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Iskanian Changes Employment Lawsuits, Arbitration, PAGA Actions

By William Peacock, Esq. on June 27, 2014 | Last updated on March 21, 2019

We've been waiting for the Iskanian decision for some time, and as predicted, it changes a lot when it comes to California employment law.

California has been an employee-friendly state for a while, with its Supreme Court holding previously that arbitration clauses that waive class action remedies were often unconscionable and unenforceable. But then, the U.S. Supreme Court handed down a series of pro-arbitration rulings, including AT&T Mobility v. Concepcion, which wiped out that entire line of California cases by holding that the Federal Arbitration Act preempts state law and allows for such waivers.

As expected, AT&T Mobility led the California Supreme Court to reverse their prior stance in this week's decision. But what about Private Attorney General Act (PAGA) qui tam actions, where a citizen sues by proxy on behalf of the state -- can arbitration clauses ban those remedies as well?

Class Action Waivers Are Valid

Like we said previously, this was no shocker. Gentry v. Superior Court, which held that class action waivers in an employment context were often unconscionable, relied upon Discover Bank, the same thing, but in a consumer protection context. In AT&T Mobility, the U.S. Supreme Court explicitly addressed and rebuked Discover, so Gentry was by extension, abrogated.

The California Supreme Court held as much here, but also addressed another interesting issue: whether the National Labor Relations Act barred class action waivers due to the act's protection of collective action amongst employees. The majority of the court held that the NLRA does not make such waivers unlawful, while the dissent would have agreed with an NLRB opinion that held that it does in fact bar class action waivers.

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PAGA Actions Survive

In a split-the-baby scenario, the California Supreme Court also held that Private Attorney General Act (PAGA) actions, which are violations of state employment law, brought by employees "deputized" by the state, on the state's behalf. If the employee wins, the state gets seventy-five percent of the payout.

Where does the rest of the payout go? The court clarified the murky act by holding that the remaining 25 percent is split amongst all aggrieved employees -- not just the employee bringing suit.

As for waivers, the court held that "a PAGA claim lies outside the FAA's coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship. It is a dispute between an employer and the state, which alleges directly or through its agents [...] that the employer has violated the Labor Code."

Going Forward

This sets up a dual track for employer-employee disputes: while many employers will have arbitration clauses in their contracts, including class-action waivers, PAGA claim litigation is still a real threat and expense that cannot be prospectively waived.

It also affects the calculus from the employee's perspective: his individual claim will be arbitrated, and his PAGA claim payout is split with fellow aggrieved employees, if there are any. Fortunately, there's also an attorney's fees provision, which reduces the cost of bringing a qui tam action, but the benefit just got a bit smaller.

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