On August 2, 2017, the California Court of Appeal issued a decision clarifying the arbitrability of claims under the Private Attorney General Act (PAGA), finding that those seeking “victim-specific” relief can be subject to mandatory arbitration.  The California Supreme Court established in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal.4th 348 (2014) that PAGA representative actions seeking civil penalties are not subject to mandatory arbitration (the so-called “Iskanian rule”).  Since Iskanian, many assumed that all PAGA claims are exempt from mandatory arbitration.  

The Court of Appeal rejected that assumption in Esparza v. KS Indus., L.P., 2017 WL 3276363 (Cal. Ct. App. 2017), holding that the Iskanian rule only applies to claims where a portion of the recovery is allocated to the Labor and Workforce Development Agency (LWDA).  On the other hand, PAGA plaintiffs requesting “victim-specific” relief – such as “an amount sufficient to recover underpaid wages” under Labor Code Section 558 – can be subject to mandatory arbitration.

The plaintiff in Esparza brought a PAGA claim seeking “civil penalties” under Labor Code Section 558 in the form of per-pay-period penalties and unpaid wages that are “paid to the affected employee.”  Lab. Code § 558 (emphasis added).

The employer moved to compel arbitration, arguing that because wages recoverable under Section 558 are “paid to the affected employee” they are “victim specific” and are thus not subject to the ruling in Iskanian.  The plaintiff, relying on the plain language of the statute, contended that wages recovered under Section 558 are a “civil penalty” for purposes of PAGA and application of the Iskanian rule.

The court rejected the employee’s argument, characterizing it as “based on semantics and not substance.”  Substantively, the wage-based recovery under Section 558 does not operate as a true civil penalty (even though referred to as such in the Labor Code) because it is recoverable by the employee in his or her individual capacity.  This is in contrast to other “civil penalties” under PAGA, seventy-five percent (75%) of which are payable to the LWDA.  The Esparza court concluded that “[t]he rule of nonarbitrability adopted in Iskanian is limited to claims ‘that can only be brought by the state or its representatives, where any resulting judgment is binding on the state and any monetary penalties largely go to state coffers.’”  

Consequently, claims for unpaid wages paid to the employees under Section 558 – even though sought under PAGA – may be subject to mandatory arbitration.  However, claims seeking per-pay-period civil penalties paid to the LWDA – are subject to the Iskanian rule and may not be compelled to arbitration.

What this means for employers:

For employers with well-crafted arbitration agreements, Esparza creates an additional hurdle for plaintiffs seeking to evade class waivers by bringing PAGA-only actions.  California employers seeking to limit their exposure to high-risk class or representative actions should review their employment arbitration agreements to ensure they:

• apply to the victim-specific  claims, including those under Labor Code Section 558;

• prohibit class and representative actions to the extent permitted by law; and

• contain no legally unconscionable provisions that would interfere with enforcement.