CA Supreme Court circumvents SCOTUS

Requires employers to litigate PAGA claims

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As we reported in June of 2022, the United States Supreme Court (“SCOTUS”) published an 8-1 decision in Viking River Cruises v. Moriana which, among other things, held that an individual claim under the Private Attorneys’ General Act (“PAGA”) is subject to arbitration assuming the employee and employer entered into an otherwise enforceable arbitration agreement that is subject to the Federal Arbitration Act (“FAA”). The FAA applies when the “class of workers [are] engaged in foreign or interstate commerce.”

SCOTUS also held in Viking River that once the individual PAGA claim is ordered to arbitration, the named plaintiff loses standing to pursue a “representative” or “non-individual” PAGA claim on behalf of others similarly situated. Thus, according to SCOTUS, the non-individual PAGA claim should be dismissed.

Justice Sotomayor’s concurring opinion in Viking River suggested that the “PAGA standing issue” is for the California courts or Legislature to decide since the interpretation of a state statute (i.e. PAGA) is outside the jurisprudence of the federal courts. As a result, the door was left open for either the California Legislature or the California Supreme Court to decide the issue: Does a plaintiff lose standing to pursue a non-individual PAGA claim in court when the plaintiff’s individual PAGA claim is ordered to arbitration? The California Legislature has not answered this question. But, unfortunately for employers, the California Supreme Court has done so in its July 17, 2023 opinion in Adolph v. Uber Technologies.

In its highly-anticipated opinion in the case of Adolph v. Uber Technologies, the California Supreme Court held on July 17, 2023 that a plaintiff-employee who files a PAGA action against his/her employee for violations of the Labor Code retains standing to pursue the “non-individual PAGA” claims in civil court even if the employee’s “individual PAGA” claim is subject to arbitration.

As noted above, the ruling settles an issue left unanswered by SCOTUS’ opinion in Viking River. In fact, the ruling is contrary to Viking River in which SCOTUS held that such a plaintiff has no standing under PAGA to pursue a non-individual PAGA claim once the individual PAGA claim is ordered to arbitration. Since the standing issue is one for the state to decide, the California Supreme Court’s ruling is binding on California employers irrespective of the ruling in Viking River.

Unfortunately, although not unexpected, the Adolph opinion is unfavorable to employers faced with PAGA claims. As a result of the ruling, employers may be faced with the untenable – and expensive – position of defending PAGA claims in two forums: (1) arbitration for the individual PAGA claims, and (2) civil court for the non-individual PAGA claims.

Procedurally, courts will likely stay litigation of the non-individual PAGA claim pending the outcome of the arbitration of the individual PAGA claim. Furthermore, the findings and conclusions reached in the arbitration will likely be binding on the civil action. Thus, if an employer prevails in the arbitration of the individual PAGA claims, the court should adopt those findings and dismiss the civil action on the non-individual PAGA claims. Conversely, if the employee prevails in the arbitration, the arbitrator’s findings and conclusions will likely be adopted by the court in the non-individual PAGA action.

The Adolph v. Uber opinion

Factual and procedural background

Plaintiff Erik Adolph worked as a driver for defendant Uber Technologies, Inc. (“Uber”), delivering food to customers through the company’s Uber Eats platform. As a condition of his employment, Adolph was required to accept the technology services agreement, and because he did not timely opt out, he became bound by the arbitration provision in that agreement. The arbitration provision requires Adolph to arbitrate, on an individual basis only, almost all work-related claims he might have against Uber. As to PAGA claims, the agreement says: “To the extent permitted by law, you and Company agree not to bring a representative action on behalf of others under the [PAGA] in any court or in arbitration. This waiver shall be referred to as the ‘PAGA Waiver.’ ”

In October of 2019, Adolph sued Uber in superior court alleging individual and class claims for relief under Labor Code section 2802 and the Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200 et seq.). Adolph claimed that Uber misclassified him and other delivery drivers as independent contractors rather than as employees and, as a result, wrongfully failed to reimburse them for necessary business expenses.

In February 2020, Adolph amended his complaint to add a claim for civil penalties under PAGA based on the same theory of misclassification. In July 2020, the trial court granted a motion by Uber to compel arbitration of Adolph’s individual Labor Code claims and dismissed Adolph’s class action claims. Subsequently, Adolph filed his operative second amended complaint, which eliminated his individual Labor Code claims and class claims and retained only his PAGA claim for civil penalties.

