Not All PAGA Claims Are Exempt from Arbitration, Court Holds
Today, a California Court of Appeal issued a published decision holding that an employer was entitled to an order compelling arbitration of a PAGA representative action to the extent the PAGA claim sought relief including “unpaid wages” under Labor Code section 558. By way of background, over the last few years, instead of filing class actions seeking damages under various Labor Code provisions, plaintiffs’ attorneys have begun abandoning those claims and instead alleging only a single claim under PAGA, but seeking penalties for violation of numerous other Labor Code provisions. In this way, they bootstrap violations of various Labor Code provisions into a single claim for penalties under PAGA. The reason they do this is to avoid getting ordered to arbitration. More and more employers have arbitration agreements with their employees that require employment disputes to be arbitrated on an indvidual basis, and California courts have upheld the enforceability of these agreements. However, the California Supreme Court has held that PAGA claims are not subject to arbitration. Thus, in an effort to avoid arbitration, plaintiffs’ lawyers allege a single, representative PAGA claim, rather than a host of “class” Labor Code claims. This allows them to maintain a “representative” wage and hour action in court, rather than in arbitration. The downside of this approach, however, is that PAGA provides only for civil penalties and, as a result, a PAGA plaintiff cannot seek all of the same “damages” that typically would be sought in a claim under the Labor Code. Plaintiffs’ attorneys have found one way around this problem – Labor Code section 558. Labor Code section 558 provides that an employer who violates certain provisions of the Labor Code and/or any provision regulating hours or days of work in any Industrial Welfare Commission Wage Order is subject to “civil penalties” of between $50 and $100 per pay period for each underpaid employee, “plus an amount sufficient to recover unpaid wages.” The statute further provides that any wages recovered shall be paid to the affected employee. Seizing on this loophole, Plaintiffs’ attorneys often file PAGA-only lawsuits that seek civil penalties, including the “unpaid wages” provided for under Labor Code section 558.
This is precisely what happened in Esparza v. K.S. Industries, LP. The plaintiff filed a single cause of action under PAGA, alleging violation of 16 different Labor Code provisions on behalf of all similarly aggrieved employees, based on K.S. Industries’ alleged failure to pay all minimum wage and overtime wages owed, failure to provide meal and rest breaks, failure to timely pay wages, failure to provide complete and accurate wage statements, and failure to reimburse business expenses. The relief sought included civil penalties and an amount sufficient to recover unpaid wages pursuant to Labor Code section 558. The employer moved to compel arbitration, but the trial court denied the motion. However, the Court of Appeal agreed with the employer that arbitration was appropriate and reversed the trial court’s ruling.
The Court of Appeal reasoned that a PAGA claim is only excepted from an otherwise enforceable arbitration agreement to the extent it is a claim seeking civil penalties that would be payable in part to the State of California. [Civil penalties awarded under PAGA are payable 25% to the plaintiff and 75% to the State.] However, to the extent that a “PAGA” claim also seeks unpaid wages that are individual in nature and payable entirely to the affected employee(s), that portion of the claim is subject to arbitration under the terms of an arbitration agreement between an employee and the employer. The court suggested that because the Plaintiff’s complaint included claims for unpaid wages under Labor Code 558, these claims would be subject to arbitration and the non-arbitrable PAGA claims would be stayed pending completion of the arbitration – unless, on remand, the Plaintiff was willing to waive the right to recover unpaid wages, leaving nothing but a true PAGA claim.
This is a significant and favorable development for employers litigating wage and hour actions in California. The full text of the court’s decision is available here.