Why California’s Labor Action Fix Isn’t the Win Employers Expect

For two decades, California’s Private Attorneys General Act has been a giant thorn in the side of California employers. Gov. Gavin Newsom effectively overhauled 20 years of PAGA precedent last month through a legislative compromise passed in response to a ballot measure seeking to eliminate the law. The move will push the plaintiffs’ bar to re-evaluate how they pursue claims.

Since its inception, PAGA has allowed private litigants to sue employers for themselves and other “aggrieved employees” to recover civil penalties under California Labor Code sections previously unique to the California Labor Commissioner. However, the reform was a much-needed measure to reel in some of PAGA’s more arduous and punitive aspects.

The amendments to PAGA are, on paper, intended to reduce and streamline litigation by allowing employer’s greater rights to cure or potentially eliminate penalties and prevent employers from being assessed significant penalties associated with technical violations.

Since the California Supreme Court has issued decisions over the years distinguishing PAGA representative actions from traditional putative class actions, PAGA has allowed employees to bring representative actions against their employers, but without affording employers many of the benefits used when defending against a putative class action under typical state or federal rules.

To bring a PAGA action, employees must give written notice of the alleged labor code violations to their employer and the California Labor and Workforce Development Agency, stating the purported violations they and other employees allegedly suffered.

Assuming the agency doesn’t investigate the matter and the employer doesn’t retroactively correct certain curable violations, the employee is authorized to pursue their PAGA action. Unlike wage and hour class actions, where penalties are determined on a workweek basis, PAGA determines civil penalties per pay period.

This previously had the punitive effect of potentially doubling liability for employers who paid employees weekly instead of bi-weekly or semi-monthly. Fortunately, the reform eliminates this presumably unintended consequence of PAGA. If there was any recovery under PAGA, 25% of it was shared among the aggrieved employees, while 75% of the recovery went to California.

The frustration for employers defending PAGA actions is that plaintiffs typically used them to increase the potential settlement value or assessed damages in a lawsuit—by stacking civil penalties recoverable under PAGA with the statutory penalties already authorized under California’s labor code, which can already be recovered, regardless.

This means that PAGA allows plaintiffs to seek significantly greater recoveries against employers for the same purported wrongs that will already be remedied. It doesn’t provide employees with greater protections than they already have. Instead, PAGA stacks more recovery on top of others.

The other benefit for employees bringing PAGA actions is that, historically, the standing requirement was non-existent. Just by filing a PAGA action and claiming to have suffered one type of labor code violation, plaintiffs were allowed to sue their employers for all wage and hour violations suffered by the entire workforce, whether or not the plaintiffs themselves even suffered those violations.

That’s a significant departure from traditional class action requirements and yet one more reason why defending against PAGA actions has been grueling for employers.

Positive Steps

The law’s reform brings many positive changes for employers. With respect to standing, the representative plaintiff now must have personally suffered each of the violations alleged, and those violations must have occurred in the past year.

There is an expanded ability to cure more labor code violations than previously available, and employers can reduce or potentially eliminate potential penalties by curing violations, taking reasonable steps to comply, or engaging in an early evaluation conference with a neutral evaluator.

Some penalty structures and amounts were also lowered. The default penalty is now $100 per aggrieved employee, removing the heightened $200 per aggrieved employee penalty for subsequent violations.

For wage statement violations under Labor Code Section 226, which previously could drive enormous derivative penalty amounts for mere technical violations, penalties are capped at $25 per pay period for violations that don’t cause harm to the employee and are capped at $50 per pay period where the violation is isolated and didn’t extend beyond the lesser of 30 consecutive calendar days or four pay periods.

Penalty amounts can also be capped between 15% to 30% of the total maximum penalty, depending on an employer’s steps to remedy or cure violations before or after receiving notice. The good news for plaintiffs is they now recover 35% of any recovery, with California receiving 65%.

Trade-Offs

However, since the legislation was a compromise, there are some notable trade-offs. A heightened $200 penalty per aggrieved employee applies if the employer’s conduct was found malicious, fraudulent, or oppressive or if there was a finding within the prior five years that the employer’s policy or practice was unlawful. Alarmingly, despite the maximum penalty amounts being capped, a court can award more than the maximum penalty if the award would be “unjust, arbitrary and oppressive, or confiscatory.”

What happens now? PAGA actions won’t go away anytime soon. The plaintiffs’ bar will need several months at minimum to react to the changes. However, the increased $200 penalty for employers allegedly acting “maliciously,” combined with a court having discretion to award more than the maximum penalty caps, are significant incentives for PAGA cases to continue.

The compromise will probably, although unintentionally, open Pandora’s box for litigation on those specific nuances of the PAGA compromise, resulting in employers trying to avoid heightened penalties while plaintiffs try to increase their potential recovery. All told, this compromise is one more event in a saga that never seems to end for employers.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Keith Rasher is partner at Thompson Coburn, specializing in labor and employment law, focusing on complex litigation, employment disputes, and regulatory compliance.

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