California Supreme Court on Arbitration Agreements: Class-Action Waivers OK, but PAGA Claims Unwaivable

This week, the California Supreme Court issued its highly anticipated opinion in Iskanian v. CLS Transportation Los Angeles, LLC. The decision was a partial victory for employers: the Court clarified that class-action waivers in arbitration agreements may be enforced, but it also held that employers cannot obtain the waiver of an employee’s right to bring a “representative” claim under California’s Private Attorney General Act of 2004 (PAGA).

Iskanian resolved a split amongst California courts as to whether the U.S. Supreme Court’s 2011 ruling in Concepcion v. AT&T Mobility overruled an earlier California case – Gentry v. Superior Court – that said courts could evaluate class-action waivers on a case-by-case basis. The Iskanian Court addressed whether the Federal Arbitration Act (FAA) allowed state courts to refuse to enforce arbitration agreements in order to promote important state interests, such as California’s wage-and-hour laws. The plaintiff in Iskanian argued wage claims were cost-prohibitive for an individual to bring, so class actions were needed to enforce California’s unwaivable labor rights.

The California Supreme Court concluded that the FAA trumps these state-law interests. Because the FAA mandates the enforcement of legal arbitration agreements, California labor laws cannot require procedures that are “incompatible with arbitration.” Therefore, California courts are not free to rely on public policy to reject class action waivers. The Court also rejected the argument that class action waivers violated employees’ rights to engage in “concerted activity” under National Labor Relations Act.

The case was not a total win for employers, however, as the Court determined that employees cannot waive the right to bring claims under the PAGA. Iskanian held that the FAA’s purpose is to preserve arbitration’s “efficient forum for the resolution of private suits.” PAGA “deputizes” employees so they can assert claims for civil penalties on behalf of the state of California. Since PAGA claims are not “private suits” but state enforcement claims, the Court reasoned, the FAA does not apply and an employee’s waiver of rights to pursue PAGA claims on behalf of other employees is not enforceable.

What This Means

Iskanian allows employers to include class action waivers in arbitration agreements. To be enforceable, these agreements still must comply with existing legal standards including mutuality, allocation of costs, and preservation of statutory rights to attorneys’ fees.

However, it is now established that such class action waivers cannot include a waiver of an employees’ right to bring PAGA claims. Therefore, employees with valid arbitration agreements can still seek civil penalties for Labor Code violations, and they can do so on behalf of themselves and all other allegedly aggrieved employees. As a result, employers with valid class action waivers in arbitration agreements could find themselves litigating wage claims in two separate forums.

The potential of parallel wage claims is a new wrinkle in this area. Employers should consider this along with all the other pros and cons of arbitration agreements, and ensure that their agreements do not otherwise violate California law against unconscionable contracts.

by Matthew R. Jedreski and Fred M. Plevin.

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