California Limits Prevailing Employers’ Ability to Recover Attorney’s Fees in Unpaid Compensation Cases

Posted on October 2, 2013 | Comments Off on California Limits Prevailing Employers’ Ability to Recover Attorney’s Fees in Unpaid Compensation Cases

California Limits Prevailing Employers’ Ability to Recover Attorney’s Fees in Unpaid Compensation Cases

By definition, wage-and-hour litigation is about the money and ability to recover attorney’s fees has always been a driving force behind any employment lawsuit.  For example, pursuant to Labor Code section 1194, when an employee prevails in a

claim for minimum wages or overtime, the employee is entitled to recover the cost of his or her attorney’s fees, which often far exceed any underlying unpaid wages. However, if the employee does not prevail in these claims, he or she is not obligated to pay the employer’s attorney’s fees.

Prior to the enactment of SB 462, things were somewhat different when it came to litigating claims for unpaid wages other than minimum wage and overtime. Specifically, when an employee filed an action to recover other types of wages pursuant to Labor Code section 218.5 – straight-time wages above the minimum wage and contractually agreed-upon or bargained-for wages – or related claims for fringe benefits, or health and welfare or pension and contributions, the law provides that attorney’s fees may be recovered by the prevailing party, whether it was the employee or the employer. The risk of being forced to pay an employer’s attorney’s fees simply because the employee did not prevail substantially detered employees from bringing potentially valid claims because the expense would be crippling for most employees.

On August 26, 2013, Governor Jerry Brown signed SB 462 amending California Labor Code §218.5 by eliminate plaintiff employees’ exposure to potential liability for attorney’s fees of the defendant employer.  However, this bill would retain the right of employers to recover attorney’s fees when they prevail, but would require evidence that the employee’s action was brought in bad faith.

Here is the full text of Section 218.5 of the Labor Code, as amended by Section 42 of Chapter 697 of the Statutes of 2010.

(a) In any action brought for the nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions, the court shall award reasonable attorney’s fees and costs to the prevailing party if any party to the action requests attorney’s fees and costs upon the initiation of the action. However, if the prevailing party in the court action is not an employee, attorney’s fees and costs shall be awarded pursuant to this section only if the court finds that the employee brought the court action in bad faith. This section shall not apply to an action brought by the Labor Commissioner. This section shall not apply to a surety issuing a bond pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code or to an action to enforce a mechanics lien brought under Chapter 4 (commencing with Section 8400) of Title 2 of Part 6 of Division 4 of the Civil Code.

(b) This section does not apply to any cause of action for which attorney’s fees are recoverable under Section 1194.

 

This bill was enacted to clarify the existing two-way fee shifting provision of section 218.5 by expressly providing that where the prevailing party is a non-employee (e.g., the employer), fees are to be awarded upon a judicial finding that the employee brought the action in bad faith.  The reason for a higher standard of course is that wage laws reflect a fundamental policy of the state, the vindication of which is largely left to employees.  The premise of this bill is that the great expense and unpredictability of exposure to attorney’s fees liability is likely to chill the pursuit of potentially valid claims by employees of limited means, contrary to the important policy objectives of the statutory scheme. For example, in support of this argument, the California Employment Lawyers Association pointed to Harris v. Investor’s Business Daily, Inc. (2006) 138 Cal.App.4th 28 where the employers sought $2.5 million in attorney’s fees.

In opposition to SB 462, CA employment defense lawyers contend that “[t]his bill would limit the ability for employers to be awarded attorney’s under Section 218.5 unless the court finds that the employee brought the court action in ‘bad faith.’  They contend that the ‘bad faith’ standard is very subjective and this measure would make it exceedingly difficult for employers to collect attorney’s fees in all but the most egregious court actions.  This will likely prompt a flood of costly new litigation because the potential downside for employees is so low.”

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