Wisdom v. AccentCare: Court Finds Arbitration Agreement Unconscionable

In Wisdom v. AccentCare, Inc. (1/3/12) --- Cal. App. 4th ----, 2012 WL 8701, the defendant employed the plaintiffs as on-call staffing coordinators. The plaintiffs filed suit, alleging that they were not paid for off-the-clock work. They sought damages and injunctive and declaratory relief.

The employer moved to compel arbitration based on an acknowledgment form that some of the plaintiffs signed when they applied for employment. The form stated:

I hereby agree to submit to binding arbitration all disputes and claims arising out of the submission of this application. I further agree, in the event that I am hired by AccentCare,that all disputes that cannot be resolved by informal internal resolution which might arise out of my employment with AccentCare, whether during or after that employment, will be submitted to binding arbitration. I agree that such arbitration shall be conducted under the rules then in effect of the American Arbitration Association.

Slip op. at 2.  The trial court (Sacramento County Superior, Judge Steven H. Rodda) denied the motion, holding that the acknowledgment form was unconscionable. Ibid.

Relying on Armendariz v. Foundation Health Psychcare Services, Inc., (2000) 24 Cal.4th 83, the Court of Appeal affirmed, holding that the acknowledgment was procedurally and substantively unconscionable.  On procedural unconscionability, the Court held:

The contract, being one of adhesion, was oppressive. It was given to plaintiffs upon their application for employment. This situation leads to inherent unconscionability because of the unequal bargaining power of the parties and the nature of the relationship. There was no evidence that the plaintiffs in this case were highly sought-after skilled employees who individually negotiated the details of their employment relationship with AccentCare.

Slip op. at 3.  The Court noted that the arbitration was to be conducted under the American Arbitration Association rules, but the acknowledgment did not attach those rules. The Court also found that an element of surprise, as stated in the plaintiffs' declarations, in that the plaintiffs did not know what “binding arbitration” meant, no one explained it to them, and they did not know that they were giving up their right to trial. Ibid.  Cf. Roman v. Superior Court (2009) 172 Cal.App.4th 1462, 1468-1469.

The Court also found the acknowledgment substantively unconscionable because it lacked mutuality, i.e., it required the plaintiffs to arbitrate their claims but did not require the defendant to do so. Slip op. at 6.  The Court concluded:

The arbitration language in the acknowledgment signed by plaintiffs did not create mutual obligations. This, combined with the elements of procedural unconscionability present in the circumstances of the execution of the agreement compel the conclusion that the arbitration agreement was unenforceable.

Slip op. at 7.  The opinion is available here.

Sky Sports v. Superior Court: Court of Appeal Finds No Waiver of Right to Arbitrate

Sky Sports, Inc. v. Superior Court (Hogan) (12/15/11) 2011 WL 6225228, brings an interesting twist to the question of whether a party waives its right to demand arbitration by taking part in litigation.

The plaintiff filed a putative class action against his former employer for meal and rest period violations. In opposition to the plaintiff's motion for class certification, the defendant argued that he was not typical of the class because, unlike the majority of his co-workers, he had not signed an arbitration agreement. The trial court (Los Angeles Superior, Judge Ernest M. Hiroshige) granted certification and held that the defendant had waived its right to compel arbitration. Slip op. at 2.

The Court of Appeal reversed. The Court held that the defendant could not have compelled the plaintiff to arbitrate because he had not signed an agreement to arbitrate. Slip op. at 3. The defendant's delay in bringing the motion to compel arbitration until certification of a class that included people who had signed an arbitration agreement could not constitute a waiver of the defendant's right to move compel arbitration. Slip op. at 4.

The opinion is available here.  

D.R. Horton: National Labor Relations Board Holds that Class Action Waivers Violate National Labor Relations Act

On January 3, 2012, the National Labor Relations Board announced its decision in In re DR Horton, Inc., 357 NLRB 184 - 2012. Many of us have been watching this case closely since the SCOTUS decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), which held that the Federal Arbitration Act (FAA) preempts the California Supreme Court's decision in Discover Bank v. Superior Court (2005) 36 Cal.4th 148 regarding unconscionability analysis of class action waivers in arbitration agreements. My posts on Concepcion are here and here.

