California Employer Cannot Force Worker to Arbitrate PAGA Claims

By Joanne Deschenaux August 26, 2020
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A California appeals court recently rejected an employer's argument that a U.S. Supreme Court ruling allows for mandatory arbitration of claims brought under the state's Private Attorneys General Act (PAGA).

In 2018, the U.S. Supreme Court ruled in Epic Systems Corp. v. Lewis that class-action waivers in arbitration agreements must be enforced, and individual arbitration must be compelled if the agreement contains such a provision.

As was the situation before the decision in Epic, however, an employer cannot compel arbitration of employees' PAGA claims, the California Court of Appeal said.

Under two California decisions—Iskanian v. CLS Transportation Los Angeles LLC (2014) and Betancourt v. Prudential Overall Supply (2017)—an employee cannot be compelled to arbitrate a PAGA claim in accordance with a pre-dispute arbitration agreement. Epic did not undermine the reasoning of these cases, the court said.  

The plaintiff worked for the employer from November 2014 to August 2015. When he began his employment, he signed an agreement consenting to resolve employment-related claims through arbitration and providing that the Federal Arbitration Act (FAA) would govern interpretation and enforcement of the agreement.

In July 2016, the plaintiff filed his PAGA complaint on behalf of himself and other employees. The company moved to compel arbitration of the plaintiff's claim, but the trial court denied the employer's motion. The appellate court affirmed the trial court's decision refusing to order arbitration.

Unique Nature of PAGA Claims

Under PAGA, the court explained, an "aggrieved employee" may bring a civil action personally and on behalf of other current or former employees to recover civil penalties for California Labor Code violations.

Before bringing the PAGA action, the employee must give the employer and the Labor and Workforce Development Agency (LWDA) notice of the alleged violations. The employee may bring the PAGA action only after the LWDA refuses to investigate or the agency's investigation results in no citation. Most of the recovered civil penalties (75 percent) go to the LWDA, with the remainder going to the aggrieved employees.

[Need help with legal questions? Check out the new SHRM LegalNetwork.]

All PAGA claims are representative actions in the sense that they are brought on the state's behalf. The employee stands in the shoes of the state's labor law enforcement agencies and represents the same legal rights and interests as those agencies.

Therefore, the court said, a PAGA action to recover civil penalties is fundamentally a law enforcement action designed to protect the public and not to benefit private parties.

The two California cases previously held that an employer cannot rely on an employee's pre-dispute arbitration agreement to compel arbitration of a PAGA claim. Generally, only the parties to an arbitration agreement can be compelled to arbitrate, the appeals court explained. And because a PAGA claim is a dispute between an employer and the state, the employee's pre-dispute agreement to arbitrate does not bind the state to arbitration.

The plaintiff signed the arbitration agreement when he began his employment and before his PAGA claim arose. He executed the agreement in his individual capacity. The state had not deputized him to act at the time, and he therefore could not agree to arbitrate on behalf of the state.

The employer argued that the earlier California cases were no longer good law after the U.S. Supreme Court's decision in Epic, but the court rejected this argument.

Epic considered the relationship between two laws: the FAA and the National Labor Relations Act (NLRA). The employees argued that the NLRA's provision guaranteeing workers the right to engage in concerted activity conflicted with the class-action waiver in their arbitration agreements, making the class-action waiver illegal. The high court rejected the employees' argument, reconfirmed that the FAA requires enforcement of class-action waivers and determined that the NLRA does not take precedence over the FAA on this issue.

The California appeals court noted that Epic does not address the unique nature of a PAGA claim and the PAGA litigant's status as the agent of the state in enforcing the California labor laws. Therefore, the ruling in Epic did not undermine the characterization of PAGA claims as law enforcement actions in which plaintiffs step into the shoes of the state, the appeals court held.

Collie v. The Icee Co., Calif. Ct. App., No. E071654 (July 20, 2020).

Professional Pointer: An employer's attempt to compel arbitration of PAGA claims will likely be unsuccessful even if the employee has signed a contract agreeing to arbitrate employment-related disputes. However, claims for damages for wage and hour violations, as opposed to claims for civil penalties available under PAGA, still may be subject to mandatory arbitration.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.  

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