June 26, 2014

CA Supreme Court Endorses Class Action Waivers in the Employment Context

4 min

The California Supreme Court's decision in Iskanian v. CLS Transportation Los Angeles, LLC, issued on June 23, 2014, confirms that class action waivers in employment arbitration agreements are enforceable, but "representative actions" brought under California's Private Attorneys General Act of 2004 (PAGA) cannot be waived.

Class Action Waivers In Employment Arbitration Agreements Are Enforceable

Most employers know that requiring employees to sign an arbitration agreement containing a class action waiver can greatly reduce the risk of expensive wage-and-hour class action litigation. Prior to the California Supreme Court's decision in Iskanian, however, California courts refused to enforce class action waivers in some cases.

Gentry v. Superior Court was the primary obstacle to the enforcement of class action waivers. In Gentry, the California Supreme Court held that such waivers were not enforceable if a class proceeding "is likely to be a significantly more effective practical means of vindicating the rights of the affected employees." In other words, California courts could (and often did) refuse to enforce class action waivers whenever they determined that a class action was more suitable for the employees.

Iskanian holds that California courts can no longer refuse to enforce class action waivers on this basis. The Court reasoned that the U.S. Supreme Court's landmark decision in AT&T Mobility LLC v. Concepcion overruled Gentry. In substance, Concepcion held that courts could not refuse to enforce consumer class action waivers on the grounds that an individual proceeding, as opposed to a class action, would be ineffective, given the Federal Arbitration Act's (FAA) liberal policy favoring arbitration. While some California courts began upholding employment class action waivers immediately (citing Concepcion and disregarding Gentry), Concepcion's impact concerning the enforceability of employment class action waivers in California remained unsettled – until now.

Iskanian also rejected the employee-plaintiff's reliance on the NLRB's decision in D.R. Horton Inc. & Cuda (Horton I). Horton I held that requiring employees to waive their rights to participate in class proceedings is an "unfair labor practice" under the NLRA. Iskanian rejected this view, following the Fifth Circuit and focusing on the FAA's liberal federal policy favoring arbitration in light of Concepcion.

Employees Can Still Bring Representative PAGA Claims

Iskanian also addresses the use among employers of arbitration agreements that contain complete waivers of PAGA claims. PAGA authorizes an employee to bring an action for civil penalties on behalf of the state against his or her employer for Labor Code violations committed against the employee and fellow employees. It further provides that 75% of the civil penalties awarded in the litigation must go to the state, rather than to the individual plaintiff. However, the prevailing employee in a PAGA action is still entitled to the remaining 25% of the civil penalties and, critically, to attorneys' fees – which alone can exceed the original civil penalties award.

Iskanian holds that an employer cannot require an employee to waive his or her right to bring claims under PAGA. The Court reasoned that such a waiver is contrary to public policy because it would harm the state's interest in enforcing the Labor Code (as opposed to an employee's private interest in redress). The Court concluded that the FAA's liberal policy favoring arbitration did not affect the analysis because the FAA focuses on private disputes, whereas PAGA claims involve disputes between the employer and the state.

Implications for Employers

  • Employers are likely to see far fewer typical wage-and-hour class actions, assuming they require their employees to sign valid class action waivers.
  • Employers are likely to see more PAGA representative actions, since those actions cannot be waived and they present lucrative opportunities for plaintiffs' attorneys.
  • Employers can still require employees to agree that disputes be settled by arbitration, including disputes involving PAGA claims – so long as the employee is not required to waive PAGA claims.

In light of the above, employers should consider how to treat PAGA actions in their arbitration agreements. There are potential benefits for not requiring employees to arbitrate PAGA claims. Since PAGA claims can be, and often are, brought in large representative actions, there may be little reason to arbitrate, since one of the main purposes of arbitration is efficient, speedy resolution, and such a resolution is unlikely in a large representative PAGA arbitration. Moreover, since PAGA claims are usually asserted with related or underlying non-PAGA claims, the employer could seek to stay the PAGA court case pending the outcome of the non-PAGA arbitration. The employer might then be able to use the outcome of the arbitration to preclude claims or issues in the PAGA court case, perhaps wiping it out altogether.