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INSIGHT: California Employers Get Break as State Court Scales Back PAGA Civil Penalties

Oct. 21, 2019, 8:01 AM

An unexpected recent pro-employer decision from California’s Supreme Court found that unpaid wage claims cannot be recovered by employees under the state’s Private Attorneys General Act (PAGA) because those wages are “not a civil penalty that a private citizen has authority to collect.”

The ruling in ZB, N.A., and Zions Bancorporation v. Superior Court of San Diego (Cal. Sept. 12, 2019) dramatically reduces employers’ PAGA exposure to only civil penalties and makes clear that there is no right to individual employee wage recovery under the PAGA umbrella. Thus, employees can still be required to arbitrate unpaid wage claims.

This decision is a welcome development for all California employers. The potential exposure in PAGA cases—and pressure to settle because of that exposure—has greatly decreased. It also puts a much-needed end to employees’ backdoor attempts to “recover” unpaid wages in PAGA actions while avoiding arbitration or the difficulties of pursuing a class action.

The PAGA statute is a powerful tool because it offers financial incentives ($50 or $100 per violation) to private individuals to enforce state labor laws, which are typically reserved for the labor commissioner or attorney general. Plaintiff’s counsel bringing a PAGA claim can seek attorneys’ fees under the statute as well.

Importantly, PAGA claims may not be waived, and employees may not be compelled to arbitrate such claims. These features made PAGA claims increasingly popular among the plaintiffs’ bar.

Case Specifics

In the case, plaintiff Kalethia Lawson alleged that her employer, ZB, failed to provide overtime, minimum wages, and meal and rest periods. Her employment agreement required that she arbitrate all disputes with her employer. She never disputed that she agreed to arbitrate her claims, but she initially sidestepped arbitration by characterizing her wage claim as a civil penalty under PAGA.

When she filed a PAGA claim, ZB moved to compel arbitration of her individual claims for unpaid wages, which was granted by the trial court. Defendants appealed a different portion of the decision, but the case wound its way to the state high court to resolve a split of authority over whether unpaid wages and the other non-fixed amounts were truly part of a civil penalty or constituted individual relief outside the scope of a PAGA action.

ZB argued before the California Supreme Court that unpaid wages claims are subject to arbitration because PAGA covers only civil penalties, and unpaid wages fail to qualify as civil penalties since they are compensatory damages.

Following an in-depth analysis of the California Labor Code language and legislative history, the court agreed, reasoning that the statute allowed recovery of only fixed penalties that are specified in the statute in certain amounts. Thus, PAGA does not cover unpaid wage claims unique to an employee because the statute encompasses only civil penalties.

The court further noted that the law authorizes only the “Labor Commissioner to issue a citation that includes both a civil penalty and the same unpaid wages.” The court recognized that plaintiffs may recover unpaid wages through civil actions or by filing labor commission claims rather than filing under PAGA.

What Does This Actually Mean?

What can companies do in the wake of this judgment?

1. California is still a pro-employee state, so review your current employee agreements or handbooks.

  • Are they easily accessible to your employees?
  • Do they include an arbitration agreement that is apparent and readable?
  • Ensure that employees expressly acknowledge and agree to arbitrate claims related to any disputes they may have with the company.

The simplest way to do this is to include an arbitration clause that the worker signs or initials within the employment agreement as opposed to referencing another document that the worker may never actually see.

2. Consider tailoring the language of arbitration clauses in employee agreements or handbooks to include unpaid wage claims, overtime claims, and meal and rest claims.

  • Ensuring that these kinds of claims are arbitrated makes legal costs more manageable and predictable.

3. Sloppy drafting and unclear language leaves arbitration agreements vulnerable to courts eager to protect employees.

Companies located in California or those with workers located in California should keep an eye on PAGA cases. PAGA claims skyrocketed in popularity because they allowed plaintiffs to circumvent arbitration clauses and the more stringent class action requirements.

Plaintiffs’ counsel is sure to seek out creative ways to steer cases into state courts. Likewise, monitor workers’ advocacy groups who disagreed with ZB as they may seek out legislative means to increase “protections” for California employees.

In that same vein, companies should keep tabs on how lower courts, other employers, and the plaintiffs’ bar grapple with this decision. While the ruling provides guidance and is welcome news for anyone doing business in California, the full ramifications and impact remain uncertain.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Ndubisi Ezeolu is counsel with Tucker Ellis LLP in Los Angeles and practices management-side employment law and focuses on helping businesses of all sizes better govern their talent.

Juan Aragon is an associate with Tucker Ellis and his practice includes high-stakes and contentious legal matters involving complex commercial, contractual, and employment mobility issues.