SCOTUS Poised to Give Employers Powerful Weapon Against PAGA Claims

A case currently pending in the Supreme Court of the United States could spell a big win for California employers this summer, allowing them to foreclose a wider range of group employee lawsuits using arbitration agreements.

Many California employers have already heavily reduced their exposure to wage and hour class actions by entering into employee arbitration agreements that waive the employees' right to bring or participate in class or collective actions. However, under California law, these waivers are not effective against similar lawsuits under the Private Attorneys General Act (PAGA) of 2004, which allows employees to sue their employer on behalf of the state and seek civil penalties for various wage and hour violations. This limitation has led to an explosion of PAGA claims in recent years. The Supreme Court, despite its recent record of opposing state attempts to restrict arbitration, has declined on previous occasions to take up cases challenging the California rule.

However, late last year the Court agreed to hear Viking River Cruises, Inc., v. Moriana, a PAGA lawsuit filed in state court in 2018. The trial court denied Viking's bid to compel Moriana's PAGA claim to individual arbitration, relying on Iskanian v. CLS Transporation Los Angeles, LLC, the 2014 California Supreme Court opinion that exempted PAGA suits from arbitration agreements. The California Court of Appeal affirmed and the state Supreme Court denied review. However, in December 2021, the U.S. Supreme Court agreed to hear the case.

This will be the first time the Supreme Court directly addresses whether federal law preempts California's PAGA carve-out from class action waivers, and employers have reason to be cautiously optimistic about the ruling, which is expected in June 2022. The Court's conservative faction favors arbitration and now holds a 6-3 majority, so two conservative justices would need to be persuaded that PAGA claims should be treated differently than traditional class actions for arbitration purposes because PAGA plaintiffs act as the state's representative.

While a decision is not expected until June, employers who use arbitration agreements should have their agreements reviewed now to ensure they are well positioned to take advantage of a favorable ruling. After Iskanian, many attorneys drafted arbitration agreements that specifically excluded PAGA claims, out of concerns that failing to acknowledge the ruling could lead a trial court to deny enforcement of the arbitration agreement even against non-PAGA claims. Unfortunately, such PAGA exclusions written into arbitration agreements may survive a pro-arbitration ruling at the high court if they do not include language waiving PAGA claims to the extent a change in law allows. A favorable outcome at the Supreme Court will make arbitration agreements an even more potent weapon against highly damaging wage and hour claims.