The comprehensive reform of California’s Private Attorneys General Act is now the law. The PAGA reform (AB 2288 and SB 92) was a result of an agreement approved by Governor Newsom that removed the vote on the repeal of PAGA from the November ballot in exchange for the reform.
PAGA is a vital issue to California employers because they often are victim of the plaintiffs’ bar seeking to impose unfair civil penalties for technical wage-and-hour violations. The PAGA reform attempts to strike the balance between the pain points of PAGA (and how it’s developed in courts) and the state’s interest in ensuring employees are treated fairly.
The PAGA reform takes effect immediately and applies to cases filed after June 19, 2024.
I. Legal Reforms That Rectify Bad Court Holdings
PAGA Plaintiffs Can Only Represent Aggrieved Employees for Violations They Suffered
One of the most malicious aspects of PAGA was that an employee (or former employee) could sue an employer for violations they did not suffer. For example, imagine an employee did not receive one single rest break during the PAGA period. That employee could sue their employer for any PAGA violation suffered by all employees (e.g., for meal period violations, overtime violations, wage statement violations) even though they did not themselves suffer those violations. Add on that the class-action like PAGA claim for “civil penalties” often comes with seven-figure demands from plaintiffs, and you have a recipe for disaster. That was the case prior to the PAGA reform. In Huff v. Securitas Sec. USA Services, Inc. and Kim v. Reins Int’l Cal., Inc., courts held that an employee could bring a PAGA action for all violations on behalf of all aggrieved employees whether or not they suffered those violations—they needed only suffer one violation of any type to represent all employees for all violations.
The PAGA reform changed that. Now, a PAGA plaintiff must have “personally suffered” the alleged violation to sue for that violation. Meaning, an employee (or former employee) can’t sue under PAGA for meal period violations if they never suffered a meal period violation. This ends one of the cruelest aspects of PAGA.
The One-Year Limitations Period Is Set
PAGA claims are now locked into a one-year statute of limitation (which is one year and 65 days before the PAGA claim is filed). Under the prior law, and following the Court of Appeals decision in Johnson v. Maxim Healthcare Services, Inc., state-level trial courts grappled with defining the limitations period of PAGA claims. Several courts found that aggrieved employees continued to suffer PAGA violations after the PAGA plaintiff stopped working for the employer. The consequence of that ruling was that plaintiffs argued the limitations period never ended because there were “continuing violations” as to current employees. Practically, this rendered the PAGA limitations period useless because any employee that suffered a Labor Code violation could claim that aggrieved employees continued to suffer violations (even violations they themselves did not suffer). Together, Huff and Johnson, in the wrong court’s hands, theoretically meant an employee who was fired 5 years ago could bring a PAGA claim for violations they never suffered. [Yes, there were plaintiffs that tried to take it that far.] That debate is now foreclosed. PAGA plaintiffs must have suffered violations within the one-year statute limitations period.
The ‘Manageability’ Argument Is Strengthened
Before the PAGA reform, the battle between the conflicting holdings in Estrada v. Carpet Royalty Mills, Inc., and Wesson v. Staples the Off. Superstore LLC, on whether a court may dismiss a PAGA claim before trial on manageability groundscaptured the minds of employment bloggers far and wide. The Estrada case made it to the California Supreme Court. There, the state Supreme Court sided with employees and held that courts cannot dismiss a PAGA claim before trial because the evidence is not manageable, but, instead, a trial court could only limit the evidence presented at trial to ensure the trial was manageable. Despite widespread belief that the PAGA reform codified the Estrada ruling, that isn’t what happened. Instead, the legislature actually based the PAGA reform language on an older case, Woodworth v. Loma Linda Univ. Med. Ctr., which did not state that a trial court could limit evidence based on manageability only at trial. While this opens the door for courts to again dismiss PAGA claims before trial, given the California Supreme Court’s ruling in Estrada, we don’t see PAGA dismissals on manageability grounds before trial as a likely long-term solution.
Regardless, the reform codifies that employers may effectively argue that plaintiffs must be able to manageably present evidence before and at a PAGA trial, which should give the courts the extra bode of confidence they need to limit the evidence presented.
