California Court Rules That The Iskanian Rule Prohibiting Arbitration Of PAGA Claims Does Not Apply To Claims For Unpaid Wages That Go Entirely To The Employee

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California Court Rules That The Iskanian Rule Prohibiting Arbitration Of PAGA Claims Does Not Apply To Claims For Unpaid Wages That Go Entirely To The Employee

 By: Jarred Lieber

Private Attorney General Act (“PAGA”) actions allow plaintiffs to step into the shoes of the Attorney General and recover penalties on behalf of the state for certain wage an hour violations.  The legal requirements to bring a PAGA case are also much more lax than class action lawsuits and the penalties are much higher, resulting in a win-win for Plaintiff attorneys. Since its inception defendants have been trying to find ways to limit the effectiveness of this punishing law.  One strategy defendants have used is to try to compel these claims to arbitration.

The 2014 decision in Iskanian v. CLS Transportation Los Angeles, LLC held that employment agreements requiring the arbitration of representative claims under PAGA were unenforceable.  As discussed here, here, and here, courts are still struggling with the applicability of the so-called Iskanian rule.

A recent case out of California’s Fifth District, however, has cleared up one aspect of the rule.  In Esparza v. KS Industries, L.P., the plaintiff employee sued individually, and on behalf of other employees, for unpaid wages, civil penalties, interest, attorneys’ fees and costs under the Labor Code and PAGA. When the defendant employer tried to compel the case to arbitration pursuant to the parties’ arbitration agreement, the plaintiff cited the Iskanian rule in arguing that a claim for civil penalties under PAGA cannot be arbitrated, and that includes claims for recovery of wages.  

The Appellate Court held that the plaintiff’s claims for unpaid wages could be compelled to arbitration.  The Court held that the Iskanian rule is limited to representative claims for civil penalties in which the state has a direct financial interest. Here, because claims for unpaid wages under Labor Code section 558 would go entirely to the employees, and not split with the state, the Appellate Court ruled that this claim was bound by the parties’ arbitration agreement.


The Esparza opinion makes clear that claims for unpaid wages based on Labor Code Section 558 are not covered by PAGA and must be arbitrated. However, there are still many current inconsistencies between the courts as to whether and what type of representative PAGA claims may be compelled to arbitration. Given the current uncertainty in the law, employers must carefully balance with counsel the type of arbitration agreement that best suits their needs. Further, because the State and Federal courts are split as to whether arbitration provisions involving representative PAGA claims are enforceable, companies should work closely with counsel to determine the advantages and disadvantages of litigating claims in State or Federal Court, and the desirability of removing claims to Federal Court. If you have questions about rolling out an arbitration agreement at your Company, or about your current arbitration agreement, contact the experts at The Saqui Law Group.


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