In a rare pro-employer decision, on September 12, 2019 the California Supreme Court decided in ZB, N.A. v. Superior Court that Private Attorney General Act (PAGA) plaintiffs cannot recover back wages in addition to civil penalties. Despite the fact that the Labor Commissioner could collect unpaid wages under California Labor Code section 558, the Supreme Court stated that "this amount – understood in context – is not a civil penalty that a private citizen has authority to collect through the PAGA." This would limit PAGA plaintiffs (and their counsel) to cumulative penalties in the amount of $50 to $100 per pay period.

This decision is important because California plaintiffs are increasingly attempting to skirt valid arbitration agreements with class action waivers by bringing PAGA-only claims. Current case law in California holds that employers cannot mandate arbitration of PAGA claims because technically, private litigants are stepping in the shoes of the State, who did not agree to the arbitration agreements. Accordingly, there are an increasing number of PAGA-only claims that forego a putative class action and instead solely pursue a collective action where the putative plaintiffs get only 25 percent of the penalties collected, but the attorneys receive fees based on the full recovery. While those claims have only a one-year statute of limitations, some courts had held that in addition to PAGA penalties, litigants could also recover back wages – essentially finding a backdoor around mandatory arbitration agreements to collect wages on behalf of a group of putative "aggrieved parties." This decision puts a stop to this practice, as a private plaintiff solely bringing a PAGA claim will no longer be able to recover unpaid wages

This case is an especially important victory for employers in light of the recent passage of AB 5, which currently awaits Governor Gavin Newsom's signature. That legislation codifies the California Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 regarding the classification of independent contractors in California.

In Dynamex, the court applied a three-part test, referred to as the ABC test, to determine whether a worker should be classified as an employee or as an independent contractor under the California Wage Orders. This test makes it much more difficult for entities to classify individuals as independent contractors and subjects employers to potential penalties and back wages associated with the alleged misclassification.

ZB, N.A. v. Superior Court provides a roadmap for California companies to address this new legislation through the use of arbitration agreements with class action waivers. Such agreements can limit recovery to the individual contractor bringing a claim, with the exception of PAGA claims – which now can be limited to penalties, and not include wages.

California entities who engage independent contractors are strongly encouraged to review their arbitration agreements with counsel to ensure that the rare victory for employers can be put into practice by companies today.