Yesterday the California Supreme Court ruled in a 4-3 decision that an employee who has a wage claim against his or her employer but is subject to an arbitration agreement has the right to first use the Labor Commissioner’s administrative processes in a so-called Berman hearing before arbitration of the wage claim can be required. The Court held that waiving the Berman process in an arbitration agreement is unconscionable and therefore cannot be enforced. The Berman process calls for various informal procedures to resolve wage claims, including a hearing before a decision is reached. When a decision is reached, the losing party has the right to appeal de novo to the superior court, where the case is essentially retried. The Supreme Court held that at this point the employer could require arbitration of the appeal but also held that the statutory protections subsequent to the Berman process would have to be followed including allowing the Labor Commissioner to represent the employee in the arbitration and requiring the employer to post a bond to appeal the decision of the Labor Commissioner to arbitration.

Frank Moreno, a former employee of Sonic Calabasas, filed a claim with the Labor Commissioner for unpaid vacation pay, thus invoking the administrative procedures of the Labor Commissioner to resolve his claim in a Berman hearing. When he began his employment, Moreno signed an arbitration agreement committing him to resolve any and all such claims in an arbitral forum. He specifically waived any right to use a judicial “or other governmental dispute resolution forum” with some exceptions, not including the Labor Commissioner. After Moreno filed his claim with the Labor Commissioner, Sonic Calabasas filed a petition to compel arbitration that was denied by the trial court. On appeal, the Court of Appeal reversed, holding that a recent U.S. Supreme Court decision, Preston v. Ferrer, which involved the Labor Commissioner’s jurisdiction over Talent Agency Act controversies, compelled a finding that the Labor Commissioner did not have jurisdiction over a wage claim subject to an arbitration agreement. The Labor Commissioner’s jurisdiction was preempted by the Federal Arbitration Act (FAA), which embodies a national policy favoring the arbitration of disputes when the parties agree to do so.