California continues to be the nation’s most challenging legal environment for employers. The challenge has been all the more vexing in recent years due to new legislation and rapidly unfolding case law, particularly with respect to the Private Attorneys General Act (PAGA). California’s Labor Code is frequently more stringent than FLSA, presenting distinct and complex compliance issues and a harsh environment for defending wage and hour class actions. PAGA continues to be a particular thorn for California employers, as does the Golden State’s controversial AB 5.

The PAGA threat persists

Enacted in 2004, PAGA dramatically increased the risk of significant exposure for employment violations and launched an ever-rising wave of litigation against California employers. The qui tam-like statute empowers private citizens to enforce the Labor Code, ostensibly to shore up compliance in the face of limited state government enforcement resources, by seeking monetary relief on behalf of similarly situated employees.

A series of court rulings over the years has lowered barriers for employees to bring claims and has added to the allure of such lawsuits for the plaintiffs’ bar. These rulings determined that class certification requirements do not apply to PAGA actions; that employees cannot, by entering into mandatory arbitration agreements, waive the right to bring a PAGA claim in court; and that plaintiffs have broad rights to information through the discovery process bringing a claim. Plaintiffs also are entitled to 25 percent of the civil penalties imposed on employers for violations. PAGA has proven a windfall for the state: it has been reported that in 2020 alone, California’s Labor and Workforce Development Agency netted $100 million from PAGA penalties.

PAGA filings continued unabated in 2021. For California employers, however, the year also brought reasons for optimism:

$102 million judgment reversed. In a significant victory for employers, the Ninth Circuit vacated a $102 million award against a major retailer in a suit alleging the employer violated the California Labor Code’s wage-statement and meal-break provisions. The court’s opinion provided an important clarification of the cognizable harm required to establish Article III standing under PAGA and the Labor Code’s wage statement requirements. It explained that an employee does not have standing to bring PAGA claims in federal court for alleged Labor Code violations the employee himself did not suffer. In addition, on the merits, the federal appeals court determined that, under the Labor Code, an employer may make lump-sum payments as a retroactive adjustment to employees’ overtime rate to factor in bonus payments without identifying a corresponding “hourly rate” for the payment on employees’ wage statements.

For now, PAGA has no parallel elsewhere. However, several states are considering legislation that mirrors the California law, giving an employee or in some cases a representative organization the authority to file an enforcement action on behalf of the state to enforce labor violations.

SCOTUS to consider PAGA arbitrability. In 2014, the California Supreme Court ruled that employees cannot be compelled to arbitrate PAGA actions, even when the parties have an enforceable arbitration agreement in place. However, the U.S. Supreme Court recently granted certiorari to consider whether this holding is in conflict with the well-established federal policy favoring arbitration as embodied in the Federal Arbitration Act (FAA). The petitioners argue that such a PAGA carveout is impermissible under federal law and that the state high court’s decision should be overturned.

Coming to a state near you? For now, PAGA has no parallel elsewhere. However, several states are considering legislation that mirrors the California law, giving an employee or in some cases a representative organization the authority to file an enforcement action on behalf of the state to enforce labor violations. During the summer of 2021, Maine became the first state to pass a PAGA-type statute mirroring the California law. However, the state governor swiftly vetoed the measure. Other states that have bills pending include Connecticut, Colorado, Illinois, Massachusetts, New Jersey, New York, Oregon, and Washington.

AB 5 remains controversial

In 2019, the California legislature passed Assembly Bill (AB) 5, adopting and expanding use of the common-law “ABC test” to define an “independent contractor” (as opposed to a statutory “employee”) not just for purposes of California Wage Orders, but also for the Labor Code and the Unemployment Insurance Code. The ABC test is a more rigorous standard. There were built-in exceptions to AB 5 and more were added after enactment by courts, the legislature, and the political process. At the start of 2020, a federal district court enjoined enforcement of AB 5 as to truck drivers, finding AB 5 was preempted by the Federal Aviation Administration Authorization Act of 1994. Later that year, Governor Gavin Newsom signed AB 2257, which recast, clarified, and expanded the exemptions to AB 5. In November 2020, California voters passed Proposition 22, approving an exemption for app-based rideshare and delivery companies.

At the start of 2021, the fate of AB 5 began to change course. The California Supreme Court held that Dynamex Operations West, Inc. v. Superior Court (the case that originally set forth the ABC test) applied retroactively. Further, a California court granted a writ of mandate barring the state from enforcing Prop 22’s AB 5 exemption for rideshare drivers. The Ninth Circuit upheld AB 5 against constitutional challenges brought by a journalist association.

A divided Ninth Circuit panel also overruled the injunction against enforcement of AB 5 for truckers. A trucking industry group has asked the U.S. Supreme Court to review the decision, arguing that, if allowed to stand, the ruling will effectively preclude the use of independent owner-operators from providing trucking services. The Supreme Court has 

asked the U.S. solicitor general to weigh in on whether to grant certiorari. Meanwhile, the injunction originally imposed by the district court remains in effect pending a decision on the trucking industry’s petition for certiorari.

Additionally, the California legislature has extended several industry-specific exemptions that were set to sunset in 2023, including for licensed manicurists, construction trucking subcontractors, and newspaper distributors and carriers. Therefore, these occupations need not follow the ABC test to determine whether they are statutory employees under California law.

Ninth Circuit: FAA does not preempt AB 51

California AB 51 provides that an employment arbitration agreement, to be enforceable, must be voluntarily agreed to by the employee, and not unilaterally imposed by an employer as a mandatory condition of employment. Before AB 51 was scheduled to take effect, a federal district court held the measure was preempted by the FAA and enjoined enforcement. However, in a September decision, a divided Ninth Circuit panel reversed in part, vacating the lower court’s preliminary injunction. In a vigorous dissent, Judge Sandra Segal Ikuta said AB 51 runs afoul of the FAA because AB 51’s threatened criminal and civil penalties create an obstacle to the FAA’s pro-arbitration objectives and that AB 51 discriminates against arbitration agreements by imposing a heightened consent requirement on such agreements.

A petition for en banc review of the panel decision is pending. The petition argues that the Ninth Circuit’s decision creates a circuit split over the reach of FAA preemption. In contrast to the Ninth Circuit, the First and Fourth Circuits have held state laws that created obstacles in forming and discouraging arbitration agreements were preempted by the FAA.