Lisa Murphy worked as a
salaried retail manager for Check ’N Go of California, Inc., a payday loan
company. Check ’N Go asked employees to sign a dispute resolution agreement,
but didn’t explain the agreement to employees or give them the opportunity to
opt out of it. Murphy signed, thinking she had to as part of her job.
The agreement required
arbitration of employment disputes (with some specific exceptions), including claims
that the agreement itself was unfair. It also included a class action waiver,
stating that for disputes the agreement covered, neither the employee nor the company
could “join or participate in a class action or representative action, act as a
private attorney general or a representative of others, or otherwise
consolidate the Covered Claim with the claims of others.”
Lawsuit Filed,
Arbitration Agreement Challenged
Murphy eventually filed
a class action wage and hour lawsuit against Check ’N Go, charging that the company
misclassified salaried retail managers as exempt under California law, thus
resulting in unpaid overtime, missed meal and rest breaks, and wage statements that
weren’t itemized. Murphy also contended that the arbitration agreement could
not be enforced because it was too one-sided and unfair. Check ’N Go asked the
trial court to send the case to arbitration because Murphy had signed the
dispute resolution agreement, but the trial court refused, finding that the
class action waiver was invalid.
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Who Decides?
Now a
ruling, 1 following the reasoning
of the California Supreme Court in a recent case involving class action waivers
in wage and hour lawsuits (see CWHA November 2007). The high court had
ruled that the following factors had to be examined to determine a class action
waiver’s validity: 1) the size of the recovery sought; 2) the potential for
retaliation against class members; 3) whether absent class members may be
ill-informed about their rights; and 4) other obstacles that may make
individual arbitrations not feasible.
The appeals court relied
on declarations from Murphy’s counsel and two other experienced wage and hour lawyers
asserting the difficulty of prosecuting wage and hour cases individually,
rather than as class actions. The lawyers stated that because of the typically
small amounts of money involved for each employee, class members would have
difficulty securing legal representation for individual cases, and thus a class
action was necessary to deter Check ’N Go from misclassifying employees. The
lawyers also noted many employees may not have even known that their rights
were being violated.
The appeals court also
ruled that it was up to the court, and not an arbitrator, to determine whether
the class action waiver or other terms were valid, even though the agreement
specified that these matters were to be arbitrated. Murphy’s agreement to this
provision was ineffective because the agreement amounted to a “contract of
adhesion”—a standardized contract drafted by the stronger party and presented
to the weaker party on a take-it-or-leave-it basis. Here, Murphy received the agreement
through interoffice mail, Check ’N Go never explained the terms, and she was
never told that it was negotiable or optional. In fact, she reasonably expected
that signing the contract was a requirement of continued employment. Thus,
ruled the court, the contract term permitting an arbitrator to determine
fairness was itself unfair and not enforceable.
A Blow for Arbitration
This ruling strikes
another blow against class action waivers and arbitration agreements more
generally. The California Supreme Court in its recent decision had left open
the possibility that class action waivers could pass legal muster—but this new
ruling demonstrates that the lower courts will lean strongly toward
invalidating them in wage and hour actions.
The decision also
underscores the importance of ensuring that the process of obtaining employee
consent to an arbitration provision is voluntary and fair. Here are three tips:
1. Be clear. Provide employees with
an appropriate, plain-language explanation of the terms.
2. Allow time. Make sure employees have
a reasonable opportunity—such as up to 30 days—to
consider the terms.
3. Don’t force it. Avoid imposing an
arbitration agreement on a nonnegotiable, take-it-or-leave-it basis. You’ll be
on sounder legal footing if you give employees a chance to opt out.
_
1 Murphy v. Check ’N Go
of California, Inc.,
Court of Appeals (Dist. 1)
No. A114442, 2007