Contractual Consequences: The Limits of a PAGA Plaintiff’s Authority to Contractually Bind the State of California, and the Enforceability of a Handbook Arbitration Provision, which an Employee Claims not to Have Read

Standard

I. The California Appellate Decisions and Practice Suggestions Arising from Them

Two decisions by the California Court of Appeal in June and August clarify when a plaintiff in a representative action under the Labor Code Private Attorneys General Act (Labor Code § 2698 et seq.) (PAGA) binds the California Labor and Workforce Development Agency (LWDA), and another California appellate decision rejects a defense against enforcement of an employee handbook’s arbitration provision based upon the employee’s sworn statement that he did not read it, where his signature on an acknowledgment that he received it is undisputed.  Here’s what the cases hold, and practice suggestions arising from the decisions:

  1. Bautista v. Fantasy Activewear, Inc., 52 Cal.App.5th 650 (June 25, 2020):  The Court of Appeal held that, because the plaintiffs were acting on their own behalves and not on behalf of the LWDA when, in 2014, they signed settlement and arbitration agreements resolving a wage and hour class action, which included no PAGA claims, the LWDA was not a party to the arbitration agreement.  Therefore, the employer, Fantasy Activewear, could not compel arbitration of subsequently filed representative claims under PAGA. 
  2. Practice Suggestions:  Until a plaintiff in a PAGA representative action has taken the steps to bring such a claim, including notifying the LWDA of his or her intention to file the PAGA lawsuit, the plaintiff is not acting as a proxy for the LWDA.  Therefore, an arbitration agreement with the plaintiff entered into in connection with the settlement of claims of wage and hour violations before the employee commenced the PAGA action is not binding on the LWDA, the settling employee or any other aggrieved employee in regard to PAGA claims based on the same or similar violations that one or more of them later file.  Because the steps to bind the LWDA and preclude later PAGA claims would involve costly procedures and delays – including notice to the LWDA and seeking court approval of the settlement, as well as potentially broader liability – employers should weigh the relative benefits and drawbacks of settling only the asserted wage and hour claims against seeking to broaden a release to PAGA claims not yet asserted. 
  3. Starks v. Vortex Industries, Inc., 2020 WL 5015248 (Aug. 25, 2020):  The Court of Appeal held that, where an employee brings an action under PAGA after having notified the LWDA about his intention to do so in accordance with PAGA, the action is resolved pursuant to an agreement approved by the trial court, and the LWDA has accepted the benefits of the settlement by negotiating the settlement check, another employee who was within the group of “aggrieved employees” covered by the action, is barred from continuing to pursue another pending PAGA action against the employer. 
  4. Practice Suggestions:  (1) An attorney representing an employee in a representative PAGA action should be vigilant to assure that the employee’s rights and interests are protected in any concurrently pending representative PAGA action against the same employer.  Where the employee is given notice of the other action and potential settlement, the attorney should carefully review the terms of the settlement before pursuing the employee’s action further, and seek to intervene in the other action if necessary.  (2) While the procedures for seeking approval of a settlement of a PAGA representative action should always be followed, an employer should use the utmost diligence to comply with those procedures in settling a representative PAGA action where other representative PAGA actions against the employer are pending. 
  5. Conyer v. Hula Media Services, LLC, 2020 WL 5035827 (Aug. 26, 2020):  The Court held that, in signing an acknowledgment that he had received an employee handbook, which stated that it set forth the terms and conditions of his employment, the plaintiff “demonstrated his assent” to the arbitration provision, despite his testimony via declaration that he had not reviewed the handbook.  Therefore, the trial court’s denial of a motion to compel arbitration was error. 
  6. Practice Suggestions:  Where a signature on an acknowledgment of receipt of a handbook is authentic, a contracting party’s defense based on failing to have read the contract has little appeal.  To assure enforceability of an arbitration provision in an employee handbook, the handbook should include a provision acknowledging receipt that also notes that the handbook states the terms and conditions of employment, and the employee’s rights and duties, and also acknowledges the employee’s responsibility to read the handbook.  To leave even less room for doubt, the acknowledgment should make explicit reference to the arbitration provision. 

II. Bautista:  An employee is not an agent of the LWDA until he or she properly commences a representative PAGA action. 

In Bautista, as part of a settlement of a wage and hour class action filed in 2013, the plaintiffs, as members of the putative class, signed settlement agreements and arbitration agreements with Fantasy in January 2014.  The arbitration agreements contained a waiver of class and representative private attorney general actions.  Four and a half years later, the plaintiffs filed similar claims, later amending their complaints to dismiss all but PAGA representative claims.  Fantasy filed petitions to compel arbitration based on the agreements the plaintiffs had signed in 2014.  The trial court denied the petitions. 

