With the California legislature’s passage of Assembly Bill 5 on September 11, 2019, which sharply restrains businesses’ use of independent contractors, California businesses welcomed some good news last week from the California Supreme Court with respect to wage and hour claims and agreements to arbitrate in ZB, N.A., et al. v. Superior Court (Lawson) (September 12, 2019).
Although the U.S. Supreme Court has consistently given the Federal Arbitration Act (“FAA”) an expansive reading and has repeatedly preempted state laws that discriminate against arbitration, California has long led the charge to undermine arbitration agreements, particularly with respect to employees’ wage and hour claims. One such loophole to the FAA that has proven particularly effective is the California Supreme Court’s holding in Iskanian v. CLS Transportation Los Angeles, LLC, 327 P.3d 129 (Cal. 2014) that a pre-dispute agreement to arbitrate a representative claim under California’s Private Attorneys General Act (“PAGA”) is unenforceable. As a result of Iskanian and its progeny, even where an employee has agreed to waive his right to a jury trial and arbitrate all claims with his employer, such an agreement is unenforceable with respect to a representative PAGA claim. Employees and their attorneys have used this loophole to defeat agreements to arbitrate claims on an individual basis, by bringing PAGA-only claims for unpaid wages and civil penalties.
In a surprise twist, the California Supreme Court issued a decision that will undoubtedly curb the impact of Iskanian by holding that plaintiffs cannot recover their unpaid wages in a PAGA action. Before we kick off the celebrations, Iskanian continues to be the law in California, and despite executing otherwise enforceable agreements to arbitrate, California employees still cannot waive the right to bring a representative PAGA claim in any forum. And in cases that would likely result in hefty penalties but modest unpaid wages, PAGA-only claims remain a strategy for employees to defeat otherwise enforceable agreements to arbitrate. But where unpaid wages are significant, ZB, N.A. will force plaintiffs to make a tough decision to waive recovery of unpaid wages in order to avoid arbitration, and in California that’s a win.