Implications of California Senate Bill 365 for Employers in Light of Estrada

West Hollywood, Century City and Griffith Observatory at sunset. Parts of Griffith Park Visible

By Ronald J. Holland & Oscar Peralta on February 13, 2024

Posted in California, California L&E Group, Legislation, Litigation, PAGA, Wage & Hour

The California Supreme Court and the Legislature ushered in 2024 with two significant changes that may appear unrelated but that may impact California employers. We consider each in turn.

1. SB 365 Precludes Automatic Stays of Litigation Pending an Appeal from an Order Denying a Motion to Compel.

California Senate Bill (SB) 365, which took effect Jan. 1, 2024, amended Code of Civil Procedure section 1294 to provide that “the perfecting of such an appeal shall not automatically stay any proceedings in the trial court” when appealing an order denying a motion to compel arbitration. In simpler terms, SB 365 gives trial court judges the discretion to move forward with litigation while an appeal of a denial of a petition to compel arbitration is pending.

This single-sentence amendment to Section 1294 has significant implications for an employer’s arbitration program, which often serves as a first line of defense to class, collective, and representative actions. Indeed, following the U.S. Supreme Court’s holding in Viking River Cruises (see June 2022 GT Alert), many employers rolled out arbitration agreements that provide for arbitration of an employee’s individual Private Attorneys General Act (PAGA) claim. And in Adolph v. Uber Technologies, the California Supreme Court recognized that the proper course for a trial court to take after compelling an employee’s individual PAGA claim to arbitration is to stay the non-individual PAGA claim.

With SB 365 in effect, however, what happens if the opposite occurs? What if an employer’s motion to compel arbitration is denied? Under SB 365, a trial court may decide that litigation of the PAGA claim (both its individual and representative component) should continue. This could result in challenges (and extra expense) given the time it takes for appeals to be resolved. For example, the 2022 California Court Statistics Report shows that 90% of appeals are processed within 964 days (approximately 2.5 years), with the median appeal resolved in 568 days (approximately 1.5 years). SB 365’s proponents were aware of these statistics, contending, “It is more likely that a business or employer will have greater resources than individual employees or consumers, and therefore greater capacity to handle a delayed resolution of the dispute.”

2. The California Supreme Court Removed a Defense from an Employer’s Arsenal When Defending PAGA Cases.

On Jan. 18, 2024, the California Supreme Court rendered its highly anticipated decision in Estrada v. Royalty Carpet Mills, Inc. holding that a trial court cannot strike a PAGA claim on manageability grounds because to do so would be “inconsistent with a plaintiff’s statutory right to bring such a claim and is beyond a trial court’s inherent authority.” The Estrada court held trial courts still had the authority to manage complex PAGA action by, for example: (i) limiting the types of evidence a plaintiff may present, (ii) limiting witness testimony; (iii) using statistical methods, such as representative testimony, surveys, and statistical analyses to determine liability; or (iv) granting dispositive motions to reign in overbroad claims. While these options – which the court described as “tools” – may assist an employer in narrowing the scope of a PAGA claim, the Estrada decision precludes a trial court from striking or dismissing a PAGA claim outright based on unmanageability.

3. What May Unfold for Employers.

The combination of these two recent developments may have real litigation consequences for employers. For example, an employer could (i) lose a motion to compel arbitration, (ii) appeal that decision without the benefit of an automatic stay of trial court proceedings, (iii) face the prospects of litigating a PAGA claim while any appeal is pending; and (iv) have no recourse to challenge a PAGA claim based on manageability grounds. By the time the Court of Appeal renders a decision, an employer may have expended considerable time, resources, and money on litigating a PAGA claim regardless of whether the trial court’s order was affirmed or denied.

For these reasons, employers should consider:

Reviewing their arbitration agreements to ensure their enforceability in light of SB 365;
Whether or not to implement arbitration agreements to minimize liability of class, collective, or representative actions; and
Reviewing and updating, and if needed, adopting appropriate wage and hour policies and practices to ensure Labor Code compliance.