Should employers require arbitration of Labor Commissioner / DLSE claims instead of going through the DLSE process? Good question.  On the one hand, the DLSE is notoriously employee-friendly, and makes every effort to extract settlements from employers, even when claims have little or no merit. The hearings are tough for employers to win as well, for a variety of reasons.  And the appeals process? Well, the odds are not in employers’ favor and appeals can get very expensive, as this blog’s readers know…(here, here), and see article here.  On the other hand, arbitrating a small wage-hour claim is costly as well, given the requirements the courts have placed on arbitration agreements. For example, employers have to pay all the costs unique to arbitration (and Labor Commissioner proceedings are free to employees). Arbitrators may be miffed that they are called upon to decide a $400 meal period claim.  So, there are considerations on both sides. Whether to require arbitration of DLSE claims is worthy of a discussion with your employment counsel.

But wait. Before you decide, better take a look at the California Supreme Court’s 6-1 decision today in OTO, LLC v. Koh, opinion here. 

By way of background, Koh worked for OTO, an Oakland Toyota dealership. His primary language was Chinese.  OTO presented him with a one-page arbitration agreement, in English, and gave him little time to review it.  The arbitration agreement was mutual, and mainly incorporated the California Arbitration Act’s provisions for conducting the arbitration.  

Koh filed a DLSE claim that didn’t settle. OTO argued it had an arbitration agreement with Koh at the DLSE’s pre-hearing settlement conference, but OTO didn’t do anything about it….  

Until the very day before the binding hearing, which was set months later.  That’s when OTO served a petition to compel arbitration, which it filed in superior court. The DLSE, however, refused to cancel the hearing. It held the hearing anyway, and awarded Koh $102,912 in unpaid wages, plus $55,634 in penalties, liquidated damages, and penalties. OTO did not appear at the hearing. OTO went to court to vacate the award.  The Labor Commissioner intervened on Koh’s behalf.  OTO also posted a bond to seek de novo review in court.  The trial court refused to compel arbitration, but also decided the DLSE should not have proceeded with the hearing. The Court of Appeal, however, decided the arbitration agreement was enforceable. Although “procedurally” unconscionable, the arbitration agreement was not “substantively” unconscionable.  Since both elements have to be present to invalidate an arbitration agreement, the arbitration agreement was enforceable, the Court of Appeal reasoned.

The California Supreme Court granted review of the case.  The Court has a history with arbitration agreements related to Labor Commissioner proceedings. Years ago, the Court tried holding that it was contrary to public policy to require arbitration of DLSE claims at all, because employees had a right to the informal DLSE hearing procedure. Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659. The U.S. Supreme Court, however, held that the California Supreme Court was wrong, because the Federal Arbitration Act preempted any such right. The California high court then issued a second Sonic decision in which it ruled that mandatory arbitration of DLSE claims could be enforceable, if the arbitration agreement provided “an accessible and affordable arbitral forum for resolving wage disputes . . . .”  The Court, though, did not elaborate what would pass muster under that standard.

Against this backdrop, the Supreme Court considered whether OTO’s agreement was unconscionable and, therefore, unenforceable as a contract under state law.  California law splits “unconscionability” analysis into two components. To be “unconscionable” and therefore unenforceable, a contract must be both procedurally and substantively unconscionable. Procedural unconscionability is about the form of the agreement, and how agreement is obtained. Substantive unconscionability is about the terms and whether they are too unfair, one-sided, or oppressive to enforce.  Both elements must be present, but there’s a “sliding scale.” The more procedural unconscionability that is present, the less substantive unconscionability the court has to find to invalidate an agreement, and vice versa. 

OTO’s agreement had an “extraordinarily high’ amount of “procedural” unconscionability. That means it was more than just a “take it or leave it” contract. In this case, Koh was given the arbitration agreement along with other employment documents by a low-level employee (who couldn’t discuss it with Kho), It was printed in very tiny type, The employee waited for Koh to sign it “on the fly,” and the verbiage was dense and legalistic. Also, the company did not give Kho a copy of his signed agreement. In all, the Court found that the arbitration agreement was highly procedurally unconscionable.

As a result, the amount of “substantive” unconscionability did not have to be significantly high to invalidate the agreement.  The Court found substantive unconscionability because, among other things, 

• the arbitration agreement was silent as to how to commence arbitration proceedings, whereas DLSE-mandated posters explain how to file Labor Commissioner claims.
• the arbitration proceedings governed by the California Arbitration Act (and not one of the arbitration services like JAMS or AAA) were too difficult to follow for a lay person. (So much for everyone is presumed to know the law).
• employees using the DLSE process have access to free legal help they cannot access in arbitration

Curiously, the majority then backstops its substantive unconscionability analysis by stating that if OTO had been more forthright with the agreement, it would have been less procedurally unconscionable, and “this would have been a different case.”  

The dissent, authored by Justice Ming Chin, argues that the arbitration agreement provided for arbitration in accordance with the very same civil litigation procedures (discovery and civil procedure rules) that would govern any wage claim appealed from a Labor Commissioner award, or a wage claim filed in court.  Justice Chin takes issue with the entire majority opinion, from the procedural and substantive unconscionability analysis, to FAA preemption of the majority’s rule.  Considering Justice Chin is the Court’s employment law expert, it’s worth a read.   Justice Chin also points out that the Court’s view of procedural unconscionability could mark a shift in the law and make it easier for employees to invalidate arbitration agreements. We’ll have to see how later case law develops. 

So, this case will make it harder to require arbitration of Labor Commissioner claims. It’s up to employers and their lawyers whether to draft arbitration agreements to exclude those claims, or if it’s worth trying to include them.  Let me know what you decide!  Just kidding.  Happy Labor Day.