June 26, 2024

Major Pro-Employer Changes To PAGA Expected To Become Law This Week

In a dramatic victory for employers, California’s Private Attorneys General Act (PAGA) is expected to be reformed this week. The reform, expected to be signed into law this week, has the potential to severely limit employers’ exposure so long as they take “reasonable steps” to address Labor Code issues proactively.

This reform has the potential to upend the scourge of PAGA lawsuits that have plagued California employers with 7- and 8-figure demands for more than 20 years, providing employers with powerful tools to defend against those cases. The reform law lays out very clear, proactive steps employers must take in order to limit their exposure.

How Did We Get Here?
In 2004, the State enacted PAGA to deputize an “aggrieved employee” to recover civil penalties for violations that previously could only be recovered by the California Labor Commissioner. The law was extremely vague about critical terms – for example, what it meant to be “aggrieved” and how to calculate penalties – resulting in outsized judgments and settlements for immaterial and harmless Labor Code violations.

For the last 20 years, the State Legislature declined to seriously consider any meaningful reform to PAGA, but that changed this year due to a proposed initiative on the November ballot that would have undercut most private PAGA claims. Faced with this prospect, California legislators, with little time to spare, have agreed upon sweeping and impactful amendments to PAGA in exchange for an agreement by the backers of the ballot initiative to withdraw it. This deal is expected to pass the Legislature this week and be signed into law by Governor Newsom.

The Reforms
These are the most notable reforms:

Changes to Civil Penalties: The single most notable change is to the amount of penalties that can be awarded in a private PAGA case. In particular, the reform lays out “reasonable steps” that can be taken by employers and which can lower their exposure by up to 85 percent.

The PAGA reform caps penalties at 15 percent for employers who take “reasonable steps” to comply before a PAGA notice and 30 percent for employers who do so after a PAGA notice. Helpfully, the law defines “reasonable steps” to include periodic payroll audits; training supervisors on common Labor Code issues; having legally compliant policies; and taking effective corrective action with regard to supervisors as to noncompliant wage/hour practices.

This is an incredibly powerful defense for California employers, provided they follow those steps. An employer who can show that it routinely audits payroll practices, trains supervisors, distributes compliant policies, and responds effectively to wage-hour complaints, stands to insulate itself from the vast majority of PAGA liability. While employment lawyers for years have advised employers to take these steps already, they will become an absolute necessity with passage of these reforms.

Standing/Personal Experience: Over the past 20 years, courts have lowered the bar for PAGA plaintiffs to show that they were “aggrieved.” Among other things, courts found that plaintiffs could assert PAGA claims even if they did not personally experience the type of violation asserted in the lawsuit or if they only experienced violations outside the one year statute of limitations. In practice, this meant that PAGA plaintiffs who experienced one lone violation of the Labor Code could assert PAGA claims for all conceivable Labor Code violations for hundreds or thousands of employees.

The reform eliminates this obvious flaw by requiring the plaintiff to prove that (1) he “personally experienced” the Labor Code violations that he seeks to remedy on behalf of other employees and (2) the violation occurred within one year of sending a PAGA notice to the State. By narrowing the class of plaintiffs who can potentially bring PAGA claims, this reform will weed out many claims by undeserving plaintiffs.

Manageability: The plaintiff’s bar favored PAGA over class actions because, unlike a class action, in PAGA cases, employees did not have to prove “commonality,” namely that their claims had anything in common with other employees. In the PAGA context, employers made similar arguments that a case was “unmanageable” when employees shared little in common, but the California Supreme Court rejected that notion. The reform changes that, allowing courts to determine that PAGA claims are unmanageable and allowing a court to limit the scope of a PAGA claim or the evidence to be presented at trial to ensure manageability.

Cap On Penalties For Wage Statement Violations Without Injury: Under PAGA, employers would often receive huge demands for seemingly “technical” wage statement violations, such as a minor errors or abbreviations in an employer’s name and address, which caused no harm. Under the reform, if a paystub violation does not cause harm to the plaintiff, then the available penalty is capped at $25, which is a 75 percent drop from the $100 penalty that previously was being assessed.

