On June 15, 2022, the US Supreme Court found that employers can compel arbitration of an employee’s individual labor code violation claims. Consequently, this case has significant implications on California’s Private Attorneys General Act (PAGA) and employees ability to bring class action claims under this act. As you may be aware, PAGA claims are infamous to California employers and carry the potential for astronomical penalties based on labor code violations which are awarded to the employee class and their attorney(s).
Background – the employee in this case signed an arbitration agreement with her employer, and the agreement specifically stated that the parties would resolve any issues via an individual action as opposed to a representative action like PAGA. However, the employee brought a wage and hour claim under PAGA, which prompted the employer to try and compel the employee’s individual matter to arbitration. When the trial court and Court of Appeal denied the employer’s request citing the California Supreme Court’s decision in another arbitration case, Iskanian v. CLS Transportation Los Angeles, LLC, the employer then petitioned the US Supreme Court to review. The US Supreme Court found that the Federal Arbitration Act (FAA) does in fact preempt California’s ruling in the Iskanian case, as such employers have the ability to enforce arbitration agreements with PAGA/class action waivers. The US Supreme Court also found that employers are permitted to compel arbitration of the individual PAGA claims (which is then moved to a separate proceeding). Once the individual claim is severed, the remaining non-individual claims (i.e., rest of the class) must be dismissed because there is currently no mechanism under PAGA to adjudicate the remainder of the representative claims.
Help, What Does This Mean for My Business?
Essentially, this means that arbitration agreements with class action waiver and severability provisions are now enforceable per the highest court in the country. While this is undoubtedly good news for California employers, it does mean there is a strong chance plaintiffs’ attorneys will only bring more challenges as to the enforceability of these agreements. For instance, arbitration agreements that contain a signature line/block for the employer that is not counter-signed may result in courts refusing to uphold those agreements; additionally, arbitration agreements buried in employee handbooks are not enforceable.
Furthermore, employers should be cautious that their arbitration agreements do not purport to waive PAGA claims in their entirety as this would also not be enforced in California courts. Rather, the terms of the agreement should mandate arbitration of the employee’s individual PAGA claims. Litigating individual PAGA claims is a significant win for employers in and of itself – this means the potential for exorbitant penalties for wage and hour violations is limited now that employers may not have to face off against a huge class.
But Wait… It’s Not All Smooth Sailing From Here!
Justice Sotomayor wrote a concurring opinion for the US Supreme Court’s decision in Viking Cruises. In it, she essentially handed the baton to the California legislature to draft an amendment to PAGA and “modify the scope of statutory standing under PAGA within state and federal constitutional limits.” This means California employers should be prepared for a legislative bill which would be compliant under the FAA and would amend PAGA to resurrect the class action claims. While California employers can enjoy the good news (for once!), they should also be mindful of the intricacies in arbitration agreements described above.
As always, please feel free to contact your MMC team to discuss this new development in arbitration agreements and how we can work together to better protect your organization.