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Chipping Away at the Enforceability of Class Waivers Requiring Arbitration of Employment Claims

By Carolyn G. Burnette – August 22, 2016

 

For years, California has been in a state of confusion over the validity of class action waivers that require plaintiffs to arbitrate their claims individually. This issue has been particularly volatile in the employment law arena, where workers and employers have taken passionately opposing positions. Adding to the constant confusion has been a long line of related split decisions in various state and federal courts, including some that have involved National Labor Relations Board (NLRB) rulings.

 

For the moment at least, California seems to know where it stands. In this regard, the California Supreme Court and the U.S. Court of Appeals for the Ninth Circuit have given a unified directive on class waivers, including how they apply to representative claims for violations of California’s Private Attorneys General Act (PAGA). More specifically, they agree that these waivers will not be enforced as to PAGA claims but will be enforced as to the underlying Labor Code violations. Whether this directive changes through a future ruling on the applicability of preemption under the Federal Arbitration Act (FAA) remains to be seen, which would not be a surprise to most California litigators.

 

What Is a PAGA Claim?
The PAGA is a provision of the California Labor Code that authorizes employees to bring actions for civil penalties on behalf of the state against their employers—frequently in connection with claims for failure to pay wages or overtime or both. Pursuant to the PAGA, workers are permitted to sue on behalf of themselves and other current or former employees in representative suits that are similar to class actions. By statute, 75 percent of the recovered penalties must be turned over to the state.

 

Class Action Waivers Are Unenforceable as to PAGA Claims, But Not as to Underlying Claims for Violations of the Labor Code
In June 2014, the California Supreme Courttook on the highly controversial issue of whether class action waivers in arbitration agreements were enforceable under the FAA. In its long-awaited opinion—Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014)—the court specifically looked to interpretations provided by the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). The Iskanian court then held after a lengthy analysis that although class action waivers are enforceable and employees who sign them may be compelled to arbitrate their claims individually, representative PAGA claims may not be waived under California law. The Iskanian court reasoned that waivers of representative PAGA claims are against the state’s public policy because they “disable one of the primary mechanisms for enforcing the Labor Code,” and a private agreement may not contravene a law established for a public reason. In other words, allowing PAGA waivers would interfere with an individual’s ability to collect the state’s 75 percent of recovered penalties on behalf of all aggrieved employees as the law provides, rather than just an individual portion.

 

The Iskanian rule caused great angst for at least two reasons. First, class action litigators and state court judges were left to determine how to apply the decision procedurally. Particularly challenging was that PAGA claims are typically alleged with related wage-and-hour class action claims—claims that can be compelled to arbitration under the Iskanian rule, while PAGA claims cannot. Much debate has since ensued as to the most efficient and “fair” way to proceed with these mixed-claim suits.

 

Yet another source of concern was that some federal district courts in California had refused to follow the Iskanian rule on the grounds that the FAA preempted the decision. This split created much uncertainty, and parties looked forward to resolution.

 

The Ninth Circuit Ends a District Court Split and Sides with the California Supreme Court
In September 2015, the Ninth Circuit silenced the confusion caused by the district court split by issuing its decision in Sakkab v. Luxottica Retail North America, Inc., 803 F.3d 425, 430 (9th Cir. 2015). The Sakkab court refused to enforce a representative action waiver in an arbitration agreement, holding that the FAA does not preempt the Iskanian rule—arbitration agreements that require arbitration of PAGA claims are not enforceable under California law.

 

In making its decision, the court noted that the Iskanian rule is a generally applicable contract defense in that PAGA waivers are unenforceable in any type of contract, not just arbitration agreements. According to the opinion, these circumstances are a permitted basis for invalidating arbitration agreements under the FAA. The court added that the Iskanian rule does not interfere with the objectives of the FAA because it does not prohibit arbitrating PAGA claims; it merely prohibits waivers of a litigant’s right to bring a PAGA claim in his or her forum of choice. The court also noted that allowing PAGA waivers would violate public policy from the standpoint that employees compelled to arbitrate their individual claims would be limited in the amount of penalties they could recover on behalf of the state, which would directly contravene the intent of PAGA (to allow an individual to recover for the state on violations against all aggrieved workers).

 

What Next?
The Iskanian rule is now the mandate in California’s state and federal courts. This circumstance will remain, unless the U.S. Supreme Court decides to weigh in on the issue—which undoubtedly would be welcomed by many. Indeed, splits in other states on similar controversies could help ensure that this happens. For example, the Seventh Circuit has held that, consistent with the NLRB’s position, class action waivers are not enforceable under the National Labor Relations Act. Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. 2016). The Fifth Circuit has conversely held that the NLRB is wrong and that waivers are enforceable. D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. Dec. 4, 2013).Notwithstanding the ongoing confusion, one thing does remain clear: Until these opinions are reconciled, litigating suits in California where both PAGA and class claims have been alleged will continue to create procedural and cost-related challenges for employers and employees alike where waivers are at issue.

 

Keywords: litigation, ADR, arbitration, class action, representative action, waiver, Private Attorneys General Act

 

Carolyn G. Burnette is an AAA employment law panelist and principal at Jackson Lewis P.C. in Sacramento, California.

 

 
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