July 24, 2023

Employee Arbitration Agreements and PAGA Claims: Yes We Can (With Qualifiers)

Last week, the California Supreme Court issued its long-awaited decision in Adolph v. Uber Technologies, Inc. to determine the effect of arbitration agreements on claims for penalties brought by employees under the Private Attorneys General Act of 2004 (PAGA). Unfortunately, this ruling does not offer employers one clear-cut way to deal with these disputes.

For many years in California, employers have understood that, although employees can waive their right to bring class actions via an arbitration agreement, they could not waive their right to bring a PAGA action, and, as a result, PAGA claims simply were not arbitrable. In a welcome development for employers, in 2022, in Viking River Cruises, Inc. v. Moriana, the United States Supreme Court held that this total prohibition on arbitrating PAGA claims violated the Federal Arbitration Act (“FAA”) and thus “individual” PAGA claims could be compelled to arbitration.

The open question after the Viking River Cruises decision was what became of the representative, “non-individual” PAGA claims that such an employee was attempting to bring on behalf of a group of “allegedly aggrieved” employees. The U.S. Supreme Court opined that a person compelled to arbitrate individual claims would have no “standing,” or legal right, to separately pursue such non-individual claims. But, Justice Sonia Sotomayor noted in a separate opinion that “standing,” at least with regard to claims brought under California law, is exclusively a matter of state law, and California would have the “last word” of how this played out.

It has now played out. In sum, a PAGA claim can now be simultaneously litigated on two tracks: an arbitration of “individual” PAGA claims, coupled with a lawsuit for “non-individual” claims. A plaintiff does not lose standing simply by having his non-individual claims compelled to arbitration.

But there is a very important caveat here: a trial court has the discretion, but not the obligation, to stay a “representative” PAGA claim while the individual PAGA claims are arbitrated. If the arbitrator concludes that the plaintiff-employee is not “aggrieved,” meaning they have not suffered any of the alleged Labor Code violations alleged, then that person does lose standing, and cannot pursue the non-individual, representative claims in court (and presumably that case would be dismissed). But if the plaintiff-employee obtains a decision from the arbitrator that they are an aggrieved employee, then that person retains standing to pursue the non-individual claims in court.

This presents employers with, possibly, a high-stakes game of chicken: if an employer believes that it has a good chance to prevail in arbitration on the employee’s individual claims, then it may want to pursue arbitration through a final decision. However, if the employer loses, then it is in the position of having to pay any assessed penalties, the arbitrator’s fees, and the attorneys’ fees and costs (upon request and award) of the plaintiff-employee. And on top of that, the employer now has to defend against a PAGA claim in a civil lawsuit.

Such a decision may or may not make sense—the risks and the rewards are high. Of course, if there is evidence that the employee is aggrieved and that some of Labor Code claims undergirding the PAGA claim have merit, an employer would be well advised to consider resolving such a case at an early stage through negotiation and mediation. Otherwise, the adage of “throwing good money after bad” comes into play.

Decisions about whether to utilize employment arbitration agreements and the enforcement of such agreements are complex, and should be considered thoughtfully with legal counsel. Please do not hesitate to reach out to us at Hirschfeld Kraemer with any questions and concerns your company may have.

For more information, contact Dan Handman or Monte Grix. Dan can be reached at 310-255-1820 or dhandman@hkemploymentlaw.com, and Monte can be reached at 415-835-9016 or mgrix@hkemploymentlaw.com