California Legislature Reaches Compromise on PAGA

THE UPSHOT: HOW THE NEW PAGA LEGISLATION IS AN IMPROVEMENT

The new PAGA legislation will help employers curtail litigation abuse by the plaintiffs’ bar on many levels:

• Plaintiffs’ lawyers can no longer find an employee with a single potential labor code violation and seek to represent a large class of employees.
• Plaintiffs’ lawyers will have a much harder time creating broad and costly discovery because courts will now have additional authority to contain PAGA litigation.
• Employers will be able to mitigate or reduce possible penalties through a more robust cure provision and as a result of the new caps on penalties.
• Employers’ counsel will be able to utilize the various provisions of the new PAGA legislation from the outset of new litigation to contain or even defeat plaintiffs’ attempts to seek extortionate penalties claims or to represent large representative classes (and seek high plaintiffs’ attorneys’ fees).

WHY NOW?

Prior to the compromise, Californians were set to vote on whether to keep PAGA as is, or to repeal and replace it with the California Fair Pay and Employer Accountability Act (FPEAA). A coalition of business groups successfully qualified the ballot measure in 2022, with Californians for Fair Pay and Employer Accountability, a political action committee, registered to support the ballot initiative and raising more than $20 million in campaign funding.

FPEAA’s proponents argued that although PAGA was meant to protect employees, workers did not benefit from it – instead, plaintiffs’ lawyers used PAGA to generate six- and seven-figure attorneys’ fees – and a better way to resolve claims without long, costly litigation and disproportionate plaintiffs’ attorneys’ fees was necessary.

Opponents of the measure argued that its title was misleading, that FPEAA would limit employees’ ability to litigate against their employers, and that the repeal would leave the California Labor and Workforce Development Agency (LWDA) without adequate funding to investigate labor code violations.

WHAT IS PAGA?

PAGA creates a private right of action and allows employees who suffer an alleged labor code violation to file lawsuits on behalf of themselves, other “aggrieved” employees and the LWDA. PAGA plaintiffs can seek penalties for alleged violations of a host of specifically enumerated labor code statutes that the employee individually experienced and penalties for alleged violations that other employees experienced.

When PAGA was enacted in 2004, its proponents convincingly argued that the LWDA lacked the resources to investigate and prosecute labor code violations. Under the prior PAGA statute, the LWDA received 75% of the monetary penalties, and 25% went to the aggrieved employees. Since PAGA’s enactment, plaintiffs’ lawyers have been incentivized to pursue claims on behalf of “aggrieved” employees because in cases where they are successful, plaintiffs’ lawyers receive a percentage of the total award or settlement (including the portion that goes to the LWDA), sometimes up to 40% of the total PAGA recovery.

Given the onerous technical requirements in California wage and hour law and recent decisions in employees’ favor, including limitations of arbitration enforcement with respect to PAGA claims, employers are fed up with PAGA litigation.

HOW WILL THE PROPOSED LEGISLATION CHANGE PAGA?

Revises the Definition of an “Aggrieved Employee”

The proposed legislation redefines who qualifies as an “aggrieved employee” and, relatedly, whether the individual has standing to bring a PAGA action.

Under the original PAGA, an “aggrieved employee” is an employee “against whom one or more of the alleged violations was committed.” This meant that, in certain instances, an exempt employee could bring PAGA claims for meal and rest break and derivative violations, for example, on behalf of nonexempt employees, even though the allegedly aggrieved exempt employee never experienced those violations.

The new law requires the “aggrieved employee” to have personally experienced each of the violations alleged within the one-year statute of limitations.

Gives Trial Courts the Inherent Authority to Limit the Scope of PAGA Claims

As many employers experienced firsthand, plaintiffs’ lawyers were emboldened by the California Supreme Court’s decision in Estrada v. Royalty Carpet Mills, Inc., (2024) 15 Cal. 5th 582 where the court held that trial courts do not have the inherent authority to strike a PAGA claim on manageability grounds, even though the court also said that trial courts have multiple tools available to them to ensure PAGA claims are effectively managed.

