Supreme Court Permits Mandatory Arbitration of PAGA Claims



The U.S. Supreme Court clarified on June 15 that companies can compel arbitration of an employee's individual claims regarding labor code violations.

In its ruling on Viking River Cruises v. Moriana, the Supreme Court pre-empted a California rule that allowed workers to go to trial with their claims under California's Labor Code Private Attorneys General Act of 2004 (PAGA).

In PAGA claims, individuals can sue a former employer as an agent or proxy of the state. They can bring representative claims, or nonindividual claims, which involve violations that happened to someone other than the plaintiffs.

'Stunning Victory' for Employers

The Supreme Court held that the Federal Arbitration Act (FAA) pre-empts the California Supreme Court's ruling in Iskanian v. CLS Transp., which invalidated contracts that waive an individual's right to file lawsuits alleging PAGA claims.

The Supreme Court did not nullify the plaintiff's right to sue in a representative capacity. It remanded the plaintiff's case back to the trial court and ordered its dismissal, based on a lack of standing under PAGA.  

"The U.S. Supreme Court delivered a stunning victory to employers seeking to enforce employment agreements requiring that their employees arbitrate on an individualized basis," said Richard Silberberg, an attorney with law firm Dorsey & Whitney in New York City.

"This gives California employers an important new tool they can use to mitigate the substantial risk posed by broad representative PAGA actions," said Gary McLaughlin, an attorney with the firm Mitchell Silberberg and Knupp in Los Angeles.

"This ruling should mean fewer PAGA claims against employers that utilize arbitration agreements," he added. "PAGA actions get their punch through the ability to aggregate numerous claims together. Employees subject to arbitration have much less incentive to pursue individual PAGA claims. Because only employers with arbitration agreements will benefit from the court's ruling, employers that have not already implemented arbitration programs may want to consider doing so."  

The decision shows that the court "remains committed to the enforcement of arbitration agreements, even those that include contractual waivers by employees and other potential claimants of class or collective procedures," Silberberg noted.  

Five justices supported the full majority opinion, and three others agreed in part. Justice Clarence Thomas dissented.

Legal Background

The state passed PAGA in 2003 to permit individuals to sue under the California Labor Code for civil penalties that were previously only recoverable by the state.

The penalties for violating PAGA are $100 for each aggrieved employee per pay period for the initial violation and $200 for each aggrieved employee per pay period for each subsequent violation.

The plaintiff in this case signed a mandatory arbitration agreement that stated she could not bring a class action against the employer. She sued over labor code violations for herself and others. 

Later, California courts denied the employer's motion to compel arbitration of the plaintiff's PAGA claims. They concluded that the employer wanted to use arbitration as a shield to avoid PAGA claims.

The case raised the question of whether individual claims can be separated from representative claims.

In its June 15 ruling, the Supreme Court "found that under PAGA, a plaintiff has standing to maintain non-individual PAGA claims in an action only by virtue of the fact that she is also asserting an individual PAGA claim in that action," Silberberg pointed out.

Therefore, the plaintiff's representative PAGA claims had to be dismissed once it was determined that she had to arbitrate her individual PAGA claim.

"For now, a PAGA claim cannot survive an agreement to arbitrate because the employee's individual PAGA claim would have to be arbitrated, and the employee would then lack standing to assert representative PAGA claims on behalf of others in court," Silberberg said. "But it is highly unlikely that today's rulings will doom PAGA claims altogether."

Today's ruling might "invigorate legislative efforts to amend PAGA to re-establish the viability of a representative PAGA action that could survive FAA pre-emption," he added.

Update Your Contracts

Employers should review their arbitration agreements and update them accordingly.

"Many arbitration agreements had expressly carved out PAGA claims based on California authority that the Supreme Court has now found to be pre-empted," McLaughlin explained. "Employers will presumably want to remove such carve-outs now.

"Employers should also be sure that their agreements do not purport to waive PAGA claims entirely, but rather mandate arbitration of employees' individual PAGA claims," he added. "California employers who do not currently use arbitration agreements may want to consider implementing them in light of this ruling."