Barnhill v. Robert Saunders & Co.
| Decision Date | 19 June 1981 |
| Citation | 174 Cal.Rptr. 671,120 Cal.App.3d 652 |
| Court | California Court of Appeals Court of Appeals |
| Parties | , 93 Lab.Cas. P 55,325 Eileen Jane BARNHILL, Plaintiff and Respondent, v. ROBERT SAUNDERS & CO., Defendants and Appellants. Civ. 46636. |
J. J. Quill, San Carlos, for defendants and appellants.
Division of Labor Standards Enforcement, Louis Giannini, Guy T. Gurney, Charlotte C. Danforth, Richard N. Dinallo, John C. Herbert, Ann Miley, Ramon Yuen-Garcia, C. S. Pedersen & Robert Lotero, San Francisco, for plaintiff and respondent.
The principal question presented here is whether an employer has the right to set off an employee's debt against wages due the employee upon the employee's discharge. We also consider whether an employer who attempted to exercise such a setoff was properly subjected to penalties for wilful nonpayment of wages pursuant to Labor Code section 203.
Respondent Eileen Barnhill was employed by appellant Robert Saunders & Company as a bookkeeper from March 3, 1975, until December 12, 1977. In October 1977 she executed a promissory note in favor of appellant in the amount of $587.50 at 10 percent interest. On its face, the note states "To be paid by payroll deduction or on demand." Subsequently, the parties orally agreed that appellant would deduct $37.50 from Barnhill's wages every two weeks.
Barnhill was discharged on December 12, 1977, for reasons not relevant herein. On that date, the balance due on the note was $475 plus interest, and Barnhill was owed two weeks wages, or $475. When she went to pick up her check, she was given a stub with a net zero balance indicating various deductions including a $442.46 setoff against the balance owing on the note.
She complained to the Labor Commissioner. After a hearing, an order in her favor was issued. Appellant sought review of that order in superior court. After a trial de novo (see Lab.Code, § 98) judgment was entered in favor of respondent in the sum of $475 for wages, plus $1,096.25 in penalties pursuant to Labor Code section 203.
Labor Code section 201 provides in relevant part: "If an employer discharges an employee, the wages earned and unpaid at the time of discharge are due and payable immediately."
Appellant contends that notwithstanding section 201, it was entitled to set off respondent's debt to it against the wages due her.
The right of setoff has been described as "the established principle in equity that either party to a transaction involving mutual debts and credits can strike a balance, holding himself owing or entitled only to the net difference." (Kruger v. Wells Fargo Bank (1974) 11 Cal.3d 352, 362, 113 Cal.Rptr. 449, 521 P.2d 441.) The right depends not on statutes authorizing setoff, but on general principles of equity. (Id., at p. 363, 113 Cal.Rptr. 449, 521 P.2d 441.) However, a creditor's right to setoff is not absolute, and may be restricted by judicial limitations imposed to uphold a state policy protecting debtors. (Id. at p. 367, 113 Cal.Rptr. 449, 521 P.2d 441.)
In Kruger a bank's depositor was delinquent in paying her Master Charge bill. At issue was whether the bank could exercise its equitable right of setoff against her checking account, when all monies in that account came from state disability insurance and unemployment compensation, funds exempt from attachment or execution. The court held the deposits immune from setoff, reasoning that to permit setoff would frustrate the Legislature's objectives in providing those benefits and protecting them from seizure by creditors. In support of its conclusion, the court looked to the law of other states, in particular Finance Acceptance Company v. Breaux (1966) 160 Colo. 510, 419 P.2d 955, a Colorado Supreme Court decision which holds that an employer cannot set off the employee's obligations on promissory notes against exempt wages due him. The court cited the Colorado court's conclusion that the general rule is that the right to exemption will be respected and protected without regard to the right of offset, and that the creditor will not be allowed to defeat the exemption with a demand against the debtor's claim, even though such demand would otherwise be good as a counterclaim or setoff. (Kruger, supra, 11 Cal.3d at p. 369, 113 Cal.Rptr. 449, 521 P.2d 441.)
