In Esparza v. KS Industries, L.P., 2017 WL 3276363 (2017), the Fifth District Court of Appeal recently clarified the arbitrability of certain claims brought under the Private Attorneys General Act (“PAGA”). Previously, in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal.4th 348 (2014), the California Supreme Court held that PAGA representative actions for civil penalties are not subject to arbitration (the “Iskanian rule”). This decision led to a spate of actions by plaintiffs who signed valid and enforceable arbitration agreements asserting only PAGA claims, in an attempt to circumvent arbitration. This has been a significant hurdle to many employers, who have been forced to defend PAGA-only actions in civil court, despite the fact that their employees signed valid and enforceable arbitration agreements. Esparza offers a potential carve out to Iskanian that employers should be aware of.
In Esparza, a former employee alleged violations of various Labor Code provisions and sought to recover on behalf of himself and other current and former employees under PAGA. The plaintiff did not solely seek civil penalties under the PAGA statute itself, but also sought to recover penalties in the form of allegedly unpaid wages pursuant to Labor Code section 558. An appellate decision, Thurman v. Bayshore Transit, 203 Cal. App. 4th 1112 (2012), had held that the recovery of unpaid wages was actually part of the “civil penalty” provided under Section 558. The defendant filed a motion to compel arbitration of the employee’s claims to recover unpaid wages under Section 558. The plaintiff responded by arguing that PAGA claims cannot be arbitrated under the Iskanian rule. The trial court agreed and denied the motion to compel arbitration.
The defendant appealed. In the appeal, the defense conceded that under the Iskanian rule, an employer cannot compel individual arbitration of a PAGA claim to the extent the claim seeks to recover “civil penalties,” where 75 percent of the recovered amount is allocated to the state. However, the defense argued that, however one labels the recovery of unpaid wages under Section 558, the statute expressly provides that the recovered wages should go entirely to the employee who earned them and nothing to the state. Given that the basis for the California Supreme Court holding that PAGA claims were not subject to mandatory arbitration was that the actions are really brought on behalf of the state to recover penalties for the state...