In D.R. Horton, the NLRB considered whether an employer violates Section 8(a)(1) of the National Labor Relations Act when it requires employees covered by the Act, as a condition of their employment, to sign an agreement that precludes them from filing joint, class, or collective claims addressing their wages, hours, or other working conditions against the employer in any forum, whether arbitral or judicial. The Board found that such an agreement violates section 7 of the Act, which gives employees the right to engage in concerted activities for mutual aid or protection, notwithstanding the FAA, which generally makes employment-related arbitration agreements judicially enforceable. The Board found that under the circumstances presented, there was no conflict between Federal labor law and policy, on the one hand, and the FAA and its policies, on the other. Slip op. at 1. 

The Board began by discussing section 7 of the Act, which preserves the right of employees to engage in concerted activity for their mutual benefit. Slip op. at 2. The Board and the courts have long held that section 7 protects the right of employees to bring legal action addressing their wages, hours, and working conditions. Ibid. This includes the right to bring "employment-related claims on a classwide or collective basis in court or before an arbitrator." Slip. op at 3. 

The Board held that the employer's Mutual Arbitration Agreement (MAA) violated section 7 because it required employees, as a condition of their employment, to refrain from bringing collective or class claims in any forum at all. "They cannot proceed in court, because the MAA waives their right to a judicial forum; and they cannot proceed in arbitration, because the MAA prohibits the arbitrator from consolidating claims or awarding collective relief. The MAA thus clearly and expressly bars employees from exercising substantive rights that have long been held protected by Section 7 of the NLRA." Slip op at 4.

Because the MAA "expressly restricts protected activity," the employer violated section 8(a)(1) of the Act by imposing it on employees as a condition of employment. Slip op. at 4. Further, even if "entered into without coercion," any agreement that obligates an employee to bargain individually constitutes a restraint upon collective action. Slip op. at 5. The prohibition on such agreements "lies at the core of the prohibitions contained in Section 8" and implicates Federal labor policy that predates the Act. Slip op. at 5-6.

The Board next rejected the defendant's argument that finding a violation of the Act would conflict with the FAA. Slip op. at 7.

Enacted in 1925, the FAA sought to "reverse the longstanding judicial hostility to arbitration agreements" and to place private arbitration agreements "upon the same footing as other contracts." Slip op. at 8, citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). Agreements to arbitrate remain subject to the same defenses against enforcement to which other contracts are subject. Slip op. at 8.

The Board held that its finding that the MAA violated the NLRA does not conflict with the FAA for several reasons. First: 

To find that an arbitration agreement must yield to the NLRA is to treat it no worse than any other private contract that conflicts with Federal labor law. The MAA would equally violate the NLRA if it said nothing about arbitration, but merely required employees, as a condition of employment, to agree to pursue any claims in court against [their employer] solely on an individual basis.

Slip op. at 9.

Second, an agreement to arbitrate statutory claims may not require a party to forego its substantive statutory rights. Ibid. The MAA's "categorical prohibition" of joint, class, or collective claims in any forum - either judicial or arbitral - violates section 7's right to engage in concerted activity. Ibid. That right is substantive, not merely procedural. It is "the core substantive right protected by the NLRA and is the foundation on which the Act and Federal labor policy rest." Slip op. at 10. 

Third, "nothing in the text of the FAA suggests that an arbitration agreement that is inconsistent with the NLRA is nevertheless enforceable." Slip op. at 11. To the contrary, the FAA provides that arbitration agreements may be invalidated in whole or in part upon any "grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. section 2. The generally applicable defense here is that the MAA violates the NLRA. Ibid. 

The Board then discussed Concepcion and the concern expressed by the Supreme Court that the "switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality." Concepcion, 131 S.Ct. at 1750. The Board reasoned that "the weight of this countervailing consideration was considerably greater in the context of AT&T Mobility than it is here" because the employment agreement at issue here differs substantially from the consumer contract at issue in Concepcion. Slip op. at 11. Employment class actions represent only a subset of all class actions and tend to be more limited than consumer class actions, so any intrusion on the policies underlying the FAA is similarly limited. Slip op. at 11-12. 

The Board thus held that its holding accommodates "to the greatest extent possible" the policies underlying both the NRLA and the FAA. Slip op. at 12. 

