U.S. SUPREME COURT LIMITS ABILITY TO USE PAGA ACTIONS TO SIDESTEP ARBITRATION OBLIGATIONS
On June 15, 2022, the U.S. Supreme Court published its game-changing decision in Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1906, 2022 WL 2135491 (2022). The Supreme Court concluded in its 8 to 1 decision that the Federal Arbitration Act (“FAA”) aids employers with arbitration agreements to prevent representative claims based on the Private Attorneys General Act of 2004 (“PAGA”). The decision prevents plaintiffs’ attorneys from sidestepping employees’ agreements to arbitrate employment disputes by pursuing representative PAGA actions in court. It does allow an employee’s individual PAGA claim to be arbitrated.
The decision is expected to increase interest in the use of arbitration agreements as a means to prevent “shakedown” lawsuits, such as the cookie-cutter PAGA actions alleging identical claims against hundreds of employers. It accomplishes this outcome by invaliding a California decision that had allowed representative actions to proceed in court despite an employee’s agreement to arbitrate all disputes on an individual basis.
1. The California Supreme Court’s Iskanian Decision Is Preempted
By disagreeing with a 2014 decision of the California Supreme Court, Viking River Cruises shields employers from representative PAGA claims if they have well-drafted arbitration agreements containing class action waivers. The U.S. Supreme Court confirmed that an employee’s “individual PAGA claims” can be arbitrated if the employee either initiates arbitration that includes such claims or is directed by a court to arbitrate such claims on an individual basis. Thus, the Supreme Court determined that the plaintiff (Moriana) who brought a PAGA action against Viking River Cruises in court could be ordered to arbitrate her individual Labor Code claims, including her individual PAGA claim. It further determined that the pending enforcement action filed on behalf of other employees under PAGA should be dismissed.
a. PAGA Claims Are Not Indivisible
This holding rejected the conclusion of the California Supreme Court announced in its famous 2014 decision in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014). Iskanian held that employers cannot rely on class and representative action waivers to compel arbitration of PAGA claims on an individual basis because PAGA plaintiffs litigate as proxies on behalf of the state. Iskanian also viewed PAGA claims as indivisible claims that cannot be split so that an employee can arbitrate an individual PAGA claim while litigating the non-individual (“representative”) PAGA claim in court.
b. Individual vs. Representative Claims
The U.S. Supreme Court disagreed with the California Supreme Court over this key issue. It concluded that the FAA preempts Iskanian’s rule insofar as it precludes division of PAGA actions into individual and non-individual claims and thus prevents employees from pursuing their individual PAGA claims in arbitration. In other words, the Iskanian rule prohibiting the splitting of PAGA claims is preempted by federal law to the extent a plaintiff’s “individual PAGA claim” arising from a violation she alleges she personally suffered cannot be split off from the non-individual (“representative”) PAGA claims arising out of events involving other employees. Because that rule in Iskanian is preempted, Viking River Cruises was entitled to compel arbitration of Moriana’s individual PAGA claim. Further, because it determined the plaintiff lacked statutory standing to continue to maintain her non-individual claims in court, the Supreme Court reversed the judgment of the California Court of Appeal and concluded the correct course is to dismiss her remaining claims.
a. Viking’s Class Action Waiver And Severability Clause
Viking River Cruises, Inc. (“Viking”) is a company that offers ocean and river cruises around the world. When she was hired as a sales representative by Viking, Angie Moriana signed an agreement to arbitrate any dispute arising from her employment. The agreement contained a “Class Action Waiver” providing that in any arbitral proceeding, the parties could not bring any dispute as a class, collective or representative PAGA action. Significantly, it also contained a severability clause specifying if the waiver was found invalid, any class, collective or representative PAGA action would presumptively be litigated in court. But under the severability clause, if any “portion” of the waiver remained valid, it would be “enforced in arbitration.”
b. The PAGA Action
Despite the agreement, Moriana filed a PAGA action in state court after leaving her position. She alleged she was an aggrieved employee under PAGA because Viking failed to pay her final wages in a timely manner under the Labor Code. She also asserted an array of other Labor Code violations allegedly sustained by other employees, including minimum wage, overtime, meal period, rest period, pay stub and other claims. Notably, she did not claim she personally suffered each of these other violations.
Viking moved to compel arbitration of Moriana’s “individual PAGA claim” meaning the claim that arose from the violation she allegedly suffered. It also moved to dismiss her other PAGA claims. After the trial court denied the motion, the California Court of Appeal affirmed, holding that categorical waivers of PAGA standing are contrary to state policy. Critically, it also held that PAGA claims cannot be split into arbitrable individual claims and nonarbitrable “representative” claims.
