For the past several years, an employer’s ability to settle wage and hour claims with its employees has been unclear at best. Although noCaliforniacourt had addressed the issue, some commentators construed California Labor Code section 206.5 as a blanket prohibition against any agreement that releases an employer from the obligation to pay wages. This view restricted an employer’s ability to negotiate a good faith settlement with an employee to resolve a disputed wage claim.
Fortunately, the first California Court of Appeals to consider this issue adopted a more reasonable approach. In Chindarah v. Pick Up Stix, Inc., 171 Cal. App. 4th 796 (February 27, 2009), a wage and hour class action, the appellate court enforced written settlement and release agreements executed by Pick Up Stix and several of its former employees. The court held that an employer and employee can enter into an enforceable settlement agreement to resolve a “bona fide dispute" as to whether the employee is actually entitled to additional wages.
Chindarah involved a restaurant chain, Pick Up Stix, facing a class action suit on behalf of its current and former employees, alleging unpaid overtime, penalties, and interest. Pick Up Stix investigated the wage claims and unsuccessfully tried to mediate the dispute. When mediation failed, Pick Up Stix offered settlements to hundreds of potential class members. More than 200 current and former employees accepted Pick Up Stix’s offer and executed written settlement agreements. The settlements all included standard contract language releasing the employer from any and liability arising out of the employment relationship, including claims for unpaid wages and penalties.
In response, the plaintiffs amended their complaint to include allegations that the settlement agreements were illegal under various provisions of the California Labor Code, including Labor Code section 206.5. A handful of the employees who had signed written settlement agreements, including Boonchai Chindarah, joined in this claim. Pick Up Stix filed a motion for summary judgment, arguing that Chindarah and the others were barred from joining the lawsuit under the express terms of their settlements. The trial court agreed, and granted the company’s motion. Chindarah appealed.
The appellate court upheld the trial court’s order, and found the California Labor Code does not prohibit the release of a claim for unpaid wages if there is a bona fide dispute over whether any wages are owed. In reaching this decision, the appellate court reviewed Labor Code section 206.5, which states that “[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." The court also considered the language of Labor Code section 1194: “[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."
The Chindarah court rejected the interpretation of these statutes as prohibiting any settlement of a disputed wage claim. Instead, the court followed the logic of recent federal court opinions to hold that Labor Code section 206.5 only bars the release of wage claims if wages are actually “due." Similarly, Labor Code section 1194 only creates an “unwaivable" right to overtime wages if there is no dispute as to whether the employee is entitled to overtime. According to the court, “wages are not ‘due’ if there is a good faith dispute as to whether they are owed." The court found noCalifornia statute that prohibits an employee from releasing a claim to past wages “as part of a settlement of a bona fide dispute over those wages."
This case is significant for Californiaemployers, whether in the context of class action cases such as Chindarah, or in resolving a formal or informal wage claim with an individual employee. Under Chindarah, employers and employees are free to negotiate reasonable settlements to resolve bona fide disputes as to whether wages are actually due and owing. This is a rare victory for reason and fairness in the application ofCalifornia’s employment laws.
Employers should keep in mind, however, that the reasoning of Chindarah only applies if there is a bona fide dispute over wages. If the employer acknowledges that any of the wages claimed by an employee are currently due and owing, the employer must pay the undisputed amount. Holding any amount of wages that are “due" until an employee agrees to sign a release agreement will render the release language unenforceable under Labor Code sections 206.4 and 1194.
Employers with questions about settling bona fide wage and hour disputes are encouraged to consult experienced employment law counsel.