Arbitration Agreements can be Modified!

An important case decided by the U.S. Supreme Court on June 15, 2022, will likely impact California employers and their right to arbitrate individually with employees who make wage and hour claims, instead  of having these PAGA claims be subject to class actions.

Background

The U.S. Supreme Court recently issued its ruling in the Viking River Cruises, Inc. v. Moriana matter (U.S.S.C. Case No. 20-1573). In this case, Angie Moriana, a former sales representative based in California for Viking River Cruises, alleged Viking failed to pay all wages and proper overtime pay,  did not provide mandatory meal and rest breaks, and failed to issue accurate wage statements in violation of the California Labor Code. Ms. Moriana signed an arbitration agreement as a condition of her employment, requiring that she arbitrate any claims against her employer individually. Viking moved to compel arbitration, asserting she was limited to asserting her individual claim and could not serve as a class representative under California’s PAGA statutes.

Viking’s position conflicted with the California Supreme Court’s holding in Iskanian v. CLS Transportation Los Angeles LLC, 206 Cal.4th 949 (2012), which held  PAGA claims are not subject to arbitration agreements and representative action waivers are unenforceable under California law.  Based upon the Iskanian decision, many California employers were subjected to class-action litigation since arbitration agreements were declared invalid for these types of claims.

Holding

The U.S. Supreme Court rendered the Iskanian decision moot, holding the Federal Arbitration Act (FAA) preempts California’s rule PAGA actions cannot be forced into arbitration “insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.” The court reasoned  the FAA requires the enforcement of an arbitration agreement that waives an employee’s right to bring individual claims through PAGA, and once those individual claims are sent to arbitration, there is no standing to bring representative claims for violations of the California Labor Code on behalf of other aggrieved employees.

This means the PAGA representative claims may not be dismissed simply because they are representative in nature, but once the class representative’s individual claim is sent to arbitration, California law eliminates standing for the representative’s claim to continue. Seemingly, this allows employers to minimize their risk of PAGA claims with an effectively  crafted arbitration agreement.

The Viking River Cruises decision indicates employers may be able to use properly drafted arbitration agreements to limit liability for representative claims. However, the U.S. Supreme Court’s decision may not be the last word, as its reasoning could leave open room for California to allow representative claims to proceed separate from individual claims.

What Does This Mean for Employers?

California employers can modify their arbitration agreements for all new hires  to include a waiver by the employee of the ability to serve as a class representative for any PAGA claims and a requirement any such claim must be individually arbitrated with the employer. As to whether the decision applies retroactively, the Viking River Cruises Court was silent. However, prior decisions that have held employers with operations in California, may ask their current or new employees to sign individual arbitration agreements.

• “Arbitration is strictly a matter of consent.’” Granite Rock Co. v. Teamsters, 561 U.S. 287, 299 (2010).

In Viking, the U.S. Supreme Court noted in its 8-1 decision the agreement to arbitrate must be upheld as a contract between the employer and employee, thereby subjecting it to all of the standard rules of contract formation. Employers reviewing or considering changes to their arbitration agreement should obtain legal advice specific to their business and agreement.

Feel free to contact Anthony Gaeta with any employment-related questions.