On April 8, 2020, California’s Second District Court of Appeal held that an employee who brings a lawsuit for civil penalties only under the Private Attorneys General Act of 2004 (PAGA), but does not request individual damages to recover his or her own wages, cannot be compelled to arbitrate the PAGA claim, even if the employee signed an employment contract requiring all disputes and controversies arising out of his employment to be arbitrated.
In Brooks v. AmeriHome Mortgage Company, LLC (“AmeriHome”), plaintiff Anthony Brooks had signed an employment contract that included an arbitration clause which required “any dispute or controversy arising out of or relating to this Agreement or your employment” to be “settled exclusively by arbitration….” Brooks filed a lawsuit alleging his employer AmeriHome failed to provide meal and rest breaks, failed to pay full wages, failed to provide accurate wage statements, failed to maintain payroll records, and failed to reimburse him for business related expenses, in violation of the Labor Code. Plaintiff’s lawsuit sought only civil penalties, costs and attorneys’ fees and other appropriate relief under PAGA, but it did not seek recovery of unpaid wages for himself or any other employee.
The court of appeal noted that PAGA is fundamentally an action designed to “protect the public, not to benefit a private party,” and that an employee cannot be compelled to submit any portion of a “representative” PAGA claim to arbitration, including whether the plaintiff was in fact injured by the allegations, if the lawsuit does not allege an individual claim for wage recovery. Under PAGA, 75% of the civil penalties recovered are paid to the California Labor Workforce Development Agency, and all aggrieved employees share in the remaining 25 percent of the recovered penalties.
The lawsuit appears to be a tactical response to the legal challenges involving Assembly Bill 51 (“AB 51”), which Governor Newsom signed into law on October 10, 2010. AB 51, which was scheduled to go into effect on January 1, 2020, forbids employees and employers from agreeing to arbitrate a broad range of labor and employment discrimination claims as a condition of employment—and makes it a crime for businesses to do so. (See Cal. Labor Code § 432.6(a), (c) (added by Stats. 2019, ch. 711, § 3) (employer may not require employees or applicants “to waive any right, forum, or procedure” of the California Fair Housing and Employment Act (“FEHA”) or California Labor Code as a “condition of employment” even if individual can “opt out”); Cal. Gov’t Code § 12953 (added by Stats. 2019, ch. 711, § 3) (violation of Labor Code § 432.6 also violates FEHA).)
A business coalition led by the U.S. Chamber of Commerce and the National Retail Federation filed a lawsuit on December 6, 2019, challenging AB 51 on the grounds that it is unconstitutional and in conflict with the Federal Arbitration Act (“FAA”), a federal statute which lets employers and workers enter into arbitration agreements to resolve disputes outside of court and shields against state laws that disfavor forming or enforcing agreements. (See Chamber of Commerce of the United States of America, et al. v. Becerra, et al., Case No. 2:19-at-01142, in the U.S. District Court for the Eastern District of California.) On December 29, 2019, U.S. District Judge Kimberly J. Mueller granted a temporary restraining order under Federal Rule of Civil Procedure 65 and Civil Local Rule 231, preventing the AB 51 from taking effect on January 1, 2020. On February 7, 2020, Judge Mueller granted a preliminary injunction enjoining the state from enforcing AB 51, holding that the business coalition plaintiffs were likely to succeed on the merits for two reasons: (1) AB 51 violates § 2 of the FAA because it treats arbitration agreements differently from other contracts, and (2) AB 51 conflicts with the purposes and objectives of the FAA. The Court found that this causes AB 51 to run afoul of the FAA, and the liberal federal policy favoring arbitration agreements. The Court further determined that AB 51 places employment arbitration agreements on an “unequal footing” rendering AB 51 preempted by the FAA. Accordingly, the Court issued a preliminary injunction, enjoining enforcement of AB 51, pending final resolution of the Plaintiff’s challenge to AB 51.
This means the State of California cannot enforce AB 51’s anti-arbitration provisions for the time being. This ruling suggests that the Court will ultimately issue a permanent injunction invalidating AB 51 on preemption grounds. This case will likely be appealed to the Ninth Circuit and maybe even to the Supreme Court.
PAGA Takeaway
Unfortunately for employers, an injunction does not invalidate Brooks v. AmeriHome Mortgage Company, LLC, which is premised on a pure PAGA lawsuit where employees seek only civil penalties as an enforcement measure for the state of California, and not recovery of personal unpaid wages. Before Brooks v. AmeriHome Mortgage Company, LLC, employees typically filed individual wage claims seeking individual damages for unpaid wages for violations such as missed rest and meal breaks, unpaid overtime (e.g., working “off the clock”), etc., in addition to a representative action under PAGA. Employers who required individual arbitration agreements have been successful in staying the PAGA claim while forcing the individual to arbitrate his or her wage claims seeking personal damages before a neutral arbitrator outside of the court system. The employers’ strategy has successfully caused many PAGA claims to settle. Brooks v. AmeriHome Mortgage Company, LLC, however, may signal a strategic change to avoid individual damage lawsuits in favor of a pure PAGA lawsuit, in order to avoid arbitration.
Questions
If you have any questions regarding this Legal Alert, please contact the following attorneys from our office, or the attorney with whom you typically consult.
Bruce Scheidt
bscheidt@kmtg.com | 916.321.4502