As employers and employees adapt to the new realities of working from home on a permanent or modified basis, employers need to be aware of the employment law issues that arise with such arrangements.  This Friday’s Five covers five items employers should review for employees working from home:

1. Confidentiality and security.

Employers are able to monitor company owned equipment and internet services at the office.  However, with employees working remotely, employers lose this control, and employees likely do not have the same sophistication when setting up security for technology.  Employers should review the need to provide training to employees about the use of public Wi-Fi, updating passwords, the use of password security management software, and other best practices.  It is also recommended to remind employees to be aware of their surroundings when discussing confidential company information – such as on phone calls in public areas.

2. Employee privacy.

Employers can generally monitor employees’ use of company provided internet at the office, employers have less rights to monitor employees while they are working from home.  The employer’s ability to monitor employees away from the office can create some issues (especially when there is no clear distinction of when the employee is on or off duty – as discussed below).  Employers should review their policies to ensure that any monitoring does not violate employee’s privacy rights and sets for a clear policy of what the employer is monitoring.  A critical aspect of the review is the company’s policies about what is being monitored, ensuring that there is a need for the monitoring, and ensuring that the monitoring does not capture data or information that the employee has a reasonable expectation of privacy.

3. Clear designation of working hours.

The Wage Orders require that California employers keep “[t]ime records showing when the employee begins and ends each work period.  Meal periods, split shift intervals and total daily hours worked shall also be recorded.”  IWC Wage Order 5-2001(7)(a)(3).

Additionally, Labor Code section 1174 requires employers to keep time records showing the hours worked daily and the wages paid, number of piece-rate units earned by, and the applicable piece rate paid.

Employers need to ensure employees have a clear method for tracking their time worked at home to meet these obligations.  In addition, employers should consider setting designated work hours, so that employees are clear on when they are expected to be responsive to work-related requests and to minimize the need for overtime work.

4. Expense reimbursement.

As explained on this blog before, California Labor Code section 2802 requires employers to pay for necessary business expenses incurred by employee, and this would include expenses for working at home, such as for computers, printers, internet usage, and other items, such as paper for printing if required by the employer.  However, as the LA Times reported, some plaintiffs are alleging that not only should employers have to pay for their printers and computers, but also for missed revenue the employee could have received for renting out their home office.  I’m a bit skeptical about whether missed rental revenue is recoverable under the Labor Code, as missed rent would be difficult to prove.

5. Minimum wage, paid sick leave, and other local requirements based on where the employee’s home is located.

Employers need to be careful about varying minimum wage and paid sick leave requirements for employees who are working from home.  The employee’s home may be located in a different jurisdiction than the employer’s workplace, and it could require the employer to pay the employee at a different minimum wage rate or provide additional paid sick leave.

Many of the local and county ordinances set forth when the city or county law will cover an employee who works within its jurisdiction.  For example:

  • Santa Monica:  Law applies to any employee working a minimum of two hours within Santa Monica in a given week (even if employer is located outside of Santa Monica).
  • City of Los Angeles: “An employee is an individual who performs at least two hours of work in a particular week within the City of Los Angeles….”
  • County of Los Angeles: “Anyone who works at least two hours in a one-week period within the unincorporated areas of Los Angeles County is entitled to the County minimum wage for the hours worked in the unincorporated area of the County.”
  • Pasadena: Applies to employees who perform at least two hours of work in Pasadena.

Employers need to review the various jurisdictions in which the employees are located when working from home to ensure the employees are provided the required minimum wage and paid sick leave that may be triggered based on where the employee is performing their work.

On February 9, 2022, Governor Newsom signed a new law requiring employers to provide supplemental COVID-19 paid sick leave during 2022 through September 30, 2022.  The law, SB 114, unlike the supplemental paid sick leave law passed in 2021, provides for no offsetting tax credits for employers to assist with the added costs this paid sick leave places on businesses across the state.  Here are five reminders for California employers about the law and its related deadlines as we approach its September 30th expiration:

1. The COVID-19 supplemental paid sick leave law took effect on February 19, 2022 and expires on September 30, 2022.

The Governor signed the law on February 9, 2022, and the paid sick leave requirement took effect 10 days after the enactment of the law – February 19, 2022.  The law applied retroactive obligation for employers to pay for qualifying paid sick leave starting January 1, 2022.  The paid sick leave requirement expires on September 30, 2022 (but employees currently using the sick leave can continue its use past the September 30th deadline).

