Changes to PAGA Create Opportunities for Employers to Minimize Penalties |  By: Tanner Hosfield

The Private Attorneys General Act (“PAGA”), which permits individual employees to sue employers on behalf of themselves, other employees and the State of California to recover civil penalties for California Labor Code violations, has long garnered criticism for excessively penalizing employers and incentivizing frivolous lawsuits.  Business groups had proposed a ballot initiative for the upcoming election that sought to repeal PAGA and replace it with a new law which did not include the state in the collection of civil penalties and which provided resources for employers to comply with labor laws.  To avoid a potential repeal, lawmakers set out to revise PAGA to alleviate some of the more pressing issues faced by employers while also providing additional benefits to employees.  On July 1, 2024, Assembly Bill 2288 and Senate Bill 92 were signed into law (the “PAGA Reforms”).  Notably, many of the changes affect PAGA claims filed on or after June 19, 2024. 

The PAGA Reforms address penalties, curing violations, and provide new procedures for early resolution, among other changes.  Since the PAGA Reforms are new, it remains to be seen whether the changes will ultimately resolve many of the issues that had plagued employers dealing with PAGA previously.  Still, while the PAGA Reforms may not be perfect, they should provide some relief for employers that act quickly in response to alleged Labor Code violations.

I. Revised Penalties

Perhaps the most important change established by the PAGA Reforms is a revised penalty structure.  Previously, penalties were set at $100 for each initial violation per aggrieved employee per pay period and were then increased to $200 for subsequent violations.  Now, the default penalty for each violation is $100 for each aggrieved employee per pay period.  However, this base penalty may be increased, reduced or capped, depending upon the circumstances of the violations.

A. Increased Penalties

The $100 penalty is increased to $200 per pay period if 1) there had been a prior determination (from the Labor & Workforce Development Agency (“LWDA”) or a court) that the employer’s policy/practice was unlawful within the last 5 years, or 2) if the employer’s conduct is determined by a court to have been malicious, fraudulent, or oppressive.

B. Reduced Penalties

On the other hand, penalties may also be reduced in certain circumstances:

• 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, then the penalty is $50 per violation per pay period;
• If the employee could “promptly and easily determine” from the wage statement alone the information required by Labor Code section 226(a), or if the employee would not be confused or misled about the correct identity of their employer. then the penalty is $25 per violation per pay period.

Further, aggrieved employees are prevented from collecting derivative penalties for certain underlying unpaid wage violations.  Specifically, employees can no longer receive penalties (that are in addition to the underlying violation) for violations of Labor Code sections 201-203, 204 (if the violation is neither willful nor intentional), or section 226 (if the violation is neither knowing or intentional and not based on a failure to provide a wage statement)

C. Capped Penalties

The PAGA Reforms also cap penalties when an employer takes “all reasonable steps” to be in compliance with the statute.  In determining whether a cap is appropriate, courts will evaluate, based on the totality of the circumstances, factors such as the employer’s size and resources, along with the nature, severity and duration of the violations.  Reasonable steps include whether an employer conducted periodic payroll audits and acted in response to the results of the audit, disseminated lawful written policies, trained supervisors on wage order compliance, or took appropriate corrective action with regard to supervisors.  PAGA penalties will be capped at 15% of the statutory amount if the employer takes reasonable steps before receiving the notice of violation, or capped at 30% if the employer takes reasonable steps within 60 days after receiving the PAGA notice.  It is important to be mindful that the penalty cap does not apply if the penalties recovered are of the increased variety (i.e. $200).

Key Takeaways.  The revised penalty structure addresses one of the key complaints about PAGA – excessive penalties that can be stacked upon underlying Labor Code remedies.  In particular, removing the ability of employees to recover additional penalties for derivative claims should help employers avoid excessive compounding of penalties that originate from only one Labor Code violation.  Additionally, capping penalties when employers take reasonable steps to be in compliance with the Labor Code rewards proactive employers and those who take decisive action to resolve issues after they arise.  This change also helps employees, who will reap the benefit of employers being incentivized to quickly correct violations.

