The California Court of Appeal recently confirmed the right of an employer to secure a release from claims for unpaid overtime where there exists a bona fide dispute over whether overtime wages were actually due. In Chindarah v. Pick Up Stix, Inc., two former employees of Pick Up Stix brought a proposed class action lawsuit against their former employer asserting claims for unpaid overtime, alleging they were misclassified as exempt from overtime pay. The employer was able to obtain settlements with over two hundred putative class members in exchange for their execution of a general release, wherein the employee acknowledged that he or she spent more than 50% of their time performing managerial duties and released Pick Up Stix from all claims for unpaid overtime and any other Labor Code violations during the relevant time period. Thereafter, the plaintiffs challenged the validity of these releases and argued that the settlement agreements violated 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, 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."
 

The court of appeal disagreed. Specifically, the court reasoned that "[W]ages are not 'due' if there is a good faith dispute as to whether they are owed"—as in Pick Up Stix, where the employer asserted its employees were exempt under California law and therefore not entitled to overtime pay. It follows that because wages are not "due," a release of claims to those wages does not implicate Section 206.5. Accordingly, the court found that the releases were valid and barred a subsequent lawsuit for overtime wages. In so ruling, the court emphasized that its decision does not alter the general premise that an employee may not waive his or her rights to overtime wages under Labor Code section 1194. But the court also made clear that "there is no statute providing that an employee cannot release his claim to past overtime wages as part of a settlement of a bona fide dispute over those wages."

Impact: while Labor Code section 206.5 generally prevents an employer from obtaining a valid release of claims for overtime pay, if the employer can articulate a bona fide dispute that any overtime pay is actually due to the employee, a subsequent settlement and release of that "disputed" pay is likely to be upheld by California courts.

This blog entry was authored by Matthew J. Sharbaugh.