CLIENT ALERT

 More than ever, employers’ wage and hour practices are being challenged in high risk multi-million dollar class actions.  These cases typically involve the employer’s overtime exemption classifications, its meal and rest break compliance, or the myriad of other technical wage and hour rules.  Earlier this year, the California Supreme Court raised the stakes even higher by ruling employees can go back as long as four years to sue for alleged meal and rest break violations.  Because there frequently are no clear cut rules which define the employer’s legal obligations in these cases, many employers agree to six and seven-figure settlements to avoid the high costs and risks of class action litigation. 

 Some employers have attempted to reduce their exposure to wage and hour claims by requiring their employees to individually arbitrate their claims rather than purse such claims on a class action basis in court.  The validity of so-called “class action waivers” has been subject to significant debate and conflicting rulings by the lower courts.   Today, in a heavily divided 4-3 decision involving Circuit City, the California Supreme Court ruled that employers face an extreme uphill battle if they try to enforce such clauses.

 Briefly, the Supreme Court held that class action waivers could interfere with employees’ unwaivable right to enforce their employer’s compliance with overtime laws and other wage and hour requirements.   The Court discussed the benefits of class actions, including:  (1) individual litigation over wage and hour violations is an inefficient way for employees to sue for relatively small amounts;  (2) current employees are reluctant to pursue claims because of their fear of retaliation; (3) many employees will not sue for wage and hour violations because they are unaware that their rights have been violated; and (4) class actions benefit society as a whole by compelling employers to comply with their statutory obligations.

 The Court held that trial courts must consider these factors when ruling on the validity of class action waivers. If the trial court concludes, based on these factors, that a class arbitration is likely to be a significantly more effective and practical way to vindicate employees’ claims than individual litigation or arbitration, it must invalidate the class action waiver. This analysis was found to be similar to the standards for class certification, generally. The Court noted there may be cases where individual arbitration is a more effective means to vindicate wage and hour claims, although it did not offer any examples of such circumstances. Further, the Court’s discussion of the perceived benefits of class actions suggests there will be very few cases where these factors will weigh in favor of class action waivers.

 If the trial court finds the class action waiver is invalid, then the parties have the option of proceeding on a class arbitration basis (unless the entire arbitration agreement is found invalid for other reasons), or in court. The Court stated that trial courts should sever the class action waiver rather than invalidate the entire arbitration agreement if the waiver clause is the only invalid provision. The Court also addressed several other provisions in Circuit City’s arbitration agreement that were being challenged as “unconscionable”, and sent the case back to the trial court to determine if the entire agreement should be thrown out.

 Employers must carefully weigh the benefits and the burdens of arbitration if they are considering arbitration on a class action basis. Not only are such cases extremely expensive since employers must generally pay all of the arbitration costs, arbitration decisions are essentially non-appealable. This means that the arbitrator’s decision on whether an employer’s wage and hour practices are in compliance cannot be challenged in court even if it is based on an erroneous application of the law. While such risks may be outweighed by the benefits of arbitration in a case brought by an individual employee, they may not when millions of dollars are at stake in a class action, particularly if the case involves complex or novel legal issues like most wage and hour class actions.

 This case also further underscores the need for employers to be vigilant in making sure their wage and hour practices are totally compliant. Employers cannot avoid the risks of wage and hour class actions with arbitration agreements or class action waivers. At a minimum, employers should conduct a self-audit of their wage and hour compliance, including their overtime, and meal and rest break practices.

 Please call your Firm contact if you have any questions about this important decision or its effect on your company. A copy of the Supreme Court’s decision in Gentry v. Circuit City Stores, Inc. can be obtained at the following link:

http://www.courtinfo.ca.gov/opinions/documents/S141502.PDF

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