California Just Passed PAGA Reform. Here Is the Impact | Brian Mass | William Gould | Tom Manzo

California's largest business and labor groups have recently come together to strike a deal on one of the most controversial laws in California, the Private Attorney General Act, also known as PAGA. What the law does is it creates an opportunity for an aggrieved employee to file a lawsuit against an employer on behalf of not just the employee but the state of California. Attorneys fighting with companies, companies fighting back, so the law continued to morph and a lot of people realized how much money they could make from it and it became this billion dollar cottage industry. Every single restaurant owner I talk to is in a PAGA lawsuit. Every single one. Every retail business owner I talk to is in a PAGA lawsuit. None of them are less than six figures. I'll never open another restaurant in the state of California. Never, ever again. Because it's inevitable you're going to run into one of the PAGA lawsuits. When the law was passed in 2004, it was meant to deter employers from violating serious labor laws. Wage theft, minimum wage violations, the government is not doing very much about this. You can file a claim with the government and it can sit there for three years or more. In today's episode, we'll look into how the PAGA law works, its growing controversy, and the recent agreement between the California legislature, business, and labor groups to reform it. We also discuss what this new reform means for California workers and employers. I'm Siamak Kourami. Welcome to Californian Insider. Tom, you were personally impacted by this. Can you tell us how did you notice this law? When was the first time you noticed it? So back in 2015, I was running a small manufacturing company that employed less than 200 people. And we had a flexible work schedule. You know, we allowed employees to come in, you know, 5.30, 6.00, 6.30, 7.00, but everybody wanted to take their lunch at 11.00. And we even had the lunch truck had a new schedule and they were wondering if they could come at 11.10. And everybody said, hey, it's the same lunch truck we've had for 30 years. We'll just change our time. And at that time, we had a very sophisticated legal team that helped us with the handbooks and terminations. We had everything we needed. And nobody said, if somebody takes a lunch past the fifth hour, it could cost you a million dollars. And that's what happened. It cost the company a million dollars. What was it like? So somebody said they're not taking the lunch break. And after five hours, what was the case? Yeah, I mean, so it turned out it was a worker's comp injury. And that injury wasn't panning out too much. And that same employee then ended up with a wage and hour attorney. And the wage and hour attorney then accused us of all these different things. And then at the end of the day, you know, it was the it was the late lunches that really hurt us. According to a UCLA study, potential wage and hour violations are the primary reason for PAGA claims making up over 90% of all cases. While many PAGA claims begin with wage and hour violations, they often lead to additional penalties for technical labor code violations. And how did it add up to a million dollars? Because that that sounds a lot like for a few minutes or an hour, a few hours of late. So, you know, if somebody takes a late lunch, you owe them a meal premium, net meal premiums, one hour's worth of pay. So then because the meal premiums weren't paid, the paycheck stub is wrong. Because the paycheck stub is wrong. If there were any employees who were no longer working for the company, they were owed 30 days of waiting time penalties. So 30 days of waiting time penalties is like 38 hour days. Because the paycheck stub was wrong. So you have all these things that trigger other penalties. And that's how it adds up. And then instead of that one employee, then it becomes this huge, it becomes a huge class. And I think that's, I believe in my heart that a majority of the employers in California want to do what's right. I really do. It's hard to find good employees. It's hard to retain talent. And, you know, employers are doing what they can to hang on to the most valuable asset, and that's the employees. And, you know, I really believe that the majority are trying to do what's right. And if you're trying to do things that are right, and you get tripped up over some technicalities, that that penalty shouldn't be that, that size or that tolerable. Not at all. And then what did it do to the relationship between you guys and the employees after the lawsuit? Well, because it was changed. No flexible work schedule. No bonuses. You know, I mean, anything we could do to ensure we're complying with the 1,100 page Labor Law Digest is what we did. And, you know, unfortunately, a lot of employees don't like that. And nobody wants to take that lunch at 10. And we just said no more flexible work schedule. Start time, six o'clock. Lunchtime, 10.50. That way we're taking up four hours and 50 minutes. We're not even risking it being one minute late. They're still not happy about it to this day. According to a recent report based on the data from the state, the Labor and Workforce Development Agency, and the Department of Industrial Relations, in recent years, PAGA filings have skyrocketed. The number of lawsuits have hit 5,000 in 2023. While in many cases, we don't have the data because a lot of these lawsuits get settled before making it to court. These lawsuits have cost businesses an estimated $10 billion over the past decade. We still cannot independently verify these numbers. Since PAGA law was enacted in 2004, it has become a