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July 2023

California Supreme Court Rules that PAGA Representative Claims Can Be Litigated Despite Binding Arbitration Agreement

Earlier this week, the California Supreme Court issued a unanimous decision in the long-awaited Adolph v. Uber Technologies case. An employee who has been compelled to arbitration still has standing to file a representative lawsuit on behalf of other aggrieved employees under California’s Private Attorneys General Act (“PAGA”) in court. This decision will have an immediate impact on employers with California workers.

PAGA is a California state law that allows employees to sue businesses on behalf of themselves, other employees, and the state itself when they believe there has been a violation of the California Labor Code. The ruling at least provides a clearer process for employers, who can still pursue compelling arbitration for an employee’s individual claims, and can request a stay of the PAGA representative claims in court pending the outcome of arbitration. However, this ruling, and the continued challenges that employers face with PAGA, could lead to a 2024 ballot measure currently proposed, the “California Fair Pay and Employer Accountability Act of 2024” seeking to dismantle PAGA entirely and replace it with increased administrative agency enforcement.

Factual Background of Adolph v. Uber Technologies

In October 2019, UberEATS delivery driver Erik Adolph filed a class action complaint, alleging that Uber misclassified a number of its drivers as independent contractors, and failed to reimburse them for necessary business expenses as a result. (See Adolph v. Uber Technologies, Inc. (2023) 2023 WL 4553702, 2 [official citation forthcoming].) Plaintiff Adolph later amended his complaint to add a cause of action for civil penalties under PAGA for drivers allegedly being misclassified as independent contractors. [HD1] Adolph agreed to an arbitration provision requiring Adolph to arbitrate on an individual basis almost all work-related claims, when he created his Uber account and accepted Uber’s technology services agreement. Adolph’s agreement with Uber contained an express waiver of PAGA representative claims. The agreement also included a severability clause, that if the PAGA waiver was found unenforceable, the unenforceable provision would be severed, and any representative actions brought under PAGA would be litigated in court.

In order to enforce the arbitration agreement, Uber filed a motion to compel arbitration, which the trial court granted in July 2020, dismissing Adolph’s individual Labor Code claims and class claims in court, but retaining his PAGA claim for civil penalties in court. Adolph requested, and the trial court granted, Adolph’s request for a preliminary injunction to prevent the arbitration from proceeding. Uber had requested that Adolph’s PAGA claim be stayed pending arbitration of the issue of whether he qualified as an “aggrieved employee” entitled to assert a PAGA claim in the first place. Preventing the arbitration from proceeding meant that Uber would not have a determination from an arbitrator whether or not Adolph suffered a Labor Code violation to attempt to preclude his standing as an “aggrieved employee” which is required to pursue a PAGA action. Uber filed a second motion to compel arbitration to determine Adolph’s contractor status. The trial court denied the second motion to compel arbitration. Uber appealed the injunction and denial of the second motion to compel arbitration, and both appeals were consolidated. The California Court of Appeal affirmed the trial court’s rulings on the injunction and denial of the second motion to compel arbitration.

In May 2022, Uber petitioned for review review to the California Supreme Court. Shortly thereafter, the United States Supreme Court had decided Viking River. (Viking River Cruises, Inc. v. Moriana (2022) 142 S.Ct. 1906.) Viking River held that the Federal Arbitration Act preempts the California Supreme Court’s decision in Iskanian, insofar as it precludes the division of PAGA actions into individual and non-individual components, which conflicted with the Federal Arbitration Act. However, Iskanian bars a pre-dispute waiver of the right to bring a PAGA action, and the California Supreme Court in Adolph held that Viking River left this aspect of the ruling undisturbed.

Adolph Held that PAGA Representative Claims Remain in Court

On July 17, 2023, the California Supreme Court unanimously held that representative PAGA claims remain in court, even when individual claims are compelled to arbitration. (Id. at p. 8.) “An order compelling arbitration of the individual claims does not strip the plaintiff of standing as an aggrieved employee to litigate claims on behalf of other employees under PAGA.” (Id. at p. 1.)

