In a rare “win” for California employers, the California Supreme Court recently ruled in ZB, N.A. v. Superior Court that the “underpaid wages” authorized by Labor Code §558 are not recoverable in a PAGA action.
California’s Private Attorneys General Act (PAGA)
As readers of this blog know well, PAGA permits an “aggrieved employee” to bring an action against his employer to collect civil penalties for violations of the Labor Code suffered by that employee and all other employees. A PAGA plaintiff may collect the civil penalties specified in the specific Labor Code statute, or, if there is no specific penalty stated in the statute, under the default provisions of the PAGA law (usually $100 per pay period for the first statutory violation and $200 per pay period thereafter). The civil penalties recovered by the plaintiff under PAGA are distributed 75% to the State and 25% to the aggrieved employees.
The Odd Language in Labor Code §558
Labor Code §558 is a statute that contains a specific statutory penalty. It says:
Any employer or other person acting on behalf of an employer who violates, or causes to be violated, a section of this chapter or any provision regulating hours and days of work in any order of the Industrial Welfare Commission shall be subject to a civil penalty as follows:
(1) For any initial violation, fifty dollars ($50) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages.
(2) For each subsequent violation, one hundred dollars ($100) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages.
(3) Wages recovered pursuant to this section shall be paid to the affected employee.
In other words, Labor Code §558 contains a typical per-pay-period penalty but, in addition, it also includes as an additional penalty an amount equal to the “underpaid wages.” Prior to ZB, N.A. v. Superior Court, California’s appellate courts were split on whether a PAGA plaintiff could recover this “underpaid wages” amount in addition to the $50/$100 per pay period amount stated in Labor Code §558. Some courts held that both could be recovered in a PAGA action because both were referenced as a “civil penalty” in the statutory language. Other courts held that only the $50/$100 per pay period penalty could be collected in a PAGA action because the “underpaid wages” component was paid 100% to the employee and, thus, not a penalty paid to the State.
This was an important distinction because the California Supreme Court previously held in Iskanian v. CLS Transportation, a case we blogged about here and here, an employee cannot be required to waive her right to bring a PAGA action on behalf of the state. Therefore, employers may not compel arbitration of PAGA civil penalty claims. Claims for unpaid wages and other non-PAGA damages, however, could be forced into arbitration.
But what about the odd language in Labor Code §558 that seemed to include “underpaid wages” within the definition of a “civil penalty”? If those “underpaid wages” were indeed a PAGA penalty, then they could not be forced into arbitration. On the other hand, if those “underpaid wages” were not technically PAGA penalties, then those claims could be forced to arbitration. With employers always trying to force as many employee claims as possible into mandatory arbitration, employers and employees (and their lawyers) eagerly awaited the California Supreme Court’s answer to this question.
The California Supreme Court’s Decision
In ZB, N.A. v. Superior Court, the Court ruled that, under Labor Code §558, only the fixed amounts of $50/$100 per pay period were civil penalties that could be recovered by a PAGA plaintiff. The “underpaid wages” that could also be collected under Labor Code §558 were not a civil penalty intended to influence good or deter bad employer conduct; instead, they were damages intended to compensate the aggrieved employees for wages they were owed. Thus, the Court ruled, a PAGA plaintiff may not recover those “underpaid wages” in a non-arbitrable PAGA action.
Instead, the plaintiff would have have to bring a claim to recover unpaid wages under Labor Code §1194 which could then include a separate request to collect the “underpaid wages” allowed by Labor Code §558. If the employer and employee have signed a mandatory arbitration agreement, this means that the claim to recover those “unpaid wages” can be forced into arbitration because it’s not a PAGA claim and, thus, will not run afoul of the Iskanian rule that exempts PAGA claims from mandatory arbitration.
You can read the California Supreme Court’s decision in ZB, N.A. v. Superior Court here.