October 2, 2019

California Supreme Court Confirms Unpaid Wages Not Recoverable as "Civil Penalties" Under PAGA

Holland & Knight Alert
Linda Auerbach Allderdice | Samuel J. Stone | John H. Haney

In ZB, N.A., and Zions Bancorporation v. Superior Court of San Diego County, No. S246711, __ Cal. 5th __, 2019 WL 4309684 (Cal. 2019) (ZB), the California Supreme Court held on Sept. 12, 2019, that California's Labor Code Private Attorneys General Act (PAGA) does not permit the recovery of "unpaid wages" as a "civil penalty" under PAGA. The favorable ruling for employers curtails PAGA's reach and should help to limit runaway settlement demands in PAGA cases.

A PAGA Primer

PAGA empowers employees to sue on behalf of themselves and other aggrieved employees to recover civil penalties such that the employee acts as the proxy or agent of the state's labor law enforcement agencies. In other words, the employee may seek any civil penalties that the state of California can recover, including penalties for violations involving employees other than the PAGA litigant. As the Supreme Court noted, PAGA allows employees to pursue civil penalties separately or concurrently while also pursuing unpaid wages and other remedies already available. Only civil penalties may be sought under PAGA and, in turn, it is only civil penalties that an employee may pursue on behalf of all other current or former employees.

When a section of the Labor Code specifically provides for a civil penalty amount, that defined amount may be sought under PAGA. When a Labor Code provision does not specifically provide for a civil penalty, PAGA generally sets the penalty for the initial violation at $100 per aggrieved employee per pay period for each initial violation and at $200 for each subsequent violation per aggrieved employee per pay period.

PAGA's Civil Penalty Provision Applied to Section 558

The dispute in ZB centered on the language of Labor Code Section 558. Section 558 authorizes the Labor Commissioner to seek a civil penalty in connection with overtime and other workday violations at an initial violation rate of $50 for each underpaid employee for each pay period and a subsequent violation rate of $100 for each underpaid employee for each pay period. Section 558 also provides that these civil penalties are in addition to an amount sufficient to recover underpaid wages. The wages recovered pursuant to Section 558 are payable to the affected employee. ZB held that under PAGA, only the Labor Commissioner may issue a citation that includes a civil penalty and unpaid wages; employees may not collect unpaid wages through a PAGA action.

Implications Moving Forward

The ZB decision represents a significant, even if somewhat limited, willingness by California's high court to address the boundaries of what may be recovered in PAGA actions. As the ZB decision explains, trial courts and the California Courts of Appeal previously were split on whether Section 558 "underpaid wages" were recoverable as civil penalties, but the state of the law is clear moving forward – Section 558 "underpaid wages" are not recoverable as PAGA civil penalties. Further, ZB eliminates a particularly effective cudgel used by the PAGA plaintiff's bar – that of "open-ended" civil penalties for a Section 558 violation. The vast majority of PAGA civil penalties are set at a defined rate ($100 or $200, or at whatever amount that is already set by statute), allowing for relatively accurate estimates of potential exposure based on the number of employees and number of pay periods. On the other hand, an "amount sufficient to recover underpaid wages" is by nature variable and employee-specific. ZB eliminates this "open-ended" issue and establishes boundaries as to what constitutes an appropriate Section 558 civil penalty.

PAGA actions continue to expose employers to paying costly penalties and attorneys' fees, even with the one-year statute of limitations for PAGA actions. Further, PAGA actions are not subject to mandatory arbitration agreements. It is therefore critical for employers with California employees to conduct regular internal audits of payroll practices and to assure compliance with the myriad requirements under the California Labor Code in order to avoid PAGA claims.

For more information or questions on how the California Supreme Court's PAGA decision can affect employers, contact the authors.   

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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