A California appellate court ruled that class action waivers in an arbitration agreement are unenforceable.
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Arbitration Update
California Court
Trashes Waste Disposal Company’s
Arbitration Agreement
By Christopher W. Olmsted
A California appellate court has refused to enforce an employer/employee arbitration agreement in a wage and hour class action involving meal and rest periods.
The appellate court’s opinion, published in March 2009 in case titled Franco v. Athens Disposal Company, Inc. relies on a 2007 California Supreme Court case titled Gentry v. Superior Court.
The issue relates to arbitration of employee disputes on the one hand, and class action claims on the other. For obvious reasons, some employers prefer arbitration agreements to jury trials. However, formulating enforceable terms of an employer-employee arbitration agreement—that is, an agreement that the courts will agree to uphold—has been very difficult. Employers have to heed a bevy of precedential cases, primary among them the California Supreme Court’s year 2000 decision Armendariz v. Foundation Health-Psychcare Services, Inc. and the aforementioned Gentry case.
Many arbitration agreements include wage and hour claims within their scope, including class action claims. Theoretically, assuming that the agreement is not otherwise unenforceable, wage and hour class action claims can be determined by an arbitrator just like any other employment law claim.
Of course, employers would prefer to have no class action claims at all, either in court or in arbitration. With that end in mind, Athens Disposal Company included an arbitration agreement clause that had employees waive their right to class action claims. Although employees retained the right to bring individual wage and hour arbitration claims, they could not bring such claims in the form of a collective class action.
Athens trash truck driver Exidon Franco filed a class action claim on behalf of all of Athens’ non-exempt employees, alleging that the company failed to provide legal meal and rest periods. Franco’s lawsuit also included a claim under California’s notorious “Private Attorney General Act of 2004 (“PAGA”), a law permitting employees to sue for fines and penalties on behalf of the Labor Commissioner.
The employee challenged Athens’ arbitration agreement, claiming as unenforceable the provision requiring claims be brought individually rather than as a class.
After the trial court ordered the matter to arbitration, on appeal the appellate court reversed the order.
The court relied on Gentry. In Gentry, the Supreme Court ruled that the employer could not force employees to waive the right to a class action on overtime issues in an arbitration agreement. The court set a very high standard that, as a practical matter, employers will not be able to meet. In short, class action waivers for overtime claims do not have a bright future in California.
Class Action Waivers Disallowed For Meal/Rest Claims
In the Athens case, the appellate court extended Gentry to apply to meal and rest period claims. The court determined that meal and rest periods are just as important of a statutory right as overtime pay. The appellate court opined that meal periods are not waivable by agreement. (Note: the California Supreme Court is currently considering whether meal and rest periods can be unilaterally waived by employees.)
The appellate court applied the analysis in Gentry and determined:
Individual meal and rest period awards are small, so employees and plaintiff lawyers have no incentive to pursue them, whereas the large sums recovered in class actions involving meal and rest period provide adequate incentive to pursue the claims. Franco’s individual claims were only worth about $10,000.
Individual employees are reluctant to bring claims out of fear of retaliation, but on a class wide basis, retaliation is not as likely. Franco was a former employee, but he could represent current employees fearful of retaliation.
Individual employees may not bring claims because they are ignorant of their rights, but class action claims can be brought on behalf of ignorant employees. Oddly, the court rejected Athens’ evidence that it gave notice of meal/rest rights, even in Spanish.
Individual claims result in “random and fragmentary enforcement” of the employer’s legal obligation to pay overtime, whereas the risk of class claims creates an incentive for employers to comply with the law.
The court stated that might have been willing to void the class action wavier clause and send the class action to arbitration, if not for the PAGA claim (see below). Thus, while the company could not force employees to waive class action claims, potentially the company could have forced the class action into arbitration.
PAGA Waiver Invalid
However, the court ultimately refused to enforce the arbitration agreement at all because of a second problem. The agreement precluded employees from bringing a PAGA claim for certain penalties described in the applicable Industrial Wage Order. (These penalties were $50 or $100 per employee per pay period.)
“Because the arbitration agreement contains a class arbitration waiver and also precludes Franco from seeking civil penalties on behalf of other employees, contrary to the PAGA,” wrote the court, “we conclude that the agreement as a whole is tainted with illegality and is unenforceable.”
Time To Revise Arbitration Agreements
In light of the Athens decision, employers who have incorporated class action waivers or PAGA waivers into their arbitration agreements should consult with legal counsel regarding possible revisions.
More Legal Update articles.
Download entire April 2009 Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2009 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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