A California Court of Appeal recently held that claims for unpaid wages under Labor Code section 558 may be compelled to arbitration even when brought under the auspices of the Private Attorneys’ General Act (PAGA). PAGA allows employees to bring representative actions on behalf of the state against employers for violations of the Labor Code. Among other things, PAGA allows for the recovery of “civil penalties,” a term of art, in which 75% of the recovery goes to the state, with the remainder going to the employees.
In Esparza v. KS Industries, L.P., No F072597 (Cal Ct. App. 5th Dist., Aug 2, 2017), the plaintiff employee brought a PAGA claim against the employer, in which he alleged 16 violations of the Labor Code, including unpaid wages under section 558. The employment agreement contained an arbitration clause, and, pursuant to that clause, the employer tried to compel arbitration, which the trial court denied based on a California Supreme Court case from a few years prior, Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348.
In Iskanian, the court held that PAGA representative claims for civil penalties are not subject to arbitration under the Federal Arbitration Act because the FAA covers disputes between private parties, while under PAGA the dispute is really between the employer and the State. This theoretically allows employees to pack all their claims for Labor Code violations under the PAGA umbrella in an attempt to avoid arbitration.
In this case, KS argued that only PAGA claims that seek the “civil penalties,” i.e., those in which the state receives part of the recovery, are excepted from arbitration, while any claims that provide “individualized relief” must be arbitrated under the Federal Arbitration Act. The court agreed. Labor Code section 558 allows the employee to recover unpaid wages, but does not award any recovery to the state. As such, the employee’s “attempt to recover unpaid wages under Labor Code section 558 is, for purposes of the Federal Arbitration Act, a private dispute arising out of his employment contract with KS.”
“In sum, Employee’s claims for unpaid wages are subject to arbitration pursuant to the terms of the parties’ arbitration agreement and the Federal Arbitration Act. The rule of nonarbitrability adopted in Iskanian is limited to representative claims for civil penalties in which the state has a direct financial interest.” (Emphasis added.) In other words, the underlying claims for unpaid wages in the PAGA action are not recoverable, but must be arbitrated.
The court remanded to allow the employee to decide if he wanted to maintain the claim for unpaid wages, which would now be subject to arbitration, or to waive that claim and proceed with the “civil penalty” PAGA claims, which are not subject to arbitration. If the plaintiff moves forward with the PAGA claim, the employees would be limited to a miniscule 25% recovery of the PAGA civil penalties while plaintiff’s attorneys could still get fees and costs awarded.
Thoughts for Employers
This is a favorable decision for employers because it prevents employees from circumventing their arbitration agreements with respect to claims for unpaid wages. Now, if an employee brings a claim for unpaid wages under PAGA, that claim for “individualized relief” is clearly subject to arbitration. Ultimately, Esparza provides some clarity in the context of PAGA and individual arbitration clauses, and it reinforces the importance of employers utilizing arbitration agreements in their employment contracts.
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