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August 2011

Employers Again Must Re-Think Their Arbitration Agreements Based on Holding that Arbitration Agreements Do Not Apply to Paga Quasi-Class Action Claims.

The issue of arbitration agreements and their enforcement to protect against class action litigation in the employment context has been a matter of much recent debate.  The issue gained another level of complexity recently as a California Appellate Court held that arbitration agreements in the employment context do not protect an employer from quasi-class actions under the Private Attorney General Act ("PAGA").  This issue is likely not settled and employers should expect another roller coaster ride as federal and state courts struggle to walk the line between California's right to enforce quasi-class actions and the federal court's enforcement of  the Federal Arbitration Act ("FAA"). 

Prior to the U.S. Supreme Court's decision in AT&T Mobility v. Concepcion, the standard governing California arbitration agreements as enforced in Gentry v. Superior Court was that arbitration agreements could not serve to preclude a party from bringing a class action in the superior court.  Thus, while an arbitration agreement in the employment context could protect an employer from a superior court action in the individual context, it would not protect the employer if that same employee brought the action as a class. 

However, the Gentry standard was subsequently reconsidered based on the Concepcion holding that the FAA preempts California's rule against waiving class actions.  However, Concepcion was a consumer class action and was not an employment based class action.  Concepcion has been hailed as an employer victory in that it has been interpreted to apply to employment related class actions as opposed to only in the consumer context. 

Recently in Brown v. Ralphs Grocery Company, the California Appellate Court pushed back on the employer friendly Concepcion ruling, holding that Concepcion does not bar quasi-class actions under PAGA.  The decision provided an in depth analysis of the purpose of PAGA and concluded that it does not conflict with the FAA. The Court stated, in part:

The purpose of the PAGA is not to recover damages or restitution, but to create a means of "deputizing" citizens as private attorneys general to enforce the Labor Code. Here, the relief is in large part for the benefit of the general public rather than the party bringing the action.

The Brown Court decision narrows the broad scope Concepcion had on California employer's ability to control all employment-related class actions.  It appears that Brown failed to adhere to the Concepcion sentiment that arbitration agreements should be strictly enforced as written. 

PAGA is a statute that allows an individual employee to step into the shoes of the Labor Department to prosecute wage and hour violations on behalf of all aggrieved employees.  Seventy-five (75) percent of the penalties recovered under PAGA must be paid to the state with the remainder going to the employee representative.  Though PAGA is not technically a class action, the litigation of a PAGA claim and its financial impact on employers can be just as devastating in that the penalties accrue per employee, per pay period in which a violation has occurred.  Though there is little case law on interpreting PAGA, discovery involved in these claims tends to be onerous and expensive. 

Practically, the Ralph's ruling is certain to create more ambiguity than clarity.  Employees rarely file a stand alone PAGA claim.  Rather, a PAGA claim is generally brought in connection with other claims, and is often pursued together with a more traditional wage and hour class action.  Where the class action fails for lack of common claims or other elements, PAGA is often used as a back up to continue to pressure the employer to settle due to the cost of the PAGA penalties.  Thus, under the Concepcion/Ralphs dynamic, it is possible that going forward a court could: (1) Split the claims, requiring the traditional class action claims to proceed in arbitration while having PAGA claims litigated in state court; (2) have all claims subject to arbitration; or (3) use the PAGA exception to informally revert back to its rule in Gentry and preclude any of the claims from going to arbitration. 

We are likely to see a division in the courts and a less than uniform application of these recent rulings.  In the meantime, employers cannot rely on class action waivers to protect against quasi-class actions or class action themselves.  An arbitration agreement, under the right circumstances, may still be beneficial.  Ultimately, the best protection against class action litigation continues to come, not from contract, but from sound employment practices and mindful attention to employee morale. 


Class Action

Stacey M. Cooper

Class Action
Employment Law