The Employer’s Wage and Hour Advisor

Generally, PAGA allows employees to stand in the government’s place and sue employers to recover civil penalties authorized by the California Labor Code. Aggrieved employees and the State of California share in any penalties recovered. PAGA actions regularly allege violations related to unpaid wages or overtime, missed meal and rest breaks, failing to pay wages timely, and failing to provide legally compliant wage statements.

Though the amendments are not retroactive (applying only to PAGA actions filed in court or noticed to the California Labor & Workforce Development Agency (“LWDA”) after June 19, 2024, the amendments are largely positive for the business community. The amendments place additional hurdles for plaintiff’s lawyers seeking to assert PAGA claims, and incentivize employers to remedy alleged Labor Code violations by providing lower penalties for employers who voluntarily come into compliance. The key changes are detailed below:

1. Standing 

With limited exceptions PAGA plaintiffs must now have “personally suffered” each violation alleged within one year of noticing the PAGA action to the LWDA. Previous judicial interpretations of PAGA allowed an employee to bring claims on behalf of other employees for labor code violations they never personally experienced so long as the employee personally experienced a single labor code violation. Practically, the amendment decreases the financial incentive to file a PAGA action if the employee experienced only one violation and should limit so-called “kitchen sink” complaints.

2. Penalty Reform

The amendments provide for significant reductions in available penalties.  While the default penalty structure of $100 per aggrieved employee per pay period for a violation continues, the amendments provide avenues for employers to reduce those penalties, including the following:

• Technical Wage Statement Violations. If all required information is present, but mislabeled or technically incomplete, penalties are reduced to $25 per aggrieved employee per pay period “if the employee could promptly and easily determine from the wage statement alone the accurate information.” Similarly, if the wage statement provides an outdated or inaccurate employer legal name or address (e.g., a d/b/a or a mailing address) the penalty is limited to $25 per aggrieved employee per pay period “if the employee would not be confused or misled about the correct identity of their employer.”
• Isolated Violations. The amendments reduce penalties to $50 per aggrieved employee per pay period “if the alleged violation resulted from an isolated, nonrecurring event that did not extend beyond the lesser of 30 consecutive days or four consecutive pay periods.”
• Taking “All Reasonable Steps” Toward Compliance. The amendments provide a limited safe harbor to employers who are working to comply with California law. If prior to receiving a records request or notice of violation from an aggrieved employee, an employer has taken “all reasonable steps” to be in compliance with the provisions identified in the notice, the civil penalty (if any) is limited to 15% of the penalty sought. If those steps are taken within 60 days after receiving notice, the employer is still eligible for a reduction to 30% of the penalty.
  
  Under the amendments, “all reasonable steps,” included, but are limited to: (1) conducting periodic payroll audits and taking action in response to the results of the audit, (2) disseminating lawful written policies, and (3) training supervisors on applicable Labor Code and wage order compliance, or taking appropriate corrective action with regard to supervisors. Under the amendments, courts will evaluate whether an employer’s conduct was reasonable based on “the totality of the circumstances and take into consideration the size and resources available to the employer, and the nature, severity and duration of the alleged violations.”  These broad factors will certainly be litigated heavily in the near future.
• Limits on “Stacking” Penalties. Previously, for certain wage violations (including overtime wages or premiums for missed meal or rest breaks), the employee could recover a penalty for the unpaid wage violation plus additional derivative penalties. The derivative penalties would include, among others, penalties for failing to pay all wages at the time of termination, failing to pay wages during the pay period they were earned, and/or failing to account for the unpaid wages on the wage statement for a given pay period. Now, an employee may recover civil penalties only for the underlying unpaid wage violation, and not the derivative claims (with some exceptions such as when an employer fails to provide wage statements at all). This limit on stacking derivative violations can significantly reduce exposure for employers.
• Enhanced Penalties. The amendments also put limits on increased penalties for subsequent violations by clarifying that employers are subject to enhanced penalties of $200 per aggrieved employee per pay period only when either (1) a court or the LWDA found within the five preceding years that the policy or practice giving rise to the violation was unlawful (i.e., repeat offenders) or (2) the “employer’s conduct giving rise to the violation was malicious, fraudulent, or oppressive.”

3. Relief For Employers Running Weekly Payroll

The PAGA amendments also fix a statutory quirk that punished employers who issue weekly paychecks. The previous PAGA assessed penalties per employee per pay period.  Thus, potential liability was doubled for no reason other than an employer merely issuing weekly paychecks (as opposed to biweekly or semi-monthly). The amendment provides that penalties recovered in PAGA actions will be reduced by 50% for employers with weekly pay periods.

