Viking River Cruises Eliminates California’s Absolute Ban on PAGA Arbitrations — Why Employers Should Shore Up Their Arbitration Agreements Before the Next Round of Litigation

On June 15, 2022, the U.S. Supreme Court delivered its opinion in Viking River Cruises v. Moriana (Dkt. No. 20-1573), which opened claims under California’s Labor Code Private Attorney General Act of 2004 (“PAGA”) to individual arbitration. In light of the Viking River Cruises ruling, employers should immediately review their arbitration agreements.

By way of context, employers regularly implement arbitration agreements to manage workplace litigation risk, relying on two key features in the agreements: first, a mandate that all claims be resolved through arbitration; and second, a class and representative action waiver limiting the arbitration to the employee’s individual claims and not those of other employees. Arbitration agreements have been effective in combating class action lawsuits, which otherwise can expose employers to multi-million dollar liability.

The Federal Arbitration Act (“FAA”) mandates enforcement of arbitration agreements, including the class and representative action waiver, notwithstanding state law resisting the agreements. However, PAGA lawsuits posed a unique challenge for arbitration agreements. PAGA is a law that permits any employee who sustained a Labor Code violation to sue their employer for civil penalties—not just on their own behalf, but on behalf of every other employee who was aggrieved by the alleged conduct of the employer. Previously, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles (2014) 59 Cal.4th 348, that PAGA claims are fundamentally a Labor Code enforcement action that cannot be separated into individual claims and, therefore, cannot be compelled to arbitration. Since Iskanian, California courts routinely refused to enforce agreements to arbitrate when the claims asserted were brought under PAGA.

Through application of the FAA, the U.S. Supreme Court dismantled PAGA’s absolute immunity from arbitration. Employers should note several principal holdings.

First, an arbitration agreement cannot prevent an employee from bringing a PAGA claim altogether, whether in court or arbitration. Second, the FAA allows arbitration agreements to require employees to bring their individual PAGA claims in arbitration. Third, the FAA prevents the employee’s individual PAGA claim from being forcibly bundled with non-individual  PAGA claims arising from Labor Code violations sustained by other employees. Finally, the Court ruled that where individual PAGA claims are compelled to arbitration, the non-individual PAGA claims that remain in court should be dismissed because the employee no longer has standing to pursue such claims in court. For a more detailed breakdown of Viking River Cruises, please consult our previous Alert on the Court’s opinion.

The end result is that employers may now compel individual PAGA claims to arbitration. However, employers should anticipate waves of litigation as parties contest whether a particular arbitration agreement qualifies under the new standard, as well as the appropriate legal standard for PAGA’s standing requirement.

Employers should work with experienced employment counsel to promptly review their arbitration agreements to ensure the language falls within the coverage of the Viking River decision. Arbitration agreements should generally cover the following bases:

• Include the employee’s individual PAGA claims within the scope of covered claims subject to arbitration
• Include a representative action waiver sufficient to permit individual PAGA claims but disallow representative PAGA claims in arbitration, while being careful to avoid language from being interpreted as a forbidden “wholesale waiver” of representative PAGA claims
• Include a severability clause to ensure that all lawful provisions authorized by Viking River Cruises are enforced and survive legal challenges designed to misconstrue the meaning of the representative waiver

Employers should understand that the centerpiece feature of Viking River Cruises—dismissal of the costly non-individual PAGA claims from court—relies on PAGA’s state law standing doctrine. In addition to legal challenges by employees in the state courts to avoid this aspect of Viking River Cruises, it is anticipated that the California Legislature may seek to revise PAGA to alter this standing requirement and provide a renewed pathway for continuing representative PAGA lawsuits in the courts.

Employers with questions about arbitration agreements and in need of assistance should contact the authors or their usual counsel at Atkinson, Andelson, Loya, Ruud & Romo for guidance.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR presentation does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.    © 2022 Atkinson, Andelson, Loya, Ruud & Romo