The 2016-17 Budget

Labor Code Private Attorneys General Act Resources

This post addresses the Governor’s 2016-17 budget proposal related to the Labor Code Private Attorneys General Act (PAGA). The following sections provide background on PAGA, describe and assess the Governor’s proposal, and outline our recommendations for the Legislature’s consideration.

Background

Labor Code Places Various Requirements on Employers Related to Employee Wages, Hours, and Working Conditions. Various provisions of the California Labor Code outline requirements that employers must meet with respect to employee wages, hours, and working conditions. For example, the Labor Code specifies a minimum hourly wage that must be paid to most workers, when overtime compensation must be paid, when meal and rest periods must be provided, what information employers must include on itemized wage statements, and what steps employers must take to provide a safe and healthy workplace.

Employers That Violate Labor Code Provisions Are Liable for Back Wages and Civil Penalties. When an employer does not pay wages as required by law (such as by not paying overtime), the Labor Code allows employees to recover these wages, either through an administrative proceeding with the state’s Labor and Workforce Development Agency (LWDA) or through private legal action in Superior Court. The Labor Code also specifies additional civil penalties that may be imposed on employers who violate Labor Code provisions. Such civil penalties are in addition to wages that may be recovered and are intended to act as a deterrent against violations. The LWDA and the related state agencies that it oversees, including the Department of Industrial Relations (DIR) and the Division of Labor Standards Enforcement (DLSE) and Division of Occupational Safety and Health (DOSH) within DIR, are responsible for enforcing the Labor Code and are authorized to impose the civil penalties outlined in state law.

The PAGA Allows Employees to Seek Civil Penalties on Their Own Behalf. As noted above, employees who have wages improperly withheld may seek to recover these wages through private legal action against the employer. For those who do so, the PAGA—enacted by Chapter 906 of 2003 (SB 796, Dunn) and Chapter 221 of 2004 (SB 1809, Dunn)—grants employees the right to additionally seek civil penalties from employers that prior to PAGA could only be pursued by LWDA and related state agencies. The general intent of PAGA is to allow employees to pursue civil penalties through the legal system when LWDA and related state agencies do not have the resources to do so, with a goal of increasing the deterrent effect of the civil penalties and compliance with labor law. While civil penalties collected by LWDA are generally deposited in the state General Fund, any penalties collected under PAGA are split between the employee, who receives 25 percent, and LWDA, which receives the remaining 75 percent. The LWDA’s portion of PAGA penalties is deposited into the Labor and Workforce Development Fund (LWDF), which is used for enforcement of labor laws and to educate employers and employees about their rights and responsibilities under the Labor Code. Figure 1 displays the amount of PAGA penalties received by the LWDF in recent years.

Current Law Allows PAGA Claims to Proceed Only After LWDA Declines to Investigate or Does Not Issue a Citation. Under PAGA, an individual who wishes to pursue civil penalties against an employer must provide a written notice to both the employer and LWDA of the alleged violations and his or her intent to pursue civil penalties under PAGA. This notice is the first step in a PAGA claim. (We note that, in practice, PAGA notices have varying levels of detail about alleged violations and the facts supporting them.) This requirement is intended to allow LWDA to step in and investigate claims that it views as preferable to handle administratively rather than through the PAGA process, such as when the claim overlaps with other matters already under investigation by LWDA.

In most cases, LWDA has 30 days to determine whether to investigate and, if it does investigate, 120 additional days to complete the investigation and determine whether to issue a citation. If LWDA does not investigate, or does investigate but does not issue a citation, the PAGA claim may proceed. For certain violations that are considered less serious (for example, failing to correctly display the legal name and address of the employer on an itemized wage statement), employers are provided 33 days to prevent a PAGA claim from proceeding by correcting the alleged violations. In the infrequent case of a PAGA claim related to workplace health and safety, a DOSH investigation is mandatory and separate time lines apply to the DOSH investigation and for the employer to correct the alleged violation. The number of PAGA notices received by LWDA over the past few years is displayed in Figure 2.

