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Wage and Hour Win for Employers: The California Supreme Court Limits PAGA's Threat to Employers

California Employees Are Prohibited From Seeking Underlying Wages in PAGA Actions

 

By Procopio Partner Marie Burke Kenny and Senior Associate Brook T. Barnes

The California Supreme Court has provided some much-needed relief to California employers who routinely face Private Attorneys General Act (“PAGA”) litigation from their current and former employees. The PAGA statute allows private citizens to sue on behalf of the state for violations of California wage and hour laws and recover substantial penalties for proven violations on behalf of all “aggrieved” employees. Prior to the Supreme Court’s decision in ZB N.A. v. Superior Court (Lawson) on September 12, 2019, employees frequently sought to recover PAGA penalties as well as unpaid wages pursuant to Labor Code section 558.

In a significant win for California employers, the Supreme Court conclusively held that the recoverable PAGA penalties under Labor Code section 558 “do not include the amount sufficient to recover underpaid wages.” While this is a great decision for employers, the procedural road to this important decision also provides many practical lessons for California employers.

In this case, an employee named Kalethia Lawson worked for California Bank & Trust, which is now a division of Zions Bancorp., NA (“ZB NA”). Upon starting her employment, Ms. Lawson signed a mandatory arbitration agreement that required her to resolve all claims and controversies with her employer though private arbitration. In February 2016, Ms. Lawson sued her employer for a single cause of action under PAGA. This technique for suing only under PAGA has become increasingly popular because PAGA actions are exempt from arbitration under the California Supreme Court’s ruling in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348 (Iskanian).

Ms. Lawson’s employer, ZB NA, filed a motion to compel arbitration and argued that Ms. Lawson was prohibited from seeking unpaid wages under Labor Code section 558 because the underlying wage was not a recoverable penalty under PAGA. Judge Pressman of the San Diego Superior Court rejected the employer’s argument and the Fourth Appellate District affirmed the denial of the employer’s motion to compel arbitration.

ZB NA appealed the decision to the California Supreme Court and asked whether the Court’s prior Iskanian ruling prevented mandatory arbitration of Labor Code section 558 unpaid wage claims. While affirming the Court of Appeal’s decision to deny the motion to compel arbitration, the California Supreme Court elected to answer what it determined was a “more fundamental question”, i.e., whether a plaintiff may seek wages “in a PAGA action at all.” The Supreme answered the question with a resounding “no.” 

There are several important lessons to be learned from this case going forward. 

  • First and foremost, the case provides an important reminder to review and revise arbitration agreements for compliance with California law to ensure employers can minimize the effect of representative wage and hour claims.
  • Second, this case demonstrates that valid arbitration agreements are still an effective defense against lawsuits containing individualized allegations and PAGA claims because employers can stay PAGA actions until the completion of private arbitration.
  • Third, this case demonstrates to all employers that wage and hour litigation continues to proliferate in California and employers are well advised to conduct comprehensive wage and hour audits on a regular basis.
  • Finally, many PAGA lawsuits commence because an employee feels disrespected or unfairly treated by an employer. As such, employers are encouraged to create a workplace where employees can openly address their concerns and be treated respectfully (especially during disciplinary or termination processes) in order to reduce the likelihood that a current or former employee will be successfully recruited as a plaintiff in a PAGA action. 

 

Marie Burke Kenny is the Leader of Procopio's Labor and Employment practice group. She represents employers in wage and hour class and PAGA representative actions and litigation involving wrongful termination, discrimination, harassment, retaliation and unfair competition claims. Marie also has extensive experience counseling employers regarding all aspects of the employment relationship, including performance management, termination, contracts, workplace investigations, medical issues, leaves of absence, wage and hour audits, compensation review, workplace training and employment policies and practices. She works with employers to develop strategies to prevent employment claims and create effective defenses to litigation. 

Brook Taylor Barnes is a member of Procopio's Labor and Employment practice group. He represents employers in all aspects of labor and employment litigation including claims for improper wage deductions, failure to pay wages, failure to pay overtime wages, failure to provide meal periods and rest breaks, misclassification of employees, inaccurate wage statements, commission calculations, wrongful termination, PAGA claims, class actions, and retaliatory and discriminatory employment actions. Brook also counsels clients on California's complicated employment laws.