On appeal, Fantasy contended that, based upon the terms of the arbitration agreement the plaintiffs had signed, “the question of whether a PAGA claim is an arbitrable claim is a question of arbitrability that has been delegated to the arbitrator”.  Fantasy relied on Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S.Ct. 524 (2019), in which the U.S. Supreme Court held that “a court may not override” the contracting parties’ delegation of “the arbitrability question to an arbitrator . . . even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 

The Court of Appeal found Henry Schein inapposite, because the question Bautista presented was “whether there exists an agreement among the parties to arbitrate.”  In other words, the question was “not whether a PAGA representative action may ever be arbitrable or who is empowered in any particular circumstances to determine arbitrability, but rather whether an arbitration agreement binds a real party in interest that never agreed to arbitrate.” 

The plaintiffs brought the PAGA action in 2018, and “did not become agents of the LWDA for purposes of their PAGA representative actions until” then.  Therefore, the Court concluded:  “Because [the plaintiffs] were not acting as agents of the state when they entered into the arbitration agreements [in 2014], Fantasy has identified no arbitration agreement that would bind the real party in interest here – the state – to arbitration, even of the question of arbitrability.” 

III. Starks:  An aggrieved employee who brings a PAGA representative action and then sits on his or her hands while a previously filed PAGA representative action against the same employer is settled cannot challenge a court approved settlement of the other action, after the LWDA has reaped the benefits of the settlement. 

Starks, an employee of Vortex, gave notice to the LWDA in accordance with PAGA of his allegations that Vortex had violated Labor Code requirements to pay overtime wages, provide meal and rest periods, timely pay wages, provide complete and accurate wage statements, pay minimum wages and reimburse employees for necessary business expenses.  Receiving no response to the notice, Starks filed a complaint against Vortex on August 10, 2015.  On October 11, 2016, Herrera, another Vortex employee, gave notice to the LWDA of his intention to sue Vortex on similar allegations of Labor Code violations, and he filed his PAGA action on December 16, 2016.  Vortex filed a notice that the two cases were related on March 17, 2017, and Herrera’s case was reassigned to the judge handling the Starks action. 

After the first part of a bifurcated trial in the Starks case, which was limited to the issue of whether Starks was an aggrieved employee, the court found that he was an aggrieved employee in July 2017.  During a case management conference on September 27, 2017, in the Herrera case, Vortex’s counsel disclosed that Starks and Vortex were engaged in settlement discussions and Herrera was within the group of aggrieved employees represented by Starks in his PAGA action.  Starks and Vortex entered into a settlement agreement on October 2, 2017, which included a release of the claims against Vortex for PAGA penalties.  The LWDA, which received a copy of the agreement, did not object to it, and the court approved the settlement of the Starks action by order and judgment filed on October 24, 2017. 

Sometime before December 13, 2017, the LWDA cashed the settlement check Vortex had sent to it.  On November 7, 2017, Herrera had filed a motion to vacate the Starks judgment.  On December 8, 2017, a third party administrator mailed to each aggrieved employee included in the Starks settlement a check for that employee’s portion of the settlement.

At a December 13, 2017 hearing on Herrera’s motion to vacate the Starks judgment, the trial court denied the motion.  Vortex filed a motion for summary judgment in the Herrera action, and by order on July 13, 2018, the court granted the motion on the grounds that Herrera’s action was barred by the terms of the Starks settlement and judgment, under the doctrine of res judicata and by the LWDA’s acceptance of the benefits of the Starks settlement. 

The Court of Appeal noted the fundamental principle governing PAGA actions: 

“Because a PAGA plaintiff acts ‘as the proxy or agent of the state’s labor law enforcement agencies” and the PAGA action “functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government.’”  (Citing Arias v. Superior Court (2009) 46 Cal.4th 969, 986.) 

In upholding the order denying Herrera’s motion to vacate the Starks judgment, the Court of Appeal held that LWDA’s “acceptance of the benefits of the Starks judgment” barred it from attacking that judgment; therefore, Herrera, whose only authority to attack that judgment was “in his capacity as the LWDA’s proxy and agent,” could not attack it.  And the trial court’s grant of summary judgment against Herrera’s own PAGA complaint was proper on the same grounds. 

IV. ConyerAn employee’s defense against enforcement of an arbitration provision in an employee handbook that is based on the employee’s ignorance of the contents of the handbook cannot overcome the employee’s acknowledgment of receipt of the document and of his responsibility to read it. 

Hula Media hired Conyer in January 2017, and provided him with its employee handbook, which did not contain an arbitration clause and as to which Conyer signed a “receipt and acknowledgment” stating he “understood and agreed it was his responsibility to read it and that he was bound by its provisions.”  Ten months later, in November, the company distributed a revised employee handbook, which contained an arbitration provision, and Conyer did not deny that his signature appeared below the acknowledgment of receipt, despite lacking a memory of signing it. 