2. Which employers are covered by the law?

The law applies to employers with more than 25 employees.

3. Which employees are entitled to paid sick leave?

Employers are required to provide employees COVID-19 supplemental paid sick leave if the employee is unable to work or telework due to the following reasons:

  1. The employee is subject to a quarantine or isolation period related to COVID-19 as defined by an order or guidance of the State Department of Public Health, the federal Centers for Disease Control and Prevention, or a local public health officer who has jurisdiction over the workplace.
  2. The employee has been advised by a health care provider to isolate or quarantine due to COVID-19.
  3. The employee is attending an appointment for themselves or a family member to receive a vaccine or a vaccine booster for protection against COVID-19, subject to certain limitations.
  4. The employee is experiencing symptoms, or caring for a family member experiencing symptoms, related to a COVID-19 vaccine or vaccine booster that prevents the employee from being able to work or telework.
  5. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
  6. The employee is caring for a family member who is subject to an order or guidance or who has been advised to isolate or quarantine.
  7. The employee is caring for a child whose school or place of case is closed or otherwise unavailable for reasons related to COVID-19 on the premises.
  8. If the employee, or a family member for whom the employee is providing care, tests positive for COVID-19. (Note: employer may condition payment of supplemental paid sick leave for this reason upon the employee providing a positive test for themselves or the family member they are caring for.)

4. How much paid leave is required?

The employee is eligible for potentially up to 80 hours of leave available under two different banks:

  • Bank #1: Employees are entitled up to 40 hours of COVID-19 supplemental paid sick leave for full time employees based on reasons 1 through 7 above.
  • Bank #2: Employees are entitled up to 40 hours of paid leave for reason number 8 listed above (if they or a family member test positive).

Employers should therefore implement internal tracking measures to track the reason for the leave and how much of the leave the employee has taken under each of the two banks of leave available.  More information can be found on the Labor Commissioner’s FAQ page.

Calculating Amount of Leave Available

The law sets forth how employers are to calculate the amount of leave for part-time, variable scheduled employees, and full-time employees.  Employers need to review the requirements in order to make the appropriate calculations for these different classes of employees.

Calculating Rate of Pay

The law sets forth how employers are to calculate the rate of pay for nonexempt employees, and exempt employees.  Employers need to carefully review these calculations to ensure the proper rate of pay is being used when an employee takes qualifying paid leave.

Caps on Payments

However, the total paid sick leave is capped at 80 hours for the period between January 1, 2022 to September 30, 2022.  In addition, employers are not required to pay more than $511 per day and $5,110 in the aggregate to an employee (unless federal legislation changes these amounts set forth in the FFCRA).

Interaction with California’s Healthy Workplaces, Healthy Families Act and Cal/OSHA ETS Exclusion Pay, and Local Ordinances

The supplemental paid sick leave is in addition to the paid sick leave employees are entitled to under California’s Healthy Workplaces, Healthy Families Act set forth in Labor Code 246.  Moreover, employers cannot require employees to first exhaust the supplemental paid sick leave before paying exclusion leave required under the Cal/OSHA Emergency Temporary Standards (ETS).  The California supplemental paid sick leave leaves in place any employer obligation to comply with local paid sick leave requirements, such as those in Los Angeles City and County, Long Beach, and Oakland.

5. Notice and pay stub requirements.

The law requires employers to provide a notice to employees the amount of COVID-19 supplemental paid sick leave that the employee has used through the pay period that it was due to be paid.  This can be provided on the employee’s pay stub or on another writing provided to the employee on the designated pay day.  The employer shall list “zero hours used” if a worker has not used any COVID-19 supplemental paid sick leave.  This requirement took effect the next full pay period following February 19, 2022.

Employers are also required to post or distribute a notice to employees that was developed by the Labor Commissioner and can be found here.

Other provisions of the law also address firefighters and providers of in-home supportive services employees.

On July 27, 2022, California’s Department of Finance confirmed that due to the raising inflation, the minimum wage for all employers will increase by 3.5% to $15.50 per hour on January 1, 2023.

California’s minimum wage not only impacts minimum wage workers, but it also effects the salary required for employees to qualify as an exempt employee.  Here are five reminders about the California minimum wage increase and its impact upon exempt employees:

1.  As of January 1, 2023, the minimum wage in California will increase to $15.50 for all employers – large and small.

The minimum wage increase on January 1, 2023 will set the same minimum wage for large and small employers, unlike recent minimum wage increases which provided for a lower amount required for smaller employers with 25 or fewer employees.  The increase on January 1, 2023 will be especially hard for small employers given the $1.50 increase in minimum wage (increase from the current $14.00 per hour) for these companies.

