Founder and Managing Partner
The California Supreme Court giveth with one hand and taketh away with the other. Dealers pay attention. This affects you.
For now, arbitration agreements will likely be more difficult to enforce for wage/hour claims brought before the Labor Commissioner
In One Toyota of Oakland v. Kho, the California Supreme Court landed a significant blow to dealers using arbitration agreements in employment. In this case, the plaintiff, a dealership service technician, brought a claim for unpaid wages before the Labor Commissioner. The dealer attempted to move the case to arbitration under the arbitration agreement the employee signed, but the trial court found that the arbitration agreement was unenforceable as procedurally unconscionable. After the Court of Appeal correctly reversed the trial court’s decision, the California Supreme Court granted review of the case.
The California Supreme Court has been engaged in a battle with the United States Supreme Court (SCOTUS) for over 20 years on the enforceability of arbitration agreements and class action waivers, with the SCOTUS firmly supporting arbitration and the California Supreme Court inventing creative ways to disagree. For example, in Discover Bank many years ago the California Supreme Court performed its own tortured brand of unconscionability analysis to invalidate class action waivers, which led to the fantastic SCOTUS decision in Concepcion, ultimately upholding them and severely weakening the bases on which lower courts, like the California Supreme Court, could challenge them.
But the California Supreme Court is stubborn. In its review of One Toyota of Oakland, the California Supreme Court dusted off its old tricks, leaning on its 2000 decision in Armendariz v. Foundation Health Psychare Service, Inc., finding an arbitration agreement is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party. Under Armendariz, to render an arbitration agreement unenforceable as unconscionable, the agreement must be both procedurally and substantively unconscionable. Procedural unconscionability is based on the circumstances of the negotiation and formation of the agreement, focusing on oppression or surprise due to unequal bargaining power. Substantive unconscionability pertains to the fairness of an agreement’s actual terms and whether such terms are overly harsh or one-sided. Got it? Ok.
So applying Armendariz to One Toyota of Oakland, the California Supreme Court found that the arbitration agreement used by the dealership had an “extraordinarily high” degree of procedural unconscionability because the employee was required to sign the agreement to keep his job, the agreement’s content or significance was not explained to the employee, the employee was expected to sign the agreement on the spot, without time to review or consider it, and the agreement was written in very small single-spaced font in dense legalese that was difficult to understand. The Court also found that the arbitration agreement was substantively unconscionable, because it would be very difficult for a lay person to arbitrate due to the myriad of technical and procedural steps necessary to navigate the arbitration system and rules set forth in the agreement (all things that previous Supreme Court precedent affirmed), and as a result, the employee would need an attorney to represent them in arbitration. Under its logic, in contrast, it is relatively simple and inexpensive for an employee to bring a claim through the Labor Commissioner, as that process involves merely filling out a complaint form and the Labor Commissioner handles moving the case forward in an efficient manner compared to the arbitration process.
Distilling the Court’s opinion to its essence, the California Supreme Court thinks anyone who is not a lawyer is stupid and, despite the fact that several litigation protections for both the employee and employer are built into the arbitration agreement, stupid people can’t figure it out. Thanks, California Supreme Court, your faith in humanity is remarkable.
It’s no surprise then that the California Supreme Court found that the arbitration agreement was unenforceable. Although this case was focused on the wage/hour setting with the availability of the Labor Commissioner as an alternative forum for the employee’s claims, and the unconscionability issue is specific to the facts of each case, this case nevertheless should send chills down the spine of employers who utilize arbitration agreements that cover wage/hour claims. Although the dealer in One Toyota of Oakland case may have better handled administering the arbitration agreement to its employees, it is common that such agreements are distributed to employees among other mandatory employment paperwork without much fanfare or extensive explanation. Moreover, it is ironic (as noted in Justice Chin’s Dissent) that the extensive procedural process of arbitration set forth in this arbitration agreement was a reason for the Court’s finding of substantive unconsionability—when such provisions were promoted by prior Supreme Court precedent to preserve the employee’s rights to the full process that is available if the case had been litigated in a court.
We hope the SCOTUS will take this case up, as we expect the SCOTUS will once again slap down the wayward California Supreme Court. In fact, it’s likely the SCOTUS will find that this area is pre-empted by the Federal Arbitration Act. In the meantime, employers who use arbitration agreements for employment disputes should consult with counsel as to possible measures to improve the likelihood that such agreements may be enforceable.
California Supreme Court holds that unpaid wages are not recoverable under PAGA
And now, for some good news: The California Supreme Court issued a ruling on September 12, 2019 that employees cannot recover unpaid wages as civil penalties under the Private Attorneys General Act (“PAGA”) and Labor Code section 558. ZB, N.A., and Zions Bancorporation v. Superior Court of San Diego County. This ruling was long-anticipated by employers and employees alike, who were waiting to see if the Superior Court would classify the “unpaid wages” provided for in Labor Code section 558 as wages (which would make this portion of the claim subject to arbitration) or as penalties (which would not be subject to arbitration).
Labor Code section 558 provides that employers shall be subject to a civil penalty if they violate any provision regarding hours and days of work. Section 558 goes on to say that the penalty shall be $50 for each underpaid employee for each pay period in which the employee was underpaid in addition to an amount sufficient to recover unpaid wages, and the fixed penalty shall increase to $100 for each subsequent violation.
In one case, Esparza v. KS Industries, L.P., a Court of Appeal found that the unpaid wages portion of Section 558 did not constitute a penalty within the meaning of PAGA. In Lawson v. ZB, N.A., the case that was on appeal here, another Court of Appeal found that the “amount sufficient to recover unpaid wages” comprised part of the civil penalty, meaning that it was indivisible from the $50 or $100 penalty per employee per pay period, and could not be compelled to arbitration.
Though the California Supreme Court affirmed the ruling denying the employer’s motion to compel arbitration, it did so because it found that section 558 does not permit employees to recover unpaid wages under PAGA at all. The Court went on to say that a plaintiff has no private right of action to seek unpaid wages under Section 558, meaning that an employee can never seek unpaid wages under Section 558; only the Labor Commissioner can include an amount sufficient to cover unpaid wages in a citation.
Though the Court’s ruling may appear favorable to employers, the decision does not mean that employees cannot file lawsuits to recover unpaid wages. In fact, in sending the case back to the trial court, the Court indicated that the trial court could consider whether to allow the plaintiff to amend her complaint to request unpaid wages under an appropriate cause of action.