4. Cure Provisions and Reduced Penalties

PAGA’s previous limited cure provisions did not prevent the later award of civil penalties in litigation.  Now, employers may avoid civil penalties under PAGA if they had previously taken “all reasonable steps” (described above) to come into compliance and then cure any Labor Code violations after receiving a PAGA notice from an aggrieved employee. The PAGA amendments provide that, except for wage statement violations discussed below, an employer has cured violations only if (1) the employer corrects the violation the aggrieved employee alleges, (2) the employer is in compliance with the statutes that the employee alleges have been violated, and (3) each aggrieved employee is “made whole.”

An employee is “made whole” when the employer pays the employee:

• “[A]n amount sufficient to recover any owed unpaid wages due under the underlying statutes specified in the notice dating back three years from the date of the notice, plus 7 percent interest”;
• “Any liquidated damages as required by statute”; and
• “[R]easonable lodestar attorney’s fees and costs to be determined by the agency or the court.”

If the employer disputes the amount of unpaid wages due, it can cure by paying amounts “sufficient to cover any unpaid wages that the agency or court determine could reasonably be owed to the aggrieved employees based on the violations alleged in the notice.”

For wage statement violations specifically, employers can cure by providing (at no cost to employees) a fully compliant, itemized wage statement to each aggrieved employee for each pay period during which the violation occurred during the three years prior to the date the employee noticed the violation. An employer whose wage statements were non-compliant because the employer’s legal name or address was incorrect or missing can cure that violation with written notice of the correct information to each aggrieved employee, rather than re-issuing all wage statements.

Penalties for employers who cure, but do not take “all reasonable steps” to come into compliance prospectively are capped at $15 per aggrieved employee per pay period.

5. Early Case Resolution Process

The amendments also provide a statutory alternative dispute resolution procedure for certain employers (formalizing the common early mediation procedure in PAGA litigation).  Employers with more than 100 employees during the PAGA period may request from the court an early evaluation conference which comes with a stay of all discovery and responsive pleading deadlines. A “neutral evaluator” will review the case, including reasons an employer disputes the violation or the employer’s cure plan, and explore potential settlement options with the parties. This provides employers with an early opportunity to address deficiencies in the pleadings, including boilerplate allegations common to many PAGA lawsuits.

Starting October 1, 2024, employers with fewer than 100 employees in total during PAGA period have an additional option for early case resolution. The employer may, within 33 days of a receiving a notice of violation, submit to the LWDA a confidential proposal to cure one or more violations. Then, LWDA will set up a conference with the parties to determine whether the proposed cure is sufficient. If LWDA finds (after a hearing, if plaintiff requests) the proposal is sufficient, the employer may then cure. Upon a determination that the employer has cured, then the employee cannot file a civil action. The employee may appeal the agency decision to the Superior Court. If the proposal is insufficient, or if LWDA does not act on the cure proposal, the employee may proceed with the PAGA action.

This process is even quicker for wage statement violations alleged against smaller employers. The employer may cure within 33 days of receipt of a notice of violation. If the employee disputes that the employer cured the violation, LWDA will review the actions the employer took to cure. If the agency determines the alleged violation has been cured, the employee may appeal that decision to the Superior Court. If the agency determines the alleged violation has not been cured, the employee may proceed with the civil action.

6. Change in Penalty Sharing Between Plaintiff and Government

As amended, PAGA provides that 65% of civil penalties recovered are paid to the government, and 35% to aggrieved employees. Previously, the split was 75% for the government and 25% for the aggrieved employees.

7. Manageability

Prior case law was mixed as to whether trial courts could use case management procedures to ensure efficient trial of PAGA claims. The PAGA amendments provide judicial powers to limit the scope of PAGA claims by explicitly authorizing trial courts to use all case management procedures at their disposal to ensure that the claim is effectively tried.

8. Injunctive Relief

Courts overseeing PAGA actions now have discretion to compel an employer to take affirmative acts in addition to assessing monetary penalties.

Key Takeaway

Employers have been inundated by PAGA claims in recent years. Many cases amounted to “gotcha” litigation where plaintiffs and their counsel asserted technical violations with no practical opportunities for employers to cure minor deficiencies where employees were not substantively harmed.  Nonetheless, employers were required to pay large settlements to avoid very costly litigation.  These amendments were long-awaited and will help employers who take “all reasonable steps” to comply with the California Labor Code. Thus, Employers should continue to review their policies and practices to ensure compliance with California wage and hour regime.

Honigman’s Labor and Employment department will continue to monitor closely developments in the California wage and hour space.