California Supreme Court ends Practice of Employees Recovering Wages Under PAGA

Today, the California Supreme Court handed a significant victory to employers in the ongoing effort to use individual-only arbitration clauses to eliminate group wage claims.  At issue was whether employees could seek to recoup underpaid wages under the California Labor Code's Private Attorneys General Act ("PAGA").  The decision, ZB, N.A. v. Superior Court (S246711), answered that question in the negative.  It is available here. 

PAGA claims can be brought by plaintiffs as representatives of the state of California to seek penalties for Labor Code violations suffered by groups of aggrieved employees.  Unlike class actions, PAGA group claims cannot be eliminated through "individual-only" arbitration agreements.  One of the key penalties employees have sought to recover through PAGA is found in Labor Code section 558, which deals with unpaid overtime wages, among other things.  That section provides for a "civil penalty" consisting of a small fine for each violation "in addition to an amount sufficient to recover underpaid wages."  Whereas most PAGA penalties are split 75/25% with the State, wages recovered under Section 558 are "paid to the affected employee" in full.  Until today, employee advocates relied on PAGA and Section 558 to recover underpaid wages for groups of employees in various situations, including where arbitration agreements had eliminated other methods of enforcement.

Today's ruling will end that practice.  In a detailed exercise in statutory interpretation, the Court concluded that Section 558's reference to an "amount sufficient to recover underpaid wages" was not part of the "civil penalty" in Section 558, and therefore not something that employees can collect via PAGA.  This was a surprise.  In the employment law trenches, there had been debate about whether a PAGA claim for underpaid wages under Section 558 could be compelled to arbitration, but it had generally been viewed as clear from the language of Section 558 that such wages were part of the "civil penalty" described in that section.  If the Court misunderstood the Legislature's intent, the remedy at this point is an amendment to Section 558.

The most obvious ramification of the Court's decision is that arbitration agreements will be even more effective at preventing enforcement of the wage laws on a group basis.  But there are other effects.  Previously, PAGA cases could be brought to recover wages when a class action was not an appropriate vehicle for various reasons -- for example, if the numerosity requirement could not be met.  In such cases, collecting wages through PAGA fulfilled the purpose of PAGA, which is to deputize citizens to enforce the wage laws on behalf of groups of aggrieved employees when the Labor Commission lacks the resources to do so.  As of today, such wages can no longer be recovered through PAGA.