HR Management & Compliance

Class Actions: State Supreme Court Limits Enforceability of Class Action Waivers for Arbitration of Overtime Claims; Practical Impact

Last year, a California employer that

was hit with a wage and hour class action lawsuit got some legal relief when an
appeals court upheld a class action waiver that was part of a mandatory
arbitration agreement the employer used. But now, the California Supreme Court
has reversed this decision, ruling that except in very limited circumstances,
such class action waivers aren’t enforceable. We’ll explain the new decision and
how it affects you.


Arbitration Agreement
Waives Class Actions

Circuit City
Stores in Southern California gave its new
hires a packet of materials that included an agreement to arbitrate employment-related
disputes. The arbitration agreement contained a class action waiver stating:
“The Arbitrator shall not consolidate claims of different [employees] into one
proceeding, nor shall the Arbitrator have the power to hear arbitration as a class
action.” Employees had 30 days to opt out of the arbitration agreement.


When Robert Gentry was
hired as a customer service manager and received this packet, he didn’t opt out
of the arbitration agreement.


Employer Faces Overtime

Gentry later brought a
class action lawsuit against Circuit
, claiming that the
company illegally misclassified salaried customer service managers as exempt
from overtime pay. Circuit
argued that Gentry
could not file a class action suit because he signed the arbitration agreement,
which required that an arbitrator hear the case as an individual action, not as
a class action.


Agreeing with Circuit City,
a California
appeals court ruled that an earlier California Supreme Court ruling invalidating
class action waivers in the consumer arbitration context didn’t apply in the
employment setting.


Paying Overtime: 10 Key Exemption Concepts

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High Court Limits
Enforceability of Waivers

But now the state
Supreme Court has ruled that class arbitration waivers in employment
arbitration agreements should not be enforced if class arbitration would be a
significantly more effective way than individual arbitrations of vindicating
employee minimum wage and overtime rights.
1  The high court set out
four factors courts must consider to make this determination:


1. Award amount. Courts must evaluate
whether awards would be so modest as to make it impractical to file individual
claims for overtime—and thus diminish the prospect that the overtime laws will
be enforced. Individual awards in minimum wage and overtime cases tend to be
small because these cases often involve low-wage earners.


2. Retaliation risk. The court explained that
employees who sue individually face a greater risk of retaliation, which could
deter some workers from filing suit or pursuing an individual arbitration. Many
federal courts have found that an employee’s fear of retaliation for filing an
individual claim justifies employment class action suits and arbitrations.


3. Employee awareness of
legal rights.
Some individual employees may not sue, said the court, because
they don’t know that their rights have been violated. This is particularly true
for workers with limited English skills, but even English-speaking and better-educated
workers may not understand the nuances of wage and hour laws.


4. Additional
The court must scrutinize other “real-world obstacles” that could
make individual arbitration infeasible.


Supreme Court also ruled that other provisions in the arbitration agreement smacked
of being procedurally ’unconscionable,’ or unfair—and allowing employees to opt
out didn’t change this


Unfair Provisions

The Supreme Court also
ruled that other provisions in the arbitration agreement smacked of being
procedurally “unconscionable,” or unfair—and allowing employees to opt out
didn’t change this. For example, the materials Circuit City
gave employees didn’t explain the disadvantages of arbitration under this
agreement as compared to court litigation, such as having less time to file
claims and a limit on remedies. In addition, it was unclear that employees felt
free to opt out, particularly because the materials trumpeted Circuit City’s
clear preference for arbitration.


The Supreme Court noted
that an agreement that is procedurally unfair isn’t automatically invalid;
however, courts must then scrutinize the substantive terms of the agreement to
ensure they are not one-sided.


The case will now return
to the trial court, which must determine whether the class action waiver is
invalid and whether the agreement as a whole is unenforceable because of the
procedural shortcomings.


Practical Impact

This new ruling doesn’t
mean employers can’t use class action waivers in predispute arbitration
agreements. But because the high court set a strict, limiting standard for such
waivers, when courts use the new factors in overtime cases, they will probably
rarely find that individual—rather than class—arbitration would allow employees
to enforce their rights. On the other hand, the Supreme Court noted that even
if a class action waiver or other term is invalidated, that doesn’t mean the
overall agreement to arbitrate must be thrown out.


In this ruling’s wake,
employers should make sure their mandatory arbitration agreement doesn’t
contain terms that are illegal, one-sided, or unfair; that the agreement’s
terms are fully and clearly explained to employees; and that employees are
given a meaningful opportunity to opt out.


You can link to the new
decision online at



1 Gentry v. Superior
Court, Calif.
Supreme Court No. S141502, 2007


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