To the dismay of California employers and labor-and-employment attorneys, the U.S. Supreme Court last week refused to take a case that could have gutted a controversial state law that businesses often complain is widely abused.

The Private Attorney General Act, passed in 2004, allows workers to file complaints against their employers for alleged labor code violations. The problem is, businesses say, it allows employees to make claims on behalf of larger groups without the hassle of obtaining a class-action certification.

What’s more, the claims frequently allege technical labor code violations such as issuing paychecks that don’t include pay period start and end dates.

“There can be technical violations that don’t harm anybody but they can lead to millions and millions of dollars in fines,” said Jack Sholkoff, a shareholder in the downtown L.A. office of law firm Ogletree Deakins Nash Smoak & Stewart.

The law, often called PAGA, calls for a $100 fine for each employee affected by a violation. If an alleged offense continued through multiple pay periods, the fine jumps to $200 an employee for each pay period until the matter is resolved.

In recent years, many employers started asking workers to sign agreements requiring them to settle disputes through mediation or arbitration rather than filing costly lawsuits.

But the California Supreme Court ruled last year that employers cannot use these requirements as a defense to PAGA claims. The federal district courts, however, have taken another view. Several federal court justices last year ruled the Federal Arbitration Act protects employers’ rights.

“There’s a direct conflict between the way federal district courts handle them and the way state courts handle them,” said Kenneth Sulzer, president of the L.A. chapter of the Federal Bar Association. “It’s a huge practical problem here, where the only thing that matters is which court you’re in. If you’re in federal court, you win; if you’re in state court, you lose if you’re an employer.”

The opposing views eventually led to last year’s petition to the U.S. Supreme Court. Now that the high court has declined to hear the issue, California employers should be prepared for a new rush of federal PAGA lawsuits, Sholkoff said.

“PAGA is becoming a sword for plaintiffs to use to avoid arbitration obligations and the U.S. Supreme Court’s failure to rule will just continue that trend,” he said. Sholkoff and Sulzer, who both defend employers involved in PAGA disputes, anticipate the high court will eventually accept a case to address the arbitration agreement issue.

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