II. Employers May Avoid PAGA Penalties Entirely
A Good-Faith Dispute Eliminates PAGA Penalties
Breathing legislative life to the recent Naranjo v. Spectrum Sec. Services, Inc. case, the PAGA reform cements that a good-faith dispute eliminates PAGA penalties for: (1) failure to pay all wages due and owing upon separation [or within three days of separation for unexpected resignations] (known as “waiting time penalties”); (2) failure to timely pay wages; and (3) wage statement violations that were not willful or intentional [but not where a wage statement was not provided at all]. This gives employers a viable argument that a court would not impose, or would significantly reduce, PAGA penalties for these claims (as in Carrington v. Starbucks Corp.).
No ‘Stacking’ Certain Violations
The PAGA reform permits courts to reduce “stacked” penalties for violations arising from the same payroll/policy error for failure to timely pay wages upon separation, failure to timely pay wages during employment, and derivative wage statement violations.
III. Reductions In Amounts Of Penalties
‘Subsequent’ Penalties Limited
Where a penalty was not provided for under the PAGA, the default penalty was $100 for an initial violation and $200 for a subsequent violation. Plaintiffs argued that “subsequent” meant any violation after the first violation. Defendants argued, often citing Gunther v. Alaska Airlines, Inc., that a subsequent violation could only occur after an initial violation was found to have occurred by a court or the Labor Commissioner.
The PAGA reform clarifies that the default $100 penalty applies to all violations, unless (1) a court or the Labor Commissioner finds that the employer’s practice or policy violated the law within the last five years, or (2) a court determines that the employer acted “maliciously, fraudulently, or oppressively.” The new law does not define what constitutes “maliciously, fraudulently, or oppressively.” But, if either of the above apply, the default penalty will increase to $200 for subsequent violations.
Wage Statement Penalties Capped (Three Ways)
Previously, wage statements could rain $100 or $200 violations (per employee, per pay period) on employers. The PAGA reform imposes more reasonable caps. This should alleviate some stress for employers rising from minor, technical, wage-statement violations that they would otherwise need Sherlock Holmes to find.
Wage Statement Cap 1 ($25): If the employee could promptly and easily determine accurate information from the wage statement alone, the penalty is capped at $25.
Wage Statement Cap 2 ($25): If the only violation is failing to accurately list the employer’s name and address, and the employee would not be confused or misled about who their employer was, the penalty is capped at $25.
Wage Statement Cap 3 ($50): If a wage statement resulted from an isolated and nonrecurring event that lasted the lesser of 30 consecutive days (for employers paying bi-weekly) or four consecutive pay periods (for employers paying weekly), the penalty is capped at $50.
There is no cap for employers who do not provide any wage statements, and the default penalties of $100/200 will apply in that case.
While these penalties are still too high, employers can deploy certain arguments to help solidify their entitlement to capped penalties. For example, under Magadia v. Wal-Mart Assocs., Inc., if an employee can conduct “simple math” to determine their wages, there may be no violation.
Employers Can Pay Weekly Without Doubling PAGA Penalties
Previously, employers who paid weekly had twice as many “pay periods” solely because they paid employees twice as often. To their employees’ dismay, many employers switched to bi-weekly pay periods to avoid the threat of doubling PAGA penalties. Employers can now pay weekly without the fear of double penalties because the PAGA reform reduces penalties by 50% for employees paying weekly.
IV. There Are Now Caps on PAGA Penalties If Employers Take ‘All Reasonable Steps’ to Comply With The Law
There are two scenarios where an employee can cap PAGA penalties by showing they have taken “all reasonable steps” (defined below) to comply with the law.
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%.
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%.
‘All Reasonable Steps’ Defined
“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.
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.
Limitations on the ‘All Reasonable Steps’ Caps
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.
