Insights

Home > News & Insights > Insights > California Employers Cannot Rely on PAGA Claim Waivers in Arbitration Agreements with Employees

Share this on:   a b j c

California Employers Cannot Rely on PAGA Claim Waivers in Arbitration Agreements with Employees

Published by on July 15, 2015

California’s Private Attorneys General Act of 2004 (PAGA) permits an “aggrieved employee” to bring a private right of action against an employer to recover civil penalties for specifically enumerated violations of the California Labor Code. See Cal. Lab. Code §§ 2698 et seq. Although only 25 percent of the collected penalties are distributed to the […]

California’s Private Attorneys General Act of 2004 (PAGA) permits an “aggrieved employee” to bring a private right of action against an employer to recover civil penalties for specifically enumerated violations of the California Labor Code. See Cal. Lab. Code §§ 2698 et seq.

Although only 25 percent of the collected penalties are distributed to the aggrieved employees (with the remaining 75 percent paid to the Labor and Workforce Development Agency), PAGA claims are brought by employees in many cases because PAGA provides for attorney’s fees to the representative employee who successfully brings the action. See Cal. Lab. Code § 2699(g).

In an attempt to protect themselves from the use of PAGA claims to obtain an attorney’s fee award, California employers began to include provisions in their arbitration agreements requiring employees to waive representative claims (like those that can be asserted pursuant to PAGA).

The following is an example of such a waiver:

[E]xcept as otherwise required under applicable law, (1) EMPLOYEE and COMPANY expressly intend and agree that class action and representative action procedures shall not be asserted, nor will they apply, in any arbitration pursuant to this Policy/Agreement; (2) EMPLOYEE and COMPANY agree that each will not assert class action or representative action claims against the other in arbitration or otherwise; and (3) each of EMPLOYEE and COMPANY shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person.

In 2014 the California Supreme Court, after considering the exact provision cited above, ruled that arbitration agreements cannot ban PAGA claims (although class action claims can be banned). Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 391 (2014).

The Court determined that preemption by the Federal Arbitration Act (and the United States Supreme Court’s decision in AT&T Mobility v. Concepcion, 563 U.S. 321 (2011), addressing the issue) does not require enforcement of an arbitration agreement waiving PAGA claims because such claims are technically disputes between an employer and the California Labor and Workforce Development Agency, not between an employer and an employee. Iskanian at 384-91.

Since Iskanian, however, a number of federal district courts in California have rejected the California Supreme Court’s reasoning and taken the opposite position, holding that the United States Supreme Court’s Concepcion decision requires enforcement of PAGA claims waivers in arbitration agreements as a matter of Federal Arbitration Act preemption.

See, e.g., Lucero v. Sears Holdings Mgmt. Corp., No. 14-CV-1620 AJB WVG, 2014 WL 6984220 (S.D. Cal. Dec. 2, 2014); Mill v. Kmart Corp., No. 14-CV-02749-KAW, 2014 WL 6706017 (N.D. Cal. Nov. 26, 2014); Ortiz v. Hobby Lobby Stores, Inc., 52 F. Supp. 3d 1070, 1075 (E.D. Cal. 2014); Langston v. 20/20 Companies, Inc., No. EDCV 14-1360 JGB SPX, 2014 WL 5335734 (C.D. Cal. Oct. 17, 2014).

On June 3, 2015, a panel of three judges from United States Court of Appeals for the Ninth Circuit struggled to determine whether the federal district courts or the California Supreme Court got it right with respect to their decisions regarding PAGA claims waiver issue. The panel appeared to be on the California Supreme Court’s side, seeming to believe that Federal Arbitration Act preemption does not require enforcement of PAGA claims waivers in arbitration agreements.

Judge Milan Smith’s comment, however, that “[w]e’re dealing with a new concept,” illustrated the Court’s difficulty in trying to figure out how PAGA claims should be handled if the Ninth Circuit decides that PAGA claims waivers in arbitration agreements are unenforceable. Should employers be forced to litigate an employee’s individual claims in arbitration and the representative PAGA claims in state court? Or should the arbitration include all of employee’s claims, both individual and representative?

In a seemingly predictive decision on June 9, 2015, the United States District Court for the Northern District of California switched gears from prior federal district court decisions and held that Uber’s arbitration agreements with its drivers are unenforceable because they include a waiver of PAGA claims. Mohamed v. Uber Technologies, Inc., No. C-14-5200 (N.D. Cal. June 9, 2015).

It is possible that the federal district courts, examining the posture of the Ninth Circuit from June 3, 2015, will now begin to issue rulings in line with the California Supreme Court’s Iskanian ruling.

Laconic Lookout:

California employers should not feel confident that arbitration agreements signed by employees waiving PAGA claims will be enforced by the courts, state or federal. Judging by the comments made by the Ninth Circuit on June 3, 2015, and the recent decision by the U.S. District Court for the North District of California on June 10, 2015, even the federal courts are indicating PAGA claims will survive arbitration agreements waiving such claims.

Until this issue is ultimately decided (the Ninth Circuit will have an en banc hearing on the issue and whatever the Ninth Circuit decides will likely be heard by the United States Supreme Court), California employers must carefully consider whether they will enforce an arbitration agreement where PAGA claims have been asserted.

In the current legal climate, California employers may find themselves in a scenario where they are litigating an employee’s individual claims in arbitration and the representative PAGA claims in California Superior Court, which would likely be significantly duplicative, time-consuming and expensive.

Topics: , , , , , , , ,

Share:   a b j c