Employers Await Significant High Court Ruling in California PAGA Case

​Claims made under the California Private Attorneys General Act (PAGA) can result in huge penalties for businesses. Employers may want to enforce arbitration agreements that bar workers from bringing representative claims—including PAGA claims—but can they? The U.S. Supreme Court justices seemed divided on the issue during recent oral arguments.

In Viking River Cruises Inc. v. Moriana, a sales representative accused her employer of violating the California Labor Code and filed a representative PAGA action in court. PAGA allows aggrieved employees to sue over alleged labor code violations on behalf of themselves and other employees by stepping into the shoes of state regulators to recover civil penalties.

But the employee had previously signed a pre-dispute agreement to bring her claims individually in arbitration and waived her right to bring a representative action. So, the employer argued that she should be bound by that agreement. 

A California appeals court sided with the employee and declined to enforce the waiver. The employer ultimately asked the Supreme Court to weigh in.  

"The impact of this case could be profound," said Adam Karr, an attorney with O'Melveny & Myers in Los Angeles. "This case is the first opportunity for the Supreme Court to weigh in on whether the Federal Arbitration Act (FAA) pre-empts California's PAGA rules," he noted.

Karr hopes the Supreme Court will rule in the employer's favor and send a clear message that state rules cannot supplant the FAA's firmly rooted policy favoring arbitration.

Some worker advocates, however, see PAGA as a critical enforcement tool. California Attorney General Rob Bonta filed a brief in support of the employee stating, "PAGA is an integral part of the state's labor code enforcement scheme. It plays a particularly important role in ensuring the fair and legal treatment of some of the state's most vulnerable workers, including those in the agricultural, garment and front-line service industries."

How will the Supreme Court rule? The answer isn't clear but based on the justices' questions during oral argument on March 30, they seemed to be split along ideological lines, with the majority favoring the employer.

"The court's questioning, and the arguments from counsel, all seem to indicate that the court will continue its present trend and enforce bilateral arbitration agreements pursuant to their terms," said Jack Sholkoff and Alexander Chemers, attorneys with Ogletree Deakins in Los Angeles. "In other words, it seems likely that employers may, after Viking River Cruises, use properly drafted arbitration agreements as a way to help protect themselves against PAGA litigation."

Why Is the Case Important for Employers?

California officials who support PAGA have argued that the law supplements the limited enforcement capability of the Labor and Workforce Development Agency by empowering employees to enforce the state labor code. Seventy-five percent of the penalties that are recovered go to the state, and 25 percent go to employees.

Many employers, however, argue that PAGA claims are too costly for businesses.

"As most businesses know, PAGA suits, which seek recovery on a representative basis for California Labor Code violations, can be devastating to employers," Sholkoff and Chemers said. "Even technical or harmless violations of the labor code can lead to potentially millions of dollars of liability."

Some business groups, such as the California Chamber of Commerce, argue that PAGA primarily benefits trial attorneys rather than workers. "PAGA also provides a statutory right to attorney fees for the employee's attorney only, thereby adding another layer of cost onto employers and providing an incentive for plaintiffs' attorneys to file the case," according to the Chamber.

Under California Supreme Court precedent, an employee cannot be compelled to arbitrate a PAGA claim in accordance with a pre-dispute arbitration agreement. But does federal law pre-empt California law in this case?

"The Viking case likely will determine whether employers can utilize a properly drafted arbitration agreement to reduce or stop PAGA suits that continue to plague employers in California," Sholkoff and Chemers said.

Possible Employer-Friendly Outcome

"Reading the tea leaves from an oral argument is always risky," Sholkoff and Chemers noted. "Nonetheless, it appears the Supreme Court may be poised to permit employers to enforce representative action waivers contained in arbitration agreements in PAGA cases."

Three of the nine Supreme Court justices seemed likely to side with the employee. Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor "expressed skepticism that the [FAA] would pre-empt a state's decision to outsource enforcement of its labor laws to individuals," Sholkoff and Chemers observed.

For example, Kagan said to the employer's attorney, "So this is a state decision to enforce its own labor laws in a particular kind of way that the state has decided is the only way to adequately do it. And, essentially, your position says, you know, the state just can't make that decision, even though that's the way that the state has decided best serves its sovereign interests."

Chief Justice John Roberts Jr. and Justices Samuel Alito Jr. and Amy Coney Barrett indicated that they may side with the employer.

The employee "doesn't have a right to pursue the substantive claim in court, but she does have a right to pursue the substantive claim," Roberts said. "It's just in arbitration. And I thought that's sort of at the core of our precedents."

Some of the justices asked few or no questions, so it's not clear how the justices will ultimately rule. Notably, however, Justices Neil Gorsuch and Clarence Thomas have decided in favor of arbitration in the past.

Jim Evans, an attorney with Alston & Bird in Los Angeles, said he's not as confident in an employer-friendly outcome as he was before the arguments.

"Despite the headwinds that appear to be blowing, the FAA should pre-empt state laws seeking to curtail otherwise enforceable arbitration agreements," he said. "That will result in enforceable PAGA waivers and more individual PAGA claims being arbitrated."

Evans noted that the high court could find a middle ground. For example, the justices could rule that employees are required to arbitrate the issue of whether they are an "aggrieved party" under PAGA before a PAGA lawsuit can continue. 

"In the meantime, I will be sitting on the edge of my seat," he said.