It was only a few weeks ago. California employees and their lawyers were jubilant after the CA Supreme Court delivered its game-changing Dynamex decision that made it even harder for California employers to properly classify workers as independent contractors. As a result, employment protections were extended to millions of California workers who were also given the right to sue the companies who had wrongfully misclassified them.
But the employee party didn’t last long. And, now, comes the hangover.
Epic Systems Corp. v. Lewis
On March 21, 2018, in a landmark decision, the U.S. Supreme Court ruled in its 5-4 decision in Epic Systems Corp. v. Lewis that class action waivers in employment arbitration agreements are enforceable.
This decision resolved a long-simmering dispute in the federal circuit courts. The 6th, 7th, and 9th circuit courts held that class action waivers were unenforceable because they violated the National Labor Relations Act (“NLRA”) and its explicit guarantee allowing employees to band together to pursue concerted labor activity. In contrast, the 2nd, 5th, and 8th circuit courts held that the NLRA did not guarantee employees any right to engage in class action litigation and that, therefore, an arbitration agreement between the employer and employee that contained a waiver of class action rights must be upheld under the Federal Arbitration Act (“FAA”).
In reaching its decision favoring employers, the U.S. Supreme Court ruled in Epic Systems that the FAA expressed a broad and “liberal” policy decision from Congress requiring “courts to respect and enforce agreements to arbitrate.” The Court admitted that the policy arguments both for and against employment arbitration agreements were “surely debatable.” However, the law as expressed by Congress in the FAA and the NLRA were “clear,” said the Court. And reading them together compelled the conclusion that employment arbitration agreements generally “must be enforced as written.”
An Important Caveat
The U.S. Supreme Court explicitly based its ruling in Epic Systems on the Court’s prior 2011 precedent in AT&T Mobility v. Concepcion, which held that class action waivers in consumer contracts were enforceable. The rationale from Concepcion, the Court said, compelled the same decision in employment contracts — that class action waivers must be enforceable in employment contracts as well.
But, the Court was careful to say that even Concepcion “has its limits.” Those limits include general defenses applicable to all contracts, such as “illegality” and “unconscionability.” According to the Court, these general contract defenses still applied to all contracts, even employment arbitration agreements. But given that there was no evidence of any such illegality or unconscionability in the contracts before the Court in Epic Systems, the Court found those contracts — and the class action waivers they contained — to be enforceable.
Thus, the Court thus rejected the employees’ argument that their arbitration agreements should be unenforceable simply because they contained class action waivers. There can be no such blanket rule invalidating class action waivers, the Court ruled. Instead, after Epic Systems, an employment arbitration agreement and any class action waiver it contains will be valid and enforceable unless the employee proves illegality, unconscionability, or some other generally available contract defense.
What It Means for California Employers
As a result of Epic Systems, California employers should review their employment arbitration agreements to ensure that they contain class action waivers.
But, employer arbitration agreements in California can still be found to be unenforceable even after Epic Systems if they are found to be unconscionable. Under California law, an employment agreement is unenforceable if it is both procedurally unconscionable (e.g., procured through oppression, surprise, or as a take-it-or-leave it deal) and substantively unconscionable (e.g., with unfair, biased, or one-sided terms). This was the law in California before Epic Systems, and it will be the law in California after Epic Systems because the U.S. Supreme Court’s opinion explicitly acknowledged unconscionability as a defense to all contracts, including arbitration waivers that contain a class action waiver.
As a result of Epic Systems, after inserting class action waivers into their arbitration agreements, California employers should then review those agreements to ensure that they are neither procedurally nor substantively unconscionable. This requires a thorough review by experienced employment counsel because (1) employees in California are constantly challenging their arbitration agreements, and (2) California’s appellate courts are constantly publishing opinions on the validity of arbitration agreements. Some courts uphold those agreements, while other courts strike them down as unconscionable.
As a result, the law of unconscionability is constantly evolving in California. Each new published opinion adds new understanding of the law — and sometimes a new “twist” or new requirement that must be included in the agreement for it to be enforceable. Arbitration agreements can therefore get outdated easily in California and be at risk of being unenforceable unless they are consistently checked against the new cases that are constantly being published in California.
What about PAGA?
Epic Systems concerns the enforceability of class action waivers in employment arbitration agreements. California allows traditional class actions, of course, where one employee sues on behalf of a class of other, similarly wronged employees. An employee’s right to join a class action can now be curtailed, and the employee can instead be forced to proceed individually and in arbitration only, as a result of Epic Systems.
But Epic Systems says nothing about the other type of action that haunts employers in California: representative claims brought under the State’s Private Attorneys General Act (“PAGA”). PAGA actions are very different from traditional class actions because the State of California is the real party in interest. In a PAGA action, the employee brings an action as a representative of the State of California against the employer for wage violations suffered by all employees. If that representative employee prevails, then the State of California gets the penalties that are due to it under California law (while the employee gets to keep 25% of those penalties, plus her attorneys’ fees, for her effort). The fact that the representative employee signed an arbitration agreement is irrelevant because the employee is not the real party in interest. The State of California is the real party in interest, and the State of California never signed anything consenting to arbitration.
Thus, in California, employers who use otherwise valid arbitration agreements — even agreements with class action waivers — still confront the prospect of representative PAGA litigation. One representative employee can still bring an action in California against an employer for wage violations suffered by other employees. In many ways, this type of representative action looks and feels like a traditional class action from the employer’s perspective. But it is not. They are representative actions because the employee is representing the State of California (not other employees) and seeking only to recover state-owed penalties (rather than traditional damages). Thus, PAGA claims are alive and well in California even after Epic Systems because the U.S. Supreme Court’s opinion says nothing about PAGA-style representative action waivers.*
*Note: This seems to be the result intended by the U.S. Supreme Court. In a separate case, Bloomingdale’s, Inc. v. Vitolo, the U.S. Supreme Court was asked to determine whether the FAA preempted this analysis and compelled the enforcement of PAGA waivers in arbitration agreements. The U.S. Supreme Court refused to hear the case, which meant that the Court let stand the lower court’s decision holding that an arbitration clause may not prospectively waive an employee’s entitlement to bring PAGA claims in some forum, and that the FAA does not require enforcement of such waivers (following the CA Supreme Court decision in Iskanian v. CLS Transportation Los Angeles, LLC, 327 P.3d 129 (2014). This Bloomingdale’s case, taken together with the Epic Systems decisions, means that Iskanian remains the law in both stated and federal courts in California. You can read my previous blog post about Iskanian here.
You can read the U.S. Supreme Court’s decision in Epic Systems Corp. v. Lewis here.