California PAGA Reform Brings Employers Relief

California employers can finally breathe a sigh of relief. The long-awaited and much-needed Private Attorneys General Act (“PAGA”) reform has arrived.  While the reform falls well short of the ballot initiative efforts to repeal PAGA, it certainly brings positive changes for employers. Of course, it remains to be seen how the reform will play out in practice, but for PAGA claims brought on or after June 19, 2024, the reform appears to give employers the chance to put the brakes on protracted PAGA litigation and instead, encourages early resolution and provides the opportunity for employers to cure many violations.  If employers are forced to litigate, PAGA reform also introduced new defenses and mitigation provisions that should benefit employers.

Here is what employers should know about the PAGA reform.

Employee Must Personally Suffer the Violation

Employees now can only seek PAGA penalties for violations of any Labor Code provision they “personally suffered” within the year prior to filing the requisite notice.  This is a significant win for employers as previously, any employee that suffered even just one Labor Code violation, at any time, were entitled to file PAGA lawsuits for any and all alleged labor code violations, even for those alleged violations the employee did not suffer, and seek steep penalties against the employer.

Reduced Penalties

1. Wage Statement Violation Penalties Reduced to $25 for each pay period in which a violation occurred, so long as the employee can promptly and easily determine from their wage statement accurate information specified by subdivision (a) of Labor Code Section 226 (i.e. gross wages earned, total hours worked, etc.) or if they would not be confused or misled about the correct identity of their employer from their wage statement. This change presents the opportunity for a significant reduction in penalties employers would have otherwise faced.
2. Default PAGA Penalty Reduced. Unless the Labor Code specifies a penalty for a particular section’s violation, the default penalty is now capped at $100 for each aggrieved employee per pay period. This cap is further reduced if certain mitigating factors apply, such as if the alleged violation resulted from an isolated, nonrecurring event that did not extend beyond the lesser of 30 consecutive days or 4 consecutive pay periods, in which case the civil penalty would be reduced to $25 or $50 per pay period.
3. 50% Reduction in Penalties for Employers with Weekly Pay Cycles. Previously, employers who paid their employees weekly were faced with double penalties, where a violation spanned into the following pay period.  This is because PAGA penalties are based on the number of pay periods in which violations occurred, rather than the frequency of the violation. The reform seems to take the realities of different industries and pay cycles into account by providing for reduction of penalties for employers with weekly pay periods.

Penalties May Be Capped Where the Employer Takes “Reasonable Steps.”

1. The reform outlines a non-exhaustive list of examples of reasonable steps employers may take to benefit from capped penalties:
   1. Conduct periodic payroll audits and take action in response to the results of the audit;
   2. Disseminate lawful written policies;
   3. Train supervisors on applicable Labor Code and wage order compliance; or
   4. Take appropriate corrective action with regard to supervisors.
2. 15% cap on penalties where reasonable steps were taken before receiving a PAGA notice or request for personnel records.
3. 30% cap on penalties where reasonable steps were taken within 60 days of receiving a PAGA notice.

No Double Dipping

Employees cannot combine PAGA penalties for unpaid wages and waiting time penalties, unless they are able to show the employer’s conduct in failing to pay wages was willful or intentional. Similarly, employees cannot obtain civil penalties for wage statement violations unless the underlying violation was a knowing or intentional violation by the employer. Again, these are positive changes for employers as previously, employees would seek to combine PAGA penalties for these violations so as to compound significant penalties against employers.

Statutory Authority for Courts to Manage PAGA Lawsuits

The law now explicitly grants courts authority to:

1. Use discretion to reduce penalties based on the circumstances of the case; and
2. Manage PAGA lawsuits, by
   1. Limiting the scope of claims;
   2. Limiting the evidence presented at trial; and
   3. Consolidating PAGA claims with overlapping violations.

Earlier this year, we wrote about the California Supreme Court’s decision in Estrada v. Royalty Carpet Mills, Inc. (Jan. 18, 2024) S274340 which stripped courts the authority to dismiss unmanageable PAGA claims. While Estrada left open defense strategies to employers facing PAGA claims, the reform returns manageability powers to the courts and gives employers more tools to limit exposure for otherwise unwieldy PAGA claims.

Early Resolution

1. Small Employers (Less than 100 employees)
   1. After receiving a Labor & Workforce Development Agency (“LWDA”) notice, the employer may give the LWDA a confidential proposal to cure one or more of the alleged violations. The LWDA may then schedule a settlement conference between the employer and employee.
2. Large Employers (More than 100 employees)
   1. After a PAGA lawsuit is filed, the employer may request an early evaluation conference and stay court proceedings. Here, employees are required to put forth the factual basis for their alleged violations, attorney’s fees and costs incurred to date, and their basis for accepting or not accepting the employer’s proposed plan for curing any or all alleged violations. Moreover, if the neutral evaluator or employee does not agree that the employer has 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.
   2. This early resolution process may work to the advantage of employers in several ways, as it:
      1. Requires employees to be clear about what they allege the violations consist of, not just simply boilerplate allegations;
      2. Provides employers the opportunity to cure violations, if any;
      3. Puts the reins on onerous demands for attorney’s fees and costs; and
      4. Allows employers to take matters into their own hands and ask the court to approve their cure, even if the neutral evaluator or employee disagree.

Cure

Employers are encouraged and incentivized to promptly cure labor code violations. To “cure”, the employer must correct the violation, be in compliance with the underlying statute, and make each aggrieved employee “whole.” The employee is made whole when they are paid any owed unpaid wages due, plus 7 percent interest, liquidated damages if required by the applicable statute, and reasonable attorney’s fees and costs.

For certain wage statement violations, the employer must also provide corrected wage statements and notice to the employee of the correction.

Takeaway: Employers Should Be Proactive

While this reform helps do away with cumulative penalties, lowers maximum penalty amounts, and caps penalties under certain circumstances, these changes should not be taken lightly or for granted. The reform is meant to encourage and incentivize employers to be proactive, to clean up any noncompliant policies and practices promptly, and to take immediate and corrective action once placed on notice of potential violations.  Thus, employers are only likely to receive the full benefits of the PAGA reform’s provisions if they are able to make a showing of good faith efforts to comply.

Steps Employers Can Take to Utilize the Reform’s Advantages:

1. Conduct timely and regular audits.
2. Take remedial steps to correct pay, time, and record issues. In some circumstances, provide employees notice of the cure.
3. If you receive an LWDA letter and/or a request for employees’ payroll or personnel records – take action.
4. Review employment policies and practices, including wage and hour, and update as needed.
5. Provide updated training to supervisors and managers.
6. Don’t go it alone. Work with trusted legal counsel.

Conclusion

If you have any questions about the 2024 PAGA reform, how to proactively tackle workplace compliance issues, or if you are facing a PAGA lawsuit, contact Guillermo Tello (gtello@ClarkHill.com), Monique Eginli (meginli@clarkhill.com), or another member of Clark Hill, LLP’s California Labor and Employment Practice Group.

This publication is intended for general informational purposes only and does not constitute legal advice or a solicitation to provide legal services. The information in this publication is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional legal counsel. The views and opinions expressed herein represent those of the individual author only and are not necessarily the views of Clark Hill PLC. Although we attempt to ensure that postings on our website are complete, accurate, and up to date, we assume no responsibility for their completeness, accuracy, or timeliness.