Big News for California Employers: Arbitration of PAGA Claims?

June 2022

In a long awaited decision, the U.S. Supreme Court has finally addressed whether the Federal Arbitration Act (“F.A.A.”) pre-empts waivers of claims under the California Private Attorney General Act of 2004 (“PAGA”)[1]. The Court specifically decided the case of Viking River Cruises, Inc. v. Moriana (“Viking”) on June 15, 2022. The Court held that California’s rule prohibiting waivers of an employee’s right to bring a PAGA claim in an arbitration agreement is pre-empted insofar as the prohibition precludes PAGA plaintiffs from litigating PAGA into individual or representative components.

In the underlying lawsuit, the respondent, Moriana, filed a PAGA action against her employer, Viking Cruises (“Viking”), alleging various violations of the California Labor Code. Viking moved to compel arbitration based on the arbitration agreement Moriana signed. The trial court denied Viking’s motion based on the California Supreme Court’s decision in Iskanian v. CLS Transp., Los Angeles, LLC (2014) 59 Cal.4th 348, 380 (“Iskanian”), which held that categorical PAGA waivers are contrary to public policy, and PAGA claims cannot be split into “individual” and “representative” claims for the purpose of arbitration. The California Court of Appeal later affirmed the trial court’s decision, which led to an appeal to the U.S. Supreme Court.

On appeal, Moriana argued that Iskanian’s holding was not inconsistent with the F.A.A. because it did nothing more than prohibit waiver of a “substantive” cause of action and thus the prohibition of PAGA waivers did not infringe on the right to arbitration.

In contrast, Viking argued that PAGA was similar to a class or collective action, which can be compelled to arbitration.

The Supreme Court rejected both Moriana’s and Viking’s characterizations of PAGA. In doing so, the Court held that PAGA actions were not like class actions where a representative plaintiff’s individual claims were used as a basis to adjudicate the claims of multiple parties at once (instead of through separate lawsuits). Rather, the Supreme Court held that PAGA plaintiffs represent a principal (the Labor Workforce Development Agency)[2] and can assert a number of claims on behalf of the state. As a result, the Court reasoned that the procedural mechanisms that render class actions ill-suited to bilateral arbitration--such as class certification, notice to the class, etc.--do not apply to PAGA.

The Court further held that because PAGA was unlike a class or collective action, the F.A.A. did not per se require enforcement of a waiver of PAGA in an arbitration agreement.

However, the Court held that the procedural structure of PAGA, which enables a plaintiff to add claims on behalf of other employees, and the F.A.A were inconsistent. To that end, the Court held that the PAGA plaintiff’s ability to introduce claims of other employees could require the parties to arbitrate a claim that they did not consent to, such as in the case where the parties agreed to individual arbitration. The Court additionally held that application of the Iskanian rule would prevent employers from arbitrating a single employee’s PAGA claim, and thus, coerce employee into withholding PAGA claims from arbitration in violation of the F.A.A.

Based on this reasoning, the Court ruled that Viking was entitled to compel individual arbitration of Moriana’s individual PAGA claim. The Court also determined that because PAGA does not provide a mechanism for the court to adjudicate representative PAGA claims once the individual claim has been committed to a separate proceeding (such as arbitration), that Moriana lacked standing to maintain her representative claims. Accordingly, Moriana’s representative PAGA claims were subject to dismissal.

Impact on California Employers

Today’s decision has made it clear that a carefully drafted arbitration agreement can be used to waive representative PAGA claims, which can reduce an employer’s liability for civil penalties considerably.

The potential exposure from an individual PAGA action from a single plaintiff will be significantly less than the potential exposure from a representative action involving hundreds or even thousands of employees. Viking, however, is not likely to be the final word regarding the enforceability of PAGA waivers in employee arbitration agreements and there is likely to be significant litigation interpreting Viking’s holding.

Moving forward, it is also possible that the California Legislature may amend PAGA to include language providing for the separate prosecution of individual and representative claims in order to circumvent Viking’s holding. At the same time, there are current efforts underway to amend PAGA though a ballot initiative called The California Fair Pay and Employer Accountability Act. If this ballot measure is adopted and passes (in the November 2022 election), private plaintiffs may be significantly limited in their ability to prosecute PAGA claims. Thus, we are likely to see considerable developments regarding PAGA over the next year.

Please reach out to the authors or your trusted employment counsel for additional guidance and recommendations given this recent decision.

[1] PAGA, Labor Code section 2699, subdivision (a), allows “aggrieved employees” to pursue civil actions to recover any penalties that the Labor and Workforce Development Agency is authorized to assess and collect. An “aggrieved employee” is defined as any employee “against whom one or more of the alleged violations was committed.” (Lab. Code § 2699(c).) PAGA also permits employees to recover civil penalties on behalf of each “aggrieved employee” on a per pay period basis. (Labor § 2699(e)(1),(f)(2).)

[2] The Labor and Workforce Development Agency is the state agency that enforces the California Labor Code.