UPDATE YOUR ARBITRATION AGREEMENTS

In a ruling that is highly favorable to California employers, the United States Supreme Court has determined that employers can compel arbitration of an employee’s individual claims regarding labor code violations, including individual claims under California’s Labor Code Private Attorneys General Act of 2004 (PAGA).  In Viking River Cruises v. Moriana, the Supreme Court pre-empted a California rule that allowed an employee to retain the right to a trial in court with respect to PAGA claims, even if the employee had signed an arbitration agreement.

In PAGA claims, individual employees can sue a former employer as an agent of the state.  These are representative claims that encompass violations that happened not only to the plaintiff, but also to “similarly aggrieved” employees other than the plaintiff as well.  Accordingly, PAGA claims can be costly because they aggregate claims of an entire group of employees together.  PAGA penalties can be steep, as there is a penalty for violating PAGA in the amount of $100 for each aggrieved employee per pay period for the initial violation and $200 for each aggrieved employee per pay period for each subsequent violation.

Specifically, in Viking River Cruises v. Moriana, the United States Supreme Court held that the Federal Arbitration Act (FAA) pre-empts the California Supreme Court’s ruling in Iskanian v. CLS Transp., which invalidated contracts that waive an individual’s right to file lawsuits alleging PAGA claims.  While the Supreme Court did not nullify the right to sue in a representative capacity altogether, it ordered the plaintiff’s individual claims to arbitration and then ordered the dismissal of the plaintiff’s representative claims in court.  This is because once the plaintiff’s individual claims were ordered to arbitration, the plaintiff lost standing to sue under PAGA on behalf of others in a representative capacity in court.  As a result, an agreement to arbitrate claims eviscerates an employee’s right to bring representative claims in court because the employee has agreed to arbitrate individual claims, and thus lacks standing to bring claims on behalf of the employee and others in court.

Employers should therefore review their current arbitration agreements and/or implement arbitration agreements.  Many previously drafted arbitration agreements carved out PAGA claims based on California authority which has now been pre-empted.  These carve-outs should be removed.  Employers should ensure that arbitration agreements mandating all claims, including those under PAGA, are in place.  However, note that as of now, Assembly Bill 51, which prohibits mandatory arbitration agreements as a condition of employment, is still in effect, although it remains under challenge.

ERICA M. SOROSKY esorosky@ptwww.com (949) 851-7271	ERIN K. OYAMA eoyama@ptwww.com (949) 851-7288