PAGA Reforms Provide Employers a Chance to Mitigate Risks

July 16, 2024

On July 1, 2024, California Governor Gavin Newsom signed SB 92 and AB 2288 into law, significantly reforming California's Private Attorneys General Act (PAGA). Although PAGA will remain a frequent source of litigation for California employers, the reforms are a positive step to reduce employers' exposure and provide incentives for employers to take proactive steps to comply with the law.

The reforms apply to civil actions filed on or after June 19, 2024. They do not apply retroactively to civil actions filed before that date, and thus the prior PAGA law will continue to apply to those cases.

This article first summarizes some of the key reforms and provides practical tips on what employers can do now to mitigate risks.

For some background on PAGA claims, see our prior article here.

1. Summary of Key Reforms

a. Stricter Standing Requirements

A key reform provides that, to bring a PAGA suit, the plaintiff must have "personally suffered" the alleged violations within one year before filing the notice. The plaintiff can then pursue those violations on behalf of other employees who suffered the same violations. Previously, an employee who had experienced a California Labor Code violation could sue under PAGA on behalf of other employees who had suffered any other kind of Labor Code violation.

This reform is significant because it means that PAGA cases will generally proceed on a more narrow set of alleged violations. However, it may also mean that plaintiffs' lawyers will assemble multiple named plaintiffs.

Notably, for plaintiffs represented by non-profit legal aid counsel, the standing limitations do not apply, and such plaintiffs can pursue any or all alleged Labor Code violations.

b. Reduced Penalties

i. Reduced Penalties for Employers that Take "Reasonable Steps" to Comply

One of the more significant amendments caps penalties at 15% of the total penalties sought for employers who take "all reasonable steps to be in compliance" before the employer receives a notice of violation or request for wage records. An employer who takes reasonable steps to comply within 60 days after receiving a notice of violation can take advantage of a 30% cap on penalties.

The amendments define "reasonable steps" to include: periodic payroll audits with corrections made if necessary, compliant written wage-hour policies, wage-hour training for supervisors, and disciplining supervisors who violate the California Labor Code.

ii. Reduced Wage Statement Penalties

For technical wage statement violations, the reforms reduce the penalty from $100 (per employee, per pay period) to $25. The reduced penalty applies only if the employee could "easily determine from the wage statement alone" the required information (hourly rate of pay, hours worked, etc.). Nevertheless, because wage statement penalties are often a significant source of PAGA liability, this reform measure should materially reduce employers' potential exposure.

iii. Reduced Penalties for Isolated Errors

For violations that occurred over less than 30 consecutive days or 4 consecutive pay periods, the reforms reduce the $100 penalty (per employee, per pay period) to $50.

iv. No Derivative Penalties

The reforms eliminate the argument for "stacking" PAGA penalties for multiple labor code violations for the same underlying conduct. Now, an employee who recovers civil penalties for an underlying wage violation (such as missed meal periods) cannot also collect civil penalties for the derivative claims of failure to pay all wages due at termination and failure to provide a compliant wage statement. This effectively clarifies an ambiguity in the prior law that plaintiffs had used to argue for increased penalties.

v. Revised Definition of Subsequent Violations

The reforms limit application of the $200 "subsequent violation" penalty to the following: within five years, any agency or court found the practice giving rise to the violation unlawful; or if a court determines the employer's conduct giving rise to the violation was malicious, fraudulent, or oppressive.

vi. Reduced Penalties for Weekly Pay Periods

To promote fairness for employers who pay weekly instead of every two weeks, the reforms cut penalty awards in half for these employers. Previously, paying weekly would have doubled the penalties.

vii.More Money Goes to Employees

The PAGA amendments increase the percentage of civil penalties that go to the employees to 35%. Before, aggrieved employees were awarded only 25% of the total civil penalties recovered, with remaining 75% going to the Labor and Workforce Development Agency (LWDA).

c. Expanded Cure Procedures

In addition to reducing penalties for employers who take all "reasonable steps" to comply with PAGA as described above, the reforms also provide two avenues (effective October 1, 2024) for employers to cure or seek an early settlement.

Employers with less than 100 employees can send the LWDA a confidential proposed cure plan within 33 days of receipt of the notice, before a lawsuit is filed. If the employer cures the violations and provides certification to both the LWDA and the aggrieved employee or representative of the cured actions, and the LWDA finds it is cured, no civil action may commence.

After a lawsuit is filed, both small employers (those with less than 100 employees) and large employers (those with 100 or more employees) can request a stay of the case to participate in an "early evaluation conference" (EEC) with a "neutral evaluator." The legislation does not define a "neutral evaluator," but presumably, it is a court-appointed or mutually agreed-upon neutral. The EEC requires the employer to submit a proposed cure plan and sets forth other procedures for the neutral to evaluate the case.

Notably, the reforms define a cure as correcting the violation and making each aggrieved employee whole by paying (i) back wages dating 3 years from the date of the notice, (ii) 7 percent interest, (iii) any liquidated damages as required, and (iv) reasonable attorneys' fees and costs to be determined by the agency or the court.

For wage statement violations, an employer can cure by providing a fully compliant itemized wage statement at no cost to the employee.

The effectiveness of this new EEC procedure remains to be seen. Given the stricter timelines and procedures and the fact that the parties typically dispute the amount of back wages owed, it seems likely that PAGA litigants will continue to frequently seek a stay in favor of private mediation, rather than using the EEC procedure.

2. Practical Tips for Employers to Mitigate Risks

Here are key steps for proactive and compliant employers to take advantage of the incentives created by the PAGA reforms.

First, conduct regular wage-hour audits. Spot checks of payroll records should be conducted at least once a year, and a comprehensive audit of all wage-hour practices should be conducted at least every three years. Audits should be conducted in close collaboration with counsel experienced with California wage-hour law, as the California Labor Code is nuanced and often changes.

Second, make corrections as a result of these audits. This may sound obvious, but it is an often-missed step. And to take full advantage of the PAGA reform penalty reductions, corrections must be made before receiving a PAGA notice asserting violations. Again, corrections should be conducted in close collaboration with experienced counsel to ensure the changes are implemented properly.

Third, maintain up-to-date and comprehensive written wage-hour policies, including policies covering meal and rest breaks, time keeping, overtime, and prohibitions on off-the-clock work. Policies should be reviewed and updated annually by counsel experienced in California wage-hour law to capture any changes in the law.

Fourth, provide regular wage-hour training to HR and supervisors. Such training should be conducted at new-hire onboarding and repeated at least every two years. The training should cover key areas where lack of supervisor knowledge creates exposure, such as meal and rest breaks and off-the-clock work.

Fifth, take disciplinary action against HR members or supervisors who violate the wage-hour policy. This includes disciplining and terminating supervisors who fail to appropriately schedule and manage the workforce to ensure compliant meal and rest breaks.