significant burden for businesses. On the other hand, unions and labor groups are concerned that without PAGA, workers' rights would be less protected, and some workplace abuses would go unchecked if the law were repealed. Stanford professor of law William B. Gould believes that PAGA enables private attorneys to file lawsuits on behalf of employees to enforce labor laws, especially when government enforcement is slow. Sometimes employers would engage in what we've come to call wage theft, where they simply say to the worker, yeah, I owe you, but I'm not going to pay you. Sue me. Well, the worker goes to the government. The government says, yeah, we'll do something, but in a few years. Well, most workers can't deal with something a few years down the road. And California, while it has a very ambitious employment law protection policy, really doesn't have very much enforcement. You can file a claim with the government, and it can sit there for three years or more without it being attended to by the government. So how to bring the private practitioners into the field was the mission of this statute, and so as to enforce the statute and realize the promises of the California labor code. And that's why Private Attorney General's Act of 2004 had become so important. I think that businesses have a valid position in some respects that probably there are abuses of this law, that probably sometimes attorney's fees were negotiated, which were imposed upon employers, or negotiated, which were excessive, particularly compared to what the workers got. I think the courts always have discretion to limit attorney's fees if they're not appropriate. I think this is an abuse of the system. The lawyers can sometimes abuse the system as well as employers. Opponents of POG argue that the law has enabled a surge of lawsuits over minor technical violations of California's extensive labor code, such as misspelling and paychecks, which are unrelated to serious issues like wage theft or poor working conditions. Nobody supports wage theft. The problem is these technical violations, shakedowns, just lawsuits, those were being filed under the name of wage theft when in fact it wasn't theft of wages at all. Brian Moss is the president of California's New Car Association. He also led a six-year effort by businesses to reform POG to negotiations with labor groups and the state legislature. So you could have circumstances where somebody puts the wrong legal name of a company on the pay stub. Maybe they use their DBA, doing business as, their alternative name, instead of their legal name. There's no economic harm to the employees, mind you. They still got paid. They got paid what they were owed. Well, that's technically a violation of the labor code and it would allow a plaintiff to sue for penalties prescribed under POGA of a hundred dollars per person, per pay period, per violation. Well, if you're a relatively large employer or this error has been in place for a matter of multiple paid periods, the penalties can stack up pretty quick. We have been covering the impact of POGA lawsuits on businesses in California. In fact, in one of our previous episodes, we sat down with celebrity chef Andrew Grohl, who has started and operated multiple restaurants in California. He shared with us how POGA has impacted his restaurant and also other restaurants across the state. I'll never open another restaurant in the state of California, never ever again, because it's inevitable you're going to run into one of the POGA lawsuits. I was at a trade event the other day. Every single restaurant owner I talked to is in a POGA lawsuit. Every single one. Every retail business owner I talked to is in a POGA lawsuit. None of them are less than six figures, many of whom have had to take out high interest loans in order to cover the POGA lawsuits. Most of the employees that are part of the class action don't even want to be part of these lawsuits, but they automatically become a class action by way of one single employee. Let's say now I'm the employee who's been improperly treated, and I file this lawsuit. Now the trial attorney comes in and they subpoena all the records, and they see that, wow, this person worked five hours without taking a break, this person improperly clocked in, you missed this punch, etc. Well, even if there's one violation, it's $100 for every single employee. It becomes a class action, regardless of whether the employees want to be a part of that lawsuit. It immediately becomes a $100,000 violation. Even if it's one violation? One violation now is a multiplier. A single violation, the penalty, that's how they formulate the penalty. It's okay if you violate it at once, it's $100 per employee per payroll period up to x amount of time. Two violations, it's like $1,000. So it just keeps compiling. Now these violations could be very, very minuscule violations. Have you had any happen to you? Oh, yeah. Oh, yeah. We've had POGA lawsuits, yep. And what does it feel like? How does it... There's no... For example, we had one where an employee got drunk on his first day at work, he quit, well, he got fired. He'd only worked for like six hours, and then he was mad that we didn't hire him back because he was begging for his job. I made a mistake, I was drinking. We're like, look, we don't... We just can't take that risk. I mean, we're a family-run business. I have my kids in there every single day. We have zero tolerance for drinking and drugs, especially on the job. Well, he was mad. So obviously, he goes to one of these trial attorneys and they file a lawsuit, missed punches, missed vacation pay, all of these things that didn't apply to him, right? He'd only worked for five or six