California’s Amended PAGA Statute Eases Burdens on Employers

June 28, 2024

The California Legislature passed legislation on June 27, 2024, representing a significant overhaul of the Labor Code Private Attorneys General Act of 2004 (PAGA). PAGA permits a current or former employee to pursue an action against an employer for civil penalties for Labor Code violations that would otherwise only be recoverable by the Labor and Workforce Development Agency (LWDA).

In the two decades since it was enacted, PAGA lawsuits have driven up litigation costs for California employers, prevented removal to federal court and circumvented class certification requirements. A number of recent employee-friendly decisions by California courts exacerbated the unwieldly nature of PAGA lawsuits and significantly limited the arsenal of defensive weapons available to employers.

With a vote on a potential repeal of PAGA looming on the November 2024 ballot, Gov. Gavin Newsom collaborated with labor and business groups to introduce Assembly Bill 2288 and Senate Bill 92 to amend PAGA. These bills “fix” several controversial and unpopular features of PAGA in its prior form or as interpreted by court decisions and are expected to avert the November PAGA repeal vote.

Once signed into law PAGA will be changed in the following ways.

PAGA Plaintiffs Must Personally Experience Each Violation Within the One-Year Period

The scope of PAGA actions is expressly limited to only those violations personally experienced by the plaintiff within the one-year limitations period. This change overrides the core holdings of a pair of controversial California Court of Appeal decisions that permitted employees to file “kitchen sink” complaints alleging dozens of different Labor Code violations, even if the employee experienced only a single violation, and it did not occur within the applicable statute of limitations. 

Courts May Manage and Limit Scope of Claims and Evidence 

In Estrada v. Royalty Carpet Mills, Inc., the California Supreme Court held that a trial court does not have authority to dismiss PAGA claims based on trial manageability concerns, but that it could use its existing powers to manage claims effectively, including by imposing limitations on the scope of claims and the amount and type of evidence to be presented at trial. AB 2288 effectively codifies the latter holding and vests the trial court with authority to manage PAGA claims for effective litigation, including by consolidating or coordinating PAGA actions with overlapping claims.

Enhanced Cure and Early Resolution Provisions and Reduced Civil Penalties for Compliance 

SB 92 expands the scope of Labor Code violations that can be cured to include unpaid wage and break claims and vacation pay and expense reimbursement violations, and now permits broader cure opportunities for wage statement deficiencies.

The amendment also creates separate early resolution avenues if the employer elects to cure one or more asserted violations. Employers with fewer than 100 employees during the liability period can, within 33 days of receipt of a PAGA notice letter, submit to the LWDA a confidential proposal to cure one or more of the alleged violations. The agency will evaluate the sufficiency of the employer’s proposal and a timeline within which it would be completed. Employers with 100 or more employees will be entitled to seek an early evaluation conference in court after the PAGA lawsuit has been filed, during which discovery or litigation are stayed.

A neutral evaluator appointed by the court will conduct the early evaluation conference process and will undertake a multistep process to assess the merits of the plaintiffs’ claims, the strengths and weaknesses of each side’s positions, the extent to which the employer already remedied any of the issues raised in the lawsuit and the efficacy of any cure proposal presented by an employer. These amendments provide mechanisms to settle and resolve PAGA claims earlier, and may force plaintiffs to substantiate their claims with more than a boilerplate pleading at an early stage.

The amendments also permit the trial court to limit the amount of civil penalties if an employer demonstrates it has taken “all reasonable steps to be in compliance” with the law. When the employer took steps prior to the receipt of a PAGA notice letter or personnel records request from the plaintiff, the penalty will be capped at 15% of the applicable penalty amount. When the employer took prospective compliance efforts within 60 days of receipt of a PAGA notice, the penalty cap is 30%. The amended statute also limits penalties in circumstances in which the violations occurred for less than 30 days or four consecutive pay periods to a maximum penalty of $50. Reasonable compliance steps under the statute include having compliant written policies, training supervisors on wage-and-hour requirements, and conducting periodic audits and taking action on the audit findings. The determination of whether an employer’s actions were reasonable is based on the totality of the circumstances, with consideration given to the size and resources of the employer and the nature, severity and duration of the alleged violations.

