Employers Win, Lose in Latest California Supreme Court Opinion on Arbitration
Why it matters: The California Supreme Court continued its complicated relationship with employment agreements and arbitration on June 23 when it issued Iskanian v. CLS Transportation. On the one hand, the majority upheld the general enforceability of class waivers in mandatory employment arbitration agreements, finding that a prior decision to the contrary (Gentry v. Superior Court, 42 Cal. 4th 443 (2007)) had been abrogated by more recent U.S. Supreme Court precedent. But the court also carved out an exemption for employees to bring representative actions under the California Labor Code's Private Attorneys General Act (PAGA), holding that “an arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.” The decision truly presents a mixed bag for California employers.
Detailed Discussion
The case involved Arshavir Iskanian, a former driver for CLS Transportation. During his time with the company, Iskanian signed an agreement providing that “any and all claims” arising out of his employment were to be submitted to binding arbitration before a neutral arbitrator. Among other features, the arbitration agreement also included a class and representative action waiver.
Iskanian filed a class action complaint against CLS alleging that the company failed to pay overtime, provide meal and rest breaks, reimburse businesses expenses, provide accurate and complete wage statements, or pay final wages in a timely manner. A trial court justice granted CLS’s motion to compel arbitration based on the agreement.
While Iskanian’s appeal was pending, the California Supreme Court issued its decision in Gentry, holding that class action waivers in employment arbitration agreements are invalid under certain circumstances. In light of the ruling, CLS voluntarily withdrew its motion and the parties proceeded to litigate, with the trial court certifying a class over CLS’s objection.
The U.S. Supreme Court then issued its 2011 decision in AT&T Mobility v. Concepcion (131 S. Ct. 1740), which expressly invalidated a California Supreme Court decision restricting consumer class action waivers in arbitration agreements in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). Relying on Concepcion, CLS renewed its motion to compel arbitration. The trial court ordered Iskanian into individual arbitration and dismissed the class claims with prejudice. He appealed.
The California Supreme Court addressed three primary issues: the validity of Iskanian’s class waiver and the viability of Gentry in the wake of Concepcion; whether CLS waived its right to compel arbitration by withdrawing its motion in light of Gentry; and the intersection of the Federal Arbitration Act (FAA) and California’s PAGA.
First, the court worked its way through its history of arbitration decisions. The Discover Bank ruling was invalidated by Concepcion, but what about Gentry? Iskanian told the court the Gentry decision survived the high court’s opinion because it did not set forth a categorical rule against class action waivers, but established factors for a court to consider when evaluating whether a class action waiver might be unenforceable. The court disagreed.
“Contrary to these contentions, however, the fact that Gentry’s rule against class waiver is stated more narrowly than Discover Bank’s rule does not save it from FAA preemption under Concepcion,” the majority wrote. “Concepcion holds that even if a class waiver is exculpatory in a particular case, it is nonetheless preempted by the FAA. Under the logic of Concepcion, the FAA preempts Gentry’s rule against employment class waivers.”
The court distinguished last year’s ruling in Sonic-Calabasas A, Inc. v. Moreno (better known as Sonic II), which involved the waiver of employee rights under the Berman statute, including a special hearing, fee-shifting provisions, and other protections, but not a class waiver.
“Sonic II recognized that the FAA does not prevent states through legislative or judicial rules from addressing the problems of affordability and accessibility of arbitration,” Justice Goodwin Liu wrote for the court. “But Concepcion held that the FAA does prevent states from mandating or promoting procedures incompatible with arbitration. The Gentry rule runs afoul of this principle.”
The majority also rejected Iskanian’s contention that the class action waiver was invalid under the National Labor Relations Act (NLRA). Following the Fifth U.S. Circuit Court of Appeals’ line of reasoning in D.R. Horton, Inc. v. NLRB, the court said the NLRB rule – like the rule in Discover Bank – was not arbitration neutral and would instead “significantly undermine arbitration’s fundamental attributes by requiring procedural formality and complexity, and by creating greater risks to defendants.”
Turning to the issue of waiver, the court determined that Iskanian did not meet the heavy burden of proof to argue CLS waived its right to arbitration, particularly given the procedural history of the case. “The fact that a party initially successfully moved to compel arbitration and abandoned that motion only after a change in the law made the motion highly unlikely to succeed weighs in favor of finding that the party has not waived its right to arbitrate,” Justice Liu wrote.
