The California Supreme Court Holds That an Employee May Waive the Right to Bring a Wage and Hour Class Action in an Arbitration Agreement

On Monday, June 23rd, 2014, the California Supreme Court issued its long awaited decision in Iskanian v. CLS Transportation.  In Iskanian, the Court held that waivers of the right to bring a wage and hour class action, contained in an otherwise valid arbitration agreement with an employee, may be enforceable.  The Court’s decision reverses its prior holding in the Gentry case that such waivers are generally invalid. 

Iskanian worked as a driver for CLS Transportation and signed a proprietary information agreement that contained an arbitration provision.  The arbitration provision provided that any and all claims related to Iskanian’s employment would be decided by binding arbitration.  The arbitration provision allowed for reasonable discovery, a written award, and judicial review of the award, and required that costs unique to arbitration (such as the arbitrator’s fees) would be paid by the company.  The arbitration provision also prohibited both Iskanian and CLS Transportation from pursuing class action or representative actions against the other.

Iskanian challenged the enforceability of the class action waiver.  The California Supreme Court concluded that the waiver was enforceable in light of the United States Supreme Court decision in Concepcion holding that the Federal Arbitration Act preempts state laws that interfere with the fundamental attributes of arbitration.  The Court also rejected Iskanian’s argument that the waiver of class action rights was illegal under the National Labor Relations Act according to the NLRB’s decision in D.R. Horton.  However, the Court did conclude that such a waiver could not encompass claims that an employee might bring in a representative capacity, such as under the Private Attorney General Act (“PAGA”).  Such claims are routinely brought by plaintiff employees in wage and hour class action proceedings and allow the plaintiff to sue, essentially as a proxy for the State enforcement agency, to recover Labor Code penalties.  A PAGA claim is desirable for the plaintiff employee because PAGA allows for an award of attorneys’ fees to the prevailing plaintiff.

The Court’s decision does not mean all arbitration agreements with employees are now valid.  The Court did not roll back the already developed law that allows employees to challenge arbitration provisions as “unconscionable.”  The Court has previously held that an employee arbitration agreement may be unenforceable if it is procedurally and substantively unconscionable.  Procedural unconscionability exists when an agreement is presented in a “take it or leave it” fashion and one party has no ability to negotiate terms.  Substantive unconscionability may exist if the agreement is unfairly weighted toward one party over another; such as when the employee gives up the right to recover attorneys’ fees, punitive damages or other substantive rights.

The Iskanian decision is the clearest direction we have received from the California Supreme Court in some time regarding employee arbitration agreements.  A defensible arbitration provision that eliminates the risk of any wage and hour class actions is highly valuable to many employers.  Although arbitration can be expensive because the employer must pay the private arbitrator’s fees, the ability to avoid a protracted and expensive wage and hour class action in either state or federal court will have tremendous appeal for certain employers.  Following the Iskanian decision, we now know that such arbitration provisions are achievable.

Whether an arbitration provision in which employees waive the right to bring wage and hour class actions make sense for a particular employer involves weighing a variety of factors, including the size of the employer and the costs of any likely arbitrations, including individual arbitrations over small wage claims that otherwise would have been resolved in some other fashion.  In addition, an employer that decides to adopt an arbitration provision must carefully consider the language used in the agreement as well as the process used to implement it across the existing workforce.  Only by careful planning with counsel will an employer position itself to defeat claims that the arbitration agreement is procedurally or substantively unconscionable.  While the Iskanian decision is one of the few positive developments regarding arbitration agreements to come out of the California Supreme Court, it does not mean all employers should immediately adopt such provisions, or that all arbitration agreements and class action waivers are enforceable.

Arbitration agreements can be an effective part of an employer’s legal risk management process.  However, the law around arbitration agreements is complex and there are practical challenges in the implementation of such agreements that must be considered before they are presented to employees for signature. 


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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