California Court of Appeal Continues Trend Rejecting Arbitration of PAGA Claims

Two recent decisions by California courts concluded employees who signed pre-dispute arbitration agreements with their employers could not be compelled to arbitrate their individual PAGA (the Private Attorney’s General Act of 2004 [Labor Code section 2698, et seq.]) claims against their employer.

In the recent decisions of Tanguilig v. Bloomingdale's (2016) 5 Cal.App.5th 665, and Hernandez v. Ross Store (2016) 7 Cal.App.5th 171, the Court of Appeal expanded the scope of Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348 (“Iskanian”), by concluding that the stand alone Labor Code violations upon which PAGA claims are based cannot be arbitrated.  This is so even when, as a condition of employment, an employee agrees to arbitrate any employment related dispute on an individual basis.  Thus, a plaintiff who brings a claim under PAGA cannot be compelled to arbitrate any portion of his or her PAGA claim as a precondition to pursuing a PAGA action.

In Tanguilig v. Bloomingdale’s, a former employee of Bloomingdale’s filed a representative PAGA action on behalf of the State of California, herself, and other current or former employees alleging that Bloomingdale’s failed to provide its commission-earning employees with paid rest periods, minimum wage for noncommission activities, complete and accurate wage statements, and timely payment of their wages.  Bloomingdale’s filed a petition to compel arbitration on the grounds that the employee had entered into a dispute resolution agreement in which she agreed to binding arbitration of all employment-related disputes. Bloomingdale’s argued that while the PAGA claim was not arbitrable under Iskanian, the underlying alleged Labor Code violations were required to be arbitrated.  The trial court denied Bloomingdale’s petition to compel arbitration holding that the PAGA claim could not be broken down into arbitrable and non-arbitrable claims.

The Court of Appeal affirmed the trial court’s ruling. The court held that under Iskanian, a PAGA representative claim is nonwaivable by an employee via a pre-dispute arbitration agreement with an employer. In addition, the Court of Appeal rejected Bloomingdale’s request to compel Tanguilig’s individual PAGA claim on the grounds that the State, as the real-party-in-interest, had not agreed to arbitration, and therefore arbitration could not be compelled (even as to Plaintiff’s individual PAGA claim). The court noted that its ruling did not conflict with the Federal Arbitration Act (9 U.S.C. et seq.) (“FAA”), reasoning that PAGA claims are a type of qui tam action, and were never intended to be within the ambit of the FAA.

Similarly, in Hernandez v. Ross Stores, Plaintiff Martina Hernandez (“Hernandez”), a non-exempt employee of Ross, filed a single-count representative action under PAGA alleging Ross violated numerous Labor Code provisions, and sought to recover PAGA civil penalties for the violations.  As a condition of employment, Hernandez had agreed to arbitrate any disputes relating to her employment on an individual basis.  Ross moved to compel arbitration, asserting that, as a precondition to pursuing a PAGA action, Hernandez had to first establish that she suffered an injury under the California Labor Code.  Ross argued that whether Hernandez suffered an injury was a “dispute” under the Labor Code and therefore subject to arbitration. The trial court disagreed and, relying on Iskanian, held that the PAGA claim was a representative action brought on behalf of the State and did not include individual claims.  It therefore denied Ross’ petition to compel arbitration.

The Court of Appeal affirmed the trial court’s ruling, and dismissed Ross’ argument on the grounds that no authority supported compelling an employee to arbitrate individual aspects of his or her PAGA claim while maintaining the representative claim in court.  The court further noted that requiring an employee to litigate his claim in multiple forums would thwart the public policy of PAGA to “empower employees to enforce the Labor Code” on behalf of the State.

These decisions, though not surprising to many practitioners, reflect California’s longstanding hostility towards the enforcement of employee arbitration agreements.  Thus, for the time being, employers will continue to be required to litigate PAGA claims in a judicial forum when sued in state court. This is so even if an employee has agreed to arbitration with respect to all employment disputes, and even if an employer only seeks arbitration with respect to an employee’s individual PAGA claim.

Pre-dispute arbitration agreements remain a useful tool for employers, but the implication of such agreements to PAGA claims continues to be a hot button issue in litigation in state and federal courts with differing results.  Indeed, while Hernandez and Tanguilig are generally reflective of the approach taken by state courts when faced with this issue, federal courts continue to conclude that PAGA claims are arbitrable.

As recently as last week, the Ninth Circuit concluded, in an unpublished decision, that an individual employee acting as an agent of the government can agree to pursue a representative PAGA claim in arbitration. (See Valdez v. Terminix International Company Limited Partnership, DBA, No. 15-56236 (9th Cir. March 3, 2017).)

Thus, while California state courts have consistently held that a pre-dispute waiver cannot bind a government agency to arbitration of an employee’s PAGA claim, the Ninth Circuit has signaled a greater willingness to compel arbitration of representative PAGA claims by holding that employees’ individual contracts can bind government parties.  Given this split in authority, as well as the current and evolving standards regarding PAGA claims, employers should regularly revisit their arbitration agreements to ensure that they are compliant with this evolving area of law. In addition, in the months ahead, the U.S. Supreme Court will consider whether an employer can require employment-related disputes to be resolved through individual arbitration, and, thus, whether an employer can include a class action waiver in its employment and/or arbitration agreementsAs the U.S. Supreme Court will be providing further guidance in this area, employers should continue to be vigilant in their ongoing review of their employment agreements to ensure the viability of such agreements.

Employers with questions regarding the business implications of these cases or about the use of pre-dispute arbitration agreements may contact the authors or their usual employment counsel at AALRR.

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