Following Initial Notice and Possible Investigation, LWDA Role in PAGA Process Is Limited. Once the PAGA claim proceeds, LWDA typically receives no further information beyond payment of the portion of any civil penalties that is due to the LWDF. Civil penalties can be assessed through the PAGA process in two ways. When the court finds that the allegations in the PAGA claim have merit, they have the authority to impose civil penalties. Alternatively, the parties to the claim may settle out of court and include civil penalties as part of such a settlement. However, not all settlements include civil penalties. In fact, LWDA reports that in 2014-15 it received just under 600 payments for PAGA claims that resulted in civil penalties. This number is low relative to the amount of PAGA notices LWDA receives each year (roughly 10 percent of notices received in 2014), implying that the final disposition of a large portion of PAGA claims, and likely many settlements, do not involve civil penalties. When cases that involve a PAGA claim settle out of court and civil penalties are included as part of the settlement, PAGA requires court review and approval of the settlement.

Administration Raises Issues Related to PAGA Implementation

The administration has raised several issues regarding the current implementation of PAGA that motivate the Governor’s 2016-17 budget proposal, as described below.

Insufficient Time and Resources to Review PAGA Notices and Investigate Claims. The LWDA notes that in the past it has been able to devote only minimal staff and resources—specifically, one position at DLSE beginning in 2014—to perform a high-level review of PAGA notices and determine which claims to investigate. In 2014, less than half of PAGA notices were reviewed, and LWDA estimates that less than 1 percent of PAGA notices have been reviewed or investigated since PAGA was implemented. When a PAGA notice is investigated, LWDA reports that it has difficulty completing the investigation within the timeframes outlined in PAGA. When an investigation is not completed, or not completed on time, the PAGA claim is automatically authorized to proceed.

Reports of Undesirable Outcomes From PAGA Litigation. The LWDA also highlights concerns from stakeholders that the outcomes of PAGA litigation may not always be in the best interest of the state as a whole. Specifically, the concern has been raised that some employers are incurring substantial legal costs to defend against PAGA claims that allege what might be viewed as relatively minor labor law violations. On the other hand, the concern has also been raised that PAGA settlements may not achieve the same level of wage recovery and civil penalties as might be the case were LWDA to investigate. Because parties to PAGA claims currently are not required to notify LWDA on the outcomes of PAGA claims after the agency declines to investigate or issue a citation (other than to forward any penalties due to the LWDF), complete information on the final disposition of PAGA claims is not available. This lack of information makes it difficult to evaluate whether, and how often, these potential undesirable outcomes are occurring.

Potential for Significant PAGA Penalties When New Precedent Is Established. Finally, as a rationale for the 2016-17 proposal, LWDA cites employer concerns about court decisions in which widespread industry practices that a significant number of employers believe in good faith to be legal are found to violate the Labor Code. Such decisions set a new precedent that could lead to PAGA claims with potentially significant penalties for employers.

Overview of the Governor’s Proposal

As part of the 2016-17 budget, the Governor proposes several actions intended to reduce litigation costs for employers and improve outcomes for employees by addressing the issues discussed above.

Increase Staff to Review Notices and Oversee PAGA Process. The Governor’s proposal would provide $1.6 million in 2016-17 and $1.5 million ongoing from the LWDF to support ten new positions—one at LWDA and nine at DIR—that would allow for greater oversight of the PAGA process. Figure 3 lists the specific positions requested. The new positions would allow for a greater number of PAGA notices to be reviewed and investigated. Specifically, the administration estimates that the proposed positions would review about 900 additional PAGA notices (a more in-depth review than current resources allow) and investigate an additional 45 claims each year. The proposed positions would also help address some increased workload related to various proposed changes to the PAGA process described below.

 Require Additional Information on PAGA Proceedings Be Provided to LWDA. The Governor’s proposal would also amend PAGA to require that more information about PAGA proceedings be provided to LWDA. Specifically, the proposal would (1) require that initial PAGA notices filed with LWDA have more detail than is currently required about the legal contentions and authorities supporting each alleged violation, (2) require that DIR receive a copy of the complaint when the legal action is initiated, (3) require that DIR be notified of the terms of PAGA settlements, and (4) require all PAGA-related notices to LWDA or related state agencies be submitted through a new online system.

Make Various Other Changes to the PAGA Process. In addition to the proposed PAGA amendments described above, the Governor’s proposal would make several other changes to the existing PAGA process, as described below.

• Require a Filing Fee for PAGA Notices. The proposal would require that employees wishing to pursue a PAGA claim pay a fee of $75 (or $150 if the PAGA claim is seeking penalties on behalf of ten or more employees) when filing the initial PAGA notice with LWDA, except when the alleged violation relates to workplace safety or health. These fees would be deposited into the LWDF and used to offset some of the cost of the proposed new positions.

