PAGA Claims Not Subject to Arbitration, California Appeal Court Rules

Attempt to circumvent state Supreme Court’s ruling fails

By Joanne Deschenaux, J.D. Feb 10, 2017
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​An employee who filed wage and hour claims against her employer under the California Private Attorneys General Act (PAGA) could not be forced to arbitrate those claims, the California Court of Appeal ruled. A PAGA suit is an action brought by an individual on behalf of the state and therefore does not present any individual claims that may be subject to arbitration, the court held.

The employer contended that although the California Supreme Court ruled in Iskanian v. CLS Transportation Los Angeles LLC (59 Cal.4th 348 (2014)) that PAGA claims themselves were not subject to mandatory arbitration, the employee could be compelled to arbitrate whether she was an "aggrieved party" under PAGA. The court rejected this argument.

Martina Hernandez worked for Ross Stores from Sept. 12, 2012, until her termination on Sept. 4, 2014. She was employed as a nonexempt, hourly warehouse employee at a distribution center in Moreno Valley, Calif. When Hernandez was hired, she agreed to submit to binding arbitration "any disputes relating to her employment."

On May 13, 2014, Hernandez brought a PAGA action on behalf of all "aggrieved employees," defined as all former and current nonexempt hourly employees who worked at any of Ross' warehouses from Dec. 2, 2012, to the present and whose time was tracked by electronic time management systems. Hernandez alleged that Ross violated several sections of the California Labor Code by failing to pay all appropriate wages, failing to properly itemize hours worked and paid, and failing to pay for overtime.

Ross filed a motion to compel arbitration, claiming that before the PAGA claims could be heard by a court, Hernandez must arbitrate whether she was an "aggrieved party" under PAGA. The trial court found, relying on Iskanian, that the PAGA claim was a representative action brought on behalf of the state and did not include individual claims. It therefore denied the motion to compel arbitration because there were no individual claims or disputes between Ross and Hernandez that could be separately arbitrated.

On appeal, Ross raised the issue of whether, under the Federal Arbitration Act (FAA), an employer and employee have the right to agree to individually arbitrate disputes underlying a PAGA claim while leaving the PAGA claim to be litigated under Iskanian. The court rejected this argument and affirmed the order refusing to compel arbitration.

Court Follows Iskanian and Williams

In Iskanian, an employee sought to bring a PAGA action for the employer's failure to properly compensate its employees for overtime, meals and rest periods. An employment agreement included a clause stating that the employee, as a condition of his employment, must waive his right to bring representative PAGA actions.

The Iskanian court noted that under PAGA, an "aggrieved employee" may bring a civil action personally and on behalf of other current or former employees to recover civil penalties for Labor Code violations. Of the civil penalties recovered, 75 percent goes to the Labor and Workforce Development Agency, leaving the remaining 25 percent for the "aggrieved employees." The court then noted that an employee suing under PAGA does so as the "'proxy or agent of the state's labor law enforcement agencies." The court concluded that an employee's right to bring a PAGA action is "unwaivable" and that a PAGA claim lies outside the FAA's coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state.

After Iskanian, a California appellate court decided Williams v. Superior Court (237 Cal.App.4th 642 (2015)). In that case, the employee brought a single representative action against his employer under PAGA for alleged rest period violations under the Labor Code. The trial court found that the PAGA waiver in an arbitration agreement was unenforceable, relying on Iskanian. But it also found that the employee must submit the "underlying controversy" to arbitration for a determination of whether he or she is an "aggrieved employee" who could file a PAGA claim.

On appeal, the Williams court concluded that "case law suggests that a single representative PAGA claim cannot be split into an arbitrable individual claim and a nonarbitrable representative claim." It ruled that the employee "cannot be compelled to submit any portion of his representative PAGA claim to arbitration, including whether he was an 'aggrieved employee.' "

Based on Iskanian and Williams, the appellate court ruled that the dispute between Ross and Hernandez was not a dispute between the employer and employee and that the trial court properly determined that it had no authority to order arbitration of the PAGA claim.

[SHRM members-only toolkit: Preventing Unlawful Workplace Retaliation in California]

Hernandez v. Ross Stores Inc., Cal. Ct. App., No. E064026 (Jan. 3, 2017).

Professional Pointer: PAGA provides for civil penalties and does not authorize the award of individualized damages to employees—although the employees do receive a set portion (25 percent) of the penalty paid. Therefore, claims for damages for wage and hour violations cannot be brought under PAGA and may be made subject to mandatory arbitration.

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

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