California Employment Law Update

California Supreme Court Rules Meal and Rest Break Premiums Constitute “Wages” Potentially Triggering Penalties for Violations

In a much anticipated ruling, on May 23, 2022, the California Supreme Court issued its decision in Naranjo et al. v. Spectrum Security Services, IncPreviously, the Court of Appeal held that unpaid premium payments for meal period violations did not entitle employees to additional penalties for either inaccurate wage statements or failure to timely pay wages upon separation of employment.  The Court of Appeal also held that unpaid premium wages for meal break violations accrued prejudgment interest at the rate of seven percent.

In reviewing the Court of Appeal’s decision, the following issues were before the Supreme Court:

(1) Does a failure to pay premium payments for meal and rest period violations gives rise to derivative penalties for inaccurate wage statements (Labor Code sections 226) and failure to timely pay wages upon separation of employment (Labor Code section 203)?; and

(2) What is the appropriate prejudgment interest rate for unpaid meal and rest period premium payments owed under Labor Code section 226.7?

On the first issue, the Supreme Court reversed the Court of Appeal’s decision and ruled that premium payments owed under Labor Code section 226.7 constitute “wages.”  Thus, employers must report these premium payments on employee wage statements and must timely pay employees for these premium payments upon separation of employment or risk incurring penalties under Labor Code sections 203 and 226.

The Supreme Court reasoned that “[a]lthough the extra pay is designed to compensate for the unlawful deprivation of a guaranteed break, it also compensates for the work the employee performed during the break period…The extra pay thus constitutes wages subject to the same timing and reporting rules as other forms of compensation for work.”

On the second issue, the Supreme Court agreed with the Court of Appeal and held that unpaid premium wages for meal break violations accrued prejudgment interest at the rate of seven percent.

Following this decision, in an effort to avoid Labor Code penalties, employers should double check employee wage statements to ensure meal and rest period premium payments are accounted for and ensure that final wage payments include any meal and rest period premium payments.

We will continue to monitor the Naranjo decision and provide any relevant updates.

California “Women on Boards” Law Ruled Unconstitutional, but California Will Appeal

Last Friday, the Los Angeles Superior Court in Crest et al. v. Padilla (“Crest”) held that Senate Bill 826 (“SB 826”), also known as the “Women on Boards” law, is unconstitutional.  The lawsuit challenging the law was brought by DC-based nonprofit Judicial Watch on behalf of California taxpayers.  Earlier this week, the state announced that it would appeal the decision.

SB 826, which Governor Jerry Brown signed in 2018, mandates that publicly held corporations headquartered in California (even if incorporated elsewhere) have a minimum number of female directors on their Boards of Directors, with at least three female directors if the corporation has at least six directors in total.  While violations of this law are punishable by fines of up to $300,000, the state has not fined a company under this law.

In Crest, the Court found that SB 826 violates the state constitution’s Equal Protection Clause by treating groups of people differently based on sex.  Because the California state constitution requires that laws that differentiate based on sex must survive “strict scrutiny” review, the challenged law must not only serve a compelling government interest but also be “narrowly tailored” to that interest.  This means that the state must show that there is no way to achieve its stated goals without differentiating based on suspect classifications.

The Court found the state’s justifications for the law were unpersuasive, including the state’s reliance on studies showing that more women on corporate boards improve corporate performance and boost the state economy.  The Court noted alternative steps the state could take to improve the state’s economy without discriminating based on sex, and thus SB 826 could not be narrowly tailored for that purpose.

This decision follows on the heels of a California court’s ruling striking down as unconstitutional under the Equal Protection Clause a similar law that required corporations headquartered in California to have at least one minority or LGBTQ+ director on their boards.

This decision may also impact judicial review of a Nasdaq rule, approved by the Securities and Exchange Commission, that will require companies listed on Nasdaq’s exchange to have at least one female director and at least one director “who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities” or as LGBTQ+, or explain why they do not.  The Nasdaq rule is currently facing a legal challenge in the Fifth Circuit in the form of a petition for review filed by the Alliance for Fair Board Recruitment.

