Contributors

Eric P. Weiss

Principal

Facts

Plaintiffs Samuel Zarate, Jorge Chavez, and Aldo Isas sued California Collision and its owner, George Osorio, for various wage and hour claims. The Complaint asserted no less than eleven causes of action: (1) misclassification as independent contractors rather than employees; (2) failure to pay minimum wages; (3) failure to pay overtime wages; (4) failure to pay wages earned; (5) failure to give meal breaks; (6) failure to give rest breaks; (7) waiting time penalties; (8) failure to provide accurate, itemized wage statements; (9) failure to reimburse for business expenses; (10) unfair business practices under the Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.); and (11) as to Chavez and Isas, violations of Labor Code section 1198.5 for failure to timely allow them to inspect or receive copies of their personnel records.

Before trial, defendants made statutory offers to settle pursuant to Code of Civil Procedure section 998 to each plaintiff. Chavez accepted his offer of $53,750 plus reasonable attorney fees and costs. Similarly, Isas accepted his 998 offer of $75,000 plus reasonable attorney fees and costs incurred as of the offer date. Zarate did not respond to his offer of $38,750 plus reasonable attorney fees and costs. Thus, only Zarate’s claims proceeded to trial.

At trial, Zarate prevailed on two causes of action: failure to pay overtime wages and failure to provide paid rest breaks. The jury found for the defendant on the other nine causes of action. The jury awarded Zarate damages ($21,061 plus $5,743.91 in restitution under the Unfair Competition Law based on the parties’ stipulation, for a total of $26,804.91) which was lower than the defendants’ section 998 offer ($38,750).

Because section 998 offers shift certain costs to the party failing to achieve a more favorable result than the settlement offer, the trial court awarded costs to the defendants and against Zarate under section 998 in the amount of $54,473. While awarding Zarate attorneys’ fees and costs (limited to those incurred before the date of the first section 998 offer by operation of that statute), the trial court slashed Zarate’s requested amount significantly due to unsatisfactory proof of reasonable hours worked. Zarate appealed.

Court of Appeal’s ruling

The Court of Appeal for the First Appellate District held that the provision of awarding costs under section 998 is only applicable in the absence of a specific Labor Code provision governing the awards of costs. The Court found that two specific Labor Code provisions govern the award of costs. First, Labor Code section 1194 allows a prevailing employee in an unpaid minimum wage and overtime suit to recover costs but makes no mention of an employer being able to recover costs. Second, Labor Code section 218.5 permits a prevailing employer to recover costs in suits for unpaid wages only if the court finds the employee brought the action in bad faith. There was no finding of bad faith in this case.

The Court noted that these Labor Code provisions supersede section 998’s cost-shifting provisions while highlighting the strong public policy interest in supporting employees’ ability to pursue wage claims without fear of incurring substantial costs. Since Zarate prevailed on some wage claims, the Court reversed the trial court’s order awarding costs to the defendants under section 998. Read the opinion.

Key takeaways

This decision is surprising in limiting the applicability of a 998 offer based on policy reasons, and potentially encourages unreasonable behavior where plaintiffs reject reasonable settlement offers. This decision will likely discourage California employers from making reasonable 998 offers in hopes of shifting costs onto plaintiffs when these offers are unreasonably rejected, which will further burden California’s impacted court system. However, this decision appears to be an exception and its application should be limited to the facts and claims at issue. California employers should work with their counsel to minimize the risk of potential wage claims, especially in light of this decision which makes it difficult for employers to recover costs even if the plaintiff is awarded an amount that is less than the 998 offer.