Hunton Employment & Labor Perspectives

On June 4, 2012, the California Court of Appeal held that class-action waivers in employment arbitration agreements are enforceable under the Federal Arbitration Act (“FAA”).  In Iskanian v. CLS Transportation Los Angeles LLC, the appeal court affirmed an order to compel arbitration of wage-and-hour claims in light of the 2011 United States Supreme Court case AT&T Mobility LLC v. Concepcion.  As a result, Iskanian provides employers with the necessary ammunition to argue for the enforceability of employment contract provisions providing for arbitration of claims and waiver of class-action lawsuits.

In 2007, the California Supreme Court in Gentry v. Superior Court held that a class waiver provision in an arbitration agreement was not enforceable if class arbitration would be a “significantly more effective way of vindicating the rights of affected employees than arbitration.”  Four years later, however, in AT&T Mobility LLC v. Concepcion, the United States Supreme Court held that requiring the availability of class-wide arbitration is inconsistent with the FAA.  The court stated that the FAA preempted state law that invalidated class-action waivers in arbitration agreements as unconscionable because it interfered with the overarching purpose of the FAA — to facilitate streamlined proceedings by enforcing arbitration agreements.  Furthermore, the court found that California cannot enforce a legal rule that is inconsistent with the FAA, even if it is desirable for other reasons.  Iskanian reviewed the issue of whether the Concepcion decision effectively invalidated the California Supreme Court’s holding in Gentry. 

At the outset of his employment, Iskanian, a limousine driver, signed an arbitration agreement which provided that all of his employment claims were to be submitted to binding arbitration and contained a class and representative action waiver under which Iskanian could not pursue a class-action claim, but instead only claims on behalf of himself individually.  Iskanian subsequently filed a class-action complaint alleging wage and hour claims as an individual, class representative, and in a representative capacity under the Private Attorneys General Act (“PAGA”). 

The Court of Appeal upheld the arbitration agreement Iskanian signed, including the provision providing for waiver of class-action claims.  Relying on the Conception decision, the California Court of Appeal explicitly found that Gentry had been invalidated.  It noted that forcing class arbitration on parties who rejected it is inconsistent the FAA’s objective of enforcing arbitration agreements according to their terms.   

The court also declined to follow the D.R. Horton decision issued by the NLRB, in which the Board held that a mandatory employer-imposed arbitration agreement that disallowed class or collective claims violated the NLRA.  The Iskanian court noted that it owes no deference to the NLRB regarding its interpretation of the federal FAA and rejected the D.R. Horton holding, finding that Concepcion made no exception for employment-related disputes.

Furthermore, the court disagreed with another court of appeal decision in Brown v. Ralph’s Grocery Co., that held that Concepcion does not apply to representative actions under PAGA, and therefore a waiver of PAGA representative actions is unenforceable under California law.  The Iskanian court stated that any California rule prohibiting the arbitration of a PAGA claim is preempted by the FAA.  The court found that the public policy reasons underlying PAGA do not allow courts to disregard a binding arbitration agreement because the FAA preempts any attempt by a state to insulate a particular type of claim from arbitration.  Although Iskanian could not bring PAGA claims on behalf of others, he could still bring PAGA claims on his own behalf.

Iskanian champions arbitration as a favorable alternative dispute resolution method and enhances the power of employers to enforce arbitration clauses in employment contracts and in accordance with the agreed-upon terms for such arbitration clauses.  By unequivocally applying the rationale of Concepcion in the employment wage and hour context, the Iskanian decision dismisses prior attempts by others to create special carve-outs from Concepcion for cases where employees assert statutory claims, like those under the Labor Code.

It is important for employers to understand, however, that there is a split of authority among the appellate courts in the application of Concepcion to PAGA claims.  Also, in the event that the California Supreme Court grants certiorari on this issue, Iskanian will not be binding precedent while the appeal is pending.  But, for now, there is precedent at both the federal and California state levels upholding class action waivers in arbitration agreements on which employer’s may rely.