Anticipating the question in this case, the Kruger court added the following footnote: (Id., at p. 369, fn. 25, 113 Cal.Rptr. 449, 521 P.2d 441.)
We conclude, from the language of the court in Kruger, that an employer is not entitled to set off debts owing by the employee against the entirety of that employee's wages. The policy underlying the wage exemption is to insure that regardless of the debtor's improvidence, the debtor and his or her family will retain enough money to maintain a basic standard of living, so that the debtor may have a fair chance to remain a productive member of the community. (Perfection Paint Products v. Johnson (1958) 164 Cal.App.2d 739, 741, 330 P.2d 829.) Permitting appellant to reach the exempt portion of respondent's wages by setoff would let it accomplish what neither it nor any other creditor could do by execution or garnishment, and would defeat the legislative policy underlying the exemption.
Since we conclude the employee's right of immunity from setoff of his earnings is derived from the statutes exempting employees' earnings from execution of judgment, it necessarily follows that the extent of that immunity is no greater than the exemption provided under those statutes. At the time of respondent's discharge, Code of Civil Procedure section 690.6 1 provided in relevant part: "One-half or such greater portion as is allowed by statute of the United States of the earnings of the debtor received for services rendered at any time within 30 days next preceding the date of a withholding by the employer shall be exempt from execution without filing a claim for exemption." (Emphasis added.) Because federal law prohibits garnishment of more than 25 percent of a debtor's disposable earnings, 2 section 690.6 provided in substance that at least 75 percent of a debtor's earnings were automatically exempt from execution, without any claim for exemption by the debtor. (Raigoza v. Sperl (1973) 34 Cal.App.3d 560, 563, 110 Cal.Rptr. 296.)
Accordingly, at least 75 percent of respondent's wages should have been absolutely immune from setoff, despite her debt to appellant, and the trial court's refusal to allow a setoff was correct, at least with respect to that portion of the wages.
Respondent argues that none of her wages are subject to setoff because when the Legislature authorized the Labor Commissioner to investigate employee complaints and hold hearings in wage disputes, it by implication excluded such proceedings from the reach of Code of Civil Procedure section 431.70, the setoff statute. 3 We are unpersuaded by that argument. Whether or not section 431.70 applies to proceedings before the Labor Commissioner is irrelevant. That section and its predecessor, former section 440, merely establish a procedure for asserting a setoff under the code pleading system of the state. The statutory setoff provisions emanate from equitable principles, and do not alter the substantive law of setoff. (Kruger, supra, 11 Cal.3d at p. 362, 113 Cal.Rptr. 449, 521 P.2d 441; see also Jess v. Herrmann (1979) 26 Cal.3d 131, 142, 161 Cal.Rptr. 87, 604 P.2d 202.) Moreover, the principle of setoff is not limited to judicial proceedings. (Murchison v. Murchison (1963) 219 Cal.App.2d 600, 605, 33 Cal.Rptr. 285.) Appellant's right to setoff was not dependent on the applicability of Code of Civil Procedure section 431.70.
However, former Code of Civil Procedure section 690.6, subdivision (b), provided that all earnings of the debtor received for services rendered within 30 days preceding the date of a withholding by the employer were exempt "if necessary for the use of the debtor or debtor's family" unless the debts were incurred for the common necessaries of life. 4 To establish entitlement to the latter exemption in the event of a garnishment, the debtor was required to file a claim of exemption promptly after a levy. If the creditor opposed the claim, a hearing was held, at which the debtor had the burden of proof. (Code Civ.Proc., § 690.50.) The Raigoza court summarized the state's statutory system for wage garnishment as a system whereby "a judgment creditor can garnish up to 25 percent of a judgment debtor's wages, which amount may be returned to the debtor, if he seeks an exemption and proves that he meets the statutory requirements for the exemption." (34 Cal.App.3d at p. 564, 110 Cal.Rptr. 296.)
Accordingly, 75 percent of the wages due respondent were automatically exempt from execution, and the remaining 25 percent might have been. If appellant were a judgment creditor of respondent, it could have garnished 25 percent of her wages, but she would...
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