July 2022
For years, Hopkins & Carley has reported about litigation and legislation regarding the enforceability of agreements that require employees to resolve disputes through arbitration, rather than in court. The issue is highly contested because employers believe that arbitrators are more likely to be receptive to their arguments than juries comprised primarily of employees, and because arbitration affords them with the opportunity to avoid becoming entangled in class action lawsuits involving large groups of employees in a single case. Employees, naturally, believe that they will fare better before a jury of their peers, and are motivated to challenge the enforceability of arbitration agreements.
Although employers are sometimes successful in enforcing arbitration agreements against employees who have asserted claims on their own behalf, or even in a class action context, California law has prohibited employers from forcing employees to resolve claims under the Private Attorneys General Act (PAGA) in arbitration. PAGA is a law that allows any “aggrieved employee” to initiate an action against a former employer “on behalf of himself or herself and other current or former employees” to obtain certain civil penalties that previously could have been recovered only by state agencies. Lawsuits alleging PAGA claims have become extremely common and problematic for employers because some of the procedural requirements applicable in class actions do not exist in PAGA cases, making it easy for an employee with a relatively minor claim to file suit on behalf of large groups of employees and create potentially substantial liability and expense for the employer. An employee who alleges meal period violations occurring once per week for a year among a team of 100 employees earning $25 per hour, for example, could assert a claim seeking over $1,000,000 against the employer (100 employees x $100 per initial violation during the first week, plus 100 employees x $200 per subsequent violation x 51 subsequent weeks), plus legal fees.
On June 15, 2022, the United States Supreme Court issued the latest decision in the ongoing battle regarding the enforceability of arbitration agreements in Viking River Cruises, Inc. v. Moriana. In this case, the plaintiff, Angie Moriana, worked for Viking River Cruises and agreed to submit any employment-related disputes to arbitration and to waive her right to assert any class actions and PAGA actions. Notwithstanding this agreement, Moriana brought suit against Viking River Cruises on behalf of herself and those similarly situated under PAGA. Viking moved to compel to arbitration Moriana’s individual PAGA claims–the claims for violations she allegedly suffered personally–and to dismiss the remaining non-individual/representative PAGA claims. Lower courts ruled against Viking River Cruises; however, the United States Supreme Court issued a decision favorable to the company.
In an 8-1 decision, the United States Supreme Court held that while wholesale waivers of an employee’s right to bring a PAGA claim continue to be invalid, the Federal Arbitration Act permits an employee to agree as they wish with regards to their individual PAGA claims. Therefore, an agreement that requires an employee to arbitrate their individual PAGA claims may be enforceable. The Court further held that once an individual PAGA claim goes into arbitration, purely representative PAGA claims are subject to dismissal because the plaintiff is no longer an “aggrieved person.”
The Viking River decision is important, and represents a tremendous victory for employers, for two reasons: it provides employers with a potential means of not only requiring employees to resolve PAGA claims in arbitration, and it provides employers with a potential means of preventing them from asserting PAGA claims in a representative capacity.
What Should Employers Do Now?
Employers that already require employees to resolve employment disputes through arbitration should review their existing agreements with counsel in light of the Viking River decision and determine whether they apply to PAGA claims. To the extent that employers may wish to consider modifying existing arbitration agreements to cover PAGA claims, they should be mindful of Assembly Bill 51, which imposes restrictions on employers’ ability to impose mandatory arbitration on employees. (See our prior Advisory regarding the current status of AB 51 here).
Because the Viking River decision makes it clear that wholesale waivers of the right to bring PAGA claims continue to be invalid, any existing arbitration agreements waiving “PAGA claims” generally should be revised to distinguish between individual PAGA claims and representative PAGA claims. Additionally, employers should review and ensure that any existing arbitration agreements include a provision stating that any terms of the agreement later found to be illegal or unenforceable can be severed, or deleted, from the agreement. The Viking River Cruises decision emphasized the effectiveness and saving grace of a carefully worded severability provision. Absent the severability provision in the Viking-Moriana arbitration agreement, it is possible that the Court could have invalidated the entire arbitration agreement based on the wholesale waiver of PAGA claims (which remains invalid).
Employers that do not require employees to resolve claims through arbitration should carefully consider the pros and cons of arbitration and decide whether they would benefit from attempting to resolve disputes through that process. Mandatory arbitration enables employers to avoid having disputes resolved by juries comprised of employees, it reduces the risk of runaway verdicts inflamed by sympathy and emotion, and it enables employers to resolve disputes in a more private setting- all significant benefits. Arbitration is not a panacea without any drawbacks, however. Employers that require employees to resolve claims in arbitration must pay the fees charged by the arbitrator, and those fees can match or exceed the legal fees incurred in defending against the claim in some situations. As mentioned above, employees often challenge the enforceability of arbitration agreements, forcing employers to fight two battles- one over the enforceability of the arbitration agreement, and then a second regarding the validity of the employee’s underlying claims. The rules of evidence are generally applied less strictly in arbitration, potentially resulting in the admission of evidence that would not be considered in court, and decisions by arbitrators are generally not subject to appeal in the absence of fraud. Prudent employers will consider all of the pros and cons of arbitration and then decide whether, and how, to implement arbitration agreements with their employees.
For an indepth discussion on arbitration agreements in the employment context, as well as the ins and outs of the Viking River decision, please check out our upcoming webinar, Arbitration Agreements After Viking River.
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| Eric C. Bellafronto | Richard M. Noack | Shirley Jackson |
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