Supreme Court Holds FAA Preempts California Precedent Precluding Division of PAGA Claims

The U.S. Supreme Court recently held that the Federal Arbitration Act (FAA) preempts the California Labor Private Attorney General Act (PAGA) “insofar as it precludes division of PAGA actions into individual and non-individual claims through an agreement to arbitrate.”

PAGA authorizes an “aggrieved employee” to bring an action against her former employer on behalf of herself, as well as other current or former employees, for violations of California labor law.  Under California precedent, wholesale waivers of PAGA claims are invalid, as are agreements that attempt to separate individual and non-individual PAGA claims.

In this case, plaintiff, a former employee, filed a PAGA action against defendant, her former employer, for defendant’s alleged failure to provide plaintiff her final wages within 72-hours, as required by California labor law.  Plaintiff also “asserted a wide array of other code violations” allegedly experienced by other current or former employees of defendant.  The employment contract between plaintiff and defendant contained a mandatory arbitration agreement; a “Class Action Waiver” that waived the employee’s right to bring a class, collective, or representative action under PAGA; and a severability clause specifying that if the Waiver was invalid any class, collective, or representative PAGA claims would be litigated in court but if any “portion” of the Waiver remained valid, it would be “enforced in arbitration.”  Defendant moved to compel arbitration of the individual PAGA claim and to dismiss the “non-individual” PAGA claims.

Applying California precedent, the lower courts held that the Class Action Waiver was invalid “insofar as it was construed as a wholesale waiver of PAGA standing” and that PAGA actions cannot be divided into individual and non-individual claims.  Accordingly, they refused to compel arbitration.  The Supreme Court granted certiorari and reversed the holding. 

The Supreme Court stated that PAGA’s built-in mechanism of claim joinder conflicts with the FAA because, under the FAA, arbitration is a matter of consent and, therefore, a party cannot be compelled to submit to class arbitration.  While the Court upheld the California precedent that PAGA claims cannot be wholesale waived, it also held that the FAA preempts the California precedent that prohibits dividing PAGA actions into individual and non-individual claims.  Accordingly, the Court held that defendant was entitled to compel arbitration of plaintiff’s individual PAGA claims.  However, plaintiff’s non-individual claims could not be brought via arbitration and, once the individual claims were committed to a separate proceeding, plaintiff did not have standing to bring the remaining non-individual claims.