Appellate Court Refuses to Permit Arbitration of Threshold “Employee or Independent Contractor” Issue

Appellate Court Refuses to Permit Arbitration of Threshold “Employee or Independent Contractor” Issue

 

California adopted a novel approach to enforcing the Labor Code of California when it enacted the Private Attorney General Act of 2004 (“PAGA”)i. This law allows a private citizen to pursue civil penalties on behalf of the State of California Labor and Workforce Development Agency (“LWDA”) provided the formal notice and waiting procedures of the law are followed. Recently in Damaris Rosales v. Uber Technologies, Inc.ii, the Second Appellate District Court of Appeal followed a long line of cases and refused to permit PAGA claims from being arbitrated.

 

  1. PAGA permits an “aggrieved employee” to act as a Private Attorney General in seeking civil penalties

PAGA permits an aggrieved employee to be deputized as a Private Attorney General to recover civil penalties for various violations of the Labor Code.iii Numerous cases have protected the PAGA statute from arbitration, arguing that arbitration of PAGA claims is inappropriate, mainly because the real party in interest is the State of California, a party that did not enter into the arbitration agreement.iv

Rosales does not address the issue of whether a PAGA claim is arbitrable. The case addresses whether a person’s employment status (employee or independent contractor) is arbitrable, in the context of a PAGA action. The Court in Rosales held that it is not, possibly to keep PAGA claims immune from arbitration.

 

  1. The Court of Appeals held employers cannot preliminarily arbitrate whether a person is an employee or independent contractor in PAGA actions

In Rosales, the arbitration agreement stated that all employment related claims should be arbitrated and specified that the issue of whether the case was arbitrable was delegated to the arbitrator. The underlying lawsuit involved a single PAGA claim for failure to pay wages under Labor Code section 216. Uber’s position was that Rosales, like other drivers, was not an employee, but an independent contractor. Uber argued if Rosales was not an employee, then he could not bring a PAGA claim and his lawsuit was therefore arbitrable. Uber had moved to arbitrate the sole issue of whether Rosales was an independent contractor or an employee. The trial court denied the arbitration motion and Uber appealed. The Second District Court of appeal, in reaching its decision, cited two previous cases which held the issue of whether a plaintiff was an aggrieved employee cannot be split from the underlying PAGA claim to be determined by arbitration.

Uber made two cogent arguments. Uber argued that the FAA governs arbitrations and the FAA permits arbitrating whether the case is arbitrable in the first place. In response, the court stated the FAA does not govern PAGA claims and therefore had no application to this matter. Uber argued the employee/independent contractor issue was a threshold issue that was separate from the underlying PAGA lawsuit and that in other contexts threshold issues were allowed to be determined by an arbitrator. The court’s response to this was simply that this was not any old case, it was a PAGA case.

Uber also argued that regardless of whether the FAA governed PAGA claims, the threshold issue in the case had nothing to do with PAGA, but instead, involved a discrete issue between the parties as to their contractual relationship. The court responded to this argument by applying the holding and reasoning of another case which held that whether a person was an aggrieved employee cannot be decided by arbitration. The application of this case, however, may not have been logical. The term “aggrieved employee” is a specific element of PAGA. But whether a person is an employee at all, does not necessarily implicate PAGA in particular.

 

  1. Takeaway

Given the court did not accept Uber’s arguments, it can be assumed that for the foreseeable future, California courts will protect PAGA cases from arbitration. Unless the PAGA statute is amended or courts hold otherwise, the only protection against PAGA claims may be the implementation of good policies and procedures and excellent attorneys.

i Cal. Lab. Code section 2698, et seq.

ii Rosales v. Uber Techs., B305546 (Cal. Ct. App. Apr. 30, 2021).

iii Cal. Lab. Code section 2698, et seq.

iv Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348.

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