California Supreme Court Upholds Class Action Waivers but Finds PAGA Representative Actions Cannot be Waived

On Monday, June 23, 2014, the California Supreme Court issued its opinion in Iskanian v. CLS Transportation Los Angeles, LLC, finding that class action waivers in employment arbitration agreements are enforceable.  However, the Court distinguished actions brought under the Private Attorney General Act (PAGA), which allows an aggrieved employee to bring a civil action on behalf of himself and other current or former employees to recover civil penalties for Labor Code violations, and concluded that such representative actions are not waivable.

In Iskanian, the plaintiff-employee signed an arbitration agreement which stated in part: “EMPLOYEE and COMPANY expressly intend and agree that class action and representative action procedures shall not be asserted, nor will they apply, in any arbitration pursuant to this Policy/Agreement; (2) EMPLOYEE and COMPANY agree that each will not assert class action or representative claims against the other in arbitration or otherwise; and (3) each of EMPLOYEE and COMPANY shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person.”

Despite the arbitration agreement, the plaintiff-employee, Iskanian, filed a wage and hour class action against the defendant-employer, CLS Transportation Los Angeles, LLC.  Iskanian also sought civil penalties for Labor Code violations in a representative capacity under PAGA.  CLS moved to compel arbitration and dismiss the class claims.  Relying on the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion (2011) 563 US 321, the California Supreme Court upheld the class action waiver, finding that the Federal Arbitration Act (FAA) preempted a state rule against such waivers.

However, the Court found that the FAA does not preempt state law prohibiting waiver of PAGA representative actions.  The Court reasoned that the PAGA litigant is acting as a “proxy or agent” of the state and prohibition of such waivers would not “frustrate the FAA’s objectives because …the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency.”

What does this mean for California employers?

Assuming the arbitration agreement is otherwise valid, class action waivers previously thought to be void as against public policy under Gentry v. Superior Court (2007) 42 Cal.4th 443, will now be enforced by California courts.  Claims under PAGA, however, still cannotbe waived and aggrieved employees are free to seek civil penalties for violations that he or she personally suffered as well as on behalf of all other current or former employees.  PAGA limits the claims for penalties to a one year statute of limitations, but does entitle employees to reasonable attorneys’ fees.  All employers should give due consideration to arbitration agreements with class action waivers.