Resolving an issue that has created uncertainty for California employers, the California Supreme Court recently held inIskanian v. CLS Transportation Los Angeles, LLC that class action waivers in employment arbitration agreements can be upheld under California law, but waivers of representative actions under California’s Private Attorneys’ General Act (“PAGA”) may not be.

Iskanian worked as a driver for CLS between March 2004 and August 2005. In December of 2004, Iskanian signed an arbitration agreement that provided that “any and all claims” arising out of his employment would be subject to binding arbitration, and that Iskanian could not assert any class or representative action claims in arbitration except as required by law. When Iskanian filed a class action lawsuit in 2006 for unpaid overtime and other violations of the wage and hour laws, CLS moved to compel arbitration, which was granted by the trial court.

While Iskanian’s subsequent appeal was pending, in 2007 the California Supreme Court decided Gentry v. Superior Court, which held that class action waivers are invalid under certain circumstances (link to September 2007 FEB). In response, CLS withdrew its motion to compel arbitration and the parties proceeded to litigate the case. During the pendency of the litigation, the United States Supreme Court decided AT&T Mobility LLC v. Concepcion in 2011, which held that federal law preempted California’s refusal to enforce waivers in consumer arbitration agreements (link to April 28, 2011 Litigation Alert). CLS then renewed its motion to compel arbitration, arguing that the ruling of Concepcionoverruled Gentry. After the trial court and a California Court of Appeal agreed with CLS, the California Supreme Court took up review.

The California Supreme Court held that the decision of the United States Supreme Court in Concepcion made clear thatGentry’s general prohibition against employment class action waivers (unless certain conditions are met) is unenforceable under federal law, because a state cannot require a procedure that interferes with the fundamental attributes of arbitration. The Court further determined that the National Labor Relations Act does not prevent the enforcement of the class action waiver, and that CLS did not waive its right to compel arbitration by withdrawing its motion to compel after issuance of the Gentry decision.

However, the Court also held that an action for violation of California’s PAGA—which allows an aggrieved employee to bring a civil action personally and on behalf of other current or former employees to recover civil penalties for Labor Code violations—is unwaivable and is not preempted by federal law.

The California Supreme Court’s ruling thus meant that plaintiff Iskanian was required to arbitrate his individual damages claims, but that CLS must answer the PAGA action for civil penalties in some forum (either in a lawsuit or through arbitration).