In a much-needed win for employers, the U.S. Supreme Court has ruled that waivers of employees’ individual claims under California’s Private Attorneys General Act of 2004 (PAGA) are enforceable. The court’s decision in Viking River Cruises, Inc. v. Moriana, released on June 15, is a lifeline for employers in California and will prove to be one of the most important decisions for California employers this year.

For many years, employers operating in California have suffered a barrage of costly lawsuits brought under PAGA. The Viking River decision gives employers the most valuable means of protecting themselves from PAGA since the enactment of the law.

However, to benefit from the decision, employers must update their arbitration agreements to bring them in line with the Viking River decision and take related actions explained below.

Setting the Stage

PAGA authorizes employees and former employees to sue their employer for civil penalties arising from the employer’s alleged violations of the California Labor Code. PAGA plaintiffs typically claim that their employer failed to pay for off-the-clock work, underpaid overtime, did not provide meal periods or permit rest breaks, failed to pay final wages when due, etc. As long as the plaintiff alleges they suffered at least one violation in one pay period, they may bring a PAGA action for penalties arising from Labor Code violations suffered by not only the plaintiff, but all other nonexempt employees in the subject time period.

Even in a modest-sized workforce, potential penalties for the alleged violations can quickly amount to the hundreds of thousands or millions of dollars.

When a PAGA plaintiff recovers money from an employer, 25% is distributed among the “aggrieved employees” identified in the case and the remaining 75% is paid to the California Labor & Workforce Development Agency. A prevailing plaintiff also may be awarded their attorney’s fees.

The Issue in Viking River

For some time, to prevent PAGA lawsuits, employers have included in their arbitration agreements a waiver by the employee of the right to bring a PAGA claim. The California Supreme Court, however, ruled in 2014 in the Iskanian decision that such “PAGA waivers” are unenforceable. The California Supreme Court reasoned that, because plaintiffs, in an important respect, bring PAGA lawsuits on behalf of the State of California, they do not have the power to waive the right to bring a PAGA action.

The Viking River case involved Angie Moriana, who entered into an arbitration agreement when she was hired by Viking River Cruises, Inc. The agreement included a PAGA waiver. When her employment ended, contrary to the PAGA waiver, Moriana filed a PAGA lawsuit against Viking River.

In the state trial court and on appeal, Viking River sought to enforce Moriana’s PAGA waiver. Adhering to the Iskanian decision, the California trial court and Court of Appeal ruled against Viking River, finding Moriana’s PAGA waiver to be unenforceable, and ruling that Moriana’s PAGA lawsuit could move forward.

The U.S. Supreme Court had long refused to consider the issue of PAGA waivers. Nevertheless, Viking River sought review by the Court, asking it to decide — once and for all — whether PAGA waivers are enforceable. In a happy surprise for employers and their counsel, on December 15, 2021, the U.S. Supreme Court accepted the Viking River case for review.

The U.S. Supreme Court’s Ruling

The court, in an opinion written by Justice Samuel Alito, found that a PAGA action does not consist of a single legal claim. Rather, a PAGA claim consists, first, of the plaintiff’s claim for penalties arising from Labor Code violations plaintiff suffered — “the Individual PAGA Claim” — and second, the claim for penalties arising from Labor Code violations suffered by all of the other “aggrieved employees” on whose behalf plaintiff brought the lawsuit — “the Non-Individual PAGA Claim.” Prior to the Viking River decision, neither California state courts nor the U.S. Supreme Court had viewed PAGA claims as consisting of two claims in this manner.

By refusing to enforce the PAGA waiver contained in Viking River’s arbitration agreement — at least insofar as Moriana’s Individual PAGA claim was concerned — the California state courts had run afoul of the Federal Arbitration Act (FAA), Justice Alito reasoned. The U.S. Supreme Court found that the FAA mandates that Moriana be free to agree with Viking River as she wished with respect to her Individual PAGA Claim and that, to that extent, the FAA preempted the rule set out in Iskanian that PAGA waivers are unenforceable. According to the U.S. Supreme Court, the rule declared by Iskanian, in effect, bars parties from dividing PAGA actions “into [their] constituent parts” and “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.’”

Thus, the U.S. Supreme Court held in Viking River that employees are free to agree in an arbitration agreement to submit their Individual PAGA Claim to arbitration and to waive them.

The court then held that once the plaintiff’s Individual PAGA Claim is diverted to arbitration, the plaintiff no longer has standing in the PAGA lawsuit pending in Superior Court, as the plaintiff is not an “aggrieved person” in the PAGA lawsuit. “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 [under PAGA].” As a consequence, Justice Alito wrote, “the correct course is to dismiss [the employee’s] remaining claims” under PAGA in the trial court.

In summary, the U.S. Supreme Court found in Viking River that employees are free to agree by an arbitration agreement to submit their Individual PAGA Claim to arbitration (and to waive their Individual PAGA Claim) and that upon enforcement of such a provision, the PAGA plaintiff loses standing to litigate the Non-Individual PAGA Claim in court, requiring dismissal of the court action.

Action Items for Employers

Viking River offers employers a valuable opportunity to protect themselves against future PAGA lawsuits. In order to take advantage of the opportunity, however, employers must act.

Important action items include:

• Update your arbitration agreements to ensure they expressly comply with Viking River.
• Determine whether you will use your new arbitration agreement only with new hires going forward or you will attempt to get current employees to sign the new agreement in the place of any earlier agreement.
• Evaluate whether you will adopt a mandatory or voluntary arbitration program. Employers’ risk tolerance will vary. The jury is still out, so to speak, on the question of whether mandatory arbitration programs are lawful in California. The challenge to California Labor Code section 432.6, which seeks to make mandatory programs unlawful, is still pending.
• This is an opportune time to review your arbitration agreements from top to bottom and revise them in ways that may be helpful in enforcing them. Ensure they clearly and obviously comply with California law. Arbitration agreements should be standalone documents and be fair, straightforward and clear.
• Where an arbitration agreement is electronically signed, confirm that audit trails are enabled and that appropriate security measures are taken to ensure that only the assigned employee has access to sign the agreement.
• Translate arbitration agreements to reflect the languages of the workforce.
• Do not use “browserwrap” agreements in electronic arbitration agreements. That is, the terms of the agreement should be on the electronic display in the agreement, as opposed to making any terms accessible only through a hyperlink.

Key Takeaways

There is no time more important than the present to review and update arbitration agreements for use with California employees. Arbitration agreements should be revised to take advantage of the Viking River decision. Keep in mind that California law concerning arbitration agreements has become intricate and that Viking River leaves open questions. Whenever you revise your arbitration agreement, involve counsel knowledgeable in California employment law.

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