Esparza v. KS Industries, LP, 13 Cal. App. 5th 1228 (5th Dist., Aug. 2, 2017) – Court of Appeal holds that victim-specific relief seeking unpaid wages are not “civil penalties” under the Iskanian rule and thus are subject to compelled arbitration under the terms of the parties’ arbitration agreement and the FAA.

This is an important decision – the first of its kind in terms of reported decisions – to drill down on the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles LLC, 59 Cal. 4th 348 (2014) concerning the scope of what qualifies as a non-arbitrable PAGA claim.

In Esparza, a former employee brought a single cause of action under PAGA in which he sought unpaid wages, civil penalties, interest, attorney’s fees and costs on behalf of himself and other employees for the employer’s alleged failure to provide meal and rest breaks, to pay wages in a timely manner, to provide accurate wage statements and to reimburse business expenses. When KS Industries moved to compel arbitration, the employee responded that a claim for civil penalties under PAGA cannot be forced to arbitration and that such a claim includes claims seeking recovery of wages. The trial court denied the employer’s motion and KS Industries appealed.

Against the backdrop of the liberal federal policy favoring arbitration, the Court of Appeal considered the Iskanian holding, as well as the language of PAGA and Labor Code section 558. In Esparza, the employee maintained that the statutory damages recoverable under Labor Code section 558 constituted a “civil penalty” within the meaning of Labor Code section 2699(a) and for purposes of the non-arbitrability. The Court of Appeal disagreed, and characterized the employee’s argument as one “ased on semantics and no substance.” The Court found that one substantive aspect of a wage claim under Labor Code section 558 is “the financial reality that 100 percent of the ‘amount sufficient to recover underpaid wages’ is paid to the affected employee.” 13 Cal. App. 5th at 1245. Citing Iskanian, the court found that the goal was to consider substance in determining the scope of representative claims that can be pursued outside arbitration without violating the FAA and the liberal federal policy favoring arbitration.

The Court of Appeal concluded that the employee’s attempt to recover unpaid wages under Labor Code section 558 was, for purposes of the FAA, a private dispute arising out of his employment contract with KS Industries because it could be pursued by the employee in his own right. Recognizing that private disputes can overlap with claims that could be pursued by state labor law enforcement agencies, the Court held that such claim retained their private nature and continued to be covered by the FAA.

“To hold otherwise would allow a rule of state law to erode or restrict the scope of the Federal Arbitration Act – a result that cannot withstand scrutiny under federal preemption doctrine. Therefore, we conclude preventing arbitration of a claim for unpaid wages would interfere with the Federal Arbitration Act’s goal of promoting arbitration as a forum for private dispute resolution. (See Iskanian, supra, 59 Cal. 4th at p. 389).

Id. at 1246.

The Court also found that the employee’s claim on behalf of “other aggrieved employees” also involved “victim-specific relief,” was a private dispute and subject to arbitration. In this regard, the Court declared that the Iskanian rule – as stated by the California Supreme Court – is limited to representative claims for civil penalties in which the state has a direct financial interest:

“The rule of nonarbitrability adopted in Iskanian is limited to claims ‘that can only be brought by the state or is representatives, where any resulting judgment is binding on the state and any monetary penalties largely go to state coffers.’ (Iskanian, supra, 59 Cal. 4th at p. 388, italics added). Those limitations are not met by the claims for unpaid wages owed to other aggrieved employees because (1) those employees could pursue recoveryof the unpaid wages in their own right and (2) the upaid wages recovered would not go to state coffers.”

Id.

Because the Court of Appeal could not discern the former employee’s true position from the record below, it remanded the case so that the employee could indicate whether he wished to pursue claims for unpaid wages and other individual relief and, if so, those claims would be ordered to arbitration. If the former employee elected to pursue only the PAGA representative claims, then those limited claims would continue in court.

Betancourt v. Prudential Overall Supply, 9 Cal. App. 5th 439 (4th Dist., Mar. 7, 2017), cert. denied, ___ S.Ct. ___ (Dec. 11, 2017) – The Fourth District takes a different approach than the Fifth District and holds that a motion to compel arbitration is not the proper procedural vehicle for addressing a PAGA claim that is pleaded to include a prayer for non-PAGA remedies such as unpaid wages, business expense reimbursements, interest, and attorney’s fees.