3. Individual Claims Include Violations Sustained By The Plaintiff
In evaluating the preemption question before it, the U.S. Supreme Court found it important to distinguish “individual PAGA claims,” which are premised on Labor Code violations “actually sustained by the plaintiff,” from “representative” PAGA claims arising out of events involving other employees. The Supreme Court used the term “individual PAGA claim” to refer to claims based on Labor Code violations “suffered by the plaintiff.”
a. Iskanian Adopted Two Relevant Rules
The Supreme Court addressed two separate rules found in the Iskanian decision. It found that Iskanian’s “principal rule” prohibits waivers of “representative” PAGA claims. This rule prevents parties from waiving representative standing to bring PAGA claims in either a judicial or arbitral forum. But Iskanian also adopted a “secondary rule” that invalidates agreements to separately arbitrate or litigate “individual PAGA claims for Labor Code violations that an employee suffered,” on the theory that resolving victim-specific claims in separate arbitrations does not serve the deterrent purpose of PAGA.
b. Moriana Could Not Sidestep The Obligation To Arbitrate
The Supreme Court held that Iskanian’s prohibition against wholesale waivers of PAGA claims is not preempted by the FAA. The FAA thus did not preempt the “principal rule” prohibiting a waiver of PAGA standing. But Iskanian’s rule that PAGA actions cannot be divided into individual PAGA claims and non-individual (representative) claims is preempted, so Viking was entitled to compel arbitration of Moriana’s individual claim. After deciding that Moriana could not sidestep her obligation to arbitrate her individual PAGA claim concerning the payment of her final wages, the Court addressed what should occur with respect to Viking’s efforts to dismiss the non-individual (representative) claims she initiated based on alleged violations suffered by other employees.
4. Key Features Of The Supreme Court’s Decision
The Supreme Court summarized several features of its decision in its conclusion. They include the following rulings:
1. The FAA preempts the rule in Iskanian insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate. That holding compelled reversal of the California Court of Appeal’s decision.
2. Viking’s agreement purported to waive “representative” PAGA claims. Under Iskanian, this provision was invalid if construed as a wholesale waiver of PAGA claims. Because that aspect of Iskanian is not preempted by the FAA, the agreement remains invalid if it is interpreted in that manner.
3. But the severability clause in the agreement provides that if the waiver provision is invalid in some respect, any “portion” of the waiver that remains valid must still be enforced “in arbitration.” Based on this clause, Viking was entitled to enforce the agreement insofar as it mandated arbitration of Moriana’s individual PAGA claim – the claim based on Labor Code violations she allegedly suffered herself.
4. The lower California courts refused to enforce the agreement based on the Iskanian rule that PAGA actions cannot be divided into individual and non-individual claims. Because that rule is preempted, Viking is entitled to compel arbitration of Moriana’s individual PAGA claim.
5. The Supreme Court framed the remaining question by asking what the lower courts should have done with Moriana’s non-individual claims, which may not be dismissed simply because they are “representative.” The Supreme Court found that PAGA provides no mechanism enabling a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate arbitration proceeding.
6. Under PAGA’s standing requirement a plaintiff can maintain non-individual (representative) PAGA claims in an action only by virtue of also maintaining an individual claim in that action. Consequently, when 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.
7. Finally, because Moriana lacks statutory standing to continue to maintain her non-individual claims in court, the correct course is to dismiss her remaining claims.
5. The California Legislature And Courts May Get Involved
Many practitioners forecast future involvement of the California Legislature and courts. Justice Sotomayor’s concurring opinion in Viking River Cruises signaled the possibility of future developments. Her opinion observed that the “Court faithfully applies precedent to hold that California’s anti-waiver rule for claims under [PAGA] is pre-empted only ‘insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.’” However, she remarked that California is not powerless to address its sovereign concerns. While the FAA poses no bar to the adjudication of Moriana’s “non-individual” PAGA claims, PAGA itself “provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding.” Thus, Moriana lacks “statutory standing” under PAGA to litigate her “non-individual claims separately in state court.
However, the concurring opinion explained that is not necessarily the end of the story. Rather, California courts will have the last word in an appropriate case if the Supreme Court’s understanding of state law is wrong. Alternatively, even if the Supreme Court’s understanding is right, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits. Such a legislative change would probably apply prospectively, so it would only affect future cases.
