Supreme Court limits California labor law that allows private suits against employers

In a victory for California employers, the Supreme Court on Wednesday sharply limited a state labor law that has authorized private lawsuits on behalf of groups of workers, even if they had agreed to resolve their disputes through individual arbitration.

In an 8-1 decision, the court ruled the Federal Arbitration Act preempts or overrides the state law.

California is the only state to authorize such private suits as a means of enforcing its labor laws. But in doing so, the state has allowed employees to escape binding arbitration agreements they signed when they were hired, the court said.

The justices ruled for Viking River Cruises, which sought to block a broad private lawsuit brought on behalf of one of its former sales agents in Los Angeles.

“This is a huge win for employers and for arbitration,” said Jack Sholkoff, a Los Angeles attorney.

California Atty. Gen. Rob Bonta called the decision disappointing but said that “key aspects of [the Private Attorneys General Act] remain in effect and the law of our state.” He said workers can continue to bring claims on behalf of others if they did not agree to individual arbitration.

The California Legislature adopted the Private Attorneys General Act, or PAGA, in 2004, saying the state did not have enough staff to protect the rights of workers.

Lawmakers said the state’s labor laws were going unenforced, even when workers were cheated out of their wages or not paid extra for overtime work. They pointed to industries where “labor law violations are the most rampant, including agriculture, garment, construction, car wash, and restaurants.”

The law gave attorneys an incentive to bring claims seeking penalties for multiple violations of the labor code, even if a plaintiff had agreed to arbitrate disputes as an individual.

In recent years, business leaders complained that plaintiffs’ lawyers were winning big settlements by filing claims on behalf of hundreds or thousands of employees. A coalition of California employers urged the court to rein in the law, and they hailed Wednesday’s ruling.

Tom Manzo, president of the California Business Industrial Alliance, called the state’s law “a toxic policy that leaves both employers and employees with less, while trial attorneys make more.”

“The financial impacts of PAGA have devastated businesses of all sizes in California,” he said, “and we are grateful to the court for rightfully ruling that businesses and employees should be allowed to resolve their disputes bilaterally and through arbitration, rather than through abusive and often frivolous PAGA lawsuits.”

Over nearly two decades, the Supreme Court has steadily closed the door to courts and lawsuits and instead upheld private arbitration as the means to resolve costly disputes, whether involving banks, credit cards, retail purchases or the workplace.

The ruling is the latest of several in which the high court overruled judges in California who declined to uphold arbitration clauses. State courts had instead upheld private lawsuits on the grounds that the state, not an individual plaintiff, “is the real party” bringing the suit over violations of the labor code.

The high court’s opinion rejected that idea, lawyers said.

Theane Evangelis, a Los Angeles lawyer, said the ruling “is part of an unbroken line of Supreme Court precedent confirming that state rules that interfere with bilateral arbitration cannot stand. After today, agreements to arbitrate PAGA claims on an individual basis will be enforceable under the [Federal Arbitration Act].”

The ruling should not affect unions that often arbitrate disputes on behalf of groups of workers. In that instance, both the employer and employees have chosen arbitration.

The case before the court was Viking River Cruises vs. Moriana. It arose after Angie Moriana quit her job in 2017 as a sales agent for Viking River Cruises and alleged she did not receive her final paycheck on time. She became the lead plaintiff in a private suit alleging multiple violations on behalf of a large group of Viking employees.

Viking objected and said that she and the other employees had agreed to arbitrate “any dispute arising out of or relating to [their] employment,” and that they had waived any right to
any “class, collective or private attorney general action.”

But a Los Angeles County Superior Court judge and the state appeals court refused to block the lawsuit.

Viking appealed to the Supreme Court, arguing that California and its state courts refused to honor binding arbitration agreements.

The only dissenter from Wednesday’s ruling was Justice Clarence Thomas, who maintains that the federal law does not apply to proceedings in state courts.