Arbitration in PAGA Actions

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A California appellate court has ruled in Rosales v. Uber Technologies, Inc. that whether a plaintiff has standing to bring a Private Attorneys General Act (PAGA) action is a question that cannot be delegated to an arbitrator. The ruling has significant implications for California employers and the use of arbitration provisions in employment agreements.

Private Arbitration Agreements Will Not Prevent PAGA Litigation

In Rosales, defendant Uber Technologies, Inc. sought to compel arbitration in a wage and hour action brought by a former driver. Uber argued the matter belonged in arbitration because the plaintiff had signed Uber’s standard technology services agreement, which contained a provision requiring the parties to arbitrate any disputes between them, including all disputes related to wage and hour laws. The agreement further stated that the plaintiff would not bring a representative action on behalf of others under PAGA in any court or in arbitration, and that all arbitration would resolve only the plaintiff’s individual claims.

After the plaintiff filed a representative suit under PAGA, Uber argued that the signed employment agreement prohibited such a suit, and it moved to compel arbitration for the plaintiff’s individual claim. Uber also argued that even if the plaintiff could not lawfully waive her ability to bring a representative action under PAGA, the employment agreement classified the plaintiff as an independent contractor, which meant she was not an “aggrieved employee” with standing to bring a PAGA action. Therefore, Uber argued, the employment agreement prohibited the plaintiff from bringing a PAGA action until an arbitrator decided the threshold question of the plaintiff’s employment status. The trial court disagreed and denied Uber’s motion to compel arbitration, stating that “no part of the [employment agreement] ... binds the State of California, on whose behalf [the plaintiff] brings the PAGA claim.”

On review, the appellate court agreed with the trial court’s decision, stating that a PAGA action is fundamentally different than an employee’s own suit for damages. The appellate court’s reasoning was guided by a California Supreme Court case, Iskanian v. CLS Transportation Los Angeles, LLC, which explained that “a PAGA claim ... is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state...”

California as the Real Party in Interest

Attempting to refute Iskanian, Uber argued that the case had been overruled by the U.S. Supreme Court in Epic Systems Corp. v. Lewis. There, the Supreme Court held that the Federal Arbitration Act (FAA) requires courts to enforce arbitration agreements, including provisions that require employees to proceed with individualized arbitration, rather than class or collective actions. The appellate court disagreed with Uber, however, and held that Epic Systems was not applicable to PAGA litigation. The court explained that Epic Systems only addressed the FAA’s potential conflict with the National Labor Relations Act, and it therefore had no preclusive effect on California’s ability to enforce its labor laws via representative actions. Because the appellate court determined that Epic Systems and Iskanian focused on separate issues, the court held that it was bound by Iskanian’s rule that “an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.”

The appellate court also disagreed with Uber’s contention that the threshold issue of the plaintiff’s employment status was subject to the FAA because it was “not a PAGA claim at all,” but instead “a private dispute between [plaintiff and defendant] regarding the nature of their business relationship.” PAGA actions, Uber argued, can only be brought by “aggrieved employees,” and the plaintiff therefore had no standing to bring such an action unless an arbitrator determined that she was indeed an Uber employee and not an independent contractor. The court was not persuaded and instead held that “whether a plaintiff is an ‘aggrieved employee’ under PAGA may not be decided in private party arbitration.” To hold otherwise, the court stated, would be to deprive the state of “one of its weapons in the enforcement of California’s labor laws.” Emphasizing that the state is the real party in interest in PAGA claims, the court held that the state’s ability to bring a PAGA action could not be precluded by a private arbitration agreement to which it did not consent.

Conclusion

The decision in Rosales is the latest in a line of California appellate court cases holding that arbitration agreements will not preclude a plaintiff from bringing a PAGA action on behalf of the state. As in Rosales, the courts in Williams v. Superior Court, Gregg v. Uber Technologies, Inc., Provost v. YourMechanic, Inc., and Contreras v. Superior Court all concluded that arbitration could not be compelled to determine “threshold issues involving whether a plaintiff is an ‘aggrieved employee’ for purposes of a representative PAGA-only action.” These cases, therefore, serve as a reminder for California employers that employment agreements may not fully mitigate the risks of PAGA litigation, and that compliance with California’s complex labor laws should be a primary concern.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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