6. Lessons Learned
Until that time occurs, employers with properly drafted arbitration agreements should be able to rely on Viking River Cruises to compel arbitration of an employee’s individual claims, including an individual PAGA claim arising from alleged Labor Code violations against that employee. They can also seek to dismiss or stay any non-individual claims asserted for different employees in court. It is predictable that the plaintiffs’ bar, which has a substantial financial interest in lobbying for PAGA actions, will seek legislative reform.
Employers with arbitration agreements should review those agreements, including their features regarding severability and the arbitration of individual PAGA claims, to make certain they reflect the teachings of Viking River Cruises. Likewise, employers who do not have such arbitration agreements may wish to discuss their potential value with experienced employment lawyers.
Employers should also monitor other activity in this area, such as the Ninth Circuit Court of Appeal’s rehearing in Chamber of Commerce v. Bonta, a case examining the validity of AB 51, anti-arbitration legislation enacted by the California Legislature in 2019. The federal district court concluded that AB 51 was likely preempted by the FAA. In a 2-to-1 decision, the Ninth Circuit disagreed and determined that some portions of AB 51 are not preempted, prompting the Chamber of Commerce to request a rehearing en banc. The Ninth Circuit issued an order in February 2022 noting that a majority of the panel agreed that consideration of the Chamber’s petition for rehearing en banc should be deferred until the Supreme Court decided Viking River Cruises. Further activity in the case is now anticipated.
7. PAGA Reform Initiative
In 2021, a proposed ballot initiative was drafted to replace PAGA with a new system that would discourage excessive litigation and provide a different and improved method for claim resolution that would allow employees to receive 100% of penalties recovered. The initiative, called the “California Fair Pay And Employer Accountability Act of 2022,” described its objective of eliminating shakedown lawsuits, producing quicker resolutions, avoiding prolonged and costly court cases, and providing penalties to workers, not lawyers or the state.
If approved, the initiative would amend Labor Code Sections 2698 – 2699 and several other statues, in order to replace current private attorney actions with employment enforcement exclusively in the hands of independent state regulators. The California Labor Commissioner’s office would handle violations, award penalties directly to employees, and eliminate PAGA’s litigation incentives that allocate 75% of penalties to the State of California while enabling plaintiffs’ attorneys to profit at the expense of employees and employers. It would not allow “stacking” penalties under separate Labor Code provisions.
Efforts to allow a vote on the ballot initiative in 2022 were delayed because of a timing issue relating to the ability of election officials to verify the collection of over 600,000 valid signatures. Those backing the measure reportedly will now seek to qualify the measure for the 2024 general election.
The Supreme Court described the primary issues in the case as whether the “premium” of an extra hour of pay for missed breaks constitutes “wages” that must be (1) reported on statutorily required pay stubs (called “wage statements”) during employment and (2) paid within statutory deadlines when an employee leaves the job. The court definitively concluded that the answer is yes. In fact, earned premiums must be reported even if they have not been paid. Although the extra pay is designed to compensate for the unlawful deprivation of a guaranteed break, “it also compensates for the work the employee performed during the break period.” The court determined that the extra pay thus serves the dual purpose of providing a remedy for the deprivation of breaks while simultaneously constituting wages subject to the same timing and reporting rules as other forms of compensation for work. It is anticipated that many employers will react to the decision by evaluating “auto-pay” systems that flag and trigger the payment and reporting of missed-break premiums in specific situations.To read more articles like this one, subscribe to the ALERT Newsletter today!
About The Author
Richard J. Simmons is a Partner in the law firm of Sheppard, Mullin, Richter & Hampton LLP in Los Angeles. He represents employers in various employment law matters involving litigation throughout the country and general advice regarding state and federal wage and hour laws, employment discrimination, wrongful discharge, employee discipline and termination, employee benefits, affirmative action, union representation proceedings, and arbitrations. Mr. Simmons received his B.A., summa cum laude, from the University of Massachusetts, where he was a Commonwealth Scholar and graduated in the Phi Kappa Phi Honor Society. He received his J.D. from Berkeley Law at the University of California at Berkeley where he was the Editor-in-Chief of the Industrial Relations Law Journal, now the Berkeley Journal of Employment and Labor Law.
Mr. Simmons argued the only case before the California Supreme Court that produced a victory for employers and business in 2018. He was recently recognized as the Labor and Employment Attorney of the Year by the Los Angeles Business Journal and was inducted into the Employment Lawyers Hall of Fame. He has lectured nationally on wage and hour, employment discrimination, wrongful termination, and other employment and labor relations matters. He is a member of the National Advisory Board to the Berkeley Journal of Employment and Labor Law, published by Berkeley Law at the University of California at Berkeley. He was also appointed by the California Industrial Welfare Commission as a member of three Minimum Wage Boards for the State of California.