Gig Worker Arbitration Stymied by California’s Private AG Law

Uber Technologies Inc. and other California gig companies have found little success in sending a unique issue involving worker misclassification claims to private arbitration, leaving them exposed to significant potential liability in court under a law that allows individuals to sue on behalf of the state.

The golden state’s courts have so far rejected arguments that gig workers must first let an arbitrator decide if they are contractors or employees before they are allowed to proceed with Private Attorneys General Act lawsuits alleging labor violations. The classification issue is important because only employees are entitled to wage protections and other benefits including rest breaks and unemployment insurance.

PAGA allows “aggrieved employees” to represent other workers in litigation, and courts have held that mandatory arbitration agreements the workers signed can be bypassed to keep disputes in court. App-based companies have fought for years to enforce arbitration as a way to avoid potential court rulings that their workers are employees.

Uber last week failed to convince a California appeals court to pause a PAGA lawsuit on arbitration grounds, joining others like Skip Transport Inc., Zum Services Inc., and Yourmechanic Inc., which have all lost similar bids.

The losses come as Uber and Lyft Inc. have separately argued in federal appeals courts nationwide that their drivers don’t qualify for a federal arbitration exemption that would allow them to keep their misclassification claims under other laws in court.

Gig companies could try to take the PAGA and federal arbitration issues to the U.S. Supreme Court in the hopes that its conservative majority will continue to favor enforcement of agreements for private dispute resolution, though prospects for top court review are dim.

“There’s potentially a lot at stake for companies when it comes to this issue,” attorney Aaron Gundzik told Bloomberg Law. He added that while state courts have shown a united front, federal courts could split on the PAGA arbitration question. Gundzik represents employers in complex business litigation, including arbitration and appeals in California state and federal courts, with Gundzik Gundzik & Heeger LLP.

In California, companies can be held liable under PAGA for up to $10,000 for each misclassified employee, in addition to the penalties for any labor code violations, Gundzik said.

Across industries, California’s PAGA recoveries have grown in recent years, with the state raking in $88 million in penalties in 2019, according to currently available data.

Pending PAGA litigation against gig companies has continued as courts grapple with whether Proposition 22—California’s voter-approved ballot initiative that carved out app-based rideshare and delivery companies from the state’s strict worker status law—applies retroactively.

Arbitration Workaround

In 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles LLC that arbitration agreements can’t waive a worker’s PAGA rights, and that the state law isn’t preempted by the Federal Arbitration Act. Although that federal law is intended to govern the resolution of private disputes, a PAGA claim is a dispute between the government and an employer, the state court said.

In recent years, gig companies have tried to get around that ruling by making the legal argument that their contractor workers aren’t “aggrieved employees” who have standing to bring PAGA misclassification lawsuits as defined in the statute. They also contend that the workers must first get an arbitrator to find they were misclassified before proceeding with their PAGA claims.

Determining whether a worker is an “aggrieved employee” is a fact-intensive question, said Hugh Baran, a senior staff attorney at the National Employment Law Project, a nonprofit organization promoting labor policies.

The tactic is yet another way for gig companies to try and use arbitration clauses to avoid courts determinations on the worker classification question, he said.

The issue in these cases is technical, but important, said Charlotte Garden, a labor and employment law professor at Seattle University. At its core, she said, the question is “who decides whether a worker can proceed with their PAGA action—an arbitrator, or a court?”

“It’s important to keep in mind that in a PAGA claim, the worker stands in the state’s shoes to enforce the law, and the state has not agreed to arbitration,” Garden said.

If an arbitrator is entitled to make the call about worker status, the state then runs the risk the arbitrator will get it wrong, she said. This means the state loses enforcement capability in a private process to which it didn’t agree, Garden said.

Gig Arguments

Gig companies like Zum Services have argued that Iskanian has been interpreted too broadly. PAGA plaintiffs can “completely disregard any arbitration agreement and avoid binding U.S. Supreme Court precedent simply by asserting employment status and claiming the mantle of a PAGA action,” the company said.

“This is not and cannot be what the Legislature —which sought to avoid ‘private plaintiff abuse'—or the California Supreme Court intended,” Zum argued to a Los Angeles Superior Court last year.

That trial judge overseeing that case ordered arbitration of the worker status issue, but was later overturned by the California Court of Appeal, Second District. Zum’s argument that the state didn’t have an interest in the suit unless an arbitrator decided that drivers are employees first is “fallacious wordsmithing,” Justice Laurence D. Rubin wrote.

If the arbitrator finds the drivers aren’t employees, there won’t be a PAGA claim left, “By virtue of an arbitration to which it did not consent, the state will have lost one of its weapons in the enforcement of California’s labor laws,” Rubin said.

Impermissible Splitting

The state’s Fourth District appellate court also rejected arbitration in a lawsuit under the private AG law involving Yourmechanic.

Justice Mark B. Simons reasoned that to require a plaintiff to arbitrate whether they were an “aggrieved employee” with standing to bring a PAGA claim would require splitting a single action into two separate components that would then proceed in separate forms: an arbitrable individual claim, and a non-arbitrable representative claim.

Such a division has been prohibited by a series of cases holding that a suit filed exclusively under PAGA isn’t an individual action at all, but is indivisible and belongs solely to the state, Simons said.

In January, the California Supreme Court denied YourMechanic’s petition for review. An attorney for the auto service platform declined to comment on whether it will further appeal to the U.S. Supreme Court.

Garden, at Seattle University, said while it’s possible the California Supreme Court or the U.S. Supreme Court could decide the issue, the federal justices have “declined other opportunities to take cases presenting similar issues in recent years.”

Federal Law

California courts also have held that Iskanian hasn’t been overturned by more recent pro-arbitration rulings from the nation’s top court.

Still, California employers in other industries have continued to push for PAGA arbitration.

In April, the Ninth Circuit refused to reconsider its ruling that a former Coverall North America Inc. janitorial worker didn’t have to arbitrate wage and hour claims under the private AG law, and rejected Coverall’s argument that Iskanian stands as an obstacle to the Federal Arbitration Act.

Coverall asked the U.S. Court of Appeals for the Ninth Circuit to pause proceedings in that PAGA case while it petitions the justices to consider its argument that arbitration of the action should be allowed.

Uber, Skip, and Zum didn’t respond to Bloomberg Law’s requests for comment.