In a highly-anticipated decision, the U.S. Supreme Court issued its opinion in Viking River Cruises, Inc. v. Moriana (Case No. 20-1573) on June 15, 2022. The Court examined whether the Federal Arbitration Act (FAA) preempted California court precedent, which invalidated contractual waivers of representative claims under California’s Private Attorneys General Act of 2004 (PAGA).

Under PAGA, an employee may sue their current or former employer as a representative of the California Labor and Workforce Development Agency (“LWDA”). In such an action the employee can seek penalties for alleged violations of the Labor Code suffered by the employee themselves and other allegedly “aggrieved employees” if the employee was subjected to one or more violations of the California Labor Code.

Previously, the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), held that an arbitration agreement requiring an employee to give up their right to bring a representative PAGA action was contrary to public policy and unenforceable. It also held that the FAA did not preempt the California rule that prohibited waiver of PAGA representative actions in an employment contract or arbitration agreement.

In the 8-1 decision, the U.S. Supreme Court held that although the FAA does not necessarily preempt California’s prohibition on “wholesale waivers” of PAGA claims, the California rule that PAGA actions cannot be divided into “individual” and “non-individual claims” is preempted. 

Angie Moriana, the plaintiff in the underlying action, was a former employee of Viking River Cruises, Inc. (“Viking”). Moriana brought a PAGA claim against Viking on behalf of the LWDA seeking penalties for Labor Code violations allegedly suffered by herself and other current and former employees. Viking moved to compel arbitration of Moriana’s individual claims and to dismiss her PAGA claims on the basis that Moriana had entered into an arbitration agreement that contained a representative action waiver. The California Courts denied that motion, holding that categorical waivers of PAGA standing are contrary to California policy and that PAGA claims cannot be split into arbitrable “individual” claims and nonarbitrable “representative” claims. The U.S. Supreme Court reversed, finding that the FAA preempts California’s rule prohibiting the division of PAGA actions into a representative claim on behalf of the LWDA seeking only “individual” penalties for the named plaintiff and a representative claim on behalf of the LWDA seeking “representative” relief for the named plaintiff and other allegedly aggrieved employees’ claims.

As a practical matter, this means that employers may now compel employees to arbitration on their individual PAGA claims if there’s a valid arbitration agreement that contains an enforceable representative action waiver. Then, once a PAGA plaintiff’s representative claim for individual penalties is sent to arbitration, that plaintiff no longer has standing to pursue representative claims in court or arbitration on behalf of other aggrieved employees.

It remains to be seen how this outcome will be interpreted by California courts, and as Justice Sotomayor’s concurrence notes, the California legislature may amend the current PAGA statute in an attempt to override this decision. In the meantime, the decision allows employers to potentially avoid representative PAGA actions on behalf of other allegedly aggrieved employees by compelling the representative claim for plaintiff’s individual penalties to arbitration. Employers with employees in California should review their arbitration agreements to ensure the appropriate language is included. The attorneys in Reed Smith’s Labor & Employment Group will continue monitoring this issue and will provide updates as necessary.