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On June 15, 2022, the Supreme Court of the United States issued its highly anticipated decision in Viking River Cruises, Inc. v. Moriana, 596 U.S. ___, 142 S.Ct. 1906 (2022), pertaining to the arbitrability of representative actions under California’s Private Attorneys General Act (“PAGA”) [Cal. Lab. Code, §§ 2698, et seq.]. Unfortunately, the Supreme Court injected a greater degree of uncertainty to the claims than previously existed, even though the decision offered a modicum of relief to employers who have been overwhelmed by the expense of defending and settling these actions. As discussed below, the California Supreme has now decided to add its voice to the matter.
Viking River Cruises
The facts of Viking River Cruises, Inc. v. Moriana are straightforward. The employer prepared an arbitration agreement for its California employees whereby the employees waived their right to bring or participate in a representative action under PAGA. Moriana, a Viking employee who signed such an agreement, tried to sue Viking under PAGA. Viking sought to dismiss the PAGA action on grounds that Moriana had contractually waived her right to bring or participate in the PAGA action. Viking lost at every stage of the action, including in its attempt to obtain review at the California Supreme Court. Viking then sought review with the United States Supreme Court and was granted certiorari.
How does PAGA work?
The California Labor and Workforce Development Agency (“LWDA”) is a policing agency for California’s wage and hour laws. As a budgeting stop-gap to LWDA, PAGA created a scheme to “deputize” private citizens (dubbed, “aggrieved employees”) to sue their employers as a representative for their co-workers to collect statutory fines on behalf of LWDA. Aggrieved employees receive a “bounty” of 25% of any recovered civil penalties, and 75% is paid to LWDA. Aggrieved employees are entitled to collect their attorney’s fees and costs of suit on top of the civil penalties assessment.
The Labor Code provisions that are subject to civil penalties include not just minimum wage and overtime laws, but also such minutiae as which line items appear on a paycheck stub, which records employers keep and for how long, whether employees receive all their paid, 10-minute rest breaks, and whether employees’ business expenses have been fully reimbursed. Numerous violations are subject to civil penalties. See Lab. Code, § 2699.5. After compounding these penalties for each employee and each pay period, the threat posed to small businesses by such a lawsuit can be existential.
Arbitrability of Wage and Hour Claims in California Pre-Viking River Cruises
Since 2011, SCOTUS has consistently held that arbitration agreements are enforceable under the Federal Arbitration Act (“FAA”) [9 U.S.C. §§ 1, et seq.], except on grounds that are applicable to any contract, such as fraud and unconscionability, and where the workers fall within a narrow exception within the FAA. Accordingly, state laws that purport to prohibit arbitration of certain kinds of claims are not valid if the arbitration agreement is enforceable under the FAA.
California has several statutes on the books that purport to limit the ability of employers to require arbitration of certain employment claims. See, e.g., Lab. Code, § 229 [“Actions to enforce the provisions of this article for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate.”]. That said, so long as the employer’s arbitration agreement may be enforced through the FAA, the FAA preempts California law.
SCOTUS has previously ruled that a provision in an arbitration agreement that waives the right to bring or participate in class actions was enforceable under the FAA. California employers have attempted to prepare private arbitration agreements to have their employees “waive” their right to participate in PAGA actions, only to be rebuffed by the California state courts. Indeed, the California Supreme Court had reasoned, in Iskanian v. CLS Transportation Los Angeles, LLC, that since the primary right of action belongs to the State, and the State is not a party to the arbitration agreement between the employer and employee, there was no effective agreement to arbitrate those PAGA claims.
SCOTUS RE-WRITES PAGA
SCOTUS’ decision in Viking River Cruises effectively rewrote PAGA rather than simply preempting the entire statutory scheme. In Viking River Cruises, the Supreme Court differentiated between “individual claims” and “non-individual claims” for employees suing as a “representative” of the “aggrieved employees.” “Individual claims” are those where the lead plaintiff in the PAGA action may have directly experienced the Labor Code violations—for instance, missed rest breaks and inaccurate wage statements, which may result in assessment of civil penalties of up to $200 per pay period in which he or she was not properly compensated with appropriate wage premiums. Other employees within the same company may have suffered totally different Labor Code violations. Under PAGA, the lead plaintiff is still able to sue the employer to impose civil penalties on behalf of those aggrieved employees as well, even though the plaintiff did not suffer those violations. The Supreme Court referred to these claims as “non-individual claims.”
The Court’s distinction between the “individual” and “non-individual” claims comes into play when the lead plaintiff signs an arbitration agreement that is enforceable under the FAA and waived the right to bring or participate in representative actions under PAGA. The Court held that the lead plaintiff’s “individual” PAGA claims are subject to arbitration under the FAA. At the same time, provided the arbitration agreement includes a “severability” clause, which severs any portion of the agreement to the extent it is not legally enforceable, the Court also held “non-individual” claims brought on behalf of the other aggrieved employees were not pre-empted by the FAA and theoretically could survive a motion compelling arbitration of the individual claims if the lead plaintiff has standing to sue for such claims.
Because PAGA requires all claims to be adjudicated collectively in a single suit, however, once a lead plaintiff’s individual PAGA claims are moved into arbitration, the Court concluded that he or she has no standing to maintain the action to prosecute the non-individual PAGA claims. Therefore, in Viking River Cruises, when the lead plaintiff’s PAGA claims were sent to arbitration, she lost standing to pursue the “nonindividual claims,” and those claims were dismissed.
Unfortunately, it appears that the Viking River Cruises decision does not provide a complete resolution of the arbitrability controversy. To the contrary, the Supreme Court has effectively invited the California legislature to try to amend PAGA to provide standing to private citizens who have not suffered a legal violation to sue employers for recovery of civil penalties. The California Supreme Court, however, may beat the legislature to the punch. The California Supreme Court recently granted review to Adolph v. Uber Technologies, Inc., on the question as to whether an aggrieved employee who has been compelled to arbitrate claims under PAGA that are “premised on Labor Code violations actually sustained by” the aggrieved employee maintains standing to pursue “PAGA claims arising out of events involving other employees” in court or in any other forum the parties agree is suitable. We may expect a decision from the California Supreme Court on that issue sometime in 2023.
California employers who are concerned about the risks of PAGA exposure would be wise to revisit their personnel policies to decide whether creating an arbitration agreement, or revising their existing arbitration agreements, would be a worthwhile endeavor. Those agreements must be re-written to include arbitration of PAGA claims and an appropriate severability provision that will be flexible with further adjustments to the scope of PAGA arbitrability with the issuance of future case law. We would be happy to work with our clients to review and update their policies and consult on the advisability of adopting an employment arbitration agreement to mitigate the risks posed by PAGA.