The California Supreme Court recently handed down an increasingly rare win for employers and the defense bar with its September 12 decision in Z.B., N.A. and Zions Bancorporation v. Supreme Court (Lawson) holding that private litigants cannot recover unpaid wages pursuant to section 558 of the Labor Code.

At its genesis, the case involved the defendant’s attempt to compel arbitration of an employee’s claim to recover unpaid wages under Labor Code section 558 through California’s Private Attorney General Act (PAGA), a statute that has vexed employers since its passage in 2003. As you likely know, PAGA gives private litigants the ability to act as the State Labor Commissioner’s proxy and recover penalties for myriad Labor Code violations in a representative action on behalf of all other allegedly aggrieved employees. Section 558 empowers the Labor Commissioner, and by extension PAGA plaintiffs, to recover civil penalties for underpayment of wages, including the actual underpaid wages.

The core dispute in Z.B., N.A. stemmed from the fact that, unlike normal class action claims for wages, representative action claims under PAGA cannot be compelled to individualized arbitration as per the court’s 2014 ruling in Iskanian v. CLS Trans. Los Angeles, LLC. In the wake of Iskanian’s protection for representative actions, the plaintiff’s bar has been using section 558 to aggregate claims of the entire workforce, thereby increasing the employer’s potential exposure and gaining important settlement leverage.

The defendant in Z.B., N.A. sought to parse the plaintiff’s claims for underpayment of wages under section 558 from the claims for strict penalties under that same Labor Code section. Its goal was to do the best it could by sending the wage claims to individual arbitration, thereby diffusing the class claims for wages, while leaving the representative action for strict penalties intact as required by Iskanian.

While the issue before the court was whether Iskanian applied to unpaid wage claims under section 558, which would have precluded the defendant’s attempt to eliminate the representative claims, the court actually decided that it need not reach that issue. Rather, the court ruled that private litigants cannot recover unpaid wages pursuant to section 558 at all.

That ruling carries a subtle yet important impact for California employers who have entered into arbitration agreements with their employees that contain class action waivers. While employers can still face representative claims for strict penalties, and while employees will no doubt continue to seek allegedly unpaid wages under the several Labor Code provisions allowing such lawsuits, employers with enforceable arbitration agreements containing class action waivers now have a tool to avoid facing those wage claims on a class and/or representative basis.

Employers wishing to maximize that advantage should seek the counsel of experienced wage and hour attorneys to review their options in the ever-shifting landscape of California employment laws.