The Choppy Waters Employers Are Navigating in California: Arbitration Limits and PAGA Maneuvering

By Ashley McLachlan and Tiffanny Brosnan

Employers in California continue to face rough waters when it comes to enforcing arbitration agreements. Through the lens of some recent California cases, this alert addresses questions employers may want to consider at each stage — from roll out of the arbitration agreements to after arbitration is initiated.  

Preparing for the Storm — Should You Re-Audit Your Alternative Dispute Programs?

Courts scrutinize not only the terms of an arbitration agreement and how an employer presents an arbitration agreement to employees, but also the terms of other documents distributed alongside the arbitration agreement. In Gurganus v. IGS Solutions, Inc., the Court read an arbitration agreement together with a Confidentiality and Non-Disclosure Agreement presented to the employee at the same time that also addressed dispute resolution. In doing so, the Court held the conflicting terms favoring the employer resulted in a lack of mutuality, rendering the arbitration agreement unconscionable. As many employers roll out arbitration agreements alongside other policies and documents, they may want to review what those other documents are saying about dispute resolution, and how such terms may impact the arbitration agreement’s enforceability.

Employers should consider confirming their agreements have clear severance provisions — as those may be able to keep agreements afloat. The California Supreme Court in Ramirez v. Charter Communication made clear there is no bright-line rule that requires a court to refuse enforcement if a contract has more than one unconscionable term. The inquiry regarding severance is more “qualitative” than “quantitative.” That said, the Ramirez Court also opined that even where a contract could be cured by severance, courts should also ask whether the contract “should be cured through severance or restriction because the interests of justice would be furthered.” Recently, in Wise v. Tesla Motors, Inc., the Court of Appeals applied the Ramirez Court’s qualitative approach and held a trial court abused its discretion when it chose not to enforce an arbitration agreement and sever from a separate non-disclosure agreement certain unconscionable terms that did not share a nexus to the arbitration agreement. Early this month, the California Supreme Court denied review of Wise v. Tesla and though it left the ruling in place, the California Supreme Court ordered the Court of Appeals’ opinion to not be officially published, taking away its precedential value.

Thus, severance provisions may remain a good defense if terms collateral to the central purpose of the arbitration agreement are found unconscionable, but employers may want to avoid relying on severance clauses alone. Having a clear roll out of the arbitration agreement, without potentially conflicting terms in other employment agreements or policies, will likely better anchor employers to be able to enforce the arbitration agreement down the line.

Knowing When the Wave is Worth the Paddle — Is A Motion to Compel the Right Move?

Even with a valid and enforceable arbitration agreement, a motion to compel may not always be the best (or possible) option.

Sex Harassment Disputes

Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) in 2022 which permits plaintiffs “alleging conduct constituting a sexual harassment dispute or sexual assault dispute” to void a predispute arbitration agreement. The breadth of this statute is continually being tested. And recently in Casey v. Superior Court, the Court held that the plaintiff’s entire case was exempt from arbitration, including those claims wholly unrelated to the harassment dispute, such as wage and hour claims. Accordingly, employers and their counsel should consider evaluating whether a lawsuit involves a sex harassment dispute early on when strategizing how to respond to the complaint.  

Headless PAGA Suits

California courts remain divided on the viability of so-called “headless” Private Attorneys General Act (PAGA) actions — where a named plaintiff attempts to forgo individual PAGA penalties. Some courts follow Leeper v. Shipt, which held as a matter of statutory construction that every PAGA action necessarily includes an individual PAGA claim. Other courts permit headless PAGA actions. For example, in CRST Expedited, Inc. v. Superior Court, the Court concluded that PAGA’s purpose of effective Labor Code enforcement is best served by allowing plaintiffs to choose to pursue only non-individual PAGA claims thus permitting the avoidance of arbitration altogether. Recently, another Court has taken a more middle ground approach. In Rodriguez v. Packers Sanitation Services LTD., the Court limited its inquiry to whether the complaint asserted an individual PAGA claim, distinguishing between whether a complaint does assert an individual claim (relevant to a motion to compel) and whether it should (relevant to a pleading challenge), suggesting that a demurrer may be the appropriate mechanism for challenging a headless PAGA action.

The California Supreme Court is set to review several cases which should provide better guidance for employers managing headless PAGA actions. Until then, when faced with an apparent headless PAGA suit, employers should weigh the costs and benefits of moving to compel arbitration or using alternative procedural mechanisms to challenge the pleading.

Turning the Tide — Did I Waive?

Regardless of how you choose to proceed, it is crucial to avoid waiving the right to arbitrate.

A waiver can occur where the compelling party knew of the contractual right to arbitrate yet engages in conduct that intentionally relinquishes or abandons that right. Cases like Rodriquez, which suggest challenging the sufficiency of the pleading through a demurrer, create a tension with an employer’s interest not to waive the right to arbitrate. Now, this tension is accompanied by the risk of possible sanctions. Recently, in Sierra Pacific Industries Wage and Hour Cases, a Court affirmed the decision to impose sanctions on an employer for its conduct that waived the right to compel arbitration. This case involved a class action, but this unique procedural posture did not shield the employer from waiver or sanctions. Where employers are seemingly forced to litigate in some respects, for example, leading to class certification, employers must still take steps to proactively preserve their right to arbitrate. Employers may want to avoid actively litigating the case, if possible, assert arbitration as an affirmative defense in any pleadings filed, and consider producing signed arbitration agreements early on to the other side.

Another instance of waiver can occur following initiation of arbitration. California Code of Civil Procedure Section 1281.98 sets forth a default rule requiring the party who drafted an arbitration agreement to pay the fees and costs within 30 days after the “due date,” and the statute instructs arbitration service providers to issue invoices to be due upon receipt. Untimely payment results in waiver of the right to compel an employee to arbitrate. Until recently, California courts had taken a hardline approach when interpreting this statute, providing little relief to employers who may have inadvertently missed the 30-day deadline. But following Hohenshelt v. Superior Court, employers now have some reprieve. The California Supreme Court acknowledged a drafting party’s failure to timely pay may be excused under general contract principles, such as preventing unjust forfeiture, or when meeting the deadline to pay would be impossible, impractical, or illegal.

While Hohenshelt gives employers some wiggle room under Section 1281.98, employers may want to consider timing of fee payment provisions in their arbitration agreements and ensure fees are timely paid under the statute.

Finding the Balance

To keep from capsizing in these rough waters, employers may want to proactively audit existing Alternative Dispute Resolution (ADR) programs to consider how dispute resolution agreements are rolled out, consider carve outs for non-arbitrable claims to account for non-individual PAGA claims, confirm agreements have clear severance clauses, engage in early litigation strategy once a suit is filed, and remain diligent in avoiding waiver of the right to arbitrate.