The U.S. Supreme Court Hands Employers a Victory on Arbitration of PAGA Disputes
Posted June 17, 2022

On June 15, 2022, the United States Supreme Court ruled 8-1 in favor of the employer in Viking River Cruises, Inc. v. Moriana, holding that Viking River was entitled to enforce its arbitration agreement and compel a former employee to arbitrate her claims for individual wage and hour violations brought under the California Labor Code Private Attorneys General Act (“PAGA”). The Court also held that once the former employee’s individual claims were subject to arbitration, she no longer had standing to pursue her PAGA representative action on behalf of other aggrieved employees, resulting in the dismissal of those claims.

Unfortunately, the Court did not go so far as to find that broad PAGA waivers as a whole are permissible or enforceable in all arbitration agreements, but the practical outcome of Viking River was the same. For now, the opinion opens the door for employers with valid arbitration agreements to compel arbitration of individual California Labor Code claims brought under PAGA, and to seek dismissal of any remaining representative PAGA claims brought on behalf of other employees. Notably, the ability to take advantage of the case will depend on whether the employer’s arbitration agreement is enforceable and contains language similar to that found persuasive by the Court in Viking River

PAGA Lawsuits and Arbitration Agreements

PAGA, often referred to as the “Sue Your Boss” law, allows individual employees claiming at least one violation of the California Labor Code to bring suit as a proxy of the State of California (and on behalf of all other allegedly aggrieved employees) and recover penalties from their employers. These penalties are awarded per aggrieved employee, per pay period and, depending on the number of employees allegedly affected, may reach millions of dollars. PAGA also allows for the plaintiff employee’s recovery of attorney fees and litigation costs.

In 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles that the right to bring a PAGA action could not be waived prospectively in an arbitration agreement. Subsequently, in Sakkab v. Luxottica Retail North America, Inc., the Ninth Circuit agreed with the California Supreme Court and held that the Federal Arbitration Act (“FAA”) did not preempt Iskanian’s holding, because the FAA preempts only those state laws that disfavor the enforcement of arbitration agreements, which would be contrary to the FAA’s purpose.

Since these cases, federal and California state courts have regularly held that Iskanian prevents employers from compelling arbitration of any aspect of PAGA claims. During the same time period, the California Supreme Court also denied several employers’ petitions for certiorari seeking clarity as to the FAA’s potential preemption of the Iskanian case.

The Viking River Case

In Viking River, the employee and Viking River entered into an arbitration agreement purporting to waive PAGA-type representative actions along with class actions. The agreement further provided that if all or any portion of the waiver was found to be invalid, those claims would be litigated in court. Thereafter, the employee filed wage and hour claims through PAGA, including representative claims against Viking River. Viking River moved to compel arbitration of the PAGA claims.

As expected, the California courts denied Viking River’s attempt to compel arbitration. The courts held that broad waivers of PAGA standing were contrary to California law and policy (as set forth in Iskanian) and stated that PAGA claims could not be split into “individual” claims that can be arbitrated and “representative” claims that cannot be arbitrated. Viking River continued to appeal and the case eventually made its way to the United States Supreme Court, resulting in the Court’s June 15, 2022 decision.

At issue before the United States Supreme Court was the question of whether the FAA “…preempts a rule of California law that invalidates contractual waivers of the right to assert representative claims under California’s Private Attorneys General Act.” In its opinion, the Court stated that although the FAA does not necessarily preempt the ban on blanket PAGA waivers found in Iskanian, the FAA does preempt California opinions holding that PAGA actions cannot be divided into separate individual and non-individual claims through an otherwise valid arbitration agreement. The Court also held that, “PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding… [because] [w]hen an employee’s own dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit.”

Based on this decision, a California court can now determine under Viking River that an employee’s individual PAGA claims should proceed in arbitration (assuming the arbitration agreement includes the Viking River language allowing this result). Once the individual PAGA claims are compelled to arbitration, the plaintiff employee would no longer have standing to pursue the remaining representative PAGA claims, resulting in their dismissal.

The Future of Viking River in California

In her concurring opinion in Viking River, Supreme Court Justice Sotomayor stated that if the Court’s understanding of California law regarding PAGA standing is incorrect, the California courts may address that issue in an appropriate case, and if the Court’s understanding of PAGA standing is correct, the California Legislature can still change the scope of statutory standing under PAGA within state and federal constitutional limits. In other words, the door remains open for California to undermine this decision through its own court system or the Legislature.

Prior California case law highlights the risk that California may do just that: in Kim v. Reins International California, Inc., the California Supreme Court held that even when employees have already settled their individual wage and hour claims against an employer, they can maintain their status as an “aggrieved employee” under PAGA, finding that settlement does not negate that the violations occurred in the first instance and an employee’s standing to bring a PAGA representative action is based on the existence of those violations.

Next Steps for Employers

As addressed in LighGabler’s prior legal updates on arbitration issues under HR 4445 (click here), AB 51 (click here), and Chamber of Commerce v. Bonta (click here), and given the outcome of Viking River, the law surrounding arbitration and the enforceability of such agreements remains very much in flux. Employers who wish to use arbitration agreements in the workplace are strongly advised to consult with their employment counsel immediately and on a regular basis regarding implementing, reviewing or modifying their arbitration agreements to comply with these ongoing case law developments.

For questions regarding arbitration agreements or to address other employment law issues, contact the attorneys at LightGabler.

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