V. Employers That ‘Cure’ Violations and Make Employees ‘Whole’ May Avoid Litigation on Certain Claims
To lawfully “cure” the applicable violations (identified below) and avoid PAGA penalties, employers must both “cure” by correcting the underlying conduct giving rise to the alleged violations described in the PAGA notice and must also make employees “whole.” The violations that an employer can “cure” are expanded in the PAGA reform, but there is a high bar for what’s required to make employees “whole.”
Step 1: ‘Cure’ Alleged Violations
Employers can now cure more Labor Code violations, including:
- Failure to Provide Meal Periods and Rest Breaks / Pay Premiums [Labor Code § 226.7, 512];
- Minimum Wage Violations [Labor Code §§ 227.3, 1194, 1197, 1197.1]
- Overtime Violations [Labor Code § 510];
- Expense Reimbursements [Labor Code § 2802]; and
- Wage Statement Violations (expanded) [Labor Code § 226].
- Previously, only two wage-statement requirements could be cured—failing to list the inclusive dates of the period for which the employee is paid [(Labor Code § 226(a)(6)] and failing to list the name and address of the legal entity that is the employer [(Labor Code § 226(a)(8)].
- The PAGA reform clarifies that failing to list the employing entity’s information can be cured by providing written notice of the correct information to each aggrieved employee that identifies the correct entity information for each pay period in which a violation occurred rather than issuing all new wage statements. Using a short-form summary of the entity information and relevant dates is sufficient.
- For all other violations, an employer must give employees corrected wage statements for each pay period in which a violation occurred in the prior three years.
- The PAGA reform settles the argument that an employer need to affirmatively “provide” (e.g., print out every wage statement) rather than make them available online for employees. That is, employers may now “provide” corrected wage statements by making them available for employees to review online.
Step 2: Make Employee “Whole”
To make an employee “whole,” an employer must:
- Pay employees, in full, an amount sufficient to recover any owed unpaid wages due for the prior 3 years;
- Pay 7% interest;
- Pay any liquidated damages as required by statute; and
- Pay reasonable lodestar attorney’s fees and costs (which are determined by the LWDA or a court) (if an attorney is involved).
If there is a dispute over how much wages are owing, the employer can pay sums sufficient to cover any unpaid wages that the LWDA or court determine could reasonably be owed to the aggrieved employees based on the violations alleged in notice.
VI. Small Employers (< 100 Employees) Have 33 Days to Cure From the Date of the PAGA Notice [Beginning On October 1, 2024]
Beginning October 1, 2024, within 33 days of receipt of the PAGA notice, employers with fewer than 100 employees may submit a confidential proposal to the LWDA describing their plan to cure the violations alleged in the PAGA notice.
Within 14 days of receiving the proposal, the LWDA may set a conference with the parties to evaluate the sufficiency of the proposed cure, which must be conducted within the next 30 days (and may be held virtually). At the conference, the LWDA may determine whether the proposed cure is sufficient, identify any additional information necessary to evaluate the sufficiency of the cure, and set a deadline for the employer to complete the cure.
If the LWDA determines that the cure is not facially sufficient or does not act on the employer’s cure proposal, the PAGA plaintiff can sue in court after 65 calendar days following the PAGA notice (but the LWDA may expand the 65-day tolling period for up to 120 days). [Note: Even if the LWDA does not respond, the employer may still request an “early evaluation conference,” discussed below, after the PAGA plaintiff files in court.]
If the employer timely cures by the LWDA’s deadline, but no more than 45 days after the conference, the employer must provide a sworn notice to the employee and the LWDA that the cure is completed and also must provide a payroll audit and check register, if the alleged violations involved a payment obligation, along with any other information necessary to verify the cure. The LWDA will then verify the cure within 20 days. If the LWDA is reviewing the cure, and that takes longer than 65 days from the date of the PAGA notice, the limitations period will be tolled.
If the LWDA determines that the alleged violations were cured, it will notify the employer/PAGA plaintiff. If the employee challenges the determination, the LWDA will set a hearing within 30 days (and issue a final determination, including its rationale, within 20 days of the hearing). If the LWDA finds the violations were properly cured, the employee may not sue in court. Still, however, the PAGA plaintiff can appeal to the superior court to challenge the LWDA’s determination. But any amounts paid by the employer to the aggrieved employees exclusive of penalties when curing will be offset against any judgment later entered with respect to that violation, if the superior court concludes the agency abused its discretion in finding that the employer’s cure was adequate.
