California, the land of opportunity and innovation, can also be a breeding ground for unexpected challenges for businesses. One such challenge is the Private Attorney General Act (PAGA), a law that has become a major source of concern for employers in the state.
What is PAGA and Why Was It Created?
Enacted in 2004, PAGA was intended to empower employees to hold businesses accountable for violations of the California Labor Code. It grants employees and plaintiff attorneys the power of the government to sue employers on behalf of themselves and other allegedly similarly aggrieved employees to enforce various provisions of the Labor Code.
The rationale behind PAGA was that the California Division of Labor Standards Enforcement (DLSE) lacked the resources to effectively police all labor code violations. PAGA aimed to fill this gap by allowing employees to act as private attorneys general, incentivizing enforcement, and deterring businesses from violating labor laws.
The Dark Side of PAGA: A System Rife with Abuse
While PAGA’s intentions were noble, the reality of its implementation has painted a different picture. Here’s why PAGA has become a major concern for California businesses:
- Surge in Frivolous Lawsuits: PAGA has become a goldmine for trial lawyers. The ability to sue for civil penalties on behalf of a group of employees, without the need to certify a class or prove wrongdoing creates a strong incentive for filing meritless lawsuits. This has led to a dramatic increase in PAGA claims, with over 5,117 complaints filed in 2023 alone – a 20% increase from 2022. These lawsuits, even if ultimately unsuccessful, can be incredibly expensive to defend.
- A Broken Distribution System: Perhaps the most concerning aspect of PAGA is the distribution of penalties recovered in successful lawsuits. When a case is settled, after the plaintiff lawyers take their 30-40%, only a meager 25% of the penalties actually goes to the “aggrieved employees.” The remaining 75% goes directly to the state Department of Labor. This means that the very workers PAGA was designed to protect receive a tiny fraction of the recovered funds, while the state and trial lawyers reap the biggest rewards. If the company tries the case, the plaintiff attorneys can seek their fees as part of the damages. PAGA does not reciprocate, as there is no “prevailing party” clause in the law, so there is no deterrent to filing frivolous suits.
- The Coercive Power of Settlements: The threat of a PAGA lawsuit, even a frivolous one, can pressure businesses into settling out of court to avoid the high costs of litigation. These settlements can be substantial, draining company resources and impacting profitability. This dynamic creates a “pay to play” system, where businesses are forced to settle weak claims simply to avoid the financial burden of defending themselves.
What Can Businesses Do to Mitigate the PAGA Threat?
While PAGA presents a significant challenge, there are steps businesses can take to mitigate its impact:
- Proactive Legal Guidance: Partner with an experienced employment law attorney to understand your obligations under PAGA and the California Labor Code. Particular attention should be paid to areas with a high risk of violations, such as wage and hour laws, employee classification (exempt vs. non-exempt), meal and rest breaks, and termination procedures.
- Strong Employment Practices: Implement clear and well-defined employment practices that comply with all labor laws. This includes developing and enforcing written policies on wages, overtime, meal breaks, and terminations. Regular training for managers and supervisors on these policies is also crucial.
- Ironclad Contracts and Handbooks: Include mandatory arbitration agreements and class action waivers in all employment contracts and employee handbooks. Arbitration agreements require disputes to be settled outside of court through a binding process, often faster and less expensive than litigation. Class action waivers prevent employees from filing lawsuits on behalf of a larger group. The US Supreme Court upheld the use of arbitration, even in PAGA claims.
- Support for Meaningful Reform: The California Fair Pay and Employer Accountability Act (FPEAA), on the November ballot, offers a potential solution. This act proposes to repeal PAGA and grant sole enforcement authority to the Labor Commissioner. Additionally, penalties recovered would go directly to aggrieved employees, ensuring a fairer outcome. Under FPEAA, the individuals will receive 75% of the settlements, and the state will get 25%. Businesses are encouraged to learn more about FPEAA and consider supporting this critical legislation.
- Invest in EPLI Protection: A comprehensive Employment Practices Liability Insurance (EPLI) program can provide a financial safety net in case of a PAGA claim. EPLI can help cover defense costs, settlements, and judgments associated with covered claims. While not a substitute for proactive risk management, EPLI can offer valuable peace of mind and help businesses weather the storm of a PAGA lawsuit.
Looking Forward: A Call to Action
California’s PAGA problem is a serious concern for businesses in the state. By understanding the law, taking preventative measures, and supporting positive reform efforts, businesses can create a more secure work environment for their employees and safeguard themselves from the financial burdens associated with PAGA claims. Staying informed, taking a proactive approach, and working together can help mitigate the risks associated with PAGA and ensure a fairer system for all.
Here are some resources to get you started:
- California Chamber of Commerce: https://advocacy.calchamber.com/
- Consult with an experienced employment law attorney to discuss your specific situation and develop a compliance strategy.
- Encourage voter support of the California Fair Pay and Employer Accountability Act (FPEAA) to repeal PAGA.
Don’t wait until a PAGA claim hits your business. Take action today!
For more information on Liberty’s Executive Liability offerings, please reach out to Bill Holden, SVP (Executive Liability Practice Leader), The Liberty Company Insurance Brokers.
