California and Federal Courts Continue Their Battle Over PAGA Arbitration

On July 22, 2022, the California Supreme Court agreed to review a lower court’s decision denying a request by Uber Technologies Inc. to enforce an arbitration agreement for Private Attorneys General Act (“PAGA”) claims filed by a driver. In April, a California Court of Appeals refused to enforce arbitration of the PAGA claims. However, the U.S. Supreme Court later issued an opinion which Uber believes contradicts the April ruling.

On June 15, 2022, the Supreme Court decided Viking River Cruises, Inc. v. Moriana, holding that the Federal Arbitration Act (“FAA”) preempts a rule of California law voiding agreements to arbitrate only an employee’s individual claims under California’s PAGA. PAGA permits employees to sue their employers for Labor Code violations on behalf of themselves and other employees as representatives of the California Labor and Workforce Development Agency (“LWDA”).

While PAGA cases are similar to class actions in many ways, there are important differences which have led to significant litigation in California and federal courts. One key dispute is whether an employee can waive their right to file PAGA cases in court despite signing an arbitration agreement with their employer. The California Supreme Court previously held in Iskanian v. CLS Transportation that employment arbitration agreements in which an employee waived their right to file a representative action under PAGA were invalid.

The U.S. Supreme Court overruled Iskanian to the extent it barred so-called “PAGA waivers” in representative actions. According to the Court, the FAA grants employees and employers the right to determine which issues they will agree to arbitrate. While the FAA does not preempt Iskanian’s prohibition on “wholesale waivers” of PAGA claims, it does preempt Iskanian’s rule that PAGA actions cannot be divided into “individual” and “non-individual claims.” In other words, an agreement to arbitrate an employee’s individual PAGA is valid.

The effect of the ruling is to allow employees to waive their right to file PAGA representative actions. This occurs because PAGA requires the representative employee to be “aggrieved” or affected by employer Labor Code violations. However, if an employee agrees to arbitrate their individual claims, they will no longer he “aggrieved” and cannot represent other employees.

As noted by Justice Sotomayor in her concurring opinion, there is a pathway for California to give standing for a representative PAGA action to employees who agreed to arbitrate their individual claims. Given the history of California’s legislature and courts expanding the rights of employees to litigate claims against employers, there is a high probability the state will act in this regard. For now, employers are free to add class-action and PAGA waivers to their employment arbitration agreements. However, the enforceability of such agreements may change depending on the California Supreme Court’s decision or new legislation.

A copy of Viking River Cruises, Inc. v. Moriana can be found here.

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