California Supreme Court Finally Recognizes Class and Collective Arbitration Waivers

An interesting case decided by the California Supreme Court overturned the court’s prior holding that class and collective arbitration waivers violate public policy and also recognized that the issue is preempted by the Federal Arbitration Act (FAA).  In Iskanian v. CLS Transportation, a worker sought to file a class action lawsuit against his employer over a number of wage and hour claims despite that he signed an arbitral agreement waiving his right to class proceedings when he was hired.  The man also filed a Labor Code Private Attorneys General Act of 2004 (PAGA) action seeking to collect civil penalties from his employer on behalf of the State of California.

In the case, the California Supreme Court held that its 2007 ruling in Gentry v. Superior Court was invalidated by the United States Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion.  The court also sided with a recent decision from the Fifth Circuit Court of Appeals and rejected the National Labor Relations Board’s holding in D.R. Horton.  That decision states the National Labor Relations Act prohibits contracts that require workers to waive their right to resolve wage claims through collective action proceedings.

Although a majority of the California court recognized FAA preemption with regard to class arbitration waivers, the court held that the man’s PAGA action was not preempted.  According to the California Supreme Court, allowing an employment arbitration agreement to preclude such a claim would be contrary to public policy.  Additionally, the court stated,

…we conclude that the FAA‘s goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state‘s behalf. Therefore, the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment contract.”

Despite that the class action waiver included in the parties’ agreement to arbitrate was valid, the Supreme Court of California remanded the case for further consideration of the PAGA issue.