PAGA Reforms Usher in a New Era of California Wage and Hour Litigation

07/02/2024|5 minute read

Key Takeaways

1. The PAGA reforms reduce the potentially shocking exposure California employers face in PAGA actions with common sense modifications that incentivize proactive remediation of violations of the California Labor Code.
2. Employers who receive notice of a PAGA action should react quickly in order to take advantage of the cure and early evaluation processes adopted in the reforms.
3. Now, more than ever before, strong incentives exist for California employers to proactively audit their wage and hour practices, both prior to and immediately after receiving notice of a PAGA action, because doing so can ameliorate tremendous exposure to PAGA penalties and related fees.

Introduction

On July 1, following the California Legislature's unanimous passage, Governor Newsom signed SB-92 and AB-2288, which drastically reform California's Private Attorneys General Act (PAGA). Most of the reforms apply to civil actions brought on or after June 19, 2024.

PAGA Background

PAGA, first passed 20 years ago, provides a private enforcement mechanism for employees to pursue claims on behalf of the Labor and Workforce Development Agency (LWDA) against employers that allegedly violate the California Labor Code. PAGA actions are almost always brought on a representative basis. However, because representative PAGA actions have lacked the procedural safeguards typical of class actions, they are far easier to pursue. Because of this and several decisions regarding the arbitrability of PAGA claims, PAGA litigation has steadily increased year after year.

As many California employers are painfully aware, defending PAGA actions is expensive and time-consuming. Prior to the present reforms, employers could be found liable for penalties of $100 per employee per pay period for an initial Labor Code violation and $200 per employee per pay period for each subsequent violation. There has also been disagreement about what constitutes an "initial" versus a "subsequent" violation. Further, if an individual employee alleged that they suffered a single Labor Code violation, they had standing to pursue penalties on behalf of all California employees of an employer for the same or even different Labor Code violations. And while the statute of limitations for PAGA penalties was (and remains) only one year, because penalties could be recovered on behalf of an employer's entire California workforce, potential liability could be staggering. Large penalty awards were further exacerbated by plaintiffs' attorneys fees, which were often tied to the total amount of penalties recovered. The commonsense reforms seek to curtail excessive PAGA litigation and provide employers with opportunities to make good-faith efforts to cure alleged violations of the Labor Code, while still allowing employees to pursue claims on the LWDA's behalf. These reforms should lead to lower penalty awards and similarly lower fee awards.

Summary of the Reforms

Incentives to Audit and Remediate Labor Code Violations

First, the penalties associated with PAGA violations have been dramatically reworked so that employers are actively incentivized to periodically audit their wage and hour practices to ensure that they are complying with the California Labor Code. If an employer is faced with a PAGA claim and the employer can show that it took "all reasonable steps" to maintain compliance with the California Labor Code before the plaintiff brought their claim, the potential PAGA penalties can be reduced by 85%. Further, if the employer takes all reasonable steps to remedy any alleged violation within 60 days after the employer is served with the required pre-filing notice to the LWDA and the employer (a PAGA notice), any associated penalties can be reduced by 70%.

Accordingly, employers should continue to make periodic efforts to audit their wage and hour practices so that if they are sued for alleged Labor Code violations, they can reduce potential penalties significantly. And even if an employer fails to preemptively audit their wage and hour practices before they are faced with a PAGA suit, they still can ameliorate potential liability if they act quickly to take all reasonable steps to respond to the alleged violations after receiving a copy of a PAGA notice.

The Early Evaluation Conference

The PAGA reforms have also created a new procedural mechanism that effectuates the legislature's intent to encourage early resolution of PAGA claims. To this end, at the outset of litigation, employers can now request an early evaluation conference with a designated neutral evaluator, which stays official court proceedings, including pleadings and discovery. During the early evaluation conference, the neutral evaluator will consider whether any potential violations actually occurred and the strength and weakness of the plaintiff's case. The defendant employer can also provide evidence that it proactively sought to comply with the Labor Code provisions implicated in the plaintiff's lawsuit, which may lead to a reduction in penalties, as described above.

Also, the early evaluation conference allows the employer to submit a plan to "cure" the practice that led to an alleged Labor Code violation. Under the PAGA reforms, employers can achieve early resolution and dismissal of PAGA claims if they cure any illegal employment practices and make the affected employees "whole." For example, if after being served with a PAGA notice the employer discovers that it had improperly calculated employees' overtime rates and thus inadvertently underpaid some employees, the employer can develop a plan to correct the practice and pay employees any missing wages and reasonable attorneys fees. Then the employer can submit its plan to cure and seek dismissal of the plaintiff's lawsuit. Importantly, if the designated neutral rejects the employer's plan to cure, the employer can bring a motion and seek court approval of its plan and dismissal of the plaintiff's claim.

Changes to Standing Requirements and Manageability

The PAGA reforms have also reduced the scope of potential litigation. Previously, assuming a PAGA plaintiff had experienced a single Labor Code violation, that plaintiff could pursue penalties for any alleged violations of the Labor Code covered by PAGA, even if the plaintiff never experienced the alleged misconduct. For example, if an employee missed a single rest break, they could seek PAGA penalties for meal break, overtime and wage statement violations allegedly committed by the employer against all other employees in the state of California. Now, named plaintiffs can only seek recovery on a representative basis for alleged Labor Code violations that the plaintiff personally experienced during the PAGA period. Additionally, the reforms confirm that a trial court can consider whether a PAGA action can manageably be tried and "limit the evidence to be presented at trial or the scope of any claim."

Enhanced Penalties for Repeat Offenders

Not all of the reforms are employer-friendly. If an employer is a repeat offender, PAGA's baseline penalty of $100 per employee per pay period can be doubled. Specifically, if within the preceding five years, any agency or court has issued a finding or determination that an employer's policy or practice is unlawful, and the employer is found to have violated the same Labor Code provision a second time, employees will be entitled to $200 per employee per pay period. Additionally, if a court finds that an employer's conduct giving rise to the violation was "malicious, fraudulent, or oppressive," the employer may also face double penalties. Further, lodestar attorneys fees remain available if employees prove that they were subjected to Labor Code violations. Further, because PAGA claims are brought on behalf of the LWDA, the PAGA statute previously mandated that 25% percent of the recovered penalties went to the affected employees, while the remaining 75% went to the LWDA. Now affected employees are entitled to a more generous 35% of all PAGA penalties recovered.

Conclusion

These commonsense reforms are a welcome reprieve for employers who have long faced what seemed to be an unending wave of litigation. However, PAGA has not "gone away." Indeed, California employers now have significant financial incentive to proactively ensure that their wage and hour practices are compliant with California law. BakerHostetler's California Labor and Employment Team is available to assist with preventive wage and hour audits in order to mitigate risk and to assist employers in navigating PAGA's new uncharted waters if they are served with a PAGA notice.

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