The Board then reasoned that, even if there were a direct conflict between the NLRA and the FAA, it is the FAA that must yield:

As explained above, under the Norris-LaGuardia Act, a private agreement that seeks to prohibit a "lawful means [of] aiding any person participating or interested in" a lawsuit arising out of a labor dispute (as broadly defined) is unenforceable, as contrary to the public policy protecting employees' "concerted activities for . . . mutual aid or protection." To the extent that the FAA requires giving effect to such an agreement, it would conflict with the Norris-LaGuardia Act. The Norris-LaGuardia Act, in turn—passed 7 years after the FAA,—repealed "[a]ll acts and parts of act in conflict" with the later statute (Section 15).

Slip op. at 12.

Finally, the Board held that its decision does not implicate the Supreme Court's restriction on compelling class arbitration, as expressed in Concepcion and Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758, 1775–1776 (2010). Slip op. at 12. Neither Concepcion nor Stolt-Nielsen involved the waiver of rights protected by the NLRA. Further, Concepcion involved a conflict between the FAA and state law, which implicated the Constitution's Supremacy Clause, while this case arguably involves a conflict between two federal statutes. Finally, the Board's decision does not require any employer to submit any employment dispute to class arbitration: 

We need not and do not mandate class arbitration in order to protect employees' rights under the NLRA. Rather, we hold only that employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral and judicial. So long as the employer leaves open a judicial forum for class and collective claims, employees’ NLRA rights are preserved without requiring the availability of classwide arbitration. Employers remain free to insist that arbitral proceedings be conducted on an individual basis.

Slip op. at 12.

The Board's opinion is available here. 

Harris v. Superior Court (Liberty Mutual Insurance): Cal. Supreme Court Reverses Insurance Adjuster Exemption Case

Plaintiffs worked as claims adjusters for defendants. They alleged that defendants erroneously classified them as exempt “administrative” employees and sought unpaid overtime. Plaintiffs moved for class certification, and the trial court certified a class of “all non-management California employees classified as exempt by [defendants] who were employed as claims handlers and/or performed claims-handling activities.”

Plaintiffs moved for summary adjudication of defendants’ affirmative defense that plaintiffs were exempt from the overtime compensation requirements under Industrial Welfare Commission (IWC) Wage Order No. 4. Cal. Code Regs., tit. 8, § 11040. Defendants opposed the motion and moved to decertify the class.

The trial court decertified the class in part, depending on then the plaintiffs’ claims arose. For claims arising before October 1, 2000, the trial court granted the motion for summary adjudication on grounds that the Bell v. Farmers Insurance line of cases – Bell v. Farmers Ins. Exchange (2001) 87 Cal. App. 4th 805 (“Bell II”) and Bell v. Farmers Ins. Exchange (2004) 115 Cal. App. 4th 715 (“Bell III”) – compelled a ruling that the claims adjusters were nonexempt “production workers.” The court decertified the class as to all claims arising after October 1, 2000, the effective date of a new Wage Order 4.

Both parties appealed. A divided court of appeal ruled for plaintiffs, concluding that they could not be considered exempt employees under either version of the Wage Order. The court of appeal directed the trial court to vacate its prior order and enter an order granting plaintiffs’ motion for summary adjudication and denying defendants’ motion to decertify.

The California Supreme Court granted defendants’ petition for review. In a unanimous but relatively narrow decision, the Court reversed and remanded to the court of appeal for reconsideration, holding that the “administrative/production worker dichotomy” is not dispositive.

In 1998, the IWC issued a new series of wage orders, abolishing overtime compensation for work over eight hours in a day. In response, the Legislature passed the AB 60, “Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999.” The Act amended Labor Code section 510 to provide overtime compensation for work over eight hours in a day. It also added section 515, which permits the IWC to exempt from overtime compensation executive, administrative, and professional employees, provided that they are primarily engaged in duties that meet the test of the exemption, that they regularly exercise discretion and independent judgment in performing those duties, and that they earn a monthly salary no less than two times the state minimum wage for full-time employees, currently $640 per workweek.

Following passage of AB 60, the IWC issued new wage orders, including Wage Order 4-2001. Whereas Wage Order 4-1998 did not “articulate the precise scope” of the administrative exemption, Wage Order 4-2001 contains “a much more specific and detailed description of work that is properly described as administrative.” Harris, slip op. at 4, 7. The Order provides a multi-pronged test of the exemption. Harris focuses on the first and last factors: that an administrative employee is one whose duties and responsibilities involve “the performance of office or non-manual work directly related to management policies or general business operations of his/her employer or his/her employer’s customers” and who is primarily engaged in duties that meet the test of the exemption.

