The U.S. Supreme Court has ruled that agreements to arbitrate
disputes override state laws requiring a dispute to be heard in a state forum,
such as before the labor commissioner. We’ll explain the decision and how it
could impact wage and hour claims.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
Can Fee Dispute Be Arbitrated?
with his client, Alex Ferrer, who appears on television as “Judge Alex.”
Because the contract between Preston and Ferrer contained a provision requiring
them to arbitrate any disputes arising under their contract,
demanded arbitration of the fees issue.
Ferrer, however, asked the
labor commissioner to order that the contract was invalid under the California
Talent Agencies Act (TAA). Ferrer claimed that
acted as a talent agent without the license the TAA requires and that his
unlicensed status voided the contract.
The labor commissioner took Ferrer’s claim but refused to grant
Ferrer’s request to block arbitration. Later, a
claim was exclusively in the labor commissioner’s domain, despite the agreement
to arbitrate. That’s because the TAA states that all TAA disputes must be heard
and determined by the labor commissioner.
Arbitration Policy Supersedes Labor Code
The U.S. Supreme Court has now ruled 8-1 that the Federal
Arbitration Act’s (FAA) policy of favoring arbitration trumped the labor
commissioner’s power over the claim.1 Thus, because of the parties’ agreement to arbitrate disputes, an
arbitrator must decide all disputes regarding the Preston-Ferrer contract,
including whether it is valid. The Supreme Court explained: “When parties agree
to arbitrate all questions arising under a contract, state laws lodging primary
jurisdiction in another forum [for example, the labor commissioner] are
superseded by the FAA.”
Arbitration Versus Labor Commissioner? Choose Wisely
This decision gives employers that have arbitration agreements
with their employees reason to cheer, and it also impacts other types of
arbitration agreements. The Supreme Court clarified that even when a state law
mandates that claims can only be filed in a state forum—whether a court or an
agency—that law will be trumped by the federal policy favoring arbitration.
Douglas Wickham, a shareholder in the
Mendelson, PC, points out that although the case arose under the TAA, the
Supreme Court’s conclusion isn’t limited to that law. A key wage and hour law,
state Labor Code Section 98(a), gives the labor commissioner exclusive
jurisdiction to determine claims filed with the commissioner for wages, penalties,
and other types of compensation. In light of the
decision, however, employers that have valid arbitration agreements covering
wage and hour disputes should be able to require that such disputes be heard by
an arbitrator, rather than the commissioner.
Wickham, however, cautions employers to choose their forum wisely,
as arbitration has downside risks that are different from those associated with
labor commissioner proceedings. Employees normally can’t recover attorney’s
fees in labor commissioner proceedings under Section 98(a), although attorney’s
fees potentially may be recoverable in arbitration. What’s more, labor
commissioner decisions after a Section 98(a) hearing can be appealed to
superior court; arbitration decisions are only reviewable in court on limited grounds.
Thus, says Wickham, “An employer who successfully compels arbitration of a
claim submitted to the labor commissioner may avoid a tribunal that may tend to
favor employees’ claims, but if the employer loses in arbitration, the employer
might have to pay the employee’s reasonable attorney’s fees and might lose the
right to full appellate review of an adverse arbitration decision.”
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1 Preston v.
Court No. 06-1463, 2008