California Appellate Courts Give Employers Some Comfort on the Enforceability of Releases of Wage Claims by Thomas N

Client Alert Employment & Labor

Employment & Labor April 27, 2009 California Appellate Courts Give Employers Some Comfort on the Enforceability of Releases of Wage Claims by Thomas N. Makris

On February 26, 2009, the Court of Appeal for the Fourth Appellate District, Division Three (Orange County) provided the first direct guidance in over 40 years on the question of when a general release of claims may be effective in releasing wage claims under the California Labor Code. In Boonchai Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796 (“Chindarah”), the court held that an employee can release state wage claims in a general release of claims, at least when two conditions are met: 1) the release is obtained in settlement of a bona fide dispute over those wages; and 2) the employer has unconditionally paid all wages concededly due.

In April the Court of Appeal for the Second Appellate District, Division Three (Los Angeles), followed the reasoning of Chindarah, holding that a general release signed in exchange for a severance package validly released an employee’s claims for unpaid overtime, at least where the plaintiff admittedly knew of her potential claim when the release was signed. Felicia M. Watkins v. Wachovia Corporation (April 16, 2009) __ Cal.App.4th __ (“Watkins”).

As long as these decisions stand as controlling precedent for superior courts, they provide significant protection to employers who obtain releases in exchange for severance pay.

History Labor Code Section 206.5 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, or made as an advance on wages to be earned, unless

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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. Violation of the provisions of this section by the employer is a misdemeanor.

In 1965, a California appellate court held that this statute changes the common law rules that govern the enforceability of a general release and invalidates many releases of wage claims that might otherwise be valid. Sullivan v. Del Conte Masonry Co. (1965) 238 Cal.App.2d 630. In Sullivan, there was a dispute about the amount of wages due to an ex-employee. The employer paid final wages that were admittedly due with a check that stated that it was delivered in full satisfaction of all claims the employee might have to wages. The court held that while under common law this form of “accord and satisfaction” would have resulted in release of any claim to additional wages when the check was cashed, Labor Code Section 206.5 prevents an employer from requiring a release as a condition for payment of the wages admittedly due. Thus, the employee could cash the check and still sue for additional wages. The Sullivan court stated an employer and employee can settle “a bona fide dispute” over wages, but only after all wages concededly due have been “unconditionally paid.” However, this statement was not necessary for the court’s decision and was therefore of limited value as precedent.

The Chindarah Case Chindarah was a putative class action in which it was alleged the employer had misclassified a large number of employees and that these employees, the potential members of the class, were owed unpaid overtime wages. A “putative” class action is a case that has been filed as a class action, but in which the court has not yet certified the class aspect of the case. At this stage in the proceeding, the potential class members were not yet considered parties to the litigation.

Following an unsuccessful mediation, the defendant sent settlement offers to a large number of the potential class members, over two hundred of whom accepted the settlement payment and signed releases stating that they accepted the settlement payment “in full and complete satisfaction of all issues and claims” for unpaid overtime, penalties, interest and other Labor Code violations.

The plaintiffs who originally filed the case and several of the individuals who signed the releases asserted that the releases were invalid under Labor Code Section 206.5. Because the individuals who signed the release were not yet parties to the litigation when the releases were signed, the validity of the releases was judged under the same standards as would have applied if no litigation had been pending.

The Chindarah court held that the releases were enforceable and barred any claims by the individuals who had signed them. The court distinguished Sullivan and similar cases because the individuals who signed the releases in Chindarah had previously received unconditional payment of all wages that were admittedly due and were paid additional consideration to settle a bona fide dispute over the issue of whether they were misclassified as exempt and owed additional overtime wages. This is the first published decision from a California court to hold a release enforceable in this circumstance.

The Watkins Case In Watkins, one of the two plaintiffs, Ms. Brown, had been an hourly employee who was entitled to overtime. In her complaint she alleged, and she later testified, that she had been required to work off the clock and that, despite complaints to her management, Wachovia had refused to pay her for this overtime.

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Ms. Brown’s employment had been terminated prior to the litigation. At the time of her termination, she was offered, and accepted, an enhanced severance package in exchange for general release. Wachovia filed a motion for summary judgment asking the court to dismiss Ms. Brown’s overtime claims as barred by the release. The trial court agreed with Wachovia and granted summary judgment.

