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California Office Manager Need Not Arbitrate PAGA Claim

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Court holds the line on Iskanian

Santa Ana, CAOn October 26, California's Fourth District appellate court ruled that Enedina Aguirre does not have to arbitrate a claim she made against Prudential Overall Supply under the California Private Attorneys General Act. The California labor lawsuit affirms, once more, that the mandatory arbitration agreements, which many employees must sign as part of their routine onboarding process, do not prevent them from filing PAGA claims that may subject employers to stiff penalties.

The rule, first set out in Iskanian v. CLS Transportation Los Angeles, LLC, may deter employers from cheating employees out of wages due under the law. It may not, however, make up for the wages that they lost. That is where the legal struggle is in California – the push and pull between workers and employers about the reach of Iskanian. Aguirre v. Prudential Overall Supply does not expand worker protections under Iskanian; neither does it limit them, however.

What happened to Enedina Aguirre

The facts are pretty simple and very commonplace. Ms. Aguirre went to work for Prudential Overall Supply as an office manager in 2016. On her first day, she was asked to sign an employment agreement in which she agreed to submit any claims arising from her employment to final and binding arbitration conducted “under the Federal Arbitration Act and the procedural rules of the American Arbitration Association.” She further agreed “to forego any right [she] may have had to a jury trial” and “to forego any right to bring claims on a representative or class member basis.”

In 2019, she filed this representative action on behalf of herself and “other aggrieved employees,” asserting a single cause of action under PAGA based on Prudential’s alleged violation of California wage and hour laws.

Prudential filed a motion to force her to arbitrate the claim. The trial court refused, and Prudential appealed. In its October 26 ruling, California's Fourth District appellate court again refused to compel arbitration of her PAGA penalty claims.

Why not arbitrate?

On its face, arbitration seems like a pretty reasonable alternative to a lawsuit – cheaper and quicker, among other things. That is certainly the spirit of the Federal Arbitration Act (FAA). Since the law’s enactment in 1925, however, it has become clear that mandatory arbitration agreements are often one-sided arrangements that deny employees the advantages of a judicial proceeding.
  • At the outset, new hires rarely have a free and fair choice about whether to agree to arbitrate disputes with an employer – unless, of course, they have no particular interest in earning a paycheck.
  • When the dispute involves relatively small amounts of money, as individual wage and hour claims often do, employees tend to just take the loss rather than pursue the unfamiliar and daunting process of arbitration.
  • This is especially true when employees must bear the burden of at least some of the costs.
  • Employers generally hire the arbitrator. An arbitrator who consistently decides against an employer may discover himself or herself without much work.
  • Arbitration hearings are generally held in private, and decisions are usually not publicly accessible, all of which makes the process more likely to feel unfair.
  • Arbitration decisions create no legal precedent and are rarely reviewed by the courts.
Not surprisingly, employee advocates generally work to secure employees their day in court wherever possible.

What PAGA does

PAGA authorizes aggrieved employees, who have suffered California Labor Code violations, to act as private attorneys general to recover civil penalties from their employers. The penalties awarded to the state are shared with individual plaintiffs. Seventy-five percent goes to the state to be used to improve Labor Code compliance and twenty-five percent goes to the plaintiffs.

PAGA applies to most California labor law violations and assesses steep penalties against employers. The penalty for the initial violation is $100 per aggrieved employee per pay period for each initial violation and $200 for each subsequent violation per aggrieved employee per pay period. It can add up for violations that extend for several years.

Iskanian v. CLS Transportation Los Angeles, LLC

The California Supreme Court’s 2014 decision in Iskanian attempts to balance the interests of employers and employees. The decision permits California employers to enforce employment arbitration agreements with class action waivers. However, employers may not require employees to waive their right to assert a “representative” action under the PAGA for Labor Code penalties.
The court likens PAGA claims to whistleblower or qui tam actions in which an individual steps in to protect the rights of a governmental unit. The decision rests on the principle that an employee cannot waive a right that belongs to a third party.

But what about the unpaid wages?

This is where the results in cases like Aguirre are mixed. The particular language of mandatory arbitration agreements varies from one employer to another.

In some circumstances, an employer’s attempt to require the worker to waive PAGA claims will invalidate the entire arbitration agreement. In these situations, a worker may be able to file a lawsuit over the underlying California Labor Code violations in addition to seeking penalties under PAGA. In other situations, however, and depending entirely on the language of the agreement, a worker may be forced to arbitrate wage claims, even though they do not have to do so with PAGA penalty claims.

PAGA does not entirely solve the problems created by mandatory arbitration agreements in employment contracts. Its goal is largely to deter employers from violating wage and hour laws, and many believe that employers who face PAGA lawsuits change their practices to avoid penalties in the future. It’s something, but perhaps still not enough for workers.


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