An Epic shadow over PAGA

In Epic Systems Corporation v. Lewis, 138 S. Ct. 1612 (2018), a divided U.S. Supreme Court ruled that the right to bring a collective action under Section 16 of the Fair Labor Standards Act (29 U.S.C. Section 16(b)) could be waived by an employee in the arbitration clause of an employment agreement. The court found the waiver effectively barred the plaintiff from bringing a so-called "collective" action under the FLSA on behalf of similarly situated employees.

FLSA Background

The FLSA was enacted in 1938 to establish uniform national wage and hour standards and to prohibit unreasonable child labor practices. The act has been supplemented over the years to add equal pay and age discrimination violations. In a collective action an employee who contends that the employer is not in compliance with federal wage and hour laws is empowered, like a class representative, to seek recovery of the unlawfully withheld benefits for similarly situated employees.

Epic Implications

The decision in Epic Systems is potentially important for California employers for two reasons. First, if the employer has a collective action waiver, Epic Systems assures that it will shield the employer from future multi-state collective actions under the FLSA. Second, because collective actions under the FLSA's Section 16(b) are similar to representative actions under California's Private Attorneys General Act of 2004 (Labor Code Sections 2698 et seq.), the Epic Systems ruling will likely have great influence over where and how those state claims are resolved. Like Section 16(b), PAGA allows an employee who asserts state labor law violations to proceed on his own behalf and that of similarly situated employees. See Labor Code Section 2698(g).

As such, the Supreme Court's decision that, under the Federal Arbitration Act (9 U.S.C. Sections 1 et seq.), an employee may waive the right to bring such a collective action, could directly impact future interpretations of similar waivers under PAGA. Those waivers are typically found in the arbitration provisions of an employment agreement. Many of those waivers have been deemed unenforceable under PAGA. See Iskanian v. CLT Trans Los Angeles, Inc., 59 Cal. 4th 348 (2014). However, the ruling in Epic Systems brings Iskanian's non-waiver rule into question under the FAA. For that reason, a PAGA action could face stumbling blocks under federal law if challenged in the federal courts.

Dissecting Epic Systems

In Epic Systems, Justice Neil Gorsuch authored the majority opinion, which held an employee could waive the right to bring a collective action on behalf of all similarly situated employees shown to have been subject to the same FLSA violations. By a 5-4 margin, the Supreme Court held that the result was dictated by the law and policy of the FAA. The employee respondents argued that such waivers were unenforceable under Section 2 of the FAA, a provision that sets forth the so-called "savings clause" of the FAA pursuant to which an arbitration agreement that violates another federal law may be revoked. See 9 U.S.C. Section 2.

Relying heavily on Justice Antonin Scalia's opinion in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), the majority concluded there was nothing in the actual language of the statute or its legislative history to indicate that a waiver of collective action right is illegal.

As noted, both PAGA and Section 16(b) of the FLSA have provisions pursuant to which the employee may recover amounts that may be shared with employees. However, in California, the recoveries are in the form of penalties and 75 percent of those penalties must be paid to the Labor and Workforce Development Agency. See Labor Code Section 2698 (i). Section 16(b) provides full recovery of amounts awarded to employees who "opt in" to receiving such collective recoveries. 29 U.S.C. Section 16(b). Under both statutes the labor regulators are entitled to notice of the claim and may trump the individual representative by bringing their own preemptive investigation and enforcement claims under the respective statutes. See Labor Code Section 2699.3 (a)(2)(3) (i); 29 U.S.C. Section 16(b).

Reconciling Epic Systems with California Law

In the Iskanian case, the California Supreme Court held that representative waivers in PAGA cases are unenforceable and that the FAA did not apply to arbitration agreements that contained such waivers. See 59 Cal. 4th at 384, 388-89.

The question, however, is whether Iskanian will stand if reviewed in light of the holding in Epic Systems.

There are parallels between Epic Systems and Iskanian. In both cases the alleged support for the requisite showing of unenforceability was drawn from sources outside of the respective collective and representative action statutes. In Epic Systems, earlier appellate decisions looked to federal laws such as the National Labor Relations Act to conclude that collective actions under the FLSA were protected from waiver.

