On September 12, 2019, the California Supreme Court in ZB, N.A. v. Superior Court (Lawson) held that unpaid wages under Labor Code Section 558 are not recoverable under the Private Attorneys General Act (PAGA). By limiting what is recoverable under PAGA, the decision immediately decreases the overall exposure on PAGA claims.

The Private Attorneys General Act and Labor Code Section 558

PAGA, codified in Labor Code, § 2698 et seq., allows an employee to recover civil penalties for Labor Code violations committed against them and other aggrieved employees by bringing — on behalf of the state — a representative action against the employer.

In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), the California Supreme Court held that a court may not enforce an employee’s predispute class action waiver that prohibits the employee from bringing a PAGA claim in court.

Labor Code Section 558 provides the Labor Commissioner authority to collect a civil penalty for certain Labor Code violations relating to overtime and hours and days of work, equal to $50 to $100 dollars for each underpaid employee for each pay period for which the employee was underpaid, in addition to “an amount sufficient to recover underpaid wages.”

For years, employees relied on Section 558 to recover unpaid wages as part of the civil penalty provided by Section 558, per California Court of Appeal decisions like Thurman v. Bayshore Transit Mgmt., Inc., 203 Cal. App. 4th 1112, 1145 (2012). The increased damages seemingly available under Labor Code Section 558, along with the inability to stop PAGA collective actions with class action waiver agreements, contributed to the proliferation of PAGA claims. Lawson concerned a PAGA-only action where plaintiff Kalethia Lawson — who signed an enforceable arbitration agreement with a class action waiver — sought to recover civil penalties under Labor Code Section 558. Lawson’s employer, defendant ZB, N.A. (ZB), moved to compel arbitration of Lawson’s 558 claim for unpaid wages.

The trial court granted ZB’s motion but compelled arbitration “as a representative action” for the unpaid wages for all aggrieved employees.

On appeal, the appellate court held that the claim for unpaid wages under Section 558 could not be arbitrated at all because the “underpaid wages” recoverable under Section 558 qualified as a civil penalty. Even though the issue presented to the court was whether the unpaid wages portion of a claim under Labor Code Section 558 could be compelled to arbitration , the court’s holding mooted that question.

At the California Supreme Court, Lawson argued that Section 558’s reference to unpaid wages should be read as part of an integrated civil penalty recoverable under PAGA. ZB argued that unpaid wages recovered through Section 558 are not “civil penalties” and are better understood as compensatory damages, which are not recoverable in a PAGA action because PAGA only creates a cause of action for civil penalties. In a unanimous decision, the Court held that the civil penalties a plaintiff may seek under Section 558 through PAGA do not include the “amount sufficient to recover underpaid wages.” The Court explained that while “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 held that “unpaid wages are not recoverable as civil penalties under the PAGA in the first place.”

The Court held that the unpaid wages sought under Section 558 are compensatory damages that can only be recovered by the Labor Commissioner. The Court distinguished civil penalties from other types of remedies (such as statutory penalties and restitution of unpaid wage), which are recoverable by employees before PAGA.

While the Court reiterated that an employee’s predispute agreement to individually arbitrate his or her claims is unenforceable with regard to PAGA claims, “a PAGA claim does not include unpaid wages under Section 558.” Thus, the Court affirmed the order denying ZB’s motion to compel arbitration and remanded the case to the trial court to determine whether to strike Lawson’s unpaid wage claim under Section 558 or to grant Lawson leave to amend. The Court’s holding provides much needed clarification as to what is recoverable under PAGA. Employees may still recover unpaid wages individually or as part of a class action lawsuit. But, Lawson represents a win for employers because unpaid wages are not recoverable as part of a PAGA collective action. The Lawson court effectively reduced employers’ monetary exposure on PAGA claims by limiting employees’ recovery to only the civil penalty amounts.

Plaintiffs’ attorneys now have another consideration when filing wage-hour claims. Bring a PAGA-only collective action without the ability to recover unpaid wages. Or, include non-PAGA class action claims under the Labor Code, which are subject to class certification requirements, and which class action waivers in employee arbitration agreements may be extinguished at the outset.