Employers routinely rely on arbitration agreements to manage risk in their workplace, but the state of the law is changing, leaving employers with questions. An arbitration agreement is any agreement allowing the parties to litigate in private arbitration rather than in court, and agreements can be reached by employers individually with employees or collectively through a collective bargaining agreement (“CBA”). with arbitration provisions. Arbitration agreements will typically have a class waiver, preventing the dispute from becoming a multi-million dollar class action.
Arbitration generally has the advantages of reducing the complexity of litigation, avoiding irrational jury verdicts, and limiting exposure to individual claims. Disadvantages include employers having to foot the expensive arbitration bill – and arbitrations carry virtually no right to appeal an unfavorable decision. Businesses often find that the pros outweigh the cons.
California law and federal law strongly favor arbitration agreements, but federal law is stronger due to the Federal Arbitration Act (“FAA”). The FAA mandates the enforcement of employee objection arbitration agreements in most cases. Challenges to arbitration agreements under the FAA are limited to very narrow grounds, such as fraud, duress, or unfairness. Additionally, the FAA strongly favors class action waivers, ensuring that arbitration remains individualized. But that favor does not historically extend to claims under the California Attorney General Act of 2004 (“PAGA”). The United States Supreme Court may change that soon.
California enacted PAGA in 2004 to improve wage and hour enforcement. PAGA authorizes the private prosecution of any employee against his employer, on behalf of all employees of the company, for civil penalties triggered by any violation of the Labor Code. Unlike class actions, PAGA has low procedural and evidentiary barriers before trial, but the level of civil penalties rivals or exceeds a comparable class action. The explosion of PAGA litigation over the past decade has been alarming to say the least for California businesses.
But arbitration agreements and attempts to implement representative waivers are historically futile. California views PAGA as fundamentally a substitute for legal action and therefore views PAGA claims as immune from arbitration. The California Supreme Court expressed this view in Iskanian vs. CLS Transportation Los Angeles (2014) 59 Cal.4th 348, which later refined lower court decisions and is now familiarly regarded as the iskanian to reign. Naturally, the iskanian rule makes PAGA litigation only the weapon of choice for many litigants.
The United States Supreme Court has agreed to hear a challenge to the iskanian rule in the case entitled Viking River Cruises vs. Moriana (Dkt. No. 20-1573). The case provides the Court with an opportunity to rule directly on whether an arbitration agreement to waive PAGA should be enforced under the FAA. Key considerations may include the degree of control the state can delegate to employees before PAGA comes within the scope of the FAA.
Stay tuned for a decision by July 2022. Possible outcomes may range from a full PAGA waiver to limiting PAGA claims to arbitration with conditions. After the Supreme Court rules, California can still amend the PAGA to circumvent the ruling, while Congress can still amend the FAA to exclude wage and hour claims altogether. Regardless of, Viking River Cruises is a case to watch.
Construction industry employers can take heart in the fact that section 2699.6 of the Labor Code already provides an exemption from PAGA for any construction industry employee covered by a qualifying collective agreement. To be eligible, a CBA must:
- Process wages, hours of work, working conditions and overtime pay
- Guarantee employees at least 30% above the state minimum wage
- Clearly and unambiguously waive PAGA requirements
- Prohibit all violations of the Labor Code that would be the subject of an appeal by the PAGA
- Provide a binding grievance and arbitration procedure for Labor Code claims
- Authorize the arbitrator to grant all remedies otherwise available under the Labor Code, except for any penalties payable to the Labor and Workforce Development Agency
Janitorial services enjoy a similar exemption, and the Labor Code is peppered with CTC-based exemptions. These are useful benefits for companies that choose to bargain with a union, but companies should make sure their collective agreements qualify with the help of a lawyer.
Employers should also take note of several other important changes in arbitration.
The “Ending Sexual Assault and Sexual Harassment Forced Arbitration Act” – also known as HR 4445 – was signed into law in March 2022. HR 4445 exempts claims of sexual assault and sexual harassment from the FAA if the claims arose or accrued after the passage of the law. Exemption is at the sole option of the accuser. This means that employers can no longer invoke the FAA in the future in cases related to sexual assault and sexual harassment disputes. It’s unclear just how “tied” the case needs to be – and it’s sure to become a flashpoint of ongoing litigation and uncertainty.
The National Labor Relations Board’s General Counsel intends to examine how and when arbitration agreements are implemented as potential unfair labor practices under the National Labor Relations Act. There will be more information to come on this matter as charges are filed and investigated.
Finally, be on the lookout for developments in the litigation regarding Assembly Bill 51 (“AB 51”). AB 51 prohibits requiring employees, as a condition of employment, to sign agreements to arbitrate California Fair Employment and Housing Act or Labor Code claims. The law carries potential criminal charges for forcing arbitration agreements on employees, but appears to have no impact on a company’s right to enforce valid agreements once signed. Professional associations obtained an injunction against AB 51 as soon as it was adopted. (See United States Chamber of Commerce v. bonta (9th Cir. 2021) CD No. 2:19-cv-02456). AB 51 is currently on appeal pending further review (after a committee decision) by the 9th Circuit, which decided to stay until the United States Supreme Court rules on Viking River Cruises vs. Moriana. For now, the AB 51 injunction will remain in place for arbitration agreements covered by the FAA.
Employers should review their existing arbitration agreements and SCCs, if any, with the assistance of an experienced employment attorney and consider applicable modifications.