Prohibition on Derivative Penalties

PAGA plaintiffs would often assert that a single type of Labor Code violation entitled them to civil penalties under multiple provisions of the code. For example, a former employee seeking a civil penalty for alleged unpaid overtime wages would also seek penalties for derivative wage statement and final pay violations. Employers have argued for years that such double-dipping unfairly penalizes employers and violates the spirit of PAGA. The changes codify the employer position and make it explicitly clear that employees cannot recover such derivative penalties.

Penalties for Non-Injurious Wage Statement Violations Capped, Heightened Penalties Limited

PAGA lawsuits have long sought huge civil penalty sums for harmless or technical wage statement violations. The amendments reduce the penalty for wage statement violations that do not cause harm from $100 to $25 per employee, per pay period.

The amendments also addressed a long-running disagreement regarding when a $200 penalty for a “subsequent” violation (as opposed to the $100 penalty for an “initial” violation) was available to employees. Employees routinely argued that a subsequent violation penalty was available for all pay periods after the first pay period at issue, whereas employers asserted that a subsequent violation arose only after a court or agency first found the employer in violation of the relevant Labor Code provision.

The new law adopts the employer view and confirms that the subsequent violation penalty is available only when there has been a court or agency determination that a violation occurred within the preceding five-year period, or if a court determines that an employer’s conduct was malicious, fraudulent or oppressive. The amendment expressly provides that the court always retains the discretion to reduce penalties based on the facts and circumstances of a case.

Employers With Weekly Payroll Find Reprieve From Heightened Penalties

PAGA’s civil penalty scheme imposes penalties on a per-employee, per-pay-period violation basis. An unintended consequence of this scheme has been to unfairly subject employers that use a weekly payroll schedule to twice the penalty exposure as employers with a bi-weekly or semi-monthly payroll schedule. The changes reduce the penalty amount by half if an employer uses a weekly pay period.

Employees Receive Larger Share of Recovered Penalties and May Seek Injunctive Relief

The amended PAGA penalty scheme increases the percentage of penalties distributed to aggrieved employees from 25% to 35% and reduces the portion of civil penalties payable to the LWDA from 75% to 65%. Additionally, the amendments permit employees to seek injunctive relief in any circumstances in which the LWDA could seek injunctive relief.

Employer Takeaways

Some of these amendments are a big win for employers, even though they do not apply to any action filed or PAGA notice given to the LWDA prior to June 19, 2024. PAGA plaintiffs must have their own violations in the relevant time period, which presents a path for dispositive motion practice for employers. Employers planning to fight PAGA claims should explore creative means by which the court might manage litigation in a fashion that streamlines costly representative litigation and discovery, including by phasing and litigating the named plaintiff’s individual PAGA claim first to confirm standing, seeking early dispositive motions on frivolous allegations and other case management strategies. 

Because of the court’s ability to reduce penalties, it remains critically important that employers have compliant policies and trainings in place for employees and supervisors. The changes to the penalty provisions and the cure and early settlement opportunities will make PAGA litigation less lucrative and desirable for plaintiffs’ lawyers, who have grown accustomed to filing and settling these cases without proving the validity of the claims.

However, it remains to be seen how these cure and early settlement procedures will function in practice, and if they can be effective under the detailed construct in these amendments. This is especially true for large employers, who will need to rely on backlogged and busy California courts to handle requests for early evaluation conferences and manage PAGA litigation pursuant to the new provisions. Given that the amendments did not impose any type of attorneys’ fee cap, plaintiffs’ lawyers will remain incentivized to continue to pursue PAGA claims as employers wait to see how these amendments take shape in practice and through judicial interpretation and application.

For additional guidance regarding this legislation, please contact the authors or any other member of McGuireWoods’ Labor & Employment Department.