Labor Code section 206.5 states that employers may not require employees to release claims for wages, and that any release required in violation of that section is void. In a recent case, the California Court of Appeal addressed the issue this raises for employers—can an employer lawfully settle wage claims by agreeing to pay funds in exchange for a release?
The Statute
Labor Code section 206.5 states as follows:
(a) An employer shall not require the execution of a release of a claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of those wages has been made. A release required or executed in violation of the provisions of this section shall be null and void as between the employer and the employee. Violation of this section by the employer is a misdemeanor.
(b) For purposes of this section, “execution of a release” includes requiring an employee, as a condition of being paid, to execute a statement of the hours he or she worked during a pay period which the employer knows to be false.
The Chindarah Case
In Chindarah v. Pick Up Stix, Inc. two former employees sued employer Stix, alleging that they were misclassified as employees exempt from overtime pay, seeking damages for failure to pay overtime, as well as penalties and interest. Plaintiffs also alleged a proposed class action, seeking to recover these sums on behalf of all other Stix current and former general managers, assistant managers, and lead cooks.
After mediation failed to resolve the lawsuit, Stix sought to settle directly with as many potential class members as possible. Over 250 former and current employees accepted an offer from Stix and signed a settlement agreement and release.
Oh yes, you can see it coming. Plaintiffs filed an amended complaint and alleged that the settlement agreements violated the Labor Code. Fourteen current and former Stix employees who had signed the settlement agreements (and presumably had been paid the settlement funds) joined as plaintiffs.
The trial court found that the Labor Code did not prohibit release of a claim for unpaid wages where there was a bona fide dispute over whether any wages were owed. The Court of Appeal affirmed this result, holding that public policy is not violated by settlement of legitimate disputes over wages already earned. The appellate court emphasized that the dispute was over past and not future wages, that the release did not purport to exonerate future violations, and that the release was not conditioned upon payment of wages concededly due. The appellate court distinguished the law under the Federal Labor Standards Act, which has been interpreted to prohibit wage settlements directly with employers without approval by the United States Department of Labor or a federal court, stating that “there is no basis for such a requirement to be read into California law.” The court did reaffirm the vitality of an earlier California Supreme Court holding that an employee’s release of all claims against the employer could not, as a matter of public policy, waive the employee’s “nonwaivable indemnity rights” against the employer for any losses caused by the employee discharging his or her duties.
A copy of the opinion in Chindarah v. Pick Up Stix, Inc. (February 26, 2009) 171 Cal.App.4th 796 can be accessed here.
Employer Action Items
Knowing the boundaries of when a release can be sought from, or enforced against, an employee oftentimes involves complex and fact intensive analysis. An employer does not want to pay money and risk a second suit. On the other hand, the prudent employer does not want to unlawfully withhold money and incur liability for wages, penalties, interest, and the employee’s attorney fees. Any wages that are concededly due should unconditionally be paid.
Subsection (b) of Labor Code section 206.5 is brand new, effective as of January 1, 2009. Obtaining an employee’s written acknowledgement that he or she has been paid for all of their worked hours might be beneficial to ward off unfounded overtime claims. However, if the employer knows the statement is false this would just create greater civil, and potentially criminal, exposure. The factual background for any release of a wage claim should be carefully evaluated to make sure that there is no violation of Labor Code section 206.5. Employers should refrain from having employees sign a statement of hours worked during a pay period where the employer knows the statement is false.
Archer Norris is experienced in evaluating the enforceability and strategic advisability of wage claim releases and also in advising employers about avoiding claims for unpaid wages. If you have any questions or need any help in these areas, please contact your Archer Norris employment attorney.
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