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CA Supreme Court: Employees Cannot Bring Claims for Unpaid Wages Under PAGA

In resolving a growing split among California courts, the California Supreme Court in ZB, N.A. v. Superior Court faced the issue of whether actions for unpaid wages under Labor Code section 558 brought under the Private Attorneys General Act (“PAGA”) could be compelled to arbitration.

The Court unanimously held that section 558 does not confer a private right of action and plaintiffs could not use PAGA for compensatory back wages that could be collected otherwise in private individual lawsuits or arbitration.

In 1999, the legislature passed section 558, which provided the Labor Commissioner the authority to sanction employers that violate sections of the Labor Code or IWC Wage Orders by imposing a civil penalty of $50 (and $100 for subsequent violations) for each underpaid employee for every pay period, in addition to an amount sufficient to recover unpaid wages.  While the Labor Commissioner would collect the civil penalties, section 558 expressly provided that the “unpaid wages” portion of the award would go directly to the affected employee.

Later in 2003, the legislature enacted PAGA, which deputized individual plaintiffs to stand in the shoes of the Labor Commissioner and recover civil penalties for Labor Code violations on behalf of themselves and other aggrieved employees. Under PAGA, prevailing plaintiffs keep 25% of these civil penalties while 75% goes to the state of California.  While PAGA has only a one-year statute of limitations, plaintiffs have advanced PAGA actions pursuant to section 558, seeking to collect not only significant penalties, but also years of alleged unpaid wages on behalf of aggrieved employees.

In the landmark case of Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court held that, unlike class action waivers, actions under PAGA could not be compelled to arbitration nor waived because PAGA enforces a right provided to the state of California and plaintiffs serve as merely the agents.  While employees may have agreed to arbitrate all claims arising out of their employment, the state of California has not agreed to arbitrate all claims the Labor Commissioner may bring.  Thus, PAGA claims—unlike class action and individual claims—cannot be arbitrated. 

In ZB, N.A. v. Superior Court, the employee signed an enforceable arbitration agreement.  She later filed suit for PAGA penalties, seeking to recover, among other things, penalties and unpaid wages under section 558.  The employer moved to compel arbitration as to the plaintiff’s individual unpaid wages portion of her section 558 PAGA action.  While the trial court agreed with the employer, the Court of Appeal reserved.  On review, the Supreme Court first needed to decide whether an individual may recover unpaid wages under section 558 pursuant to PAGA.  The Court held that the civil penalties a plaintiff may seek under section 558 through PAGA does not include the “amount sufficient to recover underpaid wages.”  Although the Labor Commissioner could conceivably collect this amount, a private citizen could not have the authority to collect compensatory damages via PAGA, because PAGA was designed to only recover civil penalties.  As the Court opined, “[a]n employee’s predispute agreement to individually arbitrate her claims is unenforceable where it blocks an employee’s PAGA claim from proceeding. But a PAGA claim does not include unpaid wages under section 558.” 

Takeaways

Some employees have used section 558 as a back door to litigating their claims for unpaid wages, despite signing enforceable arbitration agreements.  While employers will not be immune from PAGA actions, the Court’s ruling empowers employers’ use of pre-dispute arbitration agreements and class waivers and closes this loop hole regarding claims for underpaid wages. If an employee signs an arbitration agreement and files a claim for underpaid wages in addition to a PAGA action, the employer has the right to arbitrate the claim for underpaid wages separate and apart from the PAGA action. 

Of note, however, California’s legislature recently passed AB 51, limiting the validity of arbitration agreements in the employment context “to ensure that individuals are not retaliated against for refusing to consent to the waiver of those rights and procedures and to ensure that any contract relating to those rights and procedures be entered into as a matter of voluntary consent, not coercion.” The Governor has until mid-October to sign or veto the bill.

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