California Employers Get Lifeline in Unique State Labor Disputes

A new defense for employers facing worker claims under California’s unique PAGA labor law can be found in a recent concurring opinion by a Ninth Circuit judge, attorneys say.

The reasoning of Judge Kenneth Kiyul Lee in a Feb. 12 concurring opinion could help break the link between arbitrators’ rulings for individuals and court proceedings of large groups of claims.

Arbitration proceedings under PAGA might not qualify as a “full and fair opportunity to litigate,” Lee said about a case involving wage violation claims against Lowe’s Home Centers LLC.

Lee’s observation could allow employers to force individuals into arbitration with less fear that a worker-friendly finding by an arbitrator—for example, that the person is “an aggrieved employee"—would kneecap their defense in court.

Employers can only force individual PAGA claimants into arbitration, even if the employee is bringing a case on behalf of other affected workers. A PAGA case in court can involve potentially thousands of employees covered by allegations of the same harms.

Employers who argue that arbitration didn’t give them a “full and fair opportunity to litigate” may convince a court that employee-friendly findings by arbitrators shouldn’t tip the scales against them “because an individual PAGA arbitration poses a much smaller financial risk to defendants than non-individual PAGA actions,” Lee wrote.

Class-Action Workaround

The Private Attorneys General Act of 2004 became a force in California litigation because plaintiffs saw its potential as a workaround for class-action claims that were barred by arbitration agreements in employment contracts, according to Lauren Teukolsky, a PAGA plaintiffs attorney with Teukolsky Law APC.

The law allows individuals to step into California’s role as enforcer of the state’s labor code by filing lawsuits over issues such as worker misclassification and wage and hour violations on behalf of themselves as individuals and for groups of allegedly affected employees. The state recoups 75% of penalties if the employee plaintiffs win.

Individual PAGA cases can also be subject to boilerplate employment agreements that require workers to bring claims against their employer through arbitration.

The law continues to evolve with rulings from various courts pointing in different directions about whether individual arbitration findings are binding on group PAGA cases in court.

Lee’s concurring opinion out of the US Court of Appeals for the Ninth Circuit offers the state’s employers some clarity on high-stakes decisions about whether to arbitrate employee claims.

“That’s welcome news, because I think it gives employers an opportunity to potentially undo some of the damages” from a recent California Supreme Court ruling, said attorney Pascal Benyamini, who represents employers with Faegre Drinker Biddle & Reath LLP.

Viking or Adolph?

Much of the tension in PAGA litigation stems from the treatment of the claims of an individual employee alleging labor violations versus the treatment of the claims those individuals bring for a group of employees they say were also harmed.

In 2022, the US Supreme Court weighed in on PAGA in Viking River Cruises v. Moriana. In a win for employers, the federal high court found that the PAGA claims of the group of employees should be dismissed once an individual claim is forced into arbitration.

However, the Supreme Court left California room to weigh in, and it did. A year later, the California Supreme Court in Adolph v. Uber Technologies undid much of Viking, finding that group claims invoking PAGA could survive in court even after connected individual claims were sent to arbitration.

As it stands, it’s still not completely clear whether it makes sense for California employers to arbitrate an employee’s individual claims, even if they legally can, because of the legal doctrine that standing in one venue impacts standing in another.

“Employers may think that there’s not much at stake in individual arbitration, but if they don’t pay enough attention, and they lose, then they may basically effectively have lost their main legal defense,” said attorney Michael Rubin, who argued for former Uber Eats driver Erik Adolph before California’s Supreme Court in Adolph last year.

The stakes increase dramatically with a group claim that “may have 200 workers, or 2,000, or 20,000,” Rubin said.

Risk Assessment

Lower California appeals courts are also divided, said PAGA plaintiffs attorney Teukolsky. No cases have “squarely” considered whether individual PAGA arbitration findings will impact group PAGA claims—only whether individual claims of general labor code violations impact group PAGA claims.

“It’s too soon,” she said.

In 2022, California’s Fourth District Court of Appeal found that Prime Healthcare Management Inc.’s arbitration win against an employee didn’t stop pursuit of group PAGA claims in court.

However, in 2023, California’s Second District Court of Appeal found that because plaintiffs lost their labor claims against U-Haul Co. in arbitration, they couldn’t allege group PAGA claims in court. The court wrote that it disagreed with the Fourth District.

The logic in Lee’s concurring opinion could also help claimants wield the “full and fair opportunity to litigate” argument against adverse arbitration findings when their group PAGA claims unfold in court, Teukolsky said.

The question of whether to arbitrate an individual PAGA case is still a “risk assessment,” Benyamini, the defense lawyer, said. Lee’s reasoning might alter how employers make that call.

An arbitration agreement is still an advantage for employers because it can help them avoid litigation costs and ward off class action liability, Benyamini said.

Even if a finding of aggrieved employee status in arbitration is eventually found to be applicable elsewhere, “you’re kind of stuck with a PAGA claim in court,” Benyamini said. “But that doesn’t mean you’ve lost.”