Employers Strive To Close The PAGA Representative Action Escape Hatch From FAA Preemption And Arbitration.
Ever since the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014) that Private Attorneys General Act of 2004 (PAGA) representative actions are not subject to arbitration, employers preferring arbitration have struggled to chip away at that holding. In Esparza v. KS Industries, LP, F072597 (5th Dist. 8/2/17) (Franson, Poochigian, Smith) (published), the employer, with the help of the Court, of course, does some chipping.
Woodchipper. Wikipedia.
Federal preemption requires arbitration agreements be strictly enforced whenever the Federal Arbitration Act applies. Because the FAA applies to controversies arising out of contracts evidencing a transaction involving interstate commerce, preemption is frequently the rule, requiring arbitration. But even where the FAA requires enforcing an arbitration agreement, PAGA representative actions are recognized to be an exception. The rationale is that PAGA representative actions are a type of qui tam action in which the employee acts on behalf of the government, the real party in interest, and the FAA did not intend to compel the state, which is not a party to the arbitration agreement, to arbitrate. Indeed, 75% of the civil penalty in a successful PAGA representative action goes to the state.
The Court of Appeal agreed with the employer in Esparza that section 558 actions to recover unpaid wages are not representative actions that result in civil penalties. Instead, the Court explains that section 558 actions are private actions brought to recover wages that benefit the plaintiff, rather than the state. Therefore, because the section 558 action is not at bottom a dispute between the employer and California, the dispute can be arbitrated. The dispute is a private dispute, the FAA applies, and the parties must arbitrate.
The Court of Appeal affirmed the order denying the employer's motion to compel arbitration insofar as it denied arbitration of PAGA representative claims seeking civil penalties paid to the Labor and Workforce Development Agency. However, the trial court was directed to determine whether the plaintiff intended to pursue other claims seeking individual damages other than PAGA representative actions seeking civil penalties, as the other claims could be arbitrated.
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