Employers who for years have questioned whether they may contractually bar employees from bringing class action claims can now breathe a sigh of relief. On June 23, 2014, the California Supreme Court in Iskanian v. CLS Transp. L.A., LLC, No. S204032, held that class action waivers in arbitration agreements are valid. The Iskanian decision overturns the California Supreme Court’s 2007 decision in Gentry v. Superior Court, 42 Cal. 4th 443 (2007), which had found such waivers in employment agreements unconscionable and in violation of public policy. In reaching its decision, the California Supreme Court has confirmed that the United States Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion, 131 S. Ct 1740 (2011), which allowed class waivers in the consumer context, applies with equal force to employment claims.

The Court also decided, in employers’ favor, another hot-button issue of recent genesis: whether class action waivers are prohibited by the National Labor Relations Act in accordance with the NLRB’s decision in D.R. Horton, 357 N.L.R.B. 184 (2012). There, the Board opined that class waivers improperly imposed on employees’ right to engage in “concerted action,” such as by filing and prosecuting class actions. The Court held that the Board’s D.R. Horton rule would “significantly undermine” arbitration’s fundamental attributes, and is, therefore, contrary to the Supreme Court’s holding in Concepcion.

The California Supreme Court’s decision is, however, not all positive for employers as it held that employees may not waive their right to pursue “representative” claims under the California Private Attorneys General Act (“PAGA”). Pursuant to PAGA, an employee can prosecute wage and hour claims against an employer on behalf of the state of California and recover a statutory penalty for each violation, 75% of which is paid to the state. Attorneys’ fees are also recoverable under PAGA.

The Court did not take on any of the practical questions that the decision raises, such as whether an employee’s PAGA action in court ought to take precedence over the arbitration of an employee’s individual wage claims; whether one action should be stayed; or whether an arbitration decision, if reached before the PAGA litigation is completed, is binding in the PAGA litigation.

Despite this mixed ruling, and the questions it raises regarding its practical consequences, it cannot be denied that the Iskanian decision is a significant development for California employers. It is expected that the number of employers who require employees to execute arbitration agreements as a condition of employment will grow exponentially.

Prior to adopting arbitration agreements, employers should consult with counsel given the intricacies of California law and the inclination of courts to decline to compel arbitration if employment agreements are substantively or procedurally unconscionable.