2.  With the increase in the state minimum wage, there is a corresponding raise in the minimum salary required to qualify as exempt under the “white-collar” exemptions. 

To be exempt from the requirement of having to pay overtime to the employee, the employee must perform specified duties in a particular manner and be paid “a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” (Lab. Code, § 515, subd. (a).)  Therefore, on January 1, 2023, to qualify for a white-collar exemption, the employee must receive an annual salary of at least $64,480 annually ($1,240 weekly) for all employers.

3.  The salary for exempt employees must be a guaranteed, fixed amount.

The employee’s salary cannot be reduced for quality or quantity of work.

4.  To qualify as an exempt employee, the employee must perform more than 50% of their time performing exempt duties.

More information about the types of duties that qualify for the white-collar exemptions can be read here.

5.  Employers bear the burden of proof when establishing that an employee qualifies as an exempt employee.

Employers have the burden of proof when an employee challenges an exempt classification.  California courts have made clear that the employer bears the burden of proof when asserting that an employee is an exempt employee:  “[T]he assertion of an exemption from the overtime laws is considered to be an affirmative defense, and therefore the employer bears the burden of proving the employee’s exemption.”  Ramirez v. Yosemite Water Co. (1999).

Employers have the burden to record and maintain accurate time records under California law. If the employer knows employees are not properly recording their time, the employer needs to enforce a policy to have employees accurately record their time, even if it requires disciplinary action. In addition, employers need to review their time records to ensure employees are following proper procedures.  Here are five reminders of best practices for time records for California:

1. Ensure the time records are accurate.

It goes without saying that the time records need to be accurate in the time that is being recorded for the employees.  For the employer, this means reviewing the use of electronic time keeping systems.  However, if an employer is relying upon the employee to record their time manually, or in a spreadsheet, these records must be audited to ensure that the employee is being accurate in the time they are recording.  For example, the employer needs to prevent an employee manually recording their start and stop time and the same time every day without any variations.  More information about electronic time records and storage requirements is available here.

2. Storing time records for the required amount of time.

The statute of limitations can reach back four years in wage and hour class actions under California law, and time records will be the primary evidence in most of these cases.  California law requires employers to track start and stop times for hourly, non-exempt employees, and record meal breaks as discussed below.  Employers need to ensure they are keeping these critical records for the amounts of time required under the law, and also long enough to defend against wage and hour claims.

3. Must record all required information.

Employers need to ensure their timekeeping system is recording the required information.  For example, while employers are not required to record 10-minute rest breaks, employers are required to record employee’s meal periods under the IWC Wage Orders (requirement is found section 7 – Records).

4. Maintaining time records in a usable format.

Maintaining records in a form that makes reviewing the records almost impossible is almost equivalent to not maintaining them in the first place. Some thought should be put into how an employer is storing time records and understanding how that data could efficiently be reviewed in the future if needed.  Electronic time records are easiest to analyze given that the data is digital.  However, employers should consider where the records are stored (electronic or paper), and how easy is it to pull information for individual employees, and for all employees, if needed.

5. Tracking employees’ signed waivers, acknowledgments, and time card adjustments.

Just like time records, employers need to consider a system for storing, indexing, and retrieving records related to the employee’s time records, such as any time adjustments, employee signed waivers (more information about meal break waivers is available here), and signed acknowledgments.  Documentation is critical but being able to track and retrieve documents for specific employees or for the workforce over a period of time is just as important.  Employers need to put just as much thought into this aspect as they do in training managers and supervisors to document issues in the first place.

Hope you are having a great summer.  As many employees take (or consider taking) vacation during this summer, employers in California must be aware of unique rules that apply to vacation time. This Friday afternoon, I thought it was an appropriate time to review five potential vacation policy traps for California employers:

1. No use-it-or-lose-it policies permitted.
Under California law, vacation is treated the same as earned wages and vest as the employee performs work. Because vacation is earned proportionally as the employee works, policies requiring employees to lose vacation already earned is illegal under California law.