II. Curing Violations

In addition to revising penalty structure, the PAGA Reforms provide that employers that cure alleged violations can reduce penalties or avoid penalties altogether.  An employer who takes all reasonable steps to be in compliance (either before or within 60 days after the PAGA notice) and cures a violation will not be required to pay penalties for that violation.  A violation is cured when an employee is “made whole”, which is when the employee has “received an 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 seven percent interest, any liquidated damages as required by statute, and reasonable lodestar attorney’s fees and costs to be determined by the agency or the court.”

Alternatively, if an employer cures a violation but does not comply with the reasonable steps requirement within 60 days, then penalties will be capped at $15 per employee per pay period.  Until October 1, 2024, smaller employers will still have only 33 days to cure alleged violations; after that date employers with fewer than 100 employees will only be required to submit a proposal to cure within 33 days (as described in detail below).

Notably, employers are now allowed to cure more Labor Code violations, specifically including:

All Wage Statement Violations (§ 226);

Failure to Provide Meal Periods and Rest Breaks; Pay Premiums (§ 226.7, 512);

Unpaid Vacation Wages (§ 227.3);

Overtime Violations (§ 510, 1194);

Minimum Wage Violations (§ 1194, 1197, 1197.1), and

Expense Reimbursements (§ 2802)

In order to cure wage statement violations, an employer must provide, at no cost to the employee, a fully compliant, itemized wage statement or reasonable access to digital records containing the same information, for each pay period during which the violation occurred.

Key Takeaways.  Allowing employers the possibility of curing more types of Labor Code violations provides a better opportunity for fast-acting employers to minimize penalties. However, permitting an employer to potentially avoid penalties altogether should they both take reasonable steps to comply with the Labor Code and cure the violations sounds enticing, but may be hard to take advantage of in practice, at least until the new early resolution procedures kick in on October 1, 2024.  Specifically, curing violations requires an employer to calculate and pay not only all wages, interest, and liquidated damages owed for each violation, but also reasonable attorney’s fees and costs (as determined by the agency or court).  It may be difficult for an employer to accurately determine and pay all such damages in such a short timespan, while also taking reasonable steps towards Labor Code compliance.

III. New Procedures for Early Resolution

The PAGA Reforms provide additional opportunities for early resolution of claims.  However, these processes (and their effective dates) differ based on the size of the employer.  Importantly, for smaller employers the new procedure does not take effect until October 1, 2024. Additionally, there is a unique set of procedures for curing Labor Code section 226 violations that also takes effect on that same date.  It is important to be aware that employers are prohibited from using the notice and cure procedures more than once in any 12-month period for the same alleged violations. The procedures for smaller and larger employers are listed below.

A. Procedure for Smaller Employers

For employers with fewer than 100 employees, the employer may submit a confidential proposal to the LWDA to cure the alleged violation within 33 days of receipt of the notice of violation. Within 14 days after receipt of the employer’s proposal, the LWDA will set a conference to take place within the following 30 days.  Specifically, the conference will determine whether the proposed cure is sufficient, what additional information may be necessary to evaluate the sufficiency of the cure, and the deadline agreed upon by the parties for the employer to complete the cure.  If the cure includes the payment of unpaid wages, the agency shall also determine at the conference whether to request that the employer pay the proposed cure amount, including any wages and liquidated damages due and seven percent interest, into escrow or shall provide such other form of security as the agency deems suitable.

The employer must complete the cure and provide a sworn notification to the employee and agency that the cure is complete (accompanied by a payroll audit and check register if the violation involves a payment obligation) by the agreed upon deadline, which may be no later than 45 days after the conference.  This notification must also include any information the parties deemed necessary to determine the sufficiency of the cure.

The agency is then required to verify whether the cure is complete within 20 days of receiving the employer's notification.  If the agency review procedure under this section extends beyond the 65–day period, the statute of limitations on the alleged violations remains tolled until that procedure has been completed.

