The Supreme Court’s 2018 opinion in Epic Systems v. Lewis did not overrule the California Supreme Court’s decision in Iskanian v. CLS Transportation, a California appellate panel has ruled, reversing a trial court’s order to compel arbitration of a wage and hour suit.

Mark Correia and Richard Stow sued their former employer, NB Baker Electric, for a host of wage and hour violations, including a claim for civil penalties under the Private Attorneys General Act. Baker responded with a motion to compel arbitration pursuant to an agreement signed by both employees when they began working for the company. The agreement provided that arbitration shall be the exclusive forum for any dispute and prohibited employees from bringing a “representative action.”

The trial court granted the motion on all causes of action except the PAGA claim. Baker appealed, arguing that Iskanian is no longer binding because it is inconsistent with the Supreme Court’s subsequent decision in Epic Systems.

In 2014, the California Supreme Court decided Iskanian, upholding the general enforceability of class waivers in mandatory employment arbitration agreements. But the court also carved out an exemption 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.”

Last year, in a 5-4 decision, the justices held in Epic Systems that employers do not violate the National Labor Relations Act (NLRA) if they require class and collective waiver provisions in arbitration agreements that employees must sign as a condition of employment.

That holding trumps Iskanian, the employer told the California appellate panel, and permits the plaintiffs’ PAGA claim to be sent to arbitration.

But the panel disagreed. “Although the Epic court reaffirmed the broad preemptive scope of the Federal Arbitration Act (FAA), Epic did not address the specific issues before the Iskanian court involving a claim for civil penalties brought on behalf of the government and the enforceability of an agreement barring a PAGA representative action in any forum,” the court wrote. “We thus conclude the trial court properly ruled the waiver of representative claims in any forum is unenforceable.”

The Iskanian court reached its conclusion based on the unique nature of a PAGA claim as a qui tam-type action, the court said, and the “PAGA litigant’s status as ‘the proxy or agent’ of the state and his or her ‘substantive role in enforcing our labor laws on behalf of state law enforcement agencies.’”

Epic addressed a different issue, which pertained to the enforceability of an individualized arbitration requirement against challenges that such enforcement violated the NLRA, the court said, and did not consider the implications of a complete ban on a state law enforcement action.

“Because Epic did not overrule Iskanian’s holding, we remain bound by the California Supreme Court’s decision,” the panel held.

The court further rejected the employer’s contention that even if the representative action waiver was deemed unenforceable, the PAGA claim for statutory penalties remained subject to arbitration.

Without an agreement to arbitrate a claim, a court has no authority to order the claim to arbitration, the panel said, and the state did not consent to or sign the predispute agreement between the parties. Importantly, under the PAGA statutory scheme, an employee does not assume the proxy role until he or she is an “aggrieved employee.”

“When an employee signs a predispute arbitration agreement, he or she is signing the agreement solely on his or her own behalf and not on behalf of the state or any other third party,” the California appellate court wrote. “Thus, the agreement cannot be fairly interpreted to constitute a waiver of the state’s rights to bring a PAGA penalties claim in court (through a qui tam action by its deputized employee).”

Several other California state appellate courts have reached a similar conclusion based on Iskanian’s view that the state is the real party in interest in a PAGA claim. The court acknowledged contrary authority from federal courts in California, but found those decisions “unpersuasive.”

To read the order in Correia v. NB Baker Electric, Inc., click here.

Why it matters: The decision widens the divide between state and federal courts in California on the issue of the arbitrability of PAGA representative claims. Distinguishing the Supreme Court’s decision in Epic Systems and recognizing that federal courts have a conflicting perspective, the appellate panel found that Iskanian remains good law in the state and that the plaintiffs could not be forced to arbitrate their PAGA claims.