When a bona fide dispute exists, the disputed amounts are not “due,” and the bona fide dispute can be voluntarily settled with a release and a payment -- even if the payment is for an amount less than the total wages claimed by the employee.
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Wage and Hour Update
How To Release Liability
for Wage Claims
In California
By Christopher W. Olmsted
When an employer pays money to an employee asserting a legal claim, it expects to receive a release of liability in exchange. A valid release for wage claims can be tricky in California because the Labor Code places limits on the right to release such claims. A recent case titled Watkins v. Wachovia Corporation illustrates that a valid release is possible only in the context of a “bona fide dispute.”
Patricia Brown was employed by Wachovia as a sales assistant. She assisted stockbrokers with client contact and numerous other tasks. After the Department of Labor investigated another Wachovia branch office and determined that sales assistants had been improperly classified as exempt, Ms. Brown joined another employee in a class action against Wachovia, alleging failure to pay overtime.
Does the Labor Code Prohibit Releases of Wage Liability?
Wachovia sought to end Ms. Brown’s lawsuit by filing a motion for summary judgment. Wachovia based its motion on the fact that when Brown’s employment was terminated, she signed a release of all claims, known or unknown, specifically including wage claims, in exchange for enhanced severance benefits.
In response to the motion, Ms. Brown conceded that she had signed the release and received the enhanced benefits. However, she argued that the release was unenforceable under Labor Code section 206.5, which prohibits employers from requiring their employees to release claims for wages due unless payment of those wages has been made.
Labor Code section 206.5, subdivision (a) 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 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.”
Ms. Brown took the position that this statute invalidates any releases of claims for unpaid wages.
In reply, Wachovia argued that the statute is not violated when payment is made for all wages concededly owed and the release is of a claim subject to a bona fide dispute.
The trial court agreed with Wachovia and granted the motion for summary judgment. Ms. Brown appealed, but the California Court of Appeal, Fourth District sided with Wachovia.
Key Factors For A Valid Release
The keys to a valid settlement and release of a wage claim are: (1) there must be a “bona fide dispute” regarding whether or not wages are owed; (2) the employer must have paid all of the undisputed wages without regard to whether the employee signs a release; and (3) the employee receives something of value in exchange for releasing the right to sue for additional wages.
The Labor Code allows for the settlement of disputed claims. Although Labor Code section 206.5 appears to limit the right to release, the preceding section, Labor Code section 206 (a) provides otherwise. “In case of a dispute over wages, the employer shall pay, without condition . . . 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.”
Reading the two statutes together, decided the court, Labor Code section 206.5 does not prevent the settlement of wage claims, but simply prevents an employer from withholding wages concededly due in order to coerce a settlement of the disputed amount.
A Bona Fide Dispute Existed
When a bona fide dispute exists, the disputed amounts are not “due,” and the bona fide dispute can be voluntarily settled with a release and a payment -- even if the payment is for an amount less than the total wages claimed by the employee. A bona fide dispute exists where each side has a reasonable factual basis for taking a position contrary to the other side’s position.
The court determined that a bona fide dispute existed when Ms. Brown signed the release. Ms. Brown claimed she worked overtime hours for which she was not paid. In litigation she submitted a declaration indicating that she had been told to work off the clock if she had not finished her work within her scheduled 8-hour workday. Ms. Brown also submitted her deposition testimony reflecting that, while she was employed by Wachovia, she kept separate time sheets, with one set reflecting the time she reported to Wachovia and the second set reflecting the time she actually worked. Ms. Brown testified that she did this “to account for the fact that [she] was working all these hours and overtime and . . . wasn’t getting compensated for it.” Brown also testified that she had complained to management about not being paid overtime. At one point, a manager told her that her brokers would have to compensate her for her overtime work, although she did not then obtain payment from her brokers.
When Brown signed the release of all claims, including wage claims, she believed that she was entitled to additional overtime compensation. In other words, when Brown’s employment was terminated, she: (1) received all wages Wachovia conceded were due to her (based on the time sheets she had submitted); (2) believed she possessed a claim for further overtime pay; and (3) voluntarily elected to receive enhanced severance benefits in exchange for releasing her claims against Wachovia. Under these circumstances, ruled the court, the release is enforceable.
The Bottom Line
The court’s ruling follows similar case recently decided by another appellate court in the Fourth District titled Chindarah v. Pick Up Stix, Inc. Although there are now two California appellate court cases following this rule, employers should remain alert for changes in the law. The California Supreme Court has not yet directly addressed the issue, and of course the legislature could revise the Labor Code.
In any event, the bottom line is that employers may, under the proper circumstances, validly release wage claims. Employers should act carefully, however, because the distinction between a “bona fide dispute” over wages as opposed to “concededly owed wages” may be a fine line. Employers will not succeed in releasing claims where wages are clearly owed, i.e. where there is no reasonable factual basis for a dispute.
Before asking an employee to sign a release, an employer should carefully consider whether wage and hour issues may be in dispute. Where that may be the case, consult with an employment law attorney and focus on explicitly and specifically describing the nature of the disputed wage claim as part of the release.
Note too that not all claims can be released. This court addressed claims for unpaid overtime, not employment claims generally. For example, workers compensation claims, USERRA claims, federal wage claims under the FLSA and certain other claims generally cannot be released absent legal proceedings. Further, age discrimination claims under the federal Age Discrimination in Employment Act (ADEA) cannot be released without a special revocation provision in the release document. Seek legal advice to avoid giving away settlement dollars in exchange for an invalid release that may leave the door open for employee lawsuits.
Please email Chris Olmsted at cwo@barkerolmsted.com for help with your release documents.
More Legal Update articles.
Download entire May 2009 Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2009 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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