Consider Employee Arbitration Agreements
Fri, 08/26/22
Overview:
On June 15, 2022, the U.S. Supreme Court issued an 8-1 decision on the Viking River Cruises, Inc. v. Moriana case. The decision represents a rare win for employers and provides clear support for employers to adopt an Arbitration Agreement for their employees.[1]
See our prior article about this case here for more context and analysis. As anticipated, the U.S. Supreme Court ruled in favor of forcing employees to bring claims against their employers on an individual basis and in arbitration.
Specifically, the Supreme Court held:
1) An Arbitration Agreement that required employees to waive their right to bring class or representative actions and required them to bring individual claims via arbitration was enforceable; and
2) Under an Arbitration Agreement with the terms above, an employee who seeks to bring a representative action under the Private Attorney General Act (“PAGA”) can be required to bring their individual PAGA claims in arbitration and the representative portion of the PAGA action (which is not required to go to arbitration) must be dismissed.
Background:
PAGA allows an individual employee to sue their employer for civil penalties on behalf of themselves and all other aggrieved employees. PAGA claims have become the favored way to enforce Labor Code violations (or alleged violations) because it allows a single plaintiff, who may not have suffered much in the way of financial damages, to sue and collect on behalf of tens, hundreds, or thousands of employees. PAGA claims have threatened to bankrupt many employers as the cost of defending against claims, either spurious or legitimate, is substantial.
Employers attempted to confront this problem by having employees sign Arbitration Agreements at the time of hire that ensured that all potential claims arising in the employment relationship would be arbitrated. Many of those Arbitration Agreements contained class action and representative action waivers, compelling the employee to assert the claims in Arbitration on an individualized basis. While arbitration comes with a cost for employers, the impact would be a net positive. It would prevent a minor labor law violation affecting a large swath of employees from becoming a major lawsuit, as asserted by a single employee on behalf of the class or as a representative via PAGA.
The 2014 Iskanian decision by the California Supreme Court invalidated Arbitration Agreements that forced employees to assert PAGA claims individually and in arbitration. Now, eight years later, the U.S. Supreme Court has ruled that Iskanian’s holding (PAGA actions cannot be divided into “individual” and “non-individual claims”) is preempted by federal law. Moreover, the Supreme Court held the employer was entitled to force the “individual” PAGA claims into arbitration. And, finally, the PAGA statutory scheme presents no mechanism for an employee to assert, or court to hear, non-individual PAGA claims once the individual claim has been committed to a separate proceeding.
What Happens Next?
Exactly how to properly craft a “bullet-proof” Arbitration Agreement in California is still up for legal debate. In 2019, California passed a law prohibiting mandatory Arbitration Agreements in their entirety. Under that law, Arbitration Agreements were only permissible if “voluntarily” entered into by employees.
Through legal challenges by the Chamber of Commerce, the law was blocked from going into effect. The basis of the suit was to assert that the FAA preempted the right of the State to undermine the enforceability of mandatory Arbitration Agreements. In late 2021, the Ninth Circuit found that the law was not preempted by the FAA but the penalties written into the law were preempted. But further action on the law has been held up while the Viking River Cruises case was pending with the U.S. Supreme Court.
The Chamber of Commerce is now moving forward to try and reverse the Ninth Circuit’s holding, in light of the U.S. Supreme Court’s decision in Viking River Cruises. Therefore, the current status of the law in California is that mandatory Arbitration Agreements are not enforceable but this may change in light of the Viking River Cruises decision.
What Should Your Company Do?
A) If you have 100 or more employees or are otherwise concerned about group-wide claims under PAGA or via class action, we suggest you contact our office to discuss the benefits and drawbacks of adopting an Arbitration Agreement. Having a carefully crafted Arbitration Agreement can save your company thousands or even hundreds of thousands of dollars. However, there are always considerations to be made when adopting such a policy so as to avoid unintended consequences.
B) We continue to advise all employers with an Arbitration Agreement to:
1) Change the process for signing the Agreement to make it a voluntary, rather than mandatory, act; and
2) Review the Arbitration Agreement to ensure that it does not compel arbitration of sexual harassment, discrimination, and assault claims by an employee, if the agreement was entered into before the dispute arose. Such a requirement runs afoul of the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” which amended the FAA to prohibit such a requirement and was signed into law by President Biden in March 2022.
As always, the status of employment rights and responsibilities will continue to evolve as lower courts attempt to apply this Supreme Court decision. Further, the Supreme Court essentially invited the California legislature to amend the PAGA procedural rules, which may render this decision moot. Unless or until that happens, the Viking River Cruises decision represents a positive move for employers attempting to manage compliance with California’s extensive employment laws.
If you have any questions or need any additional information on this topic, please call Samantha Pungprakearti, Justin Hein, or Arif Virji at Carle, Mackie, Power & Ross LLP – (707) 526-4200.
[1] The question presented in Viking River Cruises involved whether the Federal Arbitration Act (“FAA”) preempts the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC, which invalidated contractual waivers of representative claims under California’s Labor Code Private Attorneys General Act (“PAGA”).