On appeal, the court first noted that it was undisputed that Ms. Brown had been paid all wages that were “admittedly due” based on the timesheets she had submitted and that she had signed the release in exchange for additional payment in the form of severance. The court went on to conclude that, because Ms. Brown’s testimony established that she knew that she had a claim for additional wages at the time that she signed the release, she had accepted the severance payment in settlement of a bona fide dispute.

Key Question Not Answered by Chindarah or Watkins Though the Chindarah and Watkins cases are very helpful to employers attempting to settle wage claims in California, they do not fully answer a key question: When does a theoretical claim become a bona fide dispute?

The Chindarah court recognized that in Gentry v. Superior Court (2007), 42 Cal.4th 443, the California Supreme Court held that “the statutory right to receive overtime pay embodied in [Labor Code] Section 1194 is unwaivable.” The court concluded that the public policy recognized in Gentry “is not violated by a settlement of a bona fide dispute over wages already earned.” It is not clear whether or not this language is intended to distinguish between settlement of an asserted claim and waiver of potential but unasserted claims. Watkins went a step further in finding that the plaintiff’s subjective belief that wages were due satisfied the “bona fide dispute” requirement, even though her claim had not been formally asserted when the release was signed. Additionally, both courts found a bona fide dispute without expressly addressing the reasonableness or good faith of the defendants’ reasons for not paying the disputed wages, or even the question of whether these were appropriate areas on inquiry. Thus, while these two cases clearly help employers settling pre-litigation and other known wage claims, plaintiffs may claim that they are not applicable when a general release is signed in exchange for a severance package and the wage claim is unknown and never been formally or informally asserted or that finding a bona fide dispute should require a substantive evaluation of the defendants’ reasons for not having paid the disputed wages.

Limits on Chindarah and Watkins Chindarah and Watkins are Courts of Appeal cases, not decisions of the California Supreme Court. For now, state trial courts must follow the decisions, but that may change. The plaintiffs in these cases will likely seek review of the cases by the Supreme Court. If review is granted, parties will no longer be able to cite the appellate court decisions and trial courts will no longer be bound to follow them. Even if they are not reviewed by the Supreme Court, other California Courts of Appeal are free to disagree with the holdings or reasoning in these cases. Thus, while the trial court in a pending or future case may be bound to follow Chindarah and Watkins, there is no guarantee that the result would stand on appeal.

Also, Chindarah and Watkins address only the release of overtime claims under the California Labor Code. Federal claims under the Fair Labor Standards Act cannot be waived or settled in private agreements. Settlement of a pre-litigation FLSA claim requires approval of the U.S. Department of Labor.

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Lessons of the Chindarah and Watkins Cases If an employee has asserted or otherwise notified you of a state law wage claim, you can take comfort that a release in settlement of the disputed wage claim is likely to be enforced in the wake of these new cases. The settlement agreement should include a statement that the employee has been paid all wages concededly due and should recite the facts and circumstances that support the conclusion that the dispute over additional wages is a bona fide dispute. Of course, the undisputed wages must actually have been paid unconditionally.

If you are asking an employee to sign a release in exchange for a severance package when there is no existing dispute, the enforceability of the release as to wage claims is less certain, but you can still take steps to enhance the chances that such claims will be barred. You should include a recital that all wages have been paid in any such release. You should also include claims for any additional wages, in the list of claims that are expressly released. If your standard form of release includes an exclusion of “unwaivable” claims, you should remove any reference to state (California) wage claims from this section.

Finally, the best strategy for avoiding wage claims is to regularly audit your compensation practices to ensure that employees are properly classified, that overtime hours are properly tracked and paid, and that you are otherwise in compliance with federal, state, and local laws. At minimum, these efforts will assist you in demonstrating a reasonable good faith belief that all wages due were paid, which may bolster the argument that a bona fide dispute existed and the release should be enforced to bar further claims.

For further information, please contact:

Thomas N. Makris (bio) Laura K. Latham (bio) Sacramento San Diego +1.916.329.4734 +1.619.544.3375 [email protected] [email protected]

Paula M. Weber (bio) San Francisco +1.415.983.7488 [email protected]

This publication is issued periodically to keep Pillsbury Winthrop Shaw Pittman LLP clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The comments contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice. © 2009 Pillsbury Winthrop Shaw Pittman LLP. All Rights Reserved. Pillsbury Winthrop Shaw Pittman LLP www.pillsburylaw.com Vol. 0900, No. 9016 4