As Justice Ruth Bader Ginsberg discussed in her dissent, the right to collective bargaining was bestowed under the NLRA to outlaw so-called "yellow dog contracts" pursuant to which employees signed away their rights to unionize. Justice Ginsburg argued that the FLSA had to be read in pari materia with the commonly understood meaning of collective rights under the NLRA. Otherwise an equally important collective right established under the FLSA would be rendered all but useless based on such similar "yellow dog" collective action waivers in arbitration clauses.

However, the majority was not persuaded. The court concluded that nothing in the statutory language or legislative history established that collective actions under the FLSA were entitled to the same protection as collective bargaining rights under the NLRA.

It is interesting to note that in Iskanian, the California Supreme Court found support for its decision not from the statutory language of PAGA itself, but rather, from PAGA's legislative history and other statutes the court found analogous, such as the qui tam provisions of the state's false claims law. See 59 Cal. 4th at 382; see also Cal. Gov't Code Sections 12650 et seq. The state high court reasoned that PAGA claims are not employee liability claims but government claims pursuant to which employees are deputized to act as agents of the state in pursing such claims. Iskanian, 59 Cal. 4th at 379. Thus, the court relied heavily on the fact that, though not a party, the LWDA itself receives the lion's share of any recovery of statutory penalties by way of settlement or judgment. Id. at 380-81. From that premise the court concluded that a PAGA action "is therefore a type of qui tam action." Id. at 382.

Thus, the California Supreme Court held that the FAA did not apply because arbitration agreements are directed to purely private contractual disputes and cannot be used to interfere with a state's police power. Id. at 384-85, 388.

The court held that enforcing the waiver would be akin to forcing the state of California to arbitrate its enforcement claims. Id. at 385-87.

Whether the U.S. Supreme Court would agree with this interpretation of the FAA after Epic Systems is debatable. Many labor law violations, whether state or federal, can be enforced by either the government or private parties against an employer. The LWDA does not directly participate in the case-in-chief in a typical PAGA case; even so, like the federal Department of Labor, the state agency can veto the private action and pursue enforcement itself. See Iskanian, 59 Cal. 4th at 382.

Thus, as in the case of claims under Section 16(b), the LWDA does not truly deputize employees to bring these actions against their employers. The employees deputize themselves subject to a notice requirement and a duty to account for settlements and judgments as is also the case under Section 16(b). Given that reality, it is difficult to reconcile why an employee can waive the right on his/her own behalf to self-deputize under Section 16(b) but not lawfully waive a similar voluntary right under PAGA.

Epic Systems held that to fall within Section 2 of the FAA the waiver must be illegal. Since the right to self-deputize is a private decision and not one the state can force on an employee, the assertion that the waiver interferes with the state's police power is suspect. Moreover, unlike the class waiver prohibitions found in the California Legal Remedies Act which the California Supreme Court itself found unenforceable under the FAA (see Sanchez v. Valencia Holding Co., 61 Cal. 4th 899 (2015)), the California Labor Code has no prohibition against representative waivers. The non-waiver rule was established by the Iskanian court, not the Legislature.

Ultimately, Iskanian must be viewed as a public policy decision. There is no statutory bar on waiving such representative rights. This is an important distinction, because under AT&T Mobility the Supreme Court determined that California's judicially established public policy of prohibiting class action waivers unlawfully interfered with rights of private parties under the FAA. Concepcion, 563 U.S. at 344-51.

Employees in PAGA cases are not government officials; both the plaintiff and the defendant are private parties. Epic Systems applied the rule of AT&T Mobility that the FAA preempts state laws and procedures that disrupt the arbitration process; the only exception is an arbitration waiver that is illegal under some other federal law. In short, all of this adds up to a simple conclusion: A decision or law prohibiting agreements to resolve employee-employer disputes on an individualized basis cannot stand. Even if the individual employee ultimately becomes an agent of the LWDA, he must be "aggrieved" under PAGA and thus in dispute with the employer in the first instance. Epic Systems holds that the parties to an employment contract cannot be lawfully required to stipulate that only some, but not all, such grievances will be resolved individually.

Public Policy Considerations

In Epic Systems, there were reasonable policy arguments on both sides regarding the effect of the U.S. Supreme Court's ruling.

Justice Ginsburg, speaking for herself and Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan, emphasized that the economic value of individualized claims could be so small in many cases that, as a practical matter they would not be prosecuted. Unlawful employer conduct would go unchecked in those cases.

