On August 29, 2019, the California Supreme Court ruled that an arbitration agreement signed by a mechanic at an Oakland Toyota dealership was unenforceable under the general contract principle of unconscionability. The decision came after plaintiff Ken Kho had prevailed on a claim for unpaid wages through a California Labor Commissioner complaint process commonly known as a “Berman” hearing. OTO, LLC v. Kho, No. S244630, 2019 WL 4065524 (Cal. Aug. 29, 2019).

To read the California Supreme Court’s full decision in OTO, LLC v. Kho,  (clicking here).

Background

Under California law an arbitration agreement will be held unenforceable—just like other contracts—if it is both procedurally and substantively “unconscionable.” Procedural unconscionability arises from unfairness in how a contract was formed, while substantive unconscionability arises from unfairness in a contract’s terms. Both types of unconscionability must be present before a court will refuse to enforce an agreement. However, the more substantively unconscionable the agreement is, the less procedurally unconscionable it must be, and vice versa (courts refer to this as a “sliding scale”).

The enforceability of arbitration agreements continues to be the subject of frequent litigation, much of which Sutton Hague has addressed in previous blog posts. For example:

• California Court Finds an Employee Arbitration Agreement Unenforceable Based on Incorrect Translation (Aug. 20, 2018)
• S. Supreme Court Upholds Class Action Waivers in Mandatory Arbitration Agreements (May 21, 2018)
• New California Arbitration Case Highlights Importance of Agreement Language (Mar. 7, 2016)

Presenting the Arbitration Agreement to Employees

The California Supreme Court found the method in which One Toyota presented the arbitration agreement to employee Ken Kho was procedurally unconscionable. A company representative delivered a stack of papers to Kho, including the arbitration agreement with no explanation of the contents or the significance of the papers. The papers were all in English, which was not Kho’s first language. The agreement was also printed on one page, single-spaced and in very small font (somewhere between a 7 and 8.5 point font size). The employee was not provided with a copy of the arbitration agreement to retain for his own records, and he was not given a realistic opportunity to ask questions about the arbitration agreement or consult with anyone on the consequences of signing the agreement. Further, Kho was compensated on a piece-rate basis, which the court felt likely reduced the time he took to review the arbitration agreement. (Any time spent reviewing the agreement would have been without pay.)

Based on all of these factors, the California Supreme Court held that the arbitration agreement’s presentation and execution involved an “extraordinarily high” degree of procedural unfairness or unconscionability. As a result, the Court observed that “even a relatively low degree of substantive unconscionability may suffice to render the agreement unenforceable.”

Arbitration Agreement’s Waiver of Labor Commissioner Claim Process (“Berman Hearing”) Scrutinized by the Court

In terms of the agreement’s substance, the California Supreme Court expressed concern with the scope of the arbitration agreement and the arbitration process. Most importantly, the Court held that the agreement’s waiver of Berman hearing procedures was a factor tending to make the agreement substantively unconscionable, although the Court qualified this conclusion by stating that: “Arbitration agreements could not be deemed categorically unconscionable simply because they entail a waiver of the Berman proceedings.”

To understand the issues, employers should understand that the Berman hearing process (often simply called a “Labor Commissioner Hearing”) is intended to be different from the civil litigation framework. In a Berman hearing, the employee files a claim with the California Labor Commissioner by completing a claim form and providing documents (i.e., time records, paychecks, pay stubs, etc.) that support the wage claim. After an employee files a complaint with the Labor Commissioner for nonpayment of wages, California Code section 98, subdivision (a) provides for three alternatives. The Labor Commissioner may: (1) accept the matter and conduct an administrative hearing; (2) prosecute a civil action for the collection of wages and other money payable to employees; or (3) take no further action on the complaint.

Per the Court’s findings, the Berman hearing procedure is designed to provide a speedy, informal, and affordable method of resolving wage claims. The purpose of the Berman hearing procedure is to avoid recourse to costly and time-consuming judicial proceedings in all but the most complex of wage claims. There are also timeframes under which certain actions must be performed, for example: 30 days to receive notice of the hearing, 90 days to move forward with a hearing, 10 days to file an answer, and 10 days to appeal an order, decision or award (“ODA”). Appeals are filed in court. If an employer appeals from the outcome of a Berman hearing, it must post a bond with the court in the full amount of the ODA against it. The Labor Commissioner may provide free legal counsel to represent the employee in the employer’s appeal. Also, if the employer loses its appeal, the employee will likely be entitled to recoup from the employer any attorneys’ fees incurred as a result of the appeal.

(For more information on the Berman hearing process, visit the Labor Commissioner’s hearing by (clicking here).

One Toyota’s agreement did not inform Kho how to initiate arbitration or locate an arbitrator, or even notify Kho of the existence of commercial providers of arbitration services. It also disposed of the more simple procedures involved in a Berman hearing process and required the parties to follow a civil litigation framework that included formal pleadings, discovery demands, dispositive motions, and technical rules of evidence. The Court held that such additional complexity would likely deter employees from bringing wage claims. Berman hearings do not require the complainant to retain an attorney but, in the Court’s view, the arbitration process described in One Toyota’s agreement would almost certainly require an employee to hire an attorney to represent him or her in arbitration.

Therefore, according to the California Supreme Court, One Toyota’s arbitration agreement required employees to surrender the benefits and efficiencies of the Berman process, without any of the benefits of the efficiencies or cost savings often associated with arbitration. Accordingly, given the agreement’s high degree of procedural unconscionability in the way it was presented to the employee, the waiver of Berman procedures provided the “relatively low degree of substantive unconscionability” necessary to make the agreement unenforceable.

Takeaways for California Employers

Review Arbitration Agreement. Have an employment attorney review the company’s arbitration agreement to ensure that the agreement does not contain any of the features that the OTO decision relied on to invalidate One Toyota’s arbitration agreement. While the Court did not rule that Berman hearing waivers in arbitration agreements are categorically unconscionable, whether to include a Berman hearing waiver is a topic that an employer should discuss with counsel.  The law governing arbitration agreements, particularly in California, changes frequently both by statute and by court case law, so it is also a good practice for employers to have their arbitration agreements reviewed at least annually by qualified employment law counsel.

Review Steps to Implement the Agreement. Employers should review with counsel procedures for rolling out arbitration agreements to employees to examine any similarities between your company procedures and those of One Toyota that were identified by the Court as the basis for an “extraordinarily high” degree of procedural unfairness.

More Information: This and other new California laws for employers will be discussed at our upcoming Wage and Hour Law Webinar for California Employers on November 5, 2019, as well our 2020 Employment Law Update for California Employers on December 3, 2019. For more information on these and other events, visit our (Events Page).