Arbitration Agreements Can Backfire on Employers
March 2 2015
It is no secret that arbitration agreements may greatly reduce the risks that many employers face in disputes with employees. For example, when used correctly, such agreements can curb exposure to class actions by forcing employees to arbitrate disputes on an individual basis instead of a class basis. See, e.g., Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014).
However, when such an agreement either contains certain language or fails to include other language, it may result in a class action or a representative action being litigated in front of an arbitrator instead of a court. This can be problematic for many reasons, not the least of which is that an arbitrator’s hourly charges typically are paid by the employer – and those fees can add up quickly in a complicated matter involving numerous parties.
Thus, instead of decreasing the cost of defending a class action or a representative action, a poorly drafted arbitration agreement could result in greatly escalating such costs. A pair of recent decisions from the California Court of Appeal for the Fourth Appellate District (in San Diego) underscore the need for employers to use great care in drafting such agreements to avoid such outcomes.
In Securitas Security Services USA, Inc. v. Superior Court, Cal. Ct. App. Case No. D066873, an employee filed a lawsuit alleging meal-and-rest-breaks violations. The lawsuit was fashioned both as a class action and as a representative action under California’s Private Attorneys General Act of 2004 (“PAGA”) Cal. Labor Code §§ 2698 et seq. The employer, Securitas Security Services USA, Inc. (“Securitas”), asked the trial court to (1) compel the lead plaintiff to arbitrate her individual claims, (2) dismiss and/or sever and stay the lead plaintiff’s class claims, and (3) dismiss and/or stay the PAGA claim.
Nothing out of the ordinary so far. The case took an unusual turn, however, when the trial court granted the motion to compel arbitration. It was a surprising twist not because the trial court granted the motion but because of the way it did so. Specifically, because the arbitration agreement included an invalid waiver of PAGA claims, the trial court ordered the parties to arbitrate the plaintiff’s entire complaint – including her PAGA claims.
This put Securitas in the awkward position of having to ask the appellate court to reverse a decision that granted Securitas’ own motion. Ultimately, California’s Fourth Appellate District reversed the trial court but voided the entire arbitration agreement on the ground that the invalid PAGA waiver could not be severed from the agreement. (Potential problems with clauses that bar the severability of a PAGA waiver are discussed in one of our prior blog posts, The New PAGA-Waiver Trap Door.)
This outcome, which put the parties back at square one and appears to allow the class-action and PAGA claims to proceed in civil court, amounted to an expensive ride on the merry-go-round for Securitas. At the same time, the very language of the arbitration agreement seemingly deprived Securitas of any benefit that it had hoped to gain from that agreement.
A different employer, Universal Protection Service, L.P. (“Universal”), suffered a similar fate before the same panel of the Fourth Appellate District. See Universal Protection Service, L.P. v. Superior Court, Case No. D066919. An employee in that case alleged that Universal had engaged in overtime, meal-and-rest-period, and indemnification violations. However, the employee took the unusual step of seeking arbitration of her putative class claims under the employer’s arbitration agreement, instead of filing a civil action in court.
Although the Universal likely would have been eager to arbitrate the employee’s individual claims, it had no taste for class arbitration. Thus, Universal was forced to take the unusual step of filing an action in state court to thwart the arbitration of an employment dispute.
Universal argued that it was for the court, and not the arbitrator, to decide if class claims could be arbitrated (presumably because arbitrators are thought to be far more inclin
ed to find that claims are subject to arbitration). The trial court agreed with the employee and compelled arbitration, finding that it was for the arbitrator to determine “whether the class action claims are arbitrable.”
While initially successful in persuading the Court of Appeal to take the rare step of reviewing the lower court’s decision by way of a writ petition, Universal ultimately was unable to avoid the impact of the trial court’s ruling. The appellate court agreed with Universal that the arbitration agreement did not expressly delegate to the arbitrator the determination of whether the class claims were arbitrable. Nonetheless, the Fourth Appellate District found that the arbitration agreement explicitly referenced the American Arbitration Association rules, “which unambiguously state that the arbitrator is to decide whether the parties’ arbitration agreement permits class arbitration.”
In sum, there are advantages and disadvantages to both having or refraining from using certain language in arbitration agreements. In light of these two new decisions, employers who wish to enhance the likelihood of enforcing their arbitration agreements should consult legal counsel to determine if amendments to their arbitration agreements are advisable.