Background

In 2011, the U.S. Supreme Court issued its landmark ruling in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). In that case, the Court held that the Federal Arbitration Act (FAA) requires states to enforce arbitration agreements and class action waivers in consumer contracts. Prior to Concepcion, many states, including California, had developed a practice of invalidating any contract provisions that foreclosed the possibility of obtaining relief on a class-wide basis.

Last year, the California Supreme Court responded to Concepcion with its ruling in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014). Iskanian established two important principles. First, although Concepcion was a case involving a consumer contract, Iskanian confirmed that it is equally applicable to employment contracts. Second, Iskanian distinguished waivers of class action from waivers of all “representative” action. Specifically, the California Supreme Court held that, although the FAA requires enforcement of class action waivers in employment contracts, it is not lawful for employers to require employees to waive representative action under the Private Attorneys General Act (PAGA). Therefore, to the extent that any employment contract requires an employee to waive representative action under PAGA, the provisions establishing such waiver are not enforceable.

The New Case on Iskanian

On September 28, 2015, the U.S. Court of Appeals for the Ninth Circuit was faced with this question: Is the Iskanian rule, which prohibits the waiver of PAGA representative actions, a correct application of Concepcion, or does Concepcion require that PAGA waivers be enforced? In a 2-to-1 decision, the Court of Appeals approved of the Iskanian rule.

When employers violate labor laws, they may be required to pay civil penalties to the state following an action brought by the Labor Commissioner. Prior to the enactment of PAGA, the California Legislature recognized that a shortage of government resources was preventing the Labor Commissioner from pursuing the vast majority of wage violations. To remedy this problem, the Legislature enacted PAGA, which allows a victim of wage violations—the employee—to step into the shoes of the Labor Commissioner and bring an action against his employer to assess civil penalties on behalf of all “aggrieved employees” (i.e., other employees who suffered the same injuries due to the employer’s wage violations).

Therefore, requiring employees to waive PAGA claims would have the effect of insulating the employer from the statutory civil penalties assessed by the Labor Commissioner for wage violations; it would essentially exculpate the employer for its violations of the law. Therefore, PAGA waivers would “harm the state’s interests in enforcing the Labor Code and in receiving the proceeds of civil penalties used to deter violations.”

For these reasons, the Court of Appeals agreed with the California Supreme Court, and ruled that waivers of PAGA claims in employment contracts are not enforceable. Moreover, a more general waiver of “all class and representative action” is also unenforceable to the extent it encompasses PAGA actions. On the other hand, the Court also suggested—as did the California Supreme Court in Iskanian—that PAGA actions are arbitrable. Therefore, an employment agreement requiring arbitration of PAGA actions is likely enforceable, so long as it effectively allows employees to pursue PAGA claims on a representative basis.

What This Means for Employers

This decision affirms the Iskanian rule at the federal court level. Following Iskanian, several federal trial courts declined to apply the prohibition of PAGA waivers. The courts held that Concepcion required employees who had signed waivers of representative action to arbitrate their PAGA claims on an individual basis. Now, however, California state and federal courts alike will be required to apply Iskanian.

It is recommended that employers include arbitration agreements and class action waivers in all employment contracts. However, employers should expressly carve out PAGA actions as exempt from the waiver. Also, employment contracts should contain a severability clause to save the remainder of the agreement should any individual provisions be held invalid. Employers who are unsure about the legality or enforceability of any terms of their employment contracts should seek advice from legal counsel.