Category: PAGA Actions

By Nick Baltaxe, Shireen Wetmore, Jennifer Riley, and Gerald L. Maatman, Jr.

Duane Morris Takeaways: PAGA reform is here.  On June 27, 2024, the California Legislature signed off on two bills (AB 2298 and SB 92) resulting in significant reforms to California’s Private Attorneys General Act (“PAGA”). Governor Newsom previously announced the deal between business and labor groups, which also means the referendum to repeal PAGA will not appear on the November ballot.  Once signed into law by the Governor, the new reforms will bring sweeping changes to the PAGA.  These changes aim to curtail many of the criticisms that have been levied at the PAGA from both groups.  The changes apply to PAGA actions in which the PAGA notice was filed on or after June 19, 2024 and it is anticipated that the changes will also have an immediate impact on litigation strategy in pending PAGA actions filed before that date as well.     

California Legislature Approves PAGA Reform Bills

After Governor Newsom announced on June 18, 2024, that labor and business interests had inked a deal significantly altering the PAGA, the California Legislature quickly moved to approve two bills (AB 2288 and Senate Bill 92).  Proponents of the initiative to repeal PAGA had agreed to withdraw the referendum if the bills were passed within the deadline to withdraw the referendum.  The bills were approved just in the nick of time — on June 27, 2024, which was both the deadline to withdraw the the PAGA referendum and the date the two bills were passed.  These changes include reforms to the penalty structure, new defenses for employers, standing requirements limiting the scope of PAGA actions, and a new “cure” process for both small and large employers, among other changes that will significantly impact litigation strategy for PAGA claims (and likely spawn new legal questions as the law is tested in the field and the courts.)  The reforms do not alter the requirement that a claimant first file a notice with the Labor & Workforce Development Agency (“LWDA”) also known as an LWDA or PAGA notice.  These reforms affect all PAGA notices filed on or after June 19, 2024, with some exceptions, described in further detail below.

Penalty Structure Reforms

One of the primary complaints from business interests, in particular small business interests, was that the PAGA’s penalty structure frequently resulted in potential penalties in the millions upon millions of dollars based on the barest of allegations, often of highly technical violations of the Labor Code.  Employers complained that these violations did not implicate any actual harm to employees and that there could be compounded penalties for so-called “derivative” claims.  The compounding of penalties meant plaintiffs would try to stack multiple penalties based on the same alleged act or omission by an employer.  The new PAGA addresses several of these complaints, eliminating some penalties altogether, limiting the availability of penalties for certain derivative claims, and clarifying how penalties are calculated.

• Clarity on Initial vs. Subsequent Violations: ­­Previously, PAGA penalties were set at $100 for “initial” violations of the Labor Code and $200 for any “subsequent” violations, unless otherwise prescribed by statute.  The reforms removed the distinction between “initial” and “subsequent” violations — now the civil penalty for an alleged violation is $100 for each aggrieved employee per pay period.  However, a court may reduce a penalty award in order to avoid an award that is unjust, arbitrary and oppressive, or confiscatory.  See Lab. Code § 2699(e)(2).  Repeat offenders may be subject to higher penalties.
• Reduced Penalties for Isolated Events: If the violation resulted from an isolated, non-recurring event (e., the violation had not extended beyond the lesser of 30 days or four consecutive pay periods), the penalties are further limited to $50 per aggrieved employee per pay period. See Cal. Lab. Code § 2699(f)(2)(A)(ii).
• Reduced Penalties for Wage Statement Violations: If the violation is a violation of Labor Code section 226 for non-complaint wage statements, additional limitations apply.  For violations of § 226(a) (other than (a)(8) regarding the legal name or address of the employer), the penalty is $25 for each aggrieved employee per pay period if the employee could promptly and easily determine accurate information from the wage statement or if the employee would not be confused or misled about the correct identity of their employer.  If the violation involves § 226(a)(8), the penalty is $25 if the employee would not be confused or misled about the correct identity of their employer or, if their employer is a farm labor contractor, the legal entity that secured the services of that employer.  These limitations do not apply if the employer failed to provide a wage statement to the employee.  See Lab. Code § 2699(f)(2)(A)(i).
• Special Rules for Increased Penalties: In lieu of the “subsequent violation” penalty, a $200 penalty per aggrieved employee per pay period can now only be levied in certain circumstances.  Specifically, this amount may only be awarded where an agency or court has determined that the employer’s policy or practice led to that same violation of the Labor Code in the previous five years or if a court determines that the employers’ conduct was malicious, fraudulent, or oppressive.  See Lab. Code § 2699(f)(2)(B).
• No Additional Recovery For Derivative Penalties Under Labor Code Sections 201, 202, or 203: An employee can no longer recover additional penalties for violations of Labor Code section 201, 202, or 203, which address when an employee must be paid upon resignation or termination, when seeking recovery for underlying wage violations.  The same applies to Labor Code sections 204 and 226, unless the violation meets heightened scienter requirements as outlined below. See Lab. Code § 2699(i).
• Limited Recovery Under Labor Code Sections 204 and 226: An employee can recover additional penalties for Labor Code section 204, which addresses when an employee must be paid during their employment, if that violation is willful or intentional.  Additionally, an employee can recover additional penalties for violation of Labor Code section 226, which mandates that certain information be included on wage statements, if that violation is knowing, intentional, or involves a complete failure to provide a wage statement.  See Lab. Code § 2699(i).
• Pay Period Defined: PAGA originally imposed monetary penalties on a per pay period basis. This unfairly penalized employers that paid employees on a weekly basis, as opposed to a biweekly basis.  The reforms address this disparity, by clarifying that the recoverable penalties will be reduced by 50% where an employer’s regular pay period is weekly rather than biweekly.
• Employee’s Share Of Recovery Increased: The percentage of penalties awarded to the aggrieved employees has been increased from 25% to 35%.

