California Court of Appeal Holds that Employee Releases of Disputed Wage Claims are Enforceable

February 27, 2009

Summary

In a published opinion issued yesterday, the California Court of Appeal held that releases signed by employees pursuant to the settlement of disputed wage claims are enforceable.  In Chindarah v. Pick Up Stix, Inc., a class action alleging unpaid overtime, the court held that releases contained in settlement agreements between the employer and hundreds of individual putative class members were valid, and that by signing the releases the employees had released their claims for unpaid overtime.  The court rejected the argument that the California Labor Code prohibits such releases.  This is the first published opinion by a California appellate court directly addressing this issue.

Discussion

Two former employees brought a lawsuit against Pick Up Stix, asserting claims for unpaid overtime and related penalties arising out of the alleged misclassification of their jobs as exempt from overtime pay.  The employees later amended their complaint to include class action claims for unpaid overtime.

The parties attempted to resolve the case at mediation, but were unsuccessful.  Pick Up Stix then attempted to settle directly with individual putative class members by offering each individual a settlement amount based on what the employer had offered at the mediation.  Over two hundred potential class members accepted the settlements, each of whom executed a general release of claims.  As part of the settlements, the employees acknowledged that they were properly classified as exempt employees, and released the employer from all claims for unpaid overtime and any other Labor Code violations during the relevant time period.  The settlement agreements also provided that the employees would not participate in any class action that included the released claims.

The plaintiffs attempted to strike down the releases, claiming they were void under Labor Code sections 206 and 206.5.  These Labor Code sections provide that an employer may not require the execution of a release of a claim of wages "due," or to become due, unless payment of those wages has been made.  A release required or executed in violation of these provisions is null and void.  Here, the plaintiffs argued that the releases were void because they released the employer for wages that were actually due and unpaid.  Essentially, the plaintiffs argued that any release of a disputed wage claim is unenforceable.

Pick Up Stix argued that wages were not "due" to the employees because there was a good faith dispute about whether the employees were exempt from overtime requirements.  The court agreed with Pick Up Stix, holding that the releases did not violate sections 206 and 206.5 because the settlements resolved a bona fide dispute over whether wages were "due."  As such, the releases did not unlawfully condition the payment of wages that the employer conceded were due to the employees.

What This Means

The court's opinion provides a useful tool for employers facing class action litigation involving claims for unpaid wages.  An employer who has a good faith defense to employees' claims may enter into valid, enforceable settlement agreements directly with putative class members and obtain valid releases of those claims.

This case may be appealed to the California Supreme Court.  If the Supreme Court grants review, this issue may not be finally resolved for several years.  However, in the meantime, this case provides employers with a strategic option for limiting class-wide exposure for wage and hour claims when there is a good faith dispute over whether wages are due.

This e-update was authored by Aaron Buckley, Jeffrey Ames and Timothy Keegan.  For more information, or questions, please contact Mr. Buckley, Mr. Ames, Mr. Keegan or any Paul, Plevin attorney at (619) 237-5200.

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