2. Reasonable caps are allowed.
While employers cannot implement “use-it-or-lose-it” policies, they can place a reasonable cap, or ceiling, on vacation accrual. The DLSE explains:

Unlike “use it or lose it” policies, a vacation policy that places a “cap” or “ceiling” on vacation pay accruals is permissible. Whereas a “use it or lose it” policy results in a forfeiture of accrued vacation pay, a “cap” simply places a limit on the amount of vacation that can accrue; that is, once a certain level or amount of accrued vacation is earned but not taken, no further vacation or vacation pay accrues until the balance falls below the cap. The time periods involved for taking vacation must, of course, be reasonable. If implementation of a “cap” is a subterfuge to deny employees vacation or vacation benefits, the policy will not be recognized by the Labor Commissioner.

3. Vacation is a form of earned wages that must be paid out on the employee’s last day of work.
An employee who is discharged must be paid all of his or her wages, including accrued vacation, immediately at the time of termination. See Labor Code Sections 201 and 227.3.  More information about the timing and payment of final wages can be read here.

4. Deductions are not permitted from employee’s final wages for use of vacation that was not accrued.
Vacation is treated as a form of wages under California law, and by permitting an employee to take vacation time before it is earned is similar to providing a loan to the employee.  However, employers may not utilize self-help remedies to recover debts from the employee’s final pay check, including deducting wages owed to an employee to cover vacation that time was used but had not yet been accrued by the employee.

5. “Cliff vesting” policies are problematic.
Employers may set probationary periods or waiting periods during which employees do not accrue vacation time. However, the DLSE maintains that employers may not have a policy that grants employees a lump sum of vacation upon reaching certain dates (for example, a policy granting the employee five days of vacation at the employee’s one year anniversary of work, but not permit the employee to take any vacation prior to the anniversary date).

The DLSE’s view on this type of “cliff vesting” is that the employer is attempting to provide for accrued vacation, but at the same time is attempting to limit its liability of having to pay out a pro rata share of the accrued vacation if the employee does not work until the date the vacation is granted to the employee.  Many employers avoid these potentially problematic lump sum grants of vacation by setting a time period (i.e., the employee’s first six months of employment) that the employee does not accrue vacation.

California law on vacations is vastly different than Federal law and other states. It can be a trap for employers, but with some understanding of the obligations created under the law it can easily be managed.

Hope you are enjoying your summer.

Instead of relying on the old job offer letter you had a lawyer review in the 1990’s for your next new hire, it is recommended to review the offer letter to ensure it is up to date with current law. Here are the five terms employers should consider to include in job offer letters:

1. At-will designation

An offer letter should clearly set forth that the employee is being hired as an at-will employee, and that employment may be terminated by either party with or without notice at any time. Under California law, it is presumed that all employment is terminable at-will. California Labor Code section 2922 provides: “An employment, having no specified term, may be terminated at the will of either party on notice to the other.” The at-will doctrine means that the employment relationship can be terminated by either party at any time, with or without cause, and with or without advanced notice. Even though the law presumes all employment is at-will, it should be clearly set out in the offer letter as well.

2. Description of the job

It is a good practice to have job descriptions for all positions in a company. If the company does not have a job description, be as detailed as possible about the duties of the position the applicant is being hired for in the offer letter. This will help avoid potential disputes about whether certain duties are essential functions of the position for reasonable accommodation purposes, and could also be evidence in defending claims that the employee was misclassified as exempt. The job offer could also set forth whether the position is non-exempt or exempt, and have the duties reflect the designation.

3.  Integration Clause

Place language into the offer letter that the terms set forth in the letter supersede any other offers or promises. This type of term is referred to as an integration clause. Including an integration clause into the offer letter will assist in countering any claim later on that other promises were made to the employee at the time of hire and the employer failed to comply with those promises.

4.  Set forth commission terms if employee is eligible for commissions

Since January 1, 2013, all commission agreements must be in writing and must be signed by the employer and employee. Employers should review the offer letter to see if the offer letter meets these requirements. If it does not, or the commission structure is too complex to include in the offer letter, commission agreements still must be set out in a separate writing and signed by the employer and the employee. Employers should approach the issue of commissions carefully to ensure that the agreement defines key terms. In addition, in the case of non-exempt hourly employees, employers must be careful on how the commissions could affect the calculation of the regular rate of pay for overtime purposes.