The “Cure” For Employers’ Ills

The reforms also introduce a new and more complicated “cure” process for avoiding or reducing penalties.  Employers may take steps before a complaint is filed, or during litigation, to limit potential penalties.

• Pre-LWDA Notice Penalty Cap: If, before receiving an LWDA notice or a request for records from the employee, an employer takes “all reasonable steps” to cure the violations alleged in the LWDA letter, awardable penalties are now capped at no more than 15% of the total available penalties.  See Lab. Code § 2699(g).
• Post-LWDA Notice Penalty Cap: The penalty cap is increased to 30% if the “reasonable steps” are taken within 60 days of receiving the LWDA Notice.  See Lab. Code § 2699(h).

An employer takes “all reasonable steps” if it conducts periodic payroll audits and takes action in response to those audits, disseminates lawful policies, trains supervisors on applicable Labor Code and wage order compliance, and takes appropriate corrective action with regard to its supervisors.  Whether or not an employer’s conduct was reasonable will be evaluated by the totality of the circumstances. See Cal. Lab. Code § 2699(g)(2).

Eliminating Penalties Altogether

In addition to these caps, there is now a path towards the complete elimination of PAGA penalties if an employer cures an alleged labor code violation.  Specifically, if an employer takes the “reasonable steps” defined by statute and actually cures an employee’s unpaid wages, the employee can no longer recover PAGA penalties for the Labor Code violation.  The “cure” is effective when the employee is “made whole,” or provided an amount sufficient to recover any unpaid wages due to the alleged violations going back three years from the date of the notice.  However, this amount must also include seven percent interest, liquidated damages that are required by statute, and a reasonable attorneys’ fees award as determined by the court or agency.  Practically speaking, this “cure” option will likely still require costly outlays to ensure all fees are covered and potentially litigation over the reasonableness of the claimed attorneys’ fees.  We anticipate that, in response to these complicated requirements, employee’s may start to include in the LWDA notice a calculation of the proposed “cure” amount, much like an initial settlement demand.

New Standing Requirement

Prior to the passage of these bills, judicial interpretations of the statute held that an employee who experienced a single Labor Code violation could bring a claim for violations of any provision of the Labor Code on behalf of aggrieved employees, even for violations the employee bringing the claim never experienced.  Now, an employee must have suffered every violation he or she attempts to bring on behalf of other aggrieved employees.  This inclusion effectively negates the California Court of Appeal’s ruling in Huff v. Securitas Security USA Services, Inc., 23 Cal.App.5th 745 (2018), which held that an employee could seek PAGA penalties for any and all Labor Code violations, even if the employee had not experienced those violations. The new standing requirement will narrow the scope of PAGA actions to only those allegedly suffered by the PAGA plaintiff—and by extension add some guard rails to discovery as well as the size of the representative group at issue.

