188 Litigating CA Wage & Hour Class and PAGA Actions (23rd Edition) Seyfarth Shaw LLP | www.seyfarth.com D. The California Supreme Court’s Arbitration Waiver Exception for PAGA Claims Several years before the U.S. Supreme Court’s decision in Epic Systems, the California Supreme Court ruled in Iskanian v. CLS Transportation Los Angeles, LLC,922 that the FAA preempts any California law prohibiting the waiver of class action claims in employment arbitration agreements and any such waiver is fully enforceable. At the same time, however, it held that a waiver of the right to pursue a representative claim under PAGA is not enforceable, as that claim, being on behalf of the state, is beyond the scope of the FAA, which covers only private agreements. Iskanian reasoned that the FAA broadly prevents states from mandating or promoting procedures incompatible with the fundamental attributes of arbitration. Because a state rule invalidating class action waivers violates this principle, Iskanian held that the rule was preempted by the FAA. Like Epic Systems after it, Iskanian also rejected the plaintiff’s argument that class action waivers constitute an unfair labor practice forbidden by the NLRA, which protects workers’ concerted activity. Iskanian noted that the arbitration agreement in question still permitted a broad range of activity to vindicate employee wage claims, and that neither the NLRA’s text nor legislative history contained any expression of a congressional intent to prohibit class action waivers. In reaching this conclusion, the California Supreme Court rejected the holding by the National Labor Relations Board in In re D.R. Horton, Inc.923 that mandatory class action waivers violate the NLRA. While Iskanian held that class claims can properly be waived via an arbitration agreement, it reached the opposite conclusion concerning representative PAGA claims, which it deemed non-waivable. Iskanian reasoned that PAGA empowers employees to sue to enforce the Labor Code on behalf of the State of California. As to an action brought on the state’s behalf, Iskanian reasoned, the FAA does not apply. In reaching this conclusion, Iskanian acknowledged that the FAA preempts state law whenever it “stands as an obstacle to the accomplishment of the FAA’s objectives.” But Iskanian distinguished between private disputes and disputes involving a public entity. Iskanian concluded that the FAA does not govern disputes initiated by the government in its law enforcement capacity, and characterized PAGA actions as claims between an employer and the State of California, in the form of the California Workforce Development Agency. 922 59 Cal. 4th 348 (2014). 923 In re D.R. Horton, Inc., 357 N.L.R.B. No. 184 (Jan. 3, 2012). In D.R. Horton, the NLRB ruled that the U.S. Supreme Court’s decision approving consumer class action waivers in AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011), did not apply in cases involving waiver of NLRA-protected rights. The NLRB held that employers cannot force employees to sign arbitration agreements that include class action waivers. Such an agreement unlawfully restricts Section 7 rights to engage in concerted action for mutual aid or protection, notwithstanding the FAA. The NLRB stressed that arbitration agreements are not per se unenforceable. But whether the class/collective action mechanism is used in arbitration or in a court of law, the NLRB held that class resolution must be available to employees. The NLRB distinguished Concepcion on the ground that it involved a conflict between the FAA and state law, whereas D.R. Horton involved a conflict between two federal statutes.
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