5.  Confidentiality provisions

Set forth if your company will require the employee to enter into a confidentiality agreement. If possible, attach the confidentiality agreement and have the applicant sign the agreement at the same time the job offer is accepted. The offer letter should also contain language to the effect that the applicant does not have any agreements with prior employers that would interfere with their duties and that the applicant will not use any confidential information learned at prior positions.

I have published this post since 2015 recognizing the Fourth of July (one of my favorite holidays).  Hopefully I’ll be able to keep publishing it for many years to come.  Wishing you a great Fourth, and hope you have some time to put aside your work for a bit and enjoy some time with your family.  Happy Fourth of July!

Five things I’m thankful for this Fourth of July:

1.     For the great risk and sacrifice our Founding Fathers took to establish the country. 

When learning about the Founding Fathers in high school history class I did not have a perspective about the risks the Founders took in establishing the country.  Only now that I have a business, a family, and am relatively successful, can I realize the huge risks the Founders took.  By all means, they were the establishment, the elite of the American society, and if anyone had an interest in preserving the status quo, it was them.  Their sacrifices of life (theirs and their family members) and their fortunes helped build the foundation we benefit from today.

2.     The ability to speak freely and practice or not practice any religion I want.

It is great being able to freely speak your mind and believe in whatever you want.  It is also great be free to practice (or not) any religion you want.  We live in a very tolerant society, and it is even better when the government is not telling you how to live your life.  It is important to remember that throughout history, this is the exception for how a government normally behaves.

3.     Our Country’s ability to attract creative people.

People that like creating things and being productive want to practice their trade where the government will basically leave them alone and provide a good environment to protect their gains derived from their hard effort (see item #5 below).  The U.S. provides this environment, and that is why so many people come to the U.S. to create a business or to practice their trade.  It is also important to recognize how lucky we are to be in the U.S.

4.     My right to practice any profession and access to unlimited resources to learn the required skills.

No one is dictating what students need to be after they graduate high school or college.  Everyone is free to pursue their interest, and the market decides the value of the effort.  With basically any information freely available on the Internet, anyone can learn almost any skill, and like no other time in human history individuals have an almost free method to sell their services or products over the Internet.  In your mid-40’s and want to make a career change?  Perfect, and you don’t even need to go back to school as the information is freely available on the Internet.  Didn’t finish college and are 20 years old with an idea?  Perfect.  Venture capitalists don’t care about your pedigree, they are only interested if you work hard and don’t give up.

5.     Our legal system.

Yes, it sounds trite.  But while I don’t think our legal system is perfect by any means, it is the best system established in the history of mankind.  Everyone living in the U.S. presently is very lucky to have this benefit.  It is a foundation for many of the items I mentioned above.  Because people have a good basis for predicting the outcomes of their actions, such as being able to retain property legally obtained, and knowing if someone breaches a contract there will be repercussions, it creates an environment that attracts hard effort and the best talent from around the world.  This is why the U.S. has been the leader in ideas and new businesses.  However, just because the system is established does not mean our work is done.  We have to be vigilant not to lose the fairness, reasonableness, and lack of corruption in the legal system.

Happy Fourth of July!

The last two weeks have been busy on the California employment law front, and California employers must remain vigilant about new employment law developments still going forward this summer.  As we enter the second half of 2022, here are five issues California employers need to pay attention to:

1. IRS mileage rate increases July 1, 2022 to 62.5 cents per mile.

On June 9, 2022, the IRS announced that it will be raising the mileage rate effective July 1, 2022.  The IRS mileage rate will increase from 58.5 cents per mile to 62.5 cents per mile from July 1, 2022 to December 31, 2022.

As gas prices continue to rise to historic highs, employers with employees driving for work purposes, need to ensure their mileage reimbursement polices are current.  More information about California employers’ obligation to pay for mileage reimbursement, and the seminal California Supreme Court decision on the issue, Gattuso v. Harte-Hanks Shoppers, Inc., see our prior post here.

2. Deadline for small employers to register for CalSavers is June 30, 2022.

California employers are required to register for the CalSavers retirement savings program, if they have 5 or more employees and do not sponsor a retirement plan.  Employers with 5 or more employees must register for the program by June 30, 2022.  Employers with over 100 employees were required to register by September 30, 2020, employers with more than 50 employees were required to register by June 30, 2021.  The state has begun to issue citations, which start at $250 per employee, and can increase to $750 per employee.

3. Many local minimum wage increases effective July 1, 2022.

As we have previously written about here, many local cities and counties throughout California are raising their minimum wages on July 1, 2022.  Employers need to review their jurisdictions to ensure compliance with the applicable minimum wage.

In addition, the City of West Hollywood is also increasing the amount of paid leave required to be paid to employees.  The City’s website explains, “Beginning July 1, 2022, full time employees for all businesses are to be provided at least 96 compensated hours and 80 uncompensated hours per year for sick leave, vacation, or personal necessity. Part-time employees are to be provided compensated and uncompensated hours in increments proportional to that accrued by someone who works 40 hours in a week.”  More information about West Hollywood’s minimum wage and paid leave is provided on the City’s website here.

4. Responsible Beverage Service (RBS) training required for alcohol servers starting July 1, 2022.

The RBS “training teaches servers to responsibly serve alcoholic beverages for on-premises consumption and mitigate alcohol-related harm in California communities”.  The Alcoholic Beverage Control requires that beginning July 1, 2022, any ABC licensee who has an “ABC On-Premises License” will be required to ensure specific staff (alcohol servers and managers of alcohol servers) have received training from an ABC approved RBS Training Provider within 60 days of employment. This includes staff employed prior to July 1, 2022.  More information can be found at the ABC’s website here.

5. Bill proposed to create council to regulate California “fast food restaurants” continues in California Legislature.

AB 257, termed the Fast Food Accountability and Standards Recovery Act or FAST Recovery Act, proposes to establish a Fast Food Sector Council within the Department of Industrial Relations is making it way through the California Legislature.  If passed, the bill would create a council composed of 11 members appointed by the Governor.  The council would define which fast food restaurants it would regulate, and would set standards for minimum wages, working hours, “and other working conditions related to the health, safety, and welfare of” fast food establishments.  In addition, the bill also creates joint liability for franchisors and provides a private right of action for employees to sue for discrimination or retaliation.

Moreover, as drafted, the bill defines “fast food chain” as “a set of restaurants consisting of 30 or more establishments nationally that share a common brand, or that are characterized by standardized options for decor, marketing, packaging, products, and services.”  The bill would add another layer of complexity for these restaurants in addition to the existing Labor Code and is a proposed law restaurant operators of all types should closely monitor this summer.

In Viking River Cruises, Inc. v. Moriana, plaintiff worked for Viking as a sales representative in Los Angeles.  Plaintiff sued Viking alleging various Labor Code violations and sought to recover PAGA penalties on a representative basis.  However, when she started working for Viking, she agreed to resolve all employment issues with Viking in arbitration, and the parties would use individual procedures rather than class or representative action procedures such as PAGA.  Viking sought to compel Moriana’s individual claims to arbitration, but the trial court and the California Court of Appeal denied Viking’s request, citing the California Supreme Court’s holding in Iskanian v. CLS Transportation Los Angeles, LLC. The California Court of Appeal noted that it “must follow the California Supreme Court, unless the United States Supreme Court has decided the same question differently.” Therefore, Viking petitioned the United States Supreme Court to review the case, arguing that Iskanian is preempted by federal law under the Federal Arbitration Act (FAA) and the U.S. Supreme Court holdings in AT&T Mobility v. Concepcion and Epic Systems Corp. v. Lewis.  As we reported earlier, the U.S. Supreme Court issued its decision on June 15, 2022, finding that the FAA preempts California’s prohibition on the employer’s ability to implement arbitration agreements with PAGA waivers.  Here are five issues California employers need to know about the Viking decision:

1. Arbitration agreements containing class action and PAGA waivers are enforceable by California employers.

In this case, Viking River Cruises implemented an arbitration agreement that was signed by the plaintiff, Angie Moriana.  The agreement contained a “Class Action Waiver,” setting forth that the parties could not bring any class, collective, or representative PAGA actions in arbitration.  The agreement also contained a severability clause, stating that if any portion of the class action waiver was found to be invalid, that portion of the agreement would not be enforceable, but the remainder of the agreement would be “enforced in arbitration.”  As discussed below, the U.S. Supreme Court upheld the PAGA waiver found in the arbitration agreement implemented by Viking.

While arbitration agreements can be enforeable, California employers must be aware that arbitration agreements are routinely struck down by courts if they are not properly drafted. For example, a California court held in Ajamian v. CantorCO2e, that an arbitration agreement was not enforceable because it required the employee to waive statutory damages and remedies.  In addition, the agreement in that case only allowed the employer to recover its attorney’s fees if successful, not the employee.  Challenging the enforceability of arbitration agreements in California courts will likely increase give the U.S. Supreme Court’s holding in Viking.

2. The U.S. Supreme Court noted PAGA’s unique nature.

In the decision, the U.S. Supreme Court noted how PAGA departs from the normal rules “by granting the power to enforce a subset of California public law to every employee in the State.  This combination of standing to act on behalf of a sovereign and mandatory freeform joinder allows plaintiffs to unite a massive number of claims in a single-package suit.”

The Supreme Court noted that, “[a]rbitration is poorly suited to the higher stakes of massive-scale disputes” created by PAGA.  For example, arbitration does not offer “multilayered review”, and there are risks of “in terrorem” settlements (similar to class actions).

3. The U.S. Supreme Court found that PAGA conflicts with the Federal Arbitration Act given the PAGA waiver in the arbitration agreement implemented by Viking.

The U.S. Supreme Court held that PAGA’s “procedural structure” conflicts with the FAA because of PAGA’s “built-in mechanism of claim joinder.”  Because PAGA “permits ‘aggrieved employees’ to use the Labor Code violations they personally suffered as a basis to join to the action any claims that could have been raised by the State in an enforcement proceeding.”  Next, the Court explained that the California Supreme Court’s holding in Iskanian, “prohibits parties from contracting around this joinder device because it invalidates agreements to arbitrate only ‘individual PAGA claims for Labor Code violations that an employee suffered.”  Therefore, the Supreme Court held that, “This prohibition on contractual division of PAGA actions into constituent claims unduly circumscribes the freedom of parties to determine ‘the issues subject to arbitration’ and ‘the rules by which they will arbitrate,’ and does so in a way that violates the fundamental principle that ‘arbitration is a matter of consent.”  The Supreme Court concluded that “[f]or that reason, state law cannot condition the enforceability of an arbitration agreement on the availability of a procedural mechanism that would permit a party to expand the scope of the arbitration by introducing claims that the parties did not jointly agree to arbitrate.”

4. Enforceability of arbitration agreements will be challenged going forward.

Employers implementing arbitration agreements must be careful to utilize agreements that fall within Viking’s holding and comply with California law as well.  For example, as we have written about previously, California courts have routinely found that arbitration agreements contained in employee handbooks are not enforceable.  Moreover, simple technical details such as having a clear signature by the employee on the agreements, and if there is a signature line for the company to counter sign the agreement, it should be fully completed by the company.

5. This may not be the last PAGA decision – watch for developments from California courts or from the California Legislature.

Justice Sotomayor’s concurring opinion in Viking made it clear that this is not likely the last decision regarding PAGA.  Justice Sotomayor stated that “[o]f course, if this Court’s understanding of state law is wrong, California courts, in an appropriate case, will have the last word.  Alternatively, if this Court’s understanding is right, the California Legislature is free to modify the scope of statutory standing under PAGA within state and federal constitutional limits.”

Today, June 15, 2022, the U.S. Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana, holding that the FAA preempts California’s prohibition on the employer’s ability to contract with employees to bring only their individual claims in arbitration and not a representative Private Attorneys General Act (PAGA) claim.  This is a big win for California employers in their ability to limit their exposure to PAGA representative claims through use of arbitration agreements.

California’s PAGA was designed by the California Legislature offer financial incentives to private individuals to enforce state labor laws by recovering certain civil penalties.  Aggrieved employees can seek recovery of civil penalties for Labor Code violations they suffered, in addition to penalties for all Labor Code violations by the employer in a representative action, as long as the employee suffered by at least one violation. 75% of the collected penalties must be distributed to the Labor and Workforce Development Agency, and the remaining 25% is to be distributed among the employees affected by the violations, and a prevailing plaintiff is entitled to their fees and costs.  PAGA claims are representative actions, which are distinct from class actions in a number of ways, and PAGA claims can be brought by one employee but seeking penalties for all employees.

At issue in Viking was whether a California employer may enter into an arbitration agreement with an employee whereby the employee agrees to only bring his or her individual claims in an arbitration proceeding and not bring any class or representative claim under PAGA.  The decision provides employers relief from PAGA if the employer implements compliant arbitration agreements that preclude employees’ ability to file PAGA claims.  As we digest the opinion, we will publish more analysis on our blog.  Also, be sure to subscribe so that you will receive a notification on our upcoming webinar on how the Viking decision impacts California employers.