Earlier this year, the U.S. Supreme Court rejected the California rule that prohibits the use of class action waivers in consumer arbitration agreements. Many court watchers predicted that as result of that ruling (AT&T Mobility, LLC v. Concepcion), similar waivers in employment-related arbitration agreements would be enforced going forward.

Now the state Court of Appeals has weighed in with its first significant decision on the issue, and the outcome isn’t exactly what employers hoped for. The appellate court’s ruling makes clear that it will take more than just a class action waiver to kill off employment-related lawsuits brought on behalf of groups of employees in California.

Grocery Workers Sue Their Employer

Terri Brown began working for Ralphs Grocery as a security guard in 2005. She filed a class action and a “representative action” under the state Private Attorney General Act of 2004 (PAGA) against Ralphs for alleged violations of the California Labor Code. The employer asked the court to compel arbitration of the claims, based on its mandatory arbitration policy, which Brown had acknowledged and agreed to in her employment application.

Under the arbitration policy, employment-related disputes could not be heard in court or arbitration “on a class action basis, as a private attorney general, or on bases involving claims or disputes brought in a representative capacity on behalf of … other Ralphs employees … There are no judge or jury trials and there are no class actions or Representative Actions permitted under this Arbitration Policy.”

The trial court found that the class action and PAGA waivers were unconscionable and rendered the agreement unenforceable. The employer appealed.

Before the Court of Appeals heard the appeal, the U.S. Supreme Court overturned California’s rule that class action waivers in consumer arbitration agreements are generally unenforceable or unconscionable.

Class Actions vs. PAGA Actions

The PAGA permits employees to seek permission from the state Department of Industrial Relations to file their own lawsuit to recover penalties for wage and hour violations. The law was designed to augment the understaffing of the state’s labor law enforcement agencies.

The PAGA allows employees to seek civil penalties on behalf of current and former employees for California Labor Code violations. Employees may find it easier to pursue these representative actions than traditional class actions because the latter must meet several requirements that don’t apply to PAGA actions, including obtaining class certification.

Under PAGA actions, however, employees can recover only 25 percent of the full penalty amount, with the remaining 75 percent going to the Labor and Workforce Development Agency for Enforcement of Labor Laws and Education. Also, PAGA actions can only recover civil penalties and reasonable attorney’s fees and costs, not the civil damages available in class actions.

Court Invalidates PAGA Waiver

The Court of Appeals here declined to extend the U.S. Supreme Court’s ruling on class action waivers to waivers of PAGA representative actions. As the appellate court noted, the Supreme Court did not address waivers of private attorney general actions to enforce the Labor Code in its recent AT&T Mobility ruling.

In that decision, the Supreme Court considered the private individual right of a consumer to pursue class action remedies in court or arbitration, concluding that the right could be waived by mutual agreement. But the PAGA creates a public right for an aggrieved employee to act as the proxy or agent of the state labor law enforcement agencies in a proceeding designed to protect the public, rather than benefit private parties.

As the Court of Appeals explained, PAGA’s purpose isn’t to recover damages or restitution but to “deputize” citizens as private attorneys general to enforce the Labor Code. Single-claimant arbitration under the PAGA—for only individual penalties—wouldn’t produce the penalties contemplated under the law to punish and deter unlawful employer practices.

In short, the court held that allowing waivers of PAGA representative actions would largely nullify the benefits of private attorney general actions. It therefore returned the case to the trial court to determine whether to simply sever the unenforceable PAGA waiver from the agreement or refuse to enforce the entire agreement or parts of it. Brown v. Ralphs Grocery Co., Calif. Court of Appeals (Dist. 2) No. B222689, (2011).

Court Punts on Class Action Waivers

Ralphs’ arbitration provision also contained a class action waiver, presenting the Court of Appeals with the opportunity to apply the Supreme Court’s ruling in an employment-related context and settle some uncertainty that followed it. But the court did not directly address the issue.

Instead, it relied on the fact that Brown didn’t provide the necessary evidence California law requires to invalidate a class action waiver in an employment arbitration agreement. Thus, the court said, it needn’t determine whether the AT&T ruling applies to class action waivers in the employment context. Without the necessary evidence to do so, whether the state court could invalidate the waiver was moot.

What to Expect Next

The question of whether the Supreme Court’s ruling in the AT&T case applies not just to consumer arbitration agreements but also to employment arbitration agreements is sure to come up again in the Court of Appeals (and probably the California Supreme Court). Until then, you can expect a jump in PAGA representative actions as employees attempt to circumvent compelled arbitration. Keep in mind that there’s no guarantee yet that the California courts will enforce even your class action waivers.

Practice Tip: The fact that class action waivers in arbitration provisions aren’t necessarily unconscionable on their face doesn’t mean that a court won’t consider your arbitration provisions unconscionable for another reason.