hours. It doesn't matter. They can still file it, then they receive the information in a subpoena state, basically, like, give us your payroll records, then they find a violation and then, bam, starts the lawsuit. On other people. On other people, yeah. Like, we had a situation where people didn't take their break after five hours. I begged them to take their breaks at five hours, but in many cases, they're only working five and a half, six hours, so like, I don't want to take a 30-minute break. Or their friends come in and they want to take a break with their friend, so they wait 10 minutes, eight minutes, seven minutes. They work five hours and seven minutes, and even if they fill out a form where they say, I want to work over the five hours, it doesn't matter in the state of California. So, bam, there's a violation, applies to every employee, and the number just starts aggregating over time. And then all of the employees get involved in this lawsuit? They don't get involved. They don't even know they're involved. They do it by head, right? So, if you've got 40 employees and you had one violation, they're going to say, okay, $100 per employee, every payroll period for nine payroll periods, and you can see how quickly it becomes $30,000. And the state of California gets 75% of the settlements. The employee doesn't get any, they get like 5% of the money. So that's the point. The employee is, the intention was good in 2004, we're going to help these employees, and we're going to scare the businesses. Now, fast forward to today, PAGA, the Public Attorney General Act, has been hijacked by trial attorneys. In the last six years, trial attorneys alone made $8 billion in settlements through PAGA. There was one against a pretty large employer. They represented thousands of employees. It was $17 million settlement under PAGA. This was a few years ago. And the average employee got $57. And you say, well, how can the attorneys charge that much? How did this work out? Well, what happened is the employer wanted to fight this because they felt that they didn't do anything wrong. So the longer the employer fights it, the more the other side can charge for attorney fees. So this fight costs this employer a lot of money. And you have to make business decisions. And all of these attorneys know 95% of the companies aren't going to fight it. A, because they're too small. B, because they don't have the funding to do so. You know, not everybody's Amazon or Walmart. So, you know, they took a chance, they fought it, they lost, and ended up costing them a lot of money. There was another case with an employer who got hit with a PAGA case. And he cleaned everything up that he thought he could for the company. So three and a half years later, he gets another PAGA notice. And he felt everything he was doing was right, turned over all of his records. And I saw the actual complaint. So what they did is they had a welcome basket for their employees. In the welcome basket, there was a $1 scratch-off ticket. And the attorney accused the employer of paying them with a non-monetary value of a lottery ticket. For a $1 lottery? $1. Wow. So the attorney ended up saying, yeah, it doesn't look like there's anything else here, and settled for $30,000 to the attorney. For the attorney to make it go away. Everybody saw the abuses. And you have to think about, it's anybody that employs somebody. So you're seeing universities, you're seeing schools, you're seeing hospitals, you're seeing religious institutions, nonprofits, foundations, a lot of people. Anybody with an employee is subject to one of these types of lawsuits. The United Farm Workers had their organizers file a PAGA case. And it cost the United Farm Workers $1.2 million. It cost them half of a year's worth of income that they traditionally would receive to settle this PAGA case. So again, everybody has been affected by it. Feeling that the law was being abused, Tom was motivated to fix it. He and some business owners came together to form an alliance to raise awareness about PAGA. Their efforts ultimately led to a November ballot initiative that could repeal PAGA if voters approved it. You guys got enough signatures to bring this on the ballot, right? Right. So there was the threat of the ballot initiative. And then that always forces sometimes legislature, governor's office to sit down and negotiate and see how they can get it off the ballot. So there was about three weeks worth of negotiations. And at the end of the day, it's definitely an improvement to PAGA. PAGA's still there. The 1,100-page Labor Law Digest is still there. But there's a lot of good opportunities to take care of it and take care of it right away. And right now, everybody's still dissecting the language. Just this change to PAGA. There's 21 pages. How many labor code sections? What's it going to affect? How's it going to work? How's it going to be in practice? And there's some positive things in there. The right to cure, if some of these employers can take this on right away and say, hey, we realize people were taking their lunches late. We're going to make all of our employees whole. We're going to go to the state. Let's just take care of this. And the state's going to allow this to happen. I think it's a very good thing. Do you think these lawsuits are going to go away? I think they're going to reduce. I think you're going to see a reduction in lawsuits. I think you're going to see a reduction in settlement amounts. It's going to create a robust right to cure process and is going to give employers the opportunity if they discover, oh, shoot, I screwed up. I need to fix this. They can go in and fix it and have their potential liability substantially reduced