The California Supreme Court has issued its long-awaited decision in the case of Gentry v. Superior Court, deciding whether class-action waivers in employment arbitration agreements are legally binding.
In a case of good news/bad news for employers, the court didn’t say that all arbitration agreements, or even all class-action waivers, were invalid—just the poorly drafted ones.
In a sharply divided opinion, four justices reversed the Court of Appeal’s decision upholding a class-action waiver. The majority held that “at least in some cases, the prohibition of class-wide relief would undermine the vindication of the employees’ unwaivable statutory rights and would pose a serious obstacle to the enforcement of the state’s.”
In other words, the waivers may interfere with enforcing California wage laws. Because that may be the case, the court crafted a method for trial judges to decide whether that’s the case in a particular employment arbitration agreement.
Before enforcing such a waiver, and denying class-action status, in a case where it is “alleged that the employer systematically has denied proper overtime pay,” a trial judge now must consider the following:
- The modest size of the potential individual recovery.
- The potential for retaliation against members of the class.
- The fact that absent members of the class may be ill-informed about their rights.
- “Other real world obstacles” to the vindication of class members’ rights to overtime pay through individual arbitration.
The bad news
The opinion does not explain its reference to “other real world obstacles.” The probable consequence is more litigation, as plaintiffs and their counsel will exploit this vague language to argue that every class-action waiver should be tossed out.
If, after applying these factors, the trial judge determines that “a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will probably lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver.”
In other words, class-action waivers in arbitration agreements most likely will mean litigation, and the outcome will depend on the judge’s assessment. The majority opinion’s analysis revolved around its concern that “class arbitration waivers cannot, consistent with the strong public policy behind [the overtime statute], be used to weaken or undermine the private enforcement of overtime pay legislation by placing formidable practical obstacles in the way of employees’ prosecution of those claims.”
The remainder of the majority opinion focused on whether the agreement’s provision allowing 30 days for employees to opt out was enough to save the agreement from being deemed unconscionable. The majority once again reversed the Court of Appeal’s decision, finding that the opt-out provision “did not represent an authentic informed choice.”
The majority based its ruling on the fact that the employer had not spelled out every disadvantage of the arbitration agreement. These included a reduced statute of limitations, limits on compensatory and punitive damages, and the possibility that a successful plaintiff would not recover attorneys’ fees even if the law in question allowed successful employees to collect attorneys’ fees if they won. In short, the employer could not cure its overreaching by including an opt-out provision if the employer failed to disclose all the disadvantages of the agreement.
The good news
There is a sliver of good news for employers. The court refused to issue a blanket condemnation of all arbitration agreements with class-action waivers, and stopped short of calling such agreements unconscionable per se. Plus, the court did say that even if a judge threw out the class-action waiver, the rest of the arbitration agreement would stay in effect as long as the rest of the agreement complied with the requirements of Armendariz v. Foundation Health Psychcare Services Inc., 24 Cal. 4th 83 (2000).
Another bit of good news is that the opinion deals only with class-action waivers for cases involving overtime claims. The majority opinion repeatedly focused its analysis on the public policies underlying overtime legislation in reaching its conclusions. Thus, employers faced with different types of claims where the public policies are less compelling (e.g., alleged pay stub violations, or alleged posting or record-keeping violations) may be successful in enforcing a class-action waiver.
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