The Supreme Court of the United States has been active of late in issuing decisions interpreting the Federal Arbitration Act — the principal federal statute governing judicial enforcement of arbitration agreements. In 2022, the Court handed down an opinion calling for robust enforcement of agreements to arbitrate claims brought by allegedly aggrieved employees against their employers under the California State Private Attorneys General Act, sometimes called “PAGA.” Part of the Supreme Court’s analysis relied on its own interpretation of the California law. Earlier this month, however, the Supreme Court of California — as the final arbiter of California law — found the U.S. Supreme Court had misconstrued PAGA. In so doing, the California high court explained that employers facing PAGA claims may have more exposure than the United States Supreme Court had led them to believe.

The California Private Attorneys General Act of 2004

Enacted by the California legislature in 2004, PAGA is designed to hold accountable employers that perpetrate unlawful labor practices against their employees. PAGA enables an “aggrieved employee” — defined as “any person who was employed by the alleged violator and against whom one or more of the alleged violations [of California labor law] was committed” — to sue the employer and recover civil monetary penalties. Aggrieved employees are authorized to recover penalties on their own behalf. They also may recover penalties on behalf of other current or former employees harmed by the employer’s unlawful labor practices. These so-called “representative claims” — as distinguished from personal claims — are permitted on the theory that aggrieved employees should function as “private attorneys general” and help hold employers broadly accountable for unlawful labor practices, particularly in situations where the California Attorney General lacks the resources to do so.

The California Supreme Court’s Decision in Iskanian v. CLS Transportation

Oftentimes, aggrieved employees who bring PAGA claims are bound by agreements with their employers that any such claims must be resolved in arbitration. In a case called Iskanian v. CLS Transportation (Cal. 2014), the California Supreme Court declared those agreements unenforceable as against public policy to the extent they purported to cover representative claims. The court’s rationale was that when asserting representative claims, the employee is standing in the shoes of the State, and the State had not agreed to be bound by any arbitration agreements.

The California Supreme Court in Iskanian additionally held that public policy also prohibits employers from agreeing with employees to “split” PAGA actions. That is, employers cannot enter into agreements with employees compelling them to arbitrate personal PAGA claims while litigating representative ones.

Assessing the combined effect of both Iskanian holdings, some California courts eventually started finding agreements to arbitrate PAGA claims unenforceable in their entirety.

The United States Supreme Court’s Decision in Viking River Cruises, Inc. v. Moriana

In Viking River Cruises, Inc. v. Moriana, the United States Supreme Court agreed to address the California legal landscape following Iskanian. In 2022, the Court ultimately held, in an 8-to-1 ruling authored by Justice Samuel Alito, that the Federal Arbitration Act preempted Iskanian’s “prohibition on contractual division of PAGA actions into constituent claims,” i.e., the prohibition on employers entering into agreements with employees to separate personal PAGA claims complaining of unlawful employment practices perpetrated against them from representative PAGA claims asserting harm to others.

The California state law prohibition “unduly circumscribes the freedom of parties to determine the issues subject to arbitration and the rules by which they will arbitrate, and does so in a way that violates the fundamental principle that arbitration is a matter of consent,” the Court determined. Thus, an employee who had agreed to arbitrate all PAGA claims at least could be made to arbitrate his or her personal PAGA claims.

What happens to that employee’s representative PAGA claims? The United States Supreme Court opined that “when an employee’s own dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit.” Thus — in the United States Supreme Court’s view of California state law — the employee “lacks statutory standing to continue to maintain [his or] her non-individual claims in court, and the correct course is to dismiss [the] remaining claims.”

Justice Sotomayor issued a concurring opinion. She explained that she “join[ed] the Court’s opinion in full” but noted that, on the state law issue of PAGA statutory standing, “California courts, in the appropriate case, will have the last word.”

Adolph v. Uber Technologies, Inc.: The California Supreme Court Resolves the PAGA Issue Addressed in Viking

Sure enough, the appropriate case arose, and the California Supreme Court weighed in with the “last word” on PAGA statutory standing. Earlier this month, in Adolph v. Uber Technologies, Inc., that court held that the United States Supreme Court had gotten PAGA wrong. Namely, as explained in a unanimous opinion authored by Justice Goodwin Liu, an employee made to arbitrate his or her personal PAGA claims retains statutory standing to pursue representative PAGA claims in litigation.

The California Supreme Court explained that this result follows from the definition of “aggrieved employee”: “any person who was employed by the alleged violator and against whom one or more of the alleged violations [of California labor law] was committed.” An employee is an “aggrieved employee” so long as he or she was the victim of an unlawful labor practice — regardless of whether the practice is addressed in court or arbitration.

How exactly would the bifurcated procedure unfold? The California Supreme Court suggested an answer. In its view, a proper course would be for the trial court, when faced with an action containing personal PAGA claims that must be arbitrated and representative PAGA claims that may be litigated, to stay litigation pending the outcome of the arbitration. The arbitrator will have to determine, at the threshold of the arbitration, whether the plaintiff is indeed an “aggrieved employee.” That answer presumably will be binding upon the court. Thus, if the arbitrator finds the employee to be aggrieved, the court would then entertain the representative PAGA claims in litigation. And if the arbitrator finds that the employee is not aggrieved, then the court would dismiss the claims pending before it.

What’s Next?

But, PAGA may be on the way out. A ballot initiative scheduled to be presented to California voters in November 2024, if successful, would repeal PAGA and replace it with a new statute: the “Fair Pay and Employer Accountability Act.” Among other things, the new law would completely remove the authorization for aggrieved employees to become private attorneys general and pursue representative claims on behalf of other employees — or even to pursue their own unfair labor practice claims. The law would make the State — specifically its Division of Labor Standards Enforcement — the sole enforcer of unfair labor practice claims. Inasmuch as the State will not have been a party to any employee-employer arbitration agreements, any such agreements will “have no force or effect” in unfair labor practice actions, the statute further provides.

Will California voters end up passing the PAGA repeal? Only the November 2024 election will tell. But one thing is a safe bet: Whether or not PAGA is repealed, the enforceability of employee-employer arbitration agreements in California (as elsewhere) will remain a hotly contested legal issue.

Summer Associate Dylan P. Feliciano contributed to this report.