The proposed legislation goes one step further, explicitly stating that a trial court has the authority to “limit the evidence to be presented at trial or otherwise limit the scope of any claim filed pursuant to this part to ensure that the claim can be effectively tried.” The new legislation also allows trial courts to consolidate or coordinate civil actions with overlapping legal theories or facts alleged against the same employer. This will be critical to reducing the waste of resources that employers have experienced in having to litigate broadly asserted claims (which lead to expansive and unnecessary discovery) and having to litigate similar cases in different venues.

Provides Employers a More Robust Cure Opportunity 

The proposed legislation also redefines an employer’s right to cure. Under the proposed legislation, an employer can cure alleged violations if, after receiving a PAGA notice, it takes steps to revise policies and practices and make employees whole through payment of:

• All owed wages due under the specified statutes going back three years from the date of the notice, plus 7% interest;
• Liquidated damages as provided by any applicable statute; and
• Reasonable attorneys’ fees and costs.

Reduces Penalties for Some Violations and Some Employers

The new legislation reduces civil penalties for violations that do not carry a civil penalty, depending on the circumstances of the violation, such as the duration, severity and employer’s compliance efforts. Changes to the penalty structure include:

• A 15% cap on penalties where the employer demonstrates it has “taken all reasonable steps to be in compliance” with the labor code prior to receiving a PAGA notice.
• A 30% cap on penalties where the employer, within 60 days of receiving a PAGA notice, takes “all reasonable steps” to comply with the labor code.
• Labor Code § 226 penalties are capped at $25 per pay period where the violation did not cause economic harm to the aggrieved employee. And, where the alleged violation is isolated and did not extend beyond the lesser of 30 calendar days or four pay periods, Labor Code § 226 penalties are capped at $50 per pay period.
• Aggrieved employees cannot collect derivative penalties unless they can show that the employer willfully or intentionally underpaid wages during employment.

The legislation further defines “all reasonable steps” to include, but not be limited to:

• An audit of wage and hour violations and actionable steps taken by the employer in response to the results of the audit.
• Lawful written policies.
• Training for supervisors on applicable labor code and wage order compliance.
• Appropriate corrective action with regard to supervisors who violate the labor code.

Whether the employer’s conduct was reasonable will be evaluated by the totality of the circumstances and will take into consideration the size of and resources available to the employer, and the nature, severity and duration of the alleged violations. The mere fact that a labor code violation exists is not enough to establish that an employer failed to take all reasonable steps, and the trial court will have discretion to determine whether the employer’s actions were reasonable.

Redistributes Civil Penalties

Under PAGA, 25% of civil penalties were awarded to the aggrieved employees, with 75% going to the LWDA. The new legislation increases the percentage awarded to aggrieved employees to 35%, with the remaining 65% going to the LWDA.

Offers Injunctive Relief as a Remedy

Under the new legislation, aggrieved employees have a new remedy of injunctive relief, which will allow plaintiffs to seek injunctive relief with a trial court to compel the employer to remedy alleged labor code violations. The LWDA will also have the discretion to seek injunctive relief.

Early Resolution

The new legislation offers options for early resolution of cases for both small and large employers. Employers that employ fewer than 100 employees during the applicable PAGA period can request a settlement conference through the LWDA. Employers with more than 100 employees during the applicable PAGA period may request a stay of all court deadlines and seek a neutral evaluation of the allegations. The employer can then propose a plan to cure the alleged violations to the plaintiffs, and in the event that plaintiffs do not approve of the proposed plan to cure, the employer may seek court approval by filing a motion.

***

WHAT’S NEXT?

On June 27, 2024, which was the deadline to withdraw FPEAA from the ballot, the California legislature voted on and approved Assembly Bill 2288 and Senate Bill 92. The legislation is now on California Governor Gavin Newsom’s desk. Governor Newsom is expected to sign the legislation and has already indicated his support for PAGA reform, commenting: “[w]e accomplished something that was seemingly impossible.”

If you have any questions regarding compliance with the California Labor Code or reforms related to PAGA, please contact your McDermott lawyers or the authors of this article.

Sapphire Sandoval contributed to the development of this On the Subject.