On June 23, the California Supreme Court in Iskanian v. CLS Transportation of Los Angeles, LLC upheld the enforceability of arbitration clauses with class action waivers, but found that PAGA waivers are unenforceable. This decision comes in the wake of much discussion of class action and representative action waivers due to the high frequency of lawsuits involving: 1) class action allegations based on violations of the California Labor Code, and 2) representative claims brought pursuant to the Labor Code Private Attorneys General Act of 2004 (PAGA).

In Iskanian, the plaintiff signed an arbitration agreement that contained a class action and representative action waiver. Despite the arbitration clause and the waivers contained therein, the plaintiff filed a complaint against his employer alleging Labor Code violations, including that it failed to pay overtime, provide meal and rest breaks, reimburse business expenses, provide accurate and complete wage statements, and pay final wages in a timely manner. The employee sought to represent a class of his fellow employees and sought to recover PAGA civil penalties on a representative basis.

Following a change in the law (and the withdrawal of a prior motion to compel arbitration), the employer moved to compel arbitration and requested enforcement of the class and representative action waivers. The trial court ordered arbitration and dismissed the class claims. The trial court also found that the employee’s representative PAGA claims could not be pursued in arbitration, but that the employee could pursue his individual PAGA claims in arbitration. The Court of Appeal affirmed the trial court’s ruling.

The California Supreme Court, however, reversed and remanded the lower courts’ rulings, issuing two critical holdings. First, class action waivers in employer arbitration agreements are enforceable, regardless of the presence of unwaivable rights created by the California Labor Code. Relying on recent U.S. Supreme Court precedent (AT&T Mobility v. Concepcion), the court held that the Federal Arbitration Act (FAA) preempted the California Supreme Court’s holding in Gentry v. Superior Court, which had held that class action waivers involving unwaivable rights in the employment context were unenforceable. The court rejected the argument that the use of class action waivers was an unfair labor practice in violation of the National Labor Relations Act. The court also rejected the argument that the employer had waived its right to arbitrate the case; rather, the court found that the employer’s attempt to compel arbitration would have been futile in light of existing California law at the time the prior motion to compel arbitration was withdrawn.

However, the court ruled that PAGA waivers, which would prohibit representative actions by employees acting as private attorneys general, are against public policy and thus unenforceable. In considering the effect of the FAA on PAGA waivers, the court distinguished between: 1) private disputes between an employer and an employee; and 2) PAGA disputes between an employer and the state (regardless of whether the action was brought by aggrieved employees on a representative basis or by the state agency responsible for enforcing PAGA). In finding such a distinction, the court held that PAGA claims lie outside the scope of the FAA, as this statute was intended to reach private disputes. The court also easily dispensed with arguments that PAGA violates the separation of powers doctrine.

Assuming the parties do not agree on one forum for the arbitrable and non-arbitrable claims, the court stated that the issue of whether bifurcation is proper, with individual claims going to arbitration and representative PAGA claims remaining in court, must be addressed on remand.

Although the decision is likely to be appealed to the U.S. Supreme Court, the decision will have significant legal and economic ramifications for years to come. Employers should be mindful of the decision when drafting arbitration agreements with employees.

To read the opinion, click here.