California Court of Appeal Provides Clarification of Labor Code Section 206.5's Restrictions on Releases of Wage Claims

by Sheppard Mullin Richter & Hampton LLP
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[authors: Gregg Fisch and Rachel Miller]

In the recent California Court of Appeal decision of Pulli v. Pony International, LLC, the court clarified that Labor Code section 206.5 prohibits an employer from requiring an employee to execute a release of a claim for wages only and does not prohibit the employer from requesting that the employee waive his right to a jury trial by agreeing to arbitrate his employment-related claims. Although the court refused to rule on whether the arbitration agreement itself was enforceable (even though it expressly held that the provision was not automatically unenforceable), the decision appears to be at least a small victory for employers and plain language statutory constructionists.

In Pulli, an individual sued his former employer, Pony International, for alleged fraudulent inducement to enter into an employment agreement and wrongful termination. Pulli claimed that, in order to avoid forfeiting earned wages and other types of compensation owed to him as Pony supposedly threatened, he was forced to enter into the agreement containing an arbitration requirement under which he gave up his right to a jury trial. Pony filed a motion to compel arbitration based on the arbitration provision in Pulli’s employment agreement. Agreeing with Pulli that the arbitration agreement was unenforceable because the employment agreement as a whole was unenforceable under Section 206.5 since it purportedly improperly required a release of claims for wages due, the trial court denied Pony’s motion to compel.

On review, the Court of Appeal found that the trial court erred in determining that the employment agreement, and therefore the arbitration provision within it, was unenforceable. First, the court concluded that Pony had waived its right to have the arbitrator determine the Section 206.5 issue because, in its reply brief in support of its motion to compel arbitration, Pony separately addressed the merits of Pulli’s contention that the arbitration provision was void pursuant to Section 206.5. Then, the Court of Appeal addressed the merits and held that Section 206.5 did not render the arbitration provision in the employment agreement unenforceable. More specifically, the court found that Section 206.5 does not apply towards an employee’s waiver of his right to a jury trial by entering into an agreement that contains an arbitration provision. In so finding, the court noted that nothing in the plain language of Section 206.5 could lead to a conclusion that the Labor Code provision should apply broadly, especially considering that the legislative history made clear that the statute was enacted to remedy the building industry’s former “widespread” practice to condition wage payments on the execution of a general release and then make payment by “bad checks,” thereby preventing the employees from seeking recourse for the non-payment of wages. Moreover, the Court of Appeal recognized that the Legislature was aware of its ability to broaden the scope of the statute, since it revised the statute in 2008 to expand the meaning of the term “release” to include an employee’s execution of a document that stated he or she was owed no further wages. Accordingly, the court acknowledged the significance of this statutory amendment to indicate that before 2008 the statute only covered actual releases of the right to sue and, therefore, “release” must be defined very narrowly to include only actual releases of claims. Thus, Section 206.5 is to apply only to the actual release of wage claims, as they are particularly addressed by the statute.

In its ruling, the court found unpersuasive Pulli’s argument that, because the execution of the employment agreement impermissibly violated Section 206.5, the entire agreement (including the arbitration provision) was invalid. In response to this argument, the court explicitly stated that the “existence of an invalid release of a wage claim pursuant to Section 206.5 in an agreement does not provide a defense to the enforcement of an arbitration provision contained in the same agreement.” In other words, applying the doctrine of severability, the court held that, even if the employment agreement contained an invalid (and unenforceable) release of wage claims under Section 206.5 (an issue that the court refused to address at this time), only the release portion of the agreement would be invalidated. Consequently, neither the entire agreement nor the arbitration provision would be automatically invalidated.

The court, however, limited its holding, noting that it was looking only at the enforceability of such an arbitration provision under Section 206.5 and was not expressing an opinion on whether the arbitration provision was unenforceable under other principles of law. Nonetheless, this holding appears to represent a positive result for employers towards the protection of plain language statutory construction of Labor Code section 206.5. Thus, it seems clear that the plain language of Section 206.5 should be considered and applies only to actual releases of wage claims.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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