Why it matters

The California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles forecloses an employer’s ability to require a worker to arbitrate a threshold issue of standing to bring a Private Attorneys General Act (PAGA) claim, a state appellate panel recently ruled. Sergio Perez and another former U-Haul employee sued the company and included a PAGA claim. The employer sought to compel arbitration pursuant to a provision in an employment agreement signed by the plaintiffs, arguing that whether or not they were “aggrieved employees” and therefore had standing to bring suit under PAGA was a threshold issue that should be determined in arbitration. The panel disagreed. “[W]e do not believe an employer may force an employee to split a PAGA claim into ‘individual’ and ‘representative’ components, with each being litigated in a different forum,” the court wrote, affirming denial of U-Haul’s motion to compel arbitration. “We think it clear that a private agreement requiring an employee to litigate his or her PAGA claim in multiple forums that have been selected based solely on the employer’s own preferences interferes with ‘the state’s interests in enforcing the Labor Code,’ and is therefore against public policy.” The court effectively shut the door on any form of arbitration related to a PAGA employment claim.

Detailed discussion

Sergio Perez and Erick Veliz both worked as customer service representatives for U-Haul Company. As a condition of their employment, both signed a mandatory arbitration agreement that stated: “I agree that it is my obligation to … submit to final and binding arbitration any and all claims and disputes … that are related in any way to my employment. … [B]y agreeing to use arbitration to resolve my dispute, both U-Haul and I agree to … forego any right to bring claims as a representative or as a member of a class or in a private attorney general capacity.”

Perez and Veliz filed class action complaints against U-Haul in 2012 alleging violations of various California Labor Code provisions, including unpaid overtime, failure to provide meal breaks, failure to pay minimum wages and failure to pay wages in a timely manner. After the California Supreme Court decided Iskanian v. CLS Transportation Los Angeles, the plaintiffs filed amended complaints with a cause of action under PAGA.

In Iskanian, the state’s highest court upheld the general enforceability of class waivers in mandatory employment arbitration agreements but carved out an exception for employees to bring representative actions under PAGA, holding that “an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy”.

When the cases were consolidated, U-Haul moved to compel arbitration. Specifically, the company argued that the arbitration agreement obligated Perez and Veliz to individually arbitrate the predicate issue of whether they had standing to assert a PAGA claim. Iskanian did not hold that part of a PAGA claim or that predicate issues could not be arbitrated, the employer told the court. Instead, Iskanian stands for the proposition that only “aggrieved employees” be allowed to bring representative PAGA claims.

The plaintiffs countered that the California Supreme Court made clear that claims brought pursuant to PAGA are not arbitrable in any manner whatsoever and that to permit arbitration of whether or not an employee had suffered an underlying violation of the Labor Code in order to establish standing as an aggrieved employee would render Iskanian meaningless. The court agreed, affirming denial of the motion to compel arbitration.

Whether or not the plaintiffs have standing to pursue a PAGA claim was actually not an issue that fell within the scope of the arbitration agreement, the panel said. Although the broad language of the agreement covers “any and all claims and disputes … in any way related to … employment,” an additional clause excludes “claims as a representative … or in a private attorney general capacity.”

“Given that the parties did not agree to arbitrate representative claims, and that a PAGA action is by definition a form of representative claim, we conclude that PAGA claims are categorically excluded from the arbitration agreement,” the court wrote. “Moreover, the agreement contains no language suggesting that despite this exclusion of representative claims, the parties did agree to arbitrate whether the complaining party had standing to initiate a representative claim in court. We fail to see how an agreement that excludes representative claims can nonetheless be reasonably interpreted to require plaintiffs to arbitrate their standing to bring a representative claim.”

Even if the agreement did require plaintiffs to arbitrate whether they have standing to bring a PAGA claim, the provision was unenforceable under California law, the panel held.

“In Iskanian, the Supreme Court explained that ‘every PAGA action, whether seeking penalties for Labor Code violations as to only one aggrieved employee—the plaintiff bringing the action—or as to other employees as well, it is a representative action on behalf of the state,’” the court said. “The Court also held that requiring an employee to bring a PAGA claim in his or her ‘individual’ capacity, rather than in a ‘representative’ capacity, would undermine the purposes of the statute. Given these conclusions, we do not believe an employer may force an employee to split a PAGA claim into ‘individual’ and ‘representative’ components, with each being litigated in a different forum.”

The reasoning of the California Supreme Court’s decision also indicates that an employer is not permitted to impose arbitration provisions that impede an aggrieved employee’s ability to bring a PAGA claim.

“In this case, U-Haul is, in effect, attempting to impose its preferred forum for different aspects of the PAGA claim by requiring plaintiffs to individually arbitrate whether a Labor Code violation was committed against them, while simultaneously preserving its right to a judicial forum for the ‘representative’ issues,” the panel said. “We think it clear that a private agreement requiring an employee to litigate his or her PAGA claim in multiple forums that have been selected based solely on the employer’s own preferences interferes with ‘the state’s interests in enforcing the Labor Code,’ and is therefore against public policy.”

The Federal Arbitration Act did not require a different outcome, the court added, as Iskanian held that PAGA claims “lie outside the FAA’s coverage.”

To read the decision in Perez v. U-Haul Co., click here.