The acknowledgment provision stated: 

“This is to acknowledge that I have received a copy of the employee Handbook. This Handbook sets forth the terms and conditions of my employment as well as the rights, duties, responsibilities and obligations of my employment with the Company.  I understand and agree that it is my responsibility to read and familiarize myself with all of the provisions of the Handbook.  I further understand and agree that I am bound by the provisions of the Handbook [¶] I understand the Company has the right to amend, modify, rescind, delete, supplement or add to the provisions of this Handbook, as it deems appropriate from time to time in its sole and absolute discretion.” 

After Conyer filed an action alleging claims of sexual harassment and other claims under the California Fair Employment and Housing Act (Gov. Code § 12900 et seq.), Hula filed a motion to compel arbitration.  In opposition, Conyer said he had not agreed to arbitrate, had not received the revised version of the handbook, did not know the company had adopted an arbitration policy, and would not have agreed to sign an arbitration provision in November 2017 because he had already submitted internal complaints against the company.  Finding a lack of mutual assent to arbitrate, the trial court denied the motion. 

The Court of Appeal, citing well established arbitration law, explained that, under the Federal Arbitration Act, an arbitration provision “is valid and enforceable except on grounds that exist at law or in equity for the revocation of any contract.”  The determination of whether an arbitration agreement within the FAA’s scope is enforceable is a matter of state contract law.  “State contract law in California includes the principle that an arbitration clause within a contract ‘may be binding on a party even if the party never actually read the clause.’”  (Citing Pinnacle Museum tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223, 234-35 (2012).) 

Determining whether mutual assent was present, the Court noted: “Mutual assent to enter into a contract is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts, and not their unexpressed intentions or understandings.”  (Citation and internal quotation marks omitted.)  Since Conyer did not deny the authenticity of his signature on the acknowledgement page of the revised handbook, “[i]t follows . . . that he received the handbook, despite his claims to the contrary.”  The record contained no evidence that Conyer was required to sign the acknowledgement without an opportunity to read the handbook first. 

Rejecting Conyer’s argument that mutual assent could not be shown because the arbitration agreement, included in a lengthy handbook, had not been called to his attention, the court cited the California Supreme Court decision in Sanchez v. Valencia Holding Co., 61 Cal.4th 899 (2015), which held “that a party seeking to enforce an arbitration agreement in a consumer contract has no duty to point out the arbitration clause, and any state law to that effect would be preempted by the FAA.”  The words of the acknowledgment that Conyer had signed constituted a contract.  Following Sanchez and concluding that its holding was not limited to consumer contracts, the Court held that Hula “had no obligation to point out to plaintiff that an arbitration clause had been added to the November 2017 employee handbook.  It has long been the rule in California that a party is bound by a contract even if he did not read the contract before signing it.”  The Court also reviewed Conyer’s argument that the arbitration provision was unconscionable, an issue the trial court had not reached in light of its conclusion that there was no mutual assent.  Although the provision was substantively unconscionable in regard to (1) the term that the arbitrator was to award attorney fees to the prevailing party (contrary to FEHA’s limitation on an employer recovering attorney fees unless the plaintiff’s action was frivolous, unreasonable or groundless), and (2) the requirement that each party pay a pro rata share of the arbitrator’s fees and costs (contrary to Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), which held that employees may not be compelled to pay more than what they would have to pay to pursue their claims in court), those provisions could be severed and the arbitration provision otherwise enforced. 

Contractual Consequences: The Limits of a PAGA Plaintiff’s Authority to Contractually Bind the State of California, and the Enforceability of a Handbook Arbitration Provision, which an Employee Claims not to Have Read

Standard

I. The California Appellate Decisions and Practice Suggestions Arising from Them

Two decisions by the California Court of Appeal in June and August clarify when a plaintiff in a representative action under the Labor Code Private Attorneys General Act (Labor Code § 2698 et seq.) (PAGA) binds the California Labor and Workforce Development Agency (LWDA), and another California appellate decision rejects a defense against enforcement of an employee handbook’s arbitration provision based upon the employee’s sworn statement that he did not read it, where his signature on an acknowledgment that he received it is undisputed.  Here’s what the cases hold, and practice suggestions arising from the decisions:

  1. Bautista v. Fantasy Activewear, Inc., 52 Cal.App.5th 650 (June 25, 2020):  The Court of Appeal held that, because the plaintiffs were acting on their own behalves and not on behalf of the LWDA when, in 2014, they signed settlement and arbitration agreements resolving a wage and hour class action, which included no PAGA claims, the LWDA was not a party to the arbitration agreement.  Therefore, the employer, Fantasy Activewear, could not compel arbitration of subsequently filed representative claims under PAGA. 
  2. Practice Suggestions:  Until a plaintiff in a PAGA representative action has taken the steps to bring such a claim, including notifying the LWDA of his or her intention to file the PAGA lawsuit, the plaintiff is not acting as a proxy for the LWDA.  Therefore, an arbitration agreement with the plaintiff entered into in connection with the settlement of claims of wage and hour violations before the employee commenced the PAGA action is not binding on the LWDA, the settling employee or any other aggrieved employee in regard to PAGA claims based on the same or similar violations that one or more of them later file.  Because the steps to bind the LWDA and preclude later PAGA claims would involve costly procedures and delays – including notice to the LWDA and seeking court approval of the settlement, as well as potentially broader liability – employers should weigh the relative benefits and drawbacks of settling only the asserted wage and hour claims against seeking to broaden a release to PAGA claims not yet asserted. 
  3. Starks v. Vortex Industries, Inc., 2020 WL 5015248 (Aug. 25, 2020):  The Court of Appeal held that, where an employee brings an action under PAGA after having notified the LWDA about his intention to do so in accordance with PAGA, the action is resolved pursuant to an agreement approved by the trial court, and the LWDA has accepted the benefits of the settlement by negotiating the settlement check, another employee who was within the group of “aggrieved employees” covered by the action, is barred from continuing to pursue another pending PAGA action against the employer. 
  4. Practice Suggestions:  (1) An attorney representing an employee in a representative PAGA action should be vigilant to assure that the employee’s rights and interests are protected in any concurrently pending representative PAGA action against the same employer.  Where the employee is given notice of the other action and potential settlement, the attorney should carefully review the terms of the settlement before pursuing the employee’s action further, and seek to intervene in the other action if necessary.  (2) While the procedures for seeking approval of a settlement of a PAGA representative action should always be followed, an employer should use the utmost diligence to comply with those procedures in settling a representative PAGA action where other representative PAGA actions against the employer are pending. 
  5. Conyer v. Hula Media Services, LLC, 2020 WL 5035827 (Aug. 26, 2020):  The Court held that, in signing an acknowledgment that he had received an employee handbook, which stated that it set forth the terms and conditions of his employment, the plaintiff “demonstrated his assent” to the arbitration provision, despite his testimony via declaration that he had not reviewed the handbook.  Therefore, the trial court’s denial of a motion to compel arbitration was error. 
  6. Practice Suggestions:  Where a signature on an acknowledgment of receipt of a handbook is authentic, a contracting party’s defense based on failing to have read the contract has little appeal.  To assure enforceability of an arbitration provision in an employee handbook, the handbook should include a provision acknowledging receipt that also notes that the handbook states the terms and conditions of employment, and the employee’s rights and duties, and also acknowledges the employee’s responsibility to read the handbook.  To leave even less room for doubt, the acknowledgment should make explicit reference to the arbitration provision. 

II. Bautista:  An employee is not an agent of the LWDA until he or she properly commences a representative PAGA action. 

In Bautista, as part of a settlement of a wage and hour class action filed in 2013, the plaintiffs, as members of the putative class, signed settlement agreements and arbitration agreements with Fantasy in January 2014.  The arbitration agreements contained a waiver of class and representative private attorney general actions.  Four and a half years later, the plaintiffs filed similar claims, later amending their complaints to dismiss all but PAGA representative claims.  Fantasy filed petitions to compel arbitration based on the agreements the plaintiffs had signed in 2014.  The trial court denied the petitions. 

On appeal, Fantasy contended that, based upon the terms of the arbitration agreement the plaintiffs had signed, “the question of whether a PAGA claim is an arbitrable claim is a question of arbitrability that has been delegated to the arbitrator”.  Fantasy relied on Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S.Ct. 524 (2019), in which the U.S. Supreme Court held that “a court may not override” the contracting parties’ delegation of “the arbitrability question to an arbitrator . . . even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 

The Court of Appeal found Henry Schein inapposite, because the question Bautista presented was “whether there exists an agreement among the parties to arbitrate.”  In other words, the question was “not whether a PAGA representative action may ever be arbitrable or who is empowered in any particular circumstances to determine arbitrability, but rather whether an arbitration agreement binds a real party in interest that never agreed to arbitrate.” 

The plaintiffs brought the PAGA action in 2018, and “did not become agents of the LWDA for purposes of their PAGA representative actions until” then.  Therefore, the Court concluded:  “Because [the plaintiffs] were not acting as agents of the state when they entered into the arbitration agreements [in 2014], Fantasy has identified no arbitration agreement that would bind the real party in interest here – the state – to arbitration, even of the question of arbitrability.” 

III. Starks:  An aggrieved employee who brings a PAGA representative action and then sits on his or her hands while a previously filed PAGA representative action against the same employer is settled cannot challenge a court approved settlement of the other action, after the LWDA has reaped the benefits of the settlement. 