Adolph was a highly anticipated decision that California labor and employment attorneys have monitored since even before the Seifu v. Lyft decision, where the California Court of Appeal also held that a plaintiff is not stripped of standing to pursue representative PAGA claims simply because their individual PAGA claims are compelled to arbitration. (See Seifu v. Lyft (2023) 89 Cal.App.5th 1129, 1133.) In anticipation of the then-pending Adolph decision, industry experts described Seifu as an interim ruling. By echoing Seifu, the Adolph holding marks a clear departure from U.S. Supreme Court precedent from 2022, which held in Viking River that employees compelled to arbitrate individual PAGA claims lose statutory standing to pursue representative PAGA actions in court. (Viking River Cruises, Inc. v. Moriana (2022) 142 S.Ct. 1906.)

For the past year since the U.S. Supreme Court decided Viking River, many California employers have successfully compelled arbitration of individual PAGA claims, with a stay of the remaining non-individual PAGA claims brought on behalf of other aggrieved employees.

Uber and other employers had hoped Viking River would prove to be final, thereby dictating that all representative PAGA claims such as Adolph’s be arbitrated regarding individual claims only, rather than litigated as a representative action in court. However, as the Court of Appeal stated in Seifu, it is not bound by the U.S. Supreme Court’s decision from Viking River, since PAGA standing is a matter of state law for state courts to decide. (Seifusupra, at p. 1134.) The California Supreme Court further backed its diversion from U.S. Supreme Court precedent by pointing out that Viking River did not preclude prior U.S. Supreme Court precedent that the highest court of each State is the final arbiter of state law. (Adolph, supra, at p. 5.)

What This Means for Employers

Now, a plaintiff-employee’s standing only requires the following: “only the fact of a [Labor Code] violation is required to confer standing” under PAGA, including standing to bring a representative claim even after the plaintiff-employee successfully resolved their individual claims in arbitration and has no unredressed injury. While arbitration of the individual claims proceeds, the court may stay the non-individual PAGA claim because the Adolph court held that an arbitrator’s determination that an employee is not an aggrieved employee is a final judgment binding on the court, and the employee would no longer have standing.

After Adolph, employers have lost a valuable tool in their toolkit. So, how can you protect your business in the face of a changing legal landscape? Step one is to be aware of the immediate impacts of the Adolph decision: (1) only individual PAGA claims can be compelled to arbitration; (2) individual and non-individual PAGA claims are not severable, so the court may enter a mandatory stay of non-individual PAGA claims during the pendency of the arbitration; and (3) even after a successful arbitration of their individual claims, the plaintiff-employee still has standing to pursue non-individual PAGA claims in court on behalf of other aggrieved employees.

Adolph will have an immediate impact on employers across the state of California, and is expected that courts that have stayed PAGA representative actions pending the Adolph ruling are likely to lift the stay on that basis upon request or on their own, and will hold that the PAGA representative claims may proceed in court. The courts will have discretion as to whether they will stay the non-individual PAGA claims pending the outcome of the individual PAGA claim in arbitration. However, if an arbitrator concludes that the individual did not suffer a Labor Code violation in arbitration, the employer can use this finding to attempt to preclude a non-individual PAGA action in court.

Employers should consider whether arbitration agreements are in their best interest. If such agreements are already in place, employers should review their arbitration agreements to ensure they comport with the current legal authority. Finally, it is important to evaluate if you have a pending case in both arbitration and court or wish to pursue a motion to compel arbitration, whether it is prudent to arbitrate the individual claims through bifurcated proceedings.

We anticipate the lower courts will follow suit and lift stays on PAGA representative claims. We will continue to monitor the impact of Adolph, and we will provide further updates as developments occur.

Should you have any questions about this decision or any other legal developments, please contact the authors or contact the Gordon & Rees Employment Team for more information. The team gives special acknowledgment to law clerk Morgan Sellers for his contribution to this update.

 [HD1] He had the ability to opt out.

Employment Law

Heather T. Daiza
Amanda H. Herron
Tom T. Nagashima
Brandon D. Saxon

Employment Law