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September 2019

California Supreme Court Limits PAGA Penalties

Employers in California have reason to rejoice as the California Supreme Court just issued a landmark ruling: employees can no longer recover underpaid wages through the Private Attorneys General Act (“PAGA”).

California’s highest court finally resolved the disputed interpretation of Labor Code section 558 ("Section 558"), which provides that an employer violating workday laws “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 unpaid wages… Wages recovered pursuant to this section shall be paid to the affected employee.”

For years, appellate courts could not decide whether the italicized language referred to wages or, instead, to penalties.  The confusion was understandable as the first part of the sentence underlined begins to define a “penalty,” while the last word in the definition italicized is “wages.”  In 2012, the Court of Appeal in Thurman v. Bayshore Transit Management Inc., 203 Cal. App. 4th 1112 (2012) ruled that despite the word “wages” being used, the monies referred to in the statute are really penalties and not wages. The Thurman court cited to other Courts of Appeal who similarly concluded that such “wages” are really additional penalties. The Thurman court also seized upon a sentence in a California Supreme Court opinion called Reynolds, and that sentence seemed to suggest that the wages were really penalties in a different form. The Thurman court tried its best to predict how the Supreme Court would decide on the issue in saying: “These statements show that the Supreme Court viewed the recovery of underpaid wages under section 558 subdivision (a) as being part of, rather than in addition to, the civil penalty provided by that subdivision.” 

Well, according to the California Supreme Court, the Thurman court interpreted this incorrectly.

The California Supreme Court finally rendered its opinion in Zions Bancorporation v. Superior Court of San Diego County (Lawson), Case No. S246711.  The Supreme Court quickly dismissed its prior mischievous sentence in the Reynolds case as mere “dictum,” i.e., an ancillary comment that was not pertinent to the main issue being discussed. Because the Supreme Court did not “squarely confront” the wages versus penalties issue in Reynolds, its single sentence about wages and penalties should not have been relied upon.  As such, Thurman and dozens of other appellate opinions that misinterpreted the Reynolds sentence have now been effectively overruled. 

The Supreme Court certainly did “squarely confront” the issue this time. It closely studied the legislative histories, amendments, and purposes of various Labor Codes. It sought to interpret Section 558 consistently with other codes that have similar language. Labor Code section 1197.1 has similar language, and the legislature later amended that code to state clearly and specifically that penalties and wages were separate items. Because both codes used similar language, they should be interpreted similarly as the legislature intended for the other. The Supreme Court also reasoned that penalties are typically paid to the government, yet Section 558 specifically states that the money shall be paid to the affected employee.  Accordingly, such wages could not be recovered as a penalty under PAGA, because PAGA only allows for the recovery of penalties.  For good measure, the Supreme Court noted that PAGA penalties are required to be split 75%/25% between the government and the employees, while the Section 558 wages are not. This distinction further bolstered the conclusion that such wages are not penalties.  Such wages are not a bizarre “exception” to the 75%/25% split requirement as the Thurman court posited.  They are not penalties at all.

Furthermore, the Supreme Court ruled that an employee has no ability to sue under Section 558 and that only the Labor Commissioner can do so.  Because of that basic principle, the employee who filed the lawsuit could not recover money under Section 558 anyway. The case has now been remanded back to the trial court to determine whether the Section 558 claim should be stricken out of the lawsuit or whether the employer’s motion to compel arbitration of the Section 558 claim should simply be denied because there is no viable Section 558 claim to be arbitrated anyway.

The Zions opinion represents a major victory for employers and should cut down significantly on PAGA settlements and judgments.  Prior to Zions, employees were often recovering an additional 10% to 30% of penalties because of the interpretation of Section 558, especially in overtime cases where the overtime wages owing to a quasi-class can be astronomical.

For more information regarding how this ruling may impact your business, please contact the authors or visit the Gordon Rees Scully Mansukhani, LLP website at www.grsm.com.

Employment Law

Geoff Lee
William B Richards Jr.



Employment Law