CLS did not engage in unexcused delay and Iskanian’s litigation costs did not establish that he was prejudiced. “[T]he delay was reasonable in light of the state of the law at the time and Iskanian’s own opposition to arbitration,” the court explained. “Where, as here, a party promptly initiates arbitration and then abandons arbitration because it is resisted by the opposing party and foreclosed by existing law, the mere fact that the parties then proceed to engage in various forms of pretrial litigation does not compel the conclusion that the party has waived its right to arbitrate when a later change in the law permits arbitration.”
Finally, at the intersection of the FAA and PAGA, the court turned in the direction of employees. Emphasizing the history behind the law’s enactment to deputize employees as private attorneys general because of the government’s shortage of resources to pursue enforcement of the Labor Code, the majority said two sections of the Civil Code were in play. The first, Civil Code section 1668, forbids contracts “whose object, directly or indirectly, is to exempt [their] parties from violation of the law.”
“Thus, an agreement by employees to waive their right to bring a PAGA action serves to disable one of the primary mechanisms for enforcing the Labor Code,” and is against public policy, making it unenforceable, the court wrote. “Such an agreement also violates Civil Code 3513’s injunction that ‘a law established for a public reason cannot be contravened by a private agreement.’ The PAGA was clearly established for a public reason, and agreements requiring the waiver of PAGA rights would harm the state’s interests in enforcing the Labor Code and in receiving the proceeds of civil penalties used to deter violations.”
CLS’s contention that the agreement only prohibited representative claims – not individual PAGA claims – was scorned by the majority. “[W]hether or not an individual claim is permissible under the PAGA, a prohibition of representative claims frustrates PAGA’s objectives,” the court said. “We conclude that where, as here, an employment agreement compels the waiver of representative claims under the PAGA, it is contrary to public policy and unenforceable as a matter of state law.”
Further, a rule against PAGA waivers did not frustrate the FAA’s objectives, the court added. “Simply put, a PAGA claim lies outside the FAA’s coverage because it is not a dispute between an employer and an employee arising out of their contractual relationship,” Justice Liu wrote. “It is a dispute between an employer and the state, which alleges directly or through its agents – either the Labor and Workforce Development Agency or aggrieved employees – that the employer has violated the Labor Code.”
The majority’s conclusion left the parties on uncertain ground. Both pursued all-or-nothing positions and did not consider the possibility that Iskanian’s claims could be bifurcated. “Iskanian must proceed with bilateral arbitration on his individual damages claims, and CLS must answer the representative PAGA claims in some forum,” the court said.
Several questions remain on remand: “(1) Will the parties agree on a single forum for resolving the PAGA claim and the other claims? (2) If not, is it appropriate to bifurcate the claims, with individual claims going to arbitration and the representative PAGA claim to litigation? (3) If such bifurcation occurs, should the arbitration be stayed pursuant to [civil procedure]?”
Two additional opinions were filed in the case. In a concurring opinion, Justice Ming W. Chin (joined by Justice Marvin R. Baxter) agreed with the majority but wrote separately to question the basis upon which the majority concluded that PAGA was exempt from FAA coverage, still agreeing that PAGA was exempt, but for a different reason.
And in a dissent comparing class waivers in employment agreements to “yellow dog contracts” from the 19th century, Justice Kathryn M. Werdegar argued that the FAA should not be interpreted to operate as a “super statute” because the NLRA provides employees with the right to engage in collective action, including the filing of wage and hour class actions.
“[T]he whole point of protecting a right to collective action is to allow employees to do precisely what CLS Transportation’s clause forbids – band together as a group to peaceably assert rights against their employer,” she wrote. “When Congress invalidated yellow dog contracts and protected the right to engage in collective actions, it could not have believed it was conveying rights enforceable only at the grace of employers, who could at their election, erase them by the simple expedient of a compelled waiver inserted in an arbitration agreement.”
Whether the court’s view that PAGA is outside the scope of the FAA will withstand further scrutiny remains to be seen, and is an issue that may find itself next before the United States Supreme Court.
To read the decision in Iskanian v. CLS Transportation, click here.
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D.C. Circuit: Just Two Statements Provide Basis for ADEA Suit
Why it matters: Just two statements made by a decision maker evidencing discriminatory motive were sufficient to overcome an employer’s summary judgment motion in an Age Discrimination in Employment Act (ADEA) suit, the D.C. Circuit Court of Appeals recently concluded. A 71-year-old security guard at a retirement home sued his former employer and introduced evidence of two statements made by the person who effected his termination, including a comment that the “older guards” were found asleep from time to time. Rejecting the employer’s argument that the comments were not enough to show discriminatory motive – and addressed performance issues, not age – the federal appellate panel reversed summary judgment for the employer. If the plaintiff could prove that the statements had been made, a reasonable fact finder could conclude that age-based discrimination led to his termination, the court said. The decision sets a low bar for ADEA plaintiffs to establish sufficient discriminatory motive with only two comments allegedly made by a decision maker.