Starks, an employee of Vortex, gave notice to the LWDA in accordance with PAGA of his allegations that Vortex had violated Labor Code requirements to pay overtime wages, provide meal and rest periods, timely pay wages, provide complete and accurate wage statements, pay minimum wages and reimburse employees for necessary business expenses.  Receiving no response to the notice, Starks filed a complaint against Vortex on August 10, 2015.  On October 11, 2016, Herrera, another Vortex employee, gave notice to the LWDA of his intention to sue Vortex on similar allegations of Labor Code violations, and he filed his PAGA action on December 16, 2016.  Vortex filed a notice that the two cases were related on March 17, 2017, and Herrera’s case was reassigned to the judge handling the Starks action. 

After the first part of a bifurcated trial in the Starks case, which was limited to the issue of whether Starks was an aggrieved employee, the court found that he was an aggrieved employee in July 2017.  During a case management conference on September 27, 2017, in the Herrera case, Vortex’s counsel disclosed that Starks and Vortex were engaged in settlement discussions and Herrera was within the group of aggrieved employees represented by Starks in his PAGA action.  Starks and Vortex entered into a settlement agreement on October 2, 2017, which included a release of the claims against Vortex for PAGA penalties.  The LWDA, which received a copy of the agreement, did not object to it, and the court approved the settlement of the Starks action by order and judgment filed on October 24, 2017. 

Sometime before December 13, 2017, the LWDA cashed the settlement check Vortex had sent to it.  On November 7, 2017, Herrera had filed a motion to vacate the Starks judgment.  On December 8, 2017, a third party administrator mailed to each aggrieved employee included in the Starks settlement a check for that employee’s portion of the settlement.

At a December 13, 2017 hearing on Herrera’s motion to vacate the Starks judgment, the trial court denied the motion.  Vortex filed a motion for summary judgment in the Herrera action, and by order on July 13, 2018, the court granted the motion on the grounds that Herrera’s action was barred by the terms of the Starks settlement and judgment, under the doctrine of res judicata and by the LWDA’s acceptance of the benefits of the Starks settlement. 

The Court of Appeal noted the fundamental principle governing PAGA actions: 

“Because a PAGA plaintiff acts ‘as the proxy or agent of the state’s labor law enforcement agencies” and the PAGA action “functions as a substitute for an action brought by the government itself, a judgment in that action binds all those, including nonparty aggrieved employees, who would be bound by a judgment in an action brought by the government.’”  (Citing Arias v. Superior Court (2009) 46 Cal.4th 969, 986.) 

In upholding the order denying Herrera’s motion to vacate the Starks judgment, the Court of Appeal held that LWDA’s “acceptance of the benefits of the Starks judgment” barred it from attacking that judgment; therefore, Herrera, whose only authority to attack that judgment was “in his capacity as the LWDA’s proxy and agent,” could not attack it.  And the trial court’s grant of summary judgment against Herrera’s own PAGA complaint was proper on the same grounds. 

IV. ConyerAn employee’s defense against enforcement of an arbitration provision in an employee handbook that is based on the employee’s ignorance of the contents of the handbook cannot overcome the employee’s acknowledgment of receipt of the document and of his responsibility to read it. 

Hula Media hired Conyer in January 2017, and provided him with its employee handbook, which did not contain an arbitration clause and as to which Conyer signed a “receipt and acknowledgment” stating he “understood and agreed it was his responsibility to read it and that he was bound by its provisions.”  Ten months later, in November, the company distributed a revised employee handbook, which contained an arbitration provision, and Conyer did not deny that his signature appeared below the acknowledgment of receipt, despite lacking a memory of signing it. 

The acknowledgment provision stated: 

“This is to acknowledge that I have received a copy of the employee Handbook. This Handbook sets forth the terms and conditions of my employment as well as the rights, duties, responsibilities and obligations of my employment with the Company.  I understand and agree that it is my responsibility to read and familiarize myself with all of the provisions of the Handbook.  I further understand and agree that I am bound by the provisions of the Handbook [¶] I understand the Company has the right to amend, modify, rescind, delete, supplement or add to the provisions of this Handbook, as it deems appropriate from time to time in its sole and absolute discretion.” 

After Conyer filed an action alleging claims of sexual harassment and other claims under the California Fair Employment and Housing Act (Gov. Code § 12900 et seq.), Hula filed a motion to compel arbitration.  In opposition, Conyer said he had not agreed to arbitrate, had not received the revised version of the handbook, did not know the company had adopted an arbitration policy, and would not have agreed to sign an arbitration provision in November 2017 because he had already submitted internal complaints against the company.  Finding a lack of mutual assent to arbitrate, the trial court denied the motion. 

The Court of Appeal, citing well established arbitration law, explained that, under the Federal Arbitration Act, an arbitration provision “is valid and enforceable except on grounds that exist at law or in equity for the revocation of any contract.”  The determination of whether an arbitration agreement within the FAA’s scope is enforceable is a matter of state contract law.  “State contract law in California includes the principle that an arbitration clause within a contract ‘may be binding on a party even if the party never actually read the clause.’”  (Citing Pinnacle Museum tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223, 234-35 (2012).) 

Determining whether mutual assent was present, the Court noted: “Mutual assent to enter into a contract is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts, and not their unexpressed intentions or understandings.”  (Citation and internal quotation marks omitted.)  Since Conyer did not deny the authenticity of his signature on the acknowledgement page of the revised handbook, “[i]t follows . . . that he received the handbook, despite his claims to the contrary.”  The record contained no evidence that Conyer was required to sign the acknowledgement without an opportunity to read the handbook first. 

Rejecting Conyer’s argument that mutual assent could not be shown because the arbitration agreement, included in a lengthy handbook, had not been called to his attention, the court cited the California Supreme Court decision in Sanchez v. Valencia Holding Co., 61 Cal.4th 899 (2015), which held “that a party seeking to enforce an arbitration agreement in a consumer contract has no duty to point out the arbitration clause, and any state law to that effect would be preempted by the FAA.”  The words of the acknowledgment that Conyer had signed constituted a contract.  Following Sanchez and concluding that its holding was not limited to consumer contracts, the Court held that Hula “had no obligation to point out to plaintiff that an arbitration clause had been added to the November 2017 employee handbook.  It has long been the rule in California that a party is bound by a contract even if he did not read the contract before signing it.” 

The Court also reviewed Conyer’s argument that the arbitration provision was unconscionable, an issue the trial court had not reached in light of its conclusion that there was no mutual assent.  Although the provision was substantively unconscionable in regard to (1) the term that the arbitrator was to award attorney fees to the prevailing party (contrary to FEHA’s limitation on an employer recovering attorney fees unless the plaintiff’s action was frivolous, unreasonable or groundless), and (2) the requirement that each party pay a pro rata share of the arbitrator’s fees and costs (contrary to Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), which held that employees may not be compelled to pay more than what they would have to pay to pursue their claims in court), those provisions could be severed and the arbitration provision otherwise enforced. 

Give and Take: Appellate Decisions in California Clarify the Applicability of Wage and Hour Laws and a Sexual Harassment Statute, but May Increase Employer Logistical Burdens

Standard

I. Introduction – Clarification of the Applicability of (1) California Wage and Hour Laws to Employees Who Work only Part of the Time in California for Out-of-State Employers and (2) California’s Harassment Law Prohibiting Sexual Harassment in Professional Relationships

Three appellate cases in June and July 2020, two from the California Supreme Court and one from the Ninth Circuit U.S. Court of Appeals, clarify (1) the applicability of California wage and hour laws to employees who work only part of the time in California for employers based outside of California, and (2) how courts should determine whether section 51.9 of the Civil Code, which prohibits sexual harassment in business relationships outside the workplace, applies to such relationships that are “substantially similar” to relationships enumerated in that statute. 

Lessons:  The cases inform employers, employees and persons in other business or professional relationships, of the following:

  1. An out-of-state employer that has a worker who works principally in California must comply with California laws that govern the information to be included on that employee’s wage statements and the timing of payment of wages to that employee. 
  2. Such an employer whose worker works principally in another state does not need to comply with those laws as to that employee.
  3. Where employees of an out-of-state employer do not perform a majority of their work in any one state, but the workers perform some of their work in California and are based here, that is, the physical location where they present themselves to begin work is in California, the employer must comply with the wage statement and wage payment laws with regard to those employees.
  4. Where an employee is based outside of California and works more than half the time in another state, the laws that require certain information on wage statements and that govern the timing of wage payments do not apply to the limited amount of time the employee works in California. 
  5. These principles govern the applicability of the laws regarding wage statements and the timing of pay to employees on a pay period by pay period basis.  The location in which work is performed and the location of the base of operations for that employee in each pay period governs whether California Labor Code sections 204 and 226 apply during that pay period.  Therefore, while the California Supreme Court has relieved out-of-state employers of the burden of possibly having to comply in one pay period with multiple state laws on wage statements and timing of employee pay, employers will have the potential logistical burden of shifting obligations from one pay period to the next based on the state in which an interstate employee primarily works in a pay period. 
  6. A compensation scheme that does not promise particular compensation for a particular hour of work and that guarantees a level of compensation exceeding the minimum wage for each duty period and rotation is compliant with California’s minimum wage laws as well as the case law that prohibits an employer from “borrowing” compensation from one set of hours in which the employer pays compensation exceeding the minimum wage for another set of hours in which pay is less than the minimum wage, to come up with an average wage rate meeting the minimum wage requirement. 
  7. The prohibition of sexual harassment under California Civil Code section 51.9, which provides a cause of action for such harassment, applies to a business or professional relationship outside the workplace that is not enumerated in the statute, where “an inherent power imbalance exists such that, by virtue of his or her ‘business, service, or professional’ position, one party is uniquely situated to exercise coercion or leverage over the other.”  While this standard is stated in an opinion by a federal appellate court, it is likely predictive of how a California court would rule. 

