Big Wins for Both Workers and Employers

Governor Newsom signed PAGA Reforms into law on July 1, 2024 (AB 2288 and SB 92).  During the signing ceremony the Governor stated: “[t]his reform is decades in the making- and it’s a big win for both workers and business. It streamlines the current system, improves workers protections, and makes it easier for businesses to operate. I want to thank labor and business groups for coming together to hammer out this deal, and our legislative partners for getting these bills to my desk.” Although these bills were signed on July 1, 2024, they are effective as of June 19, 2024. They apply to any proceedings of the Labor and Workforce Development Agency (LWDA) and PAGA notices initiated on or after that date.

What is PAGA?

The Private Attorneys General Act of 2004 (PAGA) authorizes aggrieved employees to bring lawsuits against an employer or former employee to recover civil penalties on behalf of themselves and other current or former employees, and the State of California for Labor Code Violations. The workers act as “private attorneys general” and can pursue civil penalties as if there were a state agency. Since enacted, PAGA has become a lucrative practice for certain plaintiff’s attorneys who sometimes file meritless PAGA lawsuits for plaintiffs (employees) alleging violations they never experienced.  This has been an allowable practice until this PAGA reform.

In the past, PAGA has been criticized as making trial lawyers rich, limiting awards to workers and subjecting businesses to costly lawsuits over technical violations. Now, PAGA Reforms are a big win for workers and businesses.

November Ballot Initiative and Labor Commissioner Audit a Motivator for Labor and Business to Agree on PAGA Reforms

On November 5, 2024, California voters would have had the opportunity to preserve PAGA in its present form or replace it with a proposed law, the California Fair Pay and Employer Accountability Act (FPEAA).   The FPEAA would have repealed PAGA and shifted the responsibility back to the Labor and Workforce Development Agency (LWDA), making it the exclusive authority for enforcing Labor Code violations under PAGA.

In May of 2024, the state auditor audited the Labor Commissioner’s Office and reported a backlog of 47,000 wage claims, with workers waiting years for money they claimed they were owed. Alarmed by these statistics and with the deadline to withdraw the initiative from the ballot approaching (June 19, 2024), legislators, labor and businesses were able to negotiate and agree upon reforms for PAGA and have AB 2282 and SB 92 approved by Governor Newsom prior to the deadline. This initiative is no longer on the ballot. Indeed, these PAGA reforms are a win-win for worker and business alike, compared to the FPEEA.

PAGA Reforms: Wins for Employers

1. Caps penalties on employers that take timely steps to fix (cure) policies and practices to comply with the Labor Code, and make workers whole, after receiving a PAGA notice, as well as on employers that act responsibly to take steps proactively to comply with the Labor Code before receiving a PAGA notice.
2. Caps penalties to a maximum of $50 per pay period per aggrieved employee where the alleged violation resulted from an isolated, nonrecurring event that did not extend beyond the lessor of 30 days, or four consecutive pay periods.
3. Caps penalties for violations under Labor Code 226 (itemized wage statements) at $25 per pay period per aggrieved employee if the employee could easily determine from the wage statement alone the correct identity of their employer and would not be confused or misled by the wage statement.

Previously PAGA provided a civil penalty under PAGA of $100 for each aggrieved employee per pay period for initial violation of certain provisions of California Labor Code, and a penalty of $200 per pay period for each aggrieved employee for each subsequent violation. Effective June 19, 2024, the term “initial” is removed and all violations are subject to $100 per day per pay period per each aggrieved employee.

However, the civil penalty is $200 for each aggrieved employee per pay period if either of the following are met: 1) Within the 5 years preceding the alleged violation, LWDA or any court issued a finding or determination to the employer that its policy or practice giving rise to the violation is unlawful; 2) the court determines that the employer’s conduct giving rise to the violation was malicious, fraudulent or oppressive.

