Hunton Employment & Labor Perspectives

In a recent case, Correia v. NB Baker Electric, Inc., the California Court of Appeal held that employers cannot require employees to arbitrate their representative claims under the California Private Attorney General Act of 2004 (“PAGA”), Labor Code § 2699 et seq., without the State’s consent.

In Correia, two former employees sued their employer, NB Baker Electric, Inc. (“Baker”), alleging wage and hour violations and seeking civil penalties under PAGA. Baker petitioned the trial court for arbitration pursuant to the parties’ arbitration agreement, which provided that arbitration would be the exclusive forum for any dispute and which prohibited employees from bringing “any class action or representative action” in any forum.

The trial court granted the petition to compel arbitration on all causes of action, except for the PAGA claim. On the PAGA claim, the trial court followed two prior California decisions, Iskanian v. CLS Transportation (“Iskanian”), 59 Cal.4th 348 (2014) (holding as unenforceable agreements to waive the right to bring PAGA representative actions in any forum) and Tanguilig v. Bloomingdale’s, Inc., 5 Cal. App. 5th 665 (2016) (holding that a PAGA claim cannot be compelled to arbitration without the State’s consent).

Baker appealed.  It argued that Iskanian was no longer binding as it was inconsistent with the United States Supreme Court’s decision in Epic Systems Corp. v. Lewis (“Epic Systems”).  The Court of Appeal affirmed the trial court’s ruling and determined that it remained bound by Iskanian.  According to the Court of Appeal, Epic did not address the same specific issues in Iskanian – namely, a claim for civil penalties brought on behalf of the government and the enforceability of an agreement barring a PAGA representative action in any forum.  Thus, the Court of Appeal concluded that the waiver of representative claims in any forum is unenforceable.

Baker also argued that the parties’ arbitration agreement should be interpreted to mean that even if the representative action waiver was unenforceable, the PAGA claim should be compelled to arbitration. The Court of Appeal rejected this argument. Instead, the Court of Appeal relied on Iskanian’s view that the State is the real party in interest in a PAGA claim. In following other California state court decisions, the Court of Appeal agreed that the State must have consented to any agreement that effectively waived the right to bring the PAGA claim into court.

While the Court of Appeal acknowledged that several federal courts have upheld the arbitrability of PAGA representative claims, it dismissed those decisions as “unpersuasive” because those federal courts did not fully consider the “qui tam” nature of a PAGA claim.

Correia is the latest in a string of California appellate decisions to find that PAGA claims are exempted from class/representative action waiver provisions in arbitration agreements and that employers cannot compel employees to arbitrate PAGA claims.  California employers seeking to enforce arbitration agreements, particularly in state court, should be aware of these recent decisions.