The CA Supreme Court Issues a Confusing Opinion on the Question of Whether Employees can be forced to Arbitrate Unpaid Wage Claims in lieu of a Berman Hearing with the Labor Commissioner's Office

We have written regularly regarding the enforceability of arbitration clauses contained in standard employment agreements. Understandably, most employers would love to avoid the uncertainty of appearing before a judge or jury to defend their employment decisions. Administrative entities like the Labor Commissioner’s office or the Department of Fair Employment and Housing are often even more disfavored by employers because of their perceived pro-employee bias and the often bureaucratic nature of the offices. So, it is not surprising that employers have sought to avoid these forums by including arbitration clauses in employment agreements. There has been a significant body of litigation around these types of arbitration clauses in both state and federal court and last week the California Supreme Court issued its second opinion in the case of Sonic-Calabasas A., Inc. v. Moreno (Sonic 2), this time around concluding that an arbitration provision that forces an employee to arbitrate a claim for unpaid wages is not categorically unenforceable under California law and the agreement may be enforceable if it passes muster under the Court’s articulated test for whether a contract is unconscionable. With that unclear direction, the Court sent the case back to the trial court for reconsideration. To say there is still no answer to whether Sonic Calabasas may force Mr. Moreno to arbitrate his claim for unpaid vacation pay rather than pursue that claim in a Berman hearing[1] before a Deputy Labor Commissioner is an understatement.

Essentially, after being forced by the United States Supreme Court to reconsider its Sonic 1 opinion, in which it concluded that waiver of the right to a Berman hearing by virtue of an arbitration agreement was absolutely impermissible, the California Supreme Court concluded in Sonic 2 that an arbitration provision that requires an employee to arbitrate a claim for unpaid wages, rather than go the route of a Berman hearing, might be permissible if the agreement is not subject to the defense of unconscionability, as developed by the court in its Armendariz opinion and further explained by the Court in its Sonic 2 opinion. The defense of unconscionability is a defense to the enforcement of an otherwise valid contract term and it has been used with good success by employees seeking to avoid arbitration of employment disputes with their employers. In this instance, the California Supreme Court directed the trial court to examine both whether this was a contract of adhesion between Mr. Moreno and his employer (e.g., a take it or leave it agreement rather than an individually negotiated agreement) and also whether the arbitration process contemplated by the arbitration clause properly protected Mr. Moreno’s right to an accessible, affordable process for resolution of his wage disputes (like the one provided through the Labor Commissioner’s office). Because the trial court took no evidence on these issues at the time it initially ruled on the employer’s motion to compel arbitration, the California Supreme Court had no evidentiary record from which to reach any conclusion on these points.

The United States Supreme Court has in recent history been more willing than the California Supreme Court to enforce arbitration agreements. The Sonic 2 opinion resulted from the United States Supreme Court directing the California Supreme Court to reconsider whether its decision in Sonic 1 was preempted by the Federal Arbitration Act. Whether the Federal Arbitration Act and the case law developed under it will ultimately push California toward more acceptance of employer-employee pre-dispute arbitration agreements remains an open question. The Sonic 2 opinion suggests that at least the current California Supreme Court is prepared to carefully scrutinize almost any arbitration agreement entered at the outset of employment with no negotiation by the employee.

 [1] Under the California Labor Code Section 98, an employee seeking unpaid wages may file a complaint with the local DLSE office and ultimately receive a hearing before a Deputy Labor Commissioner. These hearings are referred to as Berman hearings in honor of the sponsor of the legislation, Howard Berman.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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