California Court: Arbitration Agreement does not Override Statutory PAGA Rights

Non-exempt hourly auto workers filed a class action lawsuit alleging violations of various wage and hour laws, and sought penalties under California’s Private Attorneys General Act (PAGA). The employees had, however, executed the employer’s Employee Dispute Resolution Plan, which provides that all employment-related disputes must be submitted to mediation and arbitration. Employees waived any right they had to pursue, file, participate in, or be represented in disputes filed on a class basis or as a collective or representative action, and the agreement prohibited mediation or arbitration of disputes on a class basis or as a collective or representative action.

The employer did not compel arbitration initially, however, but after the U.S. Supreme Court rendered its decision in AT&T Mobility LLC v. Concepcion (2011) 131 S.Ct. 1740, attempted to do so, and though opposed by the employees, the court ordered the matter to arbitration. The employees appealed.

The California Court of Appeals considered whether the employer waived its right to compel arbitration by failing to move to compel until after Concepcion was decided, and whether Concepcion permits arbitration agreements to override the statutory right to bring representative claims under the PAGA.

In considering the first issue, the court noted that the parties litigated the matter for 10 months before arbitration became an issue. The employees argued that waiver occurred, and the employer argued that until Concepcion, it believed it had no right to individual arbitration and that any such motion would have been futile. The court agreed with the employer, finding that it was reasonable for it to believe that it did not have the right to enforce the individual arbitration agreements, and once the law changed, it promptly moved to compel arbitration.

As to the second issue, the court found that the Federal Arbitration Act does not allow for arbitration agreements to override the statutory right to bring representative claims under (PAGA). In other words, a plaintiff who seeks to recover penalties under PAGA is attempting to advance a predominately public purpose, and is suing as a proxy for the state. A private arbitration agreement which requires a plaintiff to waive the right to take representative action is therefore unenforceable, because it precludes the exercise of this unwaivable statutory right.

The court accordingly directed the lower court to vacate its order granting the employer’s motion to compel individual arbitration and to stay the case. The court directed the lower court to grant the employer’s motion to compel on all claims except for the PAGA claim, and to stay the action as to the PAGA claim pending the results of the arbitration.

Arbitration agreements remain at the forefront of California employment disputes. This case demonstrates that even a generally-enforceable agreement may result in an employer being nevertheless hailed into a court of law to defend against a civil penalty claim.