Employment Law Briefings
California Supreme Court Provides New Guidance on Enforceability of Employment Arbitration Agreements
In Gentry v. Superior Court (Circuit City Stores), the California Supreme Court continued its recent pattern of preferring class-based relief over individual actions, even in the face of private agreements to forego class arbitration. After Gentry, most such agreements will be unenforceable. The court's opinion also is instructive on how employers can ensure that their arbitration agreements are not held to be procedurally unconscionable.
The plaintiff in Gentry filed a class action lawsuit alleging that he and other salaried customer service managers had been misclassified as exempt employees and were therefore owed overtime wages. He also asserted that various provisions of his employer's arbitration were unconscionable and thus unenforceable. The primary issue in the case was the applicability of a provision of the arbitration agreement (the class waiver) that specifically forbade classwide arbitration and any form of litigation for resolving disputes arising out of the employment relationship. Focusing largely on the societal importance of overtime laws and the relatively low socioeconomic status of the workers who most need those laws' protections, the court framed the principal issue as whether the class waiver would undermine enforcement of plaintiffs' unwaivable statutory rights.
New Test Will Invalidate Most Class Waivers
While not categorically stating that such class waivers are always unenforceable, the court created a test that will almost certainly invalidate any challenged class waiver in an employment arbitration agreement. Specifically, the court held that when an employer allegedly has systematically denied overtime pay to a class of employees, and a plaintiff has requested a class action, the trial court must consider: the modest size of a potential individual recovery; the possibility that class members would be retaliated against if they sought relief individually; the "fact" that absent members of the class may be ill-informed about their rights; and "other real world obstacles" to the vindication of class members' rights through individual arbitration. If the court finds, based on these factors, that class arbitration is likely to be a significantly more effective means of comprehensively enforcing employees' rights, it must invalidate the class waiver.
Making it even less likely that class waivers will be upheld is the court's direction that trial courts determining whether to enforce a class waiver should apply essentially the same analysis as when deciding whether to certify a class for litigation. Thus, for all practical purposes, the trial court will engage in the same inquiries as it would if no class waiver were involved. Moreover, the Gentry court held that where a class waiver is unenforceable, the plaintiff may proceed with either class arbitration or class action litigation.
Avoiding a Finding of Procedural Unconscionability
In deciding the second issue - whether the arbitration agreement as a whole was unenforceable - the Gentry court provided valuable guidance on how to avoid a finding that an arbitration agreement is procedurally unconscionable. Avoiding such a finding greatly increases the probability that a contract will be enforced because a court will not scrutinize the fairness of the substantive terms of an agreement that has no element of procedural unconscionability.
At issue in Gentry was Circuit City's Dispute Resolution Rules and Procedures, which provided employees several options for resolving conflicts. Employees who entered into the voluntary arbitration agreement were allowed 30 days to change their minds and opt out. Further, the Rules and Procedures described some of the key differences between litigation and arbitration, such as the lack of a right to a jury trial and the limited discovery available in arbitration.
Despite these factors, the court nonetheless held that the agreement was procedurally unconscionable for two reasons. First, the Rules and Procedures failed to emphasize some of the potential drawbacks of arbitration that were specific to Circuit City's agreement. For example, the agreement imposed a one-year statute of limitations and limited the available remedies. Although the documents given to employees did state those drawbacks, in the court's view it would not be reasonable to expect employees to possess the legal sophistication required to understand how much less favorable these terms were than those that would apply in court. Second, because the materials made clear that the employer strongly preferred arbitration to litigation, the court was skeptical that employees felt truly free to opt out of the agreement. Thus, the substantive provisions of the arbitration agreement would be subject to judicial scrutiny.
How to Protect Yourself
First, employers should be aware that after Gentry, class waivers in arbitration agreements are unlikely to be enforced. Thus, employers whose agreements include such waivers should carefully review them and consider whether other contract provisions may provide better options for limiting exposure. Second, employers can increase the odds that their arbitration agreements will be viewed as procedurally fair by clearly disclosing and explaining all the means by which their specific agreements may be less favorable to employees than litigation and by emphasizing that employees are truly free to opt out of the agreement and will not be penalized for doing so.