Manageability Is Back!

The bills also codified a long-litigated potential defense known as “manageability.”  Specifically, in January of this year, the California Supreme Court struck down the limited defense that employers had been using to try to reign in PAGA matters, holding that trial courts did not have the inherent authority to strike a claim as unmanageable.  See Estrada v. Royal Carpet Mills, Inc., 15 Cal.5th 582 (2024).  Now, courts are empowered by statute to limit evidence presented at trial or the scope of the claims to ensure that the case is manageable and may be effectively tried.  It will remain to be seen whether requests for trial plans enter the employer’s toolbox in these representative matters as they have in California class actions.

Injunctive Relief

Another criticism of the PAGA was the inability of a PAGA plaintiff to seek injunctive relief, effectively making PAGA a bounty-hunter statute with no real teeth to effectuate change.  Under the new reforms, an employee can now seek injunctive relief related to alleged Labor Code violations.  Employers should be prepared for new PAGA claims to include requests that the Court require the employer to modify their practices to ensure compliance with Labor Code provisions.  This is reminiscent of the injunctive relief available to plaintiffs under California’s Unfair Competition Law.  Labor had identified this provision as a key priority for PAGA reform and comments from representatives from the business community reflect the common interest in working towards full compliance with the Labor Code for all employers and employees.

New Early Evaluation Procedures For Large And Small Businesses

The reforms introduce new procedures both with the LWDA and the courts to allow for effective litigation, and potential early resolution, of these claims.

For PAGA notices (and their associated claims) filed on or after June 19, 2024, employers who employed at least 100 employees during the PAGA period can now request an “early evaluation conference” and a request to stay the proceedings before or simultaneous with the employer’s responsive pleading.  This request must include a statement from the employer identifying which allegations it disputes and which allegations it will cure.  The court will then set an early evaluation conference.  To the extent the employer stated they would cure any of the alleged violations, the court may also ask the employer to submit to the neutral and plaintiff, on a confidential basis, the employer’s plan to cure the deficiencies.  If other violations remain in dispute, the neutral may stay the consideration of the cure plan or agreement until after the litigation of the disputed issues.

If the neutral approves the cure plan, the employer must submit evidence within ten days showing that the cure occurred. If the neutral, employer, and employee all agree the violations have been cured, they will submit a joint statement to the court setting forth the terms of their agreement.  If the neutral or employee does not agree that the violation was cured, the employer may file a motion to request the court to approve the cure.  The employer can submit evidence with this motion showing that the alleged violations were corrected.  Any PAGA penalties calculated with these cures must take into account other limitations and caps on penalties that would be applicable due to the prompt cure.

Smaller employers have a separate early evaluation process.  Before October 1, 2024, employers with fewer than 100 employees during the PAGA period cannot take advantage of this early conference.  However, starting October 1, 2024, employers with under 100 employees can submit a confidential proposal to the LWDA within 33 days of their receipt of notice that lays out their exact plan for the cure.  The LWDA can make a determination on the sufficiency of the cure at the outset or set a conference to determine the sufficiency of the cure.

If the cure is facially sufficient or if the LWDA believes a conference is needed to discern the sufficiency of the cure, the LWDA will set a conference.  This is an accelerated timeline, as the LWDA must rule on the plan within 14 days of its submission and the conference must occur within 30 days of that date.  At this conference, the LWDA will discern if the cures are sufficient, whether or not any additional information is needed, and set a deadline to complete the cure.

When the employer completes the cure, it must provide to the LWDA and the plaintiff a sworn notification to the employee and agency that the cure is completed, accompanied by a payroll audit and check register if the violation involves a payment obligation.  The LWDA must confirm whether the cure was completed within twenty days of receiving the cure documents.  If the LWDA preliminarily believes the violation has been cured, the LWDA must provide notice to the plaintiff that the cure is complete.  If a plaintiff disagrees with the decision, the plaintiff may request a hearing on that determination.  If the LWDA confirms the violation was cured, the employee cannot continue with a civil action.  The employee can also appeal this determination to the superior court, although any payment the plaintiff received as part of the cure process will offset any judgment later entered with respect to that violation if the superior court concludes the agency abused its discretion in finding the cure was adequate.