The trial court granted Adolph’s request for a preliminary injunction, preventing arbitration from proceeding. Uber filed a second motion to compel arbitration of Adolph’s independent contractor status and the enforceability of the arbitration agreement. The trial court denied the motion. Uber appealed.

Citing to California’s Supreme Court’s opinion in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348 the Court of Appeal held that the trial court properly found that PAGA claims are not subject to arbitration, that an agreement waiving the right to bring a claim on behalf of other employees under PAGA violates public policy and is unenforceable, and that “California case law is clear that the threshold issue of whether a plaintiff is an aggrieved employee in a PAGA case is not subject to arbitration.”

In May of 2022, Uber filed a petition for review with the California Supreme Court. Before Adolph could file an answer, SCOTUS decided Viking River, which overruled, in part, Iskanian. In particular, Viking River held that in cases governed by the FAA, a plaintiff may agree to arbitrate his or her individual PAGA claims. Viking River further stated that once a plaintiff’s individual PAGA claims are ordered to arbitration, that plaintiff no longer has standing to pursue the non-individual PAGA claims. As such, according to Viking River, those non-individual PAGA claims must be dismissed.

Supreme Court’s analysis

In Adolph, the California Supreme Court addressed whether a plaintiff retains standing to assert non-individual PAGA claims when his or her individual PAGA claims are ordered to arbitration. As noted above, the Court held that the employee retains standing. The Court first addressed the legislative intent behind PAGA.

Relevant legislative history

According to Adolph, the Legislature enacted PAGA in response to widespread violations of the Labor Code and significant underenforcement of those laws. Before PAGA’s enactment, tools for enforcing the Labor Code were limited. Some statutes allowed employees to sue their employers for damages resulting from Labor Code violations such as unpaid wages. Other Labor Code violations were punishable only as criminal misdemeanors, which local prosecutors tended not to prioritize. Additionally, several statutes provided civil penalties for Labor Code violations, but only state labor law enforcement agencies could bring an action for civil penalties and those agencies lacked sufficient enforcement resources.

To address these shortcomings, the Legislature enacted PAGA to create new civil penalties for various Labor Code violations and “ ‘to allow aggrieved employees, acting as private attorneys general, to recover [those] penalties.’ ” An employee who brings a PAGA action to recover civil penalties acts “ ‘as the proxy or agent’ ” of the state. (Iskanian, at p. 380; see § 2699, subd. (a).) “PAGA is designed primarily to benefit the general public, not the party bringing the action.” Penalties recovered are dedicated largely “to public use . . . instead of being awarded entirely to a private plaintiff.”

To have standing to bring a PAGA action, a plaintiff must be an “aggrieved employee,” which the statute defines as “any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed.” (Labor Code § 2699(c).) An aggrieved employee becomes deputized to prosecute Labor Code violations once he or she has complied with PAGA’s notice requirements. “The notice requirement allows the relevant state agency ‘to decide whether to allocate scarce resources to an investigation’ ” or instead to deputize the aggrieved employee to pursue sanctions on the state’s behalf. Once deputized, the aggrieved employee has authority to “seek any civil penalties the state can.”

Based on the foregoing, a PAGA claim for civil penalties is “fundamentally a law enforcement action.” The government entity on whose behalf the plaintiff files the lawsuit is the “real party in interest.”

Standing analysis

Because SCOTUS had expressed its opinion on PAGA standing, the California Supreme Court first made clear, relying on SCOTUS precedent, that “[]he highest court of each State . . . remains ‘the final arbiter of what is state law.’ “ As such, the California Supreme Court is free to disregard Viking River’s standing conclusion.

Second, relying on prior opinions, the California Supreme Court concluded:

As Kim and Johnson make clear, a worker becomes an “aggrieved employee” with standing to litigate claims on behalf of fellow employees upon sustaining a Labor Code violation committed by his or her employer. Standing under PAGA is not affected by enforcement of an agreement to adjudicate a plaintiff’s individual claim in another forum. Arbitrating a PAGA plaintiff’s individual claim does not nullify the fact of the violation or extinguish the plaintiff’s status as an aggrieved employee, any more than the time-barring of remedies did in Johnson or the settlement of the individual damages claims did in Kim. The operative complaint alleges that Adolph experienced Labor Code violations while driving for Uber. Under Kim, Adolph’s allegations that Labor Code violations were committed against him while he was employed by Uber suffice to confer standing to bring a PAGA action.

