June 20, 2022

New Life for California Arbitration Agreements

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Key Takeaways

  • California employers with arbitration agreements can require employees to arbitrate their individual Private Attorneys General Act (PAGA) claims and seek dismissal of PAGA claims brought on behalf of other employees.
  • Employers should review any employee arbitration agreements currently in place, and stay tuned for additional updates as the Court could potentially announce a change to the requirement of PAGA standing.

Nearly eight years after the California Supreme Court held that employee arbitration agreements do not apply to claims under California's Private Attorneys General Act (PAGA), the U.S. Supreme Court provided a bit of good news to California employers last week. Following the Court's decision in Viking River Cruises, Inc. v. Moriana, employers with arbitration agreements can require employees to arbitrate their individual PAGA claims, and—at least for now—seek dismissal of PAGA claims brought on behalf of other employees.

Under PAGA, an employee can act as an agent of the state to bring suit for civil penalties "on behalf of himself or herself and other current or former employees." PAGA requires only that the employee experience a single alleged labor code violation in order to sue for other alleged violations experienced by different employees. PAGA claims pose special challenges for employers, both because of the expansive number of potential employees that can be encompassed by a single case, and due to the extensive potential penalties the statute provides.

In addition, in circumstances where the employee bringing the PAGA action has an arbitration agreement that would compel individual claims to arbitration, California courts previously held that an employee's individual PAGA claims (labor code violations they actually experienced) could not be bifurcated from their representative, non-individual claims (labor code violations the employee-plaintiff did not experience but were allegedly experienced by their fellow employees).  Iskanian v. CLS Transportation Los Angeles LLC (2014) 59 Cal.4th 348. Thus, even with an arbitration agreement with an individual plaintiff—or indeed, with most or all employees—an employer could still face expensive litigation in state courts.

Viking River Cruises changes the waterfront, at least in part. Unfortunately for employers, the Supreme Court refused to find that the Federal Arbitration Act (FAA) preempts California's rule banning wholesale waivers of PAGA claims in arbitration agreements. However, the Court held that the FAA does preempt the California rule that PAGA claims cannot be split into arbitrable individual claims and non-arbitrable representative claims. Thus, a plaintiff who signed an arbitration agreement can now be required to arbitrate individual PAGA claims. 

In reaching its decision the Court took issue with PAGA's "claim-joinder" mechanism, which, as noted above, permits a plaintiff-employee, acting as the agent or proxy of the State, to join their individual PAGA claim with any non-individual claims the state could raise. In this way, California's prohibition on dividing PAGA claims contravened the long-standing principle that parties are free to determine "the issues subject to arbitration," since the joinder of non-individual PAGA claims expanded the scope of arbitration to include claims "that the parties did not jointly agree to arbitrate."

So if an employee's individual PAGA claims are now subject to arbitration, what should happen with the "representative" PAGA claims brought on behalf of others? The Court explained that those claims must be dismissed, because, as the Court stated, there is no PAGA mechanism "to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding." Therefore, with a plaintiff's individual PAGA claim compelled to arbitration, he or she has no standing to pursue the non-individual PAGA claims in court.

With this latest turn in the PAGA saga in California, employers that have arbitration agreements with their employees should consult with legal counsel to review those agreements. Employers who do not currently have arbitration agreements should discuss with counsel whether agreements may be warranted in light of this case. And, of course, all employers should stay tuned, since the Court left open the possibility that the California courts or legislature might change the requirement of PAGA standing, and reopen the courthouse doors once more.

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