalty is capped at $50 per pay period if the alleged violation resulted from an isolated, nonrecurring event that did not extend beyond the lesser of 30 days or four pay periods.

Derivative Penalties Eliminated: The amendments also eliminates a major source of additional potential liability – penalties for derivative claims. The legislation makes clear the aggrieved employees cannot collect derivative penalties for, among other things, the alleged underpayment of wages at the time of termination, and may only collect penalties for willful or intentional underpayment of wages during employment. 

Weekly vs. Biweekly Pay: The legislation equalizes the potential penalties for employers who pay employees on a weekly basis as opposed to paying every two weeks. Previously penalties accrued per pay period, so employers who paid weekly owed approximately twice the amount of penalties as employers who paid every two weeks. The amendments provide that the penalties recovered shall be reduced by half if an employee is paid weekly versus biweekly or semimonthly. 

Share of Penalty: The share of the penalty employees receive will increase from 25 percent to 35 percent, and the share that goes to the Labor & Workforce Development Agency (LWDA) will decrease from 75 percent to 65 percent.

Injunctive Relief: The legislation also allows for injunctive relief to be sought.

Employer's Right to Cure: The legislation provides for an increased number of labor code violations able to be cured upon notice of the alleged violations. While the ability to “cure” violations previously existed within PAGA (as to some, but not all, pay statement violations), such provisions were limited and infrequently utilized. Under the applicable amendments, employers may cure not only all wage statement violations, but also other alleged labor code violations by correcting the violation alleged, ensuring compliance with underlying statutes specified in the PAGA notice, and making each aggrieved employee whole through payment of all owed wages due under the specified statutes going back three years from the date of the notice, plus 7 percent interest, liquidated damages as provided by any applicable statute, and reasonable attorneys’ fees and costs.

Options for Early Resolution: The legislation also provides mechanisms for both large and small employers looking for early resolution. Employers with fewer than 100 employees during the applicable period may contact the LWDA and request that a settlement conference be arranged between the employer and employee, conducted by the agency. Employers with more than 100 employees during the applicable period may request a stay of all deadlines with the court and seek a neutral evaluation of the allegations. The employer may then propose a plan to cure the alleged violations, and the employer may file a motion with the court to approve such plan in the event plaintiffs do not agree. In both options for early resolution, it seems plaintiff’s counsel will be pushed to more clearly articulate their claims at an early stage, something that is rarely done under the current PAGA regime.

Takeaways

Although employers can be cautiously optimistic about these PAGA reforms, it remains to be seen how courts will interpret the new law, and whether the reforms do in fact ameliorate the abuses and resultant increase in operating costs for California employers over the last 20 years.

In the meantime, it is important that employers continue to remain vigilant with respect to their wage and hour policies and procedures.

For more information, please contact the Barnes & Thornburg attorney with whom you work or Mark Wallin at 312-214-4591 or mwallin@btlaw.com, Caroline Dickey at 424-239-3757 or caroline.dickey@btlaw.com or John Kuenstler at 312-338-5924 or johnkuenstler@btlaw.com.

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