On July 17, 2023, the California Supreme Court issued its much-anticipated ruling in Adolph v. Uber Technologies, Inc. The decision follows the U.S. Supreme Court’s (SCOTUS) ruling in Viking River Cruises, Inc. v. Moriana last summer, where SCOTUS held that the Federal Arbitration Act preempted a California law that denied enforcement of an arbitration agreement against an employee and held that an employee’s individual labor code violation claims and representative claims under the Private Attorneys General Act of 2004 (PAGA) could not be divided and had to proceed in court. SCOTUS held that California must enforce the arbitration agreements of individual employees and that such employees lose standing to assert their representative PAGA claims. However, in a concurring opinion, Justice Sotomayor opined that the issue of representative standing under PAGA was for the California courts to decide.
The issue before the California Supreme Court in Adolph was “whether an aggrieved employee who has been compelled to arbitrate claims under PAGA that are ‘premised on Labor Code violations actually sustained by’ the plaintiff maintains statutory standing to pursue PAGA claims arising out of events involving other employees.” In contrast to SCOTUS, the California Supreme Court answered that plaintiffs do not lose standing to bring a representative claim under PAGA even when a court compels them to litigate their individual claims in arbitration. Thus, the fact that a plaintiff is compelled to arbitrate the individual component of a PAGA claim should not automatically result in the dismissal of the employee’s PAGA representative action.
In reaching its decision, the California Supreme Court provide guidance on two key issues. First, when an arbitrator issues a ruling on a plaintiff’s non-individual PAGA claim and finds that plaintiff did not suffer any Labor Code violations (i.e., the plaintiff is not “aggrieved”), and “if confirmed and reduced to a final judgment, [that ruling] would be binding on the court.” In other words, an arbitrator’s finding that a plaintiff is not aggrieved has preclusive effect on the representative action in the trial court.
Second, the California Supreme Court tacitly approved the notion that trial courts should stay non-individual PAGA claims until the plaintiff’s individual claim is resolved in arbitration. This procedure avoids the risk of inconsistent rulings, such as the arbitrator finding the plaintiff has suffered an injury and therefore has standing, and the trial court concluding otherwise.
With this ruling in mind, employers will need to assess the merits of a plaintiff’s PAGA standing quite early when faced with a new PAGA action brought by an employee with a valid arbitration agreement.
On the one hand, employers may conclude that a PAGA plaintiff suffered a Labor Code violation and has standing to recover penalties on behalf of aggrieved employees. In that situation, the employer may elect to forgo paying arbitration fees and engage in early mediation to try to reach a negotiated resolution. On the other hand, employers may determine that a PAGA plaintiff will be unable to show he suffered any Labor Code violations. In such cases, the employer may elect to arbitrate the matter believing the employee is not aggrieved and lacks standing to pursue PAGA penalties.
Even though the California Supreme Court’s decision was expected and anticipated, companies should still:
