PAGA Amendments: A Reprieve for Employers Proactively Addressing Labor Code Violations, but Ambiguities Remain

On July 1, 2024, California Governor Gavin Newsom signed into law a package of reforms to the Private Attorneys General Act (“PAGA”), a statute that has created headaches for employers and driven up wage and hour litigation and settlement costs since its 2004 enactment. Indeed, the prior version of PAGA allowed individual employees to stand in the shoes of the California Labor Commissioner and recover a $100 or $200 civil penalty per Labor Code violation on behalf of other “aggrieved employees,” even if the representative plaintiff had not personally experienced all of the alleged Labor Code violations. Courts had also held that PAGA actions were not subject to the same commonality and manageability requirements as class actions, meaning that plaintiffs could take PAGA cases with disparate employee populations and wide-ranging factual and legal theories all the way to trial, virtually without limitation. In sum, defending and resolving PAGA actions has been expensive, burdensome, and frustrating for many employers.

The revised law provides some relief by establishing stricter standing requirements, giving trial courts greater discretion to manage and limit PAGA actions, reducing the recoverable penalties, and creating procedures and incentives for employers to proactively cure Labor Code violations. However, the amendments are unlikely to immediately cause a significant decline in PAGA litigation because many of the key terms are either undefined and/or ambiguous – likely requiring judicial interpretation. Nonetheless, California employers should take this opportunity to examine their wage and hour practices and policies and take corrective action if needed, as evidence of such “reasonable steps” will be helpful in defending any PAGA action. A summary of the key changes and guidance for California employers is below.

Key PAGA Amendments

Stricter Standing Requirement and Increased Trial Court Manageability Discretion

Under the revised PAGA, a representative plaintiff now must have “personally suffered each of the violations alleged” during the one-year limitation period to pursue claims on behalf of other employees. This is a significant change, as courts had previously allowed an employee who had suffered any Labor Code violation to pursue claims on behalf of all employees who had suffered any other violations. While this may mean that PAGA actions will become more narrowly tailored to the plaintiff’s specific experiences and circumstances, it is also possible that employee-side firms will just assemble a group of named plaintiffs who experienced different Labor Code violations to maximize the breadth of any PAGA action. Notably, this standing limitation only applies to plaintiffs represented by private firms – plaintiffs represented by non-profit legal aid organizations may still pursue a wider set of legal claims than those they personally experienced.

In addition to the stricter standing requirement, the revised PAGA now authorizes courts to manage PAGA actions by limiting the evidence to be presented at trial, reducing the scope of any claim filed to ensure an effective trial, and consolidating or coordinating actions alleging legally or factually overlapping violations against the same employer. This appears to be in direct response to the California Supreme Court’s January 2024 holding in Estrada v. Royalty Carpet Mills, Inc. that trial courts could not strike PAGA claims based on manageability concerns. While this increased trial court discretion should serve as a relief for employers facing the threat of a wide-ranging PAGA trial, manageability issues will likely be highly fact-dependent and subject to significant motion practice.

Reduced PAGA Penalties

The PAGA amendments drastically reduce the penalties available to employees, including as follows:

• Reducing penalties for employers that pay employees weekly: The revised PAGA provides a 50% reduction in the “per pay period” penalties that would otherwise apply, effectively eliminating any difference in damages resulting from employers paying employees weekly vs. biweekly.
• Disallowing “stacking” violations based on same underlying conduct: Under the revised PAGA, an employee who recovers civil penalties for an underlying wage violation (such as unpaid overtime or minimum wage) cannot also collect civil penalties for the derivative claims of failure to pay wages due at termination, failure to pay wages during employment (unless willful or intentional), or failure to provide a compliant wage statement (unless knowing or intentional).
• Reduced default penalty amounts: Instead of the prior penalty structure of $100 for any “initial” violation and $200 for any “subsequent” violation, the new PAGA now provides a default penalty of $100 per aggrieved employee per pay period (with some exceptions). As with the prior law, a court may award less than the default amount if the award would otherwise be unjust, arbitrary and oppressive, or confiscatory. The default penalty is further reduced for minor wage statement violations ($25 if the employee could promptly and easily determine the required information or would not be confused or misled about their employer’s identity) or violations resulting from an isolated, shortduration event ($50). A $200 penalty is only imposed if, within the prior five years, the Labor and Workforce Development Agency (“LWDA”) or a court had found that the employer’s practice giving rise to the violation was unlawful or if the employer’s conduct is found to have been malicious, fraudulent, or oppressive.

