Labor & Employment Law Daily Arbitration of wage dispute can’t be compelled where it blocked employee’s PAGA claim
Tuesday, September 17, 2019

Arbitration of wage dispute can’t be compelled where it blocked employee’s PAGA claim

By Georgia D. Koutouzos, J.D.

Although employees can seek civil penalties in an action brought under the California law that authorizes aggrieved workers to sue their employers for Labor Code violations on the state’s behalf, those penalties don’t include unpaid wages.

A California employee’s pre-dispute agreement to individually arbitrate her wage claims was unenforceable where it blocked her action under the Private Attorneys General Act of 2004 (PAGA) from proceeding, the state’s highest court determined, nevertheless concluding that claims under PAGA do not include unpaid wages under California Labor Code section 558. Because the employer’s motion to compel arbitration of the employee’s wage dispute concerned relief that was not cognizable under the sole cause of action in her complaint, the state appellate court correctly commanded the trial court to vacate its previous order mandating arbitration of the dispute, the supreme court held (ZB, N.A. v. Superior Court of San Diego County, September 12, 2019, Cuéllar, M.).

A woman employed by a California bank who had agreed as a condition of her employment to arbitrate all employment claims and to forego class arbitration filed suit against her employer and its parent company alleging a single cause of action under PAGA, which enables an employee to seek civil penalties for California Labor Code violations committed against him or her and other aggrieved employees by bringing a representative action against an employer on behalf of the state. Contending that the bank failed to provide overtime and minimum wages, meal and rest periods, timely wage payments, complete and accurate wage statements, complete and accurate payroll records, and reimbursement of business-related expenses, the employee’s complaint sought civil penalties against the bank, including unpaid wages and premium wages under Labor Code section 558.

Trial court’s ruling. Maintaining that her employment agreement required her to arbitrate all employment claims on an individual basis, the bank moved for a stay of the civil action and to compel the employee to individually arbitrate her Labor Code-based claim. According to the bank, the victim-specific relief sought by the employee under the Labor Code is not part of a standard PAGA action; rather, it remains a claim that is subject to individual arbitration, although the civil penalties available are not arbitrable.

The trial court generally agreed, bifurcating the employee’s action and granting the bank’s motion to compel arbitration of the unpaid wages issue. In the trial court’s view, the relief sought in the employee’s claim nevertheless required “representative” adjudication because PAGA, by its very nature, is a representative statute. As such, the trial court ordered the unpaid wages issue to arbitration as a representative action for the unpaid wages of all the bank’s aggrieved employees.

Appeals court’s decision. The bank filed an appeal of the trial court’s determination as well as a petition for writ of mandate with the California Court of Appeal. After consolidating the two, the appellate court dismissed the appeal on the basis that the state’s civil procedural law only provides appellate jurisdiction over an order dismissing a motion to compel arbitration, and not granting such a motion. The appeals court also issued the sought-after writ of mandate, but on a different ground from the one that the bank had asserted.

Interpreting section 558 to expressly include “underpaid wages,” the appeals court held that the employee could pursue the entire, indivisible civil penalty through PAGA, and that the bank could not compel the representative PAGA claim to arbitration. The appeals court then issued a writ of mandate commanding the trial court to vacate its previous order and enter a new order denying the bank’s motion to arbitrate. The bank petitioned the California Supreme Court for a determination whether an employer can compel arbitration of an employee’s PAGA claim requesting unpaid wages under section 558.

Labor Code penalties. Before PAGA’s enactment, section 558 gave the Labor Commissioner authority to issue citations—including an assessment of civil penalties—for overtime and other workday violations. Under section 558, any employer that violates the provision “shall be subject to a civil penalty as follows: (1) [f]or any initial violation, fifty dollars ($50) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages. [and] (2) [f]or each subsequent violation, one hundred dollars ($100) for each underpaid employee for each pay period for which the employee was underpaid in addition to an amount sufficient to recover underpaid wages.”

Compensatory relief or civil penalty? Noting that section 558 authorizes the Labor Commissioner to issue citations for a fixed civil penalty amount “in addition to” a compensatory amount “sufficient to recover underpaid wages,” the high court found that the “amount sufficient to recover underpaid wages” authorized in section 558, subdivision (a) constitutes compensatory relief––a type of recovery separate from its civil penalties. This reading properly reflects both PAGA’s purpose of authorizing aggrieved employees to seek civil penalties (which are distinctly an interest of the state and previously were unrecoverable by private parties) and section 558’s purpose of enhancing and streamlining enforcement of the Labor Code’s overtime and workday requirements. Treating the amount for unpaid wages in this way best harmonizes section 558’s provisions with each other and with the broader statutory scheme, the supreme court reasoned.

Unpaid wages aren’t recoverable. Because the amount for unpaid wages is not recoverable under PAGA and section 558 does not otherwise permit a private right of action, the trial court should have denied the bank’s motion, the high court opined. When the appeals court determined that the motion to compel arbitration should have been denied, it was operating on the faulty premise that section 558’s civil penalty includes unpaid wages. Yet the appeals court’s ultimate conclusion on the bank’s motion was justified. Section 558 has no private right of action, nor can employees recover the unpaid wages described in section 558 in a PAGA claim, even though the former permits the Labor Commissioner to include that amount in a citation.

Simply put, the employee’s complaint alleged entitlement to relief she could not seek because she lacked a cause of action, i.e., an amount for unpaid wages under section 558. The bank’s motion sought to compel arbitration of only that impermissible request for relief rather than any valid claim the court could compel to arbitration. Accordingly, while its reasoning was incorrect, the appeals court correctly granted the bank’s writ petition and ordered the trial court to deny the bank’s motion to compel arbitration, the high court concluded, affirming the appeals court’s judgment and remanding the case for further proceedings and instructing the trial court to consider striking the unpaid wages allegations from the employee’s complaint, permitting her to amend the complaint, and other measures.

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