U.S. District Court Invalidates Arbitration Agreement Containing A PAGA Waiver

As we previously reported here, on July 12, 2011, the California Court of Appeal held in  Brown v. Ralph's Grocery Company that the decision of the trial court denying enforcement of a class action waiver contained in an arbitration agreement between Ralph's Grocery Company and its employees was not supported by substantial evidence but held, also, that a provision of that arbitration agreement barring employees from pursuing claims under the California Labor Code Private Attorneys General Act of 2004 ("PAGA") is unenforceable because, according to that court, the recent decision of  Supreme Court of the United States in AT& T Mobility v. Concepcion, previously discussed here, does not apply to representative actions brought under PAGA.  Further, the Court of Appeal remanded the case back to the trial court for a determination of whether the arbitration agreement is enforceable except for the PAGA waiver or is unenforceable in its entirety because of the PAGA waiver.  

On October 5, 2011, in in Urbino v. Orkin Services of California, Inc., the United States District Court for the Southern Division of the Central District of California denied the employer's petition to compel the plaintiff former employee to arbitrate his claims, including his claims for penalties under PAGA on the ground the PAGA waiver contained in an arbitration agreement the former employee signed at the outset of his employment is unconscionable because it is contrary to California public policy and rendered the arbitration agreement unenforceable. The court explained its view that the right to bring a representative action on behalf some or all of an employer's allegedly "aggrieved" employees cannot be waived by an employee as part of an arbitration agreement or otherwise. The court concluded, also, that "the waiver in [arbitration] Agreement . . . taints the entirety of the Agreement with illegality" and renders the Agreement unenforceable in its entirety. 

The decision in Urbino if left undisturbed by higher courts is a further setback for California employers, particularly if other United States District Courts follow its reasoning. Plaintiffs bringing class action wage and hour lawsuits now routinely include allegations that their claims fall under PAGA, which provides for awards of very sizable penalties for violations of many provisions of the California Labor Code when aggregated to account for hundreds or even thousands of class members. PAGA provides for penalties of $100 per employee per pay period for each initial violation and of $200 per employee per pay period for each subsequent violation. Further, as we previously reported here and here, California courts hold that PAGA penalties apply, also, to violations of Industrial Welfare Commission Wage Orders

The issue of whether an employer can as part of an arbitration agreement require employees to waive their rights to bring PAGA claims seeking the substantial penalties available under PAGA for violations of the Labor Code and/or for violations of Industrial Welfare Commission wage orders seems destined to be further addressed by other appellate courts. Although California courts have not split on the issue, there is now a split among the United States District Courts. For example: on June 16, 2011, in Quevedo v. Macy's, Inc., the United States District Court for the Western Division of the Central District of California reached a different result and concluded that PAGA waivers are enforceable.  On August 18, 2011, in Nelson v. AT& T Mobility LLC., the United States District Court for the Northern District of California agreed with the conclusion of the court in Quevedo v. Macy's.  On September 19, 2011, in Grabowski v. C.H. Robinson Company, the United States District Court for the Southern District of California likewise held PAGA waivers are enforceable.

In the meantime, in light of the somewhat uncertain state of the law created by the split of authority on this issue, we think employers that have in place or are considering implementing arbitration agreements containing PAGA waivers should promptly consult competent employment law counsel. 

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