In sum, the Court held: “[W]here a plaintiff has filed a PAGA action comprised of individual and non-individual claims, an order compelling arbitration of individual claims does not strip the plaintiff of standing to litigate non-individual claims in court. This “is the interpretation of PAGA that best effectuates the statute’s purpose, which is ‘to ensure effective code enforcement.’ ”

The Court remanded the case to the trial court “for further proceedings consistent with this opinion.” The net result will likely be that plaintiff’s individual PAGA claims, if any, will be ordered to arbitration while the non-individual PAGA claims remain in the superior court. The latter will likely be stayed pending the outcome of the arbitration.

Key takeaways

In light of the opinions in Adolph, Iskanian and Viking River, the following will occur in PAGA cases brought by employees in California courts:

  1. For cases that do not fall under the FAA, all PAGA waivers in employment contracts will be held unenforceable. However, given the broad interpretation of the FAA’s “interstate commerce” requirement, the vast majority of employment agreements will be governed by the FAA.
  2. For cases that do fall under the FAA:
    1. an employee’s individual PAGA claim will be ordered to arbitration, assuming there is an otherwise enforceable arbitration provision that includes a PAGA waiver. In essence, the arbitration agreement, as a whole, will generally be enforced if it is not unconscionable.
    2. an employee’s non-individual PAGA claims will remain in the superior court.

As a result, an employer may be forced to litigate PAGA claims in two forums: arbitration (individual PAGA claims) and superior court (non-individual PAGA claims). How would that work? Adolph explains thusly:

First, the trial court may exercise its discretion to stay the non-individual claims pending the outcome of the arbitration pursuant to section 1281.4 of the Code of Civil Procedure. Following the arbitrator’s decision, any party may petition the court to confirm or vacate the arbitration award under section 1285 of the Code of Civil Procedure. If the arbitrator determines that [plaintiff] is an aggrieved employee in the process of adjudicating his individual PAGA claim, that determination, if confirmed and reduced to a final judgment, would be binding on the court, and [plaintiff] would continue to have standing to litigate his non-individual claims. If the arbitrator determines that [plaintiff] is not an aggrieved employee and the court confirms that determination and reduces it to a final judgment, the court would give effect to that finding, and [plaintiff] could no longer prosecute his non-individual claims due to lack of standing.

In light of the above, if a plaintiff prevails in the arbitration of his or her individual PAGA claims, he or she will most certainly prevail in the non-individual PAGA claims. Regardless, employees should take heed and prepare for the prospect of settling all PAGA claims as early as possible so as to avoid protracted and expensive litigation.

Help may be on the way

Given the devastating impact that PAGA has had on California businesses, several organizations have successfully petitioned to put an initiative on the November 2024 California ballot that would limit PAGA. In particular, The California Employee Civil Action Law Initiative (#21-0027) has qualified for the ballot in California as an initiated state statute on November 5, 2024. The initiative would repeal the Private Attorneys General Act (PAGA) and replace it with a new law—"Fair Pay and Employer Accountability Act.” The law would:

  • double statutory and civil penalties for willful violators;
  • require that 100% of monetary penalties, rather than the current 25%, be awarded to harmed employees;
  • provide resources to employers to ensure labor compliance;
  • require that the Division of Labor Standards Enforcement (DLSE) be a party to all labor complaints filed with the Labor Commissioner;
  • not award any attorney’s fees, which are currently awarded under PAGA; and
  • require that the state legislature fully funds the DLSE to meet the division's requirements by law.

It is the elimination of attorney’s fees which is the most important aspect of the initiative.

The political action committee (“PAC”), Californians for Fair Pay and Accountability, is leading the campaign in support of the initiative. As of May of 2023, the PAC has raised over $10.7 million in contributions. The top donors include California New Car Dealers Association Issues PAC, Western Growers Service Corp, and California Business PAC. The California Chamber of Commerce, which also supports the initiative, said, “The California Fair Pay and Employer Accountability Act is an opportunity to reform labor law enforcement to prevent frivolous litigation while ensuring that workers receive the wages they are owed in a timely manner, plus any penalties. The Act would also benefit both workers and employers by allowing employers to consult the Labor Commissioner when there is an ambiguity in the law, to help make sure they are in compliance.”

If a majority of California voters vote “Yes” for the initiative, the existing PAGA statute will be repealed and replaced with the new law. We anticipate that numerous “pro-labor” PACs and organizations will raise several millions of dollars to vigorously oppose the initiative.