The Reform of PAGA: What Does it Mean for California Employers? 

On June 18, 2024, the office of California Governor Gavin Newsom announced a compromise for reform of the Labor Code Private Attorneys General Act (“PAGA”). This reform is designed to remove from the November 2024 ballot an initiative, supported by multiple business interests, to repeal California’s controversial PAGA law.

On June 21, 2024, Assembly Bill 2288 and Senate Bill 92 were introduced in the California Legislature, with the support of the Governor’s office and multiple stakeholders, including the proponents of the ballot initiative. On June 27, 2024, these measures were passed by the California Legislature and sent to Governor Newsom, who has vowed to sign them into law, which will officially enact the reforms and remove the initiative to repeal PAGA from November’s ballot.

The PAGA reforms are complicated and are not a panacea for employers. In general, the reforms, as described in Assembly Bill 2288 and Senate Bill 92, make several important and beneficial improvements to the current law. However, the measures do not apply to pending PAGA lawsuits or to lawsuits filed after June 19, 2024, if the required pre-litigation letter to the California Department of Industrial Relations (“DIR”) was submitted before June 19, 2024.

PAGA filings continue to proliferate, even 20 years after adoption of the original statute. Indeed, a “PAGA industry” has arisen. 236 PAGA pre-litigation letters were received by the DIR on June 11 through 18, an average of more than 39 a day per business day. 109 additional PAGA letters were received on June 19 by the DIR, including 71 letters filed by a single firm representing plaintiffs in PAGA cases.

How Would the Reform Legislation Affect PAGA?

Unfortunately, unlike the proposed ballot initiative it replaces, the proposed PAGA reform will not end or significantly reduce PAGA lawsuits. It will, however, limit the claims that can be asserted in many PAGA lawsuits.

Here are what we view as the most significant reforms in the proposed legislation:

1. The Plaintiff Must Have Actually Experienced the Labor Code Violation Alleged in the PAGA Lawsuit

Until now, an employee or former employee could pursue civil penalties affecting other employees, even if the employee filing the suit did not actually suffer all the alleged violations. The amended law will require the plaintiff pursuing the PAGA action to have personally experienced all the Labor Code violations at issue. However, there is an exception to this “standing” requirement for nonprofit legal aid associations that have been involved in PAGA litigation for at least 5 years. Thus, the standing issue reform will not have complete, statewide effect.

2. A One-Year Statute of Limitations Will Now Apply to PAGA Claims

Existing case law has severely limited the employer's ability to assert the one-year statute of limitations for claims seeking civil penalties. The law as amended requires that all the Labor Code violation(s) must have been sustained by the plaintiff within one year of the filing of the action. With this change, employers should be able to enforce the statute of limitations issue prior to litigation about violations allegedly sustained by other employees. If the representative plaintiff’s claim is time-barred, that should be the end of the action.

3. Limitations on Amount of Penalties

Prior to the reform, when no other, pre-existing penalty exists in the Labor Code, PAGA imposed a civil penalty of $100 for each aggrieved employee per pay period for an initial violation and $200 for each subsequent violation. The amended law creates several limitations, and in one situation, an expansion of penalties.

First, the amendments incentivize employers to “take all reasonable steps to be in compliance” with the Labor Code prior to receiving any PAGA notice or any request for personnel records from potentially aggrieved employees. If the employer takes “all reasonable steps to be in compliance,” the amended law caps the penalties sought at 15% of the statutory amounts. The legislation lists examples of “reasonable steps” as conducting periodic payroll audits, taking action in response to such audits, disseminating lawful written policies, training supervisors on the applicable Labor Code requirements, and taking corrective actions against supervisors where needed. Whether an employer has taken “all reasonable steps” to achieve compliance is subject to the discretion of the court, and as such, will certainly be a point of contention between employees and employers.

A similar provision caps PAGA penalties at 30% of the statutory amount if, after receiving a PAGA notice, the employer has taken reasonable steps to comply with “all provisions identified in the [PAGA] notice.” However, to take advantage of the 30% limitation, the employer must establish to the Court that they in fact took “all reasonable steps to prospectively be in compliance” with the provisions identified in the PAGA notice. Again, this is likely to be an issue litigated by the parties.

Another limitation in the amendments precludes the imposition of multiple penalties for “derivative” violations. For example, a former employee who was improperly paid during employment typically would also claim a penalty for failure to make the correct payment at the time it was earned, and for an additional penalty for failing to pay the full amount on termination. The law as amended will eliminate penalty claims for multiple, derivative violations of the same basic provision.

Additionally, the amendments contain a provision that will reduce, by 50%, the amount of penalties available where the employer paid the employees weekly, rather than bi-weekly or bi-monthly. Previously, PAGA penalties were based on pay periods. Previously, employers who use weekly payrolls were subject to twice the amount of penalties compared to those who use bi-weekly or bi-monthly payrolls.

