Weekly Law Resume - August 2, 2012: Preserving Arbitration: Waiver and California Labor Code Section 206.5

by Low, Ball & Lynch
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[author: Joseph Aguilar]


Kyle Pulli v. Pony International, LLC.
Court of Appeal, Fourth District (June 19, 2012)

California Labor Code Section 206.5 provides that an employer shall not require the execution of a release of a claim or right on account of wages due or to become due unless payment for the same has been made. This case involves waiver and the enforceability of an arbitration provision pursuant to Section 206.5.

Plaintiff Kyle Pulli had been a shoe designer for adidas International (“adidas”) . In 2007, he was hired by defendant, Pony International, LLC. Pulli alleged that in an offer letter dated April 26, 2007, Pony promised Pulli that if he left adidas and relocated to San Diego, Pony would pay him an equivalent salary and give him a .75% equity interest in Pony, and that the arrangement would last at least four years. However, Pulli claimed that on October 30, 2007, Pony approached him with a “draconian new agreement that essentially reneged on all of the agreements under which [Pulli] agreed to leave adidas” and that if he did not sign the agreement then Pulli would never receive an equity interest in Pony, which had already started to vest. This new agreement included an arbitration provision. In August 2009, Pulli’s salary was reduced by twelve percent, and a month later Pony terminated his employment without cause.

In August of 2010, Pulli filed suit against Pony and others, alleging fraud, wrongful termination, breach of contract, breach of the covenant of good faith and fair dealing, unfair competition, and unjust enrichment. In November 2010, Pony brought a motion to compel arbitration pursuant to the October 2007 employment agreement. In Pulli’s opposition, he claimed that the October 2007 employment agreement was unenforceable under California Labor Code section 206.5 because Pony threatened to withhold wages and equity compensation unless Pulli agreed to sign the employment agreement and give up his right to a jury trial. Pony filed a reply, contending that section 206.5 did not void the October 2007 arbitration provision. In denying Pony’s motion to compel, the trial court agreed with Pulli that Labor Code section 206.5 voided the arbitration provision. Pony appealed.

The first issue addressed by the Court of Appeal was whether Pony had waived its right to arbitrate the threshold issue of whether Labor Code Section 206.5 rendered the arbitration provision unenforceable. The Court noted that various factors revealed that a waiver had occurred, including the fact that Pony did not address the issue of Section 206.5’s effect on enforceability of the arbitration provision in Pony’s motion to compel arbitration. On the other hand, in opposing the motion to compel arbitration, Pulli had argued that the arbitration provision in the October 2007 agreement was "null and void" under section 206.5 because it required him "to give up [his] right to a jury trial or forfeit [his earned] wages and equity [compensation]." In its reply, Pony did not ask the court to order that Pulli arbitrate this contention. Instead, it addressed only the legal merits of the argument, inviting the court to decide enforceability. The Court held that Pony's failure to request arbitration of the issue "prejudice[d]" Pulli as that term is used in this context, by permitting "judicial litigation of the merits of arbitrable issues." (quoting from Saint Agnes Medical Center v. PacificCare of California (2003) 31 Cal.4th 1187, 1203. Therefore, Pony waived its right to have the section 206.5 issue arbitrated.

Next, the Appellate Court discussed the merits of whether Labor Code section 206.5 rendered the October 2007 arbitration provision unenforceable. Pulli argued that this provision forbids an employer from requiring an employee to agree to an arbitration provision, which will deprive the employee the right to a jury trial, or forfeit wages the employee has already earned. The Court disagreed. Following statutory construction, the court noted that words of a statute should be given their ordinary and usual meaning and should be construed in their statutory context. Here, Section 206.5 states an employer cannot require “the execution of a release of a claim or right on account of wages due.” This clearly suggests that the subject of the release must be a claim for wages, not a right to jury trial.

This narrow reading of Section 206.5 was further supported by the legislative history and by reading Section 206.5 in conjunction with section 206, which dealt exclusively with wage disputes. Accordingly, the Court held that section 206.5 does not “preclude a party from waiving its right to a jury trial by entering into an agreement containing an arbitration provision.” However, in a footnote, the Court cautioned that its ruling was limited to section 206.5 and not whether there may be other laws that could prohibit an employer from “putting an employee to the choice of either agreeing to an arbitration provision and releasing his right to a jury trial or forfeiting wages that the employee has earned.” The Court reversed the trial court’s ruling that section 206.5 rendered the arbitration provision unenforceable, and remanded for the trial court to consider the other issues Pulli raised in his opposition.

COMMENT

Employers should consistently enforce their arbitration rights at all stages of litigation, even when trying to enforce their arbitration rights. Deviating from the matter of compelling arbitration, and attempting to address an issue on its merits can be interpreted as a waiver of a right to arbitrate on that issue. The Court clearly stated that Labor Code section 206.5 is narrowly construed to waivers involving claims for wages, and not waivers of other rights or claims that an employee may possess. However, the Court was careful to note that this is a narrow holding to the statutory construction of section 206.5, and that other laws may prohibit employers from coercing their employees to waive rights and other non-wage claims in exchange for past due wages.

For a copy of the complete decision see:

http://www.courtinfo.ca.gov/opinions/documents/B225885.PDF

 

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