• Require That PAGA Notices Involving Multiple Employees Be Verified. The proposal would require that PAGA notices that are seeking penalties on behalf of ten or more employees be verified, meaning that the employee filing the notice must attest that the information in the notice is true.

• Clarify That Employers May Request LWDA Investigation. The proposal would amend PAGA to clarify that employers who receive a PAGA notice have the ability to request an investigation by LWDA or related state agencies. Employers would be required to pay a $50 fee to file such a request.

• Extend Investigation Time Lines. The proposal would extend the time allotted for LWDA to consider whether to investigate the violations in a PAGA notice from 30 to 60 days and extend the time to investigate and issue a citation from 120 to 180 days.

• Require Court Approval of All PAGA Settlements. Currently, courts are generally required to review and approve only PAGA settlements that include civil penalties or that relate to violations of health and safety requirements. The proposal would require that all settlements be submitted to the court for review and approval.

• Allow LWDA to Object to Proposed PAGA Settlements. Currently, in addition to being reviewed by the court, PAGA requires that settlements related to health and safety requirements are also submitted to DOSH for comment and that courts give appropriate weight to DOSH comments when considering approval of the settlement. The proposal would extend this requirement to all PAGA settlements by allowing the Director of DIR to object to any proposed settlement prior to the court’s consideration of the settlement.

Grant Authority to DIR to Create Ad Hoc Employer Amnesty Programs Under Specified Conditions. In some instances where a widespread industry practice has been found to be in violation of labor law, the Legislature has enacted temporary amnesty or safe harbor programs to allow affected employers to receive relief from potentially substantial penalties in exchange for quickly compensating employees for past violations. For example, Chapter 741 of 2015 (AB 621, Hernández) recently created the Motor Carrier Employer Amnesty Program. This program allows motor carriers to pay back wages and benefits to drivers whom are misclassified as independent contractors in exchange for relief from penalties for the violations in question.

The Governor’s proposal would give DIR the authority to create temporary amnesty programs when certain conditions exist, including that (1) a court decision or other legal development invalidates a common industry practice that a substantial portion of the industry believed in good faith to be legal, (2) the decision or legal development affects at least 10,000 employees and is likely to lead to PAGA claims against at least five employers, and (3) the amnesty program is likely to provide more relief to employees than private legal action. The process of creating a temporary amnesty program would begin after a petition from an interested party (such as an employer) is filed with DIR and an opportunity is given to other interested parties, including employees, employers, and worker or industry advocacy groups, to comment on the petition. Amnesty programs created under the proposed new authority would be limited to 18 months and would require that an employer fully compensate employees for any back wages due.

Assessment

Additional Funding and Staffing Would Provide Greater PAGA Oversight, Consistent With Legislative Intent. In our view, the intent of PAGA is that LWDA have the opportunity to review PAGA notices and at least in some cases conduct its own investigation prior to the PAGA claim proceeding. Given the minimal resources currently devoted to the review and investigation of PAGA notices, we do not believe LWDA is currently able to fulfill the role intended for it in the PAGA legislation. Providing the additional funding and positions in the Governor’s proposal likely would not be sufficient to review and investigate even a majority of PAGA notices, but would greatly expand LWDA’s ability to meet the intent of the PAGA legislation.

Requiring That More Information Be Provided to LWDA Would Clarify Nature and Extent of Undesirable Outcomes. The administration has raised concerns about possible negative outcomes from PAGA litigation for both employers and employees, but because comprehensive information about the final disposition of PAGA claims is not available to the LWDA, it is difficult to assess how serious or prevalent these issues are. We think the Governor’s proposed amendments to PAGA requiring more information be provided to LWDA—specifically, more detail in the initial PAGA notice and that a copy of the PAGA complaint and any settlement be provided to LWDA—are a reasonable extension of LWDA’s oversight of the PAGA process that would make it possible to better assess the nature and extent of the undesirable outcomes highlighted in the Governor’s proposal. Information obtained about the disposition of PAGA claims could play an important role in future consideration of other potential proposals to modify the PAGA process.

