The New PAGA-Waiver Trap Door
Many employers have arbitration agreements wherein employees agree to waive the right to file a lawsuit against the employer under various laws, including the California’s Private Attorney General Act (“PAGA”). Employers were disappointed when the California Supreme Court ruled last June that such waivers of PAGA lawsuits are invalid, at least in state court. See Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014).
However, a number of federal trial judges in the Golden State subsequently disagreed and ruled that PAGA waivers are enforceable in their courts. See, e.g., Ortiz v. Hobby Lobby Stores, Inc., E.D. Cal. Case No. 2:13-cv-01619 (Sept. 30, 2014). Because a PAGA waiver still may be enforceable against an employee in federal court, many employers have either kept or inserted such waivers in their arbitration agreements.
This week it became apparent that including a PAGA waiver may destroy an employer’s ability to require arbitration in any type of lawsuit, be it under PAGA or some other theory (e.g., alleged discrimination, harassment, retaliation, or wage-and-hour or meal-and-rest-period violations). Specifically, the California Court of Appeal ruled that a PAGA waiver will invalidate an entire arbitration agreement in state court if that agreement also includes a non-severability clause. See Montano v. The Wet Seal Retail, Inc., Cal. Ct. App. Case No. B244107 (Jan. 7, 2015).
Non-severability clauses basically state that the entire agreement will be unenforceable if any provision of it is found to be invalid. By contrast, severability clauses allow a court or an arbitrator to strike any invalid provision in the agreement while still enforcing the remainder of it.
The non-severability clause in the Montano case recited that the PAGA waiver was “a material or important term of this arbitration agreement.” That clause also mandated that, if “the wavier is found to be unenforceable for any reason by a court or arbitrator, then this entire arbitration agreement is void and unenforceable by the parties.”
There are advantages and disadvantages to both having or refraining from arbitration agreements, as well as including or deleting severability clauses and non-severability clauses. Employers should weigh those risks and benefits carefully before deciding which path to follow. Employers who wish to enhance the likelihood of enforcing their arbitration agreements should review them in light of this new Montano decision and consult legal counsel to determine if amendments are advisable.