In Chindarah v. Pick Up Stix, Inc., (— Cal.Rptr.3d —, Cal.App. 4 Dist., Feb. 26, 2009), a California Court of Appeal considered whether current and former employees who entered into settlement agreements with an employer and signed releases of liability for unpaid overtime and other Labor Code violations could later sue the employer based on these same violations on the ground that the releases were void under the Labor Code. The Court of Appeal concluded that the current and former employees were barred from proceeding with their lawsuit against the employer.
Two former employees filed a lawsuit in February 2003 against Pick Up Stix (“Stix”) alleging that Stix owed them money because it misclassified their jobs as exempt from overtime pay. These two plaintiffs proposed a class action to recover unpaid overtime. Stix attempted to settle the lawsuit through mediation, but was unable to do so. Stix then sought to enter into settlements with potential members of the class. Over 200 current and former employees entered into a settlement agreement with Stix. The agreement contained a general release under which each employee agreed not to participate in any class action and also “acknowledged that he or she had spent more than 50% of the time performing managerial duties, [and] released Stix from all claims for unpaid overtime and any other Labor Code violations during the relevant time period.”
After the settlement agreements were signed, the original plaintiffs in the lawsuit filed an amended complaint, which alleged that the settlement agreements violated the Labor Code. Eight former and current employees who had signed settlement agreements with Stix joined the proposed class action. Stix filed a cross-complaint against the eight former and current employees (hereinafter, “Employees”) alleging that they breached the settlement agreement. The trial court found in favor of Stix.
The Court of Appeal affirmed the judgment of the trial court. The appellate court held that the lower court correctly found that the releases signed by Employees barred them from proceeding in the lawsuit against Stix.
Employees asserted that any settlement that involves a dispute concerning overtime constitutes a violation of Labor Code sections 206.5 and 1194. The court rejected Employees’ argument.
Labor Code section 206.5 provides, in part, “An employer shall not require the execution of a release of a claim or right on account of wages due . . . unless payment of those wages has been made.” Any release executed in violation of section 206.5 is null and void.
In two prior California cases, the courts stated that an employer and employee may compromise a bona fide dispute over wages. Here, the court noted that a federal case applying section 206.5 and these two California cases held that “[w]ages are not ‘due’ if there is a good faith dispute as to whether they are owed.” The employer in the federal case asserted that the employee was an exempt employee under California law. The federal court found the employer’s argument would, if successful, preclude any recovery for the employee because “a bona fide dispute exists and the overtime pay cannot be considered ‘concededly due.'”
Labor Code section 1194, subdivision (a), provides, “Notwithstanding 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.”
The court recognized that the statutory right to receive overtime pay is unwaivable. It noted, however, “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.”
The public policy behind section 1194 is to spread employment by placing financial pressure on employers, to foster a stable job market, and to protect employees from being forced to forego overtime by employers. The court found that public policy is not violated when a bona fide dispute over wages that an employee has already earned is settled by agreement between the employee and his or her employer.
The releases signed by Employees settled disputes involving whether Stix had, in the past, violated hour and wage laws. The releases did not exonerate Stix from future violations. The releases signed by Employees did not condition Stix’s payment of wages on the execution of the releases. Accordingly, the court found that the releases barred Employees from proceeding with their lawsuit against Stix.
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