Publication Details

Special Alert: U.S. Supreme Court Allows Enforcement of Arbitration Agreements with Respect to “Individual” PAGA Claims and Dismissal of Claims on Behalf of Other Aggrieved Employees – For Now

Jun 16, 2022 | Related Attorney Katherine M. McCray | Topic: Employment

The United States Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana on June 15, 2022.  The Court held that private arbitration agreements between employers and employees are enforceable when the employee agrees to waive the right to bring a representative action under the Private Attorneys General Act of 2004 (“PAGA”) on behalf of other aggrieved employees, so long as the arbitration agreement allows for arbitration of the employee’s individual PAGA claim. Thus, in Moriana, the employee’s PAGA claim on her own behalf could proceed in arbitration. Further, because the Supreme Court interpreted California law to mean that an employee no longer has standing to pursue a PAGA claim on behalf of other employees when her own personal claim has been resolved, the Court concluded that the employee’s representative PAGA claim on behalf of other employees would be dismissed. After the employee addresses her personal PAGA claims in arbitration, she will no longer have standing to pursue a representative action in court.

Notably, the Court outlined steps that could be taken by California courts and/or the legislature to clarify or change the standing rules and (conceivably) allow an employee to pursue representative PAGA actions in court even after resolving individual PAGA claims in arbitration. Therefore, this decision provides a limited “win” to employers who wish to enforce arbitration agreements with their employees pursuant to which employees waive the right to pursue representative PAGA actions. However, we expect the California legislature may move swiftly to change the rules once again. Therefore, employers must continue to monitor legal developments regarding PAGA and arbitration.

The Court’s Holding

The California Labor Code allows employees to sue their employers to recover unpaid wages under specified circumstances. Pursuant to PAGA, employees may also bring representative actions on their own behalf and on behalf of other employees to recover penalties associated with Labor Code violations by standing in the shoes of the state and acting as “private attorneys general.”  In PAGA actions, 75% of any penalty awarded goes to the state and 25% is awarded to the employees.

After PAGA was passed in 2004, some employers attempted to include PAGA claims in their arbitration agreements with employees, pursuant to which employees agreed to arbitrate any PAGA claims on an individual basis and to waive the right to bring representative PAGA Actions. However, in 2014, the California Supreme Court held (in Iskanian v. CLS Transportation Los Angeles, LLC ) that any prospective waiver of the right to bring a PAGA action – including in an arbitration agreement – was against California public policy and was unenforceable. Iskanian also held that it was not possible to “split” a PAGA claim into an “individual” portion (on behalf of the employee bringing the claim) and a “representative” portion (on behalf of other aggrieved employees). Therefore, pursuant to Iskanian, California courts have invalidated arbitration agreements in which employees agree to waive their right to bring representative PAGA actions, effectively forcing all PAGA claims to be resolved in court rather than arbitration.

In yesterday’s decision, the Supreme Court held that part of the Iskanian ruling is preempted by the Federal Arbitration Act. The Court decided that Iskanian was wrong to conclude a PAGA claim cannot be split into individual and representative portions. Thus, if an employee and employer entered into an otherwise valid arbitration agreement pursuant to which the employee agrees to waive the right to bring a PAGA representative action on behalf of other aggrieved employees but retains the right to arbitrate their individual PAGA claims, the agreement is enforceable. (However, the Court did not disturb Iskanian’s holding that an employee may not waive the right to bring a PAGA action altogether. Thus, if an arbitration agreement purports to waive the employee’s entire right to bring a PAGA action, such that an employee could not even arbitrate their individual claims, it would not be enforceable.)

Furthermore, the Court considered what would happen to the representative PAGA action on behalf of other aggrieved individuals if an employee arbitrates their individual PAGA claims. The Court concluded that the statutory text of PAGA and California court decisions interpreting it provide that an employee’s standing (or legal right) to pursue a representative PAGA action on behalf of other aggrieved employees is reliant on the employee having their own claim in that action.  Therefore, the Court concluded that if an employee resolves their personal PAGA claims in arbitration, they will no longer have standing to pursue a representative claim on behalf of other aggrieved employees in court.  In effect, this decision will allow employers with the appropriate language in their arbitration agreements to limit PAGA exposure to the individual employees who bring claims and avoid exposure for all aggrieved employees (assuming the arbitration agreements is otherwise enforceable).

Possible Legislative Action or Contrary Court Decisions

The Court noted that its holding regarding representative PAGA actions on behalf of all aggrieved employees was influenced by the statutory definition of “standing” in PAGA and California courts’ interpretation of that provision. In a concurring opinion, Justice Sotomayor specifically outlined the steps California courts or the legislature could take to clarify or alter the standing requirements and – presumably – allow employees to pursue representative PAGA actions on behalf of aggrieved employees even after arbitrating their individual PAGA claims.

Indeed, Senator Dave Cortese, chair of the California Senate Labor, Public Employment and Retirement Committee has already publicly stated that he is prepared to author legislation to respond to the decision and “create for employees anew pathway to legal standing.”

Therefore, the effect of yesterday’s decision may be limited. We will continue to monitor all legislative and judicial developments and provide updates on any possible changes to the law.

Next Steps for California Employers

Employers whose arbitration agreements do not include PAGA claims or waivers of the right to bring representative actions may wish to revise their agreements to include such terms.  Employers whose arbitration agreements already cover PAGA claims or include representative action waivers should carefully review the terms and consult with counsel to confirm whether the agreements as drafted are enforceable under the Supreme Court’s decision.

Employers with arbitration agreements who are currently facing any PAGA claims should consult with counsel immediately about the potential implications of this case and whether it may be possible to move to compel arbitration of an employee’s individual PAGA claims.

In addition, employers should remember that there is still a question concerning the enforceability of a California statute that aims to prohibit employers from requiring employees or applicants to enter into arbitration agreements related to disputes under the Fair Employment and Housing Act and the California Labor Code – including PAGA claims (California Labor Code Section 432.6). If enforceable, that statute would prohibit employers from making arbitration of employment claims a mandatory condition of employment. The Federal Ninth Circuit Court of Appeals has delayed further consideration of this question pending the Supreme Court’s decision in the Viking River case, and we expect they will now move forward with consideration of the case. (For more information, see our Special Alert on Chamber of Commerce v. Bonta.)

Finally, stay alert for further changes, as we expect the legislature may act quickly to preserve employees’ right to bring PAGA representative actions in court.

If you have questions or would like assistance reviewing your arbitration agreements to assess the impact of yesterday’s decision, please contact us.

Wilson Turner Kosmo’s Special Alerts are intended to update our valued clients on significant employment law developments as they occur. This should not be considered legal advice.