as a result of taking quick action to fix these mistakes. So that's a significant benefit of this legislative compromise is we're going to have a real meaningful opportunity for employers to go in and fix mistakes before they face giant lawsuits. Now, can you tell us the labor side of it? What was the benefit of this for the unions? Well, they are getting some benefit. Part of the compromise, employee representatives will be able to file for what's called injunctive relief. So that's where they can go to court and they can ask a court to step in and order a defendant to stop behavior that's violating the law or fix behavior that may be violating the law. That's a new power they'll get under this compromise. The other significant benefit to labor is it increases the percentage of settlements under PAGA that employees will get from 25% to 35%. The PAGA law is unique in the sense that if there's a settlement, previously the state got 75% and employees got 25. Now that's going to be changed and the state's going to get 65 and employees are going to get 35. So employees are going to get a larger recovery going forward. In basic respects, this is good. And also where employers engage in what we call recidivist behavior, that is where they violate the law continuously. Higher damages can be imposed on those employers and where they have engaged in violations with malice and higher damages can be imposed there. I think on balance, this is maybe a good approach. There are two principal problems with the amendments. One is that the Newsom administration makes a pledge to hire more people in their labor agency to enforce the law. It's not clear really how many people will be hired, but more importantly, what kind of salary they'll be paid. Will it attract really good, competent people? The other thing is that there's been an attempt to limit the kinds of group or class actions that can be brought. You got to show that the plaintiff you have, the charging party, plaintiff has engaged in behavior that you allege has been engaged in across the group, involving a large number of groups. So that if I say that, hey, my plaintiff was misclassified and other people don't have that allegation and they simply say, no, I wasn't paid properly. It's not clear that my plaintiff is going to be allowed to represent the entire group. And if lawyers are unable to bring large groups of workers into these proceedings, then lawyers are not interested in enforcing these proceedings. The basic thought I have is that we talk about these laws, they're very interesting and we can debate them, but unless they're actually enforced in reality, they're meaningless. And that's what PAGA is all about. And one has to hope that the basic principles that PAGA was designed to promote and enforce will remain intact, notwithstanding this agreement, which as I indicate, has to be viewed with some measure of skepticism. Now, Bill, some of the businesses that we have talked to about PAGA, they've complained to us that the California labor code is just so complicated. There are so many laws, there's so many details, and they can easily, if you're a small business, if you're a startup, even if you're a big business, you can easily make a mistake. There is a provision in this agreement, which I think is focused on the small employers. And that is if you employ less than a hundred workers, you can file a motion with the court for some kind of neutral resolution of this issue outside of court. We shouldn't have to be rushing to court and filing motions and providing for more expense. This should be another avenue, a neutral avenue, which is really the role that arbitration plays when it's negotiated between labor unions and employers. And that's one of the great promises of these amendments. And I think that many of the businesses' complaints about this are well taken. You sometimes, you know, like the medieval priest, making matters more complicated than they really are. And we should try to cut through that and look for more informal resolution of disputes. The amendments as written, try to promote that. And that's a good feature of the amendment. That's one of the, I've talked about some of the things that I'm skeptical about that. That's one of the things that if utilized is going to be a good, good feature. Why did it take six years to get this done? If it was pretty obvious to everybody that this was a bad. It's a great question. I think labor and perhaps some Democrats in the legislature are hesitant to make any change to labor laws that are being pushed by employers. Usually what happens in legislature, because Democrats control the legislature, is they're looking to expand rights for employees. And generally speaking, are suspicious of business proposing things that are going to directly affect workers. So it took a long time to convince folks that our intentions were pure. We really wanted to help both employers and employees. And to be honest, having a ballot measure on the November ballot, spurred conversations about, well, in lieu of that ballot measure, let's instead try and get a compromise in the legislature. And that's ultimately what happened this week. And why did you guys compromise and why did they compromise? Can you tell us? Yeah, I think from our standpoint, we wanted to lessen the number and severity of lawsuits. And this deal does that. We would have preferred, of course, eliminating PAGA. That would have been fantastic if we were able to pull that off. But it also would have probably cost the coalition $100 million to run a ballot measure campaign statewide in November of 2024. So that was a daunting prospect. And of course, there's no guarantee the voters are going