The California Supreme Court threw a curve ball at employment lawyers today, on both sides of the courtroom.  Justice Cuellar issued the unanimous Court’s opinion in ZB, NA v. Superior Court (opinion here).

This is a case about PAGA, the Private Attorney General Act of 2003.  That’s the law that allows plaintiffs to seek penalties for wage and hour law violations, which only the state Labor Commissioner could seek in the past.  PAGA is very dangerous for employers, for several reasons we’ve covered in the past.  Briefly, though, an employee can seek penalties for any Labor Code violation he or she can find, on behalf of himself or herself, as well as any other “aggrieved” employee.  The class action rules do not apply, so there is no need for the plaintiff to prove common questions of law or fact, or certify a class.  The penalties can add up quickly ($50 or $100 per pay period, per employee, per violation type). And the courts allow discovery to find new violations, even if the named plaintiff did not experience those violations him or herself. Oh, and another thing, lawsuits are brought in the name of the state. So, the courts have held, arbitration agreements between employer and *employee* do not apply.  Of course, there are huge attorney’s fees awards that accompany successful PAGA claims.

Now PAGA also allows plaintiffs to collect penalties other than the $50/100 “catch all” penalty I discussed above if they are already built in to a given statute.  For example, take Labor Code section 558.  Please.  

Section 558 of the Labor Code says:

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.”

Because it’s a statute providing for civil penalties, before PAGA came along it was enforceable only via the Labor Commissioner in civil enforcement actions.  Note that although it has the same $50/100 scheme, section 558 also contains that extra bit:  “in addition to an amount sufficient to recover underpaid wages. [¶] (3) Wages recovered pursuant to this section shall be paid to the affected employee.”  

So, PAGA was enacted and authorized private plaintiffs to file lawsuits to collect “civil penalties” in the Labor Code.  Section 558 contains a “civil penalty.”  Does that mean that employees could use PAGA to collect not only fixed amounts like $50 or $100 per pay period, but also the “underpaid wages” mentioned at the end of the section?  

A few courts had held “yes” in the past. And that caused a major to-do.  Why” Because that was a way of turning wages into penalties. And also because that was a big end-run around arbitration. After all, if you could sue for “an amount sufficient to recover underpaid wages” as a penalty, you could skip arbitration of underpaid wage claims, skip a class action, and just use PAGA as a baseball bat to extract a huge settlement.  Right? 

You with me?  Of course, it wouldn’t be all cookies and ice cream for plaintiffs because the statute of limitations for PAGA claims is just one year. But trust me, this section 558 is a killer. 

Or was.  :::Sad trombone:::: The California Supreme Court held in ZB that PAGA does not include the right to collect “”an amount sufficient to recover underpaid wages.”  The Court held that language was not describing a civil penalty, but rather a form of compensatory damages. As a result, the “amount sufficient to recover underpaid wages” remains under the exclusive jurisdiction of the Labor Commissioner.  PAGA plaintiffs of course may seek the $50 / 100 per  pay period for other violations of the Labor Code covered by section 558.  And that means no arbitration of such PAGA penalty claims.  

If you read the ZB opinion, you’ll see that the employer, ZB, was arguing that the employee was required to arbitrate the part of section 558 penalties equivalent to “underpaid wages.”  The Court rejected that argument as well.   At the end of the day, ZB lost its arbitration case, but significantly trimmed its PAGA exposure. 

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