What penalties do employers face for underpayment of employees?
California Labor Code Section 558 outlines penalties employers face for underpayment of employees.
The relevant language from section 558 is as follows:
(a) Any employer or other person acting on behalf of an employer who violates, or causes to be violated, 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.
(3) Wages recovered pursuant to this section shall be paid to the affected employee.
Recovery of Lost Wages and Civil Penalties through PAGA
Through the Private Attorneys General Act, or PAGA, workers are able to recover civil penalties that otherwise would only be recoverable by the State of California, including the civil penalties described in Labor Code section 558. Section 558 is unusual because, through PAGA, it provides that workers can recover both flat rate penalties and penalties equal to their underpaid wages. And unlike other PAGA penalties, of which 75 percent go to the State and 25 percent go to the workers, the underpaid wages recovered under section 558 all go directly to the workers.
Workers have relied on Section 558 to bring representative actions under PAGA to recover unpaid wages on behalf of themselves and their co-workers.
See, e.g., Thurman v. Bayshore Transit Mgmt., Inc. (2012) 203 Cal.App.4th 1112, 1148 (underpaid wages can be recovered under section 558 “as part of a civil penalty for Labor Code and IWC order violations that result in underpayment of wages.”) Significantly, pursuant to the holding in Iskanian v. CLS Transportation Los Angeles (2014) 59 Cal.4th 348, the right to collective action to enforce Labor Code section 558 survives even if the workers have signed an arbitration agreement banning such actions.
Recent Changes in Interpretation of California Labor Code section 558
Unfortunately, a recent decision of California’s Fifth Appellate District misinterprets section 558 in a confusing and potentially harmful manner. In Esparza v. KS Industries, Inc., No. F072597 (August 2, 2017), the court ignored the plain language of section 558 in holding that an attempt to recover wages under section 558 is a “private dispute.” As such, preventing arbitration of a claim for unpaid wages under section 558 would interfere with the Federal Arbitration Act.
All of that is a long way of saying that if workers bring PAGA claims under both section 558 and other Labor Code sections, and they have signed an arbitration agreement, Esparza will require them to arbitrate their section 558 claims, but leave them free to sue in court for the other claims.
Esparza is misguided for a number of reasons. First, Iskanian did not hold that PAGA claims cannot be arbitrated. Rather, it holds that waivers or representative claims under PAGA are contrary to public policy and not enforceable under state law. 59 Cal.4th at 384.
Second, the plain language of section 558, quoted above, states that civil penalties under that section include “an amount sufficient to recover underpaid wages.” The Thurman court recognized this. 203 Cal.App.4th at 1148. But Esparza ignores this language and creates a false distinction between the two types of civil penalties available under section 558 (the flat rate penalties of $50 or $100 per violation and the separate penalty equal to the underpaid wages).
Last, Esparza creates from whole cloth a new rule that PAGA representative claims for civil penalties are limited to those where a portion of the recovery is allocated to the State. In applying this rule, which has no support, the court ignores the fact that a portion of the civil penalties under section 558 is allocated to the State: the 75 percent of the flat rate penalty. Thus, Esparza misapplies the very rule that it creates.
Esparza does not directly address the next logical question, which is whether an arbitration agreement that bans representative actions would be enforceable as to claims for underpaid wages under section 558, but not as to claims for other penalties under that same section. That critical issue will have to wait for another day. For now, we can hope that the California Supreme Court will grant review and depublish Esparza before it causes too much confusion.
If you have a question about whether you are owed wages, feel free to contact Hunter Pyle Law and utilize our free, confidential intake process. We can be reached at (510) 444-4400 or at firstname.lastname@example.org.