With the advent of California’s Private Attorneys General Act of 2004 (PAGA), employees can step into the shoes of a state attorney general and bring lawsuits against their employers, seeking civil penalties for Labor Code violations. The California Supreme Court has narrowed the concept of “civil penalties” in the PAGA context to exclude underpaid wages. This alert briefly walks through PAGA, the recent holding by the California Supreme Court in ZB, N.A. v. Superior Court, No. S246711 (2019) (Lawson), and the likely impact for employers going forward.

What is PAGA?

PAGA does exactly what its name implies. That is, PAGA empowers "aggrieved employees" to become private attorneys general and bring representative lawsuits on behalf of themselves and other current and former "aggrieved employees" to recover civil penalties previously recoverable only by the labor commissioner. Before PAGA, when an employer violated the Labor Code, it was subject to civil penalties—to be collected by California—and, potentially, compensatory damages—to be collected by the employee in a private action. When the state passed PAGA, it neither added to nor subtracted from these liabilities incumbent on a violating employer. Rather, PAGA simply made civil penalties equally recoverable through a civil action brought by an aggrieved employee. In other words, after PAGA, an employee could seek civil penalties for an employer's Labor Code violations concurrently with his or her action for compensatory relief and then split the recovery of the civil penalties with the state.

In contemporary litigation, PAGA has gained prominence in the arbitration sphere because the California Supreme Court held in a landmark case, Iskanian v. CLS Transportation Los Angeles, LLC, that a class/representative action waiver in an employee’s arbitration agreement is not enforceable to bar PAGA claims, which are inherently representative actions. The Iskanian holding avoids the preemptive effect of the Federal Arbitration Act (FAA) based on the premise that the FAA applies to private disputes based on a contractual agreement, but a PAGA claim is a dispute between the state and the employer, between which there is generally no arbitration agreement. Since Iskanian, plaintiffs have sought to use PAGA to bring representative wage claims in court that would otherwise be barred by class/representative action waivers in applicable arbitration agreements.

Lawson’s Holding

In Lawson, the California Supreme Court addressed the scope of “civil penalties” within the language of PAGA. Section 558 provides:

(a) Any employer . ..  who violates . . . a section of this chapter or any provision regulating hours and days of work in any order of the Industrial Welfare Commission shall be subject to a civil penalty as follows:

(1) For 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.

(2) For 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. (Emphasis added).

In Lawson, Kalethia Lawson brought a PAGA claim under section 558, requesting both the fines set out above and underpaid wages for herself and other employees. Lawson claimed that both the fines and her underpaid wages were civil penalties, which were recoverable under PAGA and immune to the class/representative action waiver in her arbitration agreement. Lawson’s employer argued, and the California Supreme Court agreed, that the “amount sufficient to recover underpaid wages” constituted compensatory relief and not civil penalties. Because PAGA empowers employees to seek exclusively civil penalties in a representative capacity and not compensatory damages that can be sought in a standard, private suit, the court held Lawson could not request unpaid wages in her PAGA claim.

Lawson’s Effect on Employers and Steps Going Forward

Here is what we know after Lawson. First, as the court said, “[t]he civil penalties a plaintiff may seek under Section 558 through the PAGA do not include the ‘amount sufficient to recover underpaid wages.’” This does not mean an employee cannot seek recovery for underpaid wages. It just means the employee cannot seek those wages in a PAGA action.

Second, because the recovery of underpaid wages are not included within the civil penalties of a section 558 PAGA claim, a suit to recover these wages should not be immune from a class/representative action waiver under Iskanian. Notably, however, the California Supreme Court in Lawson did not directly enforce the waiver for Lawson’s underpaid wage dispute. The court reasoned it could not compel the parties to arbitrate Lawson’s underpaid claim because she had proceeded solely under PAGA, which did not permit such a claim. Lawson’s PAGA claim for penalties was not the subject of the appeal, and the California Supreme Court did not foreclose Lawson from amending her complaint to seek the underpaid remedies under an appropriate cause of action. But given that Iskanian recognized the enforceability of class/representative action waivers in the employment context generally, the inability to seek underpaid wages under PAGA is likely to preclude class-wide resolution where a plaintiff has signed a class/representative action waiver absent another creative effort by plaintiffs’ counsel.

In this sense, Lawson certainly is a good sign for employers. The decision may temper, to some degree, the plaintiffs’ bar from bringing PAGA-only representative actions, which California has seen a rise of post-Iskanian, as Lawson significantly limits the scope of what plaintiffs may now recover under PAGA. If nothing else, Lawson shows a willingness from the California Supreme Court to limit the scope of PAGA actions going forward.