July 5, 2022Client Alert

Supreme Court Delivers a Win to California Employers…With Caveats

On June 15, 2022, the U.S. Supreme Court held employers can force California Private Attorneys General Act (PAGA) claims to arbitration. In the short term, the ruling, issued in the case Viking River Cruises, Inc. v. Moriana, represents a win for California employers. Longer term, however, Viking River’s effect on PAGA actions may be limited.

Background on PAGA

PAGA is a unique California law that allows employees to file “representative actions” for Labor Code violations as a proxy of the State of California. Though they may resemble a class action, representative PAGA actions are different in several ways. For instance, an employee who alleges they have suffered a single violation is able to use that violation as a gateway to assert a potentially limitless number of other violations as predicates for liability against the employer, even if the employee is not personally harmed by the other violations. This form of “claim joinder” can significantly increase the amount of civil penalties employees can recover on behalf of the State.

PAGA and Arbitration Agreements

A pair of California rules prohibited both (1) waivers of representative standing to pursue PAGA claims, and (2) agreements to separately arbitrate or litigate individual PAGA claims for Labor Code violations the employee personally suffered. California courts have therefore rejected efforts by employers to split PAGA claims into representative and individual components. As a result, even when an employee was subject to a valid arbitration agreement with a class action waiver, the employee could still file a PAGA action to seek civil penalties for Labor Code violations they have personally suffered, and violations sustained by other employees.

For these reasons, California employers historically have been forced to chose between arbitrating PAGA claims on a representative basis or foregoing arbitration of PAGA claims altogether.

Viking River Ruling

In Viking River, the Supreme Court invalidated the California rule that employers and employees cannot arbitrate individual PAGA claims for Labor Code violations the employee personally suffered. The rule prohibiting waivers of representative PAGA claims remains untouched by the Supreme Court’s decision.

The Supreme Court’s ruling therefore permits employers to force individual PAGA claims to arbitration (assuming there is an enforceable arbitration agreement between the employer and employee). Consequently, once an employee’s individual PAGA claims are committed to arbitration, they no longer have standing to bring a representative action on behalf of other aggrieved employees, which means a court should dismiss any remaining representative claims.

What’s Next?

       A. Legislative Action

The Viking River ruling explicitly leaves open the possibility for the California legislature to amend PAGA to address part of the Supreme Court’s decision. Justice Sotomayor separately wrote the California legislature is “free to modify” PAGA’s standing requirements. Such action, if taken by the legislature, presumably would mean employers would be forced to litigate the representative PAGA claims, while defending an employee’s individual PAGA claims in arbitration. It also could force employers to reassess their appetite for arbitration of individual PAGA claims.

       B. California Assembly Bill 51 (AB 51)

Moreover, employers may see little benefit moving forward thanks to AB 51. AB 51 generally made it unlawful for employers to require employees to arbitrate discrimination, harassment, and retaliation claims under the California Fair Employment and Housing Act (FEHA), and wage and hour claims under the Labor Code.

On September 15, 2021, a Ninth Circuit panel upheld AB 51. The State of California filed a petition for rehearing en banc in October 2021. The Ninth Circuit has been deferring consideration of the petition for rehearing until the Supreme Court issued a ruling in Viking River. Now that the Supreme Court has decided Viking River, the Ninth Circuit will decide whether it will re-hear the challenge to AB 51. Should AB 51 be upheld after rehearing, or should the Ninth Circuit decline to revisit the issue altogether, employers in California will be unable to compel arbitration of Labor Code (or FEHA) claims.

There currently are many considerations for California employers to weigh in deciding whether to ask employees to sign arbitration agreements, or revise their current arbitration agreements. Employers should carefully consider these issues and expect to hear more from California on these topics in the future.

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