• Court of Appeal Affirms Enforceability of Settlement Agreements Releasing Disputed Wage Claims
  • August 31, 2009 | Authors: Felicia R. Reid; Natasha J. Baker; Glen E. Kraemer; Judy M. Iriye
  • Law Firms: Curiale Hirschfeld Kraemer LLP - San Francisco Office; Curiale Hirschfeld Kraemer LLP - Santa Monica Office
  • A California appellate court recently provided some welcome clarification to an issue of great importance to private employers, affirming the enforceability of an employee’s release of claims for unpaid wages.  The decision, issued on February 26, 2009, is Chindarah v. Pick Up Stix, Inc. http://www.courtinfo.ca.gov/opinions/documents/G037190.PDF.
    The lack of clarity in this area arises from Labor Code section 206.5, which provides: "An employer shall not require the execution of a release of a claim or right on account of wages due, or to become due … 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.” In Chindarah, the Court of Appeal rejected the argument that this statute precludes the release of any wage claims under the California Labor Code, and upheld the validity of a settlement agreement that was reached as part of a settlement of disputed wages.

    The settlement agreements at issue were executed by the Chindarah employees individually after their employer, the restaurant chain Pick Up Stix, failed to reach a class-wide settlement with the named plaintiffs in an overtime class action.  The class action alleged that class members had been improperly classified as exempt employees and were owed unpaid overtime.  Under the agreement, the employees acknowledged that they spent more than half their time in exempt duties and released Pick Up Stix "from all claims for unpaid overtime and any other Labor Code violations during the relevant time period."  The release further precluded the employees from participating in any class action that included any of the released claims.  After accepting the settlement payments, eight employees joined the class action and claimed that the agreements were unenforceable and unlawful.  On the parties’ cross-motions for summary judgment, the trial court found the releases valid as a matter of law because a good faith dispute existed regarding whether plaintiffs were non-exempt and owed overtime wages. The Court of Appeal agreed and affirmed the trial court’s decision.

    Analyzing the legislative history of Labor Code section 206.5 and the limited number of federal and state cases which interpret this Labor Code section, the Court of Appeal held that section 206.5 did not apply.  It reasoned that a bona fide dispute existed regarding the employees’ proper classification as exempt or non-exempt, and as a result, any overtime wages owed to them as a result of a misclassification were not “due” within the meaning of Labor Section 206.5 when the releases were executed.  Furthermore, the releases signed by the employees did not condition the payment of wages “concededly due.” Thus, the releases were enforceable because they did not violate Labor Code section 206.5’s prohibition against releases for unpaid wage claims that are conceded to be due.

    This case will likely be appealed to the California Supreme Court.  Until then, employers should note:

    • A settlement agreement for wage claims will be enforceable if there is a bona fide dispute regarding whether the wages are due and owing;
    • A settlement agreement for wages that are due (such as a final paycheck for wages already earned or outstanding commissions) will not be enforceable.
    • When drafting a settlement agreement pertaining to wage claims, employers are advised to consult with counsel regarding the presence of a bona fide dispute that overcomes Labor Code section 206.5’s prohibition against the release of wage claims.

    Chindarah addresses the enforceability of an agreement reached in the context of a disputed claim for wages.  A far more common situation, however, involves separation agreements providing severance pay to a departing employee who has not asserted a wage claim in exchange for a general release of claims.

    Traditionally (and to employers’ dismay), the California Labor Commissioner has treated such agreements as unenforceable in the context of wage claims filed with the agency.  Chindarah calls that approach into question, and indeed cites several federal cases enforcing release agreements in that context.  It is quite possible, however, that the Labor Commissioner will read Chindarah narrowly and decline to enforce such releases.