The PAGA reform (click here for a full analysis) caps penalties at 15% or 30% for employers that take “all reasonable steps” to comply with the law. This cap is especially meaningful when plaintiffs demand seven figures for alleged PAGA violations. This means that every California employer should immediately conduct a [privileged] wage-and-hour audit to take advantage of this new law and avoid facing potentially business-threatening PAGA penalties.  

What Does “All Reasonable Steps” Mean?

“All reasonable steps” includes, but is not limited to:

• Conducting periodic payroll audits and taking action in response to the results of the audit;
• Disseminating lawful written policies;
• Training supervisors on applicable Labor Code and wage order compliance; or
• Taking appropriate corrective action with regard to supervisors.

Whether the employer’s conduct was reasonable is evaluated by the totality of the circumstances and considers the size and resources available to the employer, as well as the nature, severity and duration of the alleged violations. It is possible to take “all reasonable steps,’ yet still have evidence of a violation.

The “all reasonable steps” cap does not apply when a court finds the employer acted “maliciously, fraudulently, or oppressively” or the employer’s policy/practice was found to be unlawful by a court or the Labor Commissioner within the last five years.

For employers taking “all reasonable steps” after receiving an LWDA notice, a court may exceed the 30% cap if, based on the facts and circumstances of the particular case, to do otherwise would result in an award that is unjust, arbitrary and oppressive, or confiscatory.

Of note, employers that “cure” alleged violations but do not take “all reasonable steps” to comply with the law will nonetheless have penalties capped at $15 per pay period.

Consider the Attorney-Client Privilege for Your Audit

Keep in mind that a wage-and-hour audit that is not protected by the attorney-client privilege is discoverable.  Imagine a scenario where the wrong minimum wage rate is paid (due to confusion about where the city boundary was), and that is uncovered in the audit.  Emails go between company principals and HR about the issue, and the decision is not to fix the issue.  All of those communications are discoverable!  However, if the audit was conducted through counsel, such emails can be protected from disclosure, and you can avoid giving a roadmap to an eager plaintiff’s attorney. 

In order to take advantage of the cure provisions, the employer can provide unprivileged documents to show the issues identified in the audit, and the fixes. 

What Are the Scenarios for the PAGA Caps?

Scenario 1 (15%): BEFORE receiving a PAGA notice or a Request for Personnel Records
If an employer can show they took “all reasonable steps” to comply with the law before either: (1) receiving a PAGA notice; or (2) receiving a request for personnel records (under Section 226, 432, or 1198.5), PAGA penalties are capped at 15%.

For example, if an employer has 2,500 pay periods at issue during the PAGA period [less than 100 employees] with a $100 violation in each pay period, the employer would be liable for $250,000 in civil penalties. But, if the employer took “all reasonable steps” in advance of the PAGA notice or before receiving a request for personnel records, civil penalties would decrease to $37,500.

Scenario 2 (30%): AFTER receiving a PAGA notice [60-Day Deadline]
If an employer can show they took “all reasonable steps” to comply with the law within 60 days after receiving a PAGA notice, PAGA penalties are capped at 30%.  

Using the same example above (of 2,500 pay periods at issue), if the employer took “all reasonable steps” after receiving the PAGA notice, potential civil penalties decrease from $250,000 to $75,000.

Key Takeaway

By conducting a wage-and-hour audit now (ideally a privileged audit), California employers can take advantage of the PAGA reform and cap PAGA penalties at 15% (or 30% if you’ve already received a PAGA notice). This relatively low-cost action also reduces the likelihood of individual wage-and-hour lawsuits as well as state wage-and-hour investigations. An ounce of prevention beats a pound of cure.

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