The Wage Order provides that the activities constituting exempt and non-exempt work “shall be construed in the same manner” as in certain regulations under the federal Fair Labor Standards Act in effect as of the date of the order. The relevant regulation provides that work is “directly related to management policies or general business operations” only if it satisfies two components. Fed. Regs. § 541.205(a) (2000). First, it must be qualitatively administrative. Second, quantitatively, it must be of substantial importance to the management or operations of the business. Both components must be satisfied before work can be deemed exempt in nature. Harris, slip op. at 10.

In their motion for summary adjudication, plaintiffs argued that defendants could not show that their work was qualitatively administrative in nature. They argued that they fell on the production side of the administrative/production worker dichotomy, as explained in the Bell cases. The administrative/production worker dichotomy distinguishes between administrative employees who are primarily engaged in “administering the business affairs of the enterprise” and production-level employees whose “primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce and market.” (Bell II, 87 Cal. App. 4th at p. 821.)

Like Harris, Bell asked whether a class of insurance adjusters could be deemed administrative exempt employees. Examining the role of the plaintiffs in the defendant’s business, the Bell court held that the defendant’s business was to handle claims, the adjusters fell squarely on the production side of the administrative/production dichotomy, and they could not be deemed administrative employees. Bell II, 87 Cal. App. 4th at 826.

The Supreme Court distinguished Bell on two grounds. First, the Bell courts were careful to limit their holdings to the facts before them, including the defendants’ stipulation that the plaintiffs’ work was “routine and unimportant.” Bell II, 87 Cal. App. 4th at 826. “Second, because Wage Order 4-1998 did not provide sufficient guidance, the Bell II court looked beyond the language of the wage order and employed the administrative/production worker dichotomy as an analytical tool.” Harris, slip op. at 17. In contrast, Wage Order 4-2001 provides “detailed guidance” on the issue. Ibid.

Having thus distinguished Bell, the Supreme Court held that the court of appeal erred in placing too much reliance upon it.

First, the court of appeal both failed to consider all of the relevant aspects of the federal regulations incorporated into Wage Order 4-2001 and it “reached out for support” to other regulations not incorporated into the Wage Order. Harris, slip op. at 18.

Specifically, the court of appeal focused on former part 541.205(a), concluding that only work performed at the level of policy or general operations can qualify as “directly related to management policies or general business operations” and that work that merely carries out the particular day-to-day operations of the business is production, not administrative, work. Harris, slip op. at 19. The court failed to take into account former part 541.205(b), which provides that “administrative operations of the business” includes work performed by “white-collar employees engaged in ‘servicing’ a business as, for example, advising the management, planning, negotiating, [and] representing the company.” Ibid. The court thus read the phrase “directly related to management policies or general business operations” in too narrow a fashion. Ibid.

Second, the court of appeal erred in relying on Bratt v. County of Los Angeles (9th Cir. 1990) 912 F.2d 1066 to support its conclusion that “although advising management about the formulation of policy is exempt administrative work, advising management about the settlement of an individual claim is not.” Harris, slip op. at 19-20. The Supreme Court distinguished Bratt because the Ninth Circuit more recently held that claims adjusters may be exempt from the Fair Labor Standards Act’s overtime requirements and because Bratt involved probation officers, not claims adjusters. Harris, slip op. at 20. The court of appeal’s reliance on Bratt “highlights the difficulty in relying on the particular role of employees in one enterprise to deduce a rule applicable to another kind of business” and “reveals the limitations of the administrative/production worker dichotomy itself as an analytical tool.” Harris, slip op. at 20-21. The Court held that modern-day, post-industrial, service-oriented businesses may not follow the administrative/production worker dichotomy, and that courts should not strain to apply the dichotomy where it does not fit. Harris, slip op. at 21.

The court of appeal did not err in considering two opinion letters issued by the Division of Labor Standards Enforcement (DLSE): a 1998 letter applying the administrative/production worker dichotomy to find that certain claims adjusters were not exempt; and a 2003 letter stating that the dichotomy is still viable after adoption of Wage Order 4-2001. Harris, slip op. at 21. The Supreme Court stated that its opinion was not inconsistent with the opinion letters.

We do not hold that the administrative/production worker dichotomy was misapplied to the Bell II plaintiffs, based on the record in that case, or that the dichotomy can never be used as an analytical tool. We merely hold that the Court of Appeal improperly applied the administrative/production worker dichotomy as a dispositive test.

Harris, slip op. at 22.

