Wednesday, June 25, 2014

California Supreme Court Concludes PAGA Claims May Not Be Waived By Private Agreement: Iskanian v. CLS Transportation

On June 23, 2014, the California Supreme Court issued its opinion in Iskanian v. CLS Transportation, __ Cal. 4th __ (2014) [2014 Cal. LEXIS 4318] which evaluated whether the vestiges of its prior decision in Gentry v. Superior Court, 42 Cal.4th 443 (2007) on the issue of class action waivers survived FAA preemption under the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. __ (2011). Specifically, the issue turned on the applicability of preemption to wage and hour rights mandated by statute, and “whether a state's refusal to enforce such a waiver on grounds of public policy or unconscionability is preempted by the FAA.” (Slip Opinion, at 1).  Not surprisingly, the Court held that Gentry's reasoning did not survive as to an employee’s “private” claims, but did survive as to claims under the PAGA, which belong to the State and are “public” in nature. The Court's analysis as to PAGA was as follows:

First, as explained by the Court, “[t]he civil penalties recovered on behalf of the state under the PAGA are distinct from the statutory damages to which employees may be entitled in their individual capacities.”  (Slip Opinion, at 32).  In this regard, “[a] PAGA representative action is … a type of qui tam action”, as “a portion of the penalty goes not only to the citizen bringing the suit but to all employees affected by the Labor Code violation.” (See id., at 33). As explained by the Court, “[t]he government entity on whose behalf the plaintiff files suit is always the real party in interest in the suit.” (Id.).

Second, as the ultimate stake-holder in a PAGA suit is always the State, the Court held that an employee cannot waive a PAGA claim by a “private” employment agreement, as such an agreement “is contrary to public policy and unenforceable as a matter of state law”:
As noted, the Legislature's purpose in enacting the PAGA was to augment the limited enforcement capability of the Labor and Workforce Development Agency by empowering employees to enforce the Labor Code as representatives of the Agency. Thus, an agreement by employees to waive their right to bring a PAGA action serves to disable one of the primary mechanisms for enforcing the Labor Code. Because such an agreement has as its "object, … indirectly, to exempt [the employer] from responsibility for [its] own … violation of law," it is against public policy and may not be enforced. (Civ. Code, § 1668.).)

Such an agreement also violates Civil Code section 3513's injunction that "a law established for a public reason cannot be contravened by a private agreement." The PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state's interests in enforcing the Labor Code and in receiving the proceeds of civil penalties used to deter violations. Of course, employees are free to choose whether or not to bring PAGA actions when they are aware of Labor Code violations. (See Armendariz, supra, 24 Cal.4th at p. 103, fn. 8 [waivers freely made after a dispute has arisen are not necessarily contrary to public policy].) But it is contrary to public policy for an employment agreement to eliminate this choice altogether by requiring employees to waive the right to bring a PAGA action before any dispute arises.
Slip Opinion, at 35.

Finally, in light of the forgoing, the Court held that “the rule against PAGA waivers does not frustrate the FAA's objectives because … the FAA aims to ensure an efficient forum for the resolution of private disputes, whereas a PAGA action is a dispute between an employer and the state Labor and Workforce Development Agency.”  (Slip Opinion, at 36-37).  The fact that such a suit is brought by a private citizen “deputized” by the State does not change this fact:
[T]he FAA aims to promote arbitration of claims belonging to the private parties to an arbitration agreement. It does not aim to promote arbitration of claims belonging to a government agency, and that is no less true when such a claim is brought by a statutorily designated proxy for the agency as when the claim is brought by the agency itself. The fundamental character of the claim as a public enforcement action is the same in both instances. We conclude that California's public policy prohibiting waiver of PAGA claims, whose sole purpose is to vindicate the Labor and Workforce Development Agency's interest in enforcing the Labor Code, does not interfere with the FAA's goal of promoting arbitration as a forum for private dispute resolution.
Slip Opinion, at 43.