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Ninth Circuit Court of Appeals Reminds Employers That Even Though PAGA Claims Cannot Be Waived In Arbitration Provisions, Such Claims May Still Be Compelled To Arbitration Pursuant To Valid Agreements

Published by on April 27, 2017

Employers should review their arbitration agreements to determine whether it is advantageous to attempt litigation of PAGA claims in arbitration.

Courts continue to struggle with defining the scope and procedure for claims brought pursuant to the California Private Attorneys’ General Act of 2004 (California Labor Code § 2698 et seq.) (“PAGA”). Judge Milan Smith’s previous comment about PAGA claims that “[w]e’re dealing with a new concept,” still seems to be relevant as courts in California continue to grapple with how PAGA claims should be handled.

In 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), that PAGA representation actions cannot be waived in arbitration agreements. For more information on Iskanian, click here. The following year, the U.S. Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act (FAA) does not preempt the Iskanian rule prohibiting PAGA waivers in Sakkab v. Luxottica Retail North America, Inc., 803 F.3d 425 (9th Cir. 2015). For more information on Sakkab, click here. Now, on March 3, 2017, in an unpublished decision in Valdez v. Terminix International Company Limited Partnership, Case No.15-56236, the Ninth Circuit reversed a U.S. District Court order denying defendant Terminix’s motion to compel arbitration of plaintiff Placido Valdez’s claim for penalties for PAGA violations. The Ninth Circuit’s ruling served as a reminder that even though an arbitration provision cannot waive the right to bring PAGA claims, a plaintiff may nevertheless be compelled to arbitrate PAGA claims. A copy of the Ninth Circuit’s unpublished slip opinion in Valdez can be found here.

In Valdez, Valdez alleged Terminix failed to provide meal and rest breaks, timely payment of wages or itemized pay stubs, and brought a representative PAGA claim for these Labor Code violations. The District Court denied Terminix’s motion to compel arbitration, explaining that the PAGA claim “belongs to the state, and the state has not waived the judicial forum” by agreeing to the arbitration clause in Valdez’s employment contract. Valdez, slip op. at 3.

The Ninth Circuit held that “Iskanian and Sakkab clearly contemplate that an individual employee can pursue a PAGA claim in arbitration, and thus that individual employees can bind the state to an arbitral forum.” The Ninth Circuit cited its own earlier decision in Wulfe v. Valero Ref. Co., Cal., 641 F.App’x 758, 760 (9th Cir. 2016), which held that ”the district court’s order compelling arbitration does not run afoul of Sakkab and Iskanian because the order did not prevent Wulfe from bringing a representative PAGA claim in arbitration….” The Ninth Circuit further explained that “An individual employee, acting as an agent for the government, can agree to pursue a PAGA claim in arbitration. Iskanian does not require that a PAGA claim be pursued in the judicial forum; it holds only that a complete waiver of the right to bring a PAGA claim is invalid.” and that Sakkab “recognized that employees may pursue PAGA claims in arbitration.”

After holding that PAGA claims can be arbitrated, the Ninth Circuit determined that Valdez’s PAGA claim fell within the scope of the arbitration clause in his employment contract. Accordingly, the Ninth Circuit reversed the District Court’s order denying Terminix’s motion to compel arbitration and remanded the case back to the District Court to determine whether to dismiss or stay the action pending arbitration. The Ninth Circuit’s decision will almost certainly be appealed.

Welter Insight

One of our previous suggestions was that employers consider requesting a stay of the PAGA action pending arbitration of the employee’s individual claims underlying the PAGA claims. The risk, however, is that the stay be denied and the employer faced with litigating simultaneously in two forums, which could be significantly duplicative, time-consuming, and expensive.

Following Valdez, employers instead should consider whether they want to attempt to compel PAGA claims to arbitration through valid arbitration agreements. Employers should review their arbitration agreements to determine whether it is advantageous to attempt litigation of PAGA claims in arbitration.

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