Last week, the California Supreme Court in Oto, LLC v. Kho, reversed an order compelling arbitration in a wage dispute, finding that the arbitration agreement was unconscionable.  

Resolution of Wage Disputes under California Law—Berman Hearing

A California employee alleging unpaid wages may either file a civil action in court or file a wage claim with the Department of Labor Standards Enforcement (“DLSE”).  The DLSE may conduct a Berman hearing—an abbreviated formal process to resolve wage disputes.  The pleadings are limited to a complaint and an answer, there is no discovery, the rules of evidence do not apply, and a deputy labor commissioner is the fact finder and renders a final decision.  Either party may appeal the hearing officer's decision to superior court who reviews the decision de novo.  The Labor Commissioner may represent employees who qualify financially on appeal.  Berman procedures are intended to be an “accessible, informal, and affordable” method for employees to resolve wage disputes.

In Sonic v. Calabasas (Sonic I), the California Supreme Court held that requiring employees to waive their Berman rights by signing an arbitration agreement rendered the agreement unenforceable as a matter of law.  The United States Supreme Court, however, reversed the court's decision in Sonic I, because states may not enact laws that discriminate against arbitration as a forum to resolve disputes.

On remand, the court relied on precedent from the United States Supreme Court providing that arbitration agreements may be unenforceable under state contract laws.  Basic contract principles require that agreements be both procedurally and substantively fair.  If either requirement is not met, the agreement will be unenforceable as “unconscionable”—meaning “one party lacked a meaningful choice deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party.”  Procedural unconscionability focuses on contract negotiation and formation and any oppression or surprise due to one party having unequal bargaining power.  Substantive unconscionability focuses on the contract's terms and whether the terms are overly harsh or one-sided. 

In Sonic II, the court recognized that an arbitration agreement is not per se unconscionable because it requires a waiver of the employee's Berman rights.  According to the court, however, a waiver of Berman rights is a significant factor in determining unconscionability.  After Sonic II, arbitration agreements regarding resolution of wage disputes are enforceable only if they provide a sufficiently accessible and affordable forum—key benefits of a Berman hearing—for resolving wage disputes.  In other words, because arbitration agreements to resolve wage disputes require employees to forfeit their Berman rights, such agreements must provide an alternative with benefits sufficiently similar to a Berman hearing.

The Court's Decision in Oto, LLC v. Kho

After three years of employment with One Toyota of Oakland (“Oto”), Kho was asked to sign a document entitled “Comprehensive Agreement: f Employment At-Will and Arbitration.”  A lower level human resources employee presented Kho with the arbitration agreement at Kho's workstation while he was working and waited while he signed the agreement.  Kho's native language is Chinese, but the document was provided only in English. 

According to the court's opinion, the arbitration clause was “contained in a dense, single-spaced paragraph, written in very small typeface that fills almost an entire page.”  The agreement required that almost all employment-related claims were subject to arbitration before a retired superior court judge and with full discovery.  The agreement further provided that pleading and evidence rules applied pursuant to California Code of Civil Procedure, as well as all rights to resolution of the dispute under section 631.8 of the California Code of Civil Procedure (e.g. motions for summary judgment or judgment on the pleadings).  According to the agreement, parties were to bear their own expenses, unless controlling case law or statutes mandated otherwise.

After Kho's employment ended in 2014, he filed a complaint with the DLSE for unpaid wages.  After the parties failed to reach a settlement agreement, Kho requested a Berman hearing.  Oto filed a petition to compel arbitration.  The hearing officer refused to stay the hearing pending resolution of Oto's petition and awarded Kho unpaid wages, liquidated damages, interest, and penalties. 

Oto filed a motion to vacate the award in superior court.  The court vacated the award but did not compel arbitration, finding the agreement procedurally and substantively unconscionable.  On appeal, the Court of Appeal noted an “extraordinarily high” degree of procedural unconscionability.  The court, however, did not find the agreement substantively unconscionable and therefore reversed and ordered the parties to arbitrate.

The California Supreme Court disagreed.  With respect to procedural unconscionability, the court reasoned that a lower level employee who purportedly lacked sufficient knowledge to answer any questions Kho may have about the agreement presented Kho with the agreement.  The employee waited for Kho to sign the agreement without allowing him time to consult with an attorney prior to signing.  Regarding the agreement itself, the court found it was a “paragon of prolixity.”  The court reasoned that the agreement contained small font, the substance of the agreement was condensed into a single paragraph consisting of complex sentences with legal jargon that a layperson could not easily understand.  In the court's view, the agreement itself and the manner in which it was presented to Kho “did not promote voluntary or informed agreement to its terms.”  In other words, Kho did not understand that he was relinquishing his Berman rights when he signed the arbitration agreement. 

After finding the agreement procedurally unconscionable, the court essentially by-passed any analysis of the actual terms of the agreement to determine if substantive unconscionability existed.  Instead, the court considered the rights and remedies that Kho relinquished (i.e. his Berman rights) and what he received by agreeing to arbitration.  The court seemed most concerned that the arbitration process essentially mirrored civil litigation and would be difficult for an employee to navigate without an attorney.  According to the court, Kho relinquished his Berman rights and did not receive any of the efficiency or cost-saving benefits typically associated with arbitration. 

What the Court's Decision Means for Employers

The court's decision in Oto, LLC v. Kho represents another weapon in the arsenal of employees seeking to challenge arbitration agreements.  Employers should review their arbitration agreements and the manner in which they present the agreements to employees.  Employers should consult with an employment attorney to ensure the terms of the arbitration agreement are fair, reasonable, and easily understood by a layperson.