If the agency preliminarily determines that the alleged violation has been cured, it must notify the aggrieved employee and, if requested by the aggrieved employee, set a hearing within 30 days of such determination.  The agency must issue an order no more than 20 days after the hearing providing a determination of whether the cure is adequate and the reasons for its determination.  If the agency determines that the alleged violation has been cured, the aggrieved employee may not proceed with a civil action.  If the aggrieved employee disagrees with the cure determination, the aggrieved employee may appeal that determination to the superior court.  However, any amounts paid by the employer to the aggrieved employees (exclusive of PAGA penalties) to cure the alleged violation is to be offset against any judgment later entered with respect to that violation, if the superior court concludes the agency abused its discretion in finding that the employer's cure was adequate.

If the agency determines that the cure is not facially sufficient or does not act upon the employer's cure proposal, the employee may proceed with a civil action after 65 calendar days from sending the PAGA notice.  This time may be extended by the agency up to a maximum of 120 calendar days after notice is sent.  The employer is still entitled to file a request for a stay and early evaluation conference (following the same procedure as described in detail below).  Again however, this process does not come into effect until October 1, 2024.

No cure or proposal to cure may be deemed an admission of liability by the employer that submitted the proposed cure.  Any cure proposal shall be deemed a confidential settlement proposal subject to Section 1152 of the Evidence Code.

B. Procedures for Larger Employers

For employers with 100 or more employees during the notice period who are served with a summons and complaint, the employer may—prior to or simultaneous with a responsive pleading or initial appearance—file a request for an early evaluation conference in the pending proceeding and request a stay of court proceedings.  An employer’s request for an early evaluation conference must include a statement regarding whether the defendant intends to cure any or all of the alleged violations, specify the alleged violations it will cure, if applicable, and identify the allegations it disputes.  During the stay the parties will work with a neutral evaluator to determine whether a violation has actually occurred and develop a plan to cure the violation. The revised law lays out the specific timeline of what actions will be taken thereafter.

Following the request, the court must issue an order setting an early evaluation conference within 70 days.  The defendant must submit the proposed plan to cure the violations confidentially to the neutral evaluator and the plaintiff within 21 days.  A defendant disputing any alleged violations must also submit a confidential statement regarding the basis and evidence for disputing the alleged violations.

After the service of defendant’s proposed cure plan, the plaintiff has 21 days to submit to the neutral evaluator and the defendant a confidential statement that includes: the factual basis for each alleged violation, the amount of penalties claimed for each violation (and basis for that calculation), the amount of attorney’s fees and costs incurred that are being claimed, any demand for settlement of the case, and the basis for accepting or not accepting the employer’s proposed cure plan.

The early evaluation conference will involve an evaluation of: 1) whether any of the alleged violations occurred and if so, whether the defendant has cured the alleged violation; 2) the strengths and weaknesses of the plaintiff's claims and the defendant's defenses; 3) whether plaintiff's claims, including any claim for penalties or injunctive relief, can be settled in whole or in part; and 4) whether the parties should share other information that may facilitate early evaluation and resolution of the dispute.

If the neutral evaluator accepts the employer's proposed cure plan, the defendant shall present evidence within 10 calendar days (unless a longer period is agreed to by the parties or set by the evaluator) demonstrating that the cure has been accomplished.  If the defendant indicated it would cure any alleged violations and fails to timely submit the required evidence showing correction of the violations to the neutral evaluator and plaintiff, the early evaluation process and any stay may be terminated by the court.

If the neutral evaluator and the parties agree that the employer has cured the alleged violations, the parties must jointly submit a statement to the court setting forth the terms of their agreement.  If no other alleged violations remain in dispute, the parties and the court are to treat the parties' submission as a proposed settlement.  If other alleged violations remain in dispute, the court has discretion to defer consideration of the parties' agreement until after further litigation proceedings.

In calculating any penalties owed under this part for any violations that the employer promptly cured pursuant to this section, the court must determine the applicability of Section 2699’s provisions regarding capped or reduced penalties and consider that the violations were cured without the need for extended litigation.

