California’s Supreme Court has cut off an area of significant potential exposure for California employers by ruling that employees cannot recover unpaid wages on behalf of themselves and other aggrieved employees through California’s Private Attorneys General Act (PAGA).

Serving as a quasi-class action, California’s PAGA allows employees to recover civil penalties for California Labor Code violations on behalf of themselves and other aggrieved employees. Of the employee’s recovery, 75% goes to the state and the other 25% goes to the aggrieved employees. Prior to PAGA, these civil penalties could be recovered only by California’s Labor Commissioner.

One such Labor Code section affected by PAGA is Labor Code § 558, which provides for the recovery of civil penalties in the amount of $50 for an initial violation and $100 for a subsequent violation per employee in the event of overtime violations. Section 558 further provides that these penalties may be recovered “in addition to an amount sufficient to recover underpaid wages.” As PAGA allows employees to recover penalties on behalf of themselves and other employees, the amount of underpaid wages can add up to significant potential exposure for an employer.

Whether employees can recover these unpaid wages in addition to the fixed penalties made its way to the California Supreme Court in ZB, N.A. v. Superior Court. As background, the California Supreme Court has previously held that an employee’s PAGA claim cannot be compelled to arbitration because the state has an interest in the recovery (75% of the amount recovered) and only the employee agreed to arbitration—not the state. In this case, the employer moved to compel arbitration of just the portion of the PAGA claim seeking unpaid wages. Therefore, under the employer’s motion, the aspect of the employee’s claim seeking the fixed statutory amount would remain in court while the aspect of the employee’s claim seeking unpaid wages would be compelled to arbitration. The employer reasoned that such wages were payable to the employees and not the state, therefore, the motion would not run afoul of the prior California Supreme Court ruling. The Court of Appeal disagreed, and the California Supreme Court granted review.

Ultimately, the California Supreme Court never ruled on the permissibility of this arbitration approach because it concluded that the employee could not recover those unpaid wages in the first instance. The court reasoned that unpaid wages constitute compensatory relief rather than civil penalties, and because PAGA only authorizes the recovery of civil penalties, the employee cannot recover the unpaid wages. And as the employee cannot recover the unpaid wages, there is no claim to arbitrate.

BOTTOM LINE: California employees can no longer recover unpaid wages through California’s Private Attorneys General Act.