Employment Arbitration Agreements & PAGA — Choose Your Words Carefully
Employment Arbitration Agreements & PAGA — Choose Your Words Carefully

Drafting arbitration provisions in the employment context is becoming a form of art. Recent decisions issued by the California Courts of Appeal highlight to employers that even valid arbitration agreements are subject to the court’s scrutiny when it comes to representative actions under the California’s Private Attorneys General Act (“PAGA”), and may not achieve the intended result depending upon the language used in the arbitration agreement.

Recent Court of Appeal Decisions
In Olabi v. Neutron Holdings, Inc., the plaintiff Olabi sued Neutron Holdings, Inc., which does business as Lime, in San Francisco Superior Court asserting various wage and hour violations under PAGA and for unfair business competition. Olabi alleged that Lime intentionally misclassified him and others as independent contractors rather than employees resulting in violations of the Labor Code. Lime filed a petition to compel arbitration based on an arbitration agreement entered into by the parties. Prior to the trial court’s hearing on the petition, however, Olabi dismissed the unfair competition claim leaving only a single cause of action — a representative PAGA action for civil penalties.

The California Supreme Court has found that representative claims under PAGA cannot be arbitrated. The Supreme Court reasoned that because PAGA actions are claims between the State and the employer, private agreements to arbitrate such claims are not enforceable for public policy reasons. Relying on that authority, the Olabi trial court denied Lime’s petition to compel arbitration, and the Court of Appeal agreed that the PAGA claim was not arbitrable and affirmed the trial court’s ruling.

In its appeal, Lime principally argued that the arbitration agreement required the parties to arbitrate the substantive dispute underlying the PAGA action—whether Lime misclassified its employees. In other words, Lime argued the court must stay the PAGA action while the parties arbitrate the misclassification dispute and then, only if Olabi wins in arbitration, can the parties return to court to litigate the claims under PAGA. The Court of Appeal disagreed. Because of the language in arbitration agreement, the Court of Appeal found that it was not necessary for it to decide the issue of whether the misclassification claim was arbitrable. Instead, the Court of Appeal focused on the plain language of the arbitration agreement which required the parties to arbitrate “any and all disputes between them” which the Court of Appeal acknowledged included potential employee misclassification. However, the agreement also included a carve-out which provided that “any representative action brought under PAGA on behalf of others must be litigated in a court of competent jurisdiction.” (emphasis added). According to the Court of Appeal, the term “action” generally means “suit” and refers to the entire judicial proceeding, from complaint to judgment. In light of this, the Court of Appeal interpreted the carve-out to mean that it removes a PAGA action, including underlying “disputes” that would be otherwise arbitrable under the arbitration provision, and requires the lawsuit to be litigated in court. Thus, the Court of Appeal affirmed the trial court’s denial of Lime’s petition because the arbitration provision in the agreement at issue “broadly excludes PAGA actions.”

Similarly, in Kec v. R.J. Reynolds Tobacco Company, the California Court of Appeal also ruled that the employer, R.J. Reynolds, would have to face a former worker’s misclassification claims in court based on the language of the arbitration agreement between the parties. The plaintiff Kec brought individual, class, and PAGA claims against the employer R.J. Reynolds alleging that she and others were misclassified as exempt employees. R.J. Reynolds sought to compel arbitration of the individual claims—the misclassification claims—based on an arbitration agreement between the parties. The agreement, however, purported to waive representative actions brought under PAGA. The agreement went on to provide that the provision containing the class action and representative waiver was not modifiable or severable from the arbitration agreement. Relying on this provision, the Court of Appeal concluded that R.J. Reynolds could not sever the individual claims from the PAGA action because the agreement expressly forbade modifications such as trial of individual claims in arbitration, and a representative action in court. Thus, Court of Appeal ordered the trial court to enter a new order denying R.J. Reynolds’ motion to compel arbitration requiring the PAGA claims and misclassification claims to be litigated in court.

What These Cases Mean for California Employers
Olabi and R.J. Reynolds serve as a cautionary tale to employers that they and their counsel must be especially careful when drafting the language of their employee arbitration agreements. The agreements should be painstakingly specific as to which claims it does and does not cover. Please contact your usual trusted counsel at AALRR or the authors if you have any questions about updating your arbitration agreement.

Categories: Wage & Hour
Tags: PAGA


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