The Private Attorneys General Act of 2004 (“PAGA”) empowers aggrieved employees to bring a representative action, on behalf of the state, against an employer to recover civil penalties for an alleged violation of certain provisions of the Labor Code.  Recently, the California Supreme Court underscored the importance of distinguishing between civil penalties recoverable by an employee under PAGA and other forms of relief under the Labor Code.

In ZB, N.A. v. Superior Court, the court held that unpaid wages under section 558 are not civil penalties recoverable by an employee in a PAGA action.  Rather, unpaid wages are a form of compensatory relief that an employee may recover through a private cause of action or through a wage complaint filed with the Division of Labor Standards Enforcement (“DLSE”).  Because an employee's claim for unpaid wages under section 558 may not be brought under PAGA, the California Supreme Court's holding in Iskanian v. CLS Transportation Los Angeles, LLC that an employee's predispute waiver of the right to bring a PAGA claim in any forum is unenforceable does not control. Thus, an employee's agreement to arbitrate wage-related claims may be upheld.

Background

The plaintiff in ZB, N.A. v. Superior Court was formerly employed by defendants ZB, N.A. and its parent company, Zions Bancorporation (collectively, “ZB”).  During her employment, the plaintiff agreed to arbitrate all employment-related claims pursuant to a “Mandatory Binding Arbitration Policy and Agreement” contained in the employee handbook. 

After her employment ended, the plaintiff filed a single cause of action under PAGA against ZB for alleged Labor Code violations.  The plaintiff sought, in part, penalties under section 558, including unpaid wages.  Relying on the employment agreement, ZB filed a motion to compel arbitration for the portion of the plaintiff's claim seeking unpaid wages.  ZB contended that unpaid wages were a type of “victim-specific” relief requiring individual arbitration and should not be considered part of the civil penalties recoverable by an employee under PAGA.  The trial mostly court agreed but found that such claim required representative action since PAGA is a representative statute.  Thus, the trial court ordered arbitration as a representative action for all aggrieved ZB employees.

ZB filed an appeal and a petition for writ of mandate with the Court of Appeal who disagreed with the trial court's finding that the plaintiff may be compelled to arbitrate her claim for unpaid wages under section 558.  According to the Court of Appeal, the civil penalties under section 558 include unpaid wages.  Therefore, the plaintiff could pursue the entire indivisible claim under PAGA and, based on Iskanian, could not be compelled to arbitration.  

The California Supreme Court granted review to determine whether an employer may compel arbitration of a PAGA claim for unpaid wages under section 558.  To answer this question, however, the court had to address the more fundamental issue of whether unpaid wages are civil penalties that an employee may recover under PAGA.

The Court's Analysis

The court found that unpaid wages are a form of compensatory relief, rather than a civil penalty, and therefore not recoverable by an employee under PAGA.  In reaching its conclusion, the court examined the purpose behind PAGA—essentially, to ensure employers' compliance with labor laws by allowing employees to act on behalf of the state to collect civil penalties previously only recoverable by the Labor Commissioner.  According to the court, a civil penalty is meant to punish an employer for having violated the labor laws, while compensatory relief is meant to reimburse an employee for actual losses incurred.   Compensatory relief has always been recoverable by employees through a private cause of action or an administrative filing with the DLSE.  PAGA, therefore, was not intended as a vehicle for employees to recover anything other than civil penalties, as other means exist for employees to be compensated fully for their losses due to an employer's violation of the Labor Code. 

In reaching its conclusion, the court analyzed section 558 in connection with section 1197.1 of the Labor Code regarding minimum wage violations.  Both sections contain similar language authorizing civil penalties “in addition to an amount sufficient to recover underpaid wages.” 

Section 558 provides, in part, that any employer who violates overtime and workday hour requirements is subject to a civil penalty of “[f]or each 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. . . . [and] [f]or 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.” (emphasis added).  According to the court, “in addition to” suggests that the civil penalties set forth in section 558 are intended to be “on top of” and not included within the amount of unpaid wages to be paid to the employee.  Section 558 further provides that any wages recovered are to be paid to the affected employee.  In the court's opinion, this provision suggests that the employee is to be compensated for actual losses incurred.

