Kelly A. Knight is an attorney and mediator based in Los Angeles, CAlifornia. He handles matters throughout California.

Short take on Lawson v. ZB, N.A.: Fourth District Court of Appeal departs from Esparza, holding that unpaid wages under Labor Code section 558 are recoverable as civil penalties under the PAGA


Update 3/23/18: the California Supreme Court has granted review. Link to the docket here.


Short take: 

In Lawson v. ZB, N.A., 18 Cal. App. 5th 705 (Cal. Ct. App. 4th Dist. Dec. 19, 2017, as modified Dec. 21, 2017) (slip opinion linked here) the Fourth District Court of Appeal issued an important opinion holding that civil penalties under Labor Code section 558 include both the default civil penalty plus underpaid wages. The result is that (if your trial court follows Lawson) employers cannot compel your PAGA civil-enforcement claims under section 558 into arbitration.

Labor Code section 558(a) provides for recovery of civil penalties for violations of overtime requirements and other provisions: 

(a) 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.

Lab. Code § 558(a).

From a reading of the statute alone, one interpretation is that the "civil penalty" under section 558(a) consists of the $50 or $100 "in addition to an amount sufficient to recover underpaid wages"---i.e., enforcement of this provision under the Labor Code Private Attorneys General Act of 2004 ("PAGA"), Labor Code section 2698 et seq., would allow for recovery of civil penalties including both of these components. Under that interpretation, by seeking to enforce Section 558 and recover those civil penalties, an employee would be acting in his or her capacity as a private attorney general under the PAGA. 

But in late 2017, the Fifth District Court of Appeal issued its opinion in Esparza v. KS Industries, 13 Cal. App. 5th 1228 (5th Dist. Aug. 2, 2017). In Esparza, the 5th District held that Labor Code section 558(a)'s reference to a civil penalty of $50 or $100 "in addition to an amount sufficient to recover underpaid wages" meant that the $50 or $100 was a civil penalty under the PAGA. But the Esparza court held that the "amount sufficient to recover underpaid wages," however, was not (at least with regards to whether such a claim can be compelled into arbitration). Why? Because the underpaid wages are payable wholly to the aggrieved employees. The Esparza part reasoned that the nature of that portion of the claim was a "private dispute" to which the Iskanian rule of nonarbitrability does not apply.  (If you're not up to date on PAGA, Iskanian, etc., see my other blog posts, e.g., here.) 

But wait a minute, you say. State law-enforcement agencies can seek to return unpaid wages to the victim employees, so why would that portion of Section 558(a) not be part of the PAGA, for which private attorneys general can do the same? After all, private attorneys general step into the shoes of the Labor Commissioner under the PAGA to enforce our state's labor laws. Not so fast. The Esparza court said that where public and private claims overlap, the claims are private and can be compelled into arbitration:

Employee's attempt to recover unpaid wages under Labor Code section 558 is, for purposes of the Federal Arbitration Act, a private dispute arising out of his employment contract with KS Industries. In statutory terms, the wage claim is covered by “[a] written provision in ... a contract ... to settle by arbitration a controversy arising out of such contract.” (9 U.S.C. § 2.) The dispute over wages is a private dispute because, among other things, it could be pursued by Employee in his own right. We recognize that private disputes can overlap with the claims that could be pursued by state labor law enforcement agencies. When there is overlap, the claims retain their private nature and continue to be covered by the Federal Arbitration Act. To hold otherwise would allow a rule of state law to erode or restrict the scope of the Federal Arbitration Act—a result that cannot withstand scrutiny under federal preemption doctrine. Therefore, we conclude preventing arbitration of a claim for unpaid wages would interfere with the Federal Arbitration Act's goal of promoting arbitration as a forum for private dispute resolution. (See Iskaniansupra, 59 Cal.4th at p. 389, 173 Cal.Rptr.3d 289, 327 P.3d 129.)

Similarly, Employee's attempt to recover wages on behalf of other aggrieved employees involve victim-specific relief and private disputes. The rule of nonarbitrability adopted in Iskanian is limited to claims “that can only be brought by the state or its representatives, where any resulting judgment is binding on the state and any monetary penalties largely go to state coffers.” (Iskaniansupra, 59 Cal.4th at p. 388, 173 Cal.Rptr.3d 289, 327 P.3d 129, italics added.) These limitations are not met by the claims for unpaid wages owed to other aggrieved employees because (1) those employees could pursue recovery of the unpaid wages in their own right and (2) the unpaid wages recovered would not go to state coffers.

In sum, Employee's claims for unpaid wages are subject to arbitration pursuant to the terms of the parties' arbitration agreement and the Federal Arbitration Act. The rule of nonarbitrability adopted in Iskanian is limited to representative claims for civil penalties in which the state has a direct financial interest.

Esparza, 13 Cal. App. 5th at 1245–1246.

The Esparza court held that the employee must decide whether he or she is pursuing civil penalties alone versus civil penalties plus unpaid wages. If the latter, then that portion of the matter would be sent to arbitration.  See id. at 1247.

Now enter Lawson. In short, the Lawson court provided a summary and analysis of the prior appellate law interpreting section 558 and the PAGA and held that the unpaid wages referred to in section 558(a) are part of the civil penalty, enforceable under the PAGA, and therefore, under Iskanian, not subject to arbitration in a PAGA-enforcement proceeding:

Section 558, by its terms and as we interpreted it in Thurman [v. Bayshore Transit Management, 203 Cal. App. 4th 1112  (2012)], expressly provides for civil penalties and hence claims under section 558, including claims for underpaid wages, are cognizable under the PAGA. As our holding in Thurman makes clear, the $50 and $100 assessments as well as the compensation for underpaid wages provided for by section 558 subdivisions (a) and (b) are, together, the civil penalties provided by the statute.

Lawson, 2017 WL 6477857, at *6.  

There's a lot more to discuss here, including why the Esparza court failed to apply Thurman (in part because Iskanian came later and didn't discuss Thurman), whether Lawson is better-reasoned, and how to argue the split to your trial court depending on which side you are on. But the short of it is that Esparza is no longer the law of the land; plaintiffs in PAGA actions now have Lawson to help keep claims under section 558 viable and in court. Both sides will have to contend with this split in authority to convince the trial court to follow either Esparza or Lawson.

Ninth Circuit holds that the Fair Labor Standards Act only requires the average hourly wage over a workweek to meet the minimum wage, even if some hours are paid at less than the minimum wage.

California Court of Appeal opens major hole in rule of PAGA non-arbitrability: post-dispute arbitration agreements