In a decision that will make it easier for employers to reach an early settlement of putative wage and hour class actions based on California law, on June 10, 2009, the California Supreme Court refused to review an appellate court decision allowing an employer to directly settle California state wage and hour claims with current and former employees even though the same claims were pending in a putative class action.  Chindarah v. Pick Up Stix, 171 Cal.App.4th 796 (2009), petition for review denied, No. S171864, 2009 Cal. LEXIS ___ (June 10, 2009).  This decision, however, will not give employers the right to directly settle claims based on the federal Fair Labor Standards Act (FLSA), which has been interpreted to prohibit employers from obtaining releases of overtime and minimum wage claims directly from their employees.

In Chindarah, the owner of a chain of Chinese restaurants had unsuccessfully attempted to settle at a mediation the exempt status claims of a putative class consisting of all of the chain’s general managers, assistant managers and lead cooks who were employed from February 28, 1999, through September 2003.  The plaintiffs alleged that their positions had been misclassified as exempt, and sought to recover unpaid overtime compensation

Following the mediation, but before class certification, the employer settled directly with more than 200 putative class members.  The settling putative class members were required to execute a settlement agreement and general release, which included an acknowledgment that they had spent at least 50 percent of their work time on exempt management duties during the class period.  They also agreed not to participate in any class actions that may include any of the released claims.

After the settlement agreements were signed, the original two plaintiffs who had initiated the lawsuit filed an amended class complaint alleging that the settlement agreements violated the California Labor Code.  Specifically, they claimed that the settlement agreements were void under Labor Code §§ 206, 206.5 and 1194.  Eight of the putative class members who had signed the settlement agreements joined in the amended class complaint as plaintiffs.

Labor Code § 206(a) provides in relevant part that “[i]n case of a dispute over wages, the employer shall pay, without condition and within the time set [by the Labor Code], all wages, or parts thereof, conceded by him to be due, leaving to the employee all remedies he might otherwise be entitled to as to any balance claimed.”  Labor Code § 206.5 provides in relevant part that “[a]n employer shall not require the execution of a release 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,” and that “[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.”  And Labor Code § 1194 provides in relevant part that “[n]otwithstanding any agreement for a lesser wage, any employee receiving less than . . . 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 . . . overtime compensation, including interest thereon, reasonable attorney’s fees, and costs of suit.”

The Court of Appeal found that the settlement agreements did not violate the above Labor Code sections or any public policy embodied in those statutes.  The court held that Labor Code § 206.5 merely prohibits a release of “wages due” unless paid in full, but that wages are not “due” if there is a good faith dispute regarding whether they are owed.  Where an employer’s defense to the payment of overtime wages is that the plaintiff was an exempt employee, which, if successful, would preclude any recovery by the plaintiff, a bona fide dispute exists and the overtime pay cannot be considered “concededly due.” 

The court also held that, although Labor Code § 1194 provides employees an unwaivable statutory right to receive overtime pay, “there is no statute providing that an employee cannot release his claim to past overtime wages as apart of a settlement of a bone fide dispute over those wages.”  The court found that the settlement agreements at issue in Chindarah: (i) settled a dispute concerning whether the employer had committed past wage and hour violations but did not release the employer from liability for future wage and hour violations, and (ii) did not condition the payment of wages that the employer conceded were due on execution of the settlement agreements.

The plaintiffs had also urged the Court of Appeal to look to the FLSA, which has been interpreted as prohibiting employers from obtaining releases of wage claims directly from employees, including those that are the subject of a bona fide dispute, even though the FLSA does not expressly prohibit such releases.  The court, noting that “the FLSA has statutory and case law history supporting the conclusion that Congress intended to require the approval of private settlement of FLSA claims by the United States Department of Labor or a district court,” declined to read such a requirement into California law, pointing out that the California legislature “is capable of expressly providing for oversight of employee releases or compromises of claims,” as it did with respect to the compromise or release of claims for workers’ compensation.

For more information about the Chindarah decision, or any other matter raised in this Client Alert, please contact John Nadolenco at +1 213 229 5173, Bronwyn F. Pollock at +1 213 229 5194, or Jerome M. Jauffret at +1 213 229 5108.