to support what we put on the ballot. So forging a legislative compromise was always something we were looking toward doing if the opportunity presented itself. And it did. And I think from labor standpoint, they didn't want to oppose a measure and have to spend tens of millions of dollars at the ballot box. You know what, let's just try and resolve this in the legislature. And weeks of negotiations led to this deal that was concluded this week. Did you think you could achieve this beforehand, that this will not go on the ballot and you guys will end up negotiating? No, we were prepared to go on the ballot. Our ballot measure committee had $20 million in it. We were prepared to go forward to the ballot. Again, the opportunity to try and resolve this in the legislature presented itself. Both labor organizations and the business community and the governor's office rolled up their sleeves and many, many, many hours of negotiation came up with this deal that we're very, very proud of and I think is going to make PAGA a lot less onerous for businesses going forward. Do you see this as a big win for businesses in California? Or is it a big win for businesses and the labor and the workers in the public? Yeah, I think it benefits both sides. It's a deal, so each side got something. But taking a little higher view, you know, more 30,000 foot, looking at this, business hasn't gotten any effective change to PAGA in 20 years. Every proposal that has been suggested by Republicans or Democrats in the legislature to fix PAGA has been shut down. It's gone nowhere. This is the first time, led by the business community, that we've been able to achieve significant changes to the scope and impact of PAGA going forward. That's a huge accomplishment for the business community. Yes, labor got some things in this deal, but labor typically wins in our California legislature. To have business come to the table with labor and have some of these achievements to narrow the scope and severity of PAGA, that's a significant win for small businesses in California. Now, do you think this kind of collaboration between business and labor in California, do you think this will continue, or do you think this is a one-time thing that happened this time? It's a great question. I'd like to think that this can continue, where labor can feel they have a trusted partner in members of our coalition who are just trying to make the laws better. What I can say is this is the first time in the 20 years that PAGA's been on the books where we've had meaningful reform. We certainly hope it doesn't take another 20 years for business and labor to come together in this fashion. Now, for you, after this deal, is your organization going to continue on other issues? We've always been promoting labor law reform. We've fought against other laws that were passed. AB5, the independent contractor rule, I think really affected and hurt a lot of people and still continues to do so. Again, it was organized labor's quest to get Uber and Lyft unionized, so all the employees were unionized. Well, the gig economy, it's different. They're looking at it like it's 1930. It's not. It's a different type of economy now. If people want to make side money driving for Uber or Lyft, they should be able to. If people make side money doing wedding planning, they should be to do that. Not everybody needs to be an employee, but that's the union's quest to do so. Now, do you have any other thoughts for our audience? Well, I would say right now, if you get a PAGA notice, reach out to us and we'll try to help you out because I think we already have the knowledge and we know what we can do to get you prepared to take this information to the state to get you to correct some of these things because you have to act fast. And I think there's still a lot to learn on how this law is going to play out. I think employers need to get more involved, join our organization. That helps us grow our voice and we need to tell, again, a lot of our stories that things are too complex. Laws don't need to be this complex. You look at some of these laws, it's in there that the bathroom room temperature needs to be 68 degrees or warmer. So who's keeping track of that? I mean, 1,100 pages, 17 different wage orders. It's a lot even for the most sophisticated HR department. It's a lot to keep track of. So you have to try to stay current on a lot of these things. We send out a weekly update to members and non-members just saying, hey, here's some laws, here's some things to look out for, here's what's new, here's how you need to do things. And I don't want the entrepreneurs to lose their entrepreneur spirit. I want them to continue to grow and develop and I want it done in California. So when this law goes to effect, does it change the time that businesses have to respond by when they get these kind of lawsuits or do they have to jump on it really fast? I would say jump on it really fast based on everything that I'm reading and interpreting right now. And there's still a lot to go through because it's fresh. But I think if you know for sure that you paid some employees, you had late lunches, and you know that they took late lunches, correct it, figure out what the meal premiums are, figure out how much you owe, make everybody whole, present to the state, you took care of it, let's move on. So then the legal side will go out of it, right? You just paid whatever it is because apparently that usually is very little compared to what the lawsuit could come. Tom Manso, founder of California Business and Industrial Alliance, it was great to have you on California Insider. Well, I thank you so much for having me. Thank you for taking the time to talk with me.