Individual Wage-and-Hour Settlements (The Merchant of Tennis v. Superior Court)
~8 minute reading time
In January 2026, the California Court of Appeal issued a published decision with implications for employers defending wage-and-hour class actions and PAGA claims who attempt to manage exposure through individual settlement agreements with employees. The case, The Merchant of Tennis, Inc. v. Superior Court, addresses what happens when those individual settlements are later found voidable and explains what employees must be told before deciding whether to rescind their agreements and rejoin representative litigation.
Background of the Case
The employer, The Merchant of Tennis, Inc., was defending a consolidated wage-and-hour action alleging violations of various provisions of the California Labor Code and related state and federal laws. While a motion for class certification was pending, the employer entered into approximately 954 individual settlement agreements with current and former employees. In exchange for releasing their wage claims, those employees received cash payments totaling more than $875,000.
After those agreements were executed, the named plaintiff moved to invalidate them. The trial court concluded that the agreements were not automatically void, but were voidable at the election of each employee because they had been procured through misleading and coercive conduct. The court ordered that employees be sent a court-approved curative notice explaining their right to rescind their individual settlement agreements and participate in the class action.
The dispute that ultimately reached the Court of Appeal did not concern whether the agreements were voidable. That determination was accepted as established. Instead, the dispute centered on what the curative notice had to say about repayment of the settlement money if an employee chose to rescind.
Why the Individual Settlement Agreements Were Voidable
Although the appellate court did not revisit the voidability finding, the opinion recounts the trial court’s factual findings in detail, particularly in the dissent. According to those findings, the employer obtained the agreements through a series of false and misleading representations. Employees were given baseless information about the value of class action recoveries, were misinformed about the scope and status of the litigation, and were told that certain claims had been dismissed when they had not. The employer also mischaracterized the breadth of the releases, marked communications as “confidential” in a way that discouraged consultation with class counsel, and overstated the effect of arbitration agreements without disclosing that only a minority of employees had signed them.
Based on these findings, the trial court ruled that the settlement agreements were voidable due to fraud, misrepresentation, and coercion. The Court of Appeal treated that ruling as a settled premise for purposes of its analysis.
The Trial Court’s Approach to Repayment
When crafting the curative notice, the trial court concluded that employees who rescinded their settlement agreements did not need to be warned that they might have to repay the settlement money. Instead, the court adopted an approach used in some federal cases, stating that any settlement payments would simply be treated as an offset against a future recovery if the employees prevailed. The court expressed concern that warning employees about potential repayment would discourage participation in the class action, particularly given the economic vulnerability of low-wage workers.
The Court of Appeal’s Holding
The Court of Appeal disagreed and granted the employer’s petition for writ relief. The court held that California rescission law governs the consequences of rescinding an individual settlement agreement, even in the context of a pending class action. Under Civil Code sections 1689 and 1691, a party who rescinds a contract obtained by fraud or duress must restore the consideration received before pursuing the released claims.
The court acknowledged that Civil Code section 1693 allows repayment to be delayed until judgment if immediate restoration would be impractical and if the employer is not substantially prejudiced. However, the court held that the trial court lacked authority to eliminate the repayment obligation altogether at the outset of the case. Employees who rescind must be informed that repayment may ultimately be required if the employer prevails, even though the trial court retains discretion at the time of judgment to adjust the equities under Civil Code section 1692.
The Court of Appeal also rejected reliance on federal decisions such as Marino v. CACafe, Inc. and McClellan v. Midwest Machining, Inc.. Those cases did not analyze California’s rescission statutes and, in some instances, arose under federal statutory schemes with distinct policy considerations. As a result, they were not controlling authority on the consequences of rescission under California contract law.
Had the Marino and McClellan cases been applied in Merchant, the employer would have been required to allow employees to rescind their settlement agreements, retain the $875,000 in total settlement payments by the company, and reassert their claims, with the payments serving at most as an offset only if the employees ultimately prevailed, leaving Merchant with no mechanism to recover the funds if it successfully defended the action.