Like the employee plaintiff in Esparza v. KS Industries, LP, 13 Cal. App. 5th 1228 (2017), the employee plaintiff in this case brought a single cause of action under PAGA in which he complained about violations of California’s wage and hour laws. Also like the employee plaintiff in Esparza, the employee plaintiff in this case sought unpaid wages, interest, attorney’s fees and costs, in addition to civil penalties. Because Betancourt signed an arbitration agreement in which he agreed to submit to final and binding arbitration any and all claims and disputes related to his employment and to “forego any right to bring claims on a representative or class member basis,” Prudential brought a motion to compel arbitration. In support of its motion, Prudential argued that Betancourt was attempting to evade arbitration by labeling garden-variety wage and hour claims as a single PAGA claim. Prudential argued that Betancourt’s action was – in substance – a standard wage and hour case as evidenced by the prayer for relief, which sought recovery of unpaid wages, business expenses, interest, attorney’s fees and costs, remedies that do not fall within a PAGA claim. The trial court denied the employer’s motion and the employer appealed.

As noted above, the United States Supreme Court denied Prudential petition for certiorari on December 11, 2017, thereby maintaining its streak of rejecting cert petitions based on PAGA issues, and has left open for another day / case whether the Court will adopt or reject the more limited application of the Iskanian rule as utilized by the Fifth Circuit in Esparza.

Julian v. Glenair, Inc., 17 Cal. App. 5th 853 (2d Dist., Nov. 27, 2017) – Under the principles and public policy considerations set forth in Iskanian, the classification of an agreement as “predispute” or “postdispute” must be made by reference to the point in time at which an individual employee acquires the status of the state’s agent in relation to the creation of the agreement to arbitrate.

California’s Private Attorney General Act (PAGA) permits employees to represent the State of California and other aggrieved employees for purposes of recovering civil penalties for violations of the California Labor Code. In 2014, the California Supreme Court determined in Iskanian v. SLC Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), the California Supreme Court was asked to decide whether the right to bring a PAGA claim may be waived by an employee in advance of such a claim coming into existence. In examining this issue, the Court relied on California Civil Code section 1668, which invalidates contracts that exempt their parties from “violation[s] of law,” and California Civil Code section 3513, which invalidates private contracts that contravene “a law established for a public reason…” 59 Cal. 4th at 382-382. Applying these statutes, the Court determined that a waiver of the right to assert a PAGA claim in any forum “disable[d] one of the primary mechanisms for enforcing the Labor Code” and thus harmed the state’s interests in enforcing that code. Id. at 383. Accordingly, the Iskanian decision establishes the general rule that a pre-dispute waiver of the right to bring a representative action under PAGA is unenforceable as against public policy. There are several issues, however, that Iskanian did not decide, including: 

• (a) whether an employer can compel an employee to arbitrate representative PAGA claims, and
• (b) whether an employee might be able to enter into an enforceable post-dispute agreement to arbitrate PAGA claims.

As to the first question, several recent appellate court decisions have relied on the rationale of Iskanian to reach the conclusion that an employer cannot compel an employee to arbitrate representative PAGA claims. See, e.g., Tanguilig v. Bloomingdale’s, Inc., 5 Cal. App. 5th 665 (2016), Betancourt v. Prudential Overall Supply, 9 Cal. App. 5th 439 (2017); Montano v. Wet Seal Retail Inc., 7 Cal. App. 5th 1248 (2015). As to the second question, Iskanian clearly limited its holding to pre-dispute arbitration agreements, thus leaving open the issue as to whether and when an employer and employee might agree to arbitrate PAGA claims after such a dispute arises. In Julian v. Glenair, Inc., 17 Cal. App. 5th 853 (2017), in a decision authored by Justice Nora M. Manella, the Second District Court of Appeal has answered precisely that question.

