The California Supreme Court issued an important decision last week on the enforceability of employment class action waivers included in arbitration agreements. The result: private parties can contract for the waiver of the right to pursue a class action in any forum. The California Supreme Court had considered this question before in 2007 in Gentry v. Superior Court, finding that an employment class action waiver could be struck down on the grounds that it violated public policy or because it was unconscionable. But in Iskanian v. CLS Transportation Los Angeles, LLC, the Court recognized that recent U.S. Supreme Court precedent now required it to reverse course. In doing so, it made some other noteworthy pronouncements as well.
The Issue of Class Active Waivers Makes Its Way Back up to the California Supreme Court
In Iskanian, Arshavir Iskanian worked as a CLS driver and entered into an arbitration agreement with CLS that required him not only to arbitrate any claims he had against the company, but to waive any right he had to bring a class or representative action. But in August 2006, despite this agreement, Iskanian filed a wage and hour class action lawsuit in a California state trial court against CLS. Iskanian also sought to bring a representative action under the Labor Code Private Attorneys General Act, which is commonly known as PAGA, a statute that permits an employee to bring an action to pursue civil penalties on behalf of the state for Labor Code violations, but which limits the employee from retaining more than 25% of any civil penalties levied against the employer.
Not surprisingly, CLS asked the trial court to compel Iskanian to arbitrate his claims. The trial court initially granted CLS’s request, but after the California Supreme Court decided Gentry in 2007, CLS withdrew it request and the case proceeded. In 2011, the U.S. Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion, which held that the Federal Arbitration Act (FAA) limited a court’s ability to invalidate class action waivers. In response, CLS renewed its arbitration request. The trial court again agreed, dismissing the class action and directing Ishkanian to arbitrate his claims individually. The California Court of Appeals affirmed the trial court’s decision and Ishkanian appealed to the California Supreme Court
The California Supreme Court Confirms that Courts Must Enforce Employment Class Action Waivers
On appeal, the California Supreme Court first confirmed that Concepcion (and its progeny) effectively nullified the California Supreme Court’s prior Gentry decision, in which the Court held that a class action waiver may be unenforceable based upon certain factors, including “the modest size of the potential individual recovery, the potential retaliation against members of the class, the fact that absent members of the class may be ill informed of their rights, and other real world obstacles to the vindication of class members’ right[s] . . . .” The Court confirmed that California trial courts no longer have discretion to address such factors and courts must enforce employment class action waivers even if an individual proceeding would be an ineffective means to prosecute employment claims as compared to a class action.
Further, it also confirmed that its ruling last year in Sonic-Calabasas A, Inc. v. Moreno meant only that an individual could challenge an arbitration agreement on unconscionability grounds if the cost of arbitration and procedure set forth in the agreement was unreasonably favorable to the employer, a challenge that would have no effect on the class waiver provision of the agreement.
The Court Rejects the Argument that the National Labor Relations Act Prohibits Employment Class Action Waivers
Next, like many other courts around the country, the Court refused to adopt the National Labor Relations Board’s position from its D.R. Horton decision that the National Labor Relations Act generally prohibits employment class action waivers. It held that the NLRA’s guarantee of the right to engage in “concerted activities” did not include a right to assert a class action and does not override the FAA’s arbitration enforceability mandate.
The Court Finds that an Individual Cannot Waive a Right to Assert a PAGA Claim
This wasn’t a total victory for CLS. The Court also held that private parties cannot contract to arbitrate PAGA claims because an employee’s action under PAGA functions as a substitute for an action brought by the government itself. In this respect, the Court found, a PAGA claim is fundamentally a law enforcement action designed to protect the public, and is not designed to benefit private parties. The Court explained that PAGA actions are not waivable because the California Legislature intended for PAGA “to augment the limited enforcement capability of the Labor and Workforce Development Agency” and because “[t]he PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state’s interests.” A PAGA claim does not run into the FAA roadblock because it is not a dispute between the employer and employee, but rather a dispute because the employer and the state that the employer has violated California wage and hour laws.
In sum, the Court’s holdings, while important, are unsurprising: private parties typically cannot bind a government agency, certainly not without its consent. But they can contract to foreclose an employee from pursuing class claims whether in court or arbitration. Given the Court’s decision, employers – at least in California – remain free to require their employees to arbitrate employment claims individually. But if they choose to do so, they must ensure that their arbitration agreements do not impose costs or other barriers on the employee to make the arbitration inaccessible and unaffordable.