In a welcome surprise for employers, on September 12, 2019, the California Supreme Court resolved the significant issue of whether unpaid wages constitute a civil penalty recoverable in Private Attorneys General Act (PAGA) claims premised on violations of Labor Code Section 558. In addition to assessing fixed-amount penalties, Section 558 provides for the recovery of “underpaid wages” that can vary from employee to employee.

In ZB, N.A. v. Superior Court (Lawson), the issue on appeal was to what extent the recovery of unpaid wages as a civil penalty in a PAGA case was arbitrable—a subject that has been mired in appellate litigation in recent years. The employer sought to compel individual arbitration of that portion of the plaintiff’s PAGA claim which the employer deemed was “victim-specific relief” covered by the arbitration agreement that the plaintiff signed. Initially, the employer’s motion was granted by the trial court, but then it was overturned by the appellate court, which determined that the recovery of unpaid wages under Section 558 constituted a civil penalty within the meaning of PAGA, and therefore was not arbitrable at all.

In resolving the issue, the California Supreme Court broadened the inquiry, and after an extensive statutory review of Section 558, confirmed that it was appropriate to deny the employer’s motion to compel arbitration, but not because PAGA civil penalties cannot be compelled to arbitration. Instead, the California Supreme Court announced that recovery of unpaid wages under Section 558 is actually not a civil penalty at all. Recovery of unpaid wages is “compensatory relief” separate from, and in addition to, the fixed-amount civil penalties provided by Section 558. Consequently, because PAGA only permits the recovery of civil penalties, the California Supreme Court held that the compensatory relief of unpaid wages cannot be recovered in a PAGA action. 

Notably, the California Supreme Court’s analysis went further to hold that, in fact, there is no private right of action under Section 558. For that reason, only the Labor Commissioner can enforce the recovery of underpaid wages under that particular statute. If an employee seeks to recover unpaid wages, he or she must do so under another statute and not with a PAGA claim premised on Section 558.

To read the decision in ZB, N.A. v. Superior Court (Lawson), click here.

Why it matters: In an odd turn of events, while the plaintiff succeeded in having the denial of the motion to compel arbitration confirmed, it is the employer, and the defense bar at large, that won a major victory in this decision. The California Supreme Court’s decision is a significant development, as it greatly reduces the possible exposure in PAGA actions. Going forward, plaintiffs will not be able to recover unpaid wages as civil penalties on behalf of themselves and other aggrieved employees, and may not seek unpaid wages at all under Section 558 in their private capacity. Overall, this decision significantly limits the amount of risk an employer faces in defending a PAGA claim.