September 9, 2019

California Supreme Court Casts Doubt on Arbitration Agreements that Require Civil Litigation Procedures for Wage Claims

On August 29, 2019, the California Supreme Court held in OTO, L.L.C. v. Kho, S244630, that a mandatory arbitration agreement may be unenforceable against employee wage claims if it requires the employee to forego the “Berman” hearing process and adhere to procedures that are more similar to civil litigation. Employers should revisit their arbitration agreements and consider carving out wage claims brought before the Labor Commissioner.  

The Facts

Plaintiff Ken Kho worked as a service technician for defendant One Toyota of Oakland (“OTO”). Three years into Kho’s employment, a human resources “porter” approached him at his workstation and asked him to sign several documents, including an arbitration agreement (the “Agreement”). The Agreement required Kho (and OTO) to bring any employment-related claims in arbitration, foregoing the right to pursue such claims in any other forum. The Agreement specified arbitral procedures that largely mirrored those found in civil litigation, including full discovery and civil rules of pleading and evidence. 

After separating from OTO, Kho filed a claim with the Labor Commissioner to recover allegedly unpaid wages. Kho’s claim was set for a hearing under the statutory procedure applicable to wage claims (known as a “Berman” hearing), but OTO filed a petition to compel arbitration. When the hearing officer proceeded with the claim and awarded Kho over $158,000, OTO appealed to the Superior Court. The Superior Court vacated the award but declined to compel arbitration.

The Court of Appeal reversed, and the California Supreme Court granted review to determine whether a “litigation-like” arbitral procedure could be a lawful substitute for the more streamlined “Berman” process to which the employee would otherwise be entitled.

The Supreme Court’s Decision

The Supreme Court reversed, finding that the Agreement was unconscionable and, thus, unenforceable. The Court found that there was an “extraordinarily high” degree of procedural unconscionability in this case, noting that OTO required Kho to sign the Agreement without a real chance to review it, that the Agreement itself was lengthy and full of legalese, and that there was nobody available to explain it to him.

The Court went on to analyze substantive unconscionability, focusing on the tradeoffs between the Berman hearing process and the Agreement’s litigation-type procedures.  While civil litigation is “carefully crafted to ensure fairness to both sides,” the Court explained that “that carefully crafted process can be costly, complex, and time-consuming.”  The Berman process, on the other hand, is an “expedient, largely cost-free administrative procedure.” From the majority’s perspective, waiving Berman procedures in favor of civil litigation procedures erects barriers to some wage claimants’ abilities to vindicate their statutory rights. “When imposed in a procedurally unconscionable fashion, such barriers to the vindication of rights may become unenforceable.” While stressing that, “the waiver of Berman procedures does not, in itself, render an arbitration agreement unconscionable,” the Court ultimately held that the Agreement in the case before it was unconscionable and unenforceable.   

The Dissent

Justice Chin filed a vigorous dissent: “Today, the majority holds that an arbitration agreement is substantively unconscionable — and therefore unenforceable — precisely because it prescribes procedures that, according to the majority, have been ‘carefully crafted to ensure fairness to both sides.’ If you find that conclusion hard to grasp and counterintuitive, so do I.” He rejected the majority’s assurance that an identical provision might “pass muster under less coercive circumstances,” and cautioned that “the majority’s new rule casts significant doubt on the enforceability of many contractual terms in the employment context, not just arbitration provisions.” He engaged in a point-by-point refutation of the majority’s conclusion that Berman procedures are more affordable and accessible than civil litigation, and argued that the majority’s holding was preempted by the Federal Arbitration Act. 

What Employers Should Know  

While the Court was careful to note that its holding was limited to “this particular arbitral process,” its discussion of substantive unconscionability is potentially far-reaching.      

The most important takeaway for employers is that a provision in an arbitration agreement that requires an employee to forego a Berman hearing in favor of arbitration could render the agreement unenforceable. In line with substantial state and federal authority, employers often adopt civil litigation procedures in their arbitration agreements to avoid invalidation of the agreements on the ground that they do not provide sufficient procedural safeguards for employees to assert their rights. OTO flips this premise on its head, so that building in too many civil litigation procedures may actually backfire when an employee brings a wage claim.

The touchstone for arbitration of wage claims is that the process must be “accessible and affordable.”  Employers may now consider specifying alternative, streamlined arbitration procedures for wage claims, excepting Berman hearings from mandatory arbitration entirely, or requiring mandatory arbitration only of an appeal from a Berman hearing award. 

Contact Payne & Fears LLP if you have any questions about OTO or would like guidance for your arbitration agreements.