Similarly, section 1197.1 provides for a civil penalty of one hundred dollars ($100) for an employer's initial violation of minimum wage requirements and two hundred and fifty dollars ($250) for each subsequent violation, “in addition to an amount sufficient to recover underpaid wages.” (emphasis added).  As in section 558, wages recovered under 1197.1 are to be paid to the affected employee, along with liquidated damages and additional statutory penalties under section 203 of the Labor Code.  According to the court, however, additional language and punctuation in section 1197.1 more clearly delineates that underpaid wages are to be paid in addition to, and not included within, the civil penalties authorized in that section. 

The court further analyzed section 558 in conjunction with section 1197.1's procedural requirements.  Pursuant to section 1197.1, employers who contest citations issued for minimum wage violations must post a bond “equal to the total amount of any minimum wages, liquidated damages, and overtime compensation that are due and owing as determined pursuant to subdivision (b) of section 558.”  Section 1197.1 further provides that such bond requirement does not include amounts for penalties.  Subdivision (b) of section 558 authorizes the Labor Commissioner to issue a citation when it is determined that “a person had paid or caused to be paid a wage for overtime work in violation” of the law. 

The court interpreted these provisions, read together, to further support the conclusion that unpaid wages in section 558 are compensatory relief, rather than a civil penalty.  The court reasoned that a citation issued under section 558 must include some amount intended to compensate for a withheld overtime wages—compensatory relief similar to minimum wages and liquidated damages under section 1197.1.  Assuming the Legislature intended “wages” to have the same meaning throughout section 558, the court found that “an amount sufficient to recover unpaid wages” referred to section 558, subsection (a) is the same compensatory relief included in the citation that may be issued under section 558, subsection (b).  Finally, the court found significant the provision in section 1197.1 providing that the bond requirement—including overtime compensation due and owing under section 558 subsection (b)—does not include amounts for penalties. 

According to the court, a consistent reading of sections 558 and 1197.1 supports the conclusion that unpaid wages under section 558 are not civil penalties recoverable by an employee in a PAGA action.  The court reasoned that the similarities between section 558 and 1197.1 indicate the Legislature's intent was the same—to assess a civil penalty against an employer who violates these provisions, in addition to compensating the employee for actual losses incurred in the form of underpaid wages.

In further support of its conclusion that unpaid wages are intended to compensate, the court noted that one hundred percent of unpaid wages are to be paid to the employee, while only twenty-five percent of penalties recovered under PAGA are payable to the employee.  Finally, the court noted that the majority of civil penalties in the Labor Code are fixed amounts—fifty dollars for an initial violation of section 558 versus “an amount sufficient to recover underpaid wages.”

Because the plaintiff may not recover unpaid wages under section 558 through a PAGA action, the court affirmed the Court of Appeal's denial of ZB's motion to compel arbitration.  The court remanded the case to the trial court to determine whether to strike the plaintiff's claim for unpaid wages or allow the plaintiff leave to amend.

Significance of the Court's Decision

The court's decision closes the door on plaintiffs' attempt to avoid arbitration by filing PAGA-only actions, while at the same time attempting to recover unpaid wages.  Now employees must recover unpaid wages through an individual action, class action, or an administrative filing with the Labor Commissioner.  Employers seeking to resolve such claims via arbitration should ensure their arbitration agreements are enforceable and specifically address individual, class, and administrative claims.

Additionally, the court's decision underscores the potential significance to employers of allowing employees to file a separate claim for unpaid wages, in addition to a PAGA-only action.  As the court notes, any employee—including non-parties to the original PAGA-action— may use a favorable ruling in a PAGA-only action as evidence of an employer's violation of labor laws in a subsequent action to recover unpaid wages.