The U.S. Supreme Court has declined to review the California Supreme Court’s decision that representative claims under the California Labor Code Private Attorneys General Act (“PAGA”) cannot be waived in employment arbitration agreements. Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348 (Cal. 2014), cert. denied, No. 14-341 (U.S. Jan. 20, 2015).
In Iskanian, the California Supreme Court ruled the Federal Arbitration Act (“FAA”) preempted California law disfavoring enforcement of a class action waiver in employment arbitration agreements. However, it also ruled the FAA did not preempt representative actions under PAGA. For additional information on Iskanian, please see our article, California High Court: Class Action Waivers in Arbitration Valid, But Waivers of Representative Actions under State Law Are Not.
Impact on California Employers
Iskanian permits California employers to develop and enforce employment arbitration agreements with class action waivers barring employees from bringing class actions in court or arbitration. However, employers cannot require employees to waive their right to assert a “representative” action under the PAGA for Labor Code penalties in an arbitration agreement, without a significant risk that a California state court will deem the waiver unenforceable. Interestingly, federal courts may not abide by the California Supreme Court’s decision in Iskanian. Since the state Supreme Court issued its decision in Iskanian, several federal courts have declined to follow the case and have enforced waivers of PAGA representative actions. It remains to be seen whether the U.S. Supreme Court’s refusal to grant review will alter this trend, or whether California state courts and federal courts will continue to reach differing outcomes on the enforceability of PAGA waivers.
In the meantime, faced with continued uncertainty, employers should consult with counsel on whether a PAGA waiver should be included in any arbitration agreement. Employers also should routinely review their policies and practices to ensure compliance with California’s employment laws and address any compliance concerns, particularly as PAGA can transform minor Labor Code violations into costly lawsuits.