Seyfarth Synopsis: The California Supreme Court has held that an individual may not seek unpaid wages under Labor Code section 558. Section 558 can be invoked only by the Labor Commissioner or by an individual suing under PAGA, and PAGA claims are limited to the recovery of civil penalties. ZB, N.A. v. Superior Court of San Diego County

The Facts

Kalethia Lawson sued her employer, a bank called ZB, under California’s Private Attorneys General Act (“PAGA”), and Labor Code section 558, seeking both the civil penalties and the unpaid wages that Section 558 references as remedies. ZB moved to compel enforcement of its arbitration agreement with Lawson, contending that she was required to arbitrate the portion of her Section 558 claim regarding wages (while acknowledging that the Section 558 claim for civil penalties was not arbitrable). The trial court agreed, bifurcating Lawson’s action and compelling the unpaid wages issue to arbitration.

The Court of Appeal disagreed, determining that Lawson, as an aggrieved employee, could pursue an entire, indivisible, Section 558 remedy through PAGA, and that such a claim could not be compelled to arbitration. The California Supreme Court agreed to review whether Section 558 claims for unpaid wages could be compelled to arbitration.

The California Supreme Court’s Decision

While the original question posed was whether claims for unpaid wages under Section 558 could be compelled to arbitration, the Supreme Court decided on its own to review a threshold issue: whether the unpaid wages that the Labor Commissioner can recover under Section 558 qualify as a “civil penalty” that an aggrieved employee can recover under PAGA. The Supreme Court determined that Section 558 does not authorize a private right of action: an aggrieved employee may invoke Section 558 only when bringing a PAGA action. Accordingly, determining whether an aggrieved employee can pursue a PAGA action hinged on whether the unpaid-wages remedy in Section 558 is a civil penalty.

In resolving this issue, the Supreme Court focused on four things: (1) the language and legislative history of Section 558; (2) the fact that statutory damages seek to compensate employees for actual losses incurred, as opposed to penalties that seek to shape employer conduct; (3) an individual’s ability to recover unpaid wages directly through a private civil action under Labor Code section 1194; and (4) the similarity in language between Sections 558 and 1197.1 (which provides for restitution of wages separate and apart from a civil penalty).

Ultimately, the Supreme Court held that the wages remedy mentioned in Section 558 is not a civil penalty but rather is more akin to a damages remedy for withheld overtime premium wages. By categorizing Section 558 unpaid wages as compensatory and not a civil penalty, the Supreme Court rendered them unrecoverable through a PAGA action.

What ZB Means to Employers

ZB is that rare example of a California judicial decision utilizing common sense and practical reasoning to limit the abuse of PAGA litigation. Unpaid employees already have ample means to recover unpaid wages, and the case law mischaracterizing them as PAGA “penalties”—pursuable without regard to arbitration agreements—created an anti-arbitration loophole that the Supreme Court has now closed. Moreover, the Supreme Court’s ruling that PAGA recoveries are limited to “civil penalties” is likely to apply beyond Section 558. While an employee may still seek unpaid wages under Section 1194, for example, such a damages claim cannot be brought on a PAGA representative basis, and thus should be subject to any valid arbitration agreement that applies.