II. California statutes governing wage statements and the timing of wage payments apply to interstate employees who perform a majority of their work in California or who do not work most of the time in any one state but for whom California serves as their base of work operations. 

In a pair of cases decided on June 29, 2020, Ward v. United Airlines, Inc., 9 Cal.5th 732 (2020) and Oman v. Delta Air Lines, Inc., 9 Cal.5th 762 (2020), the California Supreme Court clarified the application of California wage and hour laws to employees who work part of the time in California and the rest outside of California, for employers based outside of California.  In Ward, the Court held that the applicability of California Labor Code section 226, which requires certain information on wage statements, “depends on whether [the employees’] principal place of work is in California.”  For “interstate transportation workers who do not perform a majority of their work in any one state, this test is satisfied when California serves as their base of work operations, regardless of their place of residence or whether a collective bargaining agreement governs their pay.”  In Oman, the Court held that the applicability of Labor Code section 226 and Labor Code section 204, which requires that all wages earned by an employee be paid be paid twice a month, apply “only to pay periods during which an employee predominantly works inside California.” 

The issue in Ward, certified from the Ninth Circuit U.S. Court of Appeals, was whether section 226 applied “to wage statements provided by an out-of-state employer to an employee who resides in California, receives pay in California, and pays California income tax on his or her wages, but who does not work principally in California or any other state”.[1]  The Court’s analysis of this issue began with the acknowledgment that “[t]here is no single, all-purpose answer to the question of when state law will apply to an interstate employment relationship or set of transactions.”  Each law must be considered “on its own terms.” 

Noting that section 226 and its accompanying Labor Code provisions are “intended to ensure workers are correctly and adequately compensated for their work,” the Court inferred “that the relevant geographic connection for purposes of determining what state law applies is where that work occurs.”  Such a “work-location-based test” must “reconcile the possibility that some employees may perform their work in more than one jurisdiction with the legislative desire for a single statement documenting employee pay.”  Achieving that reconciliation requires application of the “insight” guiding courts that seek to discern the geographic scope of California law:  “the Legislature ordinarily does not intend for its enactments to create conflicts with other sovereigns.” 

Applying these principles, the Court inferred “that the Legislature intended for section 226 to apply to workers whose work is not performed predominantly in any one state, provided that California is the state that has the most significant relationship to the work.”  As to interstate workers in the transportation and other industries, “who do not work more than half the time in any one state, . . . this principle will be satisfied if the worker performs some work here and is based in California, meaning that California serves as the physical location where the worker presents himself or herself to begin work.” 

Specifically applied to section 226, “workers are covered if they perform the majority of their work in California; but if they do not perform the majority of their work in any one state, they will be covered if they are based for work purposes in California.” 

In Oman, a case involving wages of flight attendants, the California Supreme Court held that, consistent with the holding in Ward, California laws governing wage statements and the timing of wage payments “apply only to flight attendants who have their base of work operations in California”.  The Court also held that, whether or not California minimum wage law applies to work by flight attendants while on the ground in California, Delta Air Lines’ “pay scheme” complied with those minimum wage requirements. 

The issues that the Ninth Circuit (where the case was pending) had certified to the California Supreme Court were (1) whether sections 204 and 226 of the Labor Code apply to wage payments and statements provided by an out-of-state employer to an employee who worked in California “only episodically and for less than a day at a time;” (2) whether California’s minimum wage law applies “to all work performed in California for an out-of-state employer by an employee who works in California only episodically and for less than a day at a time;” and (3) whether the bar, developed by California case law, on averaging wages applies “to a pay formula that generally awards credit for all hours on duty, but which, in certain situations resulting in higher pay, does not award credit for all hours on duty”. 

The Court applied the analysis established in Ward to determine “whether a few minutes or hours of work in California necessarily trigger the detailed pay-period documentation requirements of California law [under section 226],” and answered that question, “no: Employees are entitled to California-compliant wage statements only if California is the principal place of their work.”  It concluded that “section 226 does not apply to work performed in California during pay periods in which the employee, based outside California, works primarily outside California.” 

Because section 204 of the Labor Code “works hand in hand with section 226,” the Court saw “no reason to interpret section 204’s geographic coverage differently from that of section 226.” 

Addressing the second and third issues, whether California’s minimum wage law applied to “the hours (or fractions thereof) that Oman worked on the ground in California,” and, if so, whether Delta’s method of computing his wages complied with that law,” the Court punted on determining the geographic reach of the minimum wage laws, because, it concluded, even if they did apply, Delta was in compliance.  Under Delta’s compensation rubric, “flight attendants are paid according to whichever formula yields the largest amount for the complete rotation.”  It was “undisputed that under this compensation scheme, flight attendants are always paid, on an hourly average, above the minimum wage.” 

