California Supreme Court Rules That Arbitration Agreements May Not Preclude Employees’ Right to An Administrative Hearing

In a 4-3 decision, the California Supreme Court ruled that arbitration agreements between employers and employees are not enforceable to the extent that they require employees to arbitrate their wage claims before they have a non-binding administrative hearing before the State Labor Commissioner (known as a “Berman” hearing). The state high court held that any preclusion of an employee’s right to a Berman hearing violates public policy and is, therefore, unconscionable, and that the court’s holding was not preempted by the Federal Arbitration Act (FAA). Sonic-Calabasas A, Inc. v. Moreno, No. S174475, California Supreme Court (February 24, 2011).

Factual Background

Frank Moreno was employed by Sonic-Calabasas A, Inc. when he signed an agreement that required both parties to submit all employment disputes “which would otherwise require or allow resort to any court or other governmental dispute resolution forum” to binding arbitration. After ending his employment with Sonic, Moreno filed an administrative claim for unpaid vacation time and “waiting time” penalties and sought a hearing on the matter before the State Labor Commissioner. Sonic petitioned the trial court to compel arbitration under the terms of the agreement. The trial court refused to order arbitration and Sonic appealed to the California Court of Appeal, which ordered the matter to be arbitrated. Moreno then sought review before the California Supreme Court.

Legal Analysis

The California Supreme Court reviewed several issues in reaching its decision. First, it held that any requirement to arbitrate wage and hour claims that would otherwise be subject to a Berman hearing is contrary to state public policy and, therefore, unenforceable. However, the court ruled that such provisions could be enforced to require arbitration, instead of court action, in a subsequent court “appeal” of the Labor Commissioner’s decision, as is currently provided by the Berman hearing process. The court also held that language included in an arbitration agreement that prevents an employee from requesting an administrative (Berman) hearing is unconscionable and, therefore, unenforceable.

Finally, the court found that the California statutory scheme providing for Berman hearings is not preempted by the FAA despite express language in the arbitration provision stating that it was intended to apply to all disputes that may arise out of the employment context “under the [FAA], in conformity with the procedures of the California Arbitration Act.”

Accordingly, employees must be permitted to file claims and receive an administrative wage claim hearing by the Labor Commissioner before they may be forced to participate in any arbitration of such claims. This is true no matter what the parties may have agreed to in any contractual arbitration agreement.

In a 29-page dissent, three justices disagreed on each of the holdings of the majority. They found that the California statutory scheme is preempted by the FAA, that the majority’s finding that the arbitration agreement is contrary to public policy “is inconsistent with the state and federal policies favoring enforcement of arbitration agreements,” and that the arbitration provision in question is not unconscionable and accordingly, is fully enforceable.

Practical Impact

According to an of counsel in Ogletree Deakins’ San Francisco office: “Employers with otherwise valid employment arbitration agreements that reference the FAA should not attempt to enforce those agreements to compel arbitration until the employee has either exhausted the administrative procedures for a hearing before the Labor Commissioner or has elected to proceed with his or her claim in court. Given the exhaustive dissent stressing the preemptive nature of the FAA and other pending arbitration-related cases currently before the U.S. Supreme Court, this is likely not the final word on this important aspect of the California Supreme Court’s decision.”