Opportunities To Reduce Penalties by Curing Violations

As amended, the PAGA statute now provides several avenues for employers to significantly reduce their potential liability by proactively addressing Labor Code violations:

• Penalties Reduced by 85% for Employers Taking “All Reasonable Steps” to Comply With Wage & Hour Laws Before PAGA Notice: In any civil action under PAGA, if a court finds that the employer had taken “all reasonable steps” to comply with the Labor Code provisions alleged in the lawsuit before receiving notice of the claims, the civil penalties are capped at no more than 15% of the total possible recovery. “All reasonable steps” include but are not limited to periodic payroll audits with actions taken in response to the results; disseminating lawful written policies; training supervisors on wage and hour compliance; and taking corrective action with regard to supervisors found to have violated the employer’s policies. Whether the employer’s conduct was “reasonable” is to be evaluated by a totality of the circumstances considering the size and resources available to the employer and the nature, severity, and duration of the violations. The existence of a violation is insufficient to establish that an employer failed to take reasonable steps.
• Penalties Reduced by 70% for Employers Taking “All Reasonable Steps” To Comply With Wage & Hour Laws Within 60 Days of PAGA Notice: If a court finds that, in the 60 days following notice of a PAGA or Labor Code violation, the employer takes “all reasonable steps” to ensure compliance (using the same totality of the circumstances analysis described above), the civil penalties are capped at no more than 30% of the possible recovery.
• Penalties Reduced or Eliminated for Employers Promptly Curing Violations After Receiving Notice: Employers are now authorized by statute to eliminate their liability for PAGA violations by promptly making employees “whole” – by compensating employees for unpaid wages owed during the statute of limitations period, paying 7% interest and any liquidated damages required by statute, and paying reasonable attorney’s fees and costs. Inaccurate wage statements can be cured by providing corrected wage statements. Notably, there will be no penalty for any PAGA violation that was both cured (i.e., made the employee whole for prior violations) and remediated (i.e., took all reasonable steps to prospectively comply with the Labor Code provisions in the PAGA notice).

Opportunity To Resolve PAGA Cases Through New Early Evaluation and Settlement Processes

The revised PAGA now provides an early evaluation and settlement process by which employers may resolve PAGA cases without protracted litigation. Employers with fewer than 100 employees may present a cure plan to the LWDA within 33 days of receiving a PAGA notice letter. The LWDA will then conduct a conference between the parties to determine if the cure plan is sufficient. If the LWDA rejects the proposal or chooses not to have a conference, the plaintiff may proceed with a civil action.

Employers with 100 or more employees may request an early evaluation conference with a neutral after a PAGA lawsuit is filed. The civil action will typically be stayed with a conference scheduled within 70 days. Smaller employers will also have access to this process if the LWDA failed to timely act on the employer’s cure plan (as described in the paragraph above).

Ambiguities Remain, Requiring Judicial Interpretation

While the above amendments have the potential to significantly reduce the costs associated with defending and resolving PAGA actions, it seems unlikely that PAGA litigation will slow down any time soon. For example, while the $200 penalty has been eliminated under most circumstances, courts will still be required to assess whether an employer’s conduct was “malicious, fraudulent, or oppressive” such that the higher penalty is justified. Similarly, the reduced penalties for minor wage statement violations will be a welcome relief to many employers, yet a trial court must still decide whether an employee could promptly and easily determine the required information or would not be confused or misled about their employer’s identity for the lower penalty to apply. Likewise, courts will have to determine whether the 70% and 85% penalty reductions are appropriate based on whether the employer took “all reasonable steps” to comply with the Labor Code in light of the “totality of the circumstances.”

Until there is a substantial body of caselaw interpreting and defining these terms, PAGA litigation will likely continue to be a lucrative and attractive prospect for employees and their attorneys – especially considering that the statute still authorizes the employees’ attorneys to recover their litigation fees and costs.

Guidance for Employers

The revised PAGA rewards employers that take proactive and prompt measures to bolster Labor Code compliance by reducing penalties for employers found to have taken all reasonable steps to follow the law. Employers should therefore take the steps outlined in the revised statute: conduct periodic payroll audits, take appropriate action in response to the results, disseminate lawful written policies, train supervisors on wage and hour compliance, and take corrective action with regard to supervisors found to have violated the employer’s policies. However, employers should exercise caution around the confidentiality of such audits, remedial measures, and corrective action. Most employers take such steps under the advice of employment counsel in order to maintain the attorney-client privilege over sensitive workplace matters. While employers may later choose to waive that privilege in a PAGA action to prove that they took all reasonable steps to comply with the Labor Code, it is advisable to maintain the privilege while conducting the audit to preserve the option to assert it later.

Upon receipt of a PAGA notice, employers should promptly and diligently review and investigate the claims asserted and determine whether any violations occurred and can be cured. Depending on the circumstances, employers may substantially reduce or eliminate any PAGA liability by making employees whole and taking steps to comply with wage and hour laws going forward. However, these steps must be taken promptly in order to effectively reduce the employer’s liability – meaning that employers must move quickly upon receiving notice of a claim. Employers should also promptly consult with counsel to determine whether any of the early resolution procedures established under the revised PAGA may provide an avenue to curtail the litigation before spending significant resources on defense.