Restaurants are often the target of frivolous lawsuits under the Private Attorneys General Act. Photo by Chris Stone

Widespread vaccinations are putting the COVID-19 pandemic in the rearview mirror. Now, it’s time for California lawmakers to focus on helping the state’s beleaguered economy recover.

Data from the Bureau of Labor Statistics indicates that California has the second-highest unemployment rate in the nation. Roughly 20,000 state businesses have closed permanently. 

New research from my organization, the California Business and Industrial Alliance, identifies one key way to help the state get back on track: reform California’s Private Attorneys General Act

PAGA deputizes ordinary employees to act as agents of the state labor department, allowing them to file employment violation claims against employers and share in the penalty or settlement income. In practice, PAGA has become a cash cow for trial lawyers, who file thousands of frivolous lawsuits each year and collect the vast majority of the proceeds. 

PAGA claims are often for administrative or good-faith violations of California’s 1,100-page labor code. For instance, employers who allow their employees to take flexible lunch hours expose themselves to PAGA lawsuits for violating California’s labor law requiring set break times. Employers who give their employees holiday or performance-based bonuses could face PAGA claims if they don’t factor these bonuses into employees’ underlying base rate of pay on which overtime compensation is calculated. 

recent study from my organization finds that employees actually fare far worse when their cases are resolved under PAGA versus the state Labor and Workforce Development Agency. In fact, it found workers received nearly twice as much when their case was handled by the agency, while employers paid less in penalties. That’s because lawyers typically take a huge cut of PAGA cases, with fees that represent one-third or more of workers’ total recovery. 

Another recent analysis provides anecdotal evidence to back up these findings. It suggests that PAGA directly costs Californians their jobs because PAGA-related expenses force employers to cut labor costs.

We cross-referenced PAGA claims and state layoff data between 2014 and February 2020 and found that more than 100 mid-size or larger companies with operations in California laid off a substantial number of employees or closed entirely within 18 months of being hit with a PAGA filing. (Small businesses generally aren’t required to file layoff notices with the state, so this analysis omits the substantial impact PAGA has had on these low-margin employers.)

Affected employers include Alpine Village, a Bavarian-themed restaurant and bar in Torrance that was forced to close and lay off 35 employees five months after a PAGA claim in 2019. And they include Sport Chalet, which closed several locations across the Southland in 2016, laying off a combined 330 employees, eight months after getting hit with a PAGA claim.   

Employees have long been the biggest victims of PAGA. To ward off PAGA lawsuits, employers must eliminate shift flexibility and office perks. For instance, employees who used to be able to work through their lunch to leave early to pick up their kids from school must now follow a standard schedule.

The economy has gone through significant changes over the past several years. No one is disputing the enormous impact that e-commerce has had on many retailers. Yet such broader challenges facing businesses as they emerge from the pandemic are all the more reason to address additional burdens such as PAGA.

California legislators should recognize that employees sometimes pay the cost of PAGA claims with their jobs and immediately reform this law to eliminate frivolous lawsuits over victimless violations of the state’s complex labor law. Updating this law could help more Californians keep their jobs when they need them most.

The pandemic may be ending, but the plague of job-killing regulations like PAGA remains.

Tom Manzo is the president and founder of the California Business and Industrial Alliance. He runs a manufacturing business with almost 200 employees.

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