Other Proposed Amendments to PAGA Raise More Significant Policy Issues That Warrant Greater Legislative Deliberation. In our view, the remaining proposed amendments to the PAGA process differ from those discussed immediately above in that they raise more significant policy issues that are more central to the Legislature’s intent for PAGA. For example, the remaining proposed changes touch on questions of employee access to the PAGA process, how long employees should wait for LWDA to conduct an investigation before the claim may proceed, and whether LWDA should be able to influence the outcome of a PAGA claim once it has decided not to investigate or issue a citation. While the proposed changes may have merit, such fundamental changes to PAGA, in our view, would be more appropriately considered in the legislative policy process rather than the state budget process. This policy deliberation also may be more productive once LWDA has more complete information about the outcomes of PAGA claims—as proposed by the Governor.

Granting Authority to DIR to Create Ad Hoc Temporary Amnesty Programs Would Undermine Legislature’s Role. Temporary amnesty programs, such as the Motor Carrier Employer Amnesty Program recently enacted through Chapter 741, can be effective tools to more quickly bring about compliance, provide back wages and benefits to employees, and protect employers from potentially damaging penalties in instances when a longstanding industry practice is found to violate the law. Giving DIR the authority to create future amnesty programs under certain conditions but without specific legislative authorization in each case would likely expedite the creation of such programs. However, we believe that the Legislature has an important role to play in considering when employers should be granted relief from penalties imposed for violating labor law, and under what terms this relief should be granted. We are concerned that giving DIR the authority to establish amnesty programs on an ad hoc basis would undermine the Legislature’s role in this area, and believe that this concern outweighs the potential benefit of establishing future amnesty programs more rapidly.

Recommendations

We recommend that the Legislature take the following actions with respect to the Governor’s 2016-17 PAGA proposal.

Approve Requested Funding and Positions. To enable LWDA to more effectively fulfill its role of reviewing and, in some cases, investigating PAGA claims, we recommend that the Legislature approve funding for the ten positions requested in the Governor’s proposal. We note that, if the Legislature does not approve the administration’s proposed fee on PAGA filings at this time (see our recommendation below), fee revenues will not be available to offset a portion of the costs of these positions and the full cost will be borne by penalties deposited in the LWDF. The LWDF has a sufficient balance to pay the full cost of these positions for the next several years, but the ability of the fund to support the positions over the longer term is unclear because it depends on potential growth or decline in PAGA penalty payments (payments appear to have been increasing in recent years). We note that the administration’s proposal also depends on uncertain revenue projections. Should the Legislature approve the requested positions but reject the proposed fee, it will be important to monitor the condition of the LWDF and consider future adjustments to the expenditures of the fund or possibly identify an additional funding source—such as a potential fee on PAGA filings as proposed by the Governor—as necessary.

Amend PAGA to Require That Additional Information Be Provided to LWDA. In order to better understand the outcomes of PAGA litigation, we further recommend that the Legislature amend PAGA to require more detail in initial PAGA notices, require that LWDA receive copies of PAGA complaints and any settlement agreements, and require that notices to LWDA related to PAGA claims be submitted through an online system, consistent with the Governor’s proposal.

Reject Remaining Proposed PAGA Amendments Without Prejudice in Favor of Separate Legislative Deliberation on PAGA Priorities. At this time, we recommend that the Legislature reject without prejudice the remaining proposed amendments, including (1) the proposed filing fee, (2) verification of PAGA notices involving more than ten employees, (3) clarifying that employers may request an LWDA investigation following a PAGA notice, (4) extending investigation time lines, (5) requiring court approval of all PAGA settlements, and (6) allowing LWDA to object to proposed PAGA settlements. These proposed amendments may have merit, but would be better addressed through a legislative policy process that examines the Legislature’s priorities for the PAGA process, allows for greater input from affected stakeholders to identify potential benefits and drawbacks, and allows for consideration of potential reporting requirements that would draw on the better information LWDA receives on the final outcomes of PAGA litigation.

Reject Proposed Language Allowing DIR to Create Ad Hoc Temporary Amnesty Programs. We recommend rejecting proposed language to grant DIR the authority to create temporary amnesty programs on an ad hoc basis, in favor of reviewing proposals for such programs on a case-by-case basis through the regular legislative policy process. This approach may slow the creation of future amnesty programs relative to what might be possible under the Governor’s proposal, but would preserve the Legislature’s important role in determining when to relieve significant groups of employers from penalties associated with violating labor law.