We will continue to monitor the Crest decision and provide any relevant updates.

Nothing Escapes Inflation, Including California’s Minimum Wage

California’s minimum wage currently is double its federal counterpart.  And, it’s going to keep climbing.  Late last week, Gov. Newsom announced that the Golden State’s minimum wage will increase to $15.50 for all employers (regardless of size), effective January 1, 2023.  Employers have inflation to thank for this latest hike.

California currently mandates a minimum wage of $15 per hour for employers with 26 or more employees, and $14 per hour for smaller employers.  The minimum wage was set to increase to $15 per hour for all employers, regardless of size, beginning January 1, 2023—a $1 per hour increase for small employers.  Now, that number will be $15.50 per hour regardless of employer size.

How did we get here?  The answer is a 2016 statute signed into law by former Gov. Jerry Brown, Senate Bill 3 (“SB 3”).  SB 3, which amended sections 245.5, 246, and 1182.12 of the Labor Code, set forth a plan to gradually increase the statewide minimum wage to $15 per hour over the past six years.  SB 3 also included a provision requiring an automatic increase in the minimum wage of up to 3.5% to account for any increase in inflation over 7%, as determined by the Consumer Price Index.  This provision is the cause of the latest increase.

Some localities in California, including the City of Los Angeles, are mandating even greater increases.  This July, the minimum wage in Los Angeles will rise to $16.04 per hour for all covered employees.  Meanwhile, in Berkeley and San Francisco, the minimum wage will increase to $16.99, among the highest in the nation, effective July 1, 2022.

California Safety Board Updates COVID-19 Emergency Temporary Standards

California’s Occupational Safety and Health Standards Board has voted for the third time to readopt and revise the Cal/OSHA COVID-19 Emergency Temporary Standards (“ETS”), which lay out guidelines for testing, masking, and other COVID-19 prevention measures for employers to follow with respect to their employees and workspaces.  The most recent ETS took effect on May 6.  Most of the changes will have little impact on current practice but are still instructive.

The major changes from the previous iteration of the ETS are as follows:

