California Supreme Court Upholds Enforceability of Class Waivers in Arbitration Agreements, But Not PAGA Waivers
Today the California Supreme Court issued its much-anticipated opinion in Iskanian v. CLS Transportation, addressing the post-AT&T Mobility v. Concepcion enforceability of class and representative action waivers in employment arbitration agreements under California law. The decision is a mixed bag for California employers. On the positive side, the Court held, consistent with Concepcion, that class action waivers are enforceable. The Court also held that class and collective action waivers do not categorically violate the National Labor Relations Act (“NLRA”) (rejecting the NLRB’s D.R. Horton analysis). That’s the good news. The bad news is that the Court held that PAGA representative action waivers in arbitration agreements are not enforceable. Thus, through properly drafted arbitration agreements, employers effectively can prevent class claims alleging wage and hour violations, but cannot prevent piggy-back “representative” claims brought under PAGA and, under the Court’s reasoning, the employee must be permitted to pursue his or her representative PAGA claim in some forum.
Class Waiver Provisions Are Enforceable
Prior to today’s decision in Iskanian, the California Supreme Court took the position that class waivers in employment arbitration agreements are “sometimes” enforceable. The test for determining enforceability was set forth by the Court in 2007 in Gentry v. Superior Court, 42 Cal.4th 443, 463-64:
“When it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider the [following] factors [ ]: the modest size of the potential recovery, the potential for retaliation against members of the class, the fact that absent class members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration. If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘vindicate [their] unwaivable rights in an arbitration forum.’”
Application of the Gentry factors resulted in many trial courts invalidating class waiver provisions in arbitration agreements in wage and hour cases. Today the California Supreme Court held that Gentry was effectively overruled by Concepcion and is preempted by the Federal Arbitration Act (“FAA”). As a result, class action waivers in employment arbitration agreements are now generally enforceable under California law.
Class Waiver Provisions Do Not Categorically Violate the NLRA
Plaintiff Iskanian alternatively argued that the class action waiver in his arbitration agreement was unenforceable because it violated his rights under the NLRA. Iskanian relied on the NLRB’s decisions in D.R. Horton and related cases, in which the NLRB reasoned that class waiver provisions prohibit employees from engaging in collective concerted activity for mutual aid and protection, and that the right to do so is guaranteed by the NLRA. The California Supreme Court (like the majority of courts that have addressed the issue) rejected the NLRB’s reasoning and held that the class waiver provision in this case did not run afoul of the NLRA. Notably, the Court carefully limited its holding to the specific arbitration agreement before it, suggesting that in some other factual contexts a class waiver might violate the NLRA:
“Notably, while upholding the class waiver in Horton II, the Fifth Circuit affirmed the Board’s determination that the arbitration agreement at issue violated section 8(a)(1) and (4) of the NLRA insofar as it contained language that would lead employees to reasonably believe they were prohibited from filing unfair labor practice charges with the Board. Moreover, the arbitration agreement in the present case, apart from the class waiver, still permits a broad range of collective activity to vindicate wage claims. CLS points out that the agreement here is less restrictive than the one considered in Horton. The arbitration agreement does not prohibit employees from filing joint claims in arbitration, does not preclude the arbitrator from consolidating the claims of multiple employees, and does not prohibit the arbitrator from awarding relief to a group of employees. The agreement does not restrict the capacity of employees to ‘discuss their claims with one another, pool their resources to hire a lawyer, seek advice and litigation support from a union, solicit support from other employees, and file similar or coordinated individual claims.”
The Court stated: “We have no occasion to decide whether an arbitration agreement that more broadly restricts collective activity would run afoul of section 7 [of the NLRA].”
PAGA Representative Action Waivers Are NOT Enforceable
The agreement at issue in Iskanian included not only a waiver of class claims in arbitration, but also a waiver of “representative” claims. The representative claim alleged by the plaintiff in Iskanian was a PAGA claim. The Court thus considered whether a waiver of representative claims under PAGA was enforceable. The Court’s answer? No. The Court reasoned that the employee’s right to bring a PAGA action is an unwaivable statutory right because that statute is intended for public benefit (collecting penalties for wage and hour violations that could otherwise be pursued by a public agency) and an individual cannot, by private agreement, waive that public benefit. “The PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state’s interests in enforcing the Labor Code an in receiving the proceeds of civil penalties used to deter violations. Of course, employees are free to choose whether or not to bring PAGA actions when they are aware of Labor Code violations. But it is contrary to public policy for an employment agreement to eliminate this choice altogether by requiring employees to waive the right to bring a PAGA action before any dispute arises.”
The employer argued that because the arbitration agreement only prohibits representative claims, not individual PAGA claims, it does not result in any improper waiver of the right to bring a PAGA action. The plaintiff argued that PAGA claims can only be brought as representative claims. Without deciding whether or not an individual claim is permissible under PAGA, the Court held that the provision was unenforceable regardless because “a prohibition of representative claims frustrates the PAGA’s objectives.” As such, the Court held that “where an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.”
The Court acknowledged that a state law rule may not be enforced if it is preempted by the FAA. However, the Court held that its rule against PAGA waivers does not frustrate the FAA’s objectives and, therefore, is not preempted by the FAA. The Court reasoned that the FAA’s objective is to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action effectively is a public dispute between the employer and the state Labor and Workforce Development Agency. “We conclude that California’s public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the Labor and Workforce Development Agency’s interest in enforcing the Labor Code, does not interfere with the FAA’s goal of promoting arbitration as a forum for private dispute resolution.”
So What Now?
The Court did not resolve how the action would proceed on remand, given that some claims were subject to arbitration while the PAGA claim was not. “This raises a number of questions [on remand]: (1) Will the parties agree on a single forum for resolving the PAGA claim and the other claims?” (2) If not, is it appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation? (3) If such bifurcation occurs, should the arbitration be stayed pursuant to Code of Civil Procedure section 1281.2? The parties have not addressed these questions and may do so on remand.”
As noted above, the Iskanian decision is mixed news for California employers. It remains to be seen whether CLS will seek review of the Court’s PAGA-related ruling before the United States Supreme Court. In the meantime, California employers should review their arbitration agreements to optimize enforceability in light of today’s decision. Among other things, employers should ensure that their agreements contain class waiver language if they do not already. The agreements should also include some language making clear that employees retain the right to file administrative charges with the NLRB and that the agreement is not intended to prohibit their exercise of rights under the NLRA. Employers should also ensure that their agreements contain a severability clause and provision for what happens in the event of bifurcated claims with some proceeding in arbitration and others in court. The full Iskanian opinion is available here.