Update Regarding Arbitration Agreements Between Employers and Employees

7.20.23

The Ninth Circuit U.S. Court of Appeals in Chamber of Commerce v. Bonta1, recently confirmed that California employers can require job candidates and employees to sign arbitration agreements as a condition of employment. This decision is significant as it clarifies the legality of mandatory arbitration agreements in California, which has been a controversial topic for some time. This is particularly noteworthy in the context of the California Supreme Court's recent decision in Adolph v. Uber Technologies2 holding that an employee's individual claims for Labor Code violations under the state's Private Attorney General Act (PAGA) can be compelled to arbitration while the employee retains standing to pursue representative PAGA claims on behalf of other "aggrieved employees" in court.

The Ninth Circuit's ruling raises the next question of whether Federal Arbitration Act (FAA) requires enforcement of an arbitration agreement mandating that claims be brought on an individual basis only and not in a representative action, including an action under California’s Private Attorneys General Act (PAGA). After years of litigation, on February 15, 2023, the Ninth Circuit revisited the case of whether FAA preempts California law AB 51 and held that the FAA preempts AB 51 and enjoined enforcement of the law in its entirety.3

The enforceability of arbitration agreements for PAGA claims in California has been a subject of debate and legal interpretation over the years. PAGA authorizes aggrieved employees to file lawsuits to recover civil penalties on behalf of themselves, other employees, and the State of California for Labor Code violations.4 PAGA claims are unique from Labor Code violations because the aggrieved employee represents the State as well as themself.5

Prior to the Supreme Court’s decision in Viking River Cruises, Inc. v. Moriana in June 2022, any settlement of a PAGA action could only be approved by the court, whether or not the private settlement included an award of PAGA penalties.6 Therefore, without court approval, settlement or arbitration negotiations could only resolve Labor Code violations but PAGA would remain to dispute at trial. In Viking River, the employer and employees’ employment contract contained a clause that explicitly compelled the parties to resolve a PAGA action in arbitration. The Supreme Court in an 8-1 decision, overruled California existing law and held that claims under PAGA are subject to an agreement to arbitrate.

While arbitration of individual claims followed by litigation of the representative claims may be more costly than standard negotiation settlements, employers with arbitration agreements could see significant benefit if able to prevail in the individual PAGA claim in arbitration. If an employer prevails, the plaintiff will be unable to pursue representative PAGA claims in court. The potential PAGA claim liability an employer could face could jeopardize many businesses. 

To discuss further, please contact one of the attorneys at Schwartz Semerdjian.

1 Chamber of Commerce v. Bonta, No. 20-15291 (Ninth Cir. Feb. 15, 2023)
2 Adolph v. Uber Technologies, Inc., No. S274671 (California Supreme Court July 17, 2023)
3 AB 51 prohibits employers from requiring employees or job applicants to agree to resolve certain disputes in binding arbitration instead of in court.
4https://www.dir.ca.gov/Private-Attorneys-General-Act/Private-Attorneys-General-Act.html#:~:text=The%20Labor%20Code%20Private%20Attorneys,California%20for%20Labor%20Code%20violations
5 “PAGA claim is legally and conceptually different from an employee's own suit for damages and statutory penalties.” Kim v. Reins International California, Inc., Supra, (2020) 9 Cal.5th 73, 81. “An employee suing under PAGA does so as the proxy or agent of the state's labor law enforcement agencies.” Id.
6 U.S. 142 S.Ct. 1906 (2022)