Reform of California’s Private Attorneys General Act (PAGA) Signed Into Law

On June 27, California Governor Gavin Newsom signed into law a compromise for reform of California's Private Attorneys General Act ("PAGA") that was negotiated by and between employer groups led by the California Chamber of Commerce and employee groups led by the California Labor Federation. The two companion bills that formed the compromise were Assembly Bill 2288 and Senate Bill 92. As background, PAGA authorizes "an aggrieved employee" to act as a proxy or agent of the state Labor and Workforce Development Agency, to bring a civil action against an employer "on behalf of himself or herself and other current or former employees" to recover civil penalties for Labor Code violations they have sustained. (Labor Code § 2699.) Employers have been seeking reform of PAGA for years to eliminate frivolous lawsuits that have driven some employers to leave the state and others to go out of business.

The amendments to PAGA shall apply to a civil lawsuit brought on or after June 19, 2024, except the amendments will not apply to a civil action for which an employee's pre-litigation notice (required by Labor Code Section 2699.3) was filed with California Labor & Workforce Development Agency before June 19, 2024. The major amendments to PAGA include the following:

Limitations on Standing

The amendments impose a long-sought limitation on "standing" by requiring an "aggrieved" employee bringing a PAGA lawsuit to have personally suffered all of the alleged Labor Code violations within one year of the lawsuit. However, there is an exemption that precludes the new standing requirement for an "aggrieved" employee who is represented by a non-profit legal aid organization as defined by Business and Professions Code section 6213 that has served as counsel of record in PAGA lawsuits for at least five years prior to January 1, 2025, who may file a PAGA action even if only one of the alleged violations was committed against such plaintiff (which is the same broad standing requirement under existing law).

Employers have complained about the unduly broad and expansive definition of "aggrieved" plaintiffs who have been filing complaints alleging a wide variety of Labor Code violations under PAGA even if they have not or could not have personally suffered a violation of each provision. There was nothing to stop one disgruntled employee from filing a PAGA action alleging any number of labor code violations for all other employees (who may not be disgruntled and who would never sue the company). The practical impact of this new definition of an "aggrieved" employee is hard to predict because it is unknown how much the technical Business and Professions Code requirements of a non-profit legal aid organization will limit the number of PAGA lawsuits that will be filed by non-profit legal aid organizations.

Manageability Requirements

The amendments also codify a court's inherent authority to dismiss or narrow employee lawsuits filed, specifically providing: "The superior court may limit the evidence to be presented at trial or otherwise limit the scope of any claim filed pursuant to this part to ensure that the claim can be effectively tried."This nullifies a California Supreme Court ruling that refused to permit trial court judges from throwing out or limiting claims of "aggrieved" employees who could not prove an employer consistently imposed a uniform policy or de facto practice that dominated over individualized factual or legal issues.

Right to Cure

Small and medium-sized businesses with fewer than 100 employees may cure alleged Labor Code violations, thus barring a civil action, if the State Labor and Workforce Development Agency determines the proposed cure is sufficient. A "cure" means the employer corrects the alleged violations of underlying Labor Code statutes, and each aggrieved employee is made whole. Unpaid wages that are owed shall date back three years, plus 7% interest and any liquidated damages. Aggrieved employees may still file a lawsuit in Superior Court if they disagree with the Labor and Workforce Development Agency's determination of the employer's plan to cure the alleged violations.

Higher Percentage of Penalties Paid to Employees

Civil penalties recovered by "aggrieved" employees under PAGA shall be distributed in a higher percentage to the employees as follows: 35 percent will be paid to aggrieved employees, up from 25 percent; and 65 percent will be distributed to the State Labor and Workforce Development Agency, down from 75 percent under PAGA prior to the amendments. This was a concession to the California Labor Federation. Thus, "aggrieved" employees may have a stronger financial incentive to file a PAGA lawsuit.

Limitation on Penalties Assessed Against Employers

Prior to the amendments, PAGA imposed a civil penalty of $100 for each aggrieved employee per pay period for an initial violation and $200 for each subsequent violation. The amendments incentivize employers to "take all reasonable steps to be in compliance" with the Labor Code prior to receiving a pre-lawsuit PAGA notice filed with the State Labor & Workforce Development Agency or any personnel records from potentially aggrieved employees. If the employer takes "all reasonable steps to be in compliance," the amendments cap the penalties sought at 15% of the statutory amounts. The legislation lists examples of "reasonable steps" as conducting periodic payroll audits, taking action in response to such audits, disseminating written policies, training supervisors on the applicable Labor Code requirements, and taking corrective actions against supervisors where needed. Whether an employer has taken "all reasonable steps" to achieve compliance is subject to the discretion of the court. This likely will be a source of contention between employers and aggrieved employees when the court is asked to exercise its discretion.

A similar provision caps PAGA civil penalties at 30% of the statutory amount if, after receiving a PAGA pre-lawsuit notice, the employer has taken all reasonable steps to comply with "all provisions identified in the (PAGA) notice."

Additionally, the amendments contain a provision that reduces by 50% the amount of the penalties available where the employer pays employees weekly, rather than bi-weekly or bi-monthly.

However, amendments allow for the full $200 penalty per pay period for an employer whose conduct was found to be "malicious, fraudulent, or oppressive" in violating the Labor Code.

Early Settlement Opportunity for Large Employers

Large employers with more than 100 employees may seek an "early evaluation" at the beginning of a PAGA lawsuit to seek a settlement. A stay of the lawsuit will be required for the early evaluation, which will be conducted by a judge or other neutral appointed by the Court. The evaluator will examine the following four aspects of PAGA claims: (1) Whether any of the alleged violations occurred, and if so, whether the defendant has cured the alleged violations; (2) the strengths and weaknesses of the aggrieved employee's claims and employer's defenses; (3) whether the aggrieved employee's claims can be settled in whole or in part; and (4) whether the parties should share other information that may facilitate a settlement of the dispute. To resolve the lawsuit, all parties will have to agree on a plan to remedy the violations. If the parties cannot reach agreement, the disputed issues shall proceed to litigation. It is unknown how effective this will be, as it will require disclosures and backpay that some employers will find unacceptable, and/or a cure proposal that some employees will find does not adequately compensate them.

With the enactment of the compromise amendments, proponents of the "California Fair Pay and Employer Accountability Act" have agreed to drop their statewide initiative that had qualified for this year's November ballot. The initiative would have gone further to reform PAGA by, for example, replacing PAGA's bounty hunter provision with an alternative enforcement mechanism by which only the Labor Commissioner could file an enforcement action to collect penalties under PAGA, prohibiting workers from hiring a private attorney.

In the meantime, to minimize PAGA's continuing risks, employers are recommended to continue to review their policies about all of the following:

• Proper classification of workers as independent contractors.
• Proper classification of exempt (from overtime) and non-exempt employees.
• Maintain compliant meal- and rest-period policies, including keeping accurate records of all meal breaks.

Questions

If you have any questions regarding this Legal Alert, please contact the following attorney from our office or the attorney with whom you typically consult.

Bruce Scheidt
[email protected] | 916.321.4502

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