The United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion allows parties to avoid arbitrating class action claims. The Court overturned an earlier California Supreme Court decision, in which the state court held class action waivers in arbitration agreements were unenforceable. The U.S. Supreme Court based its decision on the Federal Arbitration Act’s (“FAA”) mandate that parties be given the freedom to choose the scope of agreements to arbitrate.

California employers in response to Concepcion may be implementing or revising arbitration agreements to expressly exclude class claims. However, the plaintiff’s bar is not resting. Faced with the potential unavailability of class-wide relief, employees are turning with renewed vigor to a potent alternative method for challenging employer practices – the employee “representative action.” Despite Concepcion, the California Court of Appeal recently decided that employees cannot be compelled to contract away their rights to bring certain representative actions against their employers.

What are Employee Representative Actions?

As its name implies, a representative action is one in which an individual raises claims on behalf of himself and a larger group. For employers, employee representative actions arise in two different contexts – claims brought under California’s Private Attorneys General Act (“PAGA”) and claims asserted under California’s Unfair Competition Law (“UCL”). Each has its own unique rules and applications.

PAGA Actions

The Legislature passed PAGA to augment the Division of Labor Standards Enforcement’s (DLSE) enforcement abilities. As an enforcement agency, only the DLSE was authorized to issue citations for the civil penalties contained in the Labor Code. However, with the passage of PAGA, private employees were effectively “deputized” to act as private attorneys general and sue on behalf of themselves and other current or former employees to recover these penalties. PAGA also imposed a new “catch all” penalty for violation of Labor Code provisions that did not already provide for civil penalties.

PAGA provides for penalties of at least $100 to $200 per employee and per pay period that a violation continues. Prevailing “private attorneys general” plaintiffs must split recovered penalties with the state. However, as an added incentive, employees who prevail in PAGA actions are entitled to recoup their attorney’s fees and costs.

To proceed under PAGA, the employee first must give notice to the state’s Labor and Workforce Development Agency and their employer. The LWDA then has the option to investigate the claims and take action itself. If the LWDA declines or fails to respond, the employee may file a representative action in court. For certain less serious violations, PAGA contains a “safe harbor” provision, which precludes employee lawsuits to recover civil penalties if the employer “cures” the violation within a short period of time of receiving the employee’s notice. PAGA’s procedural requirements do not apply to all claims for Labor Code violations äóî only those brought under PAGA for civil penalties. Thus, there is no pre-filing exhaustion requirement for employees who make a claim for unpaid wages or statutory penalties recoverable outside of PAGA.

Two Court of Appeal decisions sparked a renewed interest in PAGA representative actions. In Bright v. 99 Cents Stores and Home Depot USA, Inc. v. Superior Court, the Second District Court of Appeal held for the first time that PAGA penalties may be recovered for violations of standards contained in California wage orders, even if they do not otherwise expressly appear in the Labor Code. In both cases, individual employees brought suit under PAGA on behalf of a group of employees claiming their employers had failed to adhere to a relatively obscure provision in Wage Order 7-2001, requiring employees be provided with “suitable seats.” These decisions, expanding PAGA’s reach to claims based on the “working conditions” imposed by the wage orders, are likely to generate a new waive of PAGA claims for employers.

UCL Actions

The UCL broadly prohibits “any unlawful, unfair or fraudulent business act or practice.” While not an employment law per se, employees commonly use the UCL to seek restitutionary or injunctive relief against employers for alleged wage-hour violations, including claims for unpaid overtime and minimum wage and failure to provide statutory meal and rest breaks. The UCL’s primary benefit is a four-year statute of limitations, which expands by at least one year the potential recovery.

The UCL does not permit the recovery of penalties, but does allow for “restitution” of property (such as wages) belonging to the plaintiff. Therefore, the UCL does not allow recovery of PAGA penalties.

An employee may bring a UCL action against his or her employer in a “representative” capacity on behalf of other similarly aggrieved employees. However, the California Supreme Court held that a plaintiff must satisfy class action procedural requirements, discussed below. The representative employee also must demonstrate an actual injury (that is, that the employee suffered a “loss of money or property” as a result of the employer’s alleged acts of unfair competition).

Unlike PAGA, the UCL contains no exhaustion requirement; employees can initiate UCL claims for “unlawful” or “deceptive” employment practices in court without having without notifying any administrative agency.

How Do Representative Actions Differ from Class Actions?

To maintain a class action, the named class representative must initially satisfy a number of strict “class requirements.” For example, she must demonstrate a large number of sufficiently similar claims exist such that it makes sense to resolve them as a class. She must also prove that her claims are typical of the absent class members’ claims, and that she and counsel will adequately represent class members’ interests.

Depending on the facts of the case, these standards can be difficult to meet. Defendants can often successfully challenge a class action during its preliminary stages. In the employment context, employers faced with a meal/rest break class action, for example, may be able to defeat class certification by showing that the reasons employees may not have received their breaks varied by a host of factors unique to the individual employee, and as such, are not amenable to class treatment.

Whether these same class action requirements apply to employee representative actions brought under PAGA or the UCL will depend on which statute is being invoked. As stated, in Arias v. Superior Court, the California Supreme Court ruled that representative actions brought under the UCL must meet class requirements. By comparison, the Court found that nothing in the language of PAGA expressly required that a representative action be brought as a class.

So, unlike in a UCL representative action, a single employee may sue his or her employer under PAGA to collect penalties on behalf of other employees without satisfying the often arduous class action prerequisites (e.g., “numerosity,” “commonality,” typicality,” etc.). PAGA, however, applies only to penalties available under the Labor Code and Wage Orders. Claims under that statute are subject to a one-year statute of limitations applicable to claims for fines and penalties.

In contrast, the UCL claim must be brought individually or as a class action, has the longer statute of limitations, but is limited to injunctive relief and restitution of the plaintiffs’ property (such as wages).

Can Employers Contractually Avoid PAGA Representative Liability?

Can employers require employees sign arbitration agreements waiving their rights to bring PAGA representative claims, under the same “freedom of contract” principles enunciated by the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion?

Recently, the California Court of Appeal addressed this very question. In Brown v. Ralph’s Grocery Co., the employee brought a PAGA representative action against her employer, seeking civil penalties for various alleged Labor Code violations. The employer petitioned to compel arbitration, based on language in the employee’s arbitration agreement expressly prohibiting claims brought “as a private attorney general.” However, the trial court denied the employer’s petition, finding that the arbitration agreement’s PAGA waiver was unconscionable and therefore unenforceable.

The California Court of Appeal affirmed this ruling on review, specifically holding that Concepcion did not apply to the PAGA claims at issue. In so ruling, the court focused its attention on PAGA’s underlying public policies, noting a fundamental difference between a waiver of one’s private right to bring a class action, and the public rights embodied by a PAGA representative action. The court recognized that a PAGA plaintiff “acts as the proxy or agent of state labor law enforcement agencies, representing the same legal right and interest as those agencies,” in contrast with a private individual’s right to pursue class action remedies in court or arbitration. Similarly, the court reasoned that if employers could avoid PAGA representative liability through carefully-worded arbitration agreements, “the benefits of private attorney general actions to enforce state labor laws would, in large part, be nullified.”

Critics of Brown argue that it ignores Concepcion’s fundamental precept that the FAA requires private arbitration agreements be enforced as written. They contend that the U.S. Supreme Court spoken, and that parties to an arbitration agreement should be permitted to carve-out claims that can and cannot be arbitrated, which should include the right to waive PAGA representative claims in arbitration. However, unless and until Brown is reviewed by either the California Supreme Court or the U.S. Supreme Court, it remains good law, and PAGA waivers in employment arbitration agreements will be deemed unenforceable. Indeed, employers should not include PAGA waiver language in their arbitration agreements, because doing so could make the entire agreement invalid.

What Can Employers Do to Avoid/Minimize Liability?

Employees can use class and PAGA/UCL representative actions to turn small wage-and-hour violations into big problems for their employers. Additionally, employees will continue to turn to representative actions as a viable means to attack employer practices without complying with “class action” requirements.

Thus, as a first line of defense, employers must work hard to ensure they understand, and are compliant with, their legal obligations (including those contained in the Labor Code and applicable wage orders). Employers should then perform regular self-audits to maintain continued compliance, working with outside human resource consultants or employment law counsel as necessary. If wage-and-hour issues are raised as to individual employees, employers should work to resolve these quickly, to prevent them from turning into potentially costly class/representative actions. Regarding PAGA claims specifically, employers should use the statutory notice and “safe harbor” provisions to correct violations before lawsuits are filed.