Many California employers have adopted arbitration agreements to resolve their workplace disputes. Such agreements are enforceable in California so long as their terms are substantively fair. To ensure enforceability, the agreement must include certain procedural protections for employees, and must not waive an employee’s rights to assert individual statutory and common law employment claims, including claims for wage and hour violations. The prohibition on claim waiver is the key to a valid agreement.
While these rules have been in place for decades, certain aspects of the anti-waiver rule with respect to claims under the Private Attorneys General Act (or PAGA) have recently evolved. Confusion has resulted – not only for employers, but also for the courts and for employees as well. As such, it is critical that employers revisit their arbitration agreements to ensure they adequately address PAGA rights. Absent such review, an entire arbitration program, carefully administered over years, can be at risk.
PAGA
PAGA, enacted in 2004, authorizes an employee to sue his or her employer to collect civil penalties (typically collected by the state) for purported Labor Code violations suffered by the employee and those (purportedly) suffered by co-workers. In 2014, the California Supreme Court held that the right to act on behalf of the state to recover all such penalties could not be waived in an arbitration agreement. In 2022, the U.S. Supreme Court held to the contrary that arbitration agreements under the Federal Arbitration Act would permit a bar on the recovery of PAGA civil penalties for violations suffered by co-workers. The Court held that the arbitration agreement would have to preserve an employee’s right to recover penalties triggered by his or her own violations, but could otherwise reduce the scope of an arbitration for the sake of efficiency. In 2023, the California Supreme Court reversed the course and held that individual employees were authorized under PAGA to recover claims based upon violations suffered by co-workers, and that such claims could not be waived in a mandatory arbitration agreement.
Arbitration Agreements
It has been a challenge for many employers with arbitration agreements to adjust to this legal flip-flop. Some employers have simply opted not to address PAGA at all in their arbitration agreements. Others have inserted a limited PAGA waiver, adopting language such as “if legal under controlling law,” and others have maintained a limited PAGA waiver in reliance on the U.S. Supreme Court’s decision as interpreted by the California Supreme Court in 2023.
While many courts will forgive an overbroad claim waiver in an arbitration agreement, and sever such provision rather than allow it to render an entire agreement invalid, many courts are now holding that an express waiver of a PAGA claim, in combination with other indications of unfairness, such as a confusing signature policy – may jeopardize the enforceability of an arbitration agreement altogether. Courts retain substantial discretion to determine whether an arbitration agreement – as a whole – is fair and therefore enforceable.
In light of this evolution, and the risk of an unenforceable arbitration agreement, employers should be sure to review their arbitration agreements to confirm whether PAGA claims are addressed at all and if so whether they are adequately addressed. Where appropriate, employees can be asked to sign updated agreements.
Note that while PAGA may one day be amended or abolished, it remains, for now, the most commonly pled employment claim against California businesses with hundreds of such claims filed every month. (While a voter initiative to replace PAGA with a system requiring more state oversight and more direct benefits to employees is slated to be on the ballot this November, securing voter approval of the fix is far from assured.) As such, California employers have no assurance that PAGA litigation is behind them. Employers with arbitration agreements must make sure they adapt to any relevant shifts in the legal landscape, including judicial opinions on PAGA rights.