However, if the LWDA believes the cure proposal is not sufficient, the employee can proceed with a civil action.  Importantly, if this process extends beyond the 65-day timeframe for the investigation by the LWDA, the statute of limitations on the PAGA claims are tolled.  As of October 1, 2024, employers with fewer than 100 employees during the PAGA period can also request the early evaluation conference described above for larger employers.  The employer’s submission of a cure proposal to the LWDA does not prevent the employer from requesting the early evaluation conference.  However, no employer can use this notice and “cure” provision more than one time in a 12-month period for violations of the same provision, regardless of the location of the worksite or if it did not cure that same violation upon prior notice.  See Cal. Lab. Code § 2699.3(d)

There is also a separate process if the only alleged violation the small employer will seek to cure is a violation of Labor Code section 226.  In that case, the employer can cure the deficiency within 33 days of the postmark date of the notice and file notice with a description of the cure to both the LWDA and the plaintiff.  If the plaintiff disputes this cure, he or she may file notice describing why the cure is being disputed.  This process is also on an accelerated timeline, and the LWDA must make a determination within 17 days of receipt of that dispute.  The LWDA can either confirm the cure, provide an additional three days for the employer to complete the cure, or allow the employee to file a PAGA claim for violation of Labor Code section 226.  If the LWDA does not respond, the employee can continue with his or her PAGA claim.  This determination can also be appealed to the superior court.

Impact On Employers and Litigation Strategy

While the focus may be on the reduction of penalties, the passage of these bills has also ushered in a new era for employers.  Not only will this greatly impact litigation strategy when dealing with PAGA claims, but employers now have a tight timeline in which to make important strategic decisions regarding things like election into early evaluation, cure, or other alternative dispute resolution.  Many are celebrating the reforms, but it remains to be seen how these reforms will impact PAGA litigation generally.  Because the reforms only apply as of June 19, 2024, employers with pending PAGA matters will want to look closely at the reforms and their cases to see whether and how the reforms will impact those pending matters.  In addition, we anticipate that there will be some bumps as the LWDA and the courts work through new questions raised by these reforms.  Each case is unique and employers should work closely with counsel to evaluate each claim.

What Should Employers Do Next?

As always, it is important to maintain up to date, compliant policies and practices and ensure your teams are trained on those policies.  If you are hit with an LWDA notice, take prompt action to evaluate whether one of these new alternative procedures will benefit your company.

Please stay tuned for additional steps you can take in light of these reforms.

If you have any questions about this post, please feel free to contact any of the wage-and-hour attorneys in our Employment, Labor, Benefits and Immigration Practice Group or your Duane Morris contact.

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!

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jerry Maatman and Shireen Wetmore and associates Nathan Norimoto and Nick Baltaxe with their discussion of 2023 developments and trends in PAGA litigation as detailed in the recently published Duane Morris PAGA Review – 2024.

Check out today’s episode and subscribe to our show from your preferred podcast platform: Spotify, Amazon Music, Apple Podcasts, Google Podcasts, the Samsung Podcasts app, Podcast Index, Tune In, Listen Notes, iHeartRadio, Deezer, YouTube or our RSS feed.

Episode Transcript

Jerry Maatman: Welcome listeners. Thank you for being here for our weekly podcast, the Class Action Weekly Wire. I’m Jerry Maatman, partner at Duane Morris, and joining me today are my three most favorite California colleagues, Shireen, Nick, and Nathan. Thank you so much for being on our podcast.

Shireen Wetmore: Thanks, Jerry. Happy to be part of the podcast.

Nathan Norimoto: Thanks, Jerry, glad to be here.

Nick Baltaxe: Thank you, Jerry. It’s always a pleasure.

Jerry: Today on the podcast we’re discussing this year’s edition of the Duane Morris PAGA Review. This is a unique publication offered in the e-book format from our Duane Morris Class Action Defense Blog. Shireen, can you tell our loyal readers a bit about this year’s book?

