Unpaid wage claims not recoverable through PAGA

Unpaid wage awards are not civil penalties and therefore are not recoverable through Private Attorney General Act claims, the state Supreme Court held Thursday.

The ruling closed the door for individual plaintiffs to recover lost wages under Labor Code Section 558, without the California Labor Commissioner's intervention.

The state Supreme Court formerly ruled, in a keystone employment law decision, that because a plaintiff acts as the representative of the state in PAGA cases, these claims cannot be waived through a pre-dispute agreement, like a class action waiver or a mandatory arbitration agreement. Iskanian v. CLS Transportation, LLC, 59 Cal.4th 348 (Cal. 2014).

As a result, Thursday's ruling significantly limits the legal options of employees seeking to recover unpaid wages, who previously signed class action waivers or binding arbitration agreements. ZB N.A., and Zions Bancorporation v. Superior Court, 2019 DJDAR 8825 (Cal. Sept. 12, 2019).

In Thursday's ruling the plaintiff, Kalethia Lawson, signed a binding mandatory arbitration agreement and class action waiver. She subsequently brought a PAGA claim against her employer seeking unpaid wages, and fixed civil penalties, which ranged from $50 to $100 for each relevant pay period, under Labor Code Section 558.

Writing for the majority, Justice Mariano-Florentino Cuellar found that the unpaid wage damages are more akin to compensatory damages than civil penalties, and therefore could not be brought through a PAGA claim. As a result, those unpaid wage claims were barred by any pre-dispute class action waivers or arbitration agreements.

Legal observers said this was a rare victory for employers at the state Supreme Court, in the arbitration context.

"Real positive for employers," said Robert Olson of Greines, Martin, Stein & Richland LLP.

"This opinion is definitely good news for employers," added Anthony J. Oncidi of Proskauer Rose LLP.

One practical effect of this case is to limit PAGA claims, which can be attractive alternatives to class actions for plaintiffs who perhaps cannot achieve class certification. "A PAGA plaintiff can sue for violations of the labor code even if he or she didn't experience it themselves...this will limit that," points out Gary M. McLaughlin of Akin Gump Strauss Hauer & Feld LLP.

However, plaintiff-side lawyers said they do not view the ruling as a complete boon to employers.

"Our strategy is we'll team up with the labor commissioner to work with them to recover underpayment of wages," said Edwin Aiwazian of Lawyers of Justice, P.C., who represented Lawson.

"[At] several points in the opinion, the court emphasizes the protections that remain," added Michael Rubin of Altshuler Berzon LLP, who argued Lawson's appeal before the high court.

Cuellar repeatedly emphasized that non-party employees might still use a successful PAGA claim as a basis for collateral estoppel in subsequent arbitration proceedings.

"If they prevail all the individual has to do is file their arbitration and collect," said Norman B. Blumenthal of Blumenthal Nordrehaug Bhowmik De Blouw LLP.

Cuellar's opinion came against the backdrop of an ongoing dispute between the state Supreme Court and the U.S. Supreme Court over the role mandatory arbitration agreements should play in the workforce.

"If the United States Supreme Court hadn't over the last 20 years issued a string of decisions based on the fiction that arbitration agreement are voluntary...then this wouldn't be a big deal," Rubin said.

"The California Supreme Court in this case is being very careful not to further FAA rulings that it doesn't have to. I think that probably is what's going on. Maybe animating some of the choices made," said Glenn Danas of Robins Kaplan LLP, who argued the Iskanian case, along with Rubin.

Regardless, the case alters the strategy for employee wage claims and is another in a line of cases clarifying the ever-ambiguous PAGA.

"It looks like the court has set the new road map here," Blumenthal said.