August: Singlepoint: PAGA REFORM

PAGA Reform: How Employers Can Take Advantage of the New Legislation

One of the costliest risks for a California employer is a Private Attorneys General Act (PAGA) claim. The number of PAGA claims is increasing yearly, with over 100 Labor Code violations that can lead to a claim. According to some reports, the average settlement is over $1 million.

But there is good news for employers. Governor Gavin Newsom signed AB 2288 and Senate Bill 92 into law on July 1, providing much-needed relief to employers. Some provisions went into effect immediately, and others will go into effect in October.

Enacted in 2004, California’s Private Attorneys General Act (PAGA) was designed by the California Legislature to offer financial incentives to employees to initiate civil action against their employers to collect civil penalties previously collected by the Labor and Workforce Development Agency (LWDA).

PAGA permits “aggrieved” employees (affected by at least one Labor Code violation) to file lawsuits on behalf of themselves, other employees, and the State of California. 

The PAGA overhaul now limits the types of employees who can bring PAGA claims, gives employers a better chance to cure mistakes, reduces possible penalties, and boosts procedural mechanisms that will reduce claims in court. The reduced penalties in the reform measure will not apply to any pending litigation matters or where notice was given to the LWDA prior to June 19, 2024

Structure of Penalties PAGA currently provides a civil penalty of $100 “for each aggrieved employee per pay period for the initial violation” of certain provisions of the California Labor Code. Employers have expressed concern over the amount of the penalty and how it fails to consider good-faith attempts to remain in compliance with applicable California wage and hour law. Under the new legislation, if an employer demonstrates that it has taken all “reasonable steps” to comply with the law prior to receipt of a PAGA notice or a request for personnel records, the available penalties are capped at 15% of the penalties sought. This provides for a potential 85% reduction in penalties for employers who engage in reasonable compliance steps before a dispute arises. Employers who take steps to comply within 60 days after receiving a PAGA notice are subject to a 30% penalty cap. This is up to a 70% reduction in penalties for employers who remedy any potential issues following receipt of a lawsuit. Before the legislation passed, PAGA allowed for a heightened penalty of $200 per pay period per employee for each “subsequent violation.” Under the new law, the $200 penalty applies when an agency or court has issued a finding or determination to the employer that its policy or practice giving rise to the violation was unlawful or if the court finds the employer’s conduct was malicious, fraudulent, or oppressive. The penalty reductions identified above are not available when a court issues heightened penalties. When violations occur for less than 30 days or four consecutive pay periods, the maximum penalty is $50. This is intended to address issues like sporadic instances of meal and rest period non-compliance or an anomaly in payroll processing. A court has discretion, based on the facts and circumstances of the case, to reduce the penalties to be imposed on employers to avoid an award that is unjust

“All Reasonable Steps” Whether the employer’s conduct was reasonable will be evaluated by the totality of the circumstances and will take into consideration the size and resources available to the employer and the nature, severity, and duration of the alleged violations. The PAGA legislation defines reasonable steps to include: 1. Disseminating lawful written policies and training supervisors on applicable Labor Code and Wage Order compliance. o These written policies or training programs will be strictly scrutinized by plaintiffs’ counsel looking to defeat any potential penalty reductions by claiming employers did not meet the “all reasonable steps” standard. Make sure your materials and training are up to date. 2. Taking appropriate corrective action with supervisors. o For example, an employer who learns that a supervisor is instructing employees not to take meal or rest periods will potentially be responsible for taking appropriate corrective measures with the supervisor. 3. Conducting periodic payroll audits and taking action in response to the results of the audit. o Employers can use their own personnel to conduct these audits. They may also consider using outside third parties to conduct audits; however, employers should request the outside consultant to provide certification that the audit was conducted competently and that any identified issues were addressed. o Some employers would be well-served by having counsel involved in audits to take advantage of the attorney-client privilege for certain aspects of the audit

Cure Provisions AB 2288 updated PAGA’s “cure provision,” allowing more violations to be cured and introducing new mechanisms that employers can take advantage of. This goes into effect on October 1, 2024. Some of the most frequently alleged violations under PAGA—wage statement violations and failure to pay meal or rest period premiums, overtime, or expense reimbursements—may be cured prior to any imposition of liability. There are different procedures for small employers with under 100 employees during the relevant period and employers with at least 100 employees

Substantive Limitation On Standing The new legislation limits an individual standing to allow the pursuit of relief for only those employees “against whom a violation of the same code provision was committed.” This means that the employee personally suffered the same purported violations as other alleged aggrieved employees

Penalty Allocation Under the previous PAGA structure, 75% of the collected penalties were distributed to the LWDA, and the remaining 25% were distributed among the employees affected by the violations, with a prevailing plaintiff entitled to their attorney’s fees and costs. The new legislation modifies this split to 65%/35%

What Should You Do? You should immediately take “reasonable steps” to avail yourselves of these welcome changes. This includes updating your handbook, conducting audits, and training your supervisors. Consider consulting with your legal counsel to ensure your processes are consistent with legal obligations.