Remember the Black Knight in Monty Python and the Holy Grail? The overconfident fellow who refuses to desist, even after losing four limbs in combat? Some lawyers are like that.

Although the California Supreme Court in Iskanian (June 23, 2014) upheld employer efforts to force waivers of class-action claims in mandatory arbitration agreements, some plaintiffs’ lawyers say that the real take-away from Iskanian is its holding that those agreements cannot be used to waive an employee’s right to bring representative PAGA actions. Moreover, say these lawyers, PAGA actions are particularly potent for plaintiffs because they are categorically unremovable to federal court, thus permitting the plaintiff to remain in more favorable state court.

So does this mean that Iskanian really was a disaster, signaling a new reign of terror for hapless employers who now must confront “gotcha” claims of obscure wage and hour violations while being subject exclusively to the tender mercies of California Superior Court?

Well, perhaps there are a couple of chinks in the Black Knight’s armor.

First, how solid is the dogmatic view about categorical unremovability of PAGA claims? PAGA cases once were routinely removed to federal court under diversity-of-citizenship jurisdiction, where the defendant employer was a non-California citizen and the amount in controversy exceeded the jurisdictional threshold ($75,000 in an individual action or $5,000,000 in a class action, although PAGA claims need not be brought as class actions). The amount in controversy was often easy to establish, as PAGA penalties mount rapidly: $100 per employee per pay period, even if one counts only the 25% of the penalties that go to the employees (75% go to the State of California).

But recent Ninth Circuit decisions dropped flies in the removal ointment. They rejected the efforts of removing defendants, in calculating the amount in controversy, to aggregate the potential individual recoveries of all the employees the plaintiff purported to represent. These decisions now suggest that one should consider only the PAGA plaintiff’s individual recovery, which would be well below $75,000. And the Ninth Circuit has stated, rather elliptically, that the State of California is not a citizen, suggesting that this observation precludes a finding of diversity of citizenship. Hence the basis for a new conventional wisdom that PAGA claims are categorically unremovable. But is this necessarily so?

  • Amount in controversy. The Ninth Circuit cases on whether a removing defendant can aggregate the employee collective’s 25% of the take have not fully addressed the numerical significance of the State’s 75% take. And now the California Supreme Court has affirmed in Iskanian that every PAGA action is a claim by the State, as the real party in interest. A prohibition against aggregating individual employee claims should not apply to the single, undivided monetary interest of the State, and 75% of the total PAGA penalties sought often will exceed the $75,000 jurisdictional threshold.
  • Diversity of citizenship. The recent Ninth Circuit discussions do not ponder the significance of the fact that the State can be the real party in interest in a PAGA claim while not being the actual party before the court for purposes of citizenship. The State is not the actual party because, in the typical PAGA action, the State has abdicated a litigating role. Older decisions, meanwhile, did carefully consider diversity of citizenship in light of the State’s interest, to conclude that diversity is not destroyed where the State has waived its right to be the actual party pursuing a PAGA claim.

Second, let’s recall that often PAGA claims accompany other claims that themselves may support a motion for removal to federal court.

Workplace solution? Maybe removing your next PAGA case to federal court is not the most practical of workplace solutions. But, as you await the inevitable PAGA suit, what about providing for arbitration of PAGA claims and having the arbitrator apply the class-action standards that would apply in federal court under Rule 23 of the Federal Rules of Civil Procedure? This approach, while entailing its own risks, would avoid the potential nightmare of having a state court judge decide a PAGA case under the ill-defined standards of a representative action. And you could help manage the risk of a rogue arbitrator by having any PAGA award appealable to a second arbitrator, while having the arbitral award generally reviewed for clear legal error, a form of contracted-for review that California law permits.

Nothing in Iskanian precludes this result, especially if the provision for Rule 23-governed PAGA arbitration is subject to an opt-out provision, which would make any resulting arbitration agreement voluntary, not mandatory, and which would thereby undermine any claim of unconscionability. While employers traditionally have been leery about having any collective action in arbitration, the Iskanian-decreed inevitability of representative PAGA claims being decided somewhere may now prompt some employers to go boldly where few have gone before.