In June 2014, the California Supreme Court held in Iskanian v. CLS Transportation Los Angeles LLC that a prospective waiver of an employee’s right to bring a representative PAGA claim in court is contrary to public policy and unenforceable as a matter of state law. The court further held that its new rule is not preempted by the Federal Arbitration Act (FAA) because vindication of the state’s interests in enforcing the Labor Code and recovering civil penalties through a PAGA action does not interfere with the FAA’s goals of promoting arbitration as a forum for private dispute resolution.
Iskanian’s Little Known Limitation
Plaintiffs attorneys have fallen in love with the PAGA portion of the Iskanian decision. In the wake of Iskanian, California employers have been facing a wave of “PAGA-only” cases in which employees allege numerous violations of the Labor Code but only plead one representative PAGA claim seeking civil penalties. One of the strategies in bringing a PAGA-only case is to avoid mandatory arbitration of the employee’s individual Labor Code claims that serve as a predicate for the PAGA claim.
Plaintiffs attorneys love Iskanian’s result more than its reasoning¸ however. One fundamental limitation embedded within the decision — a limitation that plaintiffs attorneys assiduously avoid and that has yet to be cited by any lower court — is the express acknowledgement that the new Iskanian rule does not, and cannot, permit employees to avoid their arbitration obligations and still recover individualized damages or other victim-specific relief.
Specifically, the Iskanian court admitted:
Through this discrete passage of its lengthy decision, the court recognized that the FAA would preempt any reading of PAGA that permits an employee to avoid his or her arbitration obligations yet still recover victim-specific relief that is kept 100 percent as compensation.
Iskanian and Section 558 are in Conflict
Section 558 provides than an employer “shall be subject to a civil penalty” defined as $50 per employee per pay period for an initial violation and $100 per employee per pay period for each subsequent violation “in addition to an amount sufficient to recover underpaid wages.” It further requires that any wages recovered “shall” be paid to the employees directly.
Pre-Iskanian precedent held that wages recovered under Section 558 are part of a civil penalty. It did so despite the fact that the statute distinguishes between fixed penalty amounts and variable underpaid wages; the wages are paid entirely to the employees as compensation; the wages do not fit the recognized definition of a “penalty” (i.e., punishment designed to deter wrongful conduct that is without regard to actual damages suffered); and Section 558 cannot be an exception to PAGA’s requirement that all civil penalties be distributed 75 percent to the state because PAGA did not exist when Section 558 was enacted.
Iskanian’s express limitation acknowledging that claims that seek individual damages or victim-specific relief — i.e., compensatory wages that are paid 100 percent to the employees — are not exempt from the FAA’s rule requiring enforcement of arbitration agreements according to their terms places it in direct conflict with pre-Iskanian precedent that considered wages recovered under Section 558 to be part of a “civil penalty.”
Section 558 Wage Claims Are Arbitrable Under Iskanian
The interplay between Iskanian and Section 558 will eventually be addressed by a California or federal court. The employer defendant will rely on Iskanian’s express limitation, PAGA’s fundamental purpose to enforce the Labor Code and recover civil penalties that will fund the state’s enforcement capabilities, the text of Section 558 that distinguishes between fixed penalties and variable wages, and the U.S. Supreme Court’s expansive interpretation of the FAA. The employee plaintiff will rely on pre-Iskanian precedent and argue that Section 558 wages constitute a civil penalty even though they are paid entirely to employees as compensation.
The proper result should be that, regardless of whether underpaid wages recovered under Section 558 constitute part of a “civil penalty,” an employee seeking such wages is seeking victim-specific relief and the FAA and Iskanian require claims for victim-specific relief to be arbitrated.
Section 558 Wages Cannot Constitute a PAGA Civil Penalty
For example, the text of PAGA requires that all civil penalties recovered (1) “shall” be distributed 75 percent to the state with only 25 percent going to the aggrieved employees, and (2) be calculated as a “maximum amount” that is capable of equitable reduction by the court.
The purpose behind the mandatory distribution structure is to fund the state’s enforcement agency coffers and to incentivize employees to bring PAGA claims in the nature of a qui tam action. And the reasoning behind the requirement that civil penalties be calculated as a maximum amount capable of reduction is to avoid punishing an employer in a manner that is unjust, arbitrary, oppressive or confiscatory.
Underpaid wages recovered under Section 558 do not comply with either requirement. Section 558 wages are paid entirely to the aggrieved employees and do fit within PAGA’s core purpose of funding its enforcement agencies and recovering civil penalties that cannot otherwise be recovered by employees directly. Employees simply use the imprimatur of the state to recover wages that they can recover in their individual capacities based on specific Labor Code violations. And Section 558 wages cannot be calculated as a maximum amount that is capable of equitable reduction because reducing the wages recoverable by specific employees is by its very nature inequitable to the employees who earned them.
Simply put, if Section 558 wages sought pursuant to PAGA are not arbitrable under Iskanian and the FAA, they still should not be recoverable under PAGA because they do not satisfy PAGA’s statutory requirements and cannot constitute an exception to PAGA’s specific text, structure and purpose.
PAGA Case Law Continues to Develop
—By Jamin Soderstrom, Call & Jensen
Jamin Soderstrom is an associate at Call & Jensen in Newport Beach, California. His practice includes commercial, employment, intellectual property, and consumer litigation. Soderstrom regularly defends employers in individual, class and representative actions brought by employees, including PAGA-only cases.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 Iskanian v. CLS Transportation Los Angeles LLC, 59 Cal. 4th 348 (2014).
 Id. at 387-88.
 Thurman v. Bayshore Transit Management Inc., 203 Cal. App. 4th 1112, 1146-47 (2012); Murphy v. Kenneth Cole Productions Inc., 40 Cal. 4th 1094 (2007).
 Labor Code § 2699(e)(2), (i).