I get questions all the time; did the PAGA Reform deliver on providing the changes it promised. The short answer is “maybe.” Every lawyer’s favorite response, right? The truth is, it’s still a little early to even know. In the world of litigation, especially collective action litigation (PAGA and class actions), time moves very slowly. The Reform impacted litigation where the PAGA letter was filed on or after June 19, 2024. The lawsuit that follows cannot even be filed, by law, for 65 days after the PAGA letter, and often, the lawsuits are not filed for many months after. Then, depending on the court, the first status conference may not be held for 3 – 6 months after that. It is usually after that settlement discussions are even first explored, and if a mediation is set, that can be another 9 months or even a year later, given the mediators’ busy calendars. We are just starting to see the first mediations on these matters, and most aren’t even occurring for months to come.
So far, we have not necessarily seen a slowdown in the number of PAGA cases being filed. That much we can gauge in real time. However, what we cannot tell is how the Reform is impacting the ability to resolve these cases. We suspect that these law firms may indeed be filing more PAGA letters because they are making less on each matter. Again, these settlements are confidential and JUST occurring, so it’s hard to know. But first, let’s do a bit of a refresher on what the PAGA Reform did, and then we can discuss what our office is seeing.
What did the PAGA Reform Accomplish? One year ago, we finally got a bill passed that was an agreement reached between the Governor’s office, legislative leadership, business, and labor groups to reform the Private Attorneys General Act (PAGA) that would “avoid a contentious ballot measure campaign.” It was a very long, complicated bill, and there were a lot of components to it
In general, the Reform made sweeping changes to PAGA’s penalty structure and the ability to cure or resolve these lawsuits but taking advantage of many of these changes depend on the employer’s level of COMPLIANCE, as you have heard me lecture in the past year. There were also changes to some procedural bits like standing and statutes of limitation, along with the court’s ability to manage these cases, the impact of which will take even longer to determine as these new cases wend their way through the court system.
Amount of Penalties – the Biggest News
The Reform starts by presuming that the penalties default at $100 per pay period/per employee (instead of $200) unless employer’s policy was unlawful or the employer’s conduct was malicious, fraudulent, or oppressive. And in most circumstances, penalties for wage statement violations are capped at $25 per pay period/per employee. In addition, there are no longer “derivative penalties” for Labor Code Sections 201, 202, 203, 204, and 226. All of this brings the total amount of these cases down to start.
Also, there will also be $50 penalties for what are considered to be “isolated” violations.
Then, the real changes begin. The reform caps penalties for employers who have proactively taken steps to comply with the Labor Code before receiving either a PAGA notice or written demand for employee records. In those cases, the maximum penalty that can be awarded is 15 percent of the applicable penalty amount.
For employers who take steps to fix policies and practices within 60 days after receiving a PAGA notice or demand letter, the maximum penalty that can be awarded is 30 percent of the applicable penalty amount.
The reform actually defines what it means to engage in this “compliance” – they list activities such as conducting manager training, disseminating compliant written policies, conducting payroll audits, and addressing errant practices immediately. This should all sound VERY familiar – it’s all the same kind of conduct I preach about all the time in these MMBs, even more so since last year.
Right to Cure
Then, there will be a right for employers to “cure” after litigation ensues. While I had my doubts about using this process, we have actually tried to invoke this provision more than I had envisioned. For small employers, under 100, there is a more robust process through the state which seems to try to avoid or reduce litigation altogether. For larger employers, there is an early evaluation process through the courts, where employees can be made whole more quickly and legal fees greatly reduced. We are just starting to pursue this for some of our clients, so stay tuned.
State Gets Less Money
The new reform also changes the share that the state receives in these PAGA cases from 75% to 65%. Employees will now receive 35%.
Standing and Statute of Limitations and Right to Manage Claims
The new law also reverses some judicial decisions that had caused consternation for us defense attorneys. Under the Reform, the named plaintiff must personally experience the alleged violations brought in a representative action. This alone has already tailored some of the PAGA letters we have seen. Also, the reform clarifies that these cases must be brought within the one-year statute of limitations (this had been an open question within the California courts).