No Derivative Penalties/“Stacking”: PAGA plaintiffs would routinely seek “stacked” penalties, which included numerous $100 PAGA penalties for what amounted to one violation for one employee in one pay period. The reform language significantly limits such “stacking” and makes it very hard for PAGA plaintiffs to seek them.

New Cure Provisions: The reform expands an employer’s ability to “cure” an asserted PAGA violation after receiving a PAGA notice. In practice, if an employee provides a PAGA notice asserting a Labor Code violation, an employer has the ability to pay the employee what he claims he is owed and avoid any PAGA liability. There are also new, detailed administrative procedures for both small (less than 100 employees) and large (100 or more employees) employers to execute upon such “cures” through court-administrated mechanisms, including but not limited to early evaluation conferences.

Other Reforms
There are other proposed changes of interest to employers, the most notable of which we mention briefly here:

  • $200 Penalties Are Limited: The reform makes clear that $100 penalties are the default and that $200 penalties can only be awarded after an unfavorable court or agency determination in the last five years.
  • Allocation of an Award: Previously, 75 percent of any plaintiff’s recovery went to the State’s Labor Development Workforce Agency and 25 percent went to the aggrieved employees. That ratio is now 65/35, meaning more money goes directly to the affected employees.
  • Court Discretion to Reduce Penalties: Courts have always had the power to reduce “unfair” penalties and this law strengthens that discretion.
  • Civil Penalties for Short Term Violations: The maximum violation for Labor Code violations occurring over 30 days or 4 pay periods (whichever is less) is capped at $50.
  • Relief for Staffing Agencies: Staffing agencies that pay employees on a weekly basis are not penalized for doing so by having more pay periods in a one-year period. Instead, they automatically receive a 50 percent reduction in penalties.

Takeaways/Next Steps
This PAGA reform will provide significant opportunities for employers to avoid costly PAGA civil penalties. However, such relief is not self-executing: employers need to be vigilant and work closely with their counsel to take full and appropriate advantage of the new protections and opportunities. Below are just some of the most prominent steps employers should take:

  • Routine Audits of Wage/Hour Policies and Practices: Employers should, without delay, conduct comprehensive audits of their wage/hour policies and practices, ranging from the propriety and completeness of rest and meal period policies to timekeeping (no “off the clock”) to ensuring that overtimes and meal/rest premiums are accurately paid at the regular rate of pay.
  • Training: The new PAGA language also expressly calls out “training” as a factor in penalty reduction–and with good reason: even the best policies and practices are not a shield against liability if the employer’s supervisors do not meaningfully implement, and if the employees generally do not know of or understand, what the employer’s relevant policies and practices are. Training fills that gap.
  • Arbitration Agreements: Now more than ever, employers should consider instituting mandatory arbitration agreements with class action and (to the extent permitted by law) representative action waivers. Under the current state of California arbitration law (which is always fluid, to be sure), arbitration agreements that meet certain benchmarks and are enforceable will allow employers, under the best of circumstances, to avoid class action claims altogether. Further, although “representative” PAGA claims are not subject to mandatory arbitration, “individual” arbitration claims should be under the California Supreme Court’s 2023 decision in Adolph v. Uber Technologies, Inc. Given the new PAGA language, if the only representative claims an employer has to litigate are PAGA claims, there are means to reduce the potential value of such claims to a point where they are either not worth pursuing, or at least have a greatly diminished settlement value.

Conclusion: Be Vigilant and Proactive
The PAGA reforms, while not a panacea, are a huge step in the right direction. The basic guidance remains the same: California employers should not assume that they are doing everything “right.” These reforms place an actual dollar value on the old adage that an ounce of prevention is worth a pound of cure, meaning that cautious, proactive employers stand to limit PAGA exposure dramatically.

Hirschfeld Kraemer will have a webinar in the coming weeks to discuss these important changes and answer the many questions that will undoubtedly arise.

For more information, contact Dan Handman or Monte Grix in the Los Angeles office of Hirschfeld Kraemer LLP. Dan can be reached at 310-255-0705 or dhandman@HKemploymentlaw.com. Monte can be reached at 310-255-1827 or mgrix@HKemploymentlaw.com