Challenging Individual Settlements and the Proper Reading of Chindarah
California law permits the settlement of bona fide wage disputes through individual agreements, but there are numerous grounds on which a putative class or PAGA plaintiff may challenge the validity of those agreements. Common challenges include fraud, misrepresentation, coercion, undue influence, lack of informed consent, unconscionability, and interference with the integrity of representative litigation. Courts closely scrutinize the context in which settlements are presented, particularly where employers communicate directly with putative class members while class or PAGA claims are pending.
Employers often cite Chindarah v. Pick Up Stix, Inc. (2009) 171 Cal.App.4th 796 for the proposition that employees may release accrued wage claims as part of a bona fide dispute, and Chindarah did arise from a putative class action. In that case, the employer made individual settlement offers to putative class members before class certification, and a number of employees accepted payment and signed releases. Several of those employees later attempted to participate in the putative class action and challenged the enforceability of their releases. The Court of Appeal enforced the agreements, emphasizing that California law does not prohibit employees from releasing past-due wage claims when resolving a bona fide dispute.
At the same time, Chindarah was decided in a different procedural and doctrinal context. The case did not involve PAGA claims, did not include findings of misleading or coercive settlement communications, and did not address the heightened scrutiny courts apply when individual settlements are used in a manner that may undermine representative litigation. As The Merchant of Tennis illustrates, even where individual settlements are permissible in principle, they remain vulnerable to challenge if obtained through misleading conduct or if they interfere with the rights of absent employees or, in the PAGA context, the interests of the State of California.
Labor Code Section 206.5 and Statutory Limits on Wage Releases
Any analysis of individual wage settlements must also account for Labor Code section 206.5, which imposes an independent statutory limitation on the enforceability of wage claim releases. Section 206.5 provides that an employer may not require the execution of a release of a claim or right on account of wages due, wages to become due, or wages advanced on future earnings unless payment of those wages has already been made. A release obtained in violation of this provision is null and void as between the employer and the employee, and a violation may subject the employer to misdemeanor liability.
Courts have interpreted section 206.5 to permit releases only where there is a bona fide dispute and where the employee has been paid all wages that are concededly due. This statutory framework explains why Chindarah enforced the releases at issue. There, the employer paid the wages it conceded were owed, and the settlement resolved genuinely disputed claims for additional compensation.
By contrast, where an employer conditions payment of undisputed wages on the execution of a release, or fails to distinguish clearly between conceded wages and disputed claims, section 206.5 provides a separate and independent basis for invalidating the agreement. Importantly, a release that is void under section 206.5 is void by statute, not merely voidable at the employee’s election, and does not depend on proof of fraud or coercion. Although The Merchant of Tennis did not turn on section 206.5, the statute forms part of the broader legal landscape governing individual wage settlements and further explains why courts closely scrutinize such agreements in representative litigation.
Individual Agreements in the PAGA Context
Although the Court of Appeal did not separately analyze PAGA procedure, the backdrop of Adolph v. Uber Technologies, Inc. (2023) 14 Cal.5th 1104 remains an important consideration for individual agreements in representative wage-and-hour lawsuits. In Adolph, the California Supreme Court held that even when an employee is compelled to arbitrate their individual PAGA claim, the employee retains standing to pursue non-individual, representative PAGA claims in court on behalf of the State of California. That ruling substantially limits an employer’s ability to eliminate PAGA exposure through individualized agreements alone.
Against that backdrop, The Merchant of Tennis highlights potential pitfalls when employers attempt to narrow the scope of representative wage-and-hour or PAGA claims through pre-certification individual settlement agreements. Where such agreements are procured through misleading or coercive conduct, they may be voidable, and employees who rescind them must be advised that California rescission law may require repayment of settlement consideration if the employer ultimately prevails. Together, Adolph and The Merchant of Tennis reflect increased judicial scrutiny of employer strategies aimed at reducing the scope of representative claims and confirm that individual agreements will not insulate employers from PAGA liability relating to those individual settling employees.
Practical Takeaway for Employers
This decision reinforces several important lessons for employers navigating wage-and-hour and PAGA litigation. Individual settlements of accrued wage claims are permissible and may resolve bona fide disputes, but they are susceptible to challenge. Courts will closely examine both the substance of the agreement and the manner in which it was obtained, particularly when representative claims are pending.