PAGA 2.0 Incentivizes Employers to Audit Practices & Ensure Compliance

by Ryan Carlson

July, 2024

Two weeks ago, we reported on some exciting new reforms to the Private Attorneys General Act of 2004 (“PAGA”) that were beginning to take shape in the California Legislature. We are now happy to report that those changes have been formally adopted and approved!

These changes only apply to future PAGA lawsuits for which a notice was filed with the Labor and Workforce Development Agency (“LWDA”) after June 19, 2024. Pending PAGA lawsuits and ones filed based on LWDA notices that predate June 19, 2024 are not impacted. Still, the reforms provide employers with new tools to manage their PAGA exposure. Now that we have had the chance to review the text of “PAGA 2.0”, here are the biggest improvements and drawbacks we see coming down the pike.

1. Amendments to Penalty SchemeIn a surprising twist, the CA Legislature has actually added several employer-friendly policies related to the civil penalties recoverable under PAGA. Penalties under the old statute ranged from $50 to $1,000 per violation, depending on the Labor Code section that was violated and whether the employer was previously cited by the LWDA for the same violations.Under the new law, those penalties are capped at 15% of the statutory amount when the employer can show it proactively – i.e., before receipt of an LWDA notice or personnel file request – took “reasonable steps” to comply with the Labor Code, and 30% when the employer shows it took those reasonable steps within 60 days after receiving an LWDA notice or personnel file request.The Legislature also provided guidance on what may constitute “reasonable steps.” While the following list is non-exhaustive and each case will always depend on the totality of the circumstances, some examples include: conducting periodic payroll audits, taking action in response to those audits when necessary, implementing and enforcing lawful written policies, training supervisors on applicable law and wage order provisions, and taking corrective action with supervisors when those supervisors are responsible for causing an alleged violation. In interpreting what is “reasonable”, a trier of fact will also be able to consider the size of and resources available to the employer, and the nature, severity and duration of the alleged violations.This all means employers are more incentivized than ever to get it right up front! At the very least, these changes give them the opportunity to limit their exposure once they are advised of a possible violation. We have always stressed the importance of implementing sound written policies and conducting compliance audits early and often. Employers who do so will now have an added layer of protection when their policies and practices are challenged in court by way of a PAGA action.Other changes that favor employers include a limitation on civil penalties for inaccurate wage statements when the inaccuracy does not result in any actual harm to the employee, and a 50% cap on wage statement penalties when employers utilize weekly pay periods. Moreover, PAGA plaintiffs can no longer “stack” derivative claims and recover civil penalties for multiple violations that are each based on the same act. By way of example, an employer who fails to pay a single hour of wages on time is only liable for civil penalties for a violation of Labor Code 204, even though that same violation would also technically expose them to additional civil penalties under Labor Code 226.3 for providing inaccurate wage statements, and/or Labor Code 1174.5 for failing to maintain accurate records.There were, of course, a few employee-friendly changes as well. Aggrieved employees under the old bill received 25% of the penalties collected from a PAGA judgment or settlement. They will now receive 35%. Additionally, employers who commit Labor Code violations with malice, oppression or fraud, or who commit the same violations for which they were previously cited by the LWDA, will be on the hook for heightened penalties of $200 per aggrieved employer per pay period.
2. Procedural ChangesTwo additional procedural changes that will help rein in PAGA claims involve an employee’s “standing” to bring PAGA representative claims and the requirement that litigating those claims be “manageable” in court.
   1. StandingPrior to the new reforms, an employee affected by a single Labor Code violation had standing to seek civil penalties for any Labor Code violation committed against any employee at his/her workplace, even if the he/she was not personally impacted by the violation. This effectively allowed PAGA claimants to put policies and practices that never affected them under a microscope and, in turn, drive up the cost of individual settlements based solely on the threat of expanding their individual lawsuit to include PAGA representative claims. This has been one of the biggest practical concerns employers have faced from PAGA in recent years.Employees pursuing PAGA claims under the new law will only be able to seek penalties for violations from which they personally suffered, and can no longer throw every claim at the wall hoping something will stick. This is a massive step in the right direction and will help ensure that honest employers aren’t shaken down by dishonest and/or disgruntled employees (or their attorneys) who are after a quick and easy payday.
