U.S. Supreme Court Enforces Employer’s Bilateral Arbitration Agreement, Approving Dismissal of PAGA Representative Claims

California employers that have adopted arbitration agreements received a big win from the U.S. Supreme Court on June 15, 2022. In Viking River Cruises, Inc. v. Moriana, the Court validated an employer’s arbitration agreement that would prevent both class action lawsuits as well as “representative” claims under the California Labor Code Private Attorneys General Act (“PAGA”). PAGA cases are similar to class actions in many respects. Until this decision, California law precluded arbitration of PAGA actions because the courts did not allow such claims to be split into arbitrable “individual” claims and non-arbitrable “representative” claims. In “representative” PAGA claims, a single employee can act on behalf of the State of California as a representative of all “aggrieved employees” of an employer.

By way of background, PAGA deputizes any California employee to sue his or her employer on the State’s behalf to seek civil penalties for alleged Labor Code violations committed against all aggrieved employees of that employer. These civil penalties were originally only recoverable through a California government agency enforcement action. PAGA lawsuits can pose significant liability for California employers, as the default PAGA penalties are between $100 and $200 per employee, per pay period for each Labor Code violation for a one-year period. As the Court explained: “An employee who alleges he or she suffered a single [Labor Code] violation is entitled to use that violation as a gateway to assert a potentially limitless number of other violations as predicates for liability . . . Individually, these penalties are modest; but given PAGA’s additive dimension, low-value claims may easily be welded together into high-value suits.” However, as a result of the Viking River decision, employers may significantly limit liability by requiring employees to arbitrate PAGA claims on an individual basis rather than litigate a representative action on behalf of other current and former employees.

In Viking River, the Court specifically found that the Federal Arbitration Act ("FAA") preempts a California Supreme Court precedent to the extent that it did not allow PAGA claims to be split into arbitrable “individual” and nonarbitrable “representative” claims. The Court also held that once an individual claim is sent to arbitration, the Plaintiff does not have standing to assert a representative claim (on behalf of other current and former employees), so the representative claim must be dismissed. Therefore, in current and future PAGA actions where defendant-employers have implemented appropriately-drafted arbitration agreements, courts are expected to compel individual PAGA claims to arbitration and dismiss related representative PAGA claims for lack of standing.

Justice Sotomayor filed a concurring opinion in Viking River highlighting that the California Legislature could modify the scope of statutory standing for PAGA actions. For now, however, employers that have implemented valid mandatory arbitration agreements should be shielded from unintended liability under PAGA or class actions.

California employers should review and, if necessary, update their current arbitration agreements (or evaluate whether to adopt such agreements) to ensure that they are properly drafted both to comply with pre-existing California and federal law and to take full advantage of the U.S. Supreme Court’s decision in Viking River. Such agreements should be tailored to each employer’s individual situation and workforce.