From JDSupra, Laura Devane, Robert Friedman, Julie McGoldrick, and Joseph Wientge Jr. discuss the United States Supreme Court’s decision that said arbitration agreements can require that California’s Private Attorneys General Action (PAGA) claims be arbitrated. Laura, Robert, Julie and Joseph write:
The United States Supreme Court’s decision in Viking River Cruises v. Moriana will dramatically impact employers’ rights to enforce arbitration agreements related to claims under California’s Private Attorneys General Act (PAGA).1 This decision, which is a significant win for employers with interests in California, will allow employers to compel arbitration of a PAGA plaintiff’s individual PAGA claims. In addition, because a PAGA plaintiff bound to arbitrate lacks standing to prosecute claims on behalf of other aggrieved employees, the remaining PAGA claims must be dismissed.
The Nature of PAGA
By way of background, California’s Labor and Workforce Development Agency (LWDA) is authorized to assess and collect civil penalties against employers for violations of certain provisions of the California Labor Code. The California Legislature, on the theory the LWDA lacked sufficient resources to fully enforce the Labor Code, enacted PAGA, which took effect on January 1, 2004.
PAGA authorizes an “aggrieved” employee, i.e., an employee who purportedly has had their Labor Code rights violated, to step into the shoes of the state Labor Commissioner and enforce certain violations of California labor law. PAGA allows for an employee to seek civil penalties against employers on behalf of the state. Further, only an individual employee brings a claim under PAGA, while other allegedly “aggrieved” employees do not participate in the lawsuit. Prior to the enactment of PAGA, such civil penalties could only be assessed and collected by the LWDA.
The default PAGA civil penalty is $100 per employee per pay period for an initial violation and $200 per pay period for any subsequent violations. If a PAGA plaintiff succeeds, 75% of any penalty recovered is paid to the LWDA for enforcement of labor laws and for education of employers and employees about their rights and responsibilities, with the remainder distributed among aggrieved employees. A plaintiff prevailing on a PAGA claim may also recover attorneys’ fees. In practice, employees suing under PAGA receive little of the recovery, with the majority going to the state and the attorneys who file PAGA cases against employers.
Since its enactment, PAGA has been the source of much confusion and controversy. PAGA was quickly amended within its first year2 and has been amended twice more.3 PAGA has also been subject to several court challenges, including unsuccessful efforts to minimize PAGA actions and penalties through carefully drafted arbitration agreements, which would limit employees from bringing actions on behalf of the state and other “aggrieved” employees.
Previously, California Law Precluded the Arbitration of Individual PAGA Claims
Until now, California law, including the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC,4 precluded employers from enforcing pre-dispute arbitration agreements requiring employees to arbitrate their individual PAGA claims. In Iskanian, the court held while employees may waive their right to participate in a class action by agreeing to individual arbitration, any waivers of the right to bring a PAGA action on behalf of the state are unenforceable.5
In addition, Iskanian suggested that individual PAGA claims for violations the plaintiff alleged they personally suffered could not be separately arbitrated, because prosecuting these claims in separate arbitrations would not serve the deterrent purpose of PAGA. The California Supreme Court later rejected the concept of an “individual component” to PAGA claims that could be separated from the representative claims of all alleged aggrieved employees.6 Thus, for over 15 years, employers have been left with the impossible choice of attempting to arbitrate PAGA claims on a representative basis or foregoing arbitration altogether.
The United States Supreme Court Holds Individual PAGA Claims Can Be Arbitrated
Viking River Cruises, Inc. v. Moriana marks the first time the United States Supreme Court has substantively considered PAGA. In the 8-17 holding, the Supreme Court clearly and fundamentally changed California law, finding an employee bound to individually arbitrate claims must prosecute claims for civil penalties under PAGA on an individual basis in arbitration.
In 2018, plaintiff Moriana filed a lawsuit in California state court seeking PAGA penalties for numerous alleged California Labor Code violations. Defendant Viking River Cruises moved to compel arbitration, arguing Moriana’s claims were subject to arbitration pursuant to her signed employment agreement, which contained a provision compelling employment-related disputes with Viking to bilateral arbitration, and precluded arbitration of any dispute as a class, collective, or representative action. The agreement also contained a severability clause providing that any unenforceable portion of the waiver should be severed. The trial court denied Viking’s motion, holding Moriana’s representative PAGA claims could not be compelled to arbitration, and the California Court of Appeal affirmed, relying on Iskanian, while the California Supreme Court denied review.
