Under Appropriate Circumstances, Class Action Waiver Is Unenforceable As De Facto Waiver of Unwaivable Right, Under Lab.C. 1194, To Recover Overtime Pay

In Gentry v. Superior Court (2007) 42 C.4th 443, 64 C.R.3d 773, 165 P.3d 556, 2007 WL 2445122, plaintiff retail store manager filed a class action, under Lab.C. 1194 (3 Summary (10th), Agency and Employment, §384), against defendant employer seeking damages for statutory violations arising from defendant’s failure to pay its managers overtime wages to which they were allegedly entitled. Under defendant’s dispute resolution procedure, agreed to by plaintiff, employee-related claims were to be handled by an arbitrator who lacked the power to hear class claims (a class arbitration waiver). Pursuant to this provision, defendant filed a motion to compel arbitration. The trial judge granted the motion, and plaintiff filed a petition for mandamus. After the Court of Appeal denied the petition, the Supreme Court granted review, but remanded for consideration in view of Discover Bank v. Superior Court (2005) 36 C.4th 148, 30 C.R.3d 76, 113 P.3d 1100, which held that class action waivers were unenforceable under certain circumstances. Distinguishing Discover Bank, the Court of Appeal again denied plaintiff’s petition for mandamus. Held, reversed.

(a) Class arbitration waiver as de facto waiver of unwaivable statutory right.

(1) Discover Bank, in holding that a class arbitration waiver was unenforceable because it was unconscionable, did not address the primary issue involved here, i.e., whether a class arbitration waiver undermines plaintiff’s statutory right to recover overtime pay. (42 C.4th 455.)

(2) Lab.C. 510 (3 Summary (10th), Agency and Employment, §360) specifies the rate of overtime pay for nonexempt employees, and Lab.C. 1194 (3 Summary (10th), Agency and Employment, §384) provides a private right of action to recover overtime pay. Lab.C. 1194 thus recognizes the public importance of overtime legislation (spreads employment by putting pressure on employers, and thereby fosters a stable workforce). “In short, the statutory right to receive overtime pay embodied in [Lab.C. 1194] is unwaivable.” (42 C.4th 456, citing Armendariz v. Foundation Health Psychcare Services (2000) 24 C.4th 83, 99 C.R.2d 745, 6 P.3d 669, 6 Cal. Proc. (4th), Proceedings Without Trial, Supp., §494A.)

(3) A party compelled to arbitrate an unwaivable right does not waive the right, but merely submits to its resolution in an arbitral, rather than a judicial, forum (see Little v. Auto Stiegler (2003) 29 C.4th 1064, 130 C.R.2d 892, 63 P.3d 979, 6 Cal. Proc. (4th), Proceedings Without Trial, Supp., §494D). However, in addition to agreeing to submit his claim to arbitration, plaintiff also gave up his right to maintain a class action. Thus, the issue here is whether the ability to maintain a class action in arbitration is necessary to enable plaintiff to vindicate his unwaivable right to receive overtime pay. Phrased differently, the question is whether a class arbitration waiver would lead to a de facto waiver of that right. “We conclude that under some circumstances such a provision would lead to a de facto waiver and would impermissibly interfere with employees' ability to vindicate unwaivable rights and to enforce the overtime laws.” (42 C.4th 457.)

(4) Defendant incorrectly argued that Discover Bank, held that actions involving minuscule amounts of damages were the only actions in which class action waivers would not be enforced. Rather, Discover Bank was an application of a more general principle: that although class arbitration waivers are not, in the abstract, exculpatory clauses, these waivers can be exculpatory in practical terms, because they can make it very difficult for those injured by unlawful conduct to pursue a legal remedy. Plaintiff argued persuasively that, for several reasons, class action waivers in overtime cases would often have the undesired exculpatory effect, and would therefore undermine the enforcement of the statutory right to overtime pay. (42 C.4th 457.)

(5) Overtime litigation usually involves workers at the lower end of the pay scale, because professional, executive, and administrative employees are generally exempt from overtime statutes and regulations, and the amount recovered is usually small ($5,000 to $7,000). In fact, Bell v. Farmers Ins. Exchange (2004) 115 C.A.4th 715, 9 C.R.3d 544, held that, in view of the expense and practical difficulties of an individual suit, even an award as large as $37,000 would not be ample incentive for an individual lawsuit for overtime pay and would not obviate the need for a class action. (42 C.4th 458.) “Although we agree at least in theory with [defendant] that arbitration can be a relatively quick and inexpensive method of dispute resolution, the requirement that numerous employees suffering from the same illegal practice each separately prove the employer's wrongdoing is an inefficiency that may substantially drive up the costs of arbitration and diminish the prospect that the overtime laws will be enforced.” (42 C.4th 459.)

(6) Lab.C. 1194 permits employees to recover reasonable fees and costs if they prevail in an overtime litigation suit. (42 C.4th 458.)However, employees and their attorneys must still weigh the typically modest recovery and the typically modest means of the employees bringing overtime lawsuits, with the risk of not prevailing and being saddled with substantial fees and costs. Moreover, because the trial court determines what constitutes “reasonable” fees and costs, there is still a risk that even a prevailing plaintiff may be undercompensated for his or her expenses. Given these risks and economic realities, class actions play an important function in enforcing overtime laws by affording employees a relatively inexpensive way to resolve their disputes. (42 C.4th 459.)

