In a significant ruling for California employers, the U.S. Supreme Court on June 15, 2022, held in Viking River Cruises, Inc. v. Moriana, No. 20-1573, that the Federal Arbitration Act (FAA) partially preempts California state law surrounding Private Attorney General Act (PAGA) claims.

Employees have long used PAGA claims in California to overcome their agreements to arbitrate all claims arising from their employment on an individual basis, including representative actions. Aiding this arbitration workaround is the fact that California courts have held that PAGA claims cannot be waived through a pre-dispute agreement and cannot be pursued on an individual basis, severed from the representative action. Accordingly, these courts have found unenforceable an arbitration agreement that purports to require arbitration on an individual basis.

In Viking River, the Supreme Court held that the FAA allows California to decline to enforce agreements that attempt to categorically waive all representative actions, including PAGA actions. But it also held that the FAA does not permit California to prohibit agreements to pursue such claims on an individual basis. As a result, the Supreme Court’s decision will require lower courts to enforce arbitration agreements that require the parties to arbitrate individual PAGA claims, and once a plaintiff is required to arbitrate his or her individual claims pursuant to such an agreement, he or she lacks standing to bring a representative PAGA claim in court addressing other employees’ concerns.

PAGA permits current or former employees to bring a civil action to recover civil penalties for violations of California’s Labor Code, on behalf of themself and other allegedly “aggrieved employees” who may have experienced similar violations. PAGA provides for significant civil penalties for each Labor Code violation committed against each such “aggrieved employee” on a per-pay-period basis. In a PAGA action, 75% of any recovered civil penalties is remitted to the state of California, and any aggrieved employees share in the remaining 25% of such penalties. In Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court held that, despite being filed by a private plaintiff, PAGA claims are a “a type of qui tam action” that are putatively brought on behalf of the state of California as the real party in interest.

Iskanian dealt a significant blow to arbitrating PAGA disputes in California, as the Supreme Court held that California public policy barred parties from waiving their right (via an arbitration agreement) to litigate PAGA representative claims in court. The Iskanian court reasoned that PAGA actions represent California’s interests, and agreeing to not bring any PAGA claim in court violated California’s public policy.

Since Iskanian, state and federal California courts have routinely denied requests to compel arbitration of PAGA claims, holding that provisions in arbitration agreements waiving the right to pursue a PAGA claim on a representative basis were not enforceable. Unsurprisingly, the effect of this ruling was an explosion in PAGA litigation against California employers, as the plaintiff’s bar began using PAGA claims as a workaround to defeat employment arbitration agreements that often contained class, collective and representative action waivers.

In Viking River, the U.S. Supreme Court has now partly abrogated the Iskanian ruling. The Supreme Court issued three important holdings:

First, California law is allowed to invalidate “wholesale waiver[s] of PAGA claims” in arbitration agreements. That is, preemption under the FAA does not force California courts to enforce agreements stating in effect that an employee cannot bring a PAGA action at all. Essentially, the Supreme Court was not willing to use the FAA to defeat “substantive rights afforded by the statute.”

Second, the FAA does preempt the Iskanian ruling that PAGA claims are indivisible. In other words, an employer and employee must be able to agree to arbitrate their claims against each other, and California public policy cannot defeat that principle of the FAA, even with respect to PAGA claims. Thus, the FAA requires dividing PAGA actions into individual claims (based on the experience of the plaintiff alone) and non-individual claims (asserting claims based on other employees’ experiences), with the “individual” PAGA claims being arbitrable if the parties have so agreed. The non-individual PAGA claims are thus severed and left in court.

Third, under current California law, severed representative PAGA claims belonging to a plaintiff whose individual PAGA claim is required to be arbitrated must be dismissed. The plaintiff, having gone alone to arbitration, lacks standing under state law to bring the representative PAGA claims separately.

Viking River leaves open some questions about arbitration of PAGA claims. As Justice Sonia Sotomayor noted in her concurrence, California state courts or the legislature could eventually find a way to allow plaintiffs to have standing to continue litigating their severed non-individual claims. Furthermore, employers can and should expect myriad challenges to arbitration agreements at the outset including with respect to assent, enforceability and scope.

Existing arbitration agreements in California will require close scrutiny after Viking River. In that case, it was key that the arbitration agreement at issue had a severability clause that preserved Viking River Cruises’ right to demand arbitration over Moriana’s individual claim, even after its broader provision barring all representative actions was struck down.

Viking River does not otherwise change arbitration law, so other limitations on compelling arbitration of employment disputes still apply, including the recently enacted Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, which expressly exempts sexual assault and sexual harassment disputes from predispute arbitration agreements. There is also an ongoing push at the federal level to enact legislation that would prohibit predispute arbitration agreements with respect to employment claims.