Last summer, the California Supreme Court ruled in Iskanian v. CLS Transportation Los Angeles, LLC that the Federal Arbitration Act (FAA) preempted California’s policy against enforcement of class action waivers in arbitration agreements. It was a victory for California employers, because it meant that class action waivers in employment arbitration agreements were generally enforceable. The victory, however, was only partial; in the same case, the California Supreme Court ruled that a certain kind of class action claim – namely, representative collective action claims brought pursuant to California’s Private Attorneys General Act of 2004 (PAGA) – could not be waived in arbitration agreements.
CLS Transportation appealed the PAGA arbitration waiver issue to the U.S. Supreme Court, which announced on January 20, 2015 that it would not hear the case. By denying CLS Transportation’s petition for review, the California Supreme Court’s Iskanian ruling remains in effect, and it is binding on California state courts and, by extension, on California employers.
Waivers of PAGA class action claims in arbitration agreements are not enforceable … or are they?
PAGA authorizes an employee to file a civil action on behalf of the state against an employer for alleged California Labor Code violations committed against the employee and other employees. Under Iskanian, an employee in California cannot validly waive the right to pursue collective claims under PAGA against an employer, even if the employee has technically agreed to waive that right in an arbitration agreement. Seems like a pretty clear rule, doesn’t it?
If only it were that easy. Although California state courts are bound by the Iskanian decision, federal district courts in California are not. So far, California federal judges have generally been loath to follow the Iskania ruling, finding that it is incongruent with the FAA and inconsistent with the U.S. Supreme Court’s 2011 opinion in AT&T Mobility v. Concepcion, which held that the FAA preempts any state laws that invalidate class action waivers.
The split between state and federal courts in California means that, for the time being, the enforceability of representative class action waivers in employment arbitration agreements will depend in large part on whether a state or federal court is hearing the case. In the short term, we may see an uptick in the number of representative class action claims brought under PAGA, as well as increased efforts by employers to transfer PAGA cases filed in state courts to federal courts, which are viewed as more employer-friendly venues. In the longer term, conflicting decisions between California state and federal courts make it likely that the question will eventually make its way again to the U.S. Supreme Court for review.
Despite continued uncertainty regarding the enforceability of representative class action waivers, arbitration agreements remain an important tool for limiting and preventing class action employment litigation. It is as important as ever for California employers that use employment arbitration agreements to make sure those agreements are properly drafted. For example, arbitration agreements should always contain severability clauses stating that if any portion of the agreement is deemed unenforceable (such as a class action waiver), the remainder of the agreement will remain in effect and enforceable to the full extent allowed by law. Agreements should also indicate what steps will be taken if some employee claims are found to be arbitrable (such as FLSA claims), but others are found to be exempt from arbitration (such as collective action claims under PAGA). Consulting with employment counsel is the best way to ensure that the language in an arbitration agreement maximizes the chance of withstanding legal challenges to enforceability.