On July 17, 2023, California’s Supreme Court unanimously held that employees who sign arbitration agreements governed by the Federal Arbitration Act (FAA) with representative action waivers still may have standing under the California Private Attorneys General Act (PAGA) to pursue claims in court on behalf of other allegedly “aggrieved” employees. In Adolph v. Uber Technologies, Inc., the state’s highest court said the United States Supreme Court got it wrong in the much-hyped Viking River Cruises v. Moriana decision last summer with respect to standing (or the legal right to bring a lawsuit) under California law. The Adolph decision issued yesterday may significantly impact employers who have arbitration agreements in place and others who are considering rolling them out. The decision also will likely reverberate in courts throughout California, where uncertainty around PAGA standing has held up litigation in court and/or arbitration for years.

The Evolving History of PAGA Claim Arbitrability:

PAGA authorizes current and former employees to file lawsuits to recover civil penalties for Labor Code violations on behalf of themselves, other employees, and the State of California when California’s Labor Workforce and Development Agency (LWDA) declines to initiate an enforcement action against the employer itself.

In 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC that pre-dispute arbitration agreements could not lawfully require employees to waive the right to bring PAGA representative actions. Relying on Iskanian, various California appellate courts held that employers could not require employees to “split” PAGA claims into individual and non-individual components that could be litigated separately. Effectively, Iskanian required employers with otherwise enforceable arbitration agreements to litigate PAGA claims in court.

On June 15, 2022, the U.S. Supreme Court found in Viking River Cruises v. Moriana that the FAA preempted Iskanian to the extent it held PAGA actions cannot be split into individual and non-individual components, thus paving the way for arbitration of PAGA claims. The Supreme Court also found that if an employee has arbitrated their individual PAGA claim, they would no longer have standing (or the legal right) to pursue a PAGA action on behalf of other aggrieved employees. In effect, this decision meant that an employer with an enforceable arbitration agreement might be able to limit PAGA liability to the individual employee(s) who filed claims. However, a concurrence by Justice Sotomayor acknowledged that California courts have the final say on the interpretation of the state law issue of statutory standing under the PAGA and, indeed, the full impact of Viking River was short-lived.

The Court’s Holdings:

Yesterday, the California Supreme Court unanimously held that an employee becomes an “aggrieved employee” and obtains standing to bring a PAGA claim when their employer commits at least one Labor Code violation against them. The Court concluded the employee does not “lose” standing if the employee has agreed to arbitrate their individual PAGA claim, or even if they have already settled or received payment for their individual PAGA claim pursuant to an arbitration award. The Court found an expansive approach to PAGA standard was necessary because the ability to prosecute numerous concurrent Labor Code violations is “the centerpiece of PAGA’s enforcement scheme,” and such an approach best effectuates PAGA’s purpose of ensuring effective enforcement of the Labor Code and funding the LWDA. The Court found that narrowing PAGA standing in line with Viking River would conversely reduce state revenues and increase state costs of enforcement.

Notably, in rejecting various arguments by Uber, the Court pointed out that trial courts have discretion under California Code of Civil Procedure section 1281.4 to stay a representative PAGA action in court while the individual PAGA action proceeds in arbitration. The Court further observed that if an arbitrator determined that the plaintiff is not an aggrieved employee under the PAGA (i.e., if the employer did not commit any of the asserted Labor Code violations against the employee), and if that arbitration holding is confirmed by a court and reduced to a final judgment pursuant to Code of Civil Procedure section 1287.4, then the plaintiff might not have standing to pursue a PAGA action on behalf of others.

What this Means for California Employers:

On its face, the unanimous Adolph decision confirms that PAGA actions are not going away any time soon absent legislative intervention. However, the U.S. Supreme Court’s decision in Viking River is not completely undone, and some small glimmers of a silver lining for California employers remain.

• First, employers can still require employees to arbitrate individual PAGA claims (if their arbitration agreements are otherwise enforceable).
• Second, the California Supreme Court implicitly endorsed the practice of staying the PAGA representative action in court until a final determination of aggrieved employee status in arbitration (which is ultimately a decision on merits of the alleged Labor Code violations). If the trial court chooses to exercise its discretion to stay the representative PAGA action, it could lower the risk of inconsistent rulings and concurrent litigation of the same claims, and potentially defer costly class-wide discovery.
• Third, if an employer succeeds in obtaining a court order (or agreement) to stay the representative action in court and wins an arbitral decision that the employee is not aggrieved under PAGA, the employer may be able to avoid litigating the employee’s representative action on behalf of other aggrieved employees.

On the other hand, if an employee can prove they suffered a single Labor Code violation in arbitration, they will maintain standing to litigate a broad-ranging representative PAGA claim in court. (Recent California Supreme Court cases suggest they may even retain standing if they settle their individual claims or if their individual claims are time-barred.) Thus, employers who compel arbitration of individual PAGA claims face a significant risk of duplicative litigation on the same issues in both arbitration and in court. It remains to be seen how a court might handle a PAGA representative action after numerous individual employees arbitrate identical PAGA claims and achieve inconsistent outcomes.

Furthermore, the Adolph decision’s extremely broad approach to PAGA standing suggests that employees may not be able to waive or release the right to bring a PAGA representative action absent a court-approved settlement of a bona fide PAGA dispute.

Therefore, employers with arbitration agreements who are currently facing PAGA claims should consult with counsel immediately about the potential implications of this case.

In addition, employers whose arbitration agreements require arbitration of any PAGA claims should carefully review the terms of those agreements and consult with counsel to confirm whether the agreements as drafted are enforceable under the Adolph decision and whether they may have any unintended consequences.

Employers reflecting on the value of arbitration agreements requiring the arbitration of PAGA claims in the wake of Adolph will need to weigh numerous factors, including the possible benefits of individual PAGA arbitration and the possible risks of duplicative or serial litigation of the same issues in multiple forums. Employers are encouraged to contact Wilson Turner Kosmo to discuss the application of these risks and benefits to their organizations. While arbitration agreements still can provide many crucial benefits, there are certainly drawbacks and limitations that each employer should consider in light of their specific needs.

Finally, employers should stay tuned for more possible volatility regarding PAGA and arbitration. Uber’s attorneys have indicated they are considering appealing yesterday’s decision, so this may not be the final word. And of course, California voters will have a chance to weigh in on whether the PAGA should be repealed entirely on the November 2024 ballot.

If you have questions about how this new case will affect your business or advice about how to implement these new requirements, please contact us.

• Ethan T. Litney (elitney@wilsonturnerkosmo.com)
• Aimee Axelrod Parker (aparker@wilsonturnerkosmo.com)
• Katie M. McCray (kmccray@wilsonturnerkosmo.com)

Wilson Turner Kosmo’s Special Alerts are intended to update our valued clients on significant employment law developments as they occur. This should not be considered legal advice.