Shireen: Absolutely, Jerry. So for many years, actions under the California Private Attorneys General Act, or PAGA, were used by plaintiffs or the plaintiffs’ bar as a workaround to arbitration agreements between employers and employees. In 2022, this strategy had its first big step back following a key decision by the United States Supreme Court in Viking River Cruises. Then, just last year another big decision came down in the California Supreme Court in Adolph v. Uber, adding to the mix and swinging a smidge in the other direction. To assist with understanding what this means for employers facing PAGA claims, Duane Morris has released the Duane Morris Private Attorneys General Act Review, and 2024 is the latest edition of this annual publication. It analyzes key PAGA rulings and litigation developments in 2023, and the significant trends that are apt to impact these types of representative actions in 2024. We hope that companies and employers will benefit from this resource, and that will aid them in their compliance with these evolving laws and standards.

Jerry: After practicing law for four decades, I’ve always thought that PAGA representative actions are some of the most vexing and challenging and difficult cases to defend. Nathan, what are some of the key takeaways for employers in terms of developments over the past 12 months?

Nathan: Well, according to data maintained by the California Department of Industrial Relations, the number of PAGA notices filed with the California Labor and Workforce Development Agency, or the LWDA, has increased exponentially over the past two decades. At the same time, the plaintiffs’ bar in California has used PAGA actions to circumvent workplace arbitration agreements that include class action waivers on the grounds that PAGA claims were somehow different than class actions, and therefore not covered by arbitration defenses. But this PAGA workaround has suffered significant setbacks in 2022 and 2023.

Jerry: If one keeps a litigation scorecard, it kind of changes by the inning – it’s an area that’s very much in flux. Nick, what are some of the setbacks that employers experienced over the past year in terms of defense of PAGA representative actions?

Nick: Well, Jerry, in July of 2023, the California Supreme Court issued its ruling in Adolph v. Uber. The court held that the PAGA plaintiff’s individual claims could be compelled to arbitration, but that the class claims or the representative claims could not be. The court also ruled that the plaintiff retains standing to maintain that representative PAGA claim so long as they’re an aggrieved employee. The court said that if the plaintiff loses an arbitration, they are not an aggrieved employee, and therefore lack standing. However, if the plaintiff prevails or settles their individual claims in arbitration, they could then return to court to prosecute their non-individual representative PAGA claims.

Jerry: Our Duane Morris Class Action Review in 2024 examined 1,300 rulings. By my way of thinking, I think that this particular ruling by the California Supreme Court may be the most important of all of those rulings. Shireen and Nick, I’d be interested in your takeaways of what this means for employers going forward.

Shireen: That’s a great question, Jerry, I think, in the wake of Adolph, the stakes for employers in individual PAGA arbitrations are really high. Employers facing PAGA claims should conduct an early assessment of the plaintiff’s individual claims, and if they are not meritorious, aggressively defend the matter, because a win in arbitration will completely extinguish the court case as well. We’re already seeing PAGA plaintiffs attempt to avoid arbitration through increasingly tenuous theories, or attempt to circumvent these agreements altogether through really creative pleading. It remains to be seen if these pleading strategies will be condoned by the California courts, but it’s a big, big issue for employers.

Nick: Another significant issue for employers is the recent Estrada decision, which struck a blow to employers facing PAGA claims by removing a defense that we were seeing become a little bit more common – the lack of manageability. The California Supreme Court encouraged PAGA plaintiffs to be prudent on their approach to their PAGA theories. However, usually that prudence is not seen in practice. While the decision did effectively remove the lack of manageability as a ground for dismissal, the decision did leave open an employer’s ability to seek dismissal on other due process grounds.

Jerry: I think the watch words are that in 2024, it’s probably even more difficult for employers to defend PAGA actions than it was last year. Nathan, do you have any inside baseball tips for employers in terms of this most recent California Supreme Court ruling, and what it may mean?

Nathan: Definitely, I agree. I think this is a game changer for employers operating in California. The Estrada court held in a unanimous decision that trial courts lack inherent authority to dismiss plans under PAGA with prejudice, to do the lack of manageability. The court, however, declined to address whether and under what circumstances, a defendant’s right to due process might ever support striking a pocket claim. As such. This decision in Estrada is really important for employers and their decision makers in California to read as we move forward in 2024.

Shireen: I would definitely agree with that. I think we’re seeing more and more pile-on PAGA matters where employers are facing either copycat or serial PAGA claims, and without any real adjudication of the claims that are identified in the PAGA letter, especially in the case of these kitchen sink or boilerplate letters. So query whether employers are actually getting a meaningful opportunity to cure these violations as contemplated by the statute. In no other agency context that I can think of would a government agency separately investigate a single employer for the exact same alleged violation in multiple, competing investigations or audits. These issues raise important due process concerns that the Estrada decision teed up very nicely for employers. And this could have a huge impact on the evolving landscape of PAGA, and it might actually mean that the Estrada decision is, in a funny way, a win for employers. So, very excited to see where the litigation goes from here, and especially in 2024.

