Court gives Employers a Pick Me Up over (some) Wage Settlement Agreements

In a good news decision for California employers, a state court of appeal ruled that settlement agreements relating to bona fide disputes over wages are enforceable. In doing so, the court rejected a group of employees’ contention that two Labor Code provisions operated to void any private settlement agreement involving claims of unpaid wages.

The case involved a group of employees of Pick Up Stix. The employees – a class of current and former “general managers” – contended they had been misclassified by Pick Up Stix as “exempt” from overtime. During the litigation, the employees and Pick Up Stix attempted to resolve the dispute at mediation. When the mediation failed Pick Up Stix settled with certain individual employees. The individuals who signed the agreements received checks and, in return, waived their rights to pursue any action against Pick Up Stix.

After the settlement agreements were signed, certain of the employees (including some who signed a settlement agreement and had received payment) alleged that the agreements were unenforceable. They based their contention on Labor Code sections 206 and 206.5. The first section requires an employer to pay all wages conceded to be due, even if additional wages are the subject of a dispute. Labor Code section 206.5 voids any release that an employee is required to sign in order to obtain wages that are due or will become due.

Based on these provisions, the employees argued that the releases they signed were void because, should they be determined to be non-exempt, the wages they sought would become due.

The trial court and court of appeal both rejected this argument. Instead, the court of appeal held that where there is a good faith dispute about whether the wages are due – such as when an employer believes an employee was exempt and it turns out to be incorrect – then the parties are free to settle the claim for wages. In doing so, the appellate court rejected the employees’ argument that California should follow the federal rule (under the federal Fair Labor Standards Act) that in such cases, the settlement should have to be court approved.

Employer Take Aways:

This is a good decision for employers, as it upholds the certainty that a settlement (or severance) agreement can buy for a company. However, all employers should be careful when obtaining a release from an employee because certain missteps can ultimately void the agreement. Employers should take heed about the following:

    • Never condition the payment of final wages (or other wages you cannot in good faith dispute) upon the employee’s execution of a release agreement;
    • Always pay any wages you concede are owed as a transaction separate and apart from any other money you are paying for a release. Employers should think twice about indicating in a release agreement that the employee is being paid a specified sum that includes amounts conceded as due.
    • In release agreements that are provided at the time an employee is terminated from employment, consider having a recital indicating that the employee received all wages due and owing in a separate check, and that the employee was advised that they were given that payment regardless of whether they signed the release agreement.
    • When ever you terminate an employee and commissions or bonus amounts are at issue, you should consult counsel regarding whether commissions you might not consider to be fully earned must still be paid. A release agreement based upon payment of those commissions could be void if a court determines that your termination of the employee excused the employee’s performance of certain conditions relating to the payment of the commission or bonus.