Newsom, Business Groups Agree on PAGA Reforms

California Governor Gavin Newsom, legislators and business groups struck an agreement this summer to reform a law that has become a costly thorn in the side of employers operating in the state: the Private Attorneys General Act.

The deal averted a showdown over a business-backed initiative slated to be on the November ballot that would have repealed the law outright. The reform legislation seeks to keep the law intact while limiting frivolous litigation by allowing employers to make things right after a PAGA action has been filed.

PAGA allows workers who allege they have suffered labor violations, like unpaid overtime or being denied mandatory meal and rest breaks, to file suit against their employers rather than the more typical route of filing a claim with the state Department of Labor Standards Enforcement (DLSE).

The law essentially allows employees, represented by private attorneys, to stand in for the state and all their co-workers in suing their employer.

One reason workers pursue PAGA claims is the tremendous backlog that the DLSE faces, and they do so in the belief that the claim will be handled more quickly. However, a report by the Fix PAGA Coalition found that workers filing claims directly with the DLSE wait fewer than 10 months on average for their awards, compared to 23 months for PAGA court case awards.

PAGA settlements have exploded in recent years, jumping 1,100% between 2016 and 2022, according to a study by the California Chamber of Commerce.

Proceeds from settlements are split 25% with the employee who filed the case and the rest with the state, which collected more than $200 million in civil penalties during the 2022-2023 fiscal year.

The Fix PAGA Coalition’s report found that non-profits, small businesses and other employers have paid out nearly $10 billion in PAGA case awards since 2013, with attorneys receiving the far bigger portion of the settlements and employees consistently receiving only minimal payments.

Backers of the PAGA ballot initiative agreed to withdraw their measure if the legislation is passed and signed into law, which it was on July 1.

Highlights of the agreement

While the language of the legislation has yet to be introduced, the governor’s announcement highlighted that the measure would:

Redefine ‘standing’ — It would require workers to personally experience the alleged violations brought in a claim, unlike current law.

Reduce and streamline litigation — The proposal would:

• Expand the Labor Code sections that can be cured to reduce the need for litigation and make employees “whole” more quickly.
• Protect small employers by providing a more robust right to cure process through the Labor and Workforce Development Agency to reduce litigation and costs.
• Codify a court’s ability to limit the scope of claims presented at trial, in order to improve manageability of a complaint.

Reforms penalty structure — The proposal would:

• Cap penalties on employers that quickly fix policies and/or practices to make workers whole after they receive a notice of a PAGA action. It also caps penalties on employers that proactively comply with the Labor Code before receiving a PAGA notice.
• Create new, higher penalties for employers who act maliciously, fraudulently or oppressively when they violate labor law.
• Increase the portion of awards allocated to employees to 35% from the current 25%.

Newsom also agreed to pursue a trailer bill to give the Labor Department the ability to expedite hiring and filling vacancies, in order to improve and expedite enforcement of employee labor claims.

The takeaway

Jennifer Barrera, CEO of the California Chamber of Commerce, said in a prepared statement: “This package provides meaningful reforms that ensure workers continue to have a strong vehicle to get labor claims resolved, while also limiting the frivolous litigation that has cost employers billions without benefiting workers.”

While the legislation passed will not eliminate PAGA, stakeholders predict it would go a long way towards reducing frivolous claims.