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PAGA reimagined: A new chapter for employers and employees in California | Sheppard Mullin Richter & Hampton LLP

On June 18, 2024, California Governor Gavin Newsom, Senate President pro tempore Mike McGuire, and Assembly Speaker Robert Rivas announced a tentative agreement to reform a number of aspects of California's Private Attorneys General Act (PAGA). Although the legislation has not yet been introduced, key components of PAGA reform that have been publicly announced include an increase in the employee share of PAGA penalties, caps on penalties for employers who take steps to comply with the labor law or correct potential problems after receiving notice of a PAGA claim, and requiring the representative plaintiff to experience each alleged PAGA violation in order to have standing to sue. This reform, if passed, will likely curb, but not eliminate, PAGA lawsuits for California employers in the future.

As currently drafted, PAGA allows a current or former employee to sue an employer to recover penalties on behalf of “injured employees,” as well as attorneys’ fees and costs. PAGA penalties can be as much as $100, $200, or more per pay period per injured employee. The statute of limitations for a PAGA claim is one year, and PAGA claims can be brought either as part of a larger wage and hour class action or as a standalone “PAGA-only” action. While PAGA claims may seem less risky due to the shorter statute of limitations (1 year as opposed to 3-4 years for a typical wage and hour class action), PAGA-only claims differ from class actions in a number of important ways. First, a PAGA claim is not subject to class certification. Second, California law allows for extensive disclosure of employee information from the outset of a PAGA case. Third, technical violations that would otherwise slightly In a wage and hour class action lawsuit, statutory penalties are subject to $100 or $200 per pay period per employee.

Against this backdrop, PAGA has been a major driver of wage and hour reduction litigation in California. As a result of the recent exponential increase in PAGA litigation in California, a reform measure has been brought to the November 2024 ballot by a coalition of nonprofits, social justice activists, family farmers, health care providers, and businesses.

After months of discussions with labor representatives and the coalition, California's political leaders agreed on the outlines of a PAGA reform deal to be considered by the California Legislature. If the reforms are passed by the California Legislature and signed by Governor Newsome before June 27, 2024 (the deadline for withdrawing measures from the November 2024 ballot), it would result in the removal of the PAGA reform measure from the November ballot in California.

The core elements of the reform package are increasing the employee share of all compensation, increasing penalties for employer bad faith conduct, limiting penalties for employers who fail to comply with labor laws, empowering employers to fix more alleged labor law violations to compensate workers and avoid litigation, and requiring a representative plaintiff to know all alleged labor law violations in order to bring PAGA litigation. Each of these core elements is explained in more detail below:

Employee share of the penalty

Currently, 75% of all PAGA penalties imposed, after attorneys' fees and costs, are sent to the California Labor Workforce Development Agency, and the remaining 25% is distributed among injured workers. PAGA reform increases injured workers' share of the penalties to 35%.

Increased penalties for malicious behavior by employers

PAGA reform creates a new penalty of $200 per pay period for cases where an employer has acted maliciously, fraudulently, or oppressively. It is currently unclear what constitutes malicious, fraudulent, or oppressive conduct, although this language is similar to the standard for punitive damages that applies to non-wage-and-hour employment claims.

Liability limits for employers

PAGA reform imposes caps on PAGA penalties for employers who attempt to comply with the labor law before receiving a PAGA notice and for employers who take steps to change their policies and practices after receiving a PAGA notice.

Employers who take proactive measures to comply with the Labor Code Before Receiving a PAGA notice will result in a penalty of up to 15% of the applicable PAGA penalty for a particular claim.

Employers that take steps to correct their policies and practices after receiving a PAGA notice will be required to pay no more than 30% of the applicable PAGA penalty for a given claim.

While it has not yet been announced what employer conduct will be considered proactive compliance efforts or what steps will be necessary to correct policies or practices to comply with applicable caps, it is clear that regular compliance efforts and prompt responses to PAGA letters will become even more important in the future.

Other reductions in sentence

The reform agreement also reduces the maximum penalty by an unknown amount in cases where the alleged violation was of short duration, as well as in cases of alleged technical payroll violations that did not cause confusion or economic harm to the employee, such as misspelling company names.

The reform deal also provides a mechanism to equalize penalties for employers who pay their employees weekly instead of biweekly. PAGA penalties are currently calculated per pay period, so employers who pay weekly may face double the PAGA penalties as employers who pay biweekly.

Employer’s opportunity to avoid litigation

The Reform Agreement offers employers several options to avoid litigation by either correcting the alleged violations or initiating an early resolution process in court.

PAGA currently provides an employer with the opportunity to escape liability if it properly corrects certain technical violations of the obligation to provide accurate payroll information.

The PAGA reform provides for an increase in the number of labor law provisions that the employer can remedy after becoming aware of possible violations (but currently not further specified).

The reform deal also provides for improved compensation options for small business owners through an unspecified process of the Labor and Workforce Development Agency.

Finally, the reform agreement provides large employers with the possibility of an early judicial settlement, presumably within the framework of a court-ordered early settlement procedure.

Stand

Currently under Kim v. Reins International California, Inc..(2020) 9 Cal.5th 73, a representative plaintiff is entitled to bring a PAGA action so long as the plaintiff was employed by the alleged violator and personally experienced at least one violation of the labor law upon which the PAGA action was based at some time. The Reform Treaty provides that a representative plaintiff must have actually experienced all of the alleged PAGA violations within the one-year statute of limitations for PAGA claims to be entitled to proceed with litigation.

steering

Currently, following the recent decision of the Supreme Court of California in Estrada v. Royalty Carpet Mills, Inc.trial courts lack the inherent authority to dismiss PAGA claims on the grounds of manageability, even when those claims are complex or time-consuming, unlike the authority trial courts have to dismiss class action lawsuits. The PAGA reform deal would be a step toward repeal Road and to codify the ability of a court of first instance to limit the scope of claims and evidence presented at trial for reasons of manageability.

Increased government enforcement

The PAGA reform deal would also require the Newsom administration to seek expedited filling of vacancies at the California Department of Industrial Relations (DIR) to improve and expedite the enforcement of workers' employment claims through the DIR rather than through private attorneys general.

Diploma

The PAGA reform agreement, assuming it is passed by the House in the publicly announced form and signed by the Governor before the June 27, 2024 deadline to withdraw the PAGA ballot proposal, will likely reduce, but not eliminate, PAGA lawsuits for California employers in the future. If the reformed PAGA is passed as announced, it will be even more important for employers to proactively monitor their compliance with California wage and hour laws and act quickly to consider their options for remediating or curing the alleged violations when they are notified of a potential PAGA claim.

Anna Harden

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