In a much-awaited decision, the Supreme Court of the United States indicated that it would consider whether the Federal Arbitration Act (FAA) preempts California’s rule prohibiting arbitration of Private Attorneys General (PAGA) claims under the California Labor Code. Depending upon the high court’s ultimate ruling, the case has the potential to upend wage and hour litigation in California.

In granting the petition for certiorari brought by Viking River Cruises, Inc., in the case of Viking River Cruises Inc. v. Moriana, the Court has decided to resolve the specific question of whether the FAA “requires enforcement of a bilateral arbitration agreement providing that an employee cannot raise representative claims, including under PAGA.” In other words, if the Court rules in favor of the employer, the case has the potential to permit employers to limit PAGA representative claims by implementing arbitration agreements (with representative and class action waivers) with their employees.

The stakes are enormous. Under current law, employees who allege that they have been subject to violations of the California Labor Code can sue employers on behalf of other allegedly aggrieved parties in representative actions to recover civil penalties against their employers. PAGA civil penalties are awarded per person, per pay period, and may grow exponentially. In most cases, the employees receive little of the recovery, with the majority going to the state and the lawyers who bring the cases. On the other hand, employers can face millions in penalties for a single technical error on a wage statement, or other inadvertent technical violation. The expense of defending a PAGA lawsuit itself can be severe, thus forcing many employers to seek early settlements and pay the bounty sought by plaintiffs and their lawyers.

Although the Supreme Court has repeatedly held that courts must enforce arbitration agreements, including agreements that contain class action waivers, California law, since the Supreme Court of California’s decision in Iskanian v. CLS Transportation Los Angeles LLC in 2014, has held that PAGA claims are not subject to arbitration agreements, and representative action waivers are not enforceable under California law. As a result, although many California employers could likely have averted class-action litigation through carefully crafted arbitration agreements, they could not use arbitration agreements to minimize their PAGA risks. Thus, for more than 15 years, California employers have battled a scourge of repetitive PAGA claims despite intensive efforts to comply with a technical, complicated, and byzantine Labor Code.

In the Viking case, the employee alleged that Viking had failed to pay all wages due and proper overtime and had also failed to provide meal and rest breaks and accurate wage statements in violation of the California Labor Code. Viking had an arbitration agreement that required the employee to arbitrate any claims upon an individualized basis. Viking moved to compel arbitration, asserting that pursuant to the arbitration agreement, the plaintiff would have to bring her claim on her own, and that she could not maintain a representative PAGA action. Viking’s position conflicted with the Supreme Court of California’s holding in Iskanian, so the trial court and state court of appeal rejected Viking’s motion.

The Supreme Court will now consider whether the FAA requires the court to enforce Viking’s arbitration agreement and preclude the PAGA representative action. If the high court reverses the ruling of the California appellate court and holds that the FAA applies to PAGA cases, it will represent a sea change for California employers’ ability to prevent and minimize crippling and often destructive wage and hour claims.

In the meantime, employers may want to consider reviewing their arbitration agreements (if they have them) to determine if they have representative action waivers and to evaluate whether the agreements comply with relevant law. Employers with such agreements that are facing existing PAGA cases may want to consider moving to compel arbitration. Employers that do not have such agreements may want to consider implementing them.

The case is Viking River Cruises Inc. v. Angie Moriana, No. 20-1573, in the Supreme Court of the United States.