California Supreme Court Weighs In On Employment Arbitration Agreements That Prohibit Class Actions, The

Orange County Business Journal, Sep 17-Sep 23, 2007 by Hart, Jim

While the official policy of the state of California is to encourage arbitrations as a way of efficiently resolving conflicts, California courts continue to revisit and closely scrutinize employment-related arbitration agreements. On August 30, 2007, the California Supreme Court again weighed in on the issue of employment-related arbitration agreements in the case, Gentry v. Superior Court (Circuit City). In Gentry, the court considered whether employment-related arbitration agreements can prohibit class action arbitrations. In that case, Mr. Gentry filed a claim against Circuit City on behalf of a class of salaried managers. Gentry alleged that these managers are misclassified and entitled to overtime. The arbitration agreement between Gentry and Circuit City contained a clause requiring arbitration of employment-related claims, but prohibiting the arbitrator from consolidating claims or hearing a class action arbitration.

Proliferation of arbitration agreements

For those who are unfamiliar, an arbitration agreement is a contract between two parties agreeing to resolve any dispute between or among themselves in a private setting rather than in a state or federal court. Rather than going before a judge and jury, the parties mutually select a private party to resolve any differences. Over the course of the last 20 years, arbitration agreements have become a mainstay in daily life, whether it's a trip to the doctor's office, the purchase of an electronic device, the application for a credit card or the application for employment. Typical advantages of arbitrations include a private, rather than public setting and the ability to agree on ground rules that may dispense with the length and costs usually associated with litigating disputes in open court.

Emergence of class actions

During this same period of time, class actions have also come into prominence. Again, for those who are unfamiliar, a class action is a suit brought on behalf of a group of persons who have purportedly suffered the same type of injury. Increasingly common are class actions brought against employers over wage and hour issues, such as the allegations in Gentry that Circuit City failed to pay employees for overtime.

In considering the Gentry case, the California Supreme Court would not "say categorically that all class action waivers in overtime cases are unenforceable." However, the court found that agreements prohibiting class action arbitrations may be unenforceable depending on several factors, including: 1) whether the size of the potential individual recovery is modest, 2) the potential for retaliation against members of the class, 3) the fact that absent class members may be ill informed about their rights, and 4) the other "real world obstacles" to the vindication of class members' rights to overtime pay through individual arbitration.

The court did not foreclose the possibility that there may be circumstances where individual arbitrations may satisfactorily address the overtime claims of a class or where employer may devise a system of individual arbitration that does not disadvantage employees in vindicating their rights under California's Labor Code. Nevertheless, the courts have once again placed doubt on the enforceability of arbitration agreements and complicated the ability of employer to institute these policies. The decision should, at a minimum, cause employers to closely reexamine the arbitration policies that are currently in effect.

Jim Hart is a Shareholder in the Orange County office of Littler Mendelson, P.C., the nation's largest employment and labor law firm. Mr. Hart can be reached at jhart@littler.com.