Detailed Discussion
At the age of 69, Theodore Wilson began working at the Armed Forces Retirement Home in Washington, D.C., as a security guard. Wilson had served 23 years in the Air Force and Army, and the retirement home – as well as a sister facility located in Mississippi – provided both residences and services for retired members of the Armed Forces.
After a year and a half of working at the retirement home, Wilson also became a resident. At the time, the home operated a resident employee program under which residents could also work at the home.
But two years later, a new chief operating officer (COO) decided to replace the resident employee program with a resident stipend program, under which residents were capped at monthly earnings of $120; any additional work was considered a donation. Wilson, then 71 years of age, was terminated.
He filed suit, alleging his termination violated the ADEA. In support of his claim, he provided two statements from the COO. First, he quoted him from a meeting with all of the residents about abolishing the employee program, at which the COO stated, “you didn’t come here to work, you came here to retire.”
In a subsequent conversation with his Equal Employment Opportunity counselor, Wilson was told, “[a]nother issue [the COO] had with the older guards at Armed Forces Retirement Home, ‘was that they were not doing their jobs properly, as from time to time they would be found asleep, which was not safe for a government agency in DC, what with all the threats since 9/11.’ ”
The home filed a summary judgment motion, arguing that the decision to end the employee program – and terminate Wilson’s employment – was made to save money, ameliorate concerns about the capabilities of the home’s security staff, and attain operational consistency with the Mississippi facility, which did not have an employee program. A U.S. District Court agreed, finding the comments related to concerns about performance and not age.
But the D.C. Circuit Court of Appeals reversed.
“Wilson has produced two statements that constitute direct evidence of age discrimination, entitling him to proceed to trial,” the three-judge panel wrote. “Both statements came from [the COO], who made the decision to terminate the resident employee program, causing Wilson’s discharge.”
A reasonable fact finder could conclude that discriminatory intent motivated the decision to abolish the resident employee program, the court said. “Both statements indicate the sort of ‘inaccurate and stigmatizing stereotypes’ that led Congress to enact the ADA. In particular, as the Supreme Court has explained, it ‘is the very essence of age discrimination for an older employee to be fired because the employer believes that productivity and competence decline with old age.’ ”
The COO’s comment about being “here to retire” and not “here to work” exhibited just such a discriminatory stereotype, the court noted, particularly as “[i]n Wilson’s case, the opposite was true: Wilson became a resident of the Home in part precisely because he could continue working there as a security guard. Wilson was there to work, not to retire.”
As for the second comment, the panel said the COO testified about only one incident finding a security guard asleep on the job while other witnesses said they had never heard such reports. “Even if [the COO] in fact knew of one instance in which a guard fell asleep on the job, a statement indicating a generalized concern about older guards as a group, based on one incident alone, is suggestive of impermissible, inaccurate stereotyping,” the court wrote.
The two statements “constitute direct evidence of discrimination entitling Wilson to proceed to trial,” the court concluded, reversing summary judgment for the employer.
To read the opinion in Wilson v. Cox, click here.
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Seattle Sets Record with $15 Minimum Wage; Lawsuit Filed
Why it matters: Taking the national trend of raising the minimum wage to the next level, the Seattle City Council approved an increase to pay workers from the current $9.32 to $15 per hour, a new record high for the United States. The law phased in the pay hike based on the number of a business’s employees: those with 500 or more employees were given three years to up their pay or four years if the company provides health insurance to its workers; companies with less than 500 workers were given seven years to make the change. Not surprisingly, employers reacted with criticism – and a federal lawsuit. The International Franchise Association filed suit in Washington federal court challenging the law as a violation of the U.S. and Washington Constitutions, federal statutes, and state law.
Detailed Discussion
Last year’s trend of raising the minimum wage has carried over into 2014, with Delaware and Washington, D.C., signing into law new bumps in pay and President Barack Obama issuing an Executive Order to increase the federal minimum wage to $10.10. Even in California – which enacted legislation last year providing for a scaled increase to $10 by January 1, 2016 –state lawmakers are considering a bill that would further increase the state’s rate to $13 in 2017.
But the Seattle City Council topped all other jurisdictions when it passed an ordinance taking the minimum wage to new heights: $15, to be exact. Mayor Ed Murray, who campaigned on a platform including the increase, formed a stakeholder group that drafted a proposal for the Council’s consideration. Council members passed the proposal and Murray signed it into law in early June.
