New Case Alert – Aggrieved Employees May Pursue PAGA Claims After Arbitration

Summary

In response to the U.S. Supreme Court decision in Viking River Cruises, Inc. v. Moriana (“Viking River Cruises”), the California Supreme Court’s recent ruling in Adolph v. Uber Technologies (“Adolph”) provides further guidance on statutory standing under the Private Attorney General Act (“PAGA”). In Adolph, the California Supreme Court held that if an employee is compelled to arbitrate individual claims for labor code violations, and that employee is found to be aggrieved, the employee can maintain statutory standing to pursue PAGA claims in court arising out of the same events involving other employees. The California Supreme Court also suggested that a stay of the court action regarding other employees would be appropriate to allow the arbitrator to determine if the plaintiff is an aggrieved employee and can therefore pursue the PAGA claim in court.

Factual Background

PAGA was enacted on January 1, 2004, to allow plaintiffs to pursue claims for Labor Code violations across the state of California on behalf of the State of California. Its purpose was to supplement the lack of resources in the state’s Labor and Workforce Development Agency (“LWDA”) by deputizing an aggrieved employee to act as a “private attorney general” on behalf of the state of California and penalize employers for wrongdoing.

To that end, PAGA allows employees to bring claims both on behalf of themselves as individuals, and on behalf of other employees as a proxy for the state of California. These are “non-individual” claims. The law also brings in necessary funds to the LWDA for public use, since 75% of penalties awarded for PAGA claims must be paid to the LWDA.

Plaintiff Erik Adolph worked as a driver for Uber Eats. When he became a driver, Adolph accepted a technology services agreement provided by Uber. He became bound by the arbitration provision in the agreement, which included a PAGA waiver that required him to arbitrate all work-related claims on an individual basis only, .

The arbitration provision included a severability clause, which stated that if the PAGA waiver is unenforceable or unlawful, the unenforceable part would be severed and the rest of the provision would still apply to any claims the party may bring, and any representative actions brought under PAGA must be litigated in a civil court.

Procedural History

Adolph brought individual and class claims against Uber in superior court in October 2019, alleging that Uber misclassified him and other delivery drivers as independent contractors rather than as employees. As a result, Adolph claimed that Uber wrongfully failed to reimburse him for necessary business expenses. In February 2020, Adolph amended his complaint to add a claim for civil penalties under PAGA. In July 2020, the trial court granted Uber’s motion to compel arbitration of Adolph’s individual Labor Code claims and dismissed Adolph’s class claims.

Adolph subsequently filed his second amended complaint, eliminating his individual labor code and class claims, and retaining only his PAGA claim for civil penalties. The trial court then granted Adolph a preliminary injunction to prevent the arbitration from proceeding. Uber filed a motion to compel arbitration of Adolph’s independent contractor status, and the enforceability of the arbitration agreement. The trial court denied Uber’s motion. The Court of Appeals affirmed. The panel held that the trial court properly found that PAGA claims are not subject to arbitration and that an agreement waiving the rights to bring a claim on behalf of other employees under PAGA violates public policy and is unenforceable. After Uber filed its petition for review, and before Adolph responded, the United States Supreme Court decided Viking River Cruises, overturning, in part, the precedent the California appeals court relied upon in its ruling in the Adolph case.

Viking River Cruises Precedent

Viking River Cruises concerned employment contracts with arbitration provisions that include severability clauses regarding PAGA claims. The United States Supreme Court found that the California case law interpreting PAGA came into conflict with the Federal Arbitration Act (“FAA”). In Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, the California Supreme Court had held that wholesale waivers of PAGA claims were invalid, as they were against state policy, and since individual and non-individual PAGA claims could not be severed, any waiver of PAGA claims was unenforceable.

In Viking River Cruises, the United States Supreme Court reversed Iskanian in part. The Court found that the FAA does not preempt Iskanian’s prohibition of wholesale PAGA waivers. However, the Court held that preventing the severability of individual and non-individual claims interferes with the parties’ freedom to determine issues subject to arbitration in such a way as to coerce parties away from arbitration. This is a violation of the FAA’s protection of the right to arbitrate. Therefore, under the FAA, individual and non-individual claims must be severable.

The result of this ruling is that, under Viking River Cruises, if an arbitration agreement contains a severability clause, the individual and non-individual PAGA claims can be severed. An employer can then compel arbitration of the severed individual claim since to do otherwise would conflict with the FAA’s right to arbitrate. Waiver of the non-individual PAGA claim would remain unenforceable under Iskanian.

