Employment & Labor Practice Case Alert

Iskanian v. CLS Transportation Los Angeles, LLC, No. S204032 (June 23, 2014)

There has been a surge of class action lawsuits brought against California employers in the past decade, leading to substantial losses for employers. However, the California Supreme Court recently issued its decision in Iskanian v. CLS Transportation Los Angeles, LLC, which, as a practical matter, now allows employers to avoid the risk of litigating class action lawsuits brought by employees.

In Iskanian, the California Supreme Court considered two important issues related to class and representative action waivers in employment arbitration agreements. Class and representative actions are those that an individual brings, not only on behalf of himself or herself, but also on behalf of other individuals similarly situated. Arbitration agreements are those which equally bind all parties to the agreement (in the employment context, the employer and the employee) to submit any legal claims to binding arbitration before a neutral arbitrator instead of litigating them in civil court before a jury.

The first issue in the decision is the enforceability of contractual class action waivers in employment arbitration agreements. The second issue is the enforceability of contractual waivers of the statutory right to bring representative claims under the Labor Code Private Attorneys General Act (“PAGA”) in employment arbitration agreements. Under the PAGA, any current or former employee can bring a representative claim against an employer as a proxy for the state and pursue civil penalties for technical violations of California wage and hour law. As such, it is a representative action intended to advance a predominantly public purpose. 

As we had anticipated, the California Supreme Court “split the baby” on these two issues. With respect to class action waivers in arbitration agreements, the Court overruled a long-standing test regarding the enforceability of class action waivers under Gentry v. Superior Court (2007) 42 Cal.4th 443, which in practice regularly resulted in the invalidation of class waivers, and held that such waivers are now in fact enforceable. Specifically, it held that employers could enter into arbitration agreements with employees, which waive employees’ rights to class proceedings and require the parties to assert claims only on an individual basis.

The Court, however, held that a waiver of the right to bring a representative PAGA action is unenforceable as a matter of state law. The Court reasoned that PAGA actions are essentially brought on behalf of the state by plaintiffs who act as “private attorney generals”, and it is contrary to public policy for an employment agreement to waive an employee’s right to bring a PAGA action before any dispute arises. The Court’s holding with respect to waivers of class actions and PAGA actions has significant, practical and competing implications.

First, under Iskanian, employers can now compel employees to bring their employment claims on an individual basis and not as a class action through valid arbitration agreements with class action waivers. This ruling has the potential to eliminate employment-related class actions in California, which, particularly in the wage and hour context, have increasingly been on the rise in the past decade and have subjected unwary employers to substantial losses. This also means that employers could avoid the risk of litigating class action lawsuits in state court in front of judges and juries who are known to be heavily employee-friendly.

Second, although we can expect to see a decline in employment class action lawsuits, PAGA representative actions will now be in the forefront of mass wage and hour litigation in California. Because Iskanian held that waivers of PAGA representative actions in arbitration agreements are unenforceable, employees can still bring lawsuits for alleged Labor Code violations on a representative basis. Under the PAGA, 25 percent of the recoveries goes to the aggrieved employees and 75 percent goes to the State. Perhaps for this reason, plaintiffs’ attorneys in the past have been less aggressive in pursuing penalties under the PAGA than they have been in pursuing damages under the Labor Code. However, in light of the potential elimination of employment class actions, as well as the fact that plaintiffs’ attorneys can still recover fees and costs under the PAGA, we anticipate that PAGA representative actions will now drive much of the wage and hour lawsuits in California.

Notwithstanding the expected rise in PAGA actions, the ability to avoid class action litigation is a significant milestone for California employers. Thus, consistent with this newest development, all California employers should consider implementing arbitration agreements containing class action waivers. We can guide employers through the process of weighing the pros and cons of arbitration that may be specific to each employer, and also help implement arbitration agreements and revise any existing arbitration agreements to avoid potential class action litigation.

Jeffrey S. Ranen, Partner
221 North Figueroa Street, Suite 1200
Los Angeles, CA 90012
Tel: 213.580.3921
Jeffrey.Ranen@lewisbrisbois.com

Anna Kim, Associate
221 North Figueroa Street, Suite 1200
Los Angeles, CA 90012
Tel: 213.680.5251
Anna.Kim@lewisbrisbois.com