California Court of Appeal Provides Guidance on Individual PAGA Claim Waivers

A recent California court of appeal opinion provides guidance for employers seeking to obtain waivers of their employee's individual Private Attorneys General Act (PAGA) claims. In Navas v. Fresh Venture Foods, Inc., the Second District of the California Court of Appeal affirmed a ruling denying a motion to compel arbitration. According to the court, the arbitration agreement was unconscionable and unenforceable. California employers would be wise to take note of the steps identified by the court (discussed further below) that could be taken to strengthen arbitration agreements and make them more likely to be enforced.

Background

Plaintiffs Juan Navas, Martha Herrera Lopez, and Benjamin Hernandez Ramos filed a class action lawsuit against FVF alleging that the company did not pay minimum and overtime wages. Plaintiffs also alleged a cause of action under the PAGA on their own behalf and on behalf of other employees for alleged labor law violations.

In 2021, FVF moved to compel arbitration of the claims. The trial court found, in relevant part, that Mr. Navas's signed arbitration agreement was unconscionable.

Court of Appeal Decision

In late November, the appellate court affirmed the denial of FVF's motion to compel arbitration on the ground that the arbitration agreement with Mr. Navas is both procedurally and substantively unconscionable.

Procedural unconscionability involves the circumstances of contract negotiation and formation, while substantive unconscionability relates to the fairness of the agreement's terms. Both procedural and substantive unconscionability must be present for a court to refuse to enforce an arbitration provision based on unconscionability.

In this instance, the appellate court found the arbitration agreement to be procedurally unconscionable because the facts showed that FVF used its superior bargaining power to draft an agreement with provisions favorable to itself and gave it to Mr. Navas on a "take it or leave it basis" with no opportunity to negotiate.

In its discussion of Mr. Navas's assertion that the arbitration agreement was substantively unconscionable because it required employees to renounce their rights to bring PAGA actions, the appellate court analyzed the impact of the recent United States Supreme Court decision in Viking River Cruises v. Moriana. The Navas court explained that while Viking River Cruises made clear that employers and employees may agree to arbitrate individual PAGA claims, the standards for obtaining a waiver under California law remain in effect.

Here, the appellate court found the arbitration clause to be substantively unconscionable because it contained an improper waiver of the employee's representative PAGA claim and an ambiguous and one-sided provision in which FVF unilaterally declared a right to forfeit an employee's individual PAGA claim. The court noted how the agreement failed to first: (1) explain "to the Spanish-speaking employee what is an individual PAGA claim," and (2) obtain "the employee's consent to waive the right to file an individual PAGA claim in court" as opposed to simply an acknowledgment of the purported waiver.

Takeaways

With the recent rulings in Viking and Navas, as well as the fact that the fate of AB 51 (California's law prohibiting mandatory arbitration agreements as a condition of employment) is currently in front of the Ninth Circuit in Chamber of Commerce of the U.S. v. Bonta, California law on arbitration agreements is currently experiencing a state of flux and uncertainty. As a result, California employers should carefully review their existing arbitration agreements and employment practices and once modified, continue to monitor this evolving area as some still-unanswered questions are addressed by the courts.

Employers should consider the following to increase the likelihood that an arbitration agreement will be upheld:

• Provide employees time to review the agreement—without feeling rushed to sign it. Make clear employees can read, take home, and consider before signing. Consider providing the agreement with any offer letter, so that it is signed at the same time employment is accepted.
• Ensure the agreement is written in a language the employee can read and understand.
• Clearly distinguish between individual and representative PAGA claims, making clear that the agreement to arbitrate applies to the individual PAGA claim and that there is no waiver of the ability to bring a representative PAGA action.
• Make clear that the employee actually agrees to the waiver, rather than merely acknowledging that there is one.
• If listing examples of the types of claims to be arbitrated, include some examples of the types of claims that might be brought by the employer€—not just those typically brought by an employee.
• Make clear that the FAA governs the determination of whether or not a dispute is arbitrated and the order of proceedings, especially if there are references to other California laws (like for discovery) in the agreement.

DWT will continue to monitor these issues and provide updates as they occur. In the meantime, please do not hesitate to contact the DWT Employment Services Group with any questions you may have related to your company's arbitration agreements.