In concluding Moriana must be compelled to arbitrate her individual PAGA claims, the Supreme Court acknowledged PAGA’s unique nature. All PAGA actions are “representative” in the sense they must be brought by employees acting as agents of the state. The Supreme Court also agreed with the Iskanian Court’s prohibition on a categorical waiver of the right to bring a PAGA action, and it refused to disturb Iskanian’s holding that representative-action waivers are unenforceable.
Nonetheless, the Supreme Court took issue with the portion of Iskanian’s holding that precluded the enforcement of agreements to arbitrate individual PAGA claims. The Court found requiring arbitration of all PAGA claims, both the plaintiff’s individual claims and the claims of the other aggrieved employees, violates the Federal Arbitration Act (FAA) because it permits parties to expand the scope of arbitration to include claims that were never agreed to be arbitrated, and because it would allow a plaintiff to “unite a number of claims in a single-package suit,” despite the fact the Supreme Court has previously held “arbitration is poorly suited to the higher stakes of massive-scale disputes of this kind.” Requiring an employer to choose between arbitrating all the alleged aggrieved employees’ claims or none of them was coercive and inconsistent with the FAA.
The Supreme Court also rejected other potential arguments against arbitration, including flatly rejecting the notion an arbitration agreement might be unenforceable without the state’s consent: “And regardless of whether a PAGA action is in some sense also a dispute between an employer and the State, nothing in the FAA categorically exempts claims belonging to sovereigns from the scope of §2.”
Ultimately, the Supreme Court concluded the FAA preempts the portion of Iskanian that precludes the division of PAGA claims into individual and non-individual claims. The categorical PAGA waiver in the agreement between Moriana and Viking was unenforceable, but under the severance clause, Viking was permitted to enforce the portion of the waiver that mandated Moriana arbitrate her own individual PAGA claims.
Finally, as for the remaining non-individual PAGA claims of the alleged aggrieved employees, the Court held they must be dismissed. Because Moriana’s individual claims were required to be prosecuted in arbitration, she lacked standing to prosecute the PAGA claims on behalf of the other alleged aggrieved employees. Though Justice Sotomayor joined the Court’s opinion, she wrote separately to suggest the California Legislature “is free” to modify the standing requirements under PAGA, but she also made clear such a change must be “within state and federal constitutional limits,” a high bar.
While the California Legislature8 (and the Plaintiffs’ bar) will certainly look for weaknesses in this opinion, there is no doubt it provides a significant opportunity for employers to lessen PAGA’s tight grip.
Takeaways from the Decision
Viking River Cruises is an important development and marks a sea change in California law, as it makes clear employers can compel employees to arbitrate their individual claims under PAGA, reversing California precedent to the contrary. The key takeaways are as follows:
- Individual PAGA claims can be arbitrated and Iskanian is overruled to that extent.
- “Non-individual” PAGA claims of other alleged aggrieved employees are not subject to arbitration, but because a PAGA plaintiff compelled to arbitration lacks standing to adjudicate the remaining non-individual PAGA claims, the remaining PAGA claims should be dismissed.
- Clients are strongly encouraged to examine their arbitration agreements and revise them to permit compelling arbitration of individual PAGA claims, while ensuring the agreement has severability language, which the Court found compelling in its decision.
1 Littler represented Viking River Cruises, Inc., in this case.
2 Senate Bill 1809 (establishing that as a precondition to bringing a civil action under PAGA, an aggrieved employee would have to comply with specified procedural and administrative requirements, including giving written notice to the LWDA and the employer).
3 Assembly Bill 1506 (providing an employer with the right to cure an alleged violation of failing to provide on a pay stub the inclusive dates of the pay period (Labor Code section 226(a)(6)) and the name and address of the legal employer (Labor Code section 226(a)(8)) before an employee may bring a civil action seeking PAGA penalties); Senate Bill 836 (mandating online PAGA filings and transmission of all items submitted to the LWDA, as well as a $75 filing fee for new case notices and expanding the LWDA’s investigative period of new cases from 30 to 60 days); Assembly Bill 1654 (excluding construction workers from PAGA when covered by a collective bargaining agreement).
4 59 Cal. 4th 348 (2014).
5 Iskanian, 59 Cal. 4th at 383-389.
6 Kim v. Reins, 9 Cal. 5th 73, 86-87 (2020).
7 Only Justice Thomas dissented from the opinion.
8 Indeed, mere hours after the Supreme Court’s opinion, one California senator signaled he is preparing language to get around the standing issue. Any such proposed legislation will no doubt be vigorously opposed by business groups.