PAGA reforms are mostly good news for California employers, but insurance impact is TBD

In 2004, California passed the Private Attorneys General Act (PAGA), which allowed employees to file lawsuits to recover civil penalties for state labor code violations. PAGA created new risks for employers, but also led to many insurers leaving the wage-and-hour marketplace. Recently enacted reforms scale back some of those risks, although it remains to be seen whether the new legislation will reinvigorate the wage-and-hour insurance market.

4 key changes

On July 1, California Governor Gavin Newsom signed legislation to reform PAGA, which introduces four important changes:

Employers can now substantially reduce their penalties by auditing their wage-and-hour records. To avoid the harsh penalties resulting from PAGA violations, employers can now show that they took “all reasonable steps” to comply with the California Labor Code prior to plaintiff’s claims. If successful, an employer can reduce potential PAGA penalties by 85%. In addition, if an employer remedies any alleged violation within 60 days of being served with a PAGA notice, its potential PAGA penalties can be reduced by 70%.

Plaintiffs must personally experience violations to bring claims. Previously, a plaintiff only had to experience a single labor code violation to pursue penalties for violations covered by PAGA, even if the plaintiff did not personally experience the PAGA-covered misconduct. Under the reform, a plaintiff can only seek recovery on a representative basis if the plaintiff personally experienced the alleged Labor Code violations.

Employers have new options for early resolution. An employer facing an alleged PAGA violation may now request an early evaluation conference with a neutral evaluator, who will consider the merits of the allegation; official court proceedings are stayed during this time. An employer may also submit evidence that it took “all reasonable steps” to comply with the labor code and, if applicable, a plan to “cure” the issue that gave rise to the allegations.

Repeat offender employers now face larger penalties. Under the reform bill, penalties for repeat offenders have been doubled. Additional penalties will also now apply to employer violations that are determined to be “malicious, fraudulent, or oppressive.”

The reform package was finalized following negotiations between business groups, including the California Chamber of Commerce, and labor organizations (opens a new window). Jennifer Barrera, president and CEO of the California Chamber of Commerce, hailed the bill, saying “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.”

Legal and risk implications

The passage of PAGA in 2004 led to a significant uptick in wage-and-hour claims in California. In a suddenly more challenging environment, many insurers offering wage-and-hour insurance — which can provide coverage against claims that employers have misclassified workers, failed to pay overtime and other wages, or failed to provide breaks and meal periods — severely curtailed or wholly declined to offer wage-and-hour coverage to California employers. This left many businesses with no choice but to self-insure their wage-and-hour risk.

Despite the harsher penalties for repeat offenders, the PAGA reforms should be seen as a win for California employers, whose wage-and-hour risks should be reduced. What effect the reforms will have on future insurance coverage, however, remains to be seen. Employers should consult with their insurance brokers to understand the new law’s potential impact on coverage options, and with in-house and outside labor and employment attorneys in California to understand its potential impact on their business.