What Does High Court’s Arbitration Ruling Mean for California?

Employers must comply with federal and state arbitration rules

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The U.S. Supreme Court has made clear that class-action waivers in employment arbitration agreements are enforceable—but California employers must be sure to carefully draft such agreements so they don't run afoul of state-law requirements.

The employees in a trio of cases before the high court—including a case originating in California—argued that class-action waivers violated the National Labor Relations Act (NLRA) (Ernst & Young LLP v. Morris). The 9th U.S. Circuit Court of Appeals had sided with the employees in the California case, but the Supreme Court's majority disagreed, giving employers the green light to require one-to-one arbitration proceedings.

"The NLRA secures to employees rights to organize unions and bargain collectively, but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum," wrote Justice Neil Gorsuch for the majority.

The Supreme Court's ruling reinforces a long line of decisions holding that arbitration agreements need to be enforced as they are written and that any changes to the law must come from Congress, said M.C. Sungaila, an attorney with Haynes and Boone in Orange County, Calif. She noted that employers can weigh the pros and cons for their organizations and decide for themselves if they want to mandate individual arbitration.

In California, there has been a steady flow of class filings based upon wage and hour issues, such as overtime pay and meal and rest break compliance, said Dana Kravetz, an attorney with Michelman & Robinson in Los Angeles. Thus, California employers may view arbitration as a beneficial option. "Still, employers shouldn't necessarily rest easy, as they can expect the language of these agreements to be heavily scrutinized and challenged in the courts," he said.

[SHRM members-only HR Q&A: What are the California rules regarding mandatory arbitration agreements, and how do they differ from federal law?]

The ruling tips the balance in favor of mandatory arbitration agreements, but employers must roll out any new procedures in a way that is appropriate and fair to employees, said Michele Haydel Gehrke, an attorney with Polsinelli in San Francisco. She noted that California employers must still ensure that arbitration agreements meet state-law fairness requirements. For example, the agreement can't limit the remedies that would otherwise be available to the employee in court, and the employer must pay for any arbitration costs that go beyond what the employee would be expected to pay in court.

Also, in the spirit of transparency, an employer is encouraged to attach the rules of its chosen alternative dispute-resolution agency (such as the American Arbitration Association) to the actual arbitration agreements given to employees, Kravetz said.

PAGA Claims

There's been an uptick in California Private Attorneys General Act (PAGA) claims in recent years, and Gehrke said employers may see more "PAGA-only" suits in light of the recent Supreme Court ruling.

In addition to permitting them to bring their own grievances under state law, PAGA allows employees to step into state regulators' shoes to recover civil penalties on behalf of the state for labor code violations. Seventy-five percent of the penalties recovered go to the state, and 25 percent go to the employees. Plaintiffs can also recoup attorney fees. 

In a 2014 decision, the California Supreme Court found that state PAGA claims can't be waived in arbitration agreements because such claims are brought for the public benefit (Iskanian v. CLS Transportation Los Angeles, 59 Cal. 4th 348). The U.S. Supreme Court declined to review the decision.

Therefore, PAGA claims can still be brought as class actions even if employees waive their right to bring their own grievances on a classwide basis.

But it's not clear just how far the Iskanian ruling goes, Sungaila said. The state high court left open the question of whether PAGA claims must be decided by a court or can be arbitrated on a classwide basis, and lower courts have ruled inconsistently on the issue. Thus, employers should look for more guidance in this developing area.

Employer's Role

"While the high court has given a nod to class-action waivers, each employer must remain diligent and be careful that its arbitration provisions are drafted in compliance with current law," Kravetz said. Furthermore, a class-action waiver shouldn't be buried within an employee handbook. Rather, workers should be presented with free-standing agreements.   

Employers may want to include a severability clause stating that when one portion of the agreement is found to be unenforceable it can be severed from the agreement, and the other provisions would still be enforceable.

"Remember, class-action waiver aside, a variety of grounds can exist that could render an arbitration agreement unenforceable," Kravetz said.

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