Today, the United States Supreme Court issued an order denying review of the California Supreme Court’s decision in Iskanian v. CLS Transportation.  CLS Transportation had petitioned for review of the California Supreme Court’s recent ruling that a PAGA representative action waiver in an employment arbitration agreement is unenforceable.  Although most legal commentators seem to agree that the California Supreme Court’s ruling runs afoul of the Federal Arbitration Act and is inconsistent with United States Supreme Court precedent in AT&T Mobility v. Concepcion, the high Court has chosen not to review the case.  As a result, the California Supreme Court’s decision remains good law and is binding on all California state courts.

What This Means for California Employers

California employers using employment arbitration agreements need to ensure that their agreements are carefully drafted in order to withstand a legal challenge to enforceability.  Because arbitration agreements remain an important tool for preventing class action employment litigation, it remains worthwhile to include language in the agreement stating that any arbitration will be on an individual basis only and that the arbitrator shall not have any authority to preside over or to resolve claims on a “class” or collective basis.  What about on a “representative” basis (i.e. a PAGA claim)?  In light of the denial of review of Iskanian, any waiver of the right to bring a representative PAGA claim in any forum (arbitration or court) is going to be deemed unenforceable by a California state court.  On the other hand, federal district courts in California generally have refused to follow the California Supreme Court’s Iskanian ruling (federal courts are not bound by the California state court ruling) and have instead held that PAGA representative action waivers are enforceable just like class action waivers are enforceable.  See, e.g., Lucero v. Sears Holding Mgmnt. Corp.(S.D. Cal. 2014); Mill v. Kmart Corp. (N.D. Cal. 2014); Ortiz v. Hobby Lobby (E.D. Cal. 2014); Chico v. Hilton Worldwide (C.D. Cal. 2014); Langston v. 20/20 Companies (C.D. Cal.); Fardig v. Hobby Lobby (C.D. Cal. 2014). This means that the enforceability of a PAGA representative action waiver largely will depend on whether a federal or state court (or arbitrator) is deciding the issue.  This divide in enforceability promotes forum shopping, with federal court being the preferable forum for employers and state court being the preferable forum for employees. 

What Should Employers Do Now?

Because PAGA representative action waivers are not categorically unenforceable (federal courts generally enforce the waivers), this counsels against removing PAGA representative action waiver language from employment arbitration agreements.  However, because employers must be mindful that a California state court will find such language unenforceable, employers need to ensure that their agreements contain severability clauses providing that if any portion of the agreement (including but not limited to the class/representative action waiver) is deemed unenforceable, the remainder of the agreement shall still be enforced to the full extent permitted by law.  Employers should also include provision for what happens in the event some claims are found to be arbitrable and others are not (e.g. the employee has individual wage and hour claims that will be arbitrated but a representative PAGA claim that is exempt from arbitration).  Generally, employers will want to provide that arbitrable claims will be resolved first and any non-arbitrable claims will be stayed pending resolution of the arbitrable claims.  Finally, employers may also want to include specific language in the agreement providing for who decides gateway issues pertaining to the enforceability of the agreement – a court or an arbitrator?  There are arguments in both directions, but employers are cautioned that there is very limited judicial review of an arbitrator’s interpretations and rulings and, as a result, if you get an arbitrator who decides not only that the representative action waiver is unenforceable but also that the PAGA representative action can proceed in arbitration (as opposed to court), that could be a very undesirable result.  If a court adversely decides the issue, there is at least some avenue for independent judicial review.