Taking “Reasonable Steps” to Protect Against PAGA Claims and Penalties in the New Year

On July 1, 2024, Governor Gavin Newsom signed two bills that reformed the Private Attorneys General Act of 2004 (PAGA). PAGA allows employees to recover substantial penalties on behalf of other employees and the state for violations of California’s wage and hour laws, such as strict laws regarding meal and rest breaks for nonexempt employees. Although PAGA was intended to protect workers, PAGA has come under increased criticism for causing excessive litigation and crippling penalty awards against well-intentioned employers, including independent schools.

Accordingly, the PAGA reform bills were negotiated between business and employee groups to address this criticism while still providing a robust mechanism for employees to recover substantial penalties for wage and hour violations. We do not yet know how effective those changes will be in addressing employer’s concerns, but you can read more about all of the changes in our previous update here.

As we embark on the New Year, one of the most discussed reforms were measures that allow employers to take “reasonable steps” to preemptively reduce the penalties an employee can recover in a PAGA. Specifically, built into the reform measures is an incentive to encourage employers to take steps to come into greater compliance with California’s wage and hour laws. Under those measures, if an employer can show that it took certain “reasonable steps” the employer can argue that PAGA penalties should be capped at 15% or 30% of what the employee would otherwise recover. PAGA penalty awards can be substantial, even under the newly reformed PAGA. The basic civil penalty under the reformed PAGA is $100 for each aggrieved employee for each pay period that there was a violation. Penalties are now slightly less in some cases, such as $25 per employee per pay period for certain wage statement violations, but can also be as high as $200 per employee per pay period if an employer acted, for example, fraudulently in violating wage and hour laws.

However, now, under the reform measures, an employer can seek to have the recoverable penalties in a PAGA claim capped at 15% if the employer can show that it took all “reasonable steps” to comply with the California Labor Code prior to receiving a notice of violation or request for personnel records from an employee. “All reasonable steps” that can be taken before receiving a PAGA notice or personnel records request from a potential PAGA complaint include, but are not limited to:

• Conducting periodic payroll audits and taking action in response to the results of the audit.
• Disseminating lawful written policies.
• Training supervisors on applicable Labor Code and wage order compliance.
• Taking appropriate corrective action with regard to supervisors.

Additionally, employers can also take similar reasonable steps to come into compliance within 60 days after receiving a notice, in which case employers can seek to have potential penalties capped at 30% of the penalties sought, provided the any auditing or dissemination of policies is aimed at the alleged violations in the notice. In either case, the reform measures also explain that whether a particular employer’s actions are reasonable will be based on the totality of the circumstances, taking into consideration the size and resources available to the employer and the nature, severity, and duration of the alleged violations.

Below are some important considerations for schools considering preemptively conducting some or all of these “reasonable steps” in order to be able to argue for reduced penalties in the event of a PAGA claim.

• Periodic Payroll Audits – The PAGA reform measures encourage employers to conduct periodic payroll audits and, importantly, to take action in response to the audit results. It remains to be seen how this provision will be interpreted. For example, it is unclear what qualifies as “periodic.” As another example, it is unclear if an audit must comprehensively cover all aspects of an employer’s wage and hour practices or if targeted audits at certain issues will be sufficient (e.g., classification of nonexempt, overtime practices, meal and rest break compliance). Another issue for the courts to work out and for employers to be aware of is whether an employer will be required to waive the attorney-client privilege in an audit conducted by an attorney, before the employer can rely on that audit to show that it took reasonable steps.
• Disseminating Lawful Written Policies – This reform measure incentivizes employers to adopt and regularly update written policies addressing things such as meal and rest breaks, timekeeping practices, and overtime compliance. The term “lawful” suggests that policies need to be regularly evaluated and updated to ensure they keep up with changes in the law. The term “disseminating” also implies that these policies need to be effectively given to employees, which could involve providing physical and digital copies to employees and making copies easily accessible, such as posting them on an online dashboard or intranet. Having employees sign acknowledgments that they have received the policies is already considered a best practice, and it may now also be helpful in showing that “reasonable steps” were taken under the PAGA reform measures.

• Training Supervisors – The PAGA reform measures encourage employers to provide training to supervisors specifically on wage order compliance. Again, the reform measures do not provide guidance on how often this training should occur or address what topics should be covered, but the measures suggest that the trainings should cover laws and wage orders applicable to an employer. For example, supervisors could be trained on the basics of meal and rest breaks laws under an applicable wage order, so those supervisors will be more effective in setting lawful meal and rest break schedules and ensuring nonexempt employees are being provided compliant meal and rest breaks. Accordingly, schools may want to think about making wage and hour compliance training for supervisors a regular part of their training schedules or practices for employees.

• Taking Corrective Action Against Supervisors – Finally, the PAGA reform measures make it clear that employers are expected to hold their supervisors accountable for wage and hour compliance. Accordingly, it will be even more important to take corrective action against supervisors who violate wage and hour laws, for example, by allowing employees to work off the clock. What will qualify as appropriate corrective action will depend on the specific circumstances, but as in other areas of law, the courts will likely expect the corrective action to be proportional to the violation and sufficient to address and prevent the violation from reoccurring.

By taking this step along with other reasonable measures, the hope is that schools can substantially reduce their exposure to PAGA penalties thanks to these reform measures. Moreover, by taking these sorts of steps, schools may avoid potential claims altogether by having legally compliant policies and practices in place. LCW attorneys regularly assist with conducting payroll audits, preparing lawful written wage and hour policies, and training supervisors. They are available to consult with schools on these aspects of the PAGA reform measures.