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California lets citizens enforce labor laws. The Supreme Court might end that

San Francisco Chronicle logo San Francisco Chronicle 3/15/2022 By Bob Egelko
The U.S. Supreme Court building in Washington, D.C., in January. (Drew Angerer/Getty Images/TNS) © Drew Angerer / TNS

The U.S. Supreme Court building in Washington, D.C., in January. (Drew Angerer/Getty Images/TNS)

The U.S. Supreme Court will hear a case this month that could prevent many Californians from taking their employers to court on claims that they violated state labor laws, such as paying minimum wages and requirements for overtime, meal and rest breaks.

Most large companies, in their employment contracts, require workers to take those disputes to private arbitration rather than suing in court. Arbitrators’ decisions are virtually unappealable, and their findings usually favor employers, their frequent customers. A review of 1,213 California employment arbitration cases from 2003 through 2007, published by the Journal of Empirical Legal Studies, found that employees won only 21.4% of the verdicts. Another study found that employers were more likely to win if they had appeared before the same arbitrator in the past.

And because the contracts require individual arbitration and prohibit collective action, the potential payments are often so small that employees cannot find lawyers to take their cases, causing many to drop their claims.

California responded with a 2004 law, the Private Attorneys General Act, or PAGA. It allows employees to file complaints, individually or collectively, in the name of the state for violations of labor laws. If the state Labor and Workforce Development Agency does not take over the case — which it rarely does, with a limited enforcement budget — the employees can file suit and collect 25% of any penalties awarded by the court, with the rest going to the state.

Businesses have long opposed PAGA and contend the 1925 Federal Arbitration Act overrides such state laws and allows employers to require individual arbitration in work contracts. The California Supreme Court disagreed in a 2014 ruling allowing PAGA workplace suits to continue, and the U.S. Supreme Court denied review in that case and others from state and federal courts in the following years.

But in December, the high court, with its most conservative majority in decades, agreed to take up an appeal by a Southern California shipping cruise line facing a PAGA suit by hundreds of present and past employees. The court has scheduled arguments for March 30, with a ruling due by the end of June, a timetable that has prompted expectations the justices will allow California employers to require individual arbitration.

The rapid schedule “indicates they know what they’re going to do. They’re not going to look favorably on representative actions that are carved out from the Federal Arbitration Act,” said Fred Hiestand, an attorney for the Civil Justice Association of California who filed arguments with the court on behalf of business groups.

“The smart money is betting against the workers. They’re arguing into a headwind,” said Gordon Renneisen, a San Francisco lawyer who represented employees in one of the earlier cases in which PAGA was upheld.

The stakes are high for both businesses and their employees.

PAGA suits are “extracting millions of dollars from employers … (as) another tax for doing business in California,” the shipping company, Viking River Cruises, said in a court filing by attorney Paul Clement, a former U.S. solicitor general. Business advocates and the U.S. Chamber of Commerce have filed supporting arguments. And Brian Maas, president of the California New Car Dealers Association, is leading a campaign to collect signatures for a proposed November ballot measure that would repeal PAGA.

On the other side, state Attorney General Rob Bonta told the court that the California law plays a crucial role in “ensuring the fair and legal treatment of some of the state’s most vulnerable workers, including those in the agricultural, garment, and front-line service industries.”

In 2003, a year before PAGA was passed, Bonta said, a federal study found more than 33,000 serious wage violations by employers of more than 100,000 garment workers in Los Angeles, while the state labor office filed fewer than 100 wage complaints against all employers in California.

Court filings backing the state law include one from the AFL-CIO, even though union members, about one-sixth of all employees in California, can usually rely on union contracts to avoid individual arbitration. “Millions of employees, union and non union, depend on the effective enforcement of state employment laws to protect their livelihood and their health and safety while at work,” the labor organization told the court.

Even the National Academy of Arbitrators provided some support for PAGA, telling the court that employees claiming violations of labor laws should be allowed to seek penalties for the state during arbitration.

The Supreme Court has been friendly to arbitration in the past. A 5-4 ruling in 2011 overturned another California Supreme Court decision and said companies could require employees or customers to arbitrate disputes individually rather than joining forces in a class-action suit. That case, which did not involve PAGA, required a household to arbitrate its challenge to a $30.22 phone bill from AT&T — prompting Justice Stephen Breyer to ask, in a dissenting opinion, whether any “rational lawyer” would take a case offering fees for a share of $30.22.

But opponents of PAGA say the law offers far less to employees than to their attorneys — “bounty hunters,” as Hiestand of the Civil Justice Association described them. The California Business and Industrial Alliance said in a recent report that the average employee’s share in a PAGA case was $1,400, while lawyers’ fees averaged $372,000.

The alternative, however, is far worse for employees, said Eric Kingsley, a Los Angeles-area labor lawyer and board member of Consumer Attorneys of California. When — not if — the court overrides the state law, he said, even more businesses will require arbitration in their employment contracts, and “there will be effectively no labor enforcement in the state of California except for labor agencies, which are grossly underfunded.”

But Renneisen, the San Francisco labor lawyer, said the court might not have the last word.

Ideally for employees, he said, Congress could pass a law allowing them to sue over labor conditions without going to arbitration, like a bill President Biden signed March 3 allowing employees claiming sexual harassment to sue in court despite arbitration requirements in their contracts. While legislation applying to all workplace suits seems unlikely in the current Congress, Renneisen said, California could also rewrite its laws to fit the court’s standards.

For example, he said, if the court says employees who file claims under PAGA are bound by individual arbitration agreements, the Legislature could broaden the law to allow non-employees to accuse the same company and collect a share of the penalties — the “vigilante” enforcement approach that Texas included in a recent anti-abortion law, and that Gov. Gavin Newsom has proposed to let private citizens sue sellers of illegal firearms.

If the court finds the state law shifts too much enforcement authority to employees, Renneisen said, California could give its Labor and Workforce Development Agency veto power over all PAGA settlements. And if the justices decide employees subject to arbitration contracts should not receive any automatic share of PAGA penalties, the law could be recast to direct all payments to the labor agency, which then could decide whether to share them with the employees.

As Renneisen put it in an article on the Law360 website, even if employers win in the nation’s highest court, “the long-running struggle over PAGA will continue.”

Bob Egelko is a San Francisco Chronicle staff writer. Email: begelko@sfchronicle.com Twitter: @BobEgelko

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