Jerry: Well, this is truly an area that on our blog will be tracking on a day by day and week by week basis in terms of new developments under California law and PAGA litigation. Thank you so much. Nick, Nathan, and Shireen for sharing your thought leadership today on our podcast.

Nathan: Thank you, Jerry, love being on the podcast.

Nick: Thanks for having me, Jerry, and thank you listeners as well.

Shireen: Thanks, everybody.

By Gerald L. Maatman, Jr., Jennifer A. Riley, Brandon Spurlock, and Shireen Wetmore

Duane Morris Takeaways: One law making California so different – and so challenging – for employers is the Private Attorneys General Act (“PAGA”), which authorizes employees to assert claims for alleged labor violations. Such a worker acts as “a private attorney general” to pursue civil penalties against an employer as if they were an arm of the State of its agencies. PAGA claims are not class actions per se – instead, they are known as “representative actions – but they pose analogous risks and exposures like class actions brought under the California Labor Code. Plaintiffs bring thousands of PAGA cases every year, and, because PAGA plaintiffs can bring suit on behalf themselves and other employees, the stakes are often significant, with companies exposed to risks similar to those arising from class action litigation. The PAGA, however, has its own specific rules of the road, which differ from the rules elucidated in familiar Rule 23 jurisprudence.  The explosion of PAGA litigation has resulted in a complex body of case law that is often difficult to navigate, particularly in terms of the application of arbitration agreements and representative action waivers.  Given the wide adoption of such arbitration agreements, companies are struggling to grasp how recent decisions regarding the PAGA and arbitration impact their businesses.

To that end, the class action team at Duane Morris is pleased to present this year’s edition of the Private Attorneys General Act Review – 2024. We hope it will demystify some of the complexities of PAGA litigation and keep corporate counsel updated on the ever-evolving nuances of these issues.  We hope this book – manifesting the collective experience and expertise of our class action defense group – will assist our clients by identifying developing trends in the case law and offering practical approaches in dealing with PAGA litigation.

Click here to download a copy Duane Morris Private Attorneys General Act Review – 2024 eBook.

Stay tuned for more PAGA class action analysis coming soon on our weekly podcast, the Class Action Weekly Wire.

By Eden E. Anderson, Gerald L. Maatman, Jr., and Jennifer A. Riley

Duane Morris Takeaways: On January 18, 2024, the California Supreme Court issued its opinion in Estrada v. Royalty Carpet Mills, No. S274340 (Cal. Jan. 18, 2024). It is a game changer for employers operating in California.  The Supreme Court held, in a unanimous decision, that trial courts lack inherent authority to dismiss claims under the Private Attorneys General Act of 2004 – the “PAGA”- with prejudice due to lack of manageability.  The Supreme Court declined to address whether, and under what circumstances, a defendant’s right to due process might ever support striking a PAGA claim. As such, the decision in Estrada is a required read for employers and their decision-makers.

Case Background

Jorge Estrada filed a putative class and PAGA action against his former employer asserting, as relevant here, meal period violations.  After two classes comprised of 157 individuals were certified, the case was tried to the bench.  The trial court ultimately decertified the classes, finding there were too many individualized issues to support class-wide treatment.  Although the trial court awarded relief to four individual plaintiffs, it dismissed the non-individual PAGA claim on the grounds that it was not manageable.

On appeal, Estrada argued that PAGA claims have no manageability requirement, and the Court of Appeal agreed in Estrada v. Royalty Carpet Mills, Inc., 76 Cal.App.5th 685 (2022). The Court of Appeal reasoned that class action requirements do not apply in PAGA actions and, therefore, the manageability requirement rooted in class action procedure was inapplicable.  Further, the Court of Appeal reasoned that “[a]llowing courts to dismiss PAGA claims based on manageability would interfere with PAGA’s express design as a law enforcement mechanism.” Id. at 712. The Court of Appeal acknowledged the difficulty that employers and trial courts face with PAGA claims involving thousands of allegedly aggrieved employees, each with unique factual circumstances, but concluded that dismissal for lack of manageability was not an available tool for a trial court to utilize.

