PAGA reforms will change the ADR landscape

When Governor Newsom signed into law a significant reform of the state's Private Attorney General Act on July 1, businesses across the state released a collective sigh of relief. AB 2288 and SB 92, they believed, would change the PAGA process sufficiently to countenance removal from the November ballot of an initiative that would have effectively terminated the state's landmark law. 


But that collective sigh may have been released too soon. Yes, PAGA reforms will shift the landscape for the benefit of employers. Businesses will now have an opportunity to cure Labor Code violations, and penalties may be substantially reduced. More money will go into the pockets of successful plaintiffs; more resources will help the state track down and penalize violators. 


From the neutral's perspective, PAGA 2.0, as some are calling the new regime, may impact ADR in quite a few unforeseen ways. Although PAGA 2.0 does away with most types of penalty stacking, which theoretically should reduce the settlement value of a PAGA action, the new cure provisions may actually result in companies paying even more money to settle PAGA cases. Additionally, those same cure provisions may open the door to a whole new breed of PAGA neutral, the "neutral evaluator," whom the parties can hire -- at an increased cost -- to preside over the employer's attempt to cure PAGA violations.

PENALTY STACKING


There are rarely single violations under the Labor Code. Each violation generally implicates others. Failure to pay overtime wages under Labor Code Section 510 invokes a penalty under Labor Code Section 558 of $50 for the initial violation for each underpaid employee for each underpaid pay period, on top of the underpaid wages. The penalty goes up to $100 for subsequent violations for each underpaid employee for each pay period of the underpayment, plus the underpaid wages.


Here's where penalty "stacking" comes into play. Technically, if a company systematically fails to pay overtime wages, it also fails to pay full wages by the end of the applicable pay period as required by Labor Code Section 204, which triggers a civil penalty under Labor Code Section 210 -- $50 or $100 per pay period per employee. And there's even more: Based on that same failure to pay overtime wages, each pay period that employer also issues incorrect pay stubs in violation of Labor Code Section 226 (a civil penalty of $100 or $200), fails to maintain accurate records as required by Labor Code Section 1174 ($500), and violates the Labor Code's prohibition on working more than the maximum allowable hours under the IWC Wage Orders ($100 or $200). 


Intrepid plaintiffs' attorneys undoubtedly can find even more civil penalties attributable to the same overtime violations. As a result, under the original PAGA regime, a single violation of the Labor Code could result in a stack of penalties that could amount to around $1,000 per pay period per affected employee.


PENALTIES UNDER PAGA 2.0

Stacking penalties for every affected employee for every pay period for every Labor Code violation could spell financial ruin for a small or financially precarious employer. No wonder penalty stacking was high on the list of PAGA changes requested by businesses. 


The reality, however, is that courts have historically been reluctant to stack penalties. Nevertheless, the threat of stacking has always lurked in the PAGA monster closet, potentially impacting the settlement value of PAGA cases. This was a risk employers wanted to avoid. 


In the new PAGA legislation, employers and their counsel got what they asked for, at least with respect to most typical forms of stacking. PAGA 2.0 does away with stacking of penalties for most "derivative violations" of the Labor Code. For example, civil penalties will no longer be assessed for untimely payment of wages if the underlying claim is for unpaid wages and the violation was neither willful nor intentional. They will also not apply when inaccurate wage statements were issued unknowingly or unintentionally. 


With reduced penalties for technical violations, as well as substantial rewards for good faith efforts to correct deficiencies, on paper, the PAGA reform should benefit the corporate bottom line. However, this may not be the case when parties are negotiating settlement of PAGA claims.


SETTLEMENT OF PAGA CLAIMS

In mediation, most PAGA claims generally end up settling for far less than their full stacked value. It is not unheard of for PAGA settlements to pencil out to under $10 per pay period per employee. (Of course, every case is different, so the opposite is also true, with many cases settling for far more per pay period.) Ironically, under PAGA 2.0, with the benefit of new robust cure provisions and no stacking, plaintiffs may actually set their aims much higher. 