   2. ManageabilityThe California Supreme Court recently held that judges do not have the power to strike “unmanageable” PAGA claims; i.e., claims that are not susceptible to being adjudicated on a widespread basis without straining the Court system. Not having to establish that their claim was manageable made it even easier for PAGA plaintiffs to pursue any claim under the sun because there were no procedural, evidentiary or other practical obstacles in the way of litigating them… and litigating is expensive! Consequently, regardless of whether those claims could ultimately be proven, employers were incentivized to settle PAGA lawsuits early for exorbitant amounts just because of the expense associated with defending unmanageable claims through trial… not to mention the threat of having to pay the plaintiff’s attorney’s fees if even one of those claims was successfully proven.Another appealing about face the Legislature made from recent California case law is by imposing a manageability requirement upon PAGA plaintiffs. Getting around such a hurdle within the bounds of our civil discovery rules can be very difficult and arguing a claim is not manageable was, at least prior to the Estrada decision, an arrow commonly drawn from an employer’s litigation quiver. PAGA 2.0 now codifies an employer’s right to use that arrow and prevents employees from pursuing, or threatening to pursue, unwieldy claims the resolution of which is not susceptible to common inquiries, facts and/or proof.
3. Curing Violations and Early Neutral EvaluationThe last big change is one we are interested to see play out in practice, but one about which we are cautiously optimistic. It involves an employer’s right to correct and/or remedy – or “cure” – one or more violations upon receipt of an LWDA notice, and how the sufficiency of an employer’s cure efforts will be determined moving forward.One purpose of requiring employees to send their LWDA notices to their employers prior to initiating a PAGA lawsuit is to give the employers an opportunity to identify and fix the violations they are accused of committing. Curing has always been an unappealing and seldom used option because the effects of not doing so perfectly as to all potentially aggrieved employees can be more risky and costly than committing the violation itself (it can also arguably look like an admission of liability). There was also no  vehicle for preliminarily adjudicating whether the violations were satisfactorily cured. This all meant employers still had to litigate their case all the way through trial before finding out whether their cure was good enough. By then it’s too late, especially for many smaller employers. With all these risks, why bother trying? PAGA 2.0 now gives employers an incentive to do so.Businesses with fewer than 100 employees will soon be able to request that the LWDA conduct a settlement conference with the plaintiff once they receive an LWDA notice but before they are in the throes of PAGA litigation. (Think of a process like an individual wage claim before the CA Labor Commissioner.) Similarly, once sued, employers with more than 100 employees will be able to request a stay – i.e., pause – of the entire lawsuit and an “Early Neutral Evaluation” of the claims and penalties at issue. The purpose of both processes is for a neutral third party to evaluate the claims’ merit, determine whether employers’ attempts to cure are sufficient, help develop and approve employers’ cure plans, ensure employers’ compliance therewith and, in appropriate cases, facilitate settlement discussions.The one big drawback here is that neither the LWDA nor our State’s Trial Courts are presently equipped to handle either process and, if we know anything about California, it’s that getting the necessary systems, staffing and resources in place will take quite some time. The logistics and effectiveness of these two new options remain to be seen. At the very least, it’s nice to see our State taking employer-friendly steps to keep meritless PAGA claims out of our already overburdened court system, while also giving employees with colorable claims their day in court.

Conclusion
These forthcoming changes all mean there has never been a better time to conduct a compliance audit, shore up your employment practices and clean up your written policies. For the first time in PAGA’s history, the law is incentivizing employers to get things right up front, and providing somewhat of a safety net to employers who try to do so in good faith. The 8-ball is right next to us. Don’t get stuck behind it!