California courts profess to favor arbitration as a means to resolve disputes, including those between employers and employees. When an employer enters into an arbitration agreement with an employee, the employer is generally looking for a lower cost, faster, and more informal method of resolving disputes that does not involve the unpredictability of a jury.

Employers sometimes seek to add additional terms to arbitration agreements, under which employees give up some rights. The courts have been hostile to employers’ efforts to make an arbitration agreement more than just a substitute of an arbitrator for a judge and jury. The most recent example is Sonic-Calabasas A, Inc. v. Moreno, where the California Supreme Court struck down the employer’s attempt to require arbitration instead of a so-called “Berman” hearing before the Labor Commissioner. The Court’s recent ruling reflects a trend toward invalidating arbitration agreements that contain waivers.

Waiver of Administrative Hearing

In Sonic-Calabasas A, Inc. v. Moreno, as a condition of employment with Sonic, Moreno signed an employment agreement. The agreement required both Sonic and the employee to resolve all administrative claims, other than two specified exceptions, in arbitration. Moreno left his employment with Sonic and later filed an administrative claim with the Labor Commissioner for recovery of certain wages. Rather than pursue his claim in court, Moreno sought the informal hearing the Labor Commissioner offers to resolve wage claims. These proceedings are nick-named “Berman” hearings after a former member of the legislature, who sponsored the bill creating them.

The Supreme Court decided that an employee cannot be required to waive the Berman hearing in favor of arbitration. Sonic’s imposing that requirement rendered the arbitration agreement contrary to public policy and unconscionable. Had the arbitration agreement allowed the administrative claim and Berman hearing, but required any appeal to be arbitrated, the Court would have upheld the agreement.

The Court based its decision on advantages the employee would have lost by waiving the Berman proceeding. The employee can represent himself; there is no discovery or formal rules of evidence. If the employee prevails at the hearing, the employer must post a bond, creating a deterrent.. The Court found that the waiver was an attempt by the employer to circumvent these advantages to the employee.

The Court left open the possibility that some Berman hearing waivers might survive challenge. For example, the Court questioned whether an employer could incorporate Berman-like protections in its arbitration agreement such that a Berman hearing is not necessary. It also declined to rule whether the arbitration agreement would have been lawful if the employee was a highly compensated executive employee who knowingly and voluntarily waived a Berman hearing as part of a negotiated, non-form contract. Until the lower courts provide further clarification, it is best to revise arbitration agreements to omit any administrative hearing waivers.

Waiver of Right to File a Charge of Discrimination

Although an employee can voluntarily bypass the Division of Labor Standards Enforcement by filing a claim for unpaid wages directly with the court, the rule is different when it comes to discrimination claims. Before bringing suit for unlawful discrimination or harassment, for example, an employee must file an administrative claim with the Equal Employment Opportunity Commission (“EEOC”) and/or the Department of Fair Employment and Housing (“DFEH”). This process is known as “exhausting administrative remedies.” Failure to do so may result in dismissal of a premature lawsuit.

The administrative proceedings before the EEOC and DFEH permit those agencies to investigate claims and, if warranted, seek remedies on behalf of an aggrieved employee. In fact, the EEOC may bring claims even if the employees are not willing to pursue them. Because of the importance of the administrative claim process, the EEOC has stated in enforcement guidance that a waiver of the right to file a charge or participate in an EEOC proceeding, in an arbitration agreement or otherwise, is void as a matter of public policy. The California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc., held that an arbitration agreement could not contain waiver of statutory rights created by the FEHA. Not only can inclusion of such a waiver result in the invalidity of the arbitration agreement, it can also result in a separate violation of the anti-retaliation provisions of the civil rights statutes.

Waiver of Class Actions

In Gentry v. Superior Court, the employee signed an arbitration agreement containing a waiver of the right to bring a class action in arbitration. But this agreement also gave the employee 30 days to opt-out of the arbitration agreement. Even though there was an opt-out provision, the Court deemed the arbitration agreement unconscionable anyway and held that the class action waiver was contrary to public policy.

The Court indicated that in some instances a class action waiver would be permissible, but set out a demanding “test” for lower courts to follow. The court must consider (1) the modest size of potential individual recovery, (2) the potential for retaliation against class members (3) whether absent members of the class are ill informed of their rights, and (4) real world obstacles to individual versus class arbitration.

Since Gentry, courts applying the test have consistently treated class action waivers in arbitration agreements as unconscionable. In Discover Bank v. Superior Court, the California Supreme Court determined at the outset that a small amount of damages were involved for each plaintiff and that the party with the superior bargaining power had carried out a scheme to deliberately cheat large numbers of consumers out of small sums of money, thereby making the waiver unenforceable.

Similarly, in Concepcion v. AT&T Mobility LLC, the Ninth Circuit Court of Appeals invalidated a consumer arbitration agreement on virtually the same grounds. The U.S. Supreme Court has granted certiorari in that case, and will provide guidance as to what circumstances a class action waiver would actually be deemed conscionable. Currently, it is unclear if any class action waiver could meet the Gentry test.

Interestingly, the U.S. Supreme Court’s recent ruling in Stolt-Nielsen S.A. v. Animalfeeds International Corp., means that courts cannot force parties to arbitrate class-based claims if the arbitration agreement does not specifically require them to do so. The courts have yet to decide whether an agreement that is merely “silent” about class actions, without containing an actual waiver, is unlawful.

Waiver of Jury Trial

Given the many grounds under which an arbitration agreement can be deemed invalid, an employer may resort to having an employee sign a simple jury trial waiver as an alternative to arbitration. However, the California Supreme Court in Grafton Partners L.P. v. The Superior Court, struck down that practice too. The Court found that the Legislature had not expressly authorized waiver of a jury trial before litigation is filed, and that the proper way to waive a jury trial during litigation is prescribed by a specific statute. .

Limits in Arbitration Agreements

Employers not only must be wary of including outright waivers in arbitration agreements, but also must not insert limitations on substantive rights employees may enjoy by law. Recent court rulings have struck down limits placed on damages recoverable in arbitration, limits on the time to file an arbitration that is shorter than the applicable statute of limitations, or limits on the types of claims that may be asserted. As with waivers, courts scrutinize whether the agreement will deprive a party of rights and advantages created by statutes.

Conclusion

The courts are ensuring arbitration is akin to a change of forum, rather than a means for limiting substantive rights such as the amount of damages or the nature of claims asserted. Nevertheless, there are certain advantages associated with an arbitral forum. The proceedings typically are not open to the public. The arbitration proceeding itself may be less formal than trial in court. Arbitrators may be more flexible regarding scheduling around witnesses and lawyers’ schedules. And juries can be unpredictable and may not carefully consider legal issues or business needs when deciding who is right in an employment claim.

Employers have to decide whether the above advantages, and others not listed above, are enough to justify implementing the potential employee relations issues and occasional court challenges that arbitration agreements may engender. an arbitration program. If so, employers should periodically review those agreements to make sure they are consistent with the current state of the law.