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

California Supreme Court holds that an aggrieved PAGA employee may not recover unpaid wages in a Labor Code section 558 PAGA action, resolves appellate split

We now have the answer to the appellate split between Lawson and Esparza in ZB, N.A. v. Superior Court (Lawson) (Cal. no. S246711 (Sept. 12, 2019)) (slip opinion here).

TLDR: only the fixed amount under Labor Code section 558(a) ($50/$100) is a civil penalty recoverable under PAGA. The unpaid-wage portion is recoverable only by the Labor Commissioner, and not by a private attorney general under the PAGA.

Lawson sued her employer as a private attorney general under the Labor Code Private Attorneys General Act of 2004, Labor Code section 2698 et seq. (“PAGA “), seeking civil penalties and unpaid wages under Labor Code section 558.

For a violation of any Labor Code section from 500 to 558.1 or any provision of any wage order regulating hours or days of work, Labor Code section 558 provides for a civil penalty of either $50 (for a first violation) or $100 (for a subsequent violation) “for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages.” Lab. Code § 558(a) (italics added).

The employer argued that the “amount sufficient to recover underpaid wages” was a form of “victim-specific relief” that required Lawson to individually arbitrate that portion of her claim under its arbitration policies (and, because the employer required Lawson to sign a class- and representative-action waiver, the employer argued that the arbitration must be for individual relief for Lawson only). The trial court bifurcated the action and granted the employer’s motion to compel arbitration on the “underpaid wage” issue. Slip op. at 5. But because PAGA is a “representative statute” brought on behalf of the state and the state never agreed to arbitrate (absent post-LWDA exhaustion agreement to arbitrate), the employer “got more than it bargained for in the process”—the trial court ordered arbitration of the underpaid wages of all aggrieved employees. Id.

On petition for writ of mandate, the Fourth District Court of Appeal held that section 558 underpaid wages cannot be compelled into arbitration because the “underpaid wages” was expressly part of the civil penalty under section 558(a). The appellate court issued a writ of mandate ordering the trial court to vacate its order and enter a new order denying the motion to compel arbitration. Id. at 6.

(As I wrote about here and here, this created a split with Esparza v. KS Industries, 13 Cal. App. 5th 1228 (5th Dist. 2017) (holding that the unpaid-wage remedy under section 558 is an arbitrable private remedy).)

The California Supreme Court took a new path on this one, rejecting the appellate holdings in both Lawson and Esparza.

First, the Cal. Supremes held that the unpaid-wage provision in section 558 is not a civil penalty recoverable under PAGA. See Slip op. at 13 (“[T]he amount for unpaid wages referenced in section 558 is not part of that section’s civil penalty and is not recoverable through a PAGA action.”). Instead, the unpaid-wage provision “represents compensatory damages.” Id. Because there is no private right of action under section 558 (id.), the unpaid-wage remedy under section 558 may only be invoked by the Labor Commissioner:

[S]ection 558 lacks a private right of action. An aggrieved employee can make use of section 558’s remedy only when she acts as the state’s proxy — and that’s a role she can play only through a PAGA action…. [T]he amount for unpaid wages referenced in section 558 is not part of that section’s civil penalty and is not recoverable through a PAGA action. Instead . . . this part of a section 558 citation represents compensatory damages. Section 558, in other words, authorizes only the Labor Commissioner to issue a citation that includes both a civil penalty and the same unpaid wages Lawson can alternatively recover under section 1194 through a civil action or an administrative hearing. But section 2699, subdivision (a) does not authorize employees to collect section 558’s unpaid wages through a PAGA action. This reading best harmonizes section 558 with the procedural provisions in section 1197.1, with analogous remedies elsewhere in the Labor Code, and with the broader enforcement scheme for unpaid wages. It also fits with the understanding of the agency in charge of issuing these citations, and with the relevant legislative history.

Id.

The Cal. Supremes rejected the employee’s argument that the unpaid-wage provision constated part of the same civil penalty. See id. at 15. While the provision lacks a comma separating the civil penalty language and the unpaid-wage language, the phrase “in addition to” “appears to indicate that these provisions subject the employer to a civil penalty on top of—not including—an amount meant to compensate for unpaid wages.” Id.

Additionally, civil penalties are aimed at addressing the conduct of the employer. The unpaid-wage provision, however, directs payments to the employees and thereby addresses injury to the employee. Thus the unpaid-wage language represents compensatory damages. Id.

The Cal. Supremes also analogized section 558 with the language of section 1197.1, which includes a civil penalty that shall be paid “in addition to an amount sufficient to recover underpaid wages,” and also looked to similarities in bond provisions that are based only on the amount of unpaid wages (see id. at 15-21).

Finally, the lack of a fixed amount in the unpaid-wage provision is another aspect that shows it is not a civil penalty, since other civil penalty provisions are generally for a fixed amount (e.g., $100 for each employee per pay period). See id. at 21-22.

Result? PAGA actions can no longer result in recovery of unpaid wages under section 558(a). This holding eliminates the ability of an employer to compel arbitration for “victim-specific relief” under section 558(a) and at the same time reduces the overall exposure to the employer and the remedies available in a PAGA action.

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