U.S. Supreme Court Holds “Individual” PAGA Claims Subject to Arbitration

On Behalf of | Jun 21, 2022 | Publications

By: Kyle D. Kring and Kerri N. Kramer

On June 15, 2022, the United States Supreme Court issued its highly-anticipated decision in Viking River Cruises, Inc. v. Moriana, holding that state law rules excluding from arbitration claims under the California Private Attorneys General Act (“PAGA”) are only partially preempted by the Federal Arbitration Act (“FAA”). Specifically, the Court held that, while the FAA does not preempt state prohibitions on “wholesale” waivers of PAGA claims, it does mean that PAGA claims can be divided into arbitrable “individual” claims and non-arbitrable “non-individual” claims. While the ultimate scope of the decision will not likely be known for some time, it raises important issues for all California employers to consider in the immediate future.

California law previously held that actions under PAGA consistent of one, indivisible claim for representative relief. It also made clear that a PAGA claim could not be compelled to arbitration based on an employee’s pre-dispute arbitration agreement.

Under the new Viking River decision, when an employee who has signed an applicable arbitration agreement flouts that agreement by filing a civil action, the employer may compel all “individual” PAGA claims to arbitration.

Critically, the Viking River decision was not quite what employers, employees, or legal commentators were expecting. Instead, the Court took a much more technical approach to the issue, including use of specialized definitions that have resulted in confusion about the actual reach of the decision. As such, we have endeavored to break down the decision, including the background from which it arose, to assist our clients in better understanding these complex issues.

Brief Overview of PAGA

As we have often written, PAGA is a state law that allows an aggrieved employee to seek civil penalties for their employer’s alleged violations of the Labor Code on behalf of themself, the State, and other aggrieved employees. Lab. Code §§ 2698 et seq. Of particular importance to this discussion, a key aspect of PAGA claims is that an employee need only suffer one Labor Code violation in order to bring an action to enforce all alleged violations suffered by any other aggrieved employee(s). Huff v. Securitas Security Services USA, Inc. (2018) 23 Cal.App.5th 745.

Most PAGA penalties are assessed on a per-employee, per-pay-period basis. Where a Labor Code provision does not specifically provide a civil penalty for its violation, PAGA imposes a default penalty of $100 for the initial violation and $200 for each subsequent violation. Lab. Code § 2699. These civil penalties are in addition to, not in lieu of, the wages owed to individual employees under the same Labor Code sections.

Brief Overview of FAA

The FAA, on the other hand, is a federal statute enacted to address judicial hostility toward enforcement of arbitration agreements. It that requires courts to treat arbitration agreements as “valid, irrevocable, and enforceable” except on grounds generally applicable to other (non-arbitration) types of contracts.

Critically, the FAA preempts not only any state rule that discriminates against arbitration, but also any such rule that stands in the way of the right to arbitration “through the imposition of procedures at odds with arbitration’s informal nature.”

Under the FAA, arbitration is strictly a matter of contractual consent. Therefore, parties generally cannot be compelled to arbitration claims that they did not agree to arbitrate. As a result, class action waivers contained in valid arbitration agreement are generally enforced, as they reflect that the parties did not agree to arbitration claims on a class-wide basis. The U.S. Supreme Court had not previously decided whether the same was true of a waiver of “representative” PAGA, rather than class, claim.

Brief Overview of Implicated California Decisions

In 2014, the California Supreme Court’s decision in Iskanian v. CLS Transportation of Los Angeles, held that the right to bring a PAGA claim may not be waived by an employee, including in a pre-dispute arbitration agreement. The Court further concluded that the FAA did not apply, because PAGA actions are not private claims belonging to employees, but claims belonging to and brought on behalf of the state, which is not a party to the arbitration agreement.

In Kim v. Reins International California, Inc., the California Supreme Court held that an individual’s standing to pursue PAGA claims is not dependent on their ongoing ability to maintain any kind of individual claim, so long as they initially suffered at least one Labor Code violation at the hands of the defendant employer.

Procedural Background

Viking River Cruises, Inc. (“Viking River”) operates an ocean and river cruise line. Angie Moriana (“Moriana”) was a former sales representative of Viking River. At the time of hire, Moriana executed an arbitration agreement that included what is known as a “class action waiver,” requiring signatory employees to submit all disputes with Viking River to individualized arbitration and to waive the right to bring any class or representative actions before the arbitrator. The agreement also contained a severability provision, by which the parties agreed that if any “portion” of the agreement (including the waiver provision) was valid, that the valid “portion” would still be enforced in arbitration.

After her termination, Moriana filed a lawsuit against Viking River containing a single cause of action under PAGA. Notably, Moriana alleged that she had suffered only one relevant violation of the Labor Code – based on the timing of her final wages. However, based on the precedent above, she also sought to recover against her former employer for violations of other Code provisions – including those based on minimum wage, overtime, meal and rest periods, pay days, and wage statement requirements – allegedly committed by Viking River against other employees but which did not affect Moriana individually.