Reductions in penalties are awarded as follows:

1. 85% reduction of the $100 per pay period per aggrieved employee penalty when the employer takes “all reasonable steps” to be in compliance with Labor Code prior to a dispute arising. This means action is taken before receiving an employee records request from aggrieved employee or employee’s counsel or administrative complaint filed with the California Labor Workforce Development Agency (LWDA). In this case, the civil penalty may not be more than 15% of the penalty sought.
2. 70% reduction of the $100 per pay period per aggrieved employee penalty, if after receiving a PAGA lawsuit or request for records from LWDA, the employer takes “all reasonable steps” to comply with the law. This means the civil penalty may not be more than 30% of the penalty sought.
3. 50% of the $100 per pay period per aggrieved employee penalty if the alleged violation “resulted from an isolated, non-recurring event that did not extend beyond the lessor of 30 consecutive days or four consecutive pay periods” for the allegedly aggrieved employee.
4. Court has discretion to assess penalties, based on the facts and circumstances of the case, to reduce the penalties to be imposed on employers to avoid an award that is unfair under the circumstances.

This means the plaintiff who sought a penalty for underpayment of wages, could not then also seek additional penalties for failure to pay the underpayment of wages at time of termination (§203); failure to list the underpayment on the wage statement in the pay period it was earned (§204), failure to list the underpayment on the wage statement for the pay period (§226), etc. In the past a single violation could result in numerous penalties.

1. Allows more violations to be cured for the most frequent violations and provides new mechanisms that employers can use to take advantage of to cure these violations: Labor Code §226 (wage statements); §226.7 (failure to pay meal/rest period premiums), §510 (overtime), and §2802 (expense reimbursement).
2. An employer who, within 60 days after receiving notice of violation of Labor Code Section 226 (itemized wage statements), takes reasonable steps to comply with Labor Code violations and cures a violation, shall not be required to pay a civil penalty for that violation. Any other employer shall pay a civil penalty of no more than $15 per aggrieved employee per pay period for the statute of limitations (Code of Civil Procedure Section 240).
3. Small Business Employer Opportunity: On or after October 1, 2024, SB 92 provides an opportunity for early resolution for small employers wanting to cure violation(s). Within 33 days of receipt of a PAGA notice sent by the aggrieved employee or representative, an employer that employed fewer than 100 employees in total during the period covered by the notice may submit to the LWDA a confidential proposal to cure one or more of the alleged violations. These new procedural mechanisms describing this process may be found in SB 92 by scrolling down to LC § 2699.3 (c)(1& 2- effective October 1, 2024). These mechanisms also include an early conference, with a designated neutral evaluator, which stays official court proceedings, including pleadings and discovery. This will save litigation costs and leave more funds to pay employees.
4. To “cure” a violation means the employer corrects the alleged violation, is in compliance with the Labor Code violations in the notice, and each aggrieved employee is made whole. This means the employee has received an amount sufficient to recover any unpaid wages due dating back three years from the date of the notice, plus 7 % interest, any liquidated damages (amount equal to the wages that were owed) required by statute, and reasonable lodestar attorney’s fees (hours reasonably spent by trial counsel by a reasonable hourly rate) and costs to be determined by the court and LWDA.

1. Plaintiffs (current and former employees) must personally experience each of the alleged violations they are seeking to recover on a representative basis to have standing to sue under PAGA. In the past, plaintiffs could pursue penalties affecting other employees, even if they did not personally experience these violations. Note, there is a limited exception for plaintiffs represented by non-profit legal aid associations, who suffered one or more of the violations alleged.
2. Enforces the court’s power to determine the manageability over PAGA claims and provide that it may limit the evidence to be presented at trial or otherwise limit the scope of the claim filed to ensure that the claim can be effectively tried. Previously, in Estrada v. Royalty Mills, Inc., the California Supreme had ruled that trial courts do not have the inherent authority to strike a PAGA claim on manageability grounds.

Historically, employers with weekly pay periods paid more penalties than employers with bi-weekly or semi-monthly pay periods since penalties were assessed per pay period, per aggrieved employee. PAGA now reduces civil penalties by one-half if the employer’s regular pay period is weekly for the aggrieved employees.

