Alert — California Supreme Court Rules on Class Action Waivers in Arbitration Agreements with Mixed Results for Employers and Employees

In a long-anticipated ruling, on June 23, 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC., that mandatory class action waivers in pre-employment arbitration agreements are enforceable, following the United States Supreme Court’s landmark decision AT&T v. Concepcion, 131 S. Ct. 1740 (U.S. 2011). However, despite this victory for employers with arbitration programs, the Iskanian court also held that representative claims brought under California’s Private Attorneys General Act (PAGA) may not be waived in such agreements, with the net result mixed for employers and employees.

In Iskanian¸ the Court addressed whether its decision in Gentry v. Superior Court (2007) 42 Cal.4th 443, was abrogated by the United States Supreme Court’s decision in Concepcion. Specifically, Gentry held that mandatory, pre-employment class action waivers in arbitration agreements were unenforceable on grounds of public policy and unconscionability. This holding was potentially inconsistent with Concepcion, which had held in a non-employment context that the Federal Arbitration Act (“FAA”) preempted state laws prohibiting mandatory class action waivers in arbitration agreements.

Iskanian resolved the issue by ruling that Gentry was indeed abrogated by Concepcion, and that the FAA preempted California’s law prohibiting class action waivers in pre-dispute arbitration clauses. In addition, the Court also rejected the argument that a class action waiver is unlawful under the National Labor Relations Act.

However, Iskanian carved out an important exception to this preemption for wage and hour cases brought under PAGA. PAGA, codified in California Labor Code §2698 et seq, permits employees to enforce provisions of the California Labor Code and pursue civil penalties on behalf of the State of California Labor and Workforce Development Agency (“LWDA”). In addition, representative actions under PAGA allow individual employees to bring actions on behalf of all similarly situated employees without certification by a court.

In reaching its conclusion about PAGA, the Court determined that an agreement that waives an employee’s right to bring a PAGA action would disable one of the primary mechanisms for enforcing the Labor Code, and would therefore harm the state’s interest in receiving the proceeds of the civil penalties used to deter violations.  As such, waivers of PAGA actions in employment contracts violate California public policy. In addition, the Court reasoned that the FAA only governs disputes between private individuals, and not those between an employer and the State. “Simply put, a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents—either the Labor and Workforce Development Agency or aggrieved employees—that the employer has violated the Labor Code.”

We regularly advise on arbitration clauses and related issues. Action items in light of the Iskanian decision include (1) determining whether the class action waiver finding in Iskanian “tips the balance” in favor of requiring pre-employment arbitration provisions for companies who do not currently have arbitration programs; and (2) for those companies who do have such programs, reviewing their arbitration agreements to ensure legal enforceability post-Iskanian.

We regularly provide litigation and counseling/drafting advice on arbitration clauses and related law. If you would like to discuss these issues further, or have any questions about this blog, please contact us.