The California Supreme Court recently issued its long-awaited and impactful decision in Iskanian v. CLS Transportation LLC S20432 (June 23, 2014). The central issue in the case is whether in California mandatory class and representative action waivers in employment arbitration agreements and contracts are enforceable.

Briefly, in Iskanian, plaintiff Iskanian, a driver for CLS Transportation filed a class action lawsuit in which he alleged CLS failed to provide employees with overtime pay, meal and rest breaks, proper wage statements, and sundry other claims. The employee also brought a representative action under Labor Code section 2698, commonly referred to as “PAGA.” Section 2698 authorizes an employee to bring an action for civil penalties on behalf of the state against his or her employer for Labor Code violations committed against the employee and fellow employees, with 75 percent of the proceeds of that litigation going to the state. CLS argued that both the class and representative PAGA actions were waived by virtue of the fact plaintiff Iskanian signed an employment arbitration agreement waiving both claims. The arbitration agreement read in pertinent part as follows:

[E]xcept as otherwise required under applicable law, (1) EMPLOYEE and COMPANY expressly intend and agree that class action and representative action procedures shall not be asserted, nor will they apply, in any arbitration pursuant to this Policy/Agreement; (2) EMPLOYEE and COMPANY agree that each will not assert class action or representative action claims against the other in arbitration or otherwise; and (3) each of EMPLOYEE and COMPANY shall only submit their own, individual claims in arbitration and will not seek to represent the interests of any other person.

The decision is a mixed bag for employers. First, the good news for employers. The California Supreme Court held that mandatory class action waivers in employment arbitration agreements and contracts can be enforceable. In so ruling, the Court found that California’s past refusal to enforce a class action waiver on public policy and unconscionability grounds was preempted by the Federal Arbitration Act (FAA). The ruling served to abrogate California’s past precedent to the contrary in Gentry v. Superior Court. In issuing its ruling, the Court rejected plaintiff Iskanian’s argument that the arbitration agreement violated the National Labor Relations Act. The ruling, which permits class action waivers in arbitration agreements, will serve as a potent arrow in an employer’s quiver to curb the rise in class action lawsuits.

The ruling was not entirely positive for employers. The California Supreme Court held that mandatory waivers of representative PAGA actions in employment in arbitration agreements or contracts were not enforceable. The California Supreme Court found a mandatory representative action waiver is contrary to California public policy and not preempted by the FAA. The California Supreme Court’s stated rationale behind issuing the representative action ruling is that the FAA’s goal of dispute resolution does not preclude the California Legislature “from deputizing employees to prosecute Labor Code violations on the state’s behalf.” In contrast to mandatory class action waivers, the FAA does not preempt California law prohibiting the mandatory waiver of PAGA representative actions.

The Iskanian ruling certainly tilts the landscapes in favor of employers with respect to class action waivers. The impact of Iskanian on the viability of representative actions remains hazy with anticipated future challenges to either limit the ruling or overturn it, including a likely challenge to United States Supreme Court. In the meantime, California employers with class action concerns that do not utilize arbitration agreements should consider implementing them. Employers who already utilize arbitration agreements should review them to ensure they are in compliance with Iskanian.

Additional Information

For more information about this decision or California arbitration agreements, please contact your Kutak Rock attorney or the author of this alert.