(7) Current employees, especially those further down on the corporate hierarchy, who individually sue their employer are at risk of retaliation. Indeed, federal courts have widely recognized that fear of retaliation for individual suits against an employer is a justification for class certification in the arena of employment litigation, even when it is otherwise questionable that the numerosity requirements for class certification have been satisfied. (42 C.4th 459.) Pointing out that retaliation by the employer against an employee filing an overtime claim is unlawful, defendant argued that statistics involving the number of complaints of retaliation show that efforts to sanction retaliation are working. (42 C.4th 460.) However, these statistics are supportive of plaintiff’s position that retaliation is widespread. “Given that retaliation would cause immediate disruption of the employee's life and economic injury, and given that the outcome of the complaint process is uncertain, we do not believe the existence of an antiretaliation statute and an administrative complaint process undermines [plaintiff’s] point that fear of retaliation will often deter employees from individually suing their employers.” (42 C.4th 461.)

(8) Some individual employees may not sue because they are unaware that their legal rights have been violated. Some workers, particularly immigrants with limited English language skills, may be unfamiliar with the overtime laws, and even English-speaking or better educated employees may not be aware of the nuances of overtime laws. Moreover, some employees, due to the transient nature of their work, may not be in a position to pursue individual litigation. The likelihood of employee unawareness is even greater when the employer does not simply fail to pay overtime, but affirmatively tells its employees that they are not eligible for overtime. (42 C.4th 461.)

(9) “Accordingly, we will remand this case to the Court of Appeal with directions to remand to the trial court to determine in light of the above discussion whether, in this particular case, class arbitration would be a significantly more effective means than individual arbitration actions of vindicating the right to overtime pay of the group of employees whose rights to such pay have been allegedly violated by [defendant]. If the trial court invalidates the waiver on public policy grounds, then the parties may proceed to class arbitration or, if the parties wish, have the matter brought in court.” (42 C.4th 466.)

(10) Defendant’s argument that the availability of enforcement by the Labor Commissioner is an adequate substitute for classwide arbitration is rejected. Although an employee may seek administrative relief from overtime violations with the Labor Commissioner, a losing employer has a right to a trial de novo in superior court. Thus, this remedy may result in no cost savings to the employee. (42 C.4th 464.) Also rejected is defendant’s argument that a rule invalidating class arbitration waivers discriminates against arbitration clauses in violation of the Federal Arbitration Act (9 U.S.C., §1 et seq.). The principle that, in the case of certain unwaivable statutory rights, class action waivers are forbidden when class actions would be the most effective practical means of vindicating those rights is an arbitration-neutral rule that applies to class action waivers in arbitration and nonarbitration provisions alike. (42 C.4th 465.)

(b) Opt-out provision and procedural unconscionability.

(1) Defendant argued that the fact that plaintiff had 30 days to opt out of the arbitration agreement and the class arbitration waiver meant that the terms of the agreement were not procedurally unconscionable and were therefore enforceable. However, this argument misses the point, because the validity of a class arbitration waiver has already been analyzed in terms of unwaivable statutory rights, rather than unconscionability. Moreover, because the statutory rights under Lab.C. 1194 cannot be waived, the minimal requirements imposed on arbitration agreements to ensure their vindication cannot be waived by the employee in a prelitigation agreement. A waiver can only occur if an employer and an employee knowingly and voluntarily enter into an arbitration agreement after a dispute has arisen. (42 C.4th 466.)

(2) Plaintiff challenged provisions of the arbitration agreement other than the class arbitration waiver, and argued that the entire arbitration agreement was unconscionable and unenforceable. As a threshold matter, he argued that the arbitration agreement was ineffective, because his failure to opt out of the agreement could not constitute assent to that agreement. (42 C.4th 467.) This argument is without merit. Having signed a form explaining that he had to take action to opt out, plaintiff manifested his intent to use his silence, or failure to opt out, as a means of accepting the arbitration agreement. Having thus indicated his intent, he may not now claim that his silence did not constitute acceptance of the arbitration agreement. (42 C.4th 468.)

(3) The arbitration provision at issue was procedurally unconscionable despite the existence of an opt-out provision, because there are several indications that plaintiff’s failure to opt out of the arbitration agreement did not represent an authentic informed choice. For example, although defendant pointed out some of the disadvantages to choosing arbitration (no jury trial and limited recovery), it did not mention any of the additional significant disadvantages that this particular arbitration agreement had compared to litigation, including a shorter statute of limitations, recovery of back pay of only 1 year, instead of 3, from the time that plaintiff knew of the violation of the law, limited punitive damages, and each party’s responsibility for its own attorneys’ fees, as opposed to the statutory provision providing that the prevailing party is entitled to fees and costs. Moreover, only a legally sophisticated employee would have realized that he or she had fewer rights than those available in litigation. Finally, it is unclear whether someone in plaintiff's position would have felt free to opt out, because the materials provided to him made it unmistakably clear that defendant preferred that he participate in the arbitration program. Given the inequality between defendant and plaintiff and the economic power that the former wielded over the latter, it is likely that plaintiff felt at least some pressure not to opt out of the arbitration agreement. (42 C.4th 470.)

(4) To be unenforceable, an arbitration provision must be both procedurally and substantively unconscionable. The Court of Appeal, believing the agreement not to be procedurally unconscionable and upholding the class arbitration waiver, did not address the arguments involving substantive unconscionability. Thus, on remand, the trial court must determine whether the arbitration agreement has substantively unconscionable terms. (42 C.4th 472.)

A dissenting opinion, joined by two justices, argued that under both the Federal Arbitration Act, and the California Arbitration Act (C.C.P. 1281 et seq.), private arbitration agreements were to be enforced in all but the most egregious circumstances, and that these circumstances were not present here. (42 C.4th 473.)

Witkin References
On right to overtime pay, see 3 Summary (10th), Agency and Employment, §360.
On right to bring private action to recover overtime pay, see 3 Summary (10th), Agency and Employment, §384.
On unconscionable arbitration agreements, see 1 Summary (10th), Contracts, §334 et seq.
On silence as acceptance, see 1 Summary (10th), Contracts, §193 et seq.