California Labor Law ‘Sea Change’ to Test Cash-Strapped Courts

The effectiveness of key reforms to California’s unique law allowing workers to sue for job violations in place of the state—such as damage caps and routes to resolve cases early—will partly depend on state courts’ ability to develop new procedures amid significant budget cuts.

A larger employer facing a Private Attorneys General Act lawsuit now can request an early evaluation conference, which halts ongoing litigation while a neutral party assesses the claims the company faces, its efforts to comply with the Labor Code, and any plans to cure alleged violations.

“The neutral has to be a court-appointed individual, but the courts aren’t set up to do that,” said Michael Rubin, an attorney at Altshuler Berzon LLP who represents workers. “That’s potentially another burden on an overburdened judiciary.”

California also recently slashed nearly $100 million from its fiscal year 2024-2025 budget, as part of the state’s broader efforts to close a massive shortfall by reducing funding for government operations by 8%.

The evaluation conference process, penalty caps based on corrective measures, and opportunities to quickly escape claims via cure plans are key elements in the multi-pronged PAGA reform package that California Gov. Gavin Newsom (D) signed into law in July. The package stemmed from a business-labor compromise to amend the PAGA and remove a ballot initiative that called for repealing the law.

California minted PAGA in 2004 to boost enforcement of the state’s employment laws by permitting individuals to file class action-like lawsuits on behalf of similarly situated people who work for the same employer. The aggrieved workers split the penalties with the state.

Workers have brought PAGA claims for unpaid wages, missed breaks, and other labor violations against a range of nationwide employers, including companies in the technology, retail, and app-based “gig” industries.

Employer advocates in the Golden State have long criticized the law, arguing that it imposes disproportionately large penalties for what can be technical violations, enriching plaintiffs’ lawyers at businesses expense.

Worker advocates, however, have praised PAGA as a vital tool to enforce labor standards in light of an underfunded, overwhelmed Labor and Workforce Development Agency.

The law has gained prominence in recent years, as it’s emerged as the only reliable route for workers to keep group claims in court if they previously waived their right to participate in class actions as part of mandatory arbitration agreements. The California Supreme Court reaffirmed PAGA’s power in that regard last year when it ruled workers can litigate representative claims in court even if they’ve been forced to arbitrate their individual claims.

Multi-Faceted Measure

The PAGA reform package has elements that benefit workers. For example, they can obtain injunctive relief to stop an employer’s illegal conduct. The amendments also boosted the share of PAGA penalties that workers keep to 35%, up from 25%.

Employers scored several wins, such as a tightening of the standing requirement. Rather than allowing workers who suffered one type of violation to bring claims for any other Labor Code violation on behalf of other employees, they must have suffered every type of violation that they want to include in a PAGA suit.

The reform measure also featured several different reductions to penalties, such as dropping wage statement violations to $25 from $100 and raising the bar on when heightened penalties are available.

“Most significant for employers is the potential penalty reduction for taking all reasonable steps and the expanded cure provisions,” said Alden Parker, an attorney with the management-side firm Fisher & Phillips LLP.

Employers that take remedial steps prior to receiving a PAGA notice can see an 85% reduction to penalties, or 70% if they took those actions within 60 days of getting the notice.

The legislation gave some examples of what “may” be considered part of those reasonable steps, such as conducting payroll audits and taking responsive actions, handing out lawful written policies, and training supervisors on Labor Code compliance.

Companies can also cure violations and avoid liability by fixing the problem, coming into compliance, and making aggrieved employees whole. For a worker owed pay, being made whole would include a company providing unpaid wages with interest, any double-damages as required by law, and attorneys’ fees.

Early Evaluation

Employers with 100 or more workers can present any cure plans at early evaluation conferences, a novel process that pauses litigation and provides an opportunity for neutral parties to assess the dispute. Smaller employers have a similar mechanism that operates through the Labor and Workforce Development Agency,

The early evaluation conferences represent a “massive sea change” in how PAGA suits will be litigated, said Shareef Farag, a management-side attorney at Baker & Hostetler LLP who has participated in those types of conferences in federal court cases.

“They allow you to take off the rose-colored glasses, put down the sword, and potentially get to a resolution in a much more efficient fashion, without incurring the same volume of fees,” Farag said.

Employers can also raise the potential for penalty reductions in the early conferences, though they could also be established later in litigation, he said.

The legislation gives courts leeway to determine who will conduct the conferences and how the process will operate. In an example of that latitude, the neutral evaluator can be a judge, commissioner, or “such other person knowledgeable about and experienced with” the Labor Code.

“It’s possible, maybe even likely, that different superior courts will deal with that early neutral evaluation procedure differently,” said Phillip Ebsworth, a Seyfarth Shaw LLP lawyer who represents employers.

While courts that frequently handle PAGA lawsuits, like Los Angeles Superior Court, probably will establish high functioning evaluation programs, it’s less clear what will happen with smaller courts that don’t see as much of that kind of litigation, said Lauren Teukolsky, founder of the plaintiff-side firm Teukolsky Law PC.

State trial courts’ efforts to establish and run early evaluation programs arrive in the wake of a $97 million funding cut. The state judicial council, which oversees California’s court system, hasn’t performed a financial analysis of the changes to PAGA, according to a spokesperson.

California Chief Justice Patricia Guerrero has raised concerns about how the budget could affect the court system’s operations.

“We understand that our state is facing difficult fiscal times and we remain committed to doing our part to help address the statewide budget deficit,” she said in a statement. “That said, we are concerned that these cuts to the judicial branch budget will have real impacts on operations, services and access for everyone seeking to resolve disputes or assert their legal rights in our courts.”