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The War Between PAGA and Arbitration in California Continues - This Time Employers Win

Class Actions   |   Consumer Finance   |   Insurance   |   Labor & Employment   |   Real Estate   |   Technology   |   Telecommunications   |   August 4, 2017
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Employers finally won a key victory in California courts in the continuing conflict between mandatory arbitration/class waiver agreements versus representative actions brought under the California Private Attorneys General Act (PAGA). 

In this week’s Esparza v. KS Industries, L.P., the California Fifth District Court of Appeal held that while PAGA claims for civil penalties cannot be arbitrated or waived, the underlying worker claims for the wages themselves are subject both to arbitration and a class action waiver. This substantially undercuts an employer’s group exposure in wage and hour actions.

While conceding the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles LLC, (2014) 59 Cal.4th 348 precluded arbitration of PAGA claims notwithstanding the Federal Arbitration Act, the Esparza court held that plaintiffs who still seek wages must still individually arbitrate their wage claims.

This decision places employees and their lawyers in a quandary. Where they file a PAGA case coupled with a class action asking for wages before they determine whether or not a mandatory class action/arbitration agreement exists, they may have a duty to their potential class clients not to waive that individual recovery. Consequently, they may want to limit their complaint to just the PAGA penalties but then the amount is substantially less as is the statute of limitations (one year vs. four).

The Court of Appeal interpreted Iskanian as follows:

“The rule adopted in Iskanian attempted to define the boundary between the two types of claims by stating that PAGA representative claims for civil penalties are not subject to arbitration. We conclude for purposes of the Iskanian rule, PAGA representative claims for civil penalties are limited to those where a portion of the recovery is allocated to the Labor and Workforce Development Agency. Claims for unpaid wages based on Labor Code Section 558 are not allocated in this matter and therefore the Iskanian rule does not exempt such claims from arbitration.”

The Court of Appeal went on to point out the conflict created by seeking both civil penalties and statutory damages:

“Similarly, Employee’s attempt to recover wages on behalf of other aggrieved employees involve victim-specific relief and private disputes. The rule of non-arbitrability adopted in Iskanian is limited to claims that can only be brought by the state and/or its representatives, where any resulting judgment is binding on the state and any monetary penalties largely go to the state’s coffers” [citation omitted].  “These limitations are not met by the claims for unpaid wages owed to other aggrieved employees because (1) those employees could pursue recovery of unpaid wages on their own right and (2) the unpaid wages recovered would not go to state coffers.”

“In sum, Employee’s claims for unpaid wages are subject to arbitration pursuant to the terms of the party’s arbitration agreement and the Federal Arbitration Act.  The rule of non-arbitrability adopted in Iskanian is limited to representative claims for civil penalties in which the state has a direct financial interest.”

This is a clear victory for employers in California and reinforces the importance of employers utilizing arbitration agreements coupled with class action waivers in their employment agreements. Unless, of course, the California Supreme Court takes the case and decides otherwise. Stay tuned.


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