The arbitration agreement at issue in Julian was entered into after an earlier PAGA case had been filed in 2013 (commonly referred to as “the Rojas action”). In July 2014, Glenair provided its hourly employees with a proposed arbitration agreement entitled the “Glenair Dispute Resolution Program.” The proposed agreement provided employees with a 30-day opt-out right and informed employees that if they did not opt out, their continued employment with Glenair would manifest their consent to mandatory arbitration of a broad range of claims, including “past, present and future claims.” In this regard, the proposed agreement provided that employees who did not opt out would not be able to participate in any class or collective action, including the Rojas action. The proposed agreement included a description of the claims then asserted in the Rojas action, including the PAGA claim.

In January 2015, the Julians’ employment with Glenair was terminated. In April 2015, a proposed fourth amended complaint was circulated in the Rojas action identifying the Julians as additional named plaintiffs and including a PAGA claim. That amended complaint was never filed. Instead, in October 2015, the Julians initiated their own lawsuit against Glenair. Their complaint contained a single claim under PAGA for civil penalties “on behalf of themselves and other current and former non-exempt employees. The complaint alleges that the Julians are “aggrieved employees” for purposes of prosecuting a representative action under PAGA, and that they complied with the requirements for commencing a representative action under PAGA. Glenair filed a petition to compel arbitration of the Julians’ claim, arguing that the arbitration agreement was enforceable under Iskanian because it was a voluntary postdispute arbitration agreement. The trial court and Court of Appeal both disagreed and denied Glenair’s petition.

In this case, the record was undisputed that Glenair distributed the proposed arbitration agreement to the Julians and other employees in July 2014, and that the Julians first initiated the procedure for becoming the state’s agents in April 2015 by submitting notice of Labor Code violations to the LWDA. Glenair maintained that the July 2014 arbitration agreement was an enforceable post-dispute agreement because

• (a) it came into existence after the Rojas action was commenced,
• (b) it specifically referenced and included the Labor Code violations and PAGA claim alleged in the Rojas action,
• (c) the Julians’ 2015 action asserted a PAGA claim that was essentially similar to that asserted in the Rojas action.

The crux of Glenair’s argument was that after the Rojas plaintiff was authorized to assert a PAGA claim against Glenair and Glenair’s employees received notice of that fact, the pre-dispute / post-dispute boundary was crossed with respect to all other employees relating to any similar PAGA claim that might be asserted by them. The Court of Appeal held that although the two PAGA cases were similar, they were not the same. More importantly, the Court of Appeal held that the classification of an arbitration agreement as “pre-dispute” or “post-dispute” must be made by reference to the point when the complaining employee acquires the status of “state agent” in relationship to the creation of the agreement to arbitrate. It was clear from the record in this case that the Julians did not acquire “state agent” status until 2015 and thus were no in a position in 2014 to know which alleged Labor Code violations – if any – they were authorized to assert on behalf of the LWDA or to enter into an informed waiver of their statutory right to pursue a PAGA claim in court by agreeing to arbitration of such claim. “We hold that an agreement to arbitrate a PAGA claim, entered into before an employee is statutorily authorized to bring such a claim on behalf of the state, is an unenforceable predispute waiver.”^[1] 17 Cal. App. 5th 801.

“Generally, a waiver of a statutory right is not enforceable unless – at minimum – ‘it appears that the party executing it ha[s] been fully informed of the existence of that right, its meaning, [and] the effect of the “waiver” presented to him’ [Citations] Only after employees have satisfied the statutory requirements for commencing a PAGA action are they in a position ‘to determine what trade-offs between arbitral efficiency and formal procedural protections best safeguard their statutory rights.’ [Citations] Prior to that point, the employees either have submitted no allegations of Labor Code violations to LWDA, or have done so, but await LWDA’s determination regarding the extent to which LWDA itself will resolve the allegations …. Accordingly, before meeting the statutory requirements for commencing a PAGA action, employees do not know which alleged violations – if any – they are authorized to assert in the action. Enforcing a waiver secured at that time would effectively dictate a choice of forum the employee did not knowingly make.”

Id. at 810.

It is difficult to fathom a circumstance where an employee would be in a position to initiate and assert PAGA claims against a current or former counsel without being represented by counsel and where that counsel would recommend private arbitration after the employee had exhausted the statutory requirements for filing a PAGA claim. Per the Julian decision, the limited circumstance in which an employee’s PAGA claims can be forced to arbitration is where there is a postdispute arbitration agreement that is entered into after the complaining employee as been “deputized” as a private attorney general.