Reversing years of precedent, on June 23, 2014, in Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court joined the majority of courts and held employment arbitration agreements containing class action waivers are enforceable as a general rule, relying on the recent U.S. Supreme Court decisions in this area. In this case, the Plaintiff-driver brought a class and representative action in 2006 on behalf of himself and other drivers, alleging a litany of wage and hour violations including failure to pay proper overtime, failure to provide meal and rest breaks, failure to provide accurate wage statements, and seeking penalties under California’s Private Attorneys’ General Act (PAGA) for these violations.

Although CLS initially lost a motion to compel arbitration, it renewed its motion following the US Supreme Court’s decision in AT&T Mobility LLC v. Conception,  in which the Supreme Court upheld such arbitration agreements and class action waivers under the Federal Arbitration Act (FAA). In its holding, the Conception Court held the FAA does not allow states to mandate or promote procedures that are incompatible with arbitration. The California Supreme Court found that Conception abrogated its earlier decisions to the contrary with respect to the class claims.

The California Supreme Court also held, however, that employees cannot be forced to waive their right to bring a civil lawsuit under PAGA. Under PAGA, an employee can bring a representative action on behalf of the State for labor violations committed by the employer, and seek penalties for all aggrieved employees. The California Supreme Court opined: “[A]n 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. In addition, we conclude that the FAA’s goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state’s behalf. Therefore, the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment contract.”

Meanwhile, and following that ruling, at least three federal district courts in California have rejected that part of the Iskanian ruling, holding arbitration agreements with PAGA waivers are enforceable under the Federal Arbitration Act (“FAA”). In Langston v. 20/20 Cos.,for example, employees brought a class action and PAGA complaint alleging they were misclassified as independent contractors. 20/20 moved to compel arbitration in the federal district court for the Central District of California, on the basis that employees had all signed arbitration agreements at the time of their employment containing broad waivers that prohibit class and collective actions. The Central District court found the agreement was enforceable to bar all of Plaintiffs claims against 20/20 in court under the FAA, and refused to follow Iskanian with respect to the PAGA claim as contrary to U.S. Supreme Court precedent, and compelled arbitration of all the claims.

CLS Transportation has petitioned the U.S. Supreme Court for review of the California Supreme Court’s ruling in Iskanian. Iskanian’s response was filed November 24, 2014.

In another recent development in November, a different California appellate court ruled in Garden Fresh Restaurant Corp. v. Superior Court that whether an arbitration agreement permits class-wide arbitration, when the agreement is otherwise silent on the matter, is for the courts and not an arbitrator to decide. This ruling answers a previously open question for many California employers who had pre-existing arbitration agreements that were silent as to the issue of class arbitrability. This is welcome news for California employers as this broadens the companies who can argue that class dispute resolution is not available where a binding arbitration agreement exists.

ACTION ITEM

Employers around the country are turning to arbitration as a way to mitigate the risks of large or unwieldy wage and hour class actions.

California employers who are using mandatory arbitration of all employee/employer related claims should take heart. California employers should recognize that while this new turn in arbitration law still remains a very strong mitigation technique to avoid class actions, representative PAGA claims alleging Labor Code and wage and hour violations still remain a very real risk for the California workforces. Nevertheless, this recent tide of federal cases holding the FAA permits PAGA waivers as well as class action waivers offers hope for California employers who use broad arbitration provisions with wide-ranging waivers.

To maximize enforcement of a PAGA waiver given the current split in authority, California employers should also include a governing law provision referencing the FAA, not California state law, as controlling.