Drivers’ PAGA Claims Survive Postmates’ Arbitration Challenge

San Francisco, CAOn July 20, the California Court of Appeals rejected Postmates Inc.’s argument that the plaintiff drivers must submit their Private Attorney Generals Act (PAGA) claims to arbitration. In Winns v. Postmates, Inc., the couriers alleged that Postmates withheld wages, took tips given intended for couriers and misclassified the them as independent contractors, all in violation of the California labor code. The drivers also brought representative claims under PAGA and sought civil penalties and statutory damages for unpaid wages under Labor Code section 558. 

Each of the workers had signed an agreement to arbitrate all disputes against the company. The San Francisco County Superior Court held that their individual claims were governed by the arbitration agreements. The representative claims were not, however, given the public purpose of PAGA. This has been a real sticking point for employers because PAGA penalties can be steep.Employers in the so-called “sharing economy” seem particularly engaged on this point.

Postmates appealed the PAGA portion of the decision. The Appeals Court upheld the trial court’s position, even over Postmates’ argument that the fact that the arbitration was not mandatory made previous judicial decisions inapplicable.

The Fleet Agreement

Before going to work for Postmates, drivers had to agree to a Fleet Agreement. The Fleet Agreement included an arbitration provision, under which the company and prospective couriers agreed to “resolve any disputes between them exclusively through final and binding arbitration instead of filing a lawsuit in court.” This specifically applied to “claims related to a courier’s classification as an independent contractor, the delivery fees received by a courier for deliveries, and state and local wage and hour laws.” In addition, the drivers agreed to waive their rights to have any dispute brought, heard or arbitrated as a representative action, or to participate in any representative action.”

The waiver is a specific reference to participation in a class action lawsuit and to representative claims under PAGA. As a bit of extra security, the arbitration provision explicitly provides that it is intended to be governed exclusively by the Federal Arbitration Act (FAA).

The new wrinkle in this case is the fact that the Fleet Agreement included a provision that gave couriers the right to opt out of arbitration. Specifically, the opt out provision says, “Arbitration is not a mandatory condition of [the courier’s] contractual relationship with Postmates, and therefore Contractor may submit a statement notifying Postmates that Contractor wishes to opt out of this Mutual Arbitration Provision.”

None of the plaintiff drivers opted out of arbitration. This was among the reasons that Postmates argued that the provision should be enforceable with respect to the PAGA claims.

The purpose of PAGA

PAGA enables workers to file lawsuits against employers for labor violations. Employees act as private attorneys general – essentially stepping into the shoes of the state government. Although individuals may recover 25 percent of the penalties assessed, most of the money goes to the State of California.

The employer’s initial labor violation carries a civil penalty of $100 per employee, per pay period. Subsequent violations are $200 per employee, per pay period. Taken individually, the penalties are small, but they accumulate quickly. This is particularly concerning to tech platforms who have large armies of questionably classified “independent contractors.” Think Postmates, Uber or GrubHub.
PAGA has a public purpose. The basic theory is that workers benefit indirectly because employers have a greater financial incentive to comply with the provisions of the California labor code.

A brief flyover of Epic Systems and Iskanian

Competing against this public purpose is a separate public policy articulated by the Supreme Court in 2018 in Epic Systems, Inc. v. Lewis. In that decision, the Court broadly upheld the enforceability of arbitration agreements, on the theory that individuals and employers are generally free to contract to resolve employment disputes through arbitration. The opposing viewpoint has generally held that few but the most highly paid employees have any negotiating power over the terms of their employment.

In 2014 in Iskanian v. CLS Transportation Los Angeles the Supreme Court of California concluded that:
“[A]n arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy. In addition, 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.”

Postmates argued that Epic Systems essentially overruled the earlier Iskanian decision. In addition, it relied on the fact that the Fleet Agreement explicitly provided that agreeing to arbitrate was not a condition of employment.

A win for Winns

The Court of Appeals was unpersuaded. The decision articulates several reasons., but at heart its reasoning is that Epic Systems did not explicitly address PAGA or its public purpose, so there was no reason to disregard California court decisions exempting PAGA claims from arbitration agreements.

What’s next? Avoiding PAGA penalties is a big deal for big tech platforms/employers that seek to evade California labor laws concerning wages and hours. They have deep pockets. The Winns win is likely not the end of the story.