California Appeals Court Upholds Release of Disputed Wage Claims

Affirming summary judgment in favor of the employer in a class action involving unpaid overtime claims, the California Court of Appeal has held that the Labor Code did not prohibit the release of a claim for unpaid wages where there was a bona fide dispute over whether wages were owed. Chindarah v. Pick Up Stix, Inc., No. G037190 (Cal. Ct. App. Feb. 27, 2009). After the employer had settled claims with as many class members as possible, several employees challenged the settlement agreements, claiming that they violated the Labor Code because wages owed could not be consideration for entering into a release. The court rejected the plaintiffs’ claims and found that the settlement agreements were valid as a matter of law because the wage amounts at issue were disputed.

The employer operated a restaurant. A group of former employees sued the employer on behalf of themselves and a class of current and former managers and lead cooks for unpaid overtime, penalties, and interest. The employer sought to settle the case through mediation, but settlement attempts failed. The employer then attempted to settle with as many class members as possible and offered each of them an “amount . . . based upon a figure . . . previously offered at the mediation.” Over 200 employees accepted the offer and signed a settlement agreement, which included a general release and a covenant not to participate in the class action.

Shortly thereafter, the original plaintiffs filed a second amended complaint which included allegations that the settlement agreements violated the state Labor Code. Eight employees who had signed the settlement agreements joined the action as plaintiffs (collectively, “Chindarah”). The employer filed a cross-complaint against Chindarah, alleging breach of the settlement agreement. Chindarah and the employer filed cross-motions for summary judgment. The trial court found the Labor Code did not prohibit the release of a claim for unpaid wages where there is a bona fide dispute over whether any wages were owed and granted the employer’s motion for summary judgment. Chindarah appealed.

The Court of Appeal reviewed the language of the relevant statutes. Section 206.5 of Labor Code provides, in pertinent part, “[a]n 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.” Section 1194 states that, “[n]otwithstanding any agreement to work for a lesser wage, any employee receiving less than the legal minimum wage or the legal overtime compensation applicable to the employee is entitled to recover in a civil action the unpaid balance of the full amount of this minimum wage or overtime compensation, including interest thereon, reasonable attorney’s fees, and costs of suit.”

Chindarah argued that the statutes prohibited any settlement of a dispute regarding overtime compensation. The court noted that no California state case has addressed this issue directly, but that federal case law supported the employer’s position. For example, in a federal case where an employee sued his employer for unpaid overtime time, the district court granted the employer’s motion for summary judgment based on the employee’s execution of a severance agreement and general release. Reynov v. ADP Claims Services Group, Inc., No. C 06-2056 CW, 2007 WL 5307977 (N.D. Cal., Apr. 30, 2007). Like Chindarah, the employee argued that Section 206.5 rendered the release void. The district court rejected this argument, stating that “wages are not ‘due’ if there is a good faith dispute as to whether they are owed.”

Chindarah then argued that, because the right to overtime pay under Section 1194 could not be waived, a bona fide dispute over past overtime wages cannot be settled. The court disagreed and stated that although the right to overtime is unwaivable, “there is no statute providing that an employee cannot release his claim to past overtime wages as part of a settlement of a bona fide dispute over those wages.” Accordingly, the court concluded that the release was valid and barred Chindarah’s claims.

This case is a significant win for employers and confirms that, while employees cannot waive their right to overtime, they may release claims related to disputed wages. This case also reminds employers that, even if they are sued on a class basis, they can attempt to limit class liability by settling claims with individual claimants. Of course, to avoid wage-hour litigation regarding misclassification of employees in the first instance, employers should audit their payroll practices to ensure that employees who are classified as exempt meet the federal and state standards. Employers should consult with counsel to address compliance issues regarding exempt classifications. Jackson Lewis attorneys are available to assist employers with all aspects of federal and state wage and hour compliance. Please contact the attorney with whom you regularly work with your questions about California’s wage and hour laws.