For companies doing business with independent contractors on a multistate basis that operate with arbitration provisions in their independent contractor agreements, California has presented a vexing challenge by its Labor Code Private Attorneys General Act of 2004 (“PAGA”), Cal. Lab. Code § 2698 et seq.
California’s PAGA empowers an employee (including an individual classified as an independent contractor but claims to be a misclassified employee) – who alleges that the employee’s employer violated specified California Labor Code provisions – to file a lawsuit against the employer and use the violation as a gateway to assert claims alleging a potentially limitless number of other Labor Code violations sustained by other employees of the employer. California courts have interpreted PAGA claims as Labor Code claims that an employee brings on behalf of California’s Labor and Workforce Development Agency (“LWDA”) to recover civil penalties that are otherwise recoverable only by the state in a LWDA enforcement action.
An employee who institutes a PAGA lawsuit asserts two types of claims on behalf of the LWDA, namely, (i) claims alleging specified Labor Code violations sustained by the employee, and (ii) claims alleging specified Labor Code violations sustained by other employees. In a successful PAGA action, the LWDA is entitled to 75% of the award and the remaining 25% is distributed among the affected employees.
What makes PAGA claims especially vexing for companies that operate with arbitration provisions is that California courts have held that an arbitration provision does not protect a company against having to litigate in court any PAGA claims. But this outcome was recently changed.
A June 15, 2020, decision by the U.S. Supreme Court in Viking River Cruises, Inc. v. Moriana, 2022 WL 2135491 (June 15, 2022), created a new opportunity for a company to protect itself against having to litigate in court any PAGA claims. The specific issue before the Court was whether the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., preempts a rule of California law that invalidates contractual waivers of the right to assert representative claims under PAGA.
Through a complex analysis of federal civil procedure, the FAA, and the PAGA statute, the U.S. Supreme Court in Viking River Cruises, Inc. held that a pre-dispute arbitration provision governing a PAGA claim that an individual asserts on the individual’s own behalf with respect to Labor Code violations sustained by that individual (and “individual PAGA claim”) is protected by the FAA and can be enforced. The Court also held that an “individual PAGA claim” can be split off from, and arbitrated separate and apart from, the representative PAGA claims the individual brings with respect to other employees. Finally, the Court held that once the “individual PAGA claim” is dismissed from litigation and resolved through arbitration, the individual loses the standing required to assert representative PAGA claims in court on behalf of other employees for Labor Code violations they sustained. This means that a carefully drafted arbitration provision can insulate a company against having to litigate in court any PAGA claims.
In light of the Viking River Cruises, Inc. decision, any company that operates with independent contractors in California and has arbitration provisions in its independent contractor agreements should consider consulting with a litigation attorney to ensure that its arbitration provisions are drafted in a manner that will allow it to avoid having to litigate in court any PAGA claims asserted against it.
Importantly, the U.S. Supreme Court acknowledges in its analysis that the California Legislature could amend the PAGA statute to change this outcome.
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