California law on the enforceability of arbitration agreements―and on the degree to which class action or representative action waivers are enforceable―has been dynamic and frequently changing.

On June 15, 2022, the Supreme Court of the United States issued an 8-1 decision in Viking River Cruises, Inc. v. Moriana, holding that an employee’s individual claims for penalties under the Private Attorneys General Act, California Labor Code section 2698 et seq. (PAGA), may be compelled to arbitration in certain circumstances. The Court went one step further, holding that once an employee’s individual claims under PAGA are compelled to arbitration, the employee does not have standing to bring nonindividual (i.e., representative) claims under PAGA on behalf of other employees.

PAGA Basics

PAGA, otherwise known as the “sue your employer act” and the “employment bounty-hunter law,” authorizes an employee to bring an individual or representative action for civil penalties on behalf of the state of California against their employer for labor code violations. The default civil penalty under PAGA is $100 “for each aggrieved employee per pay period for the initial violation” and $200 “for each aggrieved employee per pay period for each subsequent violation.” Any civil penalties recovered, whether in a settlement or after a trial, are distributed 75 percent to the state and the remaining 25 percent to the “aggrieved employees.” What has fueled the prolific filing of PAGA claims since its enactment in 2004 is the plaintiff’s ability to recover attorneys’ fees and costs if they prevail on any labor code violation, as well as the fact that PAGA penalties are assessed per employee and per pay period, often making them substantial.

The Iskanian Rule

Prior to the Court’s decision in Viking River, the California Supreme Court decided Iskanian v. CLS Transportation Los Angeles, 59 Cal.4th 348 (2014). In Iskanian, the employee signed an agreement that “any and all claims” arising out of his employment were to be submitted to binding arbitration. The agreement additionally included a class and representative action waiver, expressly providing that the employee and the company “agree that each will not assert class action or representative action claims against the other.”

Notwithstanding his agreement, Iskanian filed a class and PAGA action based on CLS Transportation’s alleged failure to pay wages, meal and rest period violations, as well as other wage-and-hour claims. The California Supreme Court held that arbitration agreements purporting to waive the bringing of PAGA representative claims were unenforceable and contrary to public policy. In addition, the court opined that the Federal Arbitration Act (FAA) did not preempt state law prohibiting the waiver of PAGA actions. The state court explained that a PAGA claim lies outside FAA’s coverage because it is not a dispute between the employer and an employee―but rather a dispute between the employer and the state, and that the employee was merely standing in the shoes of the state of California.

Accordingly, under Iskanian, PAGA was widely interpreted to mean that a PAGA claim could not be divided into an individual component and a representative component and, because of such joinder, PAGA claims could not be compelled to arbitration.

Enter Viking River Cruises

Moriana, a former sales representative, filed a PAGA claim against Viking River Cruises seeking penalties for alleged wage-and-hour violations. When Moriana was hired, she signed an agreement to arbitrate any disputes arising out of her employment and waived any right to bring a representative claim. Notably, the agreement contained a severability clause specifying that if any part of the waiver of representative claims were invalid, then the invalid portion would be severed from the agreement and only the remaining valid portion of the waiver would be enforceable.

Viking River Cruises argued that Moriana’s PAGA claim was subject to individual arbitration under the arbitration agreement she signed as a condition of her employment. Moriana argued that, pursuant to Iskanian, her “individual” PAGA claim (for penalties for violations she personally suffered) could not be severed from the “representative” PAGA claim (seeking penalties for violations suffered by other “aggrieved employees”).

In a big win for employers, the U.S. Supreme Court held that the FAA preempts the Iskanian rule regarding the nondivisible nature, or joinder, of PAGA claims. In other words, a plaintiff’s individual component of the PAGA claim can now be split from the representative component of the PAGA claim where there is a valid arbitration agreement providing that the individual’s claims must be arbitrated.

As a result, the Court severed and invalidated the portion of the arbitration agreement purporting to compel arbitration of Moriana’s representative PAGA claim, but upheld and enforced the portion of the agreement requiring Moriana to arbitrate her individual PAGA claims―effectively splitting California’s PAGA law.

The Court further concluded that because Moriana’s individual PAGA claim was pared away and compelled to arbitration, she lacked standing to continue to maintain her representative PAGA claims. Therefore, the Court ordered the dismissal of Moriana’s nonindividual PAGA claims because she lacked standing to sue on a representative basis.

What Is Next for PAGA?

The future of PAGA is on shaky ground. Justice Sonia Sotomayor’s concurring opinion left open the possibility that the California Legislature may seek to propose legislation to modify the standing requirement under PAGA. For now, we expect to see temporary relief in the number of PAGA cases filed and a flurry of new legislation proposed to amend PAGA.

What Does This Mean for Employers?

Employers should review their existing arbitration agreements to ensure they contain a class and representative action waiver (specifically a waiver of individual PAGA claims) and a severability clause. California law on the enforceability of arbitration agreements―and on the degree to which class action or representative action waivers are enforceable―has been dynamic and frequently changing. California employers need to remember that they cannot require employees to enter into arbitration agreements as a condition of employment and that any arbitration agreement entered into must be voluntary and must include certain key provisions such as providing for a neutral arbitrator and allowing all remedies that a plaintiff could obtain in a court proceeding, among other required elements. Employers may be able to offer existing employees an opportunity to sign a revised arbitration agreement, but new “consideration” will be required in order to support such an agreement. Any arbitration agreement that will remain in use, or that will be newly drafted in light of Viking River Cruises, should be carefully reviewed with employment counsel.

For More Information

If you have any questions about this Alert, please contact Jennifer A. Kearns, Brittany Wunderlich, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

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