CLASS ACTION WAIVERS IN PRE-EMPLOYMENT ARBITRATION AGREEMENTS MAY BE UNENFORCEABLE

In a ruling that will disappoint many employers, the California Supreme Court held that class action waivers in pre-employment arbitration agreements are not enforceable if a class action would be a "significantly more effective way of vindicating the rights of affected employees" than individual arbitration or litigation. Gentry v. Superior Court, S141502 (Aug. 30, 2007).

Background

When Gentry was hired by Circuit City, his new hire package included an arbitration agreement with a class action waiver, and a form that gave him 30 days to opt out of the arbitration agreement. He did not do so. Gentry later filed suit in superior court, seeking overtime pay on behalf of a class of managers who allegedly had been misclassified as exempt employees. The trial court ordered Gentry to arbitrate and submit to the waiver. The court of appeal found the waiver enforceable, and held that the arbitration agreement was not procedurally unconscionable.

What The Court Decided

The Supreme Court ruled that the trial court was required to consider additional factors before deciding whether to enforce the arbitration agreement. The Supreme Court did not hold that class action waivers in overtime cases are necessarily unenforceable. Instead, Gentry holds that when a plaintiff alleges that an employer has systematically denied overtime pay to a class of employees, and requests a class action in spite of a class action waiver in an arbitration agreement, the trial court must consider the following factors to determine if a class action is likely to be a significantly more effective means of vindicating statutory rights than individual arbitration or litigation:

• Whether the amount of the potential individual recovery is "modest,"
• The risk of retaliation for the individual,
• The likelihood that some individuals might not sue because they are unaware that their rights have been violated, and
• "Other real world obstacles" to individual arbitration.

The trial court must invalidate the waiver if, after consideration of these factors, it finds that a class action is likely to be a "more effective practical means" and disallowance of a class action will likely lead to a less comprehensive enforcement of overtime laws.

The Court also ruled that the arbitration agreement was procedurally unconscionable, notwithstanding the opt out, because the information provided to employees about arbitration did not advise them of the disadvantages of the procedure and the plaintiff might not have felt free to opt out.

What Does This Mean for Employers?

Employers may not be able to avoid class claims for overtime pay through waivers in pre-employment arbitration agreements. However, waivers may be enforced in other employment claims involving more substantial damages, like claims of alleged discrimination or public policy violations.

Gentry also means that opt out provisions may not be effective if the employer provides no information to employees about specific disadvantages of arbitration. As a practical matter, an "opt-out" clause may have little ultimate effect on whether a class action waiver will be given effect.