Employment Lawsuits: State High Court Deals Employers a Blow Regarding Arbitration of Overtime Claims; Practical Impact

Although employers have received some welcome rulings from the California Supreme Court over the past few months, a new high court decision squelches a tool some employers had used to prevent class action lawsuits in the wage and hour context. We’ll explain the court’s reasoning and what it means for you.

Arbitration Agreement Contains Waiver

Robert Gentry was a customer service manager for Circuit City Stores in Southern California. When hired, Gentry received a packet containing 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.” After receiving it, employees had 30 days to opt out of the arbitration agreement, but Gentry didn’t do so.

Overtime Violations Challenged

A few years later, Gentry filed a class action lawsuit in Los Angeles, alleging that Circuit City illegally misclassified salaried customer service managers such as himself as exempt from overtime pay. Circuit City argued that the arbitration agreement meant that Gentry’s case had to be sent to an arbitrator and could only proceed as an individual action and not as a class action.

A California appeals court sided with Circuit City, finding that an earlier California Supreme Court ruling didn’t invalidate a class action waiver contained in an employment arbitration agreement (see CEA April 2006).

Only one thing really matters in the determination as to whether or not an employee is exempt: The duties the employee performs. Learn how to avoid costly, preventable mistakes with our free White Paper, Paying Overtime: 10 Key Exemption Concepts.

Four Factors

But now the California Supreme Court has decided 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 size. Courts must evaluate whether awards would be so modest as to make it impractical for employees 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. Many federal courts have found that an employee’s fear of retaliation for filing an individual lawsuit justifies employment class action suits.
3. Employee awareness of rights. Some individual employees may not sue, said the court, because they don’t know 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 be aware of the nuances of the wage and hour laws.
4. Other limitations. The court must scrutinize other “real-world obstacles” that could make individual arbitration unfeasible.

Opt Outs

The Supreme Court also ruled that other provisions in the arbitration agreement smacked of being procedurally “unconscionable,” or unfair—and giving employees a chance 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 less time to file claims. What’s more, 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 pointed out that an agreement that is procedurally unfair is not 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 decision does not foreclose the use of class action waivers in predispute arbitration agreements. However, 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 the invalidation of a class action waiver or other term doesn’t necessarily mean the overall agreement to arbitrate must be thrown out.

Because of this, employers should make sure their mandatory arbitration agreement doesn’t contain terms that are illegal, one-sided, or unfair, and that it fully and clearly explains its terms to employees. Your mandatory arbitration program should also give employees a meaningful opportunity to opt out.

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