The PAGA reform notes that the cure proposal is a confidential settlement proposal under Section 1152 of the Evidence Code. But, practically, there is significant concern that the information within the communication will give plaintiffs a playbook for seeking class certification against an employer.
Employers cannot cure any violations alleged in a PAGA notice more than once in a 12-month period, regardless of the location of the worksite.
The small employer LWDA/cure process tolls the statute of limitations.
VII. Large Employers (> 100 Employees) May Request an “Early Evaluation Conference” and a Mandatory Stay of the Court Case
Starting immediately, employers with 100 or more employees who are sued under the PAGA may file a request for an “early evaluation conference” and request a stay of court proceedings prior to or simultaneous with the employer’s responsive pleading or other initial appearance in the action (e.g., a notice of appearance). An “early evaluation conference” is not defined in the new law. The purpose of the early evaluation conference includes, for example, determining whether violations occurred and if they’ve been cured, the strengths and weaknesses of the claims/defenses, whether the claims or any part of them can be settled, and whether there is information that the parties could exchange to assist in the process.
A request for an “early evaluation conference” must include a statement related to whether defendant intends to cure any or all of the alleged violations and must specify the alleged violations it proposes to cure, if any, and identify the allegations it disputes.
There is a mandatory stay on the court case when an employer requests an “early evaluation conference” (absent the court finding good cause otherwise). In issuing the stay, the PAGA reform requires a court to order, in part, that: (1) a mandatory conference be scheduled within 70 days of the order and require appearance by the parties; (2) the employer to submit confidentially to the neutral evaluator [defined as a judge or commissioner or such other person knowledgeable about and experienced with issues arising under the code whom the court shall designate] and serve on plaintiff, within 21 days after issuance of the order, the employer’s proposed plan to cure those violations and provide the basis and evidence for disputing any uncured violations; (3) orders plaintiff, within 21 days (after service of the employer’s proposed cure plan), to submit to the neutral evaluator and serve on the employer a confidential statement that includes, to the extent reasonably known, all of the following: (i) the factual basis for each of the alleged violations; (ii) the amount of penalties claimed for each violation if any, and the basis for that calculation; (iii) the amount of attorney’s fees and costs incurred to date, if any, that are being claimed; (iv) any demand for settlement of the entire case; and (v) the basis for accepting or not accepting the employer’s proposed plan for curing any or all alleged violations.
If the neutral evaluator accepts the employer’s cure plan, the employer must provide evidence within 10 calendar days (or a longer period as agreed by the parties or set by the neutral evaluator), demonstrating that the cure has been accomplished. If the employer fails to do so, the “early evaluation conference” and the stay on proceedings may be terminated by the court.
If the neutral evaluator and parties agree that the employer has cured the alleged violations it said it would, the parties must submit a joint statement to the court to this effect. If no non-cured violations remain, the court should accept the submission as a proposed settlement. If alleged violations remain that were not cured, the court will have discretion to defer consideration of the parties’ joint statement until after “further litigation proceedings.”
If the neutral evaluator or plaintiff do not agree that the employer cured the alleged violations that it stated an intention to cure, the employer may file a motion to request the court to approve the cure and submit evidence showing correction of the alleged violations. The court may request further briefing and evidentiary submissions from the parties in response to the motion.
The early evaluation process should not extend beyond 30 days, unless the parties agree to extend the time.
The evidence submitted for purposes of the early evaluation conference and all discussions at the early evaluation conference shall be deemed privileged and inadmissible in court.
VIII. Wage-Statement-Specific Cure Provisions
Beginning on October 1, 2024, if the only alleged violation the employer is curing is a wage statement violation, then employers should follow a different procedure. Employers must both (a) cure the wage-statement violations, and (b) give written notice by certified mail to the PAGA plaintiff or their counsel and file the writing online to the LWDA that describes the actions taken to cure within 33 calendar days of the postmark date of the PAGA notice.If the wage-statement violations are not cured within 33 days, the PAGA plaintiff may sue in court.
