By: John L. Wollman and Daniel A. Corren, Cypress LLP

Defendants can create risk for plaintiffs by serving statutory offers to compromise under Code of Civil Procedure Section 998. Generally, if a plaintiff rejects a 998 offer and loses at trial or recovers less money than the defendant offers, the defendant is entitled to recover various litigation costs from the plaintiff.

However, defendant-employers must exercise caution when attempting to shift risks to and recover costs from their plaintiff-employees because certain Labor Code provisions prevent employers from recovering costs under any circumstances or only if they can show the plaintiff asserted the claims in bad faith.

A recent court of appeal decision holds that these specific provisions of the Labor Code overcome the more general provisions of Section 998 and protect an employee from liability for the employer’s costs even if they lose at trial or fail to beat the 998 offer.

Summary: In Chavez v. California Collision, LLC (2024) 107 Cal.App.5th 298, the court considered a plaintiff-employee’s challenge to the trial court’s award of fees and costs to the defendant-employer pursuant to Section 998.

The plaintiff alleged various wage and hour claims. Prior to trial, the defendant made a statutory 998 offer, which plaintiff rejected. At trial, the jury found in plaintiff’s favor but awarded damages less than defendant’s 998 offer. As a result, the trial court awarded defendant fees and costs.

On appeal, plaintiff argued that the trial court’s award was in error for two reasons:

• Labor Code section 1194 applied to plaintiff’s claims for failure to pay minimum wage, failure to pay overtime wages, and unfair business practices, and only allows a prevailing employer to recover fees and costs.
• Labor Code section 218.5 applied to plaintiff’s claim for failure to pay wages earned and only allows an employer to recover costs upon a showing of plaintiff’s bad faith.

The Court of Appeal agreed and reversed based on Cruz v. Fusion Buffet, Inc. (2020) 57 Cal.App.5th 221, in which the court held that the public policy underlying the Labor Code would “not be served by allowing for a more general cost-shifting provision […] to require the shifting of costs in favor of a prevailing defendant employer.”

The court of appeal highlighted the public policy interests inherent in Sections 1194 and 218.5, which protect employees attempting to enforce their rights against employers without fear of being responsible for the employer’s costs. The court of appeal determined that applying Section 998’s fee shifting to these employee claims would unfairly undermine these interests and deprive plaintiff-employees of the legislature’s statutory protections.

The court buttressed its analysis based on two other canons of statutory construction: 1) specific provisions take precedence over general ones; and 2) later enactments take precedence over earlier enactments.

Under the first canon, Section 1194 and 218.5 apply only to specific Labor Code claims, while Section 998 is a general provision. Under the second, Section 998 was enacted in 1987, whereas Section 1194 and 218.5 were enacted in 1991 and 2013, respectively.

Why It Matters: Section 998 is a powerful tool that can dramatically change the balance of risks at trial. A defendant can use it to punish an overzealous plaintiff who will not accept a settlement that reasonably estimates their damages. However, this tool cannot be used against employees who bring claims based on Labor Code sections with more specific fee and cost provisions. A defendant-employer should therefore be wary of serving a 998 offer in a case arising from Labor Code violations. Conversely, plaintiff-employees pursuing Labor Code claims that have their own fee-shifting provisions do not need to be concerned about beating a 998 offer when evaluating whether to try their case or accept a settlement offer.