PAGA Reform: AB 2288 and SB 92 Introduced

Seyfarth Synopsis: The language of the bills detailing the most substantive changes to PAGA in its 20-year history have been released. The bills have numerous provisions that benefit California employers including imposing more restrictive standing requirements for plaintiffs, codifying the need for manageability of PAGA claims, and reforming the penalty structure, along with several other changes detailed below.

On June 21, 2024, Assembly Bill 2288 and Senate Bill 92 were introduced proposing significant reform to the Labor Code Private Attorneys General Act of 2004. We look at each of the key changes below:

Plaintiff Must Experience The Labor Code Violations They Are Seeking To Pursue On A Representative Basis.  One of the major developments for California employers is that plaintiffs will now need to personally experience the Labor Code violation(s) they are seeking to recover on a representative basis. Following the Court of Appeal decision in Huff v. Securitas Security USA Services, Inc., employee-plaintiffs could pursue penalties affecting other employees, even if the plaintiff was not personally affected by violations affecting other employees—the plaintiff just needed to prove a single Labor Code violation. This meant that plaintiffs had a very low burden in order unlock a wholesale audit of an employer’s wage and hour practices.

SB 92 brings PAGA back to a more traditional approach to standing. Now plaintiffs must prove that they experienced the same Labor Code violations they seek to pursue on behalf of other employees.

This provision will go a long way in containing the scope of PAGA actions from the outset. It will be an incredibly important tool for employers to argue that the plaintiff’s claims should be adjudicated first in order to ascertain the scope of the claims for the representative group. Employers should affirmatively ask at the outset of any litigation that the Court bifurcate discovery and the proceedings so that the plaintiff’s individual claims are adjudicated first. For this same reason, the arbitrations of individual PAGA claims will become more important as the results of arbitration will define the scope of the representative action once the representative PAGA action proceeds in Superior Court.

N.b. PAGA actions brought by nonprofit legal aid associations that have been involved in PAGA litigation for at least 5 years are exempt from this new provision. Accordingly, the Huff concept of standing in PAGA actions will remain in actions brought by nonprofits.

Plaintiff Must Experience Their Labor Code Violation Within The One-Year Statute of Limitations.  Following the Court of Appeal decision in Johnson v. Maxim Healthcare Services, Inc., plaintiffs began to argue that there was no time limit on when they could have experienced a Labor Code violation. This argument, when successful, amounted to there being no statute of limitations on a plaintiff’s individual PAGA claims.

AB 2288 makes clear that the PAGA statute of limitations applies to the personal Labor Code violation that a plaintiff must experience to have standing to bring the PAGA action. This provision will serve to restore a more traditional concept of standing to PAGA.

Manageability.  One of the more recent battles in PAGA litigation has been manageability (or lack thereof) of PAGA claims. This culminated with the California Supreme Court’s decision in Estrada v. Royal Carpet Mills, Inc. which held that trial courts do not have the inherent authority to strike a PAGA claim on manageability grounds but that PAGA claims should be manageable and a trial court can, and should, use its full tool box of case management procedures at its disposal to ensure that a PAGA claim is effectively tried. AB 2288 explicitly enforces that sentiment and provides that a court “may limit the evidence to be presented at trial or otherwise limit the scope of any claim filed pursuant to this part to ensure that the claim can be effectively tried.”

Changes To Structure Of Civil Penalties.  PAGA previously subjected employers to a civil penalty of $100 for each aggrieved employee per pay period for an initial violation, and $200 for each subsequent violation. AB 2288 makes several changes to the structure of penalties available under PAGA:

1. 15% Cap on Penalties For Employers Who Take Reasonable Steps For Compliance. If an employer demonstrates that it “has taken all reasonable steps to be in compliance” with the law prior to receipt of a PAGA notice or a request for personnel records, then the available penalties are capped at 15% of the penalties sought. Examples of such reasonable steps include, but are explicitly not limited to, “conducted periodic payroll audits and took action in response to the results of the audit, disseminated lawful written policies, trained supervisors on applicable Labor Code and wage order compliance, or took appropriate corrective action with regard to supervisors.” Ultimately, as this is a non-exhaustive list, whether the 15% cap is applied will be to the discretion of the Court as to whether the employer took reasonable steps to achieve compliance.

2. 30% Cap on Penalties For Employers Who Take Steps For Compliance After Receipt Of PAGA Notice. The bill provides that if an employer “has taken all reasonable steps to prospectively be in compliance with all provisions identified in the notice” then the available penalties are capped at 30%. Like the application of the 15% cap, this is a test to be applied by the Court considering the totality of the circumstances.

3. Cap On Penalties For Wage Statement Violations That Do Not Cause Injury. Huge penalties for innocuous wage statement violations was a posterchild for the PAGA ballot initiative. The bill provides that if a wage statement violation under Labor Code § 226 does not cause harm to the plaintiff then the available penalty is capped at $25. Additionally, the bill confirms that penalties for Labor Code § 226 violations are the only penalties available for wage statement violations, foreclosing arguments by plaintiffs that they can double-dip on wage statement claims and seek penalties under Labor Code § 226.3 as well.

