The California Supreme Court recently issued an opinion banning mandatory arbitration of employee wage disputes. This continues the court’s hostility towards mandatory arbitration in employment disputes and puts the court on a collision path — again — with the US Supreme Court. A few years ago, the California Supreme Court held that agreements that required arbitration of wage disputes were unconscionable under all circumstances and unenforceable here in California. That was the case of Sonic-Calabasas A, Inc. v. Moreno, 51 Cal.4th 659 (Cal. Supreme Court 2011). However, the US Supreme Court reversed Sonic-Calabasas and remanded for consideration in light of the Federal Arbitration Act. In general, the Federal Arbitration Act protects and encourages arbitration and preempts state laws. The California Supreme Court was forced to dial back Sonic-Calabasas and, instead, ruled that mandatory arbitration was not always unconscionable. If the arbitration provided sufficient procedural safeguards and was equivalent to the kind of hearing one might expect in a court of law, then the mandatory arbitration of wage claims would be enforceable. The purpose of inquiring into the safeguards of the arbitration was to prevent the arbitration from being “unreasonably one-sided.”
On August 29, 2019, the court issued its opinion in OTO, LLC v. Kho, Case No. S244630 (Cal. Supreme Court 2019). Oddly enough and paradoxically, the court ruled that a mandatory arbitration clause was unconscionable and therefore unenforceable because it was too much like a hearing one might expect in a court of law.
Under California law, there are two types of unconscionability — procedural and substantive. The first is about the process of agreeing to the provision in question. Here, the courts make inquiries like: Is the contract subject to negotiation or is it take-it-or-leave it? Is the contract easy to read? With respect to substantive unconscionability, the issues are about whether the contract is objectively fair. For example, the courts inquire as to whether the party with the most bargaining power imposed onerous conditions on the other party. The courts use a sliding scale approach. The more there is procedural unfairness, the less substantive unfairness is needed; the more onerous the contract, the less procedural unfairness is needed.
In OTO, the California Supreme Court held that the procedural unconscionability in the employment agreement at issue was “extraordinarily high.” The case involved car dealership employees. They were presented with a contract that contained a complex arbitration agreement written in a tiny font that the employees had to sign immediately or be fired. This was deemed procedurally unfair.
The court also found substantive unconscionability. This holding is strange because the arbitration provision required almost exactly the same procedures as would be required if the employees brought their wage claims in a court of law. Paradoxically, the court held that the provision was substantively unconscionable because it failed to provide the three benefits of arbitration — cost savings, quick decision-making, and finality.
One of the Justices dissented and expressed a vast amount of confusion. According to the dissent, the majority’s opinion was illogical in that, an arbitration provision is held to be unenforceable as being unfair precisely because it required procedures that are used by courts to ensure fairness to both sides. Needless to say, this case will cause confusion among San Diego and California employers and, likely, will end up before the US Supreme Court.
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For more information, call corporate attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named as “Best of the Bar” by the San Diego Business Journal for four years running. Mr. Leonard has extensive experience in drafting employee policies, employee handbooks, employment contracts, and all other contracts and agreements necessary for running your business. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.