The U.S. Supreme Court just handed employers a huge win in the continuing war over California’s Private Attorneys General Act (PAGA), a bounty-hunter statute that deputizes employees to sue on behalf of the state. In yesterday’s Viking River Cruises, Inc. v. Moriana, decision, the Supreme Court held that employers may compel employees to arbitrate individual PAGA claims, and that non-individual (representative) PAGA claims should be severed and dismissed by courts. (See our previous discussions of the Viking River Cruises case here and here).

The Viking River Cruises decision provides employers with a necessary defense to the ever increasing flood of PAGA claims and litigation.  Employers who already use arbitration agreements should immediately revise their templates to account for the Court’s holding. And employers who do not have arbitration programs in place now have another, compelling reason to roll out arbitration agreements: protecting their businesses against the very real threat of outlandish PAGA penalties for even minor, hyper technical violations of the California Labor Code.

Below, we recap the PAGA statute, the Court’s decision, and what employers should do now.

First, a little about PAGA

PAGA, enacted in 2004, permits a single employee to stand in the shoes of California’s Attorney General and file suit on behalf of other “aggrieved” employees to recover civil penalties for California Labor Code violations. Under existing California precedent, the PAGA statute effectively works a rule of claim joinder, allowing a single party to unite multiple claims against an opposing party in a single action. The penalties recoverable in a PAGA action can be substantial, with default penalties calculated as $100 “for each aggrieved employee per pay period for the initial violation,” and $200 per aggrieved employer per pay period for “each subsequent violation.” As such, potential PAGA claims easily reach millions of dollars against small employers, and tens of millions against large employers. Worse, PAGA claims often are founded on technical violations of the Labor Code, such as simple administrative oversights, that result in no real harm to employees. Under PAGA, the state keeps 75% of any PAGA award, with the remaining 25% distributed among the employees affected by the violation at issue.

California court decisions have expanded PAGA’s reach over the years. In 2009, the California Supreme Court held that employees bringing actions under PAGA need not comply with the procedural rules applicable to class actions, such as the need to show common issues that are capable of resolution through common proof. See Arias v. Superior Court, 46 Cal. 4th 969 (2009). Then, in 2014, the California Supreme Court held that employees could not waive their right to bring PAGA claims in court through arbitration agreements, paving the way for a significant uptick in PAGA litigation. See Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014). The U.S. Supreme Court took issue with Iskanian in Viking River Cruises, and overruled the case in part.

What happened in Viking River Cruises

After quitting her job at Viking, Angie Moriana filed a PAGA action against Viking in California state court. Her complaint alleged that Viking had failed to provide her with her final wages within 72 hours, as required by Sections 201 and 202 of the California Labor Code. Moriana also asserted an array of other Labor Code violations allegedly suffered by other Viking employees-including violations of provisions concerning the minimum wage, overtime, meal periods, rest periods, timing of pay, and pay statements.

Moriana had entered into a mandatory arbitration agreement with Viking at the start of her employment, in which she agreed to arbitrate any dispute arising out of her employment. The arbitration agreement also contained a “Class Action Waiver”-providing that in any arbitral proceeding, the parties could not bring any dispute as a class, collective, or representative PAGA action-and a severability clause specifying that if the Class Action Waiver was found invalid, any class, collective, representative, or PAGA action would presumptively be litigated in court. However, under the severability clause, if any portion of the waiver remained valid, it would be enforced in arbitration.

Viking moved to compel arbitration of Moriana’s “individual” PAGA claim—her claim for damages arising from the alleged violation she personally suffered—and to dismiss the other PAGA claims that Moriana asserted on behalf of other employees as the deputized agent of the state. The trial court denied the motion, and the California Court of Appeal affirmed, holding that categorical waivers of PAGA standing are contrary to state policy and also that PAGA claims cannot be split into arbitrable individual claims and nonarbitrable “representative” claims (i.e., claims brought on behalf of other employees).

The California Court of Appeal’s ruling necessarily followed the holding of the California Supreme Court in Iskanian, which established two PAGA rules:

• a principal prohibition that prevents parties from waiving representative standing (here, a “representative” as a proxy for the state) to bring PAGA claims in a judicial or arbitral forum, and
• a secondary prohibition invalidating agreements to separately arbitrate or litigate “individual” PAGA claims for Labor Code violations that an employee suffered, on the theory that resolving victim-specific claims in separate arbitrations does not serve the deterrent purpose of PAGA.

Under Iskanian’s principal prohibition, the lower courts were required to treat the representative-action waiver in the agreement between Moriana and Viking as invalid to the extent it was construed as a wholesale waiver of PAGA standing. However, the agreement’s severability clause allowed enforcement of any “portion” of the waiver that remained valid, so the agreement still would have permitted arbitration of Moriana’s individual PAGA claim even if wholesale enforcement was impossible. But because California law prohibits division of a PAGA action into constituent claims, the state courts refused to compel arbitration of Moriana’s individual PAGA claim as well. The U.S. Supreme Court granted certiorari, and reversed.

What the U.S. Supreme Court said

The question before the U.S. Supreme Court was whether the Federal Arbitration Act (FAA) preempts the California rule invalidating the contractual waivers of the right to assert representative claims under PAGA.

The U.S. Supreme Court found that PAGA’s built-in mechanism of claim joinder is in conflict with the FAA. Iskanian’s prohibition on contractual division of PAGA actions into constituent claims circumscribes the parties’ freedom to determine by contract what issues are subject to arbitration and the rules by which they will arbitrate, violating the fundamental principle that arbitration is a matter of consent. The Court found a state rule imposing an expansive rule of joinder in the arbitral context would defeat the ability of parties to control which claims are subject to arbitration-and which ones are not-by permitting parties to “superadd” new claims to the proceeding, regardless of whether the agreement committed those claims to arbitration. When made compulsory by way of Iskanian, precisely as how PAGA’s joinder rule functions, the result is that the parties are effectively compelled to either go along with an arbitration in which the range of issues under consideration is determined by coercion rather than consent, or else forgo arbitration altogether. Either way, the Court said, the parties are coerced into giving up a right they enjoy under the FAA, and thus Iskanian’s rule is incompatible with the FAA.

Because Iskanian’s rule that PAGA actions cannot be divided into individual and non-individual claims is preempted, Viking was entitled to compel arbitration of Moriana’s individual PAGA claim. And because PAGA does not provide a mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding, the Supreme Court held that courts should dismiss non-individual, representative PAGA claims for lack of standing.

What employers should do now

The Viking decision is the light at the end of the tunnel California employers have been looking for since the Iskanian decision-and before. But employers should be diligent to ensure that their employment agreements and arbitration provisions will avail them of the benefit of this ruling. California employers should review form / template employment agreements with counsel for any necessary modifications, and work with counsel to make sure they are compliant with applicable pay, meal and rest break, and other requirements that are popular targets of PAGA claims. Contact your Baker McKenzie employment attorney for help understanding how the Viking decision impacts your workforce and for help with your employment needs.