In a move aimed at balancing the interests of businesses and workers, California Governor Gavin Newsom and legislative leaders unveiled an agreement on June 18, 2024, to reform the Private Attorneys General Act (PAGA). Once signed into law, this landmark deal will remove a controversial initiative, known as the “Fair Pay and Employer Accountability Act,” from the upcoming November 2024 ballot. As with any legislative compromise the result is a mixed bag, but there is some good news to be found for California employers.

As many employers in the state know, PAGA allows employees to sue employers on behalf of the State of California to collect penalties for violations of the California Labor Code. The November initiative was developed in response to widespread criticisms of PAGA, which, if passed, would have replaced PAGA by enhancing the enforcement powers of the California Labor Workforce Development Agency (LWDA), ensuring employees could recover all penalties rather than just 25%, and eliminating attorneys’ fees entirely.

Although originally intended to augment enforcement of California’s labor laws for the benefit of workers, PAGA has resulted in a proliferation of litigation that has mostly benefited plaintiffs’ attorneys with large fee awards and resulted in minimal payments to employees. According to a study by the California Business and Industrial Alliance conducted in 2021, PAGA cases that are prosecuted in court by plaintiffs’ attorneys, instead of decided by the LWDA, prove much more costly for employers and result in significantly lower payments to employees.

For example, the CABIA study revealed that LWDA-decided cases averaged a total settlement amount of $789,936 with an average payment of $5,673 to employees, whereas PAGA court cases averaged a total settlement amount of $1,118,777 with an average payment of $1,264 to employees. With an average payment of $372,222 to plaintiffs’ attorneys (and $0 in fees to the LWDA), the reason for the significant difference in cost for PAGA court cases versus LWDA decided cases is unfortunately obvious. As those engaged in the PAGA litigation defense frontlines know, plaintiffs’ attorneys’ fees are a significant factor in why PAGA cases often become exploitative for employers, resulting in disproportionately high settlement amounts.

While California employers will certainly welcome some of the reforms proposed by the deal struck by Governor Newsom, the most disappointing aspect of the announcement regarding the reform deal is what it doesn’t say. Namely, there is no reference whatsoever to a limitation of attorneys’ fees for plaintiffs’ attorneys. Although the language of the proposed legislation has not yet been released to the public, it is concerning that the news announcing the deal is silent regarding one of the most important aspects of the November initiative, i.e., the elimination of attorneys’ fees. That leads to an important question, has the panacea that was promised by the November initiative been replaced with a placebo? Only time will tell.

For now, it is important to note that there is some good news for California employers in the reform deal:

• Capped Penalties for Prompt Rectification: The new legislation will cap penalties for employers who quickly act to rectify policy lapses and compensate employees accordingly after receiving a PAGA notice.
• Increased Opportunities to Cure Violations: The new legislation will expand the number of labor code violations that can be cured, aimed at reducing litigation for employers and expediting remedies for employees.
• Improved Right to Cure Process: A more robust right-to-cure process through the Labor and Workforce Development Agency (LWDA) is implemented, focusing on resolving claims outside of court.
• Capped Penalties for Proactive Compliance: Employers that proactively ensure compliance with the Labor Code before receiving a PAGA notice will also see capped penalties.
• Limitation of PAGA Claims at Trial: The new legislation will limit the scope of claims presented at trial to ensure cases are manageable and adjudicated efficiently. This includes introducing a manageability requirement, previously rejected by the California Supreme Court, to streamline litigation and reduce the burden on employers.
• Requirement that Employees Personally Experience Violations: Employees must personally experience the alleged violations to bring a claim, aiming to reduce the number of frivolous lawsuits and ensure that only legitimate claims proceed. This requirement was previously rejected by the California Supreme Court.

In addition to these employer benefits, the reform deal will redirect more settlement funds to employees by increasing the share of penalty money allocated to employees from 25% to 35%. Additionally, courts will be authorized to award injunctive relief, compelling employers to implement workplace changes to address labor law violations and will impose new, higher penalties against employers who act maliciously, fraudulently or oppressively in violating labor laws. Despite these less favorable changes, the overall reform deal appears to benefit employers.

On a broader scale, the reform deal should strengthen state enforcement by empowering the LWDA to expedite hiring and fill vacancies, with a goal of increasing effective and timely enforcement of employee labor claims.

While the full impact of the reform deal will not become clear until the official bill is released, this deal appears to represent an important step forward in addressing some of the challenges of PAGA. Given that the deadline to withdraw the November initiative is June 27, 2024, the Legislature will need to act quickly to pass the new bill in order to ensure the initiative is removed from the ballot.

The official bill should be released by June 24, 2024. Regardless of what changes to California law emerge from Sacramento, California employers are cautioned to remain vigilant about wage and hour compliance.