The timeline for the increase varies depending on the size of the employer. The new law draws a line at 500 employees: those with 500 or more workers, considered large enough to handle a quicker rise, will begin paying employees $11 in 2015, $13 in 2016, and will reach $15 in 2017. Larger employers that also provide health insurance were given an additional year to reach $15.
Employers with less than 500 employees were placed on a seven-year plan, jumping to $10 per hour in 2015 and then increasing $0.50 each year until 2021. Once the $15 rate is reached, the minimum wage is tied to the rate of inflation for annual increases.
While proponents of the new law hailed it as historic, employers expressed concern about the impact on Seattle’s businesses, and one group filed a federal lawsuit. The International Franchise Association and four members (including franchisees of Holiday Inn and AlphaGraphics) alleged that the ordinance “unfairly and irrationally discriminates against interstate commerce generally, and small businesses that operate under the franchise business model specifically” with “absurd results.”
The law treats all franchises – regardless of the number of employees in the Seattle location – as a “large” employer, meaning a business with just 20 workers must follow the accelerated pay raise schedule over three years as opposed to seven.
Application of the ordinance constitutes a violation of the Commerce Clause and the Equal Protection Clause of the U.S. Constitution as well as the Washington Constitution and numerous other statutes and legal doctrines, the plaintiffs argue, because small franchises are placed at an unfair competitive disadvantage.
“[T]hey will be forced to raise prices, reduce employees, or lower the quality of their goods and services to comply with the ordinance to a substantially greater extent than their non-franchise counterparts. It is foreseeable that some small franchises in Seattle will not survive this prolonged period of unfair competition,” according to the complaint. “It is also foreseeable that some prospective franchise owners considering whether to open up a franchise location in Seattle will choose to set up shop elsewhere (or refrain from entering the fray altogether). Moreover, the Ordinance will surely adversely impact the value of franchisees’ businesses.”
The plaintiffs request a declaration that the Ordinance is unconstitutional and an injunction enjoining implementation or enforcement of the law.
To read Seattle’s ordinance, click here.
To read the complaint in International Franchise Association, Inc. v. City of Seattle, click here.
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Lawmakers Hear Criticism of EEOC’s Background Check Guidance
Why it matters: At a recent hearing before the House Subcommittee on Workforce Protections, speakers criticized the Equal Employment Opportunity Commission’s (EEOC) 2012 guidance on the use of criminal background checks. Rep. Tim Walberg (R-Mich.) opened the hearing by describing the guidance as “flawed” and an example of administrative overreaching, “making it harder for employers to do what is right.” Testimony from the National Small Business Association focused on the vulnerability of its members, as smaller companies are less likely to have dedicated human resources personnel to handle the potential legal concerns. And a representative of the U.S. Chamber of Commerce said the guidance gives “short shrift to common sense employer concerns – workplace safety and the hiring of violent felons, sexual harassment concerns and the hiring of rapists, trust and reliability in one’s workforce.” She also noted the agency’s poor track record of litigation over employers’ use of background checks, having lost the three suits brought to date.
Detailed Discussion
In April 2012, the EEOC released “Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act of 1964,” emphasizing that while the use of criminal justice history information does not violate Title VII per se, an employer may run afoul of the law if the checks result in systemic discrimination based on race, color, national origin, religion, or sex.
Employers should endeavor to conduct an individualized assessment of a prospective employee, the agency said, by considering factors like the nature of the crime and its relation to the potential job, as well as how much time has passed since the conviction and rehabilitation efforts.
Since the guidance was released, the EEOC has filed three lawsuits alleging employers like Dollar General and BMW Manufacturing Inc. engaged in the discriminatory use of criminal background checks, disproportionately screening out African-American workers.
But at a recent hearing before the House Subcommittee on Workforce Protections, Chairman and Rep. Tim Walberg said the agency should have opened the guidance up to public comment prior to its publication, stating that the “EEOC has made it more difficult for employers to ensure the safety of their customers and clients.”
Rep. Walberg expressed concern about the fact that the agency is considering additional guidance on the issue of credit history. “It is time for EEOC to stop this nonsense, withdraw its flawed guidance, and ensure employers use the tools available to protect the men and women they serve.”
Other speakers joined Rep. Walberg in his criticism. President of the National Small Business Association Todd McCracken testified that smaller employers may lack the resources necessary to understand the guidance, which clocks in at 55 pages long with 157 footnotes. Even companies that manage to follow the guidance can face liability for negligent hiring claims, he noted.
