Finally PAGA Relief for California Businesses!

After 20 agonizing years for California employers, new bills (AB-2288 and SB-92) were passed effective July 1, 2024 clipping the albatross wings of the Private Attorneys General Act (PAGA). Though PAGA survives and still poses a formidable threat, there are several notable amendments to the former PAGA law that provide reprieve to small and medium California business.

This article will provide the notable differences to PAGA “before” and “after” this new law passed.

“Aggrieved Employee”

Who can bring a PAGA action and put the hurt on a business? Originally, effectively anyone who worked for the employer. The California supreme court has ruled a PAGA representative need only be 1) “employed by the alleged violator (business)” and 2) “against whom one or more of the alleged violations was committed.”

This led to crazy and overbroad results. For example, a PAGA “aggrieved employee” settled their individual PAGA claim and signed a general release of all claims. A settlement with a release of all claims is how 99% of all lawsuits are resolved. Signing such a settlement means case is over, employee gets paid money to release the employer from all claims, case is dismissed and that’s that.

No so according to the California Supreme Court. In the above case, the Court ruled even if the representative “aggrieved employee” settled their PAGA claim, the representative could still represent the other “aggrieved employees” in the PAGA action. So the individual representative is out, but the PAGA case is not because the settled out individual can still represent their coworkers.

In another case a California court allowed penalties for Labor Code violations that the representative “aggrieved employee” did not suffer. So long as the coworker “aggrieved employees” suffered a Labor Code violation it did not matter whether the lead representative suffered the same Labor Code violation. This resulted in an exponential increase in exposure for the employer, where an “aggrieved employee” with one Labor Code violation resulting in a $100 per pay period penalty could represent other “aggrieved employees” with say 5 different Labor Code violations thereby resulting in a potential 5x increase in the penalties.

After the PAGA amendment, both of the above scenarios are unlikely occur.

The new law says the “aggrieved employee” must “personally suffer[]” each of the Labor Code violations alleged. No more representing coworkers who may have suffered different Labor Code Violations.

Further, what happens if the representative “aggrieved employee” settles their individual PAGA claim or arbitrates their individual PAGA claim and loses? Can the representative still represent their coworkers? That seems questionable given the new definition of “aggrieved employee.” If they never “suffered” any Labor Code violation (because they lost, or settled) they cannot meet the definition of “aggrieved employee,” and cannot be the representative. Only time will tell as the courts will begin ruling on this new restriction on PAGA claims.

“The Cure”

The original PAGA had “cure” provisions in it but they were extremely limited. If paystubs were missing or had the incorrect 1) pay period start and end dates, or 2) legal name and address of the business the defendant employer could “cure” (i.e. fix) the problem and move on. No penalties.

The amended PAGA adds several substantive provisions that the employer can “cure” to avoid penalties. The following Labor Code violations are now curable: 1) all of section 226 (itemized wage statements/paystubs), 2) section 226.7 (rest, meal and recovery periods), 3) section 510 (overtime), 4) section 512 (rest/meal periods), 5) section 1194 (minimum wage), and 6) section 2802 (reimbursement for business expenses).

This is an important favorable change because the typical boilerplate PAGA claim is based on all of the above Labor Code violations. So whereas before a PAGA claim might be worth six or seven figures, the employer can now potentially cure and owe none of that. Huge.

“Derivative Claims/Stacking”

Under the prior PAGA if one Labor Code violation resulted in one or more other Labor Code violations, then there theoretically could have been a $100 penalty for each violation that occurred in a single pay period.

For example, say someone clocked out for their meal period after 5 hours of work or takes a “short meal period” of less than 30 minutes. That Labor Code violation results in one $100 penalty in the pay period in which it occurred. But that one Labor Code violation also results – according to the California courts – in three more Labor Code violations, i.e. “derivative” violations and could result in “stacking” of the penalties.

The three Labor Code violations that automatically flow from the one meal period violation are: 1) section 204 because the meal penalty should have been paid in the pay period in which it occurred and it was not, 2) section 203 because typically the employee in question has already left employ and because the meal penalty was not included in the payment of final wages, and 3) section 226 because the itemized wage statement for the pay period is incorrect because it did not list the meal penalty.

So before the amendment, one violation could result in three more, four total. Likewise the penalty could go from $100 per pay period to $400 per pay period. Multiply that by say 26 pay periods for each employee and the monetary increase is substantial.

After the new PAGA, it appears that derivative penalties/stacking are not allowed. That is a further big benefit to California employers.

“$100 or $200 Penalty Per Violation Per Pay Period?”

Prior to the amended PAGA, plaintiff’s counsel would argue that the $100 penalty applies only to the first pay period in which there was a violation. Any “subsequent” pay period violation is subject to a $200 penalty. We defense lawyers would say that’s ridiculous, a “subsequent” violation can only follow a prior court or administrative determination that there were violations, not a second pay period violation in the same case.

The difference is of course significant. Say there are 26 pay periods in the PAGA claim period. If one believes plaintiff’s counsel the potential penalty is $100 + $200 x 25 pay periods, or $5,100. According to us employer defense lawyers, the maximum penalty would be $2,600 ($100 x 26 pay periods), a difference of $2,500. Multiply that by 10 employees and the difference is $25,000. For 100 the difference is $250,000.

The new law clarifies that the $200 PAGA penalty per pay period only applies if within 5 years there has been an administrative or court ruling on the merits against the employer that the violation was unlawful or if the employer’s conduct was “malicious, fraudulent, or oppressive,” the latter of which is a high bar for plaintiff’s to overcome.

Summary

Taken in total, the amendments to PAGA provide employers with several tactics to reduce exposure to a PAGA lawsuit.

1. Because of the new “standing” requirement, defense counsel could utilize an arbitration agreement compelling the representative aggrieved employee to arbitrate their individual PAGA claim first while the representative component (i.e. the coworker claims) are stayed in court. Then if the employer can prove there are no Labor Code violations suffered by the representative then that representative can no longer represent the coworkers. That’s because of PAGA’s new requirement that the representative “aggrieved employee” must have “suffered each of the violations alleged.” If they suffered no violations then they cannot act as the representative.

2. The employer can “cure.” The typical PAGA action claims violations of minimum wage and overtime, rest and meal period violations, late payment of wages during employment (Labor Code section 204), itemized statement violations and Labor Code section 203 waiting time penalty violations. The employer can now cure all of these issues to avoid paying any PAGA penalties.

3. Leverage in negotiations – the derivative penalty and stacking arguments made by plaintiff’s counsel are now gutted by the amended PAGA which clearly states this cannot occur with Labor Code section 203 (waiting time penalties), 204 (late payroll penalties) and 226 (itemized wage statement) claims. Defense counsel can now use this to their client’s advantage.

One evil still remains. The PAGA plaintiff’s attorneys are entitled to their reasonable attorneys’ fees and costs if they prevail in a PAGA action. And the attorneys’ fees are often the “tail wagging the dog,” as they can far outstrip the penalty component of the PAGA claim.

There will still be a lot of work – not only by your own counsel – but the plaintiff’s counsel if you are even in a position to “cure” the alleged violations. There is a detailed process involved with administrative and/or court supervision. The process could also be lengthy. Detail and length of process translates to attorney time which translates to attorneys’ fees, both your own and the other side’s.

Thus it’s still better to avoid the PAGA lawsuit in the first place. To do so, see Understanding PAGA Claims: What Employers Need To Know And How To Avoid Them.

Or for more information, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (855) 534-1490 today.