The Court determined that the scheme did not violate California’s prohibition on borrowing compensation paid at higher than the minimum wage for one set of hours to comply with minimum wage requirements where an employer paid under the minimum wage in another set of hours.  “State law prohibits borrowing compensation contractually owed for one set of hours or tasks to rectify compensation below the minimum wage for a second set of hours or tasks, regardless of whether the average of paid and unpaid (or underpaid) time exceeds the minimum wage.”  In accordance with Wage Order No. 9, §§ 2(H), 4, and Labor Code section 221 to 223, “[f]or all hours worked employees are entitled to the greater of the (1) amount guaranteed by contract for a specified task or period, or (2) the amount guaranteed by the minimum wage.” 

Delta’s compensation scheme was compliant, because its “four-formula method for calculating compensation guarantees that flight attendants are always paid above the minimum wage for the hours worked during each rotation without borrowing from compensation promised for other rotations.”  No borrowing from one set of hours to another set of hours occurs, because “the scheme, taken as a whole, does not promise any particular compensation for any particular hour of work; instead, . . . it offers a guaranteed level of compensation for each duty period and each rotation.  Because there are no on-duty hours for which Delta contractually guarantees certain pay – but from which compensation must be borrowed to cover other un- or undercompensated on-duty hours – the concerns presented by the compensation scheme in Armenta [v. Osmose, Inc. (2005)] 135 Cal.App.4th 314 and like cases[, which hold that an employer may not average out times at work for which it pays no compensation or compensation under the minimum wage with times at work for which it pays more than the minimum wage to meet minimum wage requirements], are absent here.” 

III. California Civil Code section 51.9’s prohibition on sexual harassment in professional relationships applies where, because of an inherent power imbalance, one party is uniquely situated to exercise coercion or leverage over the other.

In Judd v. Weinstein, 2020 WL 4343738 (9th Cir. July 29, 2020), the U.S. Court of Appeals, interpreting California law, held that California Civil Code section 51.9, which prohibits sexual harassment in a variety of business relationships that are not in the context of employment, covers the producer-client relationship that Harvey Weinstein had with Ashley Judd.  Concluding that the U.S. District Court’s dismissal of her claim under section 51.9 was error, the appellate court reversed. 

While the California legislature amended section 51.9, effective January 1, 2019, to explicitly include directors and producers to the categories of persons that the statute encompasses, the Court’s analysis in concluding that the statute covered such professionals through its catch-all provision is instructive.  At the time Judd filed her lawsuit, section 51.9 required a plaintiff to plead four elements to state a cause of action:

  • First, that a business, service or professional relationship exists between the plaintiff and defendant, including but not limited to relationships in which the defendant was (a) a doctor, psychotherapist or dentist, (b) an attorney, holder of a master’s degree in social work, real estate agent or appraiser, accountant, banker, trust officer, financial planner, loan officer, collection service, building contractor, or escrow loan officer, (c) an executor, trustee or administrator, (d) a landlord or property manager, (e) a teacher, or (f) “a relationship that is substantially similar to any of the above;” (emphasis added)
  • Second, the defendant made sexual advances, solicitations, sexual requests, or demands for sexual compliance by the plaintiff “that were unwelcome and persistent or severe, continuing after a request by the plaintiff to stop;”
  • Third, that there “is an inability by the plaintiff to easily terminate the relationship without tangible hardship;” and
  • Fourth, that the plaintiff suffered or will suffer economic loss or disadvantage or personal injury as a result of the conduct described in the second element.

Since the appellate court was reviewing a ruling on a motion to dismiss an amended complaint, the court took as true all facts alleged in that pleading, which included a description of sexual importuning that clearly met the second element of the claim.  The main issue was whether the relationship between Weinstein and Judd was “substantially similar” to the relationships enumerated in section 51.9.  Although Weinstein argued that the enumerated relationships were “so idiosyncratic that” they could not be the basis of finding that his relationship with Judd was substantially similar, the Court of Appeals disagreed. 

Since the California Supreme Court had not “squarely addressed” the issue, the U.S. appellate court had to “predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance.”  Far from finding the enumerated examples in section 51.9 idiosyncratic, the Court found that each of them “consists of a relationship wherein an inherent power imbalance exists such that, by virtue of his or her ‘business, service, or professional’ position, one party is uniquely situated to exercise coercion or leverage over the other.” 

The potential for abuse of power by those in the enumerated “business, service, or professional” positions, “also exists in the producer-actor relationship.”  In an amicus brief, the Screen Actors Guild explained that the film industry still contains “a small cadre of top producers and executives” with “considerable power to make or break actors’ careers,” in light of the relationship-oriented business in Hollywood.  Judd’s complaint presented just such a scenario: she had been engaged in discussions with the director and producer