PAGA Reform: A Game Changer for California Employers

As most California employers are aware, the Private Attorneys General Act (“PAGA”) is a controversial law that allows employees to sue for civil penalties on behalf of the state for labor code violations. Since it became effective in 2004, PAGA has spurred debates among employers, employees, and lawmakers, with some arguing that it has led to an increase in litigation and excessive penalties. Others claim PAGA is a critical tool for enforcing labor laws and ensuring fair treatment of employees.

Recently, California enacted PAGA reform through AB 2288 and SB 92, applying to California lawsuits filed after June 19, 2024. This reform is crucial for employers as it affects the standing, statute of limitations period, manageability principle, cure provisions, and various issues relating to penalties under the law.

WHAT ARE THE KEY CHANGES IN THE PAGA REFORM?

There are now stricter rules regarding the scope of the PAGA lawsuit

Standing – a PAGA plaintiff must have personally suffered the alleged violations.

Under the prior version of PAGA, an employee could sue an employer for violations they did not suffer. This meant that an employee who suffered a single violation (such as a meal break violation) could bring claims for any other labor violations allegedly suffered by other employees (i.e., overtime violation) even though the plaintiff did not suffer those violations. Now, a plaintiff must have ​“personally suffered” the alleged violation. This change limits the universe of claims a PAGA plaintiff can bring, curtailing one of the most damaging aspects of the previous iteration of the law.

Statute of Limitations – One year and 65 days, period.

PAGA reform clarifies the applicable statute of limitations – one year and 65 days before the claim is filed. While the statute of limitations was technically the same as before, following the Court of Appeals decision in Johnson v. Maxim Healthcare Services, Inc. interpreting the prior statute, several courts found that aggrieved employees continued to suffer violations long after the PAGA plaintiff stopped working for the employer. This meant that employees could extend the statute of limitations period by making a ​“continuing violation” argument. Together with the stricter standing rule, PAGA reform arguably forecloses the possibility that an employee who is terminated more than one year and 65 days prior to the lawsuit may bring a suit against the employer.

Penalty Reform – Lower Default Maximum Penalties

The new law provides that courts ​“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” based on the decision in Woodworth v. Loma Linda Univ. Med. Ctr., 93 Cal. App. 5th 1038, 1070 (2023). This change likely revives the debate over the court’s authority to decide questions of manageability, arguably permitting case management orders limiting the scope of claims before trial.

Employers can now cure more violations to avoid PAGA litigation

Cure Provisions

Employers may now ​“cure” more violations including Failure to Provide Meal Periods and Rest Breaks / Pay Premiums, Minimum Wage Violations, Overtime Violations, Expense Reimbursements, and Wage Statement Violations by correcting the underlying conduct and making employees ​“whole.”

To make employees ​“whole,” employers must pay employees, in full, an amount sufficient to recover any owed unpaid wages due for the prior 3 years, pay 7% interest, pay any liquidated damages required by statute, and pay reasonable lodestar attorney’s fees and costs.

Beginning October 1, 2024, smaller employers (<100 employees) have 33 days from the date of receipt of a PAGA notice to submit to the Labor & Workforce Development Agency (LWDA) a confidential proposal to cure the alleged violations. Larger employers, starting immediately, may request an early evaluation and a stay of proceedings.

While this may offer employers an option to resolve employment lawsuits, the cost to make employees whole is likely very high.

Employers may avoid or reduce PAGA penalties

Avoiding PAGA Penalties

The PAGA reform codifies the holding of Naranjo v. Spectrum Sec. Services, Inc., an employer-friendly case concerning penalties for PAGA violations on which we previously reported. Under the new law, employers may avoid penalties for certain violations by arguing that the alleged violations were not willful or intentional. There is now a higher bar placed on plaintiffs to obtain penalties.

Additionally, courts may now reduce ​“stacked” penalties for the following violations arising from the same policy/payroll: failure to timely pay wages upon separation and during employment and derivative wage statement violations.

Reduction of Penalties

Previously, if the Labor Code did not provide a penalty for a particular violation, the maximum penalty was $100 per pay period for an ​“initial” violation and $200 for a ​“subsequent” violation. This allowed Plaintiffs to argue that a subsequent violation means any violation after the first violations.

The PAGA reform clarifies that the default penalty is $100 per violation unless one of the following two applies: (1) a court or the labor commissioner found in the last five years that the employer’s policy or practice giving rise to the violation was unlawful, or (2) the court determines that the employer’s conduct was ​“malicious, fraudulent, or oppressive.” If one of those two scenarios applies, the maximum penalty increases to $200 per pay period.

The PAGA reform also results in lower default maximum penalties for certain violations, as long as the heightened default penalty does not apply:

• $25 per pay period for violations of the requirement to accurately list the employer’s name and address, if the employee would not be confused or misled about identity of employer;

• $25 per pay period for other wage statement violations if the employee could promptly and easily determine the accurate information from the wage statement alone; and

• $50 per pay period if the violation resulted from an isolated, nonrecurring event that did not extend beyond the lesser of 30 consecutive days or four consecutive pay periods.

If employers show they have taken ​“all reasonable steps” to comply with the law under two scenarios, there may be caps on PAGA penalties.

• Before Employer Receives a PAGA Notice: If an employer shows they took ​“all reasonable steps” to comply with the law before either: (1) receiving a PAGA notice; or (2) receiving a request for personnel records, PAGA penalties are capped at 15%.

• After Employer Receives a PAGA Notice: If an employer shows they took ​“all reasonable steps” to comply with the law within 60 days after receiving a PAGA notice, PAGA penalties are capped at 30%. However, a court may exceed the 30% cap if adhering to the cap would result in an unjust or arbitrary award.

“Reasonable steps” includes, but is not limited to: payroll audits and taking action in response to the audit results, distributing lawful written policies to employees, conducting supervisor training on applicable labor law compliance, or taking corrective action with respect to supervisors. Whether the steps were reasonable depends on the totality of the circumstances, size and resources of the employer, the nature, severity, and duration of the alleged violations. The caps do not apply if the court finds the employer acted ​“maliciously, fraudulently, or oppressively” or the employer’s policy was found to be unlawful by a court or the labor commissioner within the last 5 years.

WHAT DOES THIS MEAN FOR EMPLOYERS

Overall, the PAGA reform potentially makes a PAGA suit less expensive to litigate. With the requirement that a PAGA plaintiff must suffered the alleged violation to bring a PAGA suit, an employer who has an arbitration agreement with a PAGA plaintiff may consider taking the case through arbitration to make the plaintiff prove that he or she has suffered the alleged violation. Although the cure provision sounds useful, many smaller employers likely will not be able to implement a plan within the 33 day window to submit a cure proposal. For larger employers, however, the opportunity for early evaluation can delay litigation and potentially help with any settlement discussion, which oftentimes is less costly than litigating the case itself.

Nonetheless, curing violations in accordance with the PAGA reform may be expensive for employers. Alternatively, employers may consider taking steps to cap potential penalties should a lawsuit arise through proactive measures, such as conducting periodic audits, increasing supervisor trainings, and taking corrective actions against supervisors for known violations. These steps may also bolster the employers’ good faith defense should they face PAGA lawsuits.