California Supreme Court: An Employee May Not Seek Unpaid Wages in a PAGA-Only Action
Today, the California Supreme Court issued its long-anticipated decision in ZB N.A. v. Superior Court (Lawson), resolving a split among California Courts of Appeal on the issue of application of an arbitration agreement to a PAGA claim seeking both civil penalties AND unpaid wages (pursuant to Labor Code section 558). By way of background, several years ago, the California Supreme Court held in Iskanian v. CLS Transportation that a PAGA claim is not subject to an employment arbitration agreement because a PAGA claim seeking civil penalties (the majority of which are paid to the state, not to affected employees) is really a claim between the state and the employer, and the state is not a party to any arbitration agreement with the employer. However, after Iskanian, plaintiffs’ attorneys began to seek more than just civil penalties in their PAGA actions. They began to also seek unpaid wages under Labor Code 558, which is a statute providing that employers who violate certain wage and hour laws may be sued for civil penalties “in addition to an amount sufficient to recover unpaid wages.” In other words, under this section, employees may recover not only penalties but also individualized monetary relief that is more akin to traditional damages. Because this relief is employee-specific and payable directly to affected employees (as opposed to being payable to the state), employers facing such claims sought to compel arbitration of the unpaid wage portion of the PAGA claims, arguing that employees who agreed to arbitrate disputes must be compelled to arbitrate the portion of the PAGA claim seeking unpaid wages and that the civil penalty portion of the claim should be stayed pending completion of the arbitration and then decided by a court. The Court of Appeal in Lawson disagreed with this position, holding that a PAGA claim cannot be split in this fashion. However, at least one other Court of Appeal ruled differently and held that the portion of the PAGA claim seeking unpaid wages was subject to arbitration. The California Supreme Court ultimately took the issue up on review in Lawson, and issued its decision today.
In an interesting twist, the Supreme Court held today that the Courts of Appeal had all analyzed the issue incorrectly and that they need not have even reached the issue of whether a PAGA claim seeking unpaid wages was subject to arbitration. The Court held that the initial question that had to be answered was whether an employee suing exclusively under PAGA may seek to recover unpaid wages as part of the relief in the action. The Court held the answer to this question is “no.” The Court emphasized that PAGA actions fundamentally are law enforcement actions brought on the state’s behalf and not for the benefit of private parties. Unpaid wages, by contrast, are a form of relief that is individualized and directly for the benefit of private parties (affected employees). The Court acknowledged that Labor Code 558 expressly states that employers who violate certain wage and hour laws are subject to a civil penalty “in addition to an amount sufficient to recover unpaid wages.” However, the Court held that this provision authorizes only the Labor Commissioner to order such relief as part of its citation procedures. Unpaid wages may not be sought by a private plaintiff suing solely under PAGA. The relief available in a PAGA action is limited to fixed civil penalties and does not include unpaid wages.
Bottom line: Today’s decision is good and bad. On the positive side, employees filing pure PAGA actions may not seek to recover unpaid wages (thereby limiting the employer's monetary exposure in the case). On the negative side, today’s decision again solidifies that PAGA claims are exempt from arbitration agreements. On the practical side, Plaintiffs’ attorneys have been favoring PAGA-only actions in recent years because they can avoid arbitration and the need to deal with class certification by suing only under PAGA. The benefits were particularly meaningful when plaintiffs' attorneys thought they could still seek unpaid wages under Labor Code 558 as part of their PAGA relief. Today’s decision sinks that possibility. Plaintiffs’ attorneys will now have to decide whether to waive the ability to seek any unpaid wages (by suing only under PAGA to avoid arbitration) or to include non-PAGA claims for unpaid wages in their lawsuits (which would make the claims subject to arbitration and require them to obtain class certification). In sum, today’s decision is a bit of a mixed bag for litigation purposes. It does not affect employer wage and hour policies or practices.