Increases penalties on employers that act maliciously, fraudulently or oppressively in violation labor laws or are repeat offenders as noted above. PAGA’s baseline penalty of $100 per employee per pay period can be doubled to $200 per aggrieved employee per pay period.

Increases the amount of penalty money allocated to employees from 25% to 35%. The remaining 65% will go to CA Labor and Workforce Development Agency (LWDA).

Employers are incentivized to “cure” violations and preempt the filing of a PAGA action in whole or in part by requesting notifying LWDA of its desire to cure violation(s) and scheduling an early evaluation conference. Curing the violations in the PAGA notice will reduce the civil penalties.  Earlier resolution will require payment to employees of legally required past due wages, 7% interest, liquidated damages, attorney’s fees and costs.  Employers will pay less penalties and litigation costs and aggrieved employees will receive payment for wages due and other statutory penalties much sooner. This more robust “right to cure and early resolution” will reduce litigation (attorney’s fees and costs) and leave more of the funds available for the aggrieved employees.

PAGA Reforms allow courts to provide injunctive relief to compel businesses to implement changes in the workplace to remedy violations.

Employers become educated in the process as they conduct wage and hour audits to determine what reasonable steps they must take to cure violations. Additionally, 65% of the penalties that LWDA receives under PAGA, are now specifically allocated for enforcement of labor laws, administration of PAGA, and for education of employers and employees about their rights and responsibilities under the Labor Code.

To take advantage of reduction in penalties and rights to cure violations, small business employers are encouraged to take all reasonable steps necessary to be compliant with California’s Labor Laws and respond timely when a PAGA notice is received. The reforms suggest these opportunities for employers as reasonable steps necessary for compliance and reduction in penalties:

1. Conduct a compliance wage and hour audit of employer’s employment practices and policies, including payroll practices and recordkeeping.  This audit is best conducted under the direction of legal counsel to maintain the attorney-client privilege while seeking legal advice and recommendations for compliance.
2. Schedule and train all new supervisors immediately, and annually for all supervisors on up-to-date federal and state labor laws, specifically including CA labor laws subject to PAGA penalties.  Keep documentation of the training, which should include names of attendees, dates of training, and topics and materials provided for training, as well as any testing. Have supervisors acknowledge receipt of the training.
3. Audit Employee Handbook policies to ensure they are current with latest statutes and court cases and distributed and acknowledged properly. Have policies reviewed by legal counsel for legal compliance. Maintain copies of these acknowledgment forms in a safe place.
4. Audit documentation of corrective actions taken, policy on corrective actions, and compliance with policies; provide additional supervisory training and/or corrective action as appropriate for supervisors who fail to follow company policies.
5. Conduct periodic (monthly or quarterly) payroll audits to ensure compliance with employer’s policies and practices and labor laws.  Conduct follow up interviews with supervisors and employees to correct inaccuracies and pay premium pay if due. Train payroll personnel and supervisors responsible for time keeping records.
6. Contact your legal counsel immediately if you receive a PAGA notice from a current or former employee or their representative or the Labor and Workforce Development Agency (LWDA).
7. Review and update Arbitration Agreements to ensure they include Class Action Waivers, require arbitration for individual PAGA claims, and allow the aggrieved employee to pursue representative PAGA claims following the new PAGA reforms.

Need More Help?

Feel free to contact the authors if you have any further questions about PAGA Reforms for Small Business Employers, including applicability to your industry and benefits from these reforms.

Authors: Chuck Farrar, aka The Frog Knows Employment Lawyer and Janice Knight, Senior HR Consultant (Knight Line Consulting)

Contact Chuck (for legal advice) or Janice (for HR compliance prevention strategies) with questions or to schedule an appointment.

Disclaimer

The Law Office of Chuck Farrar provides this Blog/Website post for educational purposes only, as well as to give the public general information and a general understanding of employment laws for small business private employers in California. It is not intended to and does not provide specific legal advice. By using this Blog/Website you understand that there is no attorney client relationship between you and The Law Office of Chuck Farrar. Do not use this Blog/Website as a substitute for competent legal advice from a licensed professional attorney in your state.