CA Supreme Court Permits PAGA Claims in Court Despite Arbitration Agreement

When employees file a wage and hour lawsuit in California, they often seek to bring the lawsuit on behalf of all potential employees affected by the alleged wage and hour violations under the California Labor Code. These lawsuits may be filed as putative class action lawsuits and/or representative lawsuits under the Labor Code Private Attorneys General Act (“PAGA”). Although class actions and PAGA lawsuits may overlap as to the alleged substantive issues (e.g. meal break violations), there are significant differences between class actions and PAGA claims, including the applicable statute of limitations, the type of recovery available, and the impact of any arbitration agreements that the employee may have entered.

In June 2022, the United States Supreme Court addressed whether an employee may be compelled to arbitrate a PAGA claim in Viking River Cruises, Inc. v. Moriana.  The U.S. Supreme Court found that the Federal Arbitration Act (FAA) permitted the division of PAGA claims into individual, and non-individual/representative claims, and that employers could compel arbitration of individual PAGA claims if an employee entered an enforceable arbitration agreement. The Court further concluded that while the non-individual claims may not be dismissed merely because they are “representative,” PAGA provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding. Thus, according to the U.S. Supreme Court in Viking River, a plaintiff loses standing to maintain a representative PAGA claim once an individual PAGA claim is compelled to arbitration. Notably, however, in her concurring opinion, Justice Sotomayor acknowledged that the Court’s reasoning was based on “available guidance from California courts,” and that “if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word.”

On July 17, 2023, the California Supreme Court took up Justice Sotomayor on her invitation, and issued its highly anticipated opinion in Adolph v. Uber Technologies, Inc. In Adolph, the California Supreme Court held that an employee does not lose standing to maintain a representative PAGA claim in court when arbitration is compelled on the individual PAGA claim. While the California Supreme Court recognized the U.S. Supreme Court said otherwise in its 2022 decision, the California Supreme Court reiterated that it is the “final arbiter” of state law, and is not “bound by the high court’s interpretation of California law.” The California Supreme Court concluded that when a plaintiff has filed a PAGA action comprised of individual and representative claims, an order compelling arbitration of the individual claims does not strip the plaintiff of standing to litigate non-individual claims in court.

Based on Adolph, if an employee entered an arbitration agreement with the employer that encompasses their PAGA claim, the employee could be compelled to arbitrate the individual PAGA claim in arbitration, while also still maintaining standing to pursue the representative PAGA claim in court.

As many employers in California are aware, representative PAGA claims – which are often brought on behalf of all current and former hourly employees that worked in the state – can be complex and costly. However, this does not mean employers are now left with no choice but to litigate meritless representative PAGA claims in court when an employee entered an enforceable arbitration agreement.

The California Supreme Court offered employers some welcome guidance in Adolph as to a manner of proceeding that may be practical with respect to litigating PAGA claims. Specifically, the Court acknowledged that a trial court “may exercise its discretion” to stay the representative PAGA claims pending the outcome of the individual arbitration. The Court further noted that if the arbitrator determined the employee was not an “aggrieved employee” under PAGA and the trial court confirmed this determination and reduced it to a final judgment, then the employee “could no longer prosecute his non-individual claims due to lack of standing.” Thus, an employer may not necessarily have to litigate a representative PAGA claim in court if the employer can first demonstrate in arbitration that the employee at issue lacks standing to proceed as an aggrieved employee. Employers with arbitration agreements should consider the impact of Adolph when it comes to how, and where, PAGA claims will be litigated in California moving forward, and will want to take all of the steps necessary to ensure they are compliant with California’s wage and hour laws.

Ballard Spahr regularly advises and defends businesses with California employees in litigation involving state and federal wage and hour issues, including under PAGA, and frequently works with clients in drafting and enforcing arbitration agreements.

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