Camille Olsen, a lawyer speaking on behalf of the U.S. Chamber of Congress, told lawmakers that “employers find themselves between a rock and a hard place” when it comes to EEOC guidance, which represents not the law itself, but the agency’s view of it.
The guidance not only suggests the need for an individualized assessment – something not required under Title VII – but in some circumstances, it competes with state law as well, Olsen testified. “It is an expensive endeavor for a nursing home or other health care facility to show that not hiring a serial rapist or drug dealer pursuant to state law is job-related and consistent with business necessity, yet that is what this guidance contemplates,” she said.
Olsen added that the guidance “gives short shrift to common sense employer concerns,” but the EEOC itself conducts criminal background checks on potential hires “because a history or pattern of criminal activity creates doubt about a person’s judgment, honesty, reliability and trustworthiness.”
One speaker – Sherrilyn Ifill, on behalf of the NAACP Legal Defense & Educational Fund – voiced her support for the guidance, calling it “commendable.” The guidance “is also consistent with the growing national and bipartisan consensus that we need to rethink our criminal reentry systems,” she told lawmakers, as to “allow the presence of an arrest or conviction record to bar an individual from meaningful employment forever, would deny to millions that most powerful and important American opportunity – a second chance.”
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FLSA Case a Cautionary Tale for Employers
Why it matters: A Fair Labor Standards Act (FLSA) case out of California federal court has become a cautionary tale for employers. Employees of Aeropostale sued the retailer in 2012 seeking unpaid bonuses. The parties negotiated a deal and presented it to the judge for preliminary approval. Calling the proposed settlement “one of the worst I have ever seen,” the judge rejected the terms, which would have paid the majority of the roughly 600 collective action members no money whatsoever with a full release of their claims. Instead of going back to the drawing board, the parties filed a joint stipulation that Aeropostale would voluntarily agree to pay each of those who opted in full payment – without the need to release any claims – with one exception: the named plaintiff, who will proceed to trial on her claims later this summer.
Detailed Discussion
A series of plaintiffs filed three collective actions against national retailer Aeropostale. One suit involved allegations of failure to pay overtime wages and the failure to timely pay wages due and was granted preliminary approval for a settlement totaling $1.5 million.
In a second suit, a state court judge gave a thumbs-up to a $2.1 million settlement for a class of Aeropostale employees seeking payment for vacation, rest period, and waiting time.
The third action – filed by the same plaintiffs’ counsel as the first two suits – alleged the retailer violated the FLSA by failing to include nondiscretionary bonus amounts in the pay for nonexempt store employees. U.S. District Court Judge William Alsup granted conditional certification for the collective action and 594 employees opted in.
The parties then filed a motion for preliminary approval of the proposed deal – without an expert class-damages report, as requested by the judge – that was soundly rejected by the court. “The question now is whether the proposed settlement is fair and reasonable,” Judge Alsup wrote. “It is not, decidedly not.”
Pursuant to the proposed deal, the “true up amount” was agreed to be $8,645.61, which would be paid to the opt-ins, who would receive their money after signing a release for FLSA claims and any other similar provisions under state or federal law. But the court broke down the payments, revealing that 60 percent of the collective action members would receive $0, with 38 percent receiving between $1 and $200, and just 2 percent getting between $201 and $588.
The court further examined the numbers to show that of the 38 percent in the middle category, 78 percent would receive between $1 and $25. “This means that the vast majority (ninety percent) of collection action opt-ins would receive nothing or virtually nothing in this proposed settlement but nonetheless would provide a release and covenant not to sue,” Judge Alsup said. “No one should have to give a release and covenant not to sue in exchange for zero (or virtually zero) dollars. To protect the absent opt-in members, they will not be required to give up on their claims in exchange for zero dollars.”
“This settlement is so unfair, it cannot be fixed,” the court wrote. “The Court is tentatively convinced that the opt ins would be better off fending for themselves and escaping the negotiating authority of plaintiff’s counsel.”
Just a few days later, the parties filed a joint stipulation in response. Reaffirming that the parties believe the true-up amount to be $8,645.61, the defendant agreed to issue a payment to each collective action member (excluding the named plaintiff) without seeking a release from them. Aeropostale noted that “a large portion of the remaining class members were owed less than $25,” a statement that the plaintiff did not disagree with.
Therefore, the parties agreed that the conditional certification order be vacated and the case should proceed as to the named plaintiff’s claim only, with trial set for August.
To read the order denying preliminary approval for the settlement in Daniels v. Aeropostale West, Inc., click here.
To read the joint stipulation, click here.
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