The trial courts are also given back their right to manage these claims, something the California Supreme Court took away earlier this year.
Penalties Reduced for Weekly Pay Periods
Thankfully, the new reform levels the playing field for employers who pay weekly versus bi-weekly by ensuring penalties are adjusted by half for those employers.
What does it mean to engage in “compliance” under the new PAGA Reform? The Reform spells out what it means to engage in these compliance measures, and it should all sound very familiar. To get the full 85% reduction, the compliance should be occurring prior to the PAGA letter being filed. That means NOW.
Disseminate Written Policies that Comply with the California Labor Code –
You all know that we have the best employee handbook program around. That will satisfy this requirement. We also update it every year. YOUR job is to make sure every single employee signs it, immediately upon hire, and every year upon update. Including all managers.
We also will provide you with current employee forms but see below under Payroll and Personnel Audit for more information on forms. This part can get tricky, since sometimes managers decide to bring their own forms from their ‘former company’ that must know more than you. You need to purge all other forms and only use approved forms.
Conduct Payroll and Personnel/HR Audit –
The PAGA Reform lists “Payroll Audit;” I added in the bit about a full Personnel/HR Audit. I think the legislature envisioned someone looking over your accounting procedures to make sure you are doing your overtime calculations, regular rate, blended rate, wage statements, break payments, split shift, reporting time pay, and all that correctly. And all that is very important. I also want to make sure you have your time edit procedures in place, your exempt/non-exempt classifications correct, your meal and rest break tracking in place, your vacation/PTO accruals correct, your sick pay usage straight, any stray forms used by managers vetted, all proper new hire forms in place, any other possible errant HR side issues corrected. I call it a “spring cleaning” audit.
Once you get a good first audit done, there should be follow up audits and systems put in place to confirm that mistakes are not made, or if they are, they are caught timely and corrected. DO NOT ASSUME that because you are using a big national payroll company like ADP or Paylocity or Toast that you are compliant. Those companies can and do make mistakes, and you are responsible if they do. You must audit for THEIR compliance! I just had a client tell me that her POS system and her payroll system weren’t talking to each other, and as a result, their double-time hours were not paid properly. They caught this by doing their own internal audit.
Manager Training –
There are a few different ways in which to conduct this training – we do it both live and via zoom, as many of you know. We also partner with some excellent resources who do online, ongoing training, and we will be providing more information about that as well. But regardless of the forum, I think our mindset about “manager training” must change. In the past, employers have really pushed back on this, at best going through the motions for harassment training only.
As most of you know, I have been a HUGE proponent for training managers, long before this Reform. You have all heard me use the phrase “we are only as strong as our weakest manager.” This is it, folks. Our managers do not intuitively know how to manage. We must teach them. And not just about wage and hour laws (although that, too!). We need to teach them how to lead. We need to teach them about our culture. We need to teach them how to hire, how to motivate, how to counsel, how to communicate. Many of them are just kids. It’s an ongoing process, and we for sure cannot expect them to know the law. The law barely makes sense to lawyers (okay, it doesn’t make sense to lawyers). Our managers will not know it, and they will often forget it, unless we teach it to them, and then remind them.
We can teach this class on zoom, and you can record it to use over again. And yes, we can do it in Spanish if you need.
Anecdotally, I believe we have already started to see a shift based on this part of the Reform. Fewer of my long-term clients are receiving PAGA letters. Maybe this is just good luck, or maybe it reflects the compliance measures these clients have implemented. Maybe a bit of both. But if I am right, compliance can be a deterrent. That would be the best news of all.
Also, for the compliant clients who have received post-Reform PAGA letters, we have been able to resolve many of these matters with a small, individual settlement. I believe that is a direct result of the PAGA Reform and the tools it provides in reducing penalty amounts.
Again, we don’t have any hard data on this effect, and it’s hard to measure success when we fail to get sued. But I truly believe the effect of the Reform is palpable, even this early.
In the meantime, why take the chance? Take advantage of the Reform tools and engage in that compliance now. It also makes it much easier to defend these individual lawsuits and demand letters, the latter of which are definitely surging.