However, the legislation potentially increases the penalty on an employer who is found to have violated the Labor Code provisions in a malicious, fraudulent or oppressive manner. In that case, the penalty is $200 for each violation, even initial violations. Absent malicious, fraudulent, or oppressive conduct, the $200 penalty also applies if there has been a court or agency determination within the last 5 years that the employer had an unlawful policy or practice that caused the violation.

4. Limitations on Penalty Claims for Wage Statement Violations.

The amended law will limit, but not eliminate, claims for penalties for alleged wage statement (“pay stub”) violations that cause no wage loss or other tangible harm to employees.

Previously, a provision of PAGA stated that most wage statement violations are “deemed” to “cause injury” to the employee, even if no actual wage loss can be proven. The previous “deemed injury” provision authorized claims for substantial PAGA penalties even when no actual wage loss or other economic harm resulted from the inaccurate wage statement. The amended law provides that if the wage statement violation did not cause harm to the plaintiff, the available penalty is capped at $25 per violation. Further, the bill clarifies that the $25 penalty is the only penalty available for wage statements; this will likely prevent the existing practice of claims for multiple penalties based on the same wage statement violation.

5. Aggrieved Employees Will Receive More of the PAGA Amounts

The amended law will increase the share of any penalties that will be distributed to the aggrieved employees from 25% to 35%. The Labor and Workforce Development Agency will receive the remaining balance of 65%.

6. PAGA Cases Can Be Managed by The Trial Courts

A recent decision of the California Supreme Court held that trial courts do not have the authority to dismiss PAGA claims the court finds to be “unmanageable.” Many PAGA suits allege multiple Labor Code violations involving hundreds or thousands of employees, at multiple facilities or locations, reporting to different supervisors over lengthy periods of time. The law as amended permits trial courts to make orders to ensure that the case can be “effectively tried.” This provision may be useful in many cases, but it will be up to the discretion of each trial judge to determine how and when to require a trial plan so the case can be effectively tried.

7. Cure Provisions

The amendments also establish new cure provisions. However, the effectiveness of these provisions in many cases is doubtful. The cure provisions are different for small employers versus larger employers. 

One of the repeated complaints about PAGA is the proliferation of PAGA claims against small employers who lack funds to adequately defend the claim and face bankruptcy or extreme hardship if they defend and litigate the claim. The amended law will allow small employers (employers with under 100 employees during the relevant period), upon receipt of a PAGA letter, to contact the state Labor and Workforce Development Agency (“LWDA”) to arrange a settlement conference with the plaintiff to attempt to reach an early resolution of the matter. The LWDA currently has no group or section tasked with conducting such settlement conferences.

For larger employers, the employer may request a stay of litigation and an Early Neutral Evaluation Conference with the court, during which time the court may stay all discovery and deadlines for responsive pleadings. A neutral will then evaluate the employer's plan to cure and ensure that the employer complies with the plan. If the neutral or the plaintiff believe that the employer has not adequately cured the violation, the employer may move the court to approve the cure. This will require already overburdened trial courts to establish an early neutral evaluation program (with associated staff). This provision will be most effective for employers who already have, or will immediately adopt, provisions and policies to comply with the Labor Code. 

Unfortunately, the cure provisions may prove unattractive or even unworkable to some employers as they will require disclosures, backpay and corrected wage statements of potentially numerous employees for lengthy periods of time. Nonetheless, the cure provisions, despite any defects or limitations, are better than the existing statutory language.

8. Effect on Pending Cases

The language in the amendments makes it clear that existing actions, meaning those filed before June 19, 2024, will not be affected. Additionally, the changes will not affect cases filed after June 19, 2024, if the required PAGA pre-litigation letter was filed with the DIR before June 19, 2024.

9. Injunctive Relief Now Available

The amendments add a provision that has been resisted by the employer community: injunctive relief for PAGA claims litigated in court. Injunctions can be enforced by the court’s contempt power and such relief is not currently available under PAGA. The new injunction provision does not identify the remedies available for breaches of an injunction. Presumably all customary remedies, including contempt power, will be available. This provision will enable PAGA plaintiffs who secure an injunction to seek ongoing relief, including back pay, attorneys’ fees and possibly additional penalties, for alleged violations of the injunction.

Conclusion

With the amendments passed in the PAGA reform package, the PAGA law is more favorable for employers than the status quo. However, these reforms will not end PAGA litigation and in fact, will raise numerous issues to be resolved by subsequent litigation. The reforms will have little effect at all for several months, as they do not apply to PAGA letters filed with DIR prior to June 19, 2024, or to lawsuits filed prior to that date. We will be monitoring these new developments as their effects are revealed.

For more information or if you have any questions, please contact your local Quarles attorney or:

• George Howard: (619) 243-1577 / george.howard@quarles.com
• Aaron Buckley: (619) 744-3642 / aaron.buckley@quarles.com

Summer Associate Connie Pasha contributed to this article.