On February 24, 2011, the California Supreme Court issued an important decision clarifying the interplay between an employer's right to compel arbitration and an employee's rights to pursue statutory wage claims with the Department of Labor Standards Enforcement (the "DLSE").  In Sonic-Calabasas A, Inc., v. Moreno, S174475, the Court ruled that an employer cannot require that an employee waive his right to pursue wage claims through the DLSE.  The Court found that pre-dispute arbitration agreements that an employer makes a condition of employment and that force employees to arbitrate their wage claims without recourse to the DLSE are against public policy and unconscionable.  Such clauses are unenforceable until after the DLSE has concluded its initial non-binding administrative hearing.  As a result, employers using arbitration agreements should consider revising their agreements to expressly preserve employee rights to pursue remedies with the DLSE.

Defendant Sonic-Calabasas employed Frank Moreno at its  automobile dealership.  As a condition of his employment, Moreno agreed to submit any disputes to "binding arbitration under the Federal Arbitration Act, in conformity with the procedures of the California Arbitration Act."  The arbitration clause applied to all disputes arising from the employment relationship that would otherwise require or allow resort to any court or other governmental dispute resolution forum.  The agreement carved out claims Moreno might have under the National Labor Relations Act or the California Workers' Compensation Act, as well as proceedings before the California Department of Fair Employment and Housing or the U.S. Equal Employment Opportunity Commission. 

After his termination, Moreno filed a claim with the DLSE against Sonic for unpaid vacation.  In response, Sonic filed a petition to compel arbitration of the wage claim, citing the arbitration provision in the employment agreement.  Sonic argued that, by signing the employment agreement, Moreno had agreed to waive all of the statutory rights afforded by the DLSE's adjudicative processes - including the initial non-binding hearing commonly known as a Berman Hearing.  The Berman Hearing process allows the DLSE to pursue administrative claims on behalf of the employee, or to conduct an administrative hearing in which it sits as the trier of fact.  More importantly, the Berman Hearing process provides specific safeguards for the employee if they are successful in prosecuting their claims before the DLSE in the initial hearing.  In particular, if an employee succeeds at the administrative hearing, the employer can only pursue a de novo appeal in the superior court by posting a bond in the full amount of the award with the court.  The labor commissioner may also represent the employee in the appellate proceedings, and in some cases must represent the employee, and the court must award attorney's fees against an unsuccessful appealing employer when the employee obtains an amount greater than zero in the de novo appeal.     

The Superior Court denied Sonic's petition to compel arbitration stating that as a matter of public policy the arbitration provisions of the employment contract were unenforceable until after the Labor Commissioner held the preliminary non-binding Berman Hearing.  The Court of Appeal reversed, holding that requiring an employee to waive the statutory protections associated with a Berman Hearing would not violate public policy because the specific pro-employee protections were merely contingent benefits that relied on an administrative ruling in the employee's favor. 

The Supreme Court disagreed with the Court of Appeal, holding that the arbitration clause was unconscionable and against public policy.  The Supreme Court began its analysis by opining that the Berman Hearing procedure is fully compatible with the arbitration process.  According to the Court, Berman Hearings are preliminary to, rather than preemptive of binding arbitration.  Once the parties conclude the initial Berman Hearing the employer may petition the superior court to compel arbitration.  Assuming the appeal and motion to compel arbitration are timely, the Superior Court would cede jurisdiction to an arbitrator, who would then enforce the same provisions as the Superior Court, i.e. requiring the employer to post a bond, allowing the Labor Commissioner to represent the employee, and enforcing the one-way fee shifting provision.

The Court then addressed the central question of whether an employer could require an employee to waive a Berman Hearing and go directly to arbitration as a condition of employment.  It answered this question in the negative finding that such a waiver would violate public policy.  The Court noted that the legislature had devised the Berman Hearing and post-hearing process as a means of affording employees with meritorious wage claims certain advantages intended to reduce the costs and risks of pursuing wage claims against their employers.  According to the Court, the statutory regime furthers the important and long-recognized purpose of ensuring that employees are paid the wages they are owed. The Berman Hearing furthers that purpose by creating a streamlined and accessible process that assures quick resolution to employee claims, and certain requirements that create a disincentive for employers to file frivolous appeals against successful employees. The Court rejected Sonic's arguments that arbitration could afford an employee the same advantages and protections as the DLSE claims process.  The Court also found that the arbitration clause was unconscionable, insofar as the primary purpose of a Berman waiver would be for the employer to gain an advantage in the dispute resolution process by eliminating certain statutory advantages that were designed to make the wage claim process fairer to the aggrieved employee.  

Takeaway

Employers will often include a mandatory arbitration provision in their employment agreements that cover all claims arising from the employment relationship.  Employers should be aware that despite the existence of such clauses, an aggrieved employee will be entitled to pursue his or her wage claim through the Labor Commission's administrative processes.  It is only after the parties have completed these processes that the employer may invoke a valid arbitration agreement.  But even then, the employer must afford the employee the same protections as those set forth in the labor code, meaning the employer will need to post a bond for the amount of the Commissioner's award, the employee may be represented by the Labor Commissioner, and the arbitrator must enforce the one-way fee shifting provision that will likely make employers liable for the employee's attorney's fees.  Employers should also be aware that including arbitration agreements that force employees to relinquish their right to pursue claims with the DLSE could be found to violate public policy, allowing an employee to challenge the enforceability of the entire arbitration agreement.