Employers in California have long relied on arbitration agreements as a sort of legal firewall, keeping conflicts at work under control and out of the hands of sympathetic juries. That firewall was severely compromised by the Private Attorneys General Act, or PAGA. Additionally, California’s appellate courts have made it clear that they intend to keep that gap wide open, just when employers thought the courts might be closing it.
The fundamental problem has never been straightforward. Employees who allege a violation of the Labor Code may file a lawsuit under PAGA not only on their own behalf but also on behalf of the state and all other similarly harmed coworkers. Because of its representative scope, PAGA is genuinely costly for employers and challenging to enforce in arbitration. In its 2022 Viking River decision, the U.S. Supreme Court attempted to provide a compromise by sending the individual PAGA claim to arbitration and allowing the representative claims to proceed from there. However, California courts have been hesitant to adhere to that script.
The Fourth District Court of Appeal’s recent ruling against In-N-Out Burgers provides an exceptionally clear illustration of this conflict. After acknowledging the “deep deference” owed to the U.S. Supreme Court, the court quickly refused to heed its advice. The California Supreme Court’s decision in Kim v. Reins International, which maintains that employees have standing to pursue representative PAGA claims in court even when their individual claims are sent to arbitration, served as the foundation for the reasoning. This legal tactic, which has become somewhat of a pattern in California courts, prevents employers from using arbitration as a complete escape hatch.
The increase in what practitioners began referring to as “headless” PAGA lawsuits in recent months has complicated matters. The concept was almost clever in its simplicity: if a plaintiff completely drops their individual PAGA claim, there is no individual claim to force arbitration, and the employer has no leverage. After an appellate ruling in Balderas v. Fresh Start Harvesting in March 2024 appeared to indicate that the door was open, some plaintiff lawyers vigorously tested this theory. Courts were unsure of how to react when they recognized this tactic for what it was: an arbitration workaround disguised as statutory law.
The situation changed after the Leeper ruling in December 2024. The Second Appellate District came to the conclusion that a PAGA plaintiff cannot simply remove their individual claim from the lawsuit due to the plain language of California’s Labor Code. According to the statute, a PAGA action is brought “on behalf of the employee and other current or former employees.” The court determined that the terms “and” and “or” are not synonymous. Without its individual counterpart, a non-individual PAGA claim cannot exist. Although Leeper did not resolve every unanswered question, it did put an end to the headless PAGA theory as a practical litigation tactic.
Whether California’s appellate courts will interpret the landscape in the same way is still up in the air. Other cases, such as Sood Enterprises, Garcia, and Barnett, are making their way through the system, and the California Supreme Court may intervene to provide some consistency. Another level of complexity is introduced by the PAGA statute’s 2024 amendments, which raised the standard for plaintiffs to establish standing. Litigation under the previous framework will continue for a while because those changes only apply to claims filed after June 19, 2024.
Employers in California can currently take a close look at the wording in their current arbitration agreements. Agreements drafted even two years ago might not reflect the current regulations regarding PAGA waivers and individual versus representative claims because the legal landscape is constantly changing. Employment lawyers believe that the courts are working hard to create a more cohesive framework. Regardless of what their arbitration agreements state, employers in California should currently assume that representative PAGA claims will end up in court.