If the aggrieved employee disputes that the employer cured the wage-statement violations, they (or their counsel) must provide written notice of the specific grounds to support their dispute by online filing with the LWDA and by certified mail to the employer.
Within 17 calendar days of the receipt of that notice, the LWDA must review the employer’s corrective action and provide written notice of its decision on the sufficiency of the cure by certified mail to the aggrieved employee and the employer. The LWDA may grant the employer three more business days to cure the alleged violation.
If the LWDA determines that the alleged violation has not been cured or if the agency fails to provide timely (or any) notification, the PAGA plaintiff may proceed in superior court.
If the LWDA determines that the wage-statement violation has been cured, but the employee still disagrees, the employee may appeal that determination to the superior court.
IX. Miscellaneous
The aggrieved employees’ share of the PAGA funds increases from 25% to 35%; the LWDA’s portion decreases from 75% to 65%.
The new standing requirement does not apply to existing nonprofit legal aid organizations.
Injunctive relief is available.
X. Key Takeaways
There are two sides to every coin. The PAGA reform is no exception. On one hand, the PAGA reform generally seeks to reward employers who promptly fix wage-and-hour practices and corrects some of the most archaic aspects of the PAGA. On the other hand, the practical application of the reform and the unintended effects may impede progress long term.
The Good
The ballot measure and reform brought a welcome spotlight on some PAGA darkness that needed addressing. The acknowledgment that there is a problem is the first step. At the least, the plaintiffs’ bar will have to re-evaluate how (and hopefully why) they pursue PAGA claims.
Some of the most menacing aspects of PAGA are resolved (e.g., requiring an employee to have suffered the types of violations to bring claims and cementing the statute of limitations period) were probably worth the trade off of removing the PAGA repeal from the ballot.
Employers who immediately take “all reasonable steps” to come into compliance, will be rewarded by triggering the new caps on PAGA penalties.
If an employer receives a PAGA notice, timely correction and close compliance with the new cure procedure will pay significant dividends.
Employers should seek bifurcation of discovery in court to limit initial discovery only to what, if any, violations the PAGA plaintiff suffered to limit the scope of the PAGA claim.
Now more than ever, it’s important to ensure compliant wage-and-hour practices. Doing so can help limit the scope of who can bring claims and will limit potential penalties. Conducting a preemptive wage-and-hour audit is core to this protective measure.
The Potentially Bad
The most unfortunate aspect of this reform is that it took away the chance to entirely get rid of a bad law.
From the rumblings, the plaintiffs’ bar view this as a reduced revenue stream that they intend to make up for elsewhere. If so, PAGA reform may simply increase the volume of PAGA cases, require more money to settle them, and result in more class actions (with even higher demands for resolution). Look for an uptick in PAGA cases after the initial dust settles.
The rules are ambiguous and not very well drafted. This gives the plaintiffs’ bar seemingly endless arguments to challenge the cure processes implemented by well-meaning employers. It may also mean that an employer will have to fight after investing a lot of time and money in retroactive compliance measures that are later deemed insufficient.
While the cure provisions are nice in theory, they require wide-spread fixes in a timeline that might not be feasible. Worse, the “confidential” nature of the early resolution process is a facade. Although evidence of corrective actions are technically settlement communications in the cure process, they provide a roadmap of violations and potentially certifiable issues that plaintiffs can use against an employer (albeit, they will have to request the information they already know in discovery). Essentially, employers might cure a PAGA claim, but they could give the plaintiff the information they need to certify a class against them in the process. Not a great tradeoff.
The cure provisions and early resolution provisions require resources that the already-stretched-thin LWDA and court system probably don’t have. There’s much left to be determined, but at first blush, it seems many cases will wind up in court despite an employer’s best efforts.
So while there is some stuff to be grateful for here, PAGA litigation in California is not going anywhere in the near future.
[View source.]
