Godzilla, Frankenstein, the Mummy…scary monsters are a staple of Hollywood. For California employers, one of the scariest monsters to roam the state in recent years has been…cue the suspenseful music…the wage and hour class action lawsuit. The losses caused by this monster due to legal fees, lost time and lost focus on the business, and multi-million dollar settlements and verdicts have been astronomical. Just like garlic defeats vampires, or silver bullets defeat werewolves, this particular monster may have finally met its match – arbitration agreements containing a class action waiver, which the California Supreme Court finally sanctioned in a decision issued on June 23, 2014, Iskanian v. CLS Transportation.
The enforceability of agreements to arbitrate employment disputes in California has long been uncertain, but one issue that has been particularly murky is whether an agreement to waive participation in a class action lawsuit is permissible. The California Supreme Court ruled in a 2007 decision, Gentry v. Superior Court, that such waivers were unenforceable. Since Gentry, the U.S. Supreme Court issued a number of rulings, both inside and outside the employment context, upholding the enforceability of arbitration agreements pursuant to the Federal Arbitration Act (FAA), including agreements containing class action waivers. This forced the California Supreme Court to review its previous decision in Gentry, but some worried the court would try to get around the FAA and continue finding class action waivers are impermissible.
In a major victory for employers, the Iskanian court bent to the will of the higher court and found the rationale of Gentry was preempted by federal law. Consequently, an employer facing a class action wage and hour lawsuit can now force the claims to be individually litigated before an arbitrator, but only if they have a properly drafted arbitration agreement in place. This will dramatically limit the potential damages faced by employers, and deter plaintiff’s attorneys, who won’t be able to collect large fees from arbitrating individual wage claims.
The court also rejected the holding of the National Labor Relations Board (NLRB) in their D.R. Horton decision that class action waivers violate the National Labor Relations Act. The Ikskanian decision is in concordance with all other courts that have considered and rejected the NLRB’s position.
Unhappily, however, the wage and hour class action monster is not entirely dead, at least not yet. The Iskanian court ruled that class actions asserting labor code private attorney general (PAGA) claims, which seek civil penalties for employees (as opposed to damages), are not barred by a class action waiver in an arbitration agreement. If the employer in Iskanian appeals to the U.S. Supreme Court, they may ultimately decide that even PAGA is preempted by the FAA, and the monster will breathe its last.
Action you should take now.
As an employer, you can potentially save millions by making sure that all your future arbitration agreements contain a class action waiver, starting today. Employers without arbitration agreements should strongly consider implementing them immediately. (A few words of caution, however: this is a tricky area where you will benefit from legal counsel — there are many other justifications that California courts use to invalidate arbitration agreements, so it is important to insure that the agreement is properly drafted. In addition, imposing arbitration agreements on current employees can be found unconscionable if not supported by some independent consideration, so it is important to discuss with your counsel the offering of something to employees in return for their signature and memorialize the consideration in the agreement.)
This is a situation where delay can potentially be extremely costly. I would be delighted to discuss how you might best protect your company from class actions in light of this recent Supreme Court of California decision. Please feel free to email me at email@example.com or call at (949) 852-1800.