In response to Moriana’s lawsuit, Viking River sought to compel Moriana’s individual claims to arbitration, pursuant to the parties’ agreement. The trial court and California Court of Appeal both denied Viking River’s request, holding, in reliance on Iskanian, that the arbitration agreement’s class action waiver was not enforceable as to Moriana’s PAGA-only claim, which could not be split into arbitrable individual claims and non-arbitrable representative claims. The California Supreme Court declined to review the case.

Viking River filed a petition for writ of certiorari, asking the U.S. Supreme Court to determine whether the FAA invalidates Iskanian’s rule. Despite having denied several similar requests in recent years, the Court granted the petition.

Viking River’s Holdings

The Court first declined to hold that the FAA preempts the portion of the Iskanian rule that held that “wholesale” waivers of the right to bring a PAGA claim at all are unenforceable. Therefore, the rule that prohibits enforcement of an employee’s waiver of representative standing to bring any PAGA claim whatsoever remains in place. Because of the severability provision in Viking River’s arbitration agreement, discussed above, however, the inquiry did not end there. The provision required the Court to determine whether a partial waiver (here, a waiver as applied only to the non-individual PAGA claims) was enforceable.

In addressing that issue, the Court held that PAGA claims can be divided into “individual” and “non-individual” claims, as defined below, and that the “individual” claims could be compelled to arbitration pursuant to a valid, applicable arbitration agreement. This holding rejected the conclusion in Iskanian and other California state court decisions, that a PAGA action – even when it asserts “multiple code violations affecting a range of different employees” -constitutes a single, indivisible claim. Rather, the Court held, PAGA contains a procedural mechanism for joining together “any claims that could have been raised by the State in an enforcement proceeding.”

The Court defined an “individual PAGA claim,” at various places in the Viking River opinion as: (1) “the claim that arose from the violation [Moriana] suffered;” (2) those “which are premised on Labor Code violations actually sustained by the plaintiff;” and (3) “claims based on code violations suffered by the plaintiff.” “Non-individual” claims, on the other hand, are defined as “PAGA claims arising out of events involving other employees.” These claims are sometimes referred to in the opinion as “representative” or “quasi-representative” claims.

The Court held that the single-claim view of PAGA is incompatible with the FAA because it forced upon employers the untenable choice of agreeing to arbitrate all PAGA claims in the same proceeding, or foregoing arbitration of PAGA claims altogether. Because the FAA preempts such a rule, parties may agree to arbitrate only “individual PAGA claims” as part of valid agreements.

Applying these principles, the Court held that Moriana’s “individual” PAGA claim must be arbitrated, pursuant to the enforceable portion of her agreement with Viking River.

As noted above, it remains to be seen how, applying the definitions used by the Court above, the “individual” and “non-individual” claims will – practically speaking – be handled and, critically, how civil penalties on the “individual” claims will be calculated.

The Court, based on its interpretation of California state law, then held that Moriana would lack standing to pursue the “non-individual” claims, which remained in court, resulting in their dismissal. This would mean, at minimum, that with the assistance of properly-worded arbitration agreements, employers could prevent employees from litigating claims for civil penalties related to Labor Code violations suffered solely by employees other than the plaintiff. However, the decision also leaves open the opportunity for the California Supreme Court and/or state legislature to alter the impact of this portion of the holding in the future, including based on the existing decision in Kim v. Reins.

These holdings, made in an 8-1 majority opinion joined by the Court’s liberal justices, is far more nuanced than anticipated and appears to reflect at least some level of compromise through consensus building. Therefore, while it will have important impacts on pending and future claims, wise employers will keep abreast of future advancements as various tribunals attempt to interpret, and as the legislative bodies consider efforts to circumvent, the decision.

Consider Revising Your Arbitration Agreement and Related Practices

As emphasized above, the Court’s decision was limited to those employees who have signed a valid, appropriately-worded arbitration agreement.

If your organization is currently using employee arbitration agreements, you should immediately meet with your employment attorney to consider updating your agreements in line with the Viking River decision. If your organization does not currently use employee arbitration agreements, careful consideration should be given to implementing such agreements in light of the new decision. This analysis should include a review of your policies and actual practices for implementing and presenting arbitration agreements to employees, which can impact the agreement’s enforceability if challenged.

Kring & Chung, LLP’s employment team can assist you in analyzing whether a new or revised arbitration agreement might be beneficial to your company and with drafting an agreement consistent with the Viking River decision.

Please give us a call if we can be of assistance. Kyle D. Kring is the Founding Partner of Kring & Chung, LLP and Kerri N. Kramer is a senior associate specializing exclusively in employment law. They can be reached at (949) 261-7700 or [email protected] and [email protected].

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