The California Supreme Court Concedes at Last: Class Action Waivers in Arbitration Agreements are Valid, but PAGA (The "Sue Your Boss" Law) Waivers Are Not.

Does your company’s arbitration agreement contain a class action waiver? It should. Does that waiver extend to Private Attorney General Act claims? It shouldn’t.

In Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court “cried uncle” by holding that the Federal Arbitration Act (FAA) and recent United States Supreme Court decisions preempt prior California case law banning the use of class action waivers in arbitration agreements. The Court specifically overruled its own holding in Gentry v. Superior Court, in which it had declined to enforce a class action waiver in arbitration agreements based upon public policy and unconscionability concerns. Changing its tune, the California Supreme Court stated in Iskanian, “… the FAA does prevent states from mandating or promoting procedures incompatible with arbitration. The Gentry rule runs afoul of this latter principle. We thus conclude in light of Concepcion that the FAA preempts the Gentry rule.” With this change of heart, if you previously removed a class action waiver from your arbitration agreement out of concern that a California court could invalidate the entire agreement on that basis, it’s time to put it back in.

A caveat to keep in mind as you draft your class action waiver: the Iskanian Court pushed back against the United States Supreme Court by holding that “representative actions” under the Private Attorney General Act (“PAGA”) cannot be waived through arbitration agreements. “Simply put, a PAGA claim lies outside the FAA‘s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents — either the Labor and Workforce Development Agency [LWDA] or aggrieved employees — that the employer has violated the Labor Code.”

This splitting of hairs will likely cause at least a minor uptick in the frequency of PAGA claims asserted by employees against employers. In our experience, however, PAGA claims are typically less attractive to plaintiffs’ attorneys (and the plaintiffs themselves) for two reasons: (1) 75 percent of any PAGA “civil penalty” recovery goes directly to the state via the LWDA, leaving the attorney and plaintiff to divide the remaining 25 percent; and (2) PAGA claims are subject to the one-year statute of limitations for penalty claims, as opposed to the more robust two, three or four year statutes of limitation typically governing other wage and hour type claims.

For questions regarding arbitration agreements or any other employment law issues, please contact any of our employment attorneys at LightGabler.