California Supreme Court Delivers Major Blow to Use of Arbitration Agreements to Manage PAGA Risks

07.17.2023

On July 17, 2023, the California Supreme Court ruled that an employee maintains standing to prosecute a representative lawsuit under the Private Attorneys General Act of 2004 (“PAGA”) even if the employee’s own individual PAGA claims are submitted to a separate arbitration. The ruling in Erik Adolph v. Uber Technologies, Inc., S274671, represents a major blow to California employers who had hoped to use employment-based arbitration agreements to keep PAGA litigation risks under control.

Originally enacted in 2004 with the lofty goal of enhancing California’s Labor Code enforcement objectives, PAGA is more often regarded as a recipe for “sue first, ask questions later” lawsuits and shakedown settlements—driven by the pursuit of attorneys’ fees rather than justice. PAGA permits any employee to sue an employer for Labor Code violations and recover steep civil penalties on behalf of all other employees. PAGA litigation usually moves forward with little regard for the severity of the violations or the merits of the plaintiff’s own claims. The potential exposure can be catastrophic.

An employer can break up a class action with a well-crafted arbitration agreement and a timely motion to compel arbitration—the end result finds the plaintiff-employee in individual arbitration while the remaining class action claims simply go away. But PAGA is not a class action, and California courts historically ruled that PAGA claims are immune from arbitration agreements, guaranteeing the continued livelihood of high-stakes PAGA lawsuits.

Employers found a glimmer of hope last June when the U.S. Supreme Court issued two employer-friendly findings in Viking River Cruises v. Moriana (2022) 142 S.Ct. 1906. First, that a plaintiff-employee’s individual PAGA claims can be compelled to arbitration where the Federal Arbitration Act (FAA) applies to the arbitration agreement. Second, that the plaintiff-employee, once their individual PAGA claim is relegated to arbitration, loses “standing” to maintain PAGA claims on behalf of the other employees—resulting in the outright dismissal of the representative PAGA claims. California trial courts quickly disregarded the second finding in Viking, because PAGA “standing” is regarded as a matter of California state law which the California Supreme Court took under review in Uber.

The California Supreme Court in Uber chose to disagree with the U.S. Supreme Court, instead deciding that even when a plaintiff-employee’s individual PAGA claims are fully committed to arbitration, the employee maintains standing to continue representing other employees in a PAGA action in the courts. Justifying its decision in Uber, the California Supreme Court reasoned that PAGA has only two written requirements to confer standing: 1. The person was employed by the alleged violator; and 2. The person suffered one or more of the alleged violations. According to the California Supreme Court, neither of those prerequisites are stripped from a plaintiff-employee merely because their individual portion of the PAGA claims is relegated to a separate arbitration proceeding.

In a potential boon to employers, the California Supreme Court passively commented that the trial court could (in its discretion) impose a stay on the representative PAGA claims until the employee’s individual PAGA arbitration concludes, further noting that the employee could not proceed with the representative PAGA claim if the arbitrator determined the employee never suffered a Labor Code violation. The end result will give employers a fighting chance to defeat PAGA actions at the individual arbitration stage. However, for employers worried about fighting a PAGA war on two fronts, it remains to be seen whether trial courts will continue to put the representative PAGA claims on hold during arbitration.

Uber represents the final word on PAGA’s representative standing requirements. However, it leaves several unanswered questions. First, if an employee suffered a Labor Code violation, is there any form of settlement or judgment that can put the employee’s representative PAGA standing to rest? Second, is a plaintiff-employee allowed to represent other employees if the other employees signed arbitration agreements requiring individual arbitration of their PAGA claims? These lingering questions are sure to instigate further litigation.

Where does this leave employers? Uber leaves employers in a complicated position as they evaluate their next steps and assess the value of using arbitration to manage PAGA litigation risks. Complete wage and hour victories are difficult, though not impossible to achieve in arbitration. Employers may therefore still face the prospect of fighting a representative PAGA lawsuit after (or even during) arbitration. However, an employer that fails to promptly compel arbitration may permanently foreclose valuable future strategies to attack the PAGA claims using the arbitration agreement.

Employers may also take heart that the California Fair Pay and Employer Accountability Act, an initiative to repeal PAGA and put civil penalties back into the hands of California’s Labor Commissioner, will be put to the voters on California’s 2024 November ballot.

Employers with questions regarding the impact of the decision, whether to implement arbitration agreements, or the strategic merits of asserting their existing arbitration agreements against a PAGA lawsuit should contact the authors of this Alert or their usual counsel at AALRR.