By Shireen Wetmore, Nick Baltaxe, Jenifer A. Riley, and Gerald L. Maatman, Jr.
Duane Morris Takeaways: On June 18, 2024, Governor Gavin Newsom of California announced that business and labor groups have reached an agreement to reform California’s Private Attorneys General Act (“PAGA”). The bill is aimed at avoiding the inclusion of the initiative to repeal and replace the PAGA, which would otherwise be included on the November ballot. If the Legislature signs off on the bill, proponents of the ballot initiative have agreed to withdraw the referendum. It must be withdrawn by June 27, 2024. While the exact language of the bill is not yet public, Governor Newsom’s and interest group press releases hint that the changes will have a positive impact on employers and greatly impact PAGA litigation going forward. Given the nature of PAGA litigation faced by employers, these developments are of utmost importance to companies operating in California.
We’ve Got A Deal!
Hot off the presses! Governor Newsom just announced on June 18, 2024, that labor and business interests have inked a deal that would avoid the placement of the PAGA referendum on the November ballot. On November 5, 2024, the California voters would have had the opportunity to vote on the “California Employee Civil Action Law and PAGA Repeal Initiative,” which would have repealed the PAGA and replaced it with the “Fair Pay and Employer Accountability Act.” This new Act was aimed at addressing many of the criticisms of the PAGA and proposed changes including providing more power to the Labor & Workforce Development Agency (“LWDA”) for enforcement, allowing employees to recover all of the recovered penalties instead of only 25%, and eliminating attorneys’ fees entirely.
Instead, Cal Chambers and Labor representatives negotiated a compromise bill that would avoid the ballot initiative while providing much needed reforms to the PAGA. While the full language of the bill has not yet been released, nor has the referendum been officially withdrawn, the proposal purportedly includes:
Penalty Structure Reforms, including capped penalties for employers who quickly take steps to “cure” alleged violations; new, higher penalties on employers who act maliciously, fraudulently or oppressively in violating labor laws; and allocation of 35% (instead of 25%) of penalties to aggrieved employees.
Streamlined Litigation, including expansion of the Labor Code sections that may be cured; more “robust” cure processes “through the Labor and Workforce Development Agency (LWDA)” (aimed at protecting small businesses and potentially permitting employers to seek to cure in partnership with the LWDA to avoid litigation); and importantly, the new legislation is intended to codify a court’s ability to limit the scope of claims presented at trial and to ensure cases can be managed effectively.
Injunctive Relief and Standing Requirements, including allowing courts to compel businesses to implement changes in the workplace to remedy labor law violations and requiring the employee to personally experience the alleged violations brought in a claim.
If this last item is accurate, it will have a huge impact on defense strategies and place significant pressure on plaintiffs to demonstrate harm before bringing broad allegations against employers. Recently reported details not in the official press release indicate that there will still be some attorney fees available but that attorneys’ fees may be limited in some way.
The deadline to remove the referendum from the ballot is June 27, 2024, and the proponents have agreed to withdraw the measure once the legislation is passed. We anticipate the full release of the proposed legislation later this week. In the meantime, here is the Governor’s announcement.
Needless to say, the terms of the deal will have a major impact on litigation strategies in PAGA cases. Employers will want to look closely at the procedural posture of pending cases and consider revising litigation strategy in those matters as more details emerge.
What is the PAGA?
The Labor Code Private Attorneys General Act, or “PAGA,” was passed in 2004 and authorizes employees to “step into the shoes of the state” and file lawsuits to recover civil penalties on behalf of themselves, other employees, and the State of California for Labor Code violations. Standing requirements were minimal and the statute was designed to allow employees (and their counsel) to enforce the Labor Code while funneling collected penalties to the State’s coffers. While the aggrieved employee had to follow certain notice requirements, including allowing the Labor and Workforce Development Agency (“LWDA”) an opportunity to investigate the claims, and a nominal opportunity to cure alleged violations, there was little guidance on the cure process and in practice the Labor Commissioner rarely investigated claims. Subsequent case law developed to confirm that class action standards would not apply to these representative actions. Combined with the low standing requirements and minimal notice standards, PAGA matters proliferated, threatening employers statewide with bet-the-company litigation alleging penalties far outstripping any alleged damages by millions upon millions of dollars. There was no requirement that an aggrieved employee even suffer all the violations alleged in their lawsuit.
The PAGA permits recovery of civil penalties on behalf of the plaintiff and “aggrieved employees” for violations of the Labor Code during a one-year lookback often on a per employee and/or per violation basis, plus attorneys’ fees. Seventy-five percent of recovered penalties are allocated to the State, while the aggrieved employees retain 25% of the award. Since the inception of PAGA in 2004, the number of notices filed with the LWDA has skyrocketed, and the number of PAGA lawsuits has increased exponentially in the last couple of years.
The Referendum
The PAGA has faced significant criticism since its implementation. Many noted that the lack of a “certification” process allowed employees to represent entire workforces with minimal protections against abuse. As a result, employers were often forced to settle for large sums of money simply to avoid the cost or inconvenience of company-wide or state-wide discovery and litigation, even in the absence of any evidence of unlawful conduct. Additionally, some argued that the PAGA primarily benefits attorneys at the expense of employees, as attorneys’ are allowed to take a portion of the employees’ already limited recovery for attorneys’ fees. While employers had a few successes in the courts, California courts have generally supported a broad interpretation of a plaintiff’s ability to pursue a PAGA action and struck down repeated attempts by employers to narrow the scope of these cases.
With these criticisms in mind, an initiative to repeal PAGA began to work its way towards the ballot, finally receiving enough support to be placed on the November 2024 ballot. Specifically, this ballot initiative, if passed, would have replaced the PAGA with the “Fair Pay and Employer Accountability Act.” This Act was meant to curtail many of the general criticisms levied against the PAGA, including providing more power to the Labor & Workforce Development Agency (“LWDA”) for enforcement, allowing employees to recover all of the recovered penalties instead of only 25%, and eliminating attorneys’ fees entirely.
However, opponents of the initiative argued that the PAGA was intended to provide a unique enforcement mechanism to protect employees and sought to avoid a vote that could eliminate this powerful tool. The ongoing negotiations between business and labor were aimed at finding a compromise that would avoid the inclusion of the initiative on the ballot, protecting employers from crushing litigation and protecting employees from Labor Code violations.
Implications For Employers
Change is in the air. While the latest proposal may take effect, more grounds will need to be covered. Stay tuned to these developments, which we will cover in future updates on our Blog.
What’s next?
The official language of the bill will be released by June 24, 2024. If passed, the ballot initiative will be withdrawn. The latest date to withdraw the initiative is June 27, 2024, so we anticipate the Legislature will move quickly. While the specifics are not yet known, the language of the bill could have a significant impact on PAGA actions going forward and litigation strategy for any pending actions as well. Stay tuned for a deep dive into the bill once the proposed language is released!