Controversial Supreme Court Ruling Brings Employers Back to Original Guidelines About Arbitration Agreements

Karina Sterman Esq.
November 4, 2013 — 1,312 views  

The more things change, the more they stay the same: Controversial Supreme Court ruling brings employers back to original guidelines about arbitration agreements.

If, like many employers, you have required that your employees sign agreements to arbitrate employment disputes, you probably also specifically assure the employees that by agreeing to arbitrate all claims against the employer, they can nonetheless still pursue wage claims directly with the CA Labor Commissioner. This administrative avenue is free for employees, typically does not involve legal counsel and entitles the employee to a “Berman hearing” (a forum that is specifically designed to help employees recover wages that are due to them from the employer). Access to this administrative forum has been considered of paramount importance and any employment or arbitration agreement that included a waiver of this administrative access has been deemed by the courts to be automatically “unconscionable” and therefore unenforceable. Indeed, this public policy was confirmed by the California Supreme Court in Sonic–Calabasas A, Inc. v. Moreno, 51 Cal. 4th 659 (2011).

Sonic-Calabasas A, Inc. was a California employer that required its employees to sign arbitration agreements that waived access to all resolution mechanisms other than for purposes of filing discrimination or harassment claims with the DFEH and EEOC, Workers Compensation Claims and EDD unemployment claims. The Sonic-Calabasas arbitration agreement did not exclude wage claims with the Labor Commissioner. Therefore, when terminated employee Frank Moreno filed an administrative claim for unpaid vacation “wages” with the Labor Commissioner, Sonic-Calabasas argued that he had waived that forum by signing the arbitration agreement. The California Supreme Court (after several layers of appeals) disagreed and said that although Moreno “could be compelled to arbitrate, he could not be required to waive his right to a Berman hearing before arbitration.”

After the California Supreme Court definitely closed the door on the non-waivability of the Berman hearing, the United States Supreme Court issued its rulings in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) and American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013). In those cases, the Supremes said that federal law strongly favors arbitration and state laws that interfere with that goal are not valid. And just to make sure California got the point, the Supremes ordered the California Supreme Court to reconsider its ruling in Sonic-Calabasas in light of Concepcion. The California Supreme Court did and reversed itself.

Specifically, the California Supreme Court held in Sonic–Calabasas A, Inc. v. Moreno, 2013 WL 5645378 (Oct. 17, 2013) (Sonic II) that because the Supremes made it clear that the Federal Arbitration Act (FAA) preempts and trumps California law when the two are inconsistent, requiring access to a Berman hearing prior to being sent to agreed-upon arbitration imposes significant delays to arbitration and is inconsistent with the FAA. In other words, California courts can’t require access to a Berman hearing if that impedes the speedy and efficient arbitration of claims under the FAA.

The Sonic II decision reaffirmed that state courts may continue to enforce unconscionability rules under the traditional Armendariz standard so long as they do not interfere with “fundamental attributes of arbitration.” This means that an arbitration agreement will still be evaluated for both procedural and substantive unconscionability, but no one type of provision is likely to make an arbitration agreement decidedly unconscionable:

“As with any contract, the unconscionability inquiry requires a court to examine the totality of the agreement’s substantive terms as well as the circumstances of its formation to determine whether the overall bargain was unreasonably one-sided.” To be enforceable, an arbitration agreement “must provide an employee with an accessible and affordable arbitral forum for resolving wage disputes.”

So, the more things change, the more they stay the same. Sonic II sounds controversial and sexy. It is not really, though. It is just a proverbial rehash of the unconscionability standard set out in cases over the last decade, and it is merely a reminder that convincing a trial court about the enforceability or unenforceability of an arbitration agreement will continue to be a fact-intensive and time-consuming slog through the legal system. But instead of figuring out how to enforce your arbitration agreements, invest in preventive actions and avoid disputes; because it is best to not get sued at all.

Did you know…That employers failing to provide the appropriate information on paychecks can be subject to penalties even where no actual injury occurs? Labor Code section 226 was amended to deem an injury and thereby entitle an employee to a statutory penalty for a failure to provide the required information. The penalty is $50 for the first pay period violation and $100 each subsequent pay period violation up to an aggregate penalty of $4000 per employee. In addition, attorneys’ fees and costs will be awarded to the prevailing employee.

Karina Sterman Esq.

Ervin Cohen & Jessup LLP

Karina Sterman has substantial expertise defending employers in discrimination, wrongful termination, and wage and hour litigation. She is a published author, frequent speaker, and she advises her clients with smart, business-savvy strategies.