PAGA 2.0 provides that, when no penalty has been established for a specific Labor Code violation, the default penalty for employers with one or more employees is $100 per employee per pay period; $200 if found to be malicious, fraudulent or oppressive. For isolated, nonrecurring events that do not exceed 30 days, the penalty is $25 or $50 per employee per pay period. 


The cure provision now rewards employers who make reasonable efforts to fix a problem. It will reduce their potential penalties by up to 85% when employers act before being notified of a claim, by up to 70% if they act after being notified. What this means is that, instead of being on the hook for $100 per employee per pay period, the business may now be liable for no more than $30 per employee per pay period for a violation.


For plaintiffs negotiating settlement of their PAGA claims, that $30 per pay period could be an excellent outcome. Instead of having to navigate the prior penalty stacking terrain, they would need to look no further than the penalty that is laid out in the statute. It is a far better settlement line than the moving target against which plaintiffs have had to negotiate in the past, which had many times resulted in sub-$30-per-pay-period settlements. In addition to abbreviating settlement discussions, the new PAGA law could end up transferring more money into the hands of PAGA plaintiffs.


Employers will undoubtedly argue that $30 per pay period is not a floor for settlements under PAGA 2.0. They will point to the discretion granted to the courts -- carried over from the previous PAGA regime -- to reduce the maximum penalty amounts under certain circumstances. (Labor Code Section 2699, subd. (e)(2).) How this plays out in mediation will be interesting to observe. 


ADR NEUTRAL EVALUATORS

PAGA 2.0 also opens the door to the creation of a whole new type of ADR professional -- the neutral evaluator. Pursuant to PAGA 2.0's new cure provisions, when a PAGA claim has been filed, an employer of 100 or more employees can ask for an early evaluation conference and a stay of court proceedings. In a confidential statement, the employer must explain which violations it is disputing and which, if any, it plans to cure. The plaintiff is required to lay out in a confidential statement the basis for the claim, the amount of penalties sought for each violation, the basis for accepting or rejecting any proposed cure, and any settlement demand. 


These statements will then be reviewed by a neutral evaluator, who will hold an early evaluation conference to explore the strengths and weaknesses of the plaintiff's claim, the proposed cure, and the likelihood of achieving settlement of those claims. A judge or a magistrate can serve as the neutral evaluator, but as is often the case with our court system, relying on a court-appointed neutral to hold a conference could result in significant delays as the wheels of justice slowly roll down the litigation track.


In addition to allowing a judge or magistrate to serve as a neutral evaluator, PAGA 2.0 specifies that the early evaluation conference can be conducted by "such other person knowledgeable about and experienced with issues arising under the code whom the court shall designate." (Labor Code Section 2699.3, subd. (f)(12).) In other words, the parties can agree that a private ADR neutral can serve as the neutral evaluator, so long as the court agrees with the appointment. 


That neutral can review the employer's cure proposal and make a determination as to its efficacy. If the proposal passes muster, PAGA penalties could be substantially reduced. The process should be relatively seamless, and it could provide a new area of specialty for ADR professionals who have the requisite knowledge of and experience with the intricacies of the Labor Code. While the parties would likely have to pay for the private neutral's time in serving as an evaluator, they could avoid the delays and formalities of staying within the civil court framework for the approval of the employer's cure attempts.


CONCLUSION

Changes to California's PAGA laws have been long sought by California businesses. The reforms enacted this summer may go a long way toward providing their requested relief. 


How the reforms play out in the context of ADR remains to be seen. Despite the appearance of providing long-sought relief, the new law might actually increase settlement amounts as compared to the earlier regime. PAGA 2.0 may also provide additional opportunities for private ADR professionals to have an even greater role in PAGA cases, which could also increase the costs of PAGA litigation. 


Michael Strauss is an employment mediator with Alternative Resolution Centers and an employment arbitrator for the American Arbitration Association. As a litigation attorney, he represented both employees and employers, with a primary focus on class actions and mass arbitrations concerning wage and hour disputes.