A 2026 Roadmap for California Employers: Establishing Reasonable Steps to Limit PAGA Exposure

PAGA remains the single largest source of employment-law exposure for California employers. In the first half of 2026 alone, we tracked roughly $1.3 billion in PAGA and wage-and-hour class action settlements, and PAGA notice filings with the LWDA are on pace for their biggest year ever. And no employer is too small or too remote to be a target: about 44% of recent settlements covered workforces of fewer than 200 employees, and filings are spreading well beyond Los Angeles, San Francisco, and San Diego.

The good news is that the 2024 PAGA reform gives employers a powerful, concrete way to limit that exposure. If your company takes “all reasonable steps” to comply with the Labor Code, PAGA penalties can be capped at a fraction of their former size. But the caps are not automatic — the employer bears the burden of proving its compliance efforts, with documentation. Here is a practical roadmap for putting those reasonable steps in place in 2026.

The payoff: capped penalties

Under the reformed PAGA, civil penalties — which historically ran $100 or more per employee, per pay period, and quickly reached seven figures for even mid-sized employers — can be dramatically capped:

When “all reasonable steps” are taken	Penalty cap
Before receiving a PAGA notice or a Labor Code records request	15%
Within 60 days after receiving a PAGA notice	30%

The difference is enormous. In a typical 100-employee scenario, exposure that could have exceeded $2 million under the old PAGA can be reduced to roughly $150,000 as a starting point for negotiation — before your compliance records reduce it further, because the plaintiff still has to prove the underlying violations. Penalty “stacking” of multiple derivative claims on the same conduct is also no longer permitted.

One point we stress with every client: perfection is not the standard. The reform recognizes that even the most diligent employer will occasionally have a violation. The question courts ask is whether you implemented a reasonable compliance system — and whether you can prove it.

How “reasonable steps” are evaluated

The statute does not provide a bright-line test, and because the law is still new, courts are only beginning to define it. But the factors courts will weigh are clear from the statute itself: the timing and frequency of payroll and time-record audits (and, critically, whether issues identified were actually corrected); whether supervisors were trained on Labor Code and Wage Order requirements; the size and resources of the employer; and the duration and severity of any alleged violation — a one-off error is viewed differently than a systemic practice.

One theme runs through all of it: compliance is a system, not an event. A single webinar, one handbook revision, or one payroll audit conducted years ago will likely not be enough. The strongest position is a recurring, documented pattern of compliance efforts over time.

The four pillars

The statute specifically identifies four categories of reasonable steps. Think of them as the four pillars of a defensible compliance program — if one is missing, a plaintiff’s attorney will argue the system was incomplete:

1. Periodic payroll audits — regular review of time records, pay calculations, wage statements, and final pay, with action taken on the results.
2. Lawful written policies — current, compliant meal and rest break, timekeeping, overtime, and reimbursement policies. An outdated policy becomes Exhibit 1 in the plaintiff’s brief.
3. Supervisor training — documented training on break obligations, the prohibition on off-the-clock work, time-edit procedures, and overtime rules.
4. Corrective action — when audits or reports identify a problem or a non-compliant supervisor, fix it: pay premiums owed, retrain, discipline, and document each step.

Your 2026 roadmap

Here is a practical cadence for building all four pillars — and the documentation trail that proves them — over the course of the year.

Now (first 30 days)

• Conduct a baseline audit of time and payroll records: meal period timing, premium payments, overtime, pay stubs, expense reimbursement, and final pay practices.
• Review your handbook and wage-and-hour policies for facially unlawful language.
• Turn on daily meal-period attestations in your timekeeping system, and put meal period waivers in place where appropriate.
• Document: a dated audit report with a corrective-action plan for each issue found, a memo noting the policies reviewed and changes made, and signed waivers.

Weekly

• Review meal break exceptions and attestation responses before payroll runs. Pay premiums where a break was missed, short, or late, and follow up on any “no” attestation.
• Document: exception reports, premium payment records, and written notes of follow-up with employees.

Monthly

• Run a time-record compliance audit showing violation rates by location, department, and supervisor. Investigate outliers and correct them.
• Track your compliance rate over time — we like to see employers at 95% or better.
• Document: monthly audit reports showing rates, trends, and the specific corrective steps taken.

Quarterly

• Audit a random sample of exempt and non-exempt wage statements against Labor Code section 226 requirements, including sick leave accruals.
• Audit final pay practices using a checklist — final pay is one of the easiest issues for plaintiffs’ attorneys to pursue and one of the easiest for employers to prevent.
• Verify your payroll and timekeeping software settings (daily overtime on, regular rate correct, rounding off) have not changed.
• Document: completed checklists, the samples reviewed, and a dated log of software settings verified.

Annually

• Train supervisors on break obligations, off-the-clock work, time edits, and overtime approval — with refreshers for new supervisors.
• Update your handbook and policies before the new employment laws take effect January 1.
• Review arbitration agreements with class action waivers with counsel.
• Document: training logs (who, what, when), sign-in sheets or certificates, updated policies with revision dates, and counsel review notes.

Ongoing

• Take corrective action whenever an issue or non-compliant supervisor is identified — retraining, discipline, or process changes.
• Attend legal updates and stay current on wage-and-hour developments.
• Document: written corrective-action records and certificates of attendance at trainings and seminars.

If a PAGA notice or records request arrives

A PAGA notice filed with the LWDA — or a Labor Code records request, which is often the first warning sign — starts the clock. If you have not yet taken all reasonable steps, you have 60 days from the notice to do so and still qualify for the 30% cap. Contact counsel immediately: this window is also when cure rights, early-resolution strategies, and defense positioning are established, and the earlier a case moves toward resolution, the fewer pay periods are in play.

The bottom line

You bear the burden of proving your reasonable steps. Every audit, policy review, training session, software settings check, and corrective action should be documented, dated, and stored where it can be retrieved easily — so that if a claim ever arrives, your counsel walks into mediation with exhibits, not assertions. With $1.3 billion in settlements on the table in just six months, building this program now is one of the best investments a California employer can make.

Frequently asked questions

What are "reasonable steps" under PAGA?

The statute identifies four categories: periodic payroll audits with action taken on the results, lawful written policies, supervisor training on Labor Code and Wage Order requirements, and corrective action when issues are identified. Courts look for a recurring, documented compliance system — not perfection, and not a single one-time effort.

How much can PAGA penalties be reduced?

If an employer took all reasonable steps before receiving a PAGA notice or a Labor Code records request, penalties are capped at 15% of the maximum. If the employer takes all reasonable steps within 60 days after receiving a notice, penalties are capped at 30%. In practice, that can turn seven-figure exposure into a six-figure starting point for negotiation — before compliance records reduce it further.

Are the penalty caps automatic?

No. The employer bears the burden of proving it took all reasonable steps, which is why documentation is critical. Dated audit reports, training logs, policy revision histories, and corrective-action records are the evidence that supports the cap.

What should an employer do after receiving a PAGA notice?

Contact counsel immediately. The notice starts a 60-day window in which taking all reasonable steps can still cap penalties at 30%, and it is also when cure rights and early-resolution strategies are established. A Labor Code records request should be treated with the same urgency — it is often the first sign a PAGA claim is coming.

This article is a general overview for informational purposes only and is not legal advice. Every employer’s situation is different — if you have questions about your company’s specific circumstances, please contact us.