Executive Summary:  Acknowledging the U.S. Supreme Court's decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), to be a game-changer, the California Supreme Court has held that the Federal Arbitration Act (FAA) preempts a state's refusal to enforce an arbitration agreement that includes a class action waiver. The California Supreme Court's decision in Iskanian v. CLS Transportation Los Angeles, LLC, officially signals the demise of its earlier ruling in Gentry v. Superior Court, which had invalidated class action waivers in employment arbitration contracts. The court also rejected the plaintiff's argument that an employment contract requiring individual arbitration is an unfair labor practice under the National Labor Relations Act (NLRA). Despite these favorable rulings for the employer, the court also held that claims brought under the California Private Attorneys' General Act of 2004 (Cal. Lab. Code, §§ 2698, et seq.) (PAGA) could not be waived.

While the 4-3 opinion authored by Justice Goodwin Liu addressed several issues submitted by the parties, of particular concern to most employers are its opinions on three issues: (1) the continued viability of Gentry, a 2007 California high court decision that has been called into question following the U.S. Supreme Court's decision in Concepcion; (2) whether class action waivers in arbitration agreements violate the NLRA; and (3) whether arbitration agreements can be used to waive claims brought under the PAGA.

With respect to the first issue, the court quickly disposed of that argument, holding that Gentry, which had found class action waivers in arbitration agreements to be unconscionable or against public policy under California law, could not survive afterConcepcion. Previously, there had been disputes among the lower courts regarding whether Gentry's holding could survive since Concepcion had addressed class action waivers in arbitration agreements in the consumer context. Nevertheless, the California Supreme Court held that Gentry has been effectively abrogated byConcepcion, and ultimately found its earlier opinion to be preempted by the FAA.

The court also rejected the plaintiff's argument that class action waivers in arbitration agreements run afoul of the NLRA. In reaching this decision, the California Supreme Court joined with other federal courts in declining to adopt the National Labor Relations Board's reasoning in In re D.R. Horton, Inc., which found arbitration contracts that include class action waivers to be unfair labor practices. That decision was reversed by the Fifth Circuit Court of Appeals in December of last year. See D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344 (5th Cir. 2013).

With respect to the issue of PAGA claims, however, the California Supreme Court handed employers a disappointing ruling by concluding that that the plaintiff could proceed with litigating his representative PAGA claims, despite the existence of a waiver. In so ruling, the majority found that the waiver ran contrary to California's stated public policy in having its labor code provisions enforced through private individuals. The court went on to find that an employee's right to bring a PAGA action is unwaivable. Additionally, the court concluded that the state's prohibition of waivers of PAGA representative actions was not preempted by the FAA, stating that the FAA, which focuses on providing an efficient forum for the resolution of private disputes, does not apply to PAGA actions, which involve disputes between an employer and the state.

What does this mean for me?

The new California Supreme Court opinion is considered a mixed bag result. While it substantially reduces the potential exposure that California employers typically face in wage and hour litigation, the case does not fully eliminate the ability of plaintiffs to bring their suits in some representative capacity. The implications of this may be highly concerning for employers operating in California. PAGA claims are subject to a one-year statute of limitations, and generally allow plaintiffs to seek recovery of civil penalties between and up to $100 to $200 for each aggrieved employee per pay period for each wage and hour violation that occurred. Further, based on a previous ruling by the California Supreme Court, claims brought under the PAGA are not subject to class certification requirements. The opinion also raises additional questions about the immediate and long-term future of PAGA actions. The court's decision with respect to PAGA will likely draw a petition for U.S. Supreme Court review. Further, and as noted in the majority opinion, the California Supreme Court remanded the case to determine whether bifurcation of the plaintiff's PAGA claim and individual claims would be appropriate. Whether that means that a PAGA claim could be litigated separately from a plaintiff's individual claim, or whether the PAGA claim must also be litigated in arbitration, remains unsettled.