Justice Gorsuch, on behalf of the majority, retorted that the scale of such group claims can place pressure on defendants to settle even unmeritorious claims. Justice Gorsuch urged that it is the job of the legislature to ban such waivers where there is popular consensus such waivers should be abolished.

Representative plaintiffs often find themselves tethered to protracted litigation in which the benefits lawfully due to represented group of employees are often deferred to their detriment. Justice's Ginsburg's commentary about the chilling effect of waivers may be valid under the FLSA. However, in California, an individual is often entitled to a sizable recovery based on waiting time and other Labor Code penalties and interest. When coupled with potential fee-shifting risks, an individual employee who does not pursue a PAGA claim can often obtain a substantial and early settlement of claims based on legitimate Labor Code claims. In contrast, a PAGA plaintiff may wait years to obtain a recovery.

In addition, many class, collective and representative claims are brought by dissident employees who challenge their exempt status. E.g., In re Farmers Ins. Exchange, Claims Reps. Overtime Pay Litig., 481 F.3d 1119, 1127 (9th Cir. 2006); Tysn v. Wells Fargo Advisors, LLC, 14-CV-02552 (N.D. Cal. 2016).

Employees who find themselves "represented" by these dissidents stand to lose the flexibility many exempt employees enjoy in less regimented workplaces. The claims can have a chilling effect on employers who may feel safer putting all employees "on the clock" to avoid claims by retaliatory dissenters.

Constitutional Question

In the case of PAGA, the policy problem of being involuntarily "represented" also raises a potential constitutional defect. As noted previously, the FLSA's Section 16(b) has an "opt in" requirement that precludes determining (much less paying) an employee a recovery without his or her consent. PAGA has no such requirement.

In Arias v. Superior Court, 46 Cal. 4th 969, 984-86 (2009), the California Supreme Court held that, because representative actions only bind the defendant if the employee prevails, no due process issues arise with respect to represented employees that are never informed of the action. However, Arias only addressed the due process rights of defendants.

The issue of employee rights was identified by Justice Kathryn Werdeger in her concurring opinion in Arias. Justice Werdeger flagged the fact that the circumstances under which "virtual representation" is permissible are complex. See 46 Cal. 4th at 935-37. Justice Werdeger noted that offensive and/or defensive collateral estoppel is only one of multiple issues at stake under a due process evaluation.

The U.S. Supreme Court determined long ago that some form of notice is required "as a matter of process in all representative actions." Mullane v. Central Hanover Bank & Trust, 339 U.S. 306 (1950).

In Mullane, the court emphasized that notice to represented parties was required not merely to ensure adequate representation but also to "present their objections." 339 U.S. at 314-15.

This is precisely why, in Clougherty v. James Vernon Co., 187 F.3d 288, 290 (6th Cir. 1951), the 6th U.S. Circuit Court of Appeals held that the notice and opt in provisions found in Section 16(b) -- but absent from PAGA -- are not optional. They are required under the due process clause. The court noted that the FLSA's Section 16(b) "does not permit a plaintiff to represent another employee without specific authorization," and if that occurs, the proceedings "doubtless would be subject to constitutional attack" because the employee would be "thus represented without his consent might be deprived of due process of law." 187 F.2d at 290. Moreover, observed the court, the defendant has a constitutional right to know who is suing it and the nature of the action against it. Id.

For this reason, the PAGA statute may have constitutional problems precisely because of its dissimilarity to Section 16(b), which protects the rights of those who object to the claims of their self-appointed representatives.

Conclusion

It will take time before there is a definitive decision as to whether California's rule of non-waiver in PAGA cases can be reconciled with the FAA in light of Epic Systems. However, Justice Gorsuch appears to have taken up Justice Antonin Scalia's torch in reversing decisions that conflict with precedent upholding one-on-one individualized arbitration agreements. On several occasions, the Supreme Court has actively sought review of California decisions at odds with its ruling in AT&T Mobility. See, e.g., DIRECTTV v. Imburgia, 135 S. Ct. 1547 (2015).

Given the high court's readiness to defend and enforce AT&T Mobility, it would appear that the decision in Epic Systems casts new doubt on the question of whether California's representative waiver prohibition under PAGA conforms with the FAA. In addition, there are potential due process notice questions that linger in these cases as well.