The Supreme Court thus reversed and remanded with instructions that the court of appeal review the trial court’s denial of the summary adjudication motion, applying the legal standards set forth in the opinion. The Court did not take immediate action in either of the two companion cases, Pellegrino v. Robert Half International, Inc., Case No. S180849 (blogged here) and Hodge v. AON Insurance Services, Case No. S191415 (blogged here). 

The opinion is available here. 

Harris v. Superior Court: Supreme Court Says Court of Appeal Erred in Finding Insurance Adjustors Not Exempt

The California Supreme Court has issued its decision in Harris v. Superior Court (Liberty Mutual Insurance).  I will post more later, but for the time being, here's the headline: 

This litigation tests whether certain insurance company claims adjusters are exempt employees, not entitled to overtime compensation under the Labor Code and regulations of the California Industrial Welfare Commission (IWC or Commission).  Reviewing the trial court’s denial of a summary adjudication motion, the Court of Appeal held the adjusters are not exempt employees as a matter of law.  In doing so, the Court of Appeal misapplied the substantive law.  We reverse. 

The opinion is available on the Supreme Court's web site.   

Aleman v. AirTouch Cellular: Court Issues Decision on Reporting Time, Split Shifts

In Aleman v. AirTouch Cellular (12/21/11) --- Cal.App.4th ----, the Court of Appeal affirmed an order granting summary judgment (Los Angeles Superior Court, Judge William Highberger) to an employer in a putative class action.

The plaintiffs alleged that the defendant violated two separate provisions of Industrial Welfare Commission (IWC) Wage Order No. 4-2001. They alleged that defendant: (1) failed to pay reporting time pay for days when they were required to report to work just to attend work-related meetings; and (2) failed to pay split shift compensation for days on which they attended a meeting in the morning and worked another shift later the same day.

The trial court granted motions for summary judgment against two of the named plaintiffs. The Court of Appeal affirmed, issuing three holdings of note.

First, the defendant did not have to pay the plaintiffs “reporting time pay” for attending meetings at work, because all the meetings were scheduled, and the plaintiff worked at least half the scheduled time, even if the scheduled time was less than four hours.  In other words,  if an employee's only scheduled work for the day is a mandatory meeting of one and a half hours, and the employee works a total of one hour because the meeting ends a half hour early, the employer is not required required to pay reporting time pay pursuant to subdivision 5(A) of Wage Order 4 in addition to the one hour of wages because the employee was furnished work for more than half the scheduled time.  Slip op. at 10.

Second, the defendant did not owe the plaintiffs additional compensation for working “split shifts” because on each occasion he worked a split shift he earned more than the minimum amount required by the wage order.  Slip op. at 17.  In other words, the plaintiff would be entitled to split shift pay only if his total earnings for the day were less than the number of hours worked, plus the split shift premium of one hour's pay, at the minimum wage rate.  Ibid.

Third, the defendant could not recover its attorney fees from the plaintiffs because the claims arose under Labor Code section 1194, the one-way fee-shifting statute, rather than section 218.5, which allows either successful party to recover its fees.  Slip op. at 22.  "Ultimately, reporting time and split shift pay requirements serve the same general purpose as Labor Code section 1194."  Slip op. at 25.

The opinion is available here.

Brinker-Watch 2012

The California Supreme Court held oral argument in Brinker on November 8, 2011. (You can view the oral argument on youtube.) The Court deemed the matter submitted as of that date, meaning that it would issue its opinion no later than 90 days later, or February 6, 2012. 

On December 2, the Court granted permission to the California Employment Law Council to file an amicus brief regarding the retroactive application of the Court's opinion. Yesterday, the Court vacated its prior order deeming the case submitted and held that it will be deemed "resubmitted" on January 13, 2012: 

Pursuant to California Rules of Court, rule 8.520(f)(7) and this court's December 2, 2011, order, the parties' answers to the amicus curiae brief of the California Employment Law Council, addressing the grounds for prospectively applying portions of this court's eventual decision on the merits, are due Tuesday, January 3, 2012. Each party may file a simultaneous reply to the other party's answer within 10 days thereafter. Submission of the cause is vacated. (See Cal. Rules of Court, rule 8.524(h)(1) [submission runs from expiration of the time in which to file briefs, including supplemental briefs].) The cause will be resubmitted on January 13, 2012.

The result is that we will have the opinion no later than April 12, 2012. Stay tuned. 

As a reminder, the Court's docket is here.