Legislation to Reform California's Labor Code Private Attorneys General Act (PAGA)

Eye on Washington Article contributor Eye on Washington Team

California employers should remain highly attuned to the risk of Labor Code violations.

Under California's unique Private Attorneys General Act of 2004 (PAGA), an aggrieved employee is permitted to not only bring their own civil action or a class action against an employer to seek damages for alleged wrongdoings, but is also deputized to step into the shoes of the Labor Commissioner and pursue penalties for alleged violations of the Labor Code on behalf of the Labor Workforce Development Agency (LWDA). The LWDA receives 75 percent of the recovered penalties, with the remaining 25 percent distributed to aggrieved employees. The availability to individuals of these additional PAGA penalties effectively incentivizes those individuals to bring private litigation on the agency's behalf.

Amendments to PAGA were recently negotiated in the form of two separate bills which were signed into law on July 1, 2024. The amendments limit the claims that can be asserted and penalties that can be imposed in many PAGA lawsuits in the future. Most amendment provisions take effect immediately and apply to PAGA actions filed on or after June 19, 2024, unless the employee's underlying PAGA notice was submitted to the LWDA and the employer prior to June 19, 2024. Some provisions, such as cure procedures for small employers and measures to cure pay statement violations, take effect on October 1, 2024.

The Details

Background

Since enactment, PAGA has been criticized because it permitted lawsuits, often for minor technical violations that did not impact employees' pay. In recent years, more than 5,000 PAGA suits were filed annually. Penalties were often quite harsh ($100 per employee per pay period for initial violations and $200 per employee per pay period for subsequent violations, with no cap on penalties), which generated significant pressure for employers to settle claims. These statutory penalties applied even for issues that caused no harm to employees. Additionally, few violations could be cured. Even if an employer promptly corrected a violation, the same penalties applied.

To address these concerns, legislation was negotiated to make meaningful reforms to PAGA, preempting a ballot initiative that was scheduled for November 2024 to more broadly repeal and replace PAGA. The most significant provisions are summarized below.

Penalty Changes

Penalties can be capped at no more than 15% of the otherwise-applicable penalty under Labor Code Section 2699 for employers that have taken "all reasonable steps" to comply before receiving a notice from an employee of an intent to file a PAGA claim (a PAGA Notice). Examples of reasonable steps include conducting payroll audits, taking corrective action, implementing new policies in response to the audit, and training supervisors. The legislation provides that "Whether the employer's conduct was reasonable shall be evaluated by the totality of the circumstances and take into consideration the size and resources available to the employer, and the nature, severity and duration of the alleged violations." Therefore, the examples of "all reasonable steps" are not exhaustive and may be subject to further interpretation by the courts and/or agency guidance. The legislation also limits penalties to "no more than 30%" of the otherwise-applicable amount for employers that have taken all reasonable steps to prospectively comply with the law after receipt of a PAGA Notice.

Penalties are also reduced from $100 per employee per pay period to $50 per employee per pay period for violations that are isolated, non-recurring incidents limited to 30 days or four pay periods.
The bill increases the share of penalties that go to workers, to 35% from 25%, and reduces the allocation to the agency to 65% from 75%.

The $200 penalty now only applies to employer conduct deemed "malicious, fraudulent, or oppressive," or for violations previously declared unlawful by a state agency or court within the past five years.

For violations of Labor Code Section 226(a)(1)-(7) and (9) (regarding pay statement requirements), the penalty is $25 per employee per pay period "if the employee could promptly and easily determine from the wage statement alone the accurate information specified by subdivision (a) of Section 226."
The penalty for Section 226(a)(8) (i.e., the requirement to include the correct name and address of the employer on each pay statement) is also limited to $25 per employee per pay period "if the employee would not be confused or misled about the correct identity of their employer or farm labor contractor."
The bill reduces penalties by half for companies that pay weekly. This addresses the unintended outcome that companies that pay weekly were generally liable for twice the penalty amount because PAGA penalties apply to each pay period.

Expanded Ability to Cure

The legislation generally facilitates and expands the types of violations that can be cured to avoid penalty.
Employers with fewer than 100 employees are provided a more comprehensive "right to cure" to avoid litigation over Labor Code violations within 33 days of receipt of a PAGA notice.

Employers with 100 or more employees will be able to seek an "early evaluation conference" when confronted with PAGA litigation. The evaluation examines four elements:

1) Whether violations occurred and whether alleged violations were cured;

2) The strengths and weaknesses of the claims and defenses;

3) Whether claims for penalties or other relief can be settled; and

4) Whether the parties should share information to facilitate early resolution.

If the early evaluation conference results in a plan to remedy violations, the parties jointly submit a statement to the judge that is to be treated as a proposed settlement.

For non-pay statement claims, employees should be "made whole" by payment of any wage underpayments, along with interest, any liquidated damages and attorney's fees.
All pay statement violations under Labor Code 226(a) will be eligible to be cured. Violations of pay statement-related provisions are cured upon a showing that the employer has provided the correct written statements to each employee for each pay period in which the violation occurred, going back up to three years from the date of the PAGA notice.
- If pay statements are customarily provided electronically, a violation can also be cured by providing "reasonable access to a digital or computer-generated record or records…containing the same information required on a fully compliant itemized wage statement."

- A failure to provide an accurate employer name and address can be cured by providing "written notice of the correct information to each aggrieved employee."

Other Changes

The bill generally limits standing for PAGA plaintiffs to employees that personally suffered a violation of the code section as is alleged for any other employees. Exceptions apply for certain non-profit legal aid organizations.

Courts are given more authority to limit the scope of claims.

Derivative claims beyond the underlying Labor Code violation are restricted.
The legislation includes authority for the Department of Industrial Relations to expedite hiring and fill vacancies to improve enforcement of labor claims. The 2004 PAGA law was originally justified by a claim that state enforcement resources were inadequate.

Implications for California Employers

California employers should remain highly attuned to the risk of Labor Code violations.

Diligent employers should assess and document a comprehensive program demonstrating that they have taken all reasonable steps to comply with Labor Code requirements, e.g., routine payroll audits, establishing appropriate employee policies, and training all supervisors, to qualify for the lower penalty under the newly reformed PAGA. Consult with appropriate legal counsel before taking action.

For more information, see both Assembly Bill 2288 and Senate Bill 92. The Assembly and Senate bills contain different provisions. Both bills should be reviewed.

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Updated on July 9, 2024