The Court of Appeal in Estrada recognized its holding was contrary to the holding in Wesson v. Staples the Office Superstore, LLC, 68 Cal.App.5th 746 (2021), and created a split in authority.  In Wesson, the trial court struck a PAGA claim as unmanageable, and the Court of Appeal affirmed. The claims at issue in Wesson involved the alleged misclassification of 345 store managers.  The employer’s exemption affirmative defense turned on individualized issues as to each manager’s performance of exempt versus non-exempt tasks which varied based on a number of factors including store size, sales volume, staffing levels, labor budgets, store hours, customer traffic, all of which varied across the stores.  The split in authority prompted the California Supreme Court to grant review in Estrada.

The California Supreme Court’s Decision

At the outset, the California Supreme Court noted that the issue before it was whether trial courts possess inherent authority to “strike” PAGA claims for lack of manageability, defining the word “strike” to mean a dismissal with prejudice. Jan. 18 Opinion at 7. The Supreme Court then addressed, and rejected, the employer’s argument that trial courts possess inherent authority to, for judicial economy purposes, strike any claim a plaintiff asserts. The Supreme Court explained that the power to dismiss a claim with prejudice is limited to cases involving a failure to prosecute, frivolous claims, or egregious misconduct, and that judicial economy does not warrant the dismissal of any claim.

The Supreme Court rejected the employer’s argument that the manageability requirement for class actions should be imported into PAGA actions. It reasoned that there are three structural differences between class actions and PAGA representative actions that warrant treating these claims differently, as well as differences in jurisprudential history. The three structural differences cited by the Supreme Court were: (1) that plaintiffs in PAGA actions are not required to establish superiority or predominance of common issues; (2) PAGA’s purpose is to maximize enforcement of labor laws; and (3) that the California Labor and Workforce Development Agency (LWDA) can impose civil penalties for Labor Code violations without considering manageability.

As to jurisprudential history differences, the Supreme Court noted that, unlike class actions which were an “invention of equity,” PAGA actions are not “creatures of equity.” Id. at 30. Thus, while class action jurisprudence developed to create various common law requirements for class actions that are not set forth in California’s class action statute, the PAGA statute provides detailed statutory requirements for maintaining a PAGA claim, thereby constraining trial courts from using “extra-statutory inherent authority to strike PAGA claims that the Legislature has authorized.” Id. at 31. Because PAGA’s express wording permits a plaintiff who has suffered one labor code violation to seek civil penalties on behalf of other employees for “violations that vary widely in nature,” imposing a manageability requirement would “defeat the purpose of statute.” Id. at 32.

The Supreme Court declined to address whether, and under what circumstances, a defendant’s right to due process might ever support striking a PAGA claim other than to note that any such authority would be “narrow authority of last resort.” Id. at 41. Although the employer argued its due process rights would be violated if the PAGA claims against it were re-tried, the Supreme Court noted that the employer had only offered the testimony of two employees in the original trial and, thus, the due process issue was “hypothetical.” Id. at 40. The Supreme Court, however, agreed that employers have a due process right to present an affirmative defense, but emphasized that an employer has no due process right to present the testimony of an “unlimited number of individual employees” or “each allegedly aggrieved employee.” Id. at 40.

The Supreme Court concluded by noting that trial courts have “numerous tools” to manage complex cases, and suggested that the “extent of liability” in a PAGA case can be determined by surveys or statistical methods that estimate the number of aggrieved employees. Id. at 41. The Supreme Court emphasized that the burden of proof in a PAGA case remains with plaintiffs who should endeavor to be “prudent in their approach to PAGA claims” and that, if “a plaintiff alleges widespread violations of the Labor Code . . . but cannot prove them in an efficient manner, it does not seem unreasonable for the punishment assessed to be minimal.” Id. at 44.

Implications For Employers

The Estrada opinion strikes a blow to employers facing PAGA claims by removing lack of manageability as a ground for dismissal.  While the California Supreme Court encouraged PAGA plaintiffs to be prudent to their approach to their PAGA theories, in practice, such prudence is uncommon.  On the bright side, the decision leaves open an employer’s ability to seek dismissal on due process grounds.