PAGA Victory for Employers in the California Supreme Court

The California Supreme Court issued a monumental opinion that reduces the incentive to bring Private Attorneys General Act (“PAGA”)[1] actions against employers. Employees have been suing under PAGA for civil penalties and unpaid wages to avoid arbitration and class certification. Significantly, the California Supreme Court ruled on September 12, 2019, in ZB N.A. v. Superior Court (Lawson), that employees may no longer seek unpaid wages under PAGA.[2]

Because of this ruling, employees who wish to recover unpaid wages will no longer have the option of strategically choosing only to pursue PAGA claims to avoid arbitration and class certification requirements. Although employees can still avoid arbitration and class certification by bringing a PAGA action, their recovery is limited to civil penalties under PAGA. To recover unpaid wages, employees now also need to bring individual claims or collective actions. In light of the Lawson ruling, employees or more likely to bring their wage and hour claims as individual or class actions, which makes legally compliant arbitration agreements even stronger tools in an employer’s defense to wage and hour claims.  

Case Background & Analysis

In ZB N.A. v. Superior Court (Lawson), Lawson, on behalf of herself and other aggrieved employees, sued her former employer alleging a variety of wage and hour violations, including failure to provide overtime and minimum wages, meal and rest periods, timely wage payments, complete and accurate wage statements, complete and accurate payroll records, and reimbursement of business-related expenses. Although Lawson’s complaint asserted violations of a variety of Labor Code sections, it included only a single cause of action brought under the PAGA (Labor Code section 558) seeking civil penalties in addition to unpaid wages and premium wages. Filing solely under Section 558 was a strategic choice to avoid arbitration.

Lawson did not dispute and implicitly agreed that she and fellow employees were bound to arbitrate their disputes pursuant to an arbitration provision in the employee handbook that she and others electronically acknowledged. The provision mandated binding arbitration to resolve any legal controversy or claim arising out of the employment, and it contained a class action waiver. However, based on the 2014 California Supreme Court decision in Iskanian v. CLS Transportation Los Angeles, LLC, all PAGA actions are exempt from arbitration.[3] As a result, Lawson brought her lawsuit only under PAGA to avoid arbitration, as employees often do.    

Lawson’s employer challenged the practice of using Section 558 to avoid arbitration. After a lower level appeal, the California Supreme Court granted the employer’s petition for review to resolve the split of authority over whether an employer may compel arbitration of an employee’s PAGA claim requesting civil penalties that encompassed unpaid wages under Section 558. Before addressing that question, the Court addressed what it called the “more fundamental question” which was whether the civil penalties employees can seek under Section 558 through filing a PAGA claim can include unpaid wages? The Court answered — “No.”

In reaching its conclusion, the California Supreme Court highlighted that PAGA actions are fundamentally law enforcement actions brought on the state’s behalf and not to benefit private parties. The Court found that unpaid wages are an employee-specific amount and are, therefore, a form of individualized relief that directly benefits private parties, i.e., the affected employees.  It is not the kind of “civil penalty” the PAGA and the  Iskanian Court contemplated an employee would pursue on the state’s behalf. Specifically, the Court opined: “Deeming the unpaid wages amount to be a civil penalty despite the existing enforcement mechanisms for those wages cannot be squared with the understanding of that term under the PAGA.” Accordingly, the Court concluded that employees may recover civil penalties under Section 558 through a PAGA claim, but they may not use Section 558 to recover unpaid wages as part of a PAGA claim.

Advice for Employers

Employers who want the ability to resolve wage and hour claims through arbitration should review their arbitration agreements for compliance with California law and ensure they include a valid class action waiver. Employers with enforceable arbitration agreements can minimize the effect of representative wage and hour claims by requiring the employees to bring individual claims and postponing their PAGA actions until completion of private arbitration. Thus, lawful arbitration agreements are an effective tool in defending against wage and hour lawsuits.

Lagasse Branch Bell + Kinkead LLP can assist employers with compliance with the laws affecting the decision regarding arbitration clauses and class action waivers. For more information, please call Lara Besser, Esq. at 858.703.8160 or Jennifer Branch, Esq. at 858.345.5073.

[1]Labor Code section 2698 et. seq

[2] ZB, N.A. v. Superior Court of San Diego County (2019) —P.3d— (2019 WL 4309684)

[3] Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348.