United States: California Supreme Court Rules That The "Underpaid Wages" Component Of Labor Code Section 558 Is Not A Civil Penalty Under PAGA

Last Updated: September 26 2019
Article by Richard H. Rahm and Julie M. McGoldrick

In ZB, N.A. v. Superior Court of San Diego County (Lawson),1 the California Supreme Court held that unpaid wages are not civil penalties under California Labor Code section 558 and are therefore outside the reach of California's Private Attorneys General Act (PAGA). This ruling clarifies the scope of PAGA remedies; it also confirms that no part of a PAGA claim may be compelled to arbitration.

Labor Code Section 558 and PAGA

Section 558 of the California Labor Code is a civil penalty statute permitting the Labor Commissioner to issue citations for: (1) civil penalties, which are to be dispersed to the state, and (2) "underpaid wages," which are to be dispersed directly to the underpaid employees.

PAGA, enacted five years later, permits "aggrieved" employees to bring claims as "private attorneys general" to collect civil penalties on behalf of the Labor Commissioner for violations of the Labor Code, including those under Section 558.2 The PAGA plaintiff acts as a proxy or an agent of the state's labor enforcement agencies to recover civil penalties previously recoverable only by the Labor Commissioner. A PAGA plaintiff may collect civil penalties either through civil penalty statutes covering the specific violation or, if there is no specific civil penalty statute, through the default penalties of PAGA. Civil penalties recovered under PAGA are distributed 75% to the state and 25% to the aggrieved employees.3

Since PAGA's enactment, a split has arisen in California courts over the scope of a "civil penalty" under Section 558, given that this section permits citations for both civil penalties and underpaid wages. Although three separate appellate districts concluded that PAGA allowed aggrieved employees to use Section 558 to collect both civil penalties and underpaid wages, two appellate districts have concluded that underpaid wages are a component of Section 558's civil penalty,4 whereas a third has ruled that underpaid wages are a remedy separate from civil penalties.5

In the context of arbitration, whether "underpaid wages" fall within the scope of Section 558's civil penalties provision is significant. In Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court held that while an employee may waive her right to participate in a class action by agreeing to individual arbitration, she cannot be required to waive her right to bring a PAGA action on behalf of the state.6 Therefore, even under the Federal Arbitration Act, employers may not compel arbitration of PAGA civil penalty claims. Claims for individual-specific damages, on the other hand, do not fall under Iskanian's prohibition and are arbitrable.

It was within the scope of this arbitration analysis that the California Supreme Court addressed the issue of civil penalties in Lawson. The court granted review of the following issue: Whether Iskanian prevents a court from compelling arbitration of a PAGA claim even if that claim seeks to recover individual-specific underpaid wages. Rather than rule on this issue, the court addressed the issue of whether unpaid wages under Section 558 are recoverable under PAGA at all. The court concluded they are not. Finding that unpaid wages are compensatory damages, the court held that an employee may not use PAGA to collect unpaid wages under section 558, because PAGA permits only the collection of civil penalties.

Enter Lawson

In Lawson, the employer sought to compel an employee to arbitrate a claim for underpaid wages under Section 558. Lawson brought a PAGA-only action on behalf of the state against her employer ZB and its parent company seeking to recover civil penalties, "including unpaid wages and premium wages per California Labor Code section 558." The parties were bound by an arbitration agreement that covered "any" claim arising out of employment. Based on this arbitration agreement, ZB acknowledged that the civil penalty portion of the PAGA claim was not arbitrable under Iskanian. However, ZB moved to compel Lawson to individually arbitrate the portion of her claim seeking victim-specific unpaid wages under Section 558, which Section 558 provides "shall be paid to the affected employee."

Although the Fifth Appellate District had recently accepted this same argument,7 the Fourth Appellate District in Lawson rejected ZB's argument. Citing another Fourth Appellate District case, Thurman v. Bayshore Transit Management,8 the Lawson Court of Appeal interpreted Section 558 to expressly include "underpaid wages" within this section's civil penalty provision. The Fourth Appellate District concluded that because this indivisible civil penalty could only be recovered through PAGA, it fell within Iskanian's prohibition on predispute waiver of such claims.

California Supreme Court Weighs In

PAGA allows aggrieved employees to file civil actions only to collect civil penalties, not victim-specific damages. To resolve whether an aggrieved employee bringing a PAGA claim under section 558 could be forced to arbitrate the unpaid wages part of the penalty, the Supreme Court concluded that it had to first decide whether the "unpaid wages" portion of Section 558 was part of a civil penalty, e.g., simply an enhanced civil penalty, or whether the collection of unpaid wages was separate from the civil penalty.

The Supreme Court agreed with the Lawson Court of Appeal that Section 558 does not have a private right of action, so its provisions are enforceable only under PAGA. But it concluded that only the fixed amounts of $50 and $100 per pay period were civil penalties that could be recovered by a PAGA plaintiff. It held that "unpaid wages" to be collected under Section 558 were never intended to be part of a civil penalty recoverable by the state to influence employer conduct, but instead were damages intended to compensate the aggrieved employees for wages they were owed.9 While the Labor Commissioner could still use the citation process in section 558(c) to assess civil penalties and collect unpaid wages, a PAGA plaintiff is limited to the collection of civil penalties only.

Of course, this does not mean that these unpaid wages are no longer recoverable; they just cannot be recovered under PAGA. A plaintiff may still seek unpaid wages, e.g., under Labor Code Section 1194. And when the parties are bound by an arbitration agreement, such wage claims may undoubtedly be compelled to arbitration. But because the court found that a PAGA plaintiff may not seek individual relief under Section 558, there is no damages portion of a PAGA claim that may be compelled to arbitration. Rather, a PAGA action may only be litigated in a court.

Going Forward

Lawson is a helpful decision for employers because it limits PAGA claims to the recovery of civil penalties only. In addition, because only 25% of the civil penalties recovered under PAGA are distributed to the aggrieved employees, employees might be less interested in serving as named plaintiffs for PAGA-only actions if they cannot recover their unpaid wages. Moreover, because PAGA actions need not be certified, it has never been clear how victim-specific relief could be collected and dispersed to each aggrieved employee in a PAGA action. At the same time, because no part of a PAGA claim can relate to damages, no part of a PAGA claim can be compelled to arbitration.

Footnotes

1. 2019 WL 4309684 (Cal. Sup. Ct., Sept. 12, 2019) ("Lawson").

2. Lab. Code §§ 2699(a), (f).

3. Lab. Code § 2699(a), (f), (i).

4. Lawson v. ZB, N.A., 18 Cal. App. 5th 705 (4th App. Dist. 2017); Zakaryan v. The Men's Wearhouse, Inc., 33 Cal. App. 5th 659 (2nd App. Dist. 2019).

5. Esparza v. KS Industries, L.P., 13 Cal. App. 5th 1228 (5th App. Dist. 2017).

6. 59 Cal. 4th 348, 383-389 (2014).

7. Esparza v. KS Industries, L.P., 13 Cal. App. 5th 1228 (5th App. Dist. 2017).

8. 203 Cal. App. 4th 1112 (4th App. Dist. 2012).

9. Lawson, 2019 WL 4309684 at *6-11.

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