The Supreme Court Resolves California’s PAGA Saga.
For nearly a decade, a California rule has prohibited employers from requiring employees to arbitrate individual claims brought under the state’s Private Attorney Generals Act (PAGA). On June 15, 2022, the U.S. Supreme Court changed all that, ruling in Viking River Cruises v. Moriana that the Federal Arbitration Act (FAA) preempts the California rule and permits employers and employees to agree to arbitrate individual PAGA claims. The Supreme Court’s decision represents a huge shift in arbitration law for employers with employees in California.
PAGA deputizes employees to prosecute employers’ California Labor Code violations. If an employee has suffered a Labor Code violation, that employee can bring a representative PAGA claim “on behalf of himself or herself” and all other aggrieved employees. A PAGA plaintiff can seek any civil penalties the state would be permitted to seek, “including penalties for violations involving employees other than the PAGA litigant herself.” This results in potentially huge penalties for employers faced with PAGA claims.
In 2014, the California Supreme Court held in Iskanian v. CLS Transportation that (1) employees couldn’t waive their right to bring a representative PAGA claim and (2) employers and employees couldn’t agree to arbitrate individual PAGA claims, reasoning that PAGA claims couldn’t be split into arbitrable individual claims and non-arbitrable representative claims. In Viking River Cruises, the U.S. Supreme Court agreed to hear a challenge claiming that the FAA preempts the Iskanian rule.
The Supreme Court’s Decision
The Court dealt employers a big win, ruling that the FAA preempts the Iskanian rule to the extent it prohibits employers and employees from agreeing to arbitrate individual PAGA claims. That means that employers can now enforce arbitration agreements that require employees to arbitrate individual PAGA claims. However, the Court left intact the Iskanian rule prohibiting wholesale waivers of PAGA claims, meaning that an employee cannot waive their right to bring a representative PAGA action.
Under the arbitration agreement at issue in this case, the parties had agreed to arbitrate individual PAGA claims, while any representative claims would be litigated in court. Importantly, the Court found that once the plaintiff’s individual PAGA claims were submitted to arbitration, the representative claims in court had to be dismissed for lack of standing because “PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding.” Under the Court’s decision, a carefully drafted arbitration agreement can allow employers to avoid the risk of substantial penalties in representative PAGA actions.
However, the Court’s decision was not an unqualified victory for employers. In her concurring opinion, Justice Sotomayor clarified that the California Supreme Court can clarify, or the state legislature is free to modify, “the scope of statutory standing under PAGA within state and federal constitutional limits.” So while individual PAGA claims can undoubtedly be subject to arbitration going forward, it remains to be seen whether California will provide a mechanism for a PAGA plaintiff to litigate non-individual PAGA claims separated from individual claims in court. If so, this could mean California employers may have to arbitrate individual PAGA claims while simultaneously litigating non-individual PAGA claims in court.
SixFifty has updated its employment agreement tools to account for this latest decision from the Supreme Court.
The Next Front in California’s Battle on Arbitration: AB 51
Despite the Court’s decision, there remains an open question whether mandatory employment arbitration agreements in California are enforceable. California Assembly Bill 51 prohibits employers from requiring employees to arbitrate employment disputes. The law went into effect in 2020, but was quickly challenged in court. The case is now in front of the Ninth Circuit Court of Appeals, which put a pause on the case until the Supreme Court decided Viking River Cruises. Now that the Supreme Court has issued its decision, expect to see movement from the Ninth Circuit on AB 51. We are continuing to monitor that case.