4. Limitations On When $200 Penalty Available. Since PAGA’s inception there had been plenty of disagreement as to when the $200 penalty for a “subsequent violation” could be awarded. Plaintiffs argued that every violation other than the first one was a “subsequent violation” and therefore the vast majority of penalties that employers would be liable for would be $200 subsequent violation penalties rather than $100 penalties. In turn, employers argued that a violation was only a “subsequent violation” if there had previously been a court or agency finding of a violation. The language of the bill confirms that a $200 penalty for a subsequent violation is only available if there has been a court or agency determination that a violation had occurred.

The bill also introduces a second circumstance where a $200 penalty is available: if the court determines that the employer’s conduct which caused the violation was malicious, fraudulent, or oppressive. This is the same standard for imposition of punitive damages in California.

Ultimately, the bill does not create any increased or higher penalties under PAGA than which previously existed. However, the threshold to attain the higher $200 penalty is more precisely defined and ultimately harder for plaintiffs to attain.

5. No Derivative Penalties. Another cause of the large possible exposure to employers under PAGA was the penalties for derivative Labor Code violations. Plaintiffs would seek a penalty for underpayment of wages and also penalties for derivative violations such as § 203 (failure to pay the underpayment at time of termination), § 204 (failure to pay the underpayment in the pay period it was earned), § 226 (failure to list the underpayment on the wage statement for the pay period) etc. As a result, a single violation could result in numerous penalties. The bill makes clear that penalties cannot be awarded for derivative claims. Instead, a single violation will only give rise to a single penalty.

6. Cap On Penalties For Isolated Errors. Where violations occur for less than 30 days or four consecutive pay periods the maximum penalty available is $50.

7. Court’s Discretion To Assess Penalties Is Codified. It has long been accepted that the Court has discretion, based on the facts and circumstances of the case, in reducing the penalties to be imposed on employers to avoid an award that is unjust, arbitrary, oppressive, or confiscatory. The Court’s discretion to adjust the amount of penalties awarded based on the circumstances of the case has been codified in the bill.

8. Employers With Weekly Pay Periods Get Relief. PAGA imposes penalties on a pay period basis. This meant that if an employer operated on a weekly pay period, they were exposed to an award of twice as many penalties than if they operated on a biweekly pay period. The bill addresses this unfairness and provides that any penalty amount for an employer operating on a weekly pay period is reduced by half.

9. Employees Receive Greater Portion of Penalties Awarded. Famously, any award under PAGA was distributed 75% to the California Labor & Workforce Development Agency and 25% to the affected employees. The bill increases the employees’ share of penalties to 35%.

New Cure Provisions.  PAGA previously had a limited “cure” provision which allowed employers to cure or fix the alleged Labor Code violations included in a plaintiff’s PAGA notice. This mechanism was seldom used by employers as any attempt to cure was often ignored by plaintiffs and the PAGA claims would still proceed in Court. AB 2288 overhauls PAGA’s cure provision, allowing more violations to be cured and introducing new mechanisms that employers can take advantage of.

AB 2288 now allows violations of Labor Code § 226 (wage statements – previously, only certain wage statement violations could be cured), § 226.7 (failure to pay meal/rest period premiums), § 510 (overtime), and § 2802 (expense reimbursement) to be cured. This expansion includes some of the most frequently alleged violations under PAGA.

For small employers (defined as under 100 employees during the relevant period), the employer can notify the LWDA that it would like to cure the alleged violations. The agency will then arrange a settlement conference with the plaintiff and employer in an attempt to reach an early resolution for the matter, like the conferences held by the Labor Commissioner for individual wage claims.

For employers with more than 100 employees, the bill allows the employer to file a request for a stay and Early Neutral Evaluation with the court which requires the court stay all discovery and responsive pleading deadlines. The court will then provide a ruling as to whether the cure was sufficient in addressing the violations alleged in the PAGA notice and, if so, preclude the PAGA claims from proceeding in court.

While it remains to be seen how the courts will handle these new requests for Early Neutral Evaluations, it will likely put an onus on plaintiffs to provide more than boilerplate allegations in their PAGA notices. Employers should be given sufficient notice to be afforded the opportunity to cure and the Early Neutral Evaluations (and their associated stays) will provide an early opportunity for employers to highlight any vague or conclusory allegations in plaintiff’s PAGA notices.

Injunctive Relief Is Now A Remedy Available Under PAGA.  Previously, the only available remedies under PAGA were civil penalties and attorneys’ fees. AB 2288 adds injunctive relief as an available remedy. This permits PAGA plaintiffs to seek injunctive relief in any circumstances where the LWDA could seek injunctive relief.

The legislation specifies that regardless of when it is signed into law by Governor Newsom, the new provisions will apply to PAGA claims where the PAGA authorization letter was submitted to the LWDA on or after June 19, 2024.