Implications of the PAGA Reform

On July 1, 2024, Governor Gavin Newsom signed legislation to make significant reforms to PAGA, with significant implications for small and large employers in California. At Libra Analytics, we provide data expert services to assist with navigating these changes, which compelled us to write an article discussing the updated PAGA claims process.

What is a PAGA Claim?

The Private Attorneys General Act (PAGA) was enacted in 2004, and it allows employees to sue their employer on behalf of the State of California for certain Labor Code violations. PAGA claims typically allege the same violations as California wage and hour class actions, such as meal and rest breaks, rounding, regular rate of pay, off-the-clock, inaccurate wage statements and so on. 

In a PAGA claim, the employees file for civil penalties (instead of individual damages) on behalf of themselves and other employees affected by the same violations (“aggrieved employees”). This allows employees to enforce labor laws collectively even without class certification. 

For more general information about PAGA claims, the Labor and Workforce Development Agency maintains a helpful FAQ page.

What are PAGA Penalties?

If a PAGA claim is successful, the court will impose civil penalties against the employers. The exact amount of the penalty can vary depending on the specific Labor Code violations, but penalties are usually assessed for each employee in each pay period when a violation took place. For example, the court may award $100 for each pay period with a meal period violation. Assuming biweekly pay periods, the penalties will add up to $2,600 in a year for a single employee.

When the PAGA penalties are collected:

• 65% goes to the State of California (Labor & Workforce Development Agency, or LWDA)
• 35% goes to the aggrieved employees

Note: the allocation used to be 75/25 before the 2024 PAGA reform.

Why are PAGA Claims Important for Employers?

The bad news is that PAGA claims can become very expensive for the unprepared employer, because the penalties add up quickly. In our experience as data experts, PAGA penalties will often far exceed the potential damages owed for the alleged Labor Code violations.

The good news is that proactive employers can minimize their exposure to PAGA penalties, especially since the legislative amendment of the PAGA laws (the “PAGA reform”) took effect on June 19, 2024. 

What are the most important changes after the 2024 PAGA Reform?

The PAGA reform represents a compromise between business and labor groups. The new legislation changed some key elements of PAGA, including:

• Plaintiff’s personal experience requirement (“stricter standing”): Under the prior law, a plaintiff employee could bring a representative PAGA claim even if they personally experienced only one violation, but claim penalties for other violations they didn’t personally suffer. Under the reforms, the plaintiff must have personally experienced each Labor Code violation alleged in the representative action in the relevant time period.
  
  
• Lower base penalties: the prior PAGA provided a typical penalty of $100 for the first pay period when a violation occurred, and a $200 penalty for each subsequent pay period with a violation (per person). The new PAGA rules impose a standard $100 penalty for each aggrieved employee per pay period, with some defined exceptions (such as malicious or fraudulent action from the employer).
  
  
• Penalty caps for employers who show proactive compliance: the new PAGA rules significantly reduce the penalties for employers who can show that they have taken reasonable steps to be in compliance.
  
  • A 15% penalty cap is imposed if the employer has taken reasonable steps to be in compliance before receiving a notice of violation
  • A 30% penalty cap is imposed if the employer has taken all reasonable steps to prospectively be in compliance within 60 days after receiving a PAGA notice
    
• Cure procedures and early evaluation process: under the new rules, employers have an opportunity to cure violations (in some cases, before litigation) and reduce penalties. In fact, an employer will not be required to pay a civil penalty if it has taken the required "reasonable steps" and cured a violation. The process is different for smaller employers (fewer than 100 employees) and large employers (at least 100 employees), but both may submit a proposal to cure alleged violations and end a civil action if the LWDA determines that the alleged violation has been cured.
  
  
• Penalty amounts are reduced for weekly pay periods: The old PAGA rules assessed penalties by pay period, regardless of the payment cycle (weekly, biweekly, semi-monthly). As a result, employers with weekly pay periods were imposed much higher penalties than employers using biweekly or semi-monthly pay periods. To avoid penalizing employees who pay their employees more frequently, the new PAGA rules standardized penalties by reducing the penalty amount by half for weekly pay periods.

What are the implications of the PAGA Reform?

The new PAGA reform provides strong incentives for employers to audit their wage and hour compliance and take quick remedial action if issues are identified. If the employer is able to show that it took “reasonable steps” to be in compliance, the exposure for penalties can be significantly reduced in case a PAGA claim is filed. And civil penalties may be completely avoided by a proactive employer who identifies and cures potential Labor Code violations.

The changes also mean that representative PAGA actions will likely have a more limited scope, since the plaintiff must have personally suffered each alleged violation. This will likely reduce the number of PAGA filings with extremely broad claims, which was an area of debate long before the 2024 PAGA reform (see Amaro v. Anaheim Area Management).

While the long-term consequences of the PAGA reform continue to unfold, our experience as data experts shows that PAGA continues to be a very active area of California wage and hour litigation.

What does a PAGA audit look like?

A PAGA audit may include conducting a compliance audit of the employer’s timekeeping and payroll data, reviewing written policies, providing compliance training to supervisors, and taking corrective action if any issues are identified. 

From the data expert’s perspective, the PAGA audit focuses on a detailed review of the employer’s timekeeping, payroll, and potentially HR records. Data experts can help with the data collection process and consult the employer’s HR, payroll or IT team about the project’s data needs. The investigation includes data analysis for typical wage and hour issues, such as meal and rest breaks, rounding, unpaid minimum wages, unpaid or incorrectly calculated overtime, and others. A consultation with the employer may reveal further potential issues, and additional data may be included in the audit to provide comprehensive analysis.

If potential wage and hour issues are identified, the data expert can calculate aggregate and individual damages, which can be used by the employer to remedy the violations.

Following the initial audit, periodic audits may be recommended. These tend to be much simpler than the initial audit, since the expert is already familiar with the data and new updates can be processed easily and earlier analytical steps can be followed to replicate the analyses. The goal of the periodic audits is to ensure continued compliance and to confirm remedy if issues were identified earlier.

Summary

Civil penalties from PAGA claims can escalate rapidly, presenting a significant financial risk for California employers. The recent PAGA reform has created a powerful incentive for employers to prioritize compliance before a claim ever arises. Businesses that conduct thorough PAGA audits, document “reasonable steps” toward compliance, and promptly correct issues can substantially reduce penalties or avoid them entirely. The new law’s penalty caps, cure opportunities, and early evaluation procedures all reward employers who understand their exposure and address it proactively. Given these incentives, PAGA audits have become a powerful compliance tool available to California employers.

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