If the neutral evaluator or plaintiff does not agree that the employer has cured the alleged violations, the employer may file a motion to request the court to approve the cure and submit evidence showing correction of the alleged violations.  The court may request further briefing and evidentiary submissions from the parties.

All statements or evidence submitted for purposes of the early evaluation conference and all discussions at the early evaluation conference are subject to Section 1152 of the Evidence Code, which means that these documents are inadmissible to prove liability.  The early evaluation process need not extend beyond 30 days unless parties mutually agree to extend time.  Early evaluation conferences shall be conducted by a judge or commissioner or such other person knowledgeable about and experienced with issues arising under the code whom the court shall designate.

C. Procedures for Curing Labor Code Section 226 Violations

Starting October 1, 2024, if an employer seeks to cure only a section 226 violation, the employer is required to give written notice within 33 calendar days of the PAGA notice by certified mail to the aggrieved employee or representative and by online filing with the LWDA.  This notice shall include a description of actions taken and prevents the filing of a civil action.  If the alleged violation is not cured within 33 days, the employee may commence a civil action.

If the aggrieved employee disputes that the alleged violation has been cured, the aggrieved employee or representative must provide written notice by online filing with the agency and by certified mail to the employer, including specified grounds to support that dispute.  Within 17 calendar days of the receipt of that notice, the agency is required to review the actions taken by the employer to cure the alleged violation, and provide written notice of its decision by certified mail to the aggrieved employee and the employer.  The agency may grant the employer three additional business days to cure the alleged violation.  If the agency determines that the alleged violation has not been cured, or if the agency fails to provide timely or any notification, the employee may proceed with the civil action pursuant to Labor Code section 2699.  If the agency determines that the alleged violation has been cured, but the employee still disagrees, the employee may appeal that determination to the superior court.

Key Takeaways.  While it may be difficult to cure violations within 33 days, the new procedure requiring small employers to only submit a proposal to cure violations within 33 days provides a more realistic timeline.  Although it may still prove difficult for an employer to meet this deadline, it provides a better opportunity for small employers to reduce liability for PAGA violations.  Similarly, the process allowing employers to request an early evaluation conference might also provide useful in keeping defense costs down, allowing employers the opportunity to work towards resolving a case without incurring unnecessary litigation expenses.  However, while statements and evidence submitted for the early evaluation conference are not admissible, this process may still provide the plaintiff with further insight into potential issues that the plaintiff could later use to against the employer in court.

IV. Other Changes to PAGA

Aside from changes to penalties, curing violations, and new procedures for early resolution, there are a few other noteworthy changes.  Significantly, in order to have standing, unless the employee is represented by certain nonprofit legal aid organizations, the aggrieved employee must have personally suffered each of the violations alleged within the one-year statute of limitations period.  Previously, an aggrieved employee only needed to have personally suffered at least one of the alleged violations.  This change should reduce the amount of frivolous claims brought by employees who are simply on a fishing expedition to search for potential violations that they had not experienced.  Furthermore, aggrieved employees now receive a greater portion of the penalties recovered, as they are now entitled to 35% of the civil penalties recovered (up from 25%), with 65% of the civil penalties going to the LWDA.  Additionally, penalties are reduced by half if the employees' regular pay period is weekly rather than biweekly or semimonthly. This change corrects a previous oversight in the law, which essentially penalized employers who paid employees on a weekly basis double.

V. Conclusion

The PAGA Reforms provide employers with tools to reduce costs associated with defending against PAGA violations.  Reduced or capped penalties provide a strong incentive for employers to show prompt compliance with the Labor Code.  Furthermore, the revamped procedures for early resolution allow employers to pause litigation while an adequate cure is determined. 

For employers to best take advantage of the PAGA Reforms, it is advised that employers ensure their current policies and practices are compliant with the Labor Code and act quickly in response to receiving a PAGA notice alleging potential violations.  Employers should consult with legal counsel if they have any questions about the PAGA Reforms and to make sure that their policies and practices are up-to-date.