California Law's Employment Arbitration Limits Land in Supreme Court's Crosshairs

Author: Robert S. Teachout, Brightmine Legal Editor

December 17, 2021

Does the Federal Arbitration Act (FAA) preempt a charge filed by an employee under California's Private Attorneys General Act (PAGA) when the employee is subject to a bilaterally agreed upon arbitration agreement? The US Supreme Court agreed to take up a case this week, Viking River Cruises, Inc. v. Moriana, that examines that question.

Under PAGA, an employee has the right to sue an employer for civil penalties on behalf of all "aggrieved employees" if the employer violates California's labor code. This process allows an employee to avoid the procedural requirements for bringing a case as a class action.

Employers argued that such cases should be dismissed and sent to arbitration when an employee was subject to an arbitration agreement that includes a waiver of representative actions - such as a PAGA claim - arguing that the FAA preempted California law.

However, in its 2014 ruling in Iskanian v. CLS Transportation Los Angeles, the California Supreme Court held that the FAA, which applies to employer-employee issues, was not applicable to PAGA cases. The court found that PAGA cases are deemed to be between the employer and the state because the employee is acting as a proxy for the state to enforce the Labor Code. Therefore, employers are not permitted to enforce an arbitration agreement that requires employees to waive the right to litigate PAGA claims. The 9th Circuit Court of Appeals upheld that ruling in 2015.

The employers in Viking River Cruises argue, however, that the FAA requires enforcement of bilateral arbitration agreements, including in PAGA cases. They contend that the US Supreme Court's 2018 Supreme Court rulings in Epic Systems Corp. v. Lewis (holding that arbitration agreements providing for individualized proceedings are enforceable) and its 2011 ruling in AT&T Mobility LLC v. Concepcion (holding that courts may not disregard or reshape traditional individualized arbitration agreements) support the conclusion that arbitration agreements must be enforced according to their terms, including terms that prohibit class or collective arbitrations.

If the Supreme Court sides with the employers, it would be a major victory for them by preventing expensive litigation of labor class actions in favor of individual arbitration. The Court is expected to issue a ruling by June 2022.