This week, the California Supreme Court upheld the enforceability of class action waivers in the context of employment arbitration agreements in its long-awaited decision in Iskanian v. CLS Transportation Los Angeles, LLC.  Though mostly positive for employers, the Iskanian decision also leaves employers in a difficult position with respect to representative claims brought pursuant to the Labor Code Private Attorney’s General Act (“PAGA”), California Labor Code §§ 2698 et seq.  Although the Court held that class action waivers were enforceable with respect to most wage/hour claims, it held that PAGA’s unique nature prohibits an employer from precluding employees from bringing such claims on a representative basis.   

Iskanian v. CLS Transportation Los Angeles, LLC

Arshavir Iskanian filed a putative class and representative PAGA action against his former employer, CLS Transportation Los Angeles, LLC, on behalf of himself and other current and former employees.  Iskanian sought unpaid wages and penalties, alleging claims for: unpaid overtime, failure to pay wages upon termination, failure to provide meal and rest breaks, failure to reimburse business expenses, failure to provide compliant wage statements, confiscation of gratuities, and a claim for penalties pursuant to PAGA.  After the U.S. Supreme Court decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), CLS moved to compel arbitration of Iskanian’s claims on an individual basis, pursuant to an arbitration agreement he executed during his employment.  The trial and appellate courts granted CLS’s motion and ordered Iskanian to arbitrate his claims on an individual basis.  Iskanian appealed. 

The Majority Upholds Class Action Waivers

On appeal, Iskanian argued that he could not be compelled to arbitrate his class claims on an individual basis, relying heavily on the Court’s prior opinion in Gentry v. Superior Court, 42 Cal. 4th 443 (2007).  InGentry, the Court had held that class waivers in arbitration agreements should not be enforced if “class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.”  In undertaking that analysis, the Gentrycourt held that courts needed to consider the modest size of the potential recovery, the potential for retaliation against members of the class, the fact that absent members of a class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ rights to unpaid wages through individual arbitration.

The California Supreme Court disagreed with Iskanian and overruledGentry.  The majority found that the U.S. Supreme Court’s opinion inConcepcion was clear that states could not require a procedure that interferes with the fundamental attributes of arbitration.  Thus, because Gentry created a separate set of considerations for enforcing employment arbitration agreements with class action waivers, it was preempted by the FAA and could not stand.

The Court also rejected Iskanian’s argument that the National Labor Relations Board’s holding in In re D.R. Horton, Inc., 357 NLRB No. 184 (2012), precluded enforcement of the class action waiver.  InD.R. Horton, the NLRB had held that class action waivers violated employees’ rights to engage in protected concerted activities under the National Labor Relations Act (“NLRA”).  The majority found thatD.R. Horton could not be reconciled with Concepcion and that neither the NLRA’s text nor its legislative history contained a congressional command overriding the FAA’s mandate and prohibiting class waivers.

The Majority Upholds Employees’ Rights to Proceed on a Representative Basis

In addition to his claims for unpaid wages, Iskanian also sought to recover penalties pursuant to PAGA on a representative basis.  Pursuant to PAGA, individuals may bring non-class representative actions to recover civil penalties and attorneys’ fees on behalf of themselves and other “aggrieved employees” for certain violations of the California Labor Code.  Of civil penalties recovered, 75 percent are paid to the state and the remainder belong to the aggrieved employee(s) pursuing the action. In Arias v. Superior Court, 46 Cal. 4th 969 (2009), the California Supreme Court held that PAGA claims were fundamentally different from class actions because they are law enforcement actions brought by private litigants standing in the shoes of the state.  Guided, in part, by Arias, several California courts have resisted compelling PAGA representative actions to arbitration on an individual basis, arguing that the statute’s purpose requires that such claims be litigated on behalf of other employees.  Seee.g.Brown v. Ralphs Grocery Co., 197 Cal. App. 4th 489 (2011). 

Majority Holds There is a Substantive Right to Bring a Representative PAGA Claim

After reviewing the history of PAGA and the Arias decision, the California Supreme Court determined that “where . . . an employment agreement compels the waiver of representative claims under . . . PAGA, it is contrary to public policy and unenforceable as a matter of state law.”  In arriving at this conclusion, the Court compared PAGA actions to qui tam actions, brought on behalf of the government.  The Court reasoned that a prohibition of PAGA representative claims would frustrate the objectives of PAGA by limiting the statute’s ability to punish and deter unlawful employer practices.

The Court rejected the argument that the right to proceed on a representative basis pursuant to PAGA was preempted by the FAA.  The majority noted that the FAA’s focus was on private disputes.  Because a PAGA action was on behalf of the government, the Court held that “a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship.”

Iskanian’s Open Question: One Forum or Two?

Having concluded that the class action waiver was enforceable but the PAGA representative action waiver was not, the Court raised the question of how Iskanian (and similar cases) would proceed.  On the one hand, Iskanian was required to arbitrate his damages (i.e., wage) claims on an individual basis.  However, the Court suggested two options existed with respect to the representative PAGA claims: (1) they could go to arbitration on a representative basis; or (2) the case could be bifurcated, with the PAGA claims remaining in court and the remainder of the case in individual arbitration.

Unfortunately, the Court left this question unanswered; the parties were asked to address this issue on remand.  As a practical matter, this means that it is unclear whether, after Iskanian, courts should or will bifurcate cases and have them proceed on two tracks – arbitration and litigation in court – or whether entire cases should be compelled to arbitration, with the PAGA claims proceeding on a representative basis.

Take Aways From Iskanian

It is unknown whether CLS will petition the U.S. Supreme Court to review Iskanian’s holding with respect to PAGA representative action waivers.  Whether the U.S. Supreme Court would uphold Iskanianalso is an open question.  Numerous district courts in California that considered some of the arguments relied on by the California Supreme Court in Iskanian found that they were inconsistent with Concepcionand its progeny.  Given the current U.S. Supreme Court’s pro-arbitration leaning, it is unclear whether Iskanian would survive.

Regardless of what CLS decides to do, unless and until the U.S. Supreme Court overrules Iskanian’s holdings, the case has major implications for California employers.  As to class action waivers,Iskanian confirms that Concepcion invalidated any employment arbitration agreement-specific hurdles imposed by Gentry and similar decisions.  As to PAGA representative action waivers, employers should proceed with caution.  In particular, employers should consider whether they will want to move to compel arbitration of PAGA claims to avoid inconsistent judgments and the added expense of re-litigating issues in multiple forums if a court declines to enforce a representative action waiver.