Important California Supreme Court Ruling On Class Action Waivers

On June 23, 2014, the California Supreme Court issued its long-awaited decision in Iskanian v. CLS Transportation Los Angeles, LLC. The central issue decided by the court was whether an employer could prevent employees from bringing a wage and hour class action by including a so-called class action waiver in an arbitration pact with the employee. The California Supreme Court said "yes" to this question. We explain below.  

In an earlier case, the California high court ruled that class action waivers of wage and hour claims were unenforceable under state law.  Normally, that would have been the end of the issue, but California's highest court revisited the issue following recent cases from the U.S. Supreme Court upholding these waivers under federal arbitration law. 

This time around, the California Supreme Court followed the U.S. Supreme Court's lead and OK'd the right of an employer to include a class action waiver in a private arbitration agreement. Thus, an employer may now require employees to sign an arbitration pact which expressly limits the employee to bringing  his or her own individual claims in arbitration, and prohibits the filing of a class action in court. 

The California Supreme Court also rejected the employee's argument that class action waivers like this one violate another law known as the National Labor Relations Act by restricting employees' right to engage in protected "concerted activities".  The NLRB has long held that the filing of a class action was a protected federal right under the union-management labor law. In making its ruling on the matter, the California Supreme Court joined a growing number of federal courts that have refused to follow the NLRB's controversial ruling outlawing these waivers.

Although the Iskanian ruling is mostly good news for employers, there is one important aspect of the case that is very troubling. The California Supreme Court ruled that arbitration agreements cannot limit an employee's right to bring a so-called "representative claim" under California's Private Attorney's General Act (PAGA).  Under PAGA, an employee may sue on behalf of a group of "aggrieved employees" to recover civil penalties (up to $200 per employee per pay period) without having to satisfy any of the strict legal requirements for  a  "class action". PAGA allows for penalties in cases where the employer is accused of not adhering to the minimum wage, overtime, meal/rest period and paystub rules, just to name a few. This makes the case easier to mount for the employee's lawyer, and very costly to defend since the case is a claim on behalf of the entire group of the "aggrieved employees" (i.e., present and former employees affected by the policy or policies at issue).  

We will have to wait to see whether the California Supreme Court's PAGA ruling will be appealed to the U.S. Supreme Court, and may eventually be reversed.  In the meantime, the plaintiffs' bar likely will be filing more of these representative PAGA actions as a result of the Court's ruling.

One word of caution. Like everything else in the law, there are pros and cons to every strategy. Arbitration pacts are no different. Though the ability to restrict employees from bringing a class action cannot be overstated, arbitration does have its own drawbacks for employers.  Two major examples are that California law requires the employer to pay 100% of the arbitrator's fees and costs (this could be many thousands of dollars if the case is hotly contested), and an arbitrator's unfavorable ruling is not appealable in most cases.  In other words, arbitration can be very costly with the employer footing the entire bill for the arbitrator, and the employer is stuck with the outcome of the case in all but the rarest of instances. We recommend that you consult with counsel about these matters before adopting an arbitration pact with your employees.

If your arbitration agreement contains a reference to PAGA claims being covered, then you should discuss with counsel whether it should be amended to conform to this new opinion. Many observers suggest holding off on doing so until it is clear whether the case will be appealed to the U.S. Supreme Court.

Please call your Firm contact for any questions about the court's ruling or arbitration pacts generally. We are reachable at 818-508-3700 or at www.brgslaw.com.