United States: The California Supreme Court Clarifies Wages Are NOT Part Of The "Civil Penalty" Under Labor Code Section 558 In A PAGA Action

On September 12, 2019, the California Supreme Court issued its decision in ZB, N.A., and Zions Bancorporation v. Superior Court [Lawson, real party in interest] ("Lawson"). In analyzing whether the Plaintiff's lawsuit could be compelled to binding arbitration under the arbitration agreement she entered into with her employer, the Supreme Court clarified that under Labor Code section 558, employees are not entitled to recover underpaid wages in a Private Attorneys General Act ("PAGA") claim.

Before the enactment of the PAGA, section 558 gave the Labor Commissioner authority to issue overtime violation citations for 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.

(Labor Code §558, italics added.)

The Lawson case concerned a PAGA action seeking civil penalties under Labor Code section 558. Lawson brought the representative action against her employer, ZB, N.A. — with whom she agreed to arbitrate all employment claims and forego class arbitration — and its parent company, Zions Bancorporation (collectively, "ZB"). ZB filed a motion compelling that Lawson individually arbitrate her "unpaid wages" claim under section 558 because it was not a PAGA civil penalty claim.

The trial court generally agreed, bifurcating Lawson's action and granting ZB's motion to compel arbitration of the "unpaid wages" issue. However, it ordered the issue to arbitration "as a representative action" for the unpaid wages of all aggrieved ZB employees. ZB responded by filing both an appeal and petition for writ of mandate with the Court of Appeal. After consolidating the two, the appellate court dismissed the appeal, holding that Code of Civil Procedure section 1294 only gave it appellate jurisdiction over an order dismissing, not granting, a motion to compel arbitration. However, ZB persuaded the Court of Appeal to issue the writ of mandate, but the court did so on a different ground from the one ZB asserted. The appellate court concluded that Lawson's request for "unpaid wages" under section 558 in fact could not be arbitrated at all. Relying on Thurman v. Bayshore Transit Management (Thurman), the Court of Appeal interpreted section 558 to expressly include "underpaid wages" within the scope of its "civil penalty" provision. In the appellate court's view, an employee could pursue the entire, indivisible civil penalty through the PAGA action, and that pursuant to Iskanian v. CLS Transportation Los Angeles, LLC, her employer could not compel the PAGA claim to arbitration.

The Supreme Court granted review of the Lawson case to decide whether the Iskanian case controlled the facts and whether or not the Federal Arbitration Act (FAA) (9 U.S.C. § 1 et. seq.) had preemptive force where an aggrieved employee seeks to recover an amount sufficient to recover underpaid wages in a PAGA action. In its prior Iskanian case, the Supreme Court held that a court may not enforce an employee's alleged pre-dispute waiver of the right to bring a PAGA claim in any forum. The Court found that where such a waiver appears in an employee's arbitration agreement, the FAA does not preempt state law.

However, the Supreme Court determined that to resolve the Lawson case it was required to ask an even more fundamental question: Can a plaintiff seek "an amount sufficient to recover underpaid wages" [as stated in Section 558] in a PAGA action at all? The Court of Appeal thought so and concluded that section 558's civil penalty encompassed the amount for unpaid wages [into the "civil penalty"], and therefore Lawson's claim for unpaid wages could not be compelled to arbitration under Iskanian.

The Supreme Court concluded differently. It held that the civil penalties a plaintiff may seek under section 558 through a PAGA action do not include the "amount sufficient to recover underpaid wages." The Court reasoned that, although section 558 authorizes the Labor Commissioner to recover such an amount, "... this amount –– understood in context –– is not a civil penalty that a private citizen has authority to collect through the PAGA."

The Court found that its conclusion — that unpaid wages under section 558 must be distinguished from the civil penalty aggrieved employees may recover under the PAGA — is not inconsistent with the Labor Code's broader remedial purpose or "the protection of employees." It also rejected Lawson's contention that unpaid wages recovered under section 558 meet the definition of "civil penalty" because prior to the PAGA, only the state could bring an action under section 558 because there is no private right of action under that section. (Iskanian, supra, 59 Cal.4th at p. 381.) However, as the Court explained, while section 558 gave the state exclusive power to collect unpaid wages through its citation procedure, section 558 achieves the same result with respect to unpaid wages as a private right of action for unpaid wages under Labor Code section 1194 does. Therefore, only the fixed amount stated in section 558 qualifies as a "civil penalty" for purposes of a PAGA claim.

As for the question of arbitration in this case, the motion to compel the "unpaid wages" part of the section 558 claim to arbitration really became a moot point. There is no private right of action to recover such "unpaid wages" under section 558. As such, the Court affirmed the order denying ZB's motion to compel arbitration and remanded the case to the trial court who can decide whether or not to grant her leave to amend her complaint to pursue the "unpaid wages" claim under section 1194 instead of section 558.

Beth West and the other employment attorneys at Weintraub Tobin are available to assist you in your wage and hour compliance and are happy to discuss the Lawson case further. Feel free to contact any one of them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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