NORTHERN CALIFORNIA RECORD

Facing potential disaster at the ballot box this fall, California Democrats and their union and trial lawyer allies have struck a deal with the state's business and employer advocates to reform and save a controversial California law that critics said for decades has made California employers easy targets for alleged "shakedown lawsuits" that have generated big profits for lawyers and little comparable benefits for workers.

On June 19, Gov. Gavin Newsom and the California Chamber of Commerce and other pro-business groups in the so-called Fix PAGA coalition announced a deal that would result in substantial reforms of the state's Private Attorney General Act (PAGA).

"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," said Jennifer Barrera, president and CEO of the California Chamber of Commerce.

Jennifer Barrera | California Chamber of Commerce

Newsom also hailed the deal, in a separate statement.

"We came to the table and hammered out a deal that works for both businesses and workers, and it will bring needed improvements to this system," Newsom said. "This proposal maintains strong protections for workers, provides incentives for businesses to comply with labor laws and reduces litigation.”

For decades, the PAGA law has empowered workers to sue their employers for big money on behalf of their coworkers for often small or merely technical violations of California labor law, stepping into court in place of California state labor officials. Before enactment of the PAGA law, only California state officials were empowered to bring enforcement actions on behalf of entire workforces.

Employers targeted by such actions could be forced to pay penalties, the bulk of which would to the state of California. But under PAGA, employers could also be made to pay another large chunk to cover the fee demands of the lawyers who sued them.

This has generated a cottage industry of plaintiffs' lawyers who critics say use PAGA lawsuits to rake in fees, while generating significantly less benefits for workers. A recent analysis from the law firm of Duane Morris revealed that 2022 was a record-breaking year for such PAGA lawsuits, with nearly 8,000 notices of actions filed against California employers last year.

And the trendline predicted still more PAGA lawsuits should be expected, if no action was taken to rein them in. A report from the American Tort Reform Association indicated PAGA lawsuits had increased 273% from 2011-2022.

Published reports indicated the lawsuits may have done little more than to generate big - and relatively easy - paydays for lawyers.

A report authored by former top California state labor officials for the firm of Baker & Welsh showed PAGA lawsuits have forced California employers to pay more than $10 billion to end PAGA lawsuits since 2013. 

Attorneys received the largest portion of the settlements, once the state took its share of the penalties, the report indicated.

Businesses have failed to achieve any relief from the law from California's state courts. In 2022, the U.S. Supreme Court appeared to hand a significant win against PAGA, declaring that federal law allows employers to use arbitration agreements in employment contracts to force workers to take their PAGA-related complaints to arbitration, rather than court.

However, the California Supreme Court then quickly ruled that the U.S. Supreme Court's ruling doesn't thwart PAGA lawsuits. The state high court conceded that federal law can force individual employees to arbitrate their individual claims. But the court said those same workers can still press "non-individual" PAGA claims on behalf of their co-workers.

That decision prompted employers and their advocates to ask the U.S. Supreme Court to take up a new case that could ultimately block trial lawyers from using "non-individual claims" to sidestep federal arbitration law and the U.S. Supreme Court's ruling.

However, on June 17, the U.S. Supreme Court denied that petition, as well.

While the courts have given next to no relief for businesses targeted by PAGA, businesses this year turned to the voters.

The Fix PAGA coalition, a large collective of business and non-profit groups, placed on the ballot a referendum that would rewrite PAGA to end the law's so-called "lawsuit-first approach." Instead, it would require more funding and give more authority to the state's Labor Commissioner's office and eliminate the so-called "right of private action" that has powered the PAGA lawsuit blitz.

According to a survey of California voters, as many as 72% of voters have indicated they could support the ballot measure, if it were to advance to the fall 2024 election.

Faced with a potentially embarrassing loss, Newsom and the Democratic leaders in the state legislature agreed to substantial reforms of the PAGA law instead.

Under the reforms outlined by the two sides, the law would be revised to:

• Allow employees to receive 35% of all penalties paid by employers, rather than the current 25%; 
• Require plaintiffs to show they personally experienced the alleged violations of California labor law within the preceding year. Currently, they don't need to show they were actually harmed and there is no time limit on the lawsuits;
• Cap penalties for employers who take steps to remedy the problems before they are sued at 15% of the applicable penalties, and at 30%, if they move to fix the problems after they are sued;
• Gives employers - and small employers, particularly - greater opportunities to "cure" the violations through the state labor department to avoid unnecessary lawsuits;
• Heightens penalties for employers who "acted maliciously, fraudulently, or oppressively;" and
• Expressly grants greater discretion to judges to "limit both the scope of claims and evidence presented at trial."

It also would revise the law to allow for courts to award injunctions, as well as money damages.

Under the compromise, California state lawmakers have until June 27 to enact the PAGA reforms. If they act by then, the Fix PAGA Coalition said they would remove their far stricter PAGA reform ballot initiative.

The deadline to remove ballot initiatives this year is June 27.

"Small businesses throughout the state have been targeted by frivolous PAGA lawsuits for decades, even forcing some restaurants to shut down," said Jot Condie, president and CEO of the California Restaurant Association, in a statement announcing the PAGA reform deal.

"We support this reform which will reduce shakedown lawsuits against small businesses while providing strong protections for workers."

California's powerful union leaders also announced their support for the deal.

“We are happy to have negotiated reforms to PAGA that better ensure abusive practices by employers are cured and that workers are made whole, quicker,” said Lorena Gonzalez, a former Democratic California state lawmaker who is now principal officer of the California Labor Federation, AFL-CIO. “PAGA is an essential tool to help workers hold corporations accountable for widespread wage theft, safety violations, and misclassification. We appreciate the work of the Governor’s office and Legislative Leadership to help us reach agreement with the Cal Chamber of Commerce to protect this innovative law and strengthen labor law enforcement.”

And California's state Senate President Mike McGuire and Speaker of the Assembly Robert Rivas also signaled support. However, none of the statements from the Democratic officials or their political allies referenced the problems posed to the state's economy from decades of PAGA lawsuits against employers.

“Today’s agreement is critical to the long-term success of workers and businesses here in the Golden State,” said McGuire.

Rivas added the deal "protects working people, who are the real engine behind California's economic strength" and "recognizes companies that follow labor laws."