The Supreme Court then interpreted PAGA’s standing requirement. The Court found that a plaintiff can only maintain standing for a non-individual PAGA claim by virtue of also maintaining an individual claim in that same action. If an individual PAGA claim is compelled to arbitration, the Supreme Court held that PAGA provides no mechanism to enable a court to adjudicate the remaining non-individual PAGA claim, and so the remaining non-individual claim should be dismissed. But in her concurring opinion, Justice Sotomayor opined that if the Supreme Court’s understanding of the statutory requirement for PAGA is wrong, California courts in an appropriate case will have the last word on the matter.

The California Supreme Court found Adolph to be the appropriate case to provide guidance on statutory standing under PAGA post-Viking River Cruises.

Adolph Holding and Reasoning

The California Supreme Court maintained the precedent set by Viking River Cruises that if an employee is party to an arbitration agreement with their employer, an individual claim can be severed from a non-individual claim and compelled to arbitration. However, the California Supreme Court differed from the United States Supreme Court’s ruling in Viking River Cruises concerning standing under PAGA. The California Supreme Court held that an aggrieved employee may still have standing to bring non-individual PAGA claims even though compelled to arbitrate the individual claim, if that individual is deemed to be an aggrieved employee.

To interpret standing under PAGA, the California Supreme Court examined the plain text of the PAGA statute and found that the only standing requirement for individual and non-individual claims under PAGA is that the plaintiff be an “aggrieved employee.” An “aggrieved employee” is one – (i) who was employed by the defendant, and (ii) against whom an alleged labor code violation was committed while employed by defendant. The statute does not require an unaddressed injury for standing and includes no statutory expiration beyond its one-year statute of limitations.

The arbitration of an individual claim does not inherently prevent standing for non-individual claims if a plaintiff remains an aggrieved employee. Non-individual and individual claims can proceed separately in a civil case and an arbitration, respectively, while remaining part of the same action. The California Supreme Court explained that this delineation is foundational to PAGA’s goal, as “an interpretation of the statute that impedes an employee’s ability to prosecute his or her employer’s violations committed against other employees would undermine PAGA’s purpose of augmenting enforcement of the Labor Code.”

Arbitrating individual claims will preclude a plaintiff from bringing non-individual claims if the arbitrator for the individual claim finds that the plaintiff is not an aggrieved employee. If a court confirms the arbitrator’s findings by final judgment, then the plaintiff will lose standing to prosecute PAGA claims, as such plaintiff no longer meets the aggrieved employee requirement for standing under PAGA.

In sum, while Viking River Cruises held that an individual compelled to arbitrate individual claims loses standing for non-individual claims, Adolph clarified that an individual may lose standing for non-individual claims only upon a final ruling that such individual is not an aggrieved employee.

Take Away

California employers should continue to include pre-dispute arbitration provisions that compel plaintiffs to arbitrate their individual claims, including PAGA claims, and include a severability provision. However, these provisions will not prevent plaintiffs from bringing non-individual claims to court unless employers are first able to have a finding by the arbitrator that the plaintiff is not an aggrieved employee per PAGA and reduced to a final judgment. Employers should move to compel arbitration of the individual claim and request a stay of the remaining PAGA claim so that the arbitrator can determine whether the individual is an aggrieved employee. Once that determination is made, either the PAGA claim cannot proceed or the determined aggrieved employee can pursue the PAGA claim in court. Also, to the extent a settlement is reached in the arbitrated matter, counsel should attempt to include the remaining representative PAGA claims for a universal resolution of all pending claims.

The California Supreme Court has shown that they are willing to protect the value of PAGA as a high-caliber weapon to target Labor Code violators and deter such future violations. The California Supreme Court maintained the United States Supreme Court’s holdings to prevent a conflict with the FAA but deferred to the California legislature’s intentions behind PAGA on the issue of state law regarding standing. The combination of Viking River Cruises and Adolph places California in a more neutral zone regarding arbitration in employment agreements, protecting the employer’s ability to require arbitration while leaving the door open for aggrieved employees to pursue a representative PAGA claim for Labor Code violations affecting many employees.

© 2023 – Hahn & Hahn LLP All rights reserved. The information in this article has been prepared by Hahn & Hahn LLP for informational purposes only and does not constitute legal advice.

This article is republished with permission and authored by Laura Farber (lfarber@hahnlawyers.com) of Hahn & Hahn LLP with assistance by Arielle Basich (Loyola Law School, J.D. Candidate 2024), the firm’s summer associate.

Thank you for your continued support of the Committee.