U.S. Supreme Court to Review California’s Ban on PAGA Waivers

Employment Law

In a major turn of events for California employers, on December 15, 2021, the U.S. Supreme Court granted certiorari in a case that challenges California’s ban on arbitration agreements that limit employees’ right to sue their employers in court on a representative basis under the Private Attorney General Act (PAGA). In 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), that PAGA claims are proxy actions brought on behalf of the state to enforce the Labor Code, and as such, they are not disputes between an employer and an employee. Given that posture, the California Supreme Court determined that waivers of PAGA representative claims in favor of individual arbitration violated the state’s public policy and could not be enforced. The California Supreme Court further reasoned that its position did not run afoul of federal preemption under the Federal Arbitration Act (FAA) because preemption only applies to employer/employee agreements and not to matters that involve the state. Later, in 2015, the Ninth Circuit supported that position, holding in Sakkab v. Luxottica Retail North America, 803 F.3d 425 (9th Cir. 2015), that the FAA does not preempt California’s ban on PAGA waivers.

In Viking River Cruises, Inc. v. Moriana, the U.S. Supreme Court will now directly tackle California’s rule allowing employees to circumvent individual arbitration agreements by bringing PAGA representative claims in court. In Viking River, the employer argues that Iskanian goes against the U.S. Supreme Court’s holding in Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018), in which it held that under the FAA, courts must enforce the terms of arbitration agreements, including those that require individual proceedings and waive representative or class proceedings. The employer further argues that California’s ban on PAGA waivers is directly contrary to the U.S. Supreme Court’s earlier holding on FAA preemption in AT&T Mobility LLC v. Concepcion, 563 U.S. 331 (2011), as well as other cases, in which the Court held “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”

Why it matters: If the employer in Viking River is ultimately successful, employees with enforceable arbitration agreements may be prevented from bringing PAGA representative actions and may be compelled to comply with the terms of arbitration agreements that require their claims to be brought on an individual basis in arbitration. In other words, California’s ban on PAGA waivers may come to an abrupt end. A decision is expected in mid-2022. Employers should watch closely for updates on this decision.

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