Wednesday’s ruling by the U.S. Supreme Court in Viking River is expected to chill California’s cottage industry of representative wage-and-hour cases, which have long driven huge damages against employers.
The decision offers California employers a significant opportunity to require employees to pursue these types of claims individually. Employers should now at least feel confident in defending actions under California’s Private Attorneys General Act (PAGA), where the individual PAGA plaintiff has signed an enforceable arbitration agreement.
Employers with arbitration agreements should consult with experienced employment attorneys to determine what, if any, updates should be made to these agreements.
California Private Attorneys General Act
California employers have long been forced to litigate wage-and-hour cases on a representative basis. Even when employers had arbitration agreements with class action waivers, a long line of California cases required that representative actions under PAGA had to be resolved in Court and on a representative basis.
PAGA allows any “aggrieved employee” to step into the shoes of the California Labor and Workforce Development Agency (LWDA) to initiate an action against an employer. The employee is empowered to seek damages individually in addition to being able to seek damages with all other employees. While PAGA was initially drafted to help the LWDA enforce labor laws, the statute has long been a sword wielded by employee attorneys to drive up the value of wage-and-hour suits. When PAGA suits were brought on behalf of hundreds of aggrieved employees, employers faced monolithic penalties.
California Courts have enforced arbitration agreements that preclude employees from being a class representative in a class action lawsuit. Courts have refused, however, to enforce arbitration agreements in the same way for PAGA – holding that the employee is a representative of the LWDA and allowed to represent other employees. Employee attorneys have used this loophole to drive huge attorney fees their way.
Viking River Case
This new case should put a significant chill on these cases. In Viking River, the Supreme Court underscored the preemption of the Federal Arbitration Act in an 8-1 ruling. The Court held that employers can force individual PAGA claims to arbitration. Once an employee is forced to tackle their individual PAGA claim in arbitration, they will no longer have standing to bring a representative claim under PAGA on behalf of “aggrieved employees.” The representative action will have to be dismissed.
The underlying case was brought by Angie Moriana, a former employee of Viking River Cruises, who used PAGA to allege wage-and-hour violations against Viking on behalf of all of Viking’s California employees. When Viking sought to enforce its valid arbitration agreement, which included a waiver of representative acts, the lower court invalidated the agreement, seeking to have the case litigated in court and allowing Moriana to represent other employees.
The United States Supreme Court considered whether the Federal Arbitration Act preempted California’s prohibition on PAGA waivers.
On June 15, 2022, the Supreme Court held the FAA preempted these PAGA waivers, insofar as the preexisting California rule prohibits dividing PAGA actions into individual and non-individual claims through an agreement to arbitrate. In other words, individual PAGA claims can be compelled to arbitration, so long as an enforceable arbitration agreement exists between the employer and individual employee. Once the individual action is resolved in arbitration, the employee will no longer have standing to bring an action on behalf of other employees. These representative claims, which carry significant penalties, will have to be dismissed.
Further Legislative Action Expected
The decision and the concurring opinion leave the door open for the California legislature to take responsive action, as it has been known to do in the past. Dinsmore’s California attorneys will closely monitor the legislature for any developments, and ensure clients have strong arbitration agreements that take full advantage of the new change in the law.
In the interim, employers should carefully review their arbitration agreements to make sure they take full advantage of this significant change in the law.