California employers have come to know California’s Private Attorneys General Act (“PAGA”) as an expensive cost of doing business within the state. Unfortunately, the new PAGA reform is not likely to lead to any decrease in the number of PAGA lawsuits filed. However, the reform offers employers significant discounts (up to 85%) on penalties awarded if they show they have attempted in good faith to comply with the Labor Code. To take advantage of PAGA’s reform and penalty discounts, we recommend employers take immediate action to implement a systemized and regular audit of all wage and hour practices.
The comprehensive review should include the following:
- Audit payroll and timekeeping practices frequently and implement protocols to ensure compliance with the myriad of Labor Code requirements, including the following requirements:
- minimum wage
- overtime
- regular rate of pay
- meal and rest periods
- sick pay
- Regularly review and assess exemption classification and any use of contingent workers.
- Regularly review and update written wage-and-hour policies.
- Frequently train managers and employees on wage-and-hour compliance.
- Remind employees regularly about accurate timekeeping and the importance of taking meal and rest periods.
- Discipline managers and supervisors who do not enforce wage-and-hour policies.
- Promptly correct any wage-and-hour shortcomings that are discovered.
The reform offers other benefits for employers, which are discussed in more detail below, but these proactive compliance steps will allow employers to reduce potential exposure under PAGA going forward.
Summary
California Gov. Gavin Newsom signed two bills into law reforming the Private Attorneys General Act (PAGA), which permits employees to seek civil penalties on behalf of the State for California Labor Code violations.
The changes are unlikely to decrease PAGA filings, but they do provide mechanisms for California employers to limit the scope of and exposure for PAGA actions. The Reforms apply to PAGA actions filed on or after June 19, 2024.
Now that AB 2298 and SB 92 have become law, voters in California will not cast ballots in a referendum on PAGA changes that had been scheduled for November.
At a Glance: The PAGA Reforms
1. The new law caps penalties to reward good faith compliance efforts.
- The reforms cap penalty assessments at 15% of the available penalty award for employers that take proactive “reasonable steps” to comply with the California Labor Code – even before a receiving a PAGA notice.
- Employers face a maximum penalty of 30% of the available penalty award if they take “reasonable steps” to comply within 60 days of receiving a PAGA notice.
- “Reasonable steps" include:
- Conducting wage and hour compliance audits.
- Issuing lawful written policies.
- Training supervisors on wage and hour requirements.
- Taking corrective action when supervisors violate wage and hour requirements.
- The law reduces penalties for technical wage statement violations by 75% if the employee can confirm the accuracy of wages from the wage statement alone.
- Other wage statement violations are capped at 50% if the alleged violation is isolated and lasted less than 30 calendar days or four pay periods.
- Because penalties are assessed on a per-pay-period basis, penalties assessed against an employer that pays weekly are cut in half. That means employers will no longer be penalized for paying employees more frequently than the law requires.
2. The changes prohibit stacking of derivative PAGA penalties. The law makes an exception for cases where an employer willfully or intentionally underpays wages.
3. Courts can now streamline PAGA claims for manageability. The law authorizes courts to limit the evidence presented at trial or the scope of any claim to ensure it can be effectively tried.
4. The reforms raise the bar for standing. The reforms require an employee to personally experience violations alleged in a claim.
5. Employees will receive a greater share of penalty amounts.
- The aggrieved employees’ portion of any penalties awarded increases from 25% to 35%.
- The LWDA’s portion of any penalties awarded declines from 75% to 65%.
6. Employers receive additional opportunities to “cure” or resolve violations before a lawsuit may be filed.
- Once cured, violations cannot support a lawsuit. Violations that may be “cured” include:
- Wage statements.
- Meal and rest periods.
- Unpaid vacation wages.
- Unpaid minimum, straight and overtime wages.
- Unreimbursed business expenses.
- To make an employee “whole” for purposes of a cure, an employer must pay the unpaid wages going back three years, plus seven percent of any applicable liquidated damages and attorney’s fees and costs.
- Employers can request an early evaluation conference with the court and a stay of litigation before or at the time of the responsive pleading deadline.
7. Courts have the discretion to award injunctive relief to the same extent as the Labor Commissioner.
Challenges and Uncertainties
While the reforms usher in several positive changes for employers, some present significant challenges to employers and others leave open important questions:
The expanded cure opportunities are challenging.
- To “cure,” an employer must investigate, identify, remedy (e.g., determine what is owed and to which employees and pay it) and notify the Labor and Workforce Development Agency of the cure in 60 days or less, depending on the size of the employer and alleged violation.
- Not only is the tight timeline a hurdle, but the employee may dispute whether the cure was adequate, and the reform allows them to seek attorneys’ fees.
- Also, while curing may help avoid PAGA exposure, employers could then face exposure for derivative statutory penalties, such as waiting time penalties and wage statement penalties, depending on the cured practice. To avoid such penalties, employers will have to prove that they had a good-faith belief that the preexisting practice complied with the law.
An early evaluation conference also poses challenges.
- As with curing, the early evaluation conference also comes with a tight timeline that may not be feasible.
- Companies may find they are more comfortable proceeding before a proven, private wage-and-hour mediator.
What are “reasonable steps?”
- While the reforms provide some examples of reasonable steps, it remains to be seen how the provisions will be interpreted. For example, how recent must a compliance audit or training be to constitute a “reasonable step?”
What does it mean to be “effectively tried?”
- The reforms purport to codify the California Supreme Court’s decision in Estrada v. Royalty Carpet Mills, Inc., which held that courts have the authority to limit the scope of a PAGA claim so that it may be effectively tried.
- While the statute authorizes courts to streamline PAGA claims so they may be “effectively tried,” it remains to be seen how courts will interpret this grant of authority – particularly given Estrada’s suggestion that limiting testimony or using representative evidence would be enough.