  • Elimination of Distinction Between Employees Who Are and Are Not “Fully Vaccinated.” In perhaps the most significant change, the new ETS delete all differentiation based on vaccination status.  This flattening has a number of repercussions, including:
    • Employers must now provide respirators upon request to all employees, not just those who are unvaccinated.
    • Employers must now provide face coverings to and ensure that they are worn, when required, by all employees, not just those who are unvaccinated.
      • However, in another change, this obligation to provide and wear face coverings applies now only to exposed employees in the event of a COVID-19 outbreak or when required by order of the California Department of Public Health (“CDPH”), not at all times.
    • All employees who cannot, when required, wear face coverings or a non-restrictive alternative for medical reasons must undergo weekly testing, on paid time and at no cost to the employee, even if they are fully vaccinated.
    • COVID-19 prevention measures are now required for all employer-provided housing and transportation, even if the housing or vehicle is occupied solely by fully vaccinated employees.
      • Among these prevention measures is that employers are now required to provide training on effective use of face coverings for employees who use employer-provided housing or transportation.
    • In the event of a COVID-19 outbreak at work, employers must provide tests to all employees in the exposed group, even those who are fully vaccinated.
  • Elimination of Objects or Surfaces from Definition of Hazard. In line with an increasing body of study that COVID-19 transmission is far more likely through the air than through surfaces, the revised ETS eliminate “objects or surfaces that may be contaminated” from the definition of “COVID-19 hazard.”
    • The new guidelines also remove the requirement that employers maintain a strict cleaning and disinfecting regimen in their workplaces as well as in employer-provided housing and transportation.
    • Finally, in the event of a COVID-19 outbreak, the revised ETS no longer require employees to be boxed off by “cleanable solid partitions” in environments where six feet of social distance is not possible.
  • New Return-to-Work Guidelines. The previous iteration of the ETS laid out strict requirements for the circumstances under which “COVID-19 cases” (i.e., people who have either tested positive with, been diagnosed with, or are subject to an isolation order regarding COVID-19) and “close contacts” to COVID-19 cases were permitted to return to the workplace.  The new ETS revamp these requirements as follows:
    • COVID-19 cases who are asymptomatic or whose symptoms are “resolving” (it is unclear what this means) may return to work 5 days after their symptom onset or first positive test and 24 hours after a fever, if the employee had one, came down without medication, so long as the employee tests negative on that fifth day.
      • Employers need not require this negative test, but in that case the employee must wait 10 instead of 5 days after symptom onset or first positive test before returning.
    • COVID-19 cases whose symptoms are “not resolving” (it is unclear what this means) may return to work only if (1) symptoms begin resolving or 10 days have passed from symptom onset and (2) 24 hours have passed since a fever came down without medication.
    • All returning COVID-19 cases, regardless of symptoms, must wear a face covering for 10 days since either their symptom onset or first positive test.
    • In a bright spot, the new ETS loosen the requirements for an acceptable COVID-19 test.  Previously, a test had to be observed by either the employer or a health proctor.  Self-administered and self-read tests now are acceptable so long as the employee can provide independent verification of the results, such as a time-stamped photograph.
    • The previous ETS also had detailed requirements for when “close contacts” to a COVID-19 case were permitted to return to work.  The new ETS delete those requirements and instead direct employers merely to “review current CDPH guidance” and develop their own policies for preventing COVID-19 transmission with respect to these employees.
      • The new ETS do require that in the event of a COVID-19 outbreak in the workplace, close contacts must test negative following the contact or otherwise follow the ETS’ return-to-work criteria starting from the date of contact.
    • In the event of a “major” (20 or more cases within an exposed group) COVID-19 outbreak, testing is now required of all exposed employees.  Exposed employees who do not undergo testing must follow the ETS’ return-to-work guidelines starting from the date the outbreak began.
    • Finally, the new ETS carve out a new category of cases in “Returned Cases,” defined as a case who returns to work and remains symptom-free after their return.
      • An employee is only characterized as a Returned Case for the first 90 days after either their initial onset of symptoms or their first positive test if they were asymptomatic.
      • Employers are not required to provide testing to Returned Cases except in the event of a major outbreak.
    • Relaxed Masking Requirements. As stated above, the new ETS do not strictly require employees to wear face coverings at all times when indoors, only when ordered by CDPH and, in the event of an outbreak, among exposed employees.
      • Similarly, employees are no longer strictly required to wear masks at all times inside employer-provided vehicles—employers instead must “implement face covering polices that effectively eliminate or minimize transmission.”
      • The ETS’ definition of “face covering” has also been amended to remove the “light test”—i.e., that an acceptable face covering cannot let light pass through when held up to a light source.

Per Governor Newsom’s Executive Order N-84-20, where the ETS’ exclusion periods exceed those issued by CDPH guidance, the CDPH periods will control.  We encourage employers to familiarize themselves with this latest guidance and will be sure to monitor any updates.

Judge Reduces $137 Million Race Harassment Verdict Against Tesla to $15 Million

A federal court judge pared down last year’s jaw-dropping $137 million damages award against Tesla in a racial bias lawsuit.  As covered previously here, a San Francisco federal court jury awarded $6.9 million in emotional distress damages and $130 million in punitive damages to a Black former elevator operator who worked at Tesla’s Fremont facility for approximately one year before quitting his employment in 2016.  On April 13, 2022, the judge granted Tesla’s motion for a reduction in the amount of damages in part and denied Tesla’s motion for judgment as a matter of law that it is not liable.  The judge explained in his order: “Great deference is owed to the jury’s verdict, but after careful review of the record, I conclude that the award of compensatory damages was excessive.”

Specifically, the judge reduced the emotional distress damages to $1.5 million, the highest award supported by the evidence, as compared to the $300,000 for which Tesla advocated.  With an eye toward United States Supreme Court precedent imposing constitutional limitations on punitive damages awards, the judge reduced the punitive damages to $13.5 million—nine times the amount of compensatory damages—as opposed to the one-to-one ratio Tesla proposed.  While the judge described the jury’s award as “unconstitutionally large,” he rejected the argument that no punitive damages are warranted.  The court granted the highest possible ratio of punitive damages (9:1) under the United States Supreme Court’s guidance that it is unlikely awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process.

The former Tesla employee may not accept the reduced damages and instead request a new trial on damages – and Tesla presumably will appeal to the Ninth Circuit as well.  As we’ve noted before here, here, and here, this case well exemplifies the advantages of arbitration for employers and employees alike—arbitration offers increased speed, finality, cost-efficiency, and predictability, which are all absent in a jury trial like this one.  We will continue to monitor this case and provide any relevant updates.

Spring Showers Bring Job Killer Bills to California

Pablo Neruda once said “you can cut all the flowers but you cannot keep spring from coming.”  Likewise, California businesses’ protests against oppressive employment legislation don’t seem to stem the tide of the Legislature’s latest batch of anti-employer bills.

The California Chamber of Commerce has just identified a host of recently introduced “Job Killer” Bills pending before the California Legislature.  This year’s list includes bills that would, among other things, inflate employer data reporting requirements and further expand the scope of the Fair Employment and Housing Act (“FEHA”).  Here are a few from the list:

Data Reporting and Publication

  • AB 2095 (Kalra; D-San Jose) Employment Information & Worker Metrics.  Would require employers with 1,000 or more employees in California to annually submit wage and hour and employee benefits data regarding employers’ entire United States workforce.  The Labor and Workforce Development Agency would then publish employers’ scores and rankings based on the collected statistics.  This bill is similar to AB 1192 proposed last year by the same author, which was placed in the Assembly Inactive File at the author’s request in June 2021.
  • SB 1162 (Limón; D-Goleta) Publication of Pay Data.  Expands upon the legislation enacted two years ago requiring employers with 100 or more employees to report specific pay data annually.  SB 1162 would require the pay data reports to be published on a public website and impose civil penalties against employers who fail to report required pay data.  SB 1162 also would require covered employers to provide pay scale information to job applicants.

Expansion of the FEHA

  • AB 2182 (Wicks; D-Oakland) Expansion of Duty to Accommodate Employees for Family Responsibilities.  Would amend the FEHA to add “familial responsibilities” as a protected classification.  The bill defines “familial responsibilities” as obligations of an employee or applicant to provide care for a minor child or family member who relies on the employee or applicant for medical care or assistance with activities of daily living.  Not only does AB 2182 prohibit discrimination based on “familial responsibilities,” it also imposes an obligation on employers to provide reasonable accommodations for employees with such responsibilities, and prohibits retaliation for requests for accommodations.  A similar bill (AB 1119) introduced by the same author last year failed to advance beyond the Assembly last year.
  • AB 2188 (Quirk; D-Hayward) Cannabis Use & Employment Discrimination.  Would make it unlawful to discriminate against employees for the use of cannabis off the job and away from the workplace.  While the bill would not bar an employer from taking adverse action against an employee who is impaired while at the worksite or on duty, it would prohibit use of traditional marijuana tests, such as urine and hair testing, and compel employers to utilize saliva-based testing.  Notably, the bill would not apply to employees in building or construction, and would not preempt state and federal laws related to drug testing for controlled substances, including federal funding or federal licensing-related benefits.

Labor Relations

  • AB 2183 (Stone; D-Scotts Valley) Agricultural Labor Relations.  Would change union election procedures, in part by permitting agricultural employees to vote for union election through a representation ballot card election signed by a majority of employees who were employed at any time during the employer’s last payroll period before the filing of the petition for representation ballot card election rather than independent and secret ballots.  AB 2183 also would limit employers’ ability to challenge the ballot cards submitted by forcing employers to post a bond.

Privacy Rights

  • SB 1189 (Wieckowski; D-Fremont) New Private Right of Action for Biometric Information.  Would prohibit private entities from collecting or receiving biometric information unless they provide notice and receive consent from the individual, similar to Illinois’ Biometric Privacy Act, which has spawned an avalanche of class action lawsuits.  SB 1189 would provide a private right of action and allow for recovery of statutory or actual damages, punitive damages, attorneys’ fees and costs, and any other relief the court determines appropriate.

States of Emergency

  • SB 1044 (Durazo; D-Los Angeles) State of Emergency.  As we reported last month here, this bill would permit employees, without notice, to leave their workplace – or not show up at all – if they “feel unsafe.”  SB 1044 would prohibit employers from taking any adverse action against employees who decide to leave the premises or not arrive at work during a state of emergency or emergency condition when the employees “feel unsafe.”  SB 1044 also would prohibit employers from limiting employees’ use of mobile phones or other communication devices in such an event, if the employee wishes to communicate about their safety, seek emergency assistance, or assess the situation.

Wage and Hour Changes

  • AB 2932 (Low; D-Campbell) Workweek and Overtime Requirements.  As we reported here, AB 2932 would require that companies with 500 or more employees pay weekly overtime for work in excess of 32 hours in a workweek.

Workers’ Compensation

  • SB 213 (Cortese; D-San Jose) Workers’ Compensation Expansion of Presumption of Injury.  A carryover bill from 2021, SB 213 would create a rebuttable presumption that infectious diseases, cancer, musculoskeletal injuries, post-traumatic stress disorder, and respiratory diseases arose out of work for any hospital direct patient care worker for purpose of claiming workers’ compensation benefits.  The bill also would extend these presumptions for specified time periods after the hospital employee’s termination of employment.

We will continue to track the progress of these and any other “job killer” bills as they move through the Legislature.

Gone Surfing: Could California Be the First State to Adopt a Four-Day Workweek?

In recent years, countries such as Iceland and Belgium and some domestic companies have experimented with the concept of four-day workweeks.  Now, a new bill proposed by California Assemblymembers Cristina Garcia (D-Bell Gardens) and Evan Low (D-San Jose), Assembly Bill 2932 (“AB 2932”), proposes to make a four-day workweek the new normal in California for non-exempt employees.

Under existing law, both California’s Labor Code and its Industrial Welfare Commission Wage Orders set the threshold for weekly overtime at 40 hours per week.  In its current form, AB 2932 would redefine the standard workweek for non-exempt employees who work for employers with more than 500 employees to 32 hours.  Any work beyond 32 hours would trigger overtime.

In an attempt to mitigate the potential wage loss to employees from a reduced workweek, AB 2932 confusingly provides that “[t]he compensation rate of pay at 32 hours shall reflect the previous compensation rate of pay at 40 hours.”  It is unclear whether this would mean that employers covered by AB 2932 would be prohibited from reducing salaried non-exempt employees’ salaries based on their shorter workweeks, or whether it would require that employers actually increase the hourly rate of pay for hourly-paid non-exempt employees so that, on balance, they end up earning the same amount of pay for 32 hours as they did for 40.   Interestingly, AB 2932 does nothing to relieve overworked exempt employees.

If signed into law, AB 2932’s redefined standard non-exempt workweek could have ripple effects beyond just the increase in free time it may provide to some California workers.  Compensating hourly employees for overtime at the lower threshold could be exceedingly expensive, especially given California’s high state and local minimum wage rates.  Further, the limited workweek could negatively impact client service, heighten employees’ stress to complete the same amount of work in fewer weekly working hours, and negatively impact employees’ sick leave and other paid time off accrual.

It is still unclear whether AB 2932 has any chance of being passed.  However, if enacted, the law would mark the first change to the definition of the standard 40-hour workweek in the United States since 1926.  The Legislature has until August 31st to pass measures, and Governor Newsom has until September 30th to sign or veto bills.  We will continue to monitor and report on developments.

Court Declares California Law Requiring Diverse Corporate Boards Unconstitutional

As discussed in our previous blog, on April 1, 2022, Los Angeles Superior Court Judge, Terry Green, granted summary judgment in favor of individuals represented by D.C.-based nonprofit Judicial Watch, declaring Assembly Bill 979 (“AB 979”) to be unconstitutional and granting an “injunction preventing the expenditure of taxpayer funds on the implementation of the measure.”

AB 979 required publicly held corporations with a principal executive office in California to have at least one member from an “underrepresented community” on their board of directors by December 31, 2021.  A director from an underrepresented community included “an individual who self-identifie[d] as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifie[d] as gay, lesbian, bisexual, or transgender.  Companies in violation of AB 979 faced fines of $100,000 for first violations and $300,000 for repeated violations.

In its lawsuit challenging the law, Judicial Watch claimed AB 979 violated the Equal Protection Clause of the California Constitution by using taxpayer funds to enforce a quota based on race, ethnicity, sexual preference, and transgender status.  California disagreed, arguing that AB 979 was necessary to reverse a culture of discrimination, and pointing out that no companies had been fined and no tax dollars had been used to enforce the measure.

Judge Green has since issued an order agreeing with Judicial Watch that AB 979 violates the Equal Protection Clause of the California Constitution on its face because:

  1. AB 979 “treats similarly-situated individuals – qualified potential corporate board members – differently based on their membership (or lack thereof) in certain listed racial, sexual orientation, and gender identity groups. It requires that a certain specific number of board seats be reserved for members of the groups on the list – and necessarily excludes members of other groups from those seats.”
  2. The use of suspect categories is not justified by any compelling interest. “The broader public benefits produced by well-run businesses do not fit that bill. On the other hand, while remediation of discrimination can be a compelling interest, the state must define a specific arena in which the discrimination has occurred…[c]orporate boards are not such an arena… The Legislature did not even attempt to limit its investigation or its findings to California corporations, though jurisdictional restrictions ensured that only California corporations would be covered by the law.  And even supposing that corporate boards were a sufficiently specific arena, neither the Legislature nor the Secretary [of State] has produced the combination of (a) valid statistical comparisons and (b) anecdotal testimony which could serve as “convincing evidence” of discrimination in that arena.”
  3. The statute is not narrowly tailored to serve the compelling interests offered. “The Legislature made no attempt to conduct a demographic survey of the qualified talent pool of potential board members…[and]…made no attempt to obtain disclosure from California corporations regarding the current demographics of their boards….The Legislature and the Secretary [of State] blame a “secretive, insular” selection process for the problem with current board compositions. Yet there has been no attempt to improve that process, nor has any good explanation been offered for that lack of effort.”

This decision may impact another lawsuit Judicial Watch filed against the State challenging a 2018 law (Senate Bill 826) requiring a minimum of one female director on corporate boards. This decision may also impact the Securities and Exchange Commission approval of a rule proposed by Nasdaq, set to go in effect this year, that will require companies listed on its exchange to have “at least one director who self-identifies as a female,” and to have “at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+,” or explain why they do not.

The current California Secretary of State, Dr. Shirley Weber, has yet to comment on whether or not she will appeal this decision.  Nevertheless, proponents of AB 979 are hopeful that the law has already created expectations of increased diversity on corporate boards moving forward.

We will continue to monitor this decision and provide any relevant updates.

Real WFH Stories: Employer Not Responsible for Ensuring Safety of Employees’ Homes, Appeals Court Holds

California law requires employers to furnish a “safe and healthful” workplace to employees. Now that the line between “workplace” and “home” has been blurred for so many workers in the wake of the COVID-19 pandemic, the law has been unclear as to whether that obligation extends to an employee whose “workplace” happens to be their residence. In Colonial Van & Storage, Inc. v. Superior Court, a California appeals court answered at least one iteration of that question: An employer’s duty to ensure workplace safety does not extend to ensuring that an “off-site meeting place,” including an employee’s home, is safe from “third party criminal harm.”

The facts of the case are tragic and unusual—an employee of the defendant, Colonial Van & Storage, who occasionally worked from home invited her coworkers over for dinner. The employee’s son, who lived with her and was a veteran suffering from post-traumatic stress disorder, used a handgun stored in the house to attack the party, wounding each attendee and killing one.

The appeals court found that Colonial could not be held liable for the coworkers’ injuries. Because Colonial did not “control” the employee’s home, either legally or through acts showing ownership, Colonial had no duty to ensure that it was safe. The fact that Colonial derived some commercial benefit from the home—in that the employee performed some work there—was not enough to create that duty.

The court also noted that accepting respondents’ arguments would have sweeping consequences for the employer-employee relationship. Holding “every employer . . . absolutely liable for any injury suffered at home by working-at-home employees” would not only be extremely onerous for employers—who would have to expend significant effort and money to secure and insure every employee’s home—but also for employees, who would essentially cede any right to privacy in their own home to their employer’s legal obligation to inspect, modify, and surveil their private residences.

An employer could avoid these costs by simply not allowing any employees to work from home, but the court did not find this a fair or realistic option, considering how many employees need to work from home for personal reasons (such as caring for a child or an elder relative) as well as legal obligations (such as abiding by a mandatory quarantine order).

Supreme Court Hears Oral Argument in Advance of Major Ruling on the Arbitrability of PAGA Claims

Last week, the United States Supreme Court heard oral argument in Viking River Cruises, Inc. v. Moriana, Case No. 20-1573,_ U.S. _ (2022). The case addresses whether the Federal Arbitration Act (“FAA”) requires the enforcement of bilateral arbitration agreements that preclude an employee from bringing claims under the Private Attorneys General Act (“PAGA”) on a representative basis. The plaintiff, Moriana, sued Viking, alleging a number of claims, including failure to pay wages. The parties’ arbitration agreement precludes class and collective claims but Moriana proceeded under PAGA, which allows workers to sue their employers on the State’s behalf for alleged violations of California labor law. In 2014, the California Supreme Court held that because PAGA actions are brought on behalf of the state, employees cannot individually waive their right to bring these claims. Often, this means limited and even minor Labor Code violations become grounds for costly litigation that encompasses all of an employer’s non-exempt California workforce.

At oral argument, the questions focused on state sovereignty, preemption, the compatibility of large PAGA-like claims in the intentionally streamlined context of arbitration, claim preclusion, and whether PAGA provides substantive versus merely procedural rights. Justices Kagan and Sotomayor focused their questioning on areas that would keep PAGA claims in court. For example, Justice Sotomayor questioned the notion that PAGA is an “intentional evasion” of the holdings in prior Supreme Court cases that approved class action waivers in the consumer and employment contexts. Justice Kagan challenged whether it is appropriate to override a state’s decision to enforce its labor laws when “that’s the way the state has decided best serves its sovereign interests.”

Some of the more conservative Justices’ questions, on the other hand, appeared focused on reconciling PAGA with the Court’s prior pro-arbitration rulings. For example, Justice Barrett questioned whether California could create other legislative bypasses to the FAA by characterizing rights as substantive, as opposed to procedural. Similarly, Justice Alito questioned whether it would be appropriate to view a PAGA claim as “a set of claims integrated into a single action by an implicit rule of claim joinder,” drawing a comparison to class claims.

Viking River Cruises’ counsel repeatedly emphasized the important point that an arbitrator easily could deal with an individual’s claims for lost wages, but when the issue becomes resolving several different violations on behalf of the entire salesforce and employer-wide discovery, then arbitration as an efficient dispute resolution mechanism would be gutted in practice. He noted, as California employers are well aware, that dozens of PAGA claims are being filed each day and they look just like class actions (e.g., the ones the parties agreed would be brought on an individual basis in arbitration).

The Supreme Court likely will issue an opinion in Viking River Cruises in June or July of this year. We will provide any updates as soon as they become available.


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