Eliminate Employee Class Actions Through Binding Arbitration

The California Supreme Court has ruled California employers may avoid employee class action lawsuits through binding arbitration. (Iskanian v. CLS Transportation Los Angeles, LLC, 6/23/2014). This is clearly a big win for all employers, large and small.

California Employment Arbitration Agreements

For California employers, arbitration has been a super roller coaster ride. It’s been up, then down, then up again.

Before 2000, things were pretty good. Then a California Supreme Court case called Armendariz (read more here) came along and downhill we went for 11 years.

During those 11 years, California courts had grown increasingly hostile towards mandatory arbitration of employee claims. Public policy says employees need protection, especially when it comes to civil rights and wage and hour laws. Therefore, arbitration agreements are bad. Courts have scrutinized and used any slight reason to invalidate arbitration agreements because they deemed them “unconscionable,” really meaning against “public policy.”

A class action waiver in an arbitration agreement was a sure fire way to invalidate arbitration. Such a waiver tread upon the public policy of protecting employees. For what better way to vindicate employees’ rights than with a class action lawsuit? One person can sue on behalf of many others. That way many others’ rights are vindicated at the same time. Take away that public policy vindication and the arbitration agreement is invalid.

Iskanian Changes The Game

Iskanian puts the issue of whether an employee can waive class actions through mandatory arbitration to rest. The highest California court reversed its prior decision, and ruled not only may employers force employees to arbitrate employee claims, but they may force employees to waive their ability to arbitrate on a class action basis.

This means your employee must arbitrate their claims solo, not on behalf of all others “similarly situated” (potentially 10s, 100s or 1,000s). Further, your employee cannot bring the class action in court; he/she must arbitrate, individually. Thus, no class action risk.

This is game changing for employers and employees.

Armendariz essentially torpedoed arbitration for all but the largest of employers because it saddled employers with 100% of the cost of the arbitrator’s fees and costs. When those fees and costs can be in the tens of thousands of dollars, the costs of arbitration outweigh the benefits.

Avoiding class action employee lawsuits and their devastating effects, however, certainly changes the analysis. An arbitration agreement with a class action waiver is a major tool for employers of all sizes to reduce their employment legal risk. And that alone might justify the cost.

Common class action lawsuits that now can be thwarted include wage and hour claims for overtime and rest period, meal period, Labor Code section 226 itemized statement and Labor Code section 203 waiting time penalties, misclassification of exempt versus non-exempt status, and misclassification of independent contractor versus employee status.

Other Favorable Arbitration Developments for Employers

Last October (2013), the California Supreme Court in Sonic-Calabasas ruled that Employers with properly drafted arbitration agreements can now compel arbitration over wage claims before the California Labor Commissioner (Berman Hearings) (read more here).  This means the employee friendly (and employer unfriendly) Berman Hearing and appeals process may be trumped with an appropriate arbitration agreement.

Under potential fire is Armendariz’ blanket public policy based rule requiring employers to pay for 100% of the arbitration fees and costs in all cases. Flipping that around, if an arbitration agreement makes the employee pay for any of the arbitrator’s fees/costs (other than what it would pay in court), the agreement is “unconscionable” and thus unenforceable under Armendariz.

But the rationale of the United States Supreme Court decision in Concepcion v. AT&T Mobility and others like American Exress v. Italian Colors Restaurant suggests such a blanket public policy based rule that disfavors arbitration may be short lived.

The assumption that the employee in all cases is less able to afford arbitration than the employer in all cases is a false one.  And that public policy based assumption manifested by the rule that employers bear 100% of the arbitration fees and costs disfavors arbitration, especially for small/medium employers.

Stay tuned as this major obstacle to arbitration for small/medium employers may be next on the chopping block.