The California Court of Appeals decision in Lewis v. Simplified Labor Staffing Solutions, Inc. is a good example of the enforceability of arbitration agreements that contain class and Private Attorneys General Act waivers.  As explained below, there are still arguments being addressed by California courts regarding whether arbitration agreements with Private Attorneys General Act (PAGA) waivers are enforceable.  Employers are well advised to review their use of arbitration agreements as we enter 2023.  Here are five items California employers should understand about the Lewis decision and the continuing changing PAGA landscape into 2023:

1. Background on California’s Private Attorneys General Act (“PAGA”).

PAGA was enacted to authorize aggrieved employees to file lawsuits against employers on behalf of themselves, other employees, and the State of California for Labor Code violations.  PAGA allows aggrieved employees to act as a “Private Attorney General” to seek remedies against their employer not only for the violations committed against them, but also to recover any violations committed by their employer against other employees.

California’s PAGA was designed by the California Legislature offer financial incentives to private individuals to enforce state labor laws to recover certain civil penalties. As set forth below, the issue regarding whether employers can implement arbitration agreements with PAGA representative waivers is an issue that was addressed by the U.S. Supreme Court in June 2022 and will be addressed again by the California Supreme Court in 2023.

2. Background in Lewis v. Simplified Labor Staffing Solutions.

Lewis was hired by Simplified Labor Staffing Solutions, Inc. (“Simplified”) a multi-state temporary staffing services company in September 2019. On or about her hire date, Lewis signed an arbitration agreement that requires arbitration of all claims that arise out of employment relationship with Simplified.

In 2020, Lewis commenced a lawsuit against Simplified and brought her claims pursuant to Private Attorney General Act (“PAGA”), alleging a number of Labor Code violations, including failures to pay wages, provide meal and rest periods, maintain accurate payroll records, and reimburse business expenses. Simplified moved to compel arbitration in which the trial court denied, on the grounds that pre-dispute agreements to arbitrate PAGA claims are not enforceable. Subsequently, Simplified appealed the trial court’s decision which was reversed by the Court of Appeal.

3. The trial court’s ruling in Lewis was overturned based on Viking River.

In Lewis v. Simplified, the trial court initially refused to grant Simplified’s motion to compel arbitration based on the notion that the absence of state consent renders a pre-dispute arbitration agreement unenforceable. This decision was based on the California Supreme Court’s holding in Iskanian v. CLS Transportation Los Angeles, LLC. The trial court reasoned that because the State of California is the real plaintiff in interest in a PAGA action, it is the consent of the State, and not of the named employee plaintiff, that is required to compel arbitration. While the appeal was pending, the U.S. Supreme Court issued its decision in Viking River Cruises, Inc. v. Moriana, prompting the Court of Appeal to reverse the order denying Simplified’s motion to compel arbitration.

As the appellate court in Lewis explained:

This status requires enforcement of an employee’s predispute agreement to arbitrate PAGA claims. Congress’s “`preeminent concern . . . in passing [the FAA] was to enforce private agreements into which parties had entered.'” (Perry v. Thomas (1987) 482 U.S. 483, 490.) As a result, such agreements must be “`rigorously enforced.'” (Ibid.) Where, as here, an employee agrees to arbitrate future disputes with her employer and she later brings such a dispute as a PAGA action, courts must hold her to her choice of forum for the resolution of her dispute.

More information about the Viking River decision can be read here.

4. California Supreme Court to decide key PAGA case in 2023.

In Viking River, the U.S. Supreme Court held that the FAA preempts California’s prohibition on the employer’s ability to implement arbitration agreements with PAGA waivers.  However, Justice Sotomayor’s concurring opinion in Viking made it clear that this is not likely the last decision regarding PAGA waivers.  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.”

The California Supreme Court was quick to act based on the Viking decision, and in August 2022, granted review of Adolph v. Uber Technologies, Inc., and will decide the following issue:

Whether an aggrieved employee who has been compelled to arbitrate claims under the Private Attorneys General Act (PAGA) that are “premised on Labor Code violations actually sustained by” the aggrieved employee (Viking River Cruises, Inc. v. Moriana (2022) 596 U.S. __, __ [142 S.Ct. 1906, 1916] (Viking River Cruises); see Lab. Code, §§ 2698, 2699, subd. (a)) maintains statutory standing to pursue  PAGA claims arising out of events involving other employees” (Viking River Cruises, at p. __ [142 S.Ct. at p. 1916]) in court or in any other forum the parties agree is suitable.

It is likely that the California Supreme Court will issue a decision in Adolph in 2023.  Therefore, employers will need to continue to monitor this case for developments.

5. Issues regarding the implementation and storage of arbitration agreements going forward.

While arbitration agreements can be enforceable, California employers must be aware that arbitration agreements are routinely struck down by courts if they are not properly drafted and the parameters of whether employees can waive their ability to bring representative PAGA actions will likely be addressed once again in the Adolph case.

Challenging the enforceability of arbitration agreements in California courts will likely increase give the U.S. Supreme Court’s holding in Viking. As such, it is imperative for California employers to at least consider the following when implementing arbitration agreements:

  1. Avoid placing arbitration agreements into employee handbooks.
  2. Set forth arbitration agreements in standalone documents with signature lines for the employee and the employer.
  3. Ensure that the employee and a representative from the employer sign the document.
  4. Electronic signatures are acceptable, but employers must review how the electronic signature is recorded and ensure this could be documented in a manner that will be upheld in court when enforcing the arbitration agreement.
  5. If the arbitration agreement is voluntary, implement a system to track who has signed and not signed the agreement.
  6. Implement a system to securely store signed arbitration agreements. This can be a manual or electronic system, but it needs to be audited routinely to ensure that the agreements are store in a usable format, are backed up, and the appropriate people have access to these saved documents.