Revise Arbitration Agreements to Cover PAGA Claims (or Suffer the Consequences)!

It has been clear for nearly a year that employers should adopt employment arbitration agreements covering claims under the California Labor Code Private Attorneys General Act (“PAGA”). While state courts long held PAGA to be exempt from arbitration, the United States Supreme Court disagreed in its 2022 Viking River Cruises, Inc. v. Moriana decision (available here).

Viking River Cruises, Inc. ended a dilemma faced by employers drafting effective arbitration agreements. While it was possible to include PAGA or use vague language referring to “representative” or “mass” claims, the strategy risked state-court refusal to enforce the rest of the agreement in non-PAGA cases. This made it almost impossible to craft language that did not either (1) "carve out" PAGA completely, or (2) include PAGA claims - risking the agreement’s enforceability.

Employment arbitration agreements should now be revised immediately, despite the effort needed to replace current language, to ensure PAGA coverage if necessary.

One recent California case highlights the urgency of this issue. In Duran v. EmployBridge Holding Co., an employer had excluded PAGA claims but argued that – under the rest of the agreement’s language – it ought to apply to an employee’s PAGA suit following the United States Supreme Court’s Viking River Cruises, Inc. decision.

The arbitration agreement did cover most non-individual claims, stating that neither the employee nor the employer would bring any “class action, collective action, or representative action claims against each other in arbitration, in any court, or otherwise.” This certainly would prevent against class-action claims by the employee given United States Supreme Court authority holding that – unless an employer expressly agrees – class claims cannot be made by employees covered by arbitration agreements.

The problem with the arbitration language was that it expressly excluded PAGA claims. Its only reference to PAGA stated:

“Claims for unemployment compensation, claims under the National Labor Relations Act, claims under PAGA and any claim that is non-arbitrable under applicable state or federal law arbitrable under this Agreement.”

Using this language was a reasonable decision before the Viking River Cruises decision. But relying on the agreement's express language, the court found that it had not changed and the PAGA exclusion still applied. As a result, the employee’s PAGA claim survived and was sent down for trial in civil court.

Duran v. EmployBridge Holding Co. highlights the urgent need for employers to revise their arbitration agreements now to clarify two issues.

First: the agreement expressly covers PAGA claims.

Second: the agreement allows an employee to bring only her own individual PAGA claim, excluding arbitration of all claims based on Labor Code violations allegedly suffered by other employees. This ensures that PAGA claims will remain a single-employee matter in employment arbitrations (though the California Supreme Court will soon consider the fate of PAGA claims based on employees other than the individual’s arbitration agreement in another case).

The case can be viewed here.

Policies and Agreements: Sometimes Too Much - is Too Much!

It can be very difficult to keep language straight when an employer presents different policies, and different agreements, to the same employees. One recent California appellate opinion highlights this issue.

In Playu Alberto v. Cambrian Homecare, the employer presented a caregiver with multiple agreements during her orientation. These included an arbitration agreement, a confidentiality agreement, and an "addendum" to the confidentiality agreement.

The problem? Inconsistency between the three agreements presented to an employee at one time. While the arbitration agreement applied to “all claims or controversies arising out of Employee’s . . . employment . . . or cessation of employment,” the confidentiality agreement required employees to “consent to the order of an immediate injunction … from any court of competent jurisdiction” – and included other employer-friendly provisions as well.

Noting that the arbitration agreement might have been enforceable on its own, the court nonetheless held that (1) it would be unfair to require arbitration of all an employee’s claims while allowing the employer to bring some important claims in court (in addition to other employer-friendly provisions), and (2) the arbitration and confidentiality agreements should be read together because they were presented at the same time as part of the same new employment relationship.

The result? An employer left facing a full civil PAGA/Class Action rather than a single-plaintiff arbitration.

This was a case of bad facts making bad law. But it provides an important lesson for all employers: policies should be considered together when presented to employees. Failure to consider the relationship between different policies or employee agreements, even those adopted years apart, can have a devastating effect when both are read together.

An aside: Employers should also carefully consider any ‘integration’ clauses stating that a policy is the “entire agreement” with an employee or “supplants any prior agreements.” This type of language, often placed in commission or severance materials, can destroy prior at-will, trade secret protection, or other important agreements with an employee.

The case, Jennifer Playu Alberto v. Cambrian Homecare, can be viewed here.

Here's a Tip: Know the Law About Tips!

California treats customer tips (or “gratuities”) far differently than federal law. Many states, for example, permit employers to take a federal “tip credit” toward minimum wage – lowering tipped employees’ actual hourly wage well below the federal minimum. Tip credits are illegal in California; all employers must pay the state minimum wage whether an employee receives tips or not.

Employer treatment of tips has become a hot topic for lawyers, who have filed many recent class actions alleging violation of state gratuity laws.

Tips Belong to Employees

State law makes clear that tips belong only to employees, not their employers. California Labor Code section 350 states that a gratuity is “the sole property of the employee or employees for whom it was paid, given or left for." This means that employers may not keep any part of a tip for themselves, even to cover administrative or credit-card fees.

While employers may enforce a tip-pooling arrangement initially approved by employees, any system must be “fair,” reasonable and consistent with industry practice. California does not just prohibit owners from keeping tips or participating in a tip pool. Any employee with supervisory duties is prohibited from participating as well. Managers, supervisors, and low-level shift leaders are prohibited from taking any part of customer gratuities – even a share of the “tip jar” at a coffee counter. These employees need not even be exempt from overtime; Starbucks faced a $100M class action alleging that shift supervisors had taken a share of tips despite a prior suit alleging that the same workers were not sufficiently high-level to be exempt management employees. An appellate court overturned the nine-figure (!) award in that case, but it highlights the risks posed by gratuities.

Recent Changes to Tip Pooling Law

Tip pooling was even more limited under Labor Commissioner opinion letters suggesting that only employees actually engaged in the direct “chain of service” could share tips. This prohibited tip-sharing with chefs, kitchen staff, some bussers, bartenders, and other employees despite their contribution to the overall customer experience. The policy was based on language in an older California tip-pooling case that had suggested the “chain of service” language.

In recent years, state courts have rejected the “chain of service” language, arguing

that it does not appear anywhere within California’s Labor Code. This suggests that one basis for many recent actions – sharing tips with co-employees such as bartenders and runners – will soon be discredited. Federal authorities also moved in this direction but may not continue under the current Administration.

Management Options

Employers should be aware of state-law restrictions on tip pooling and monitor developments in the coming months. General rules can be viewed on the Labor Commissioner’s website at http://www.dir.ca.gov/dlse/faq_tipsandgratutities.htm.

Management should also review the status of "service charges" added to bills, a practice commonly applied to larger parties. Some establishments have turned entirely to service charges and discouraged gratuities on the belief that service charges do not count as “tips” under state law. This has been questioned in at least one recent appellate opinion (see the opinion here) and is likely to evolve based on employee and customer assumptions that charges will be split among servers.

Finally, businesses enforcing a tip-pooling policy should be certain that the system truly complies with applicable law and excludes all managers, assistant managers and shift leads. It makes no sense for employers to accept liability for allocating money that was never theirs in the first place.