Can an Arbitration Agreement Waive the Right to Bring a Class Action?

For at least two decades, employers nationwide have been requiring employees to sign arbitration agreements. In a typical arbitration agreement, the employee gives up the right to sue over employment-related claims, instead agreeing to have such disputes heard in an arbitration proceeding. (Twenty years ago, the U.S. Supreme Court decided Gilmer v. Interstate/Johnson Lane, in which it made clear that employees could be required to arbitrate claims protected by statute, such as discrimination claims. Many employers and their lawyers interpreted this case as a green light to impose arbitration agreements on employees.)

Advocates for employees have brought piles of cases challenging arbitration agreements, arguing that the rules by which these agreements are judged should be different when one party has all or most of the bargaining power, as is the case in the employment relationship — particularly when the employee is required to sign the agreement as a condition of employment. (Generally, employees would prefer to proceed publicly, before a jury of their peers, with all of the protections offered by the judicial system, rather than privately, before a professional arbitrator whose decision is largely unappealable and who has a much freer hand in deciding which evidence to admit, how long the proceeding will last, and so on.) For the most part, however, these cases have failed, and arbitration agreements have been upheld. Progressive members of Congress have introduced various versions of legislation (here’s a recent example) that would prohibit the enforcement of pre-dispute arbitration agreements in consumer, civil rights, and employment cases, but have had no success to date.

But the legal landscape is different in California, where state law is more protective of employees, consumers, and others who often find themselves at the mercy of more powerful adversaries. The California Supreme Court and Courts of Appeal have continually refused to enforce arbitration agreements that overreach in favor of the employer. In the case of Armendariz v. Foundation Health Psychcare Services, the California Supreme Court held that arbitration agreements may be enforced as to statutory claims (such as discrimination) only if they comply with five rules intended to ensure that the employee’s claims receive a fair hearing. These rules, called the Armendariz factors, are:

  1. The agreement can’t limit the damages and other remedies available to employees. If, for example, an employee would be entitled to ask for punitive damages in court, such damages must also be available in arbitration.
  2. The employee must be allowed to conduct sufficient discovery — the opportunity to seek documents and information regarding the dispute. The Court noted that employers typically hold most of the relevant information in an employment dispute, and limiting the employee’s ability to collect that evidence could unfairly affect the outcome of the case.
  3. The arbitrator must issue a written decision that includes the essential findings and conclusions on which the award is based. The intent of this rule is to give employees sufficient information to appeal the decision, even though appeals of arbitration awards are quite limited.
  4. The employer must pay all costs and fees that are unique to arbitration. In other words, an employer can’t make it more expensive for an employee to arbitrate than it would have cost to bring a claim in court.
  5. The agreement must provide for neutral arbitrators.

Also unique to California is the state’s protection of an employee’s right to bring a class or collective action: a dispute brought on behalf of a group of similarly situated employees who have the same claim against the employer (for example, that the employer improperly failed to provide rest breaks or pay overtime). Many arbitration agreements preclude not only class actions in court, but also class or collective arbitration proceedings. Instead, employees agree to bring their disputes only on their own behalf as individuals.

In the case of Gentry v. Superior Court, the California Supreme Court laid out some more factors for courts to consider in deciding whether to enforce this type of agreement, including the size of the potential damages, the potential for retaliation against employees, the likelihood that employees who aren’t part of the proceedings may be ignorant of their rights, and other real-world facts that might pose an obstacle to employees seeking to vindicate their statutory rights through individual arbitration proceedings. Despite the language of an arbitration agreement, a court can order class arbitration of claims that cannot be waived under California law (such as the right to overtime) if it decides that a group proceeding would be significantly more effective at vindicating and enforcing employee rights.

California courts have continued to apply the Gentry case despite the U.S. Supreme Court’s finding, in AT&T v. Concepcion, that California courts may no longer prohibit the enforcement of class action waivers in arbitration agreements entered into by consumers. And last week, the National Labor Relations Board gave the state some support: The NLRB ruled that arbitration agreements prohibiting group actions violate the National Labor Relations Act (NLRA), even at companies where employees are not represented by a union. The NLRA protects the rights of all employees to engage in concerted activity to try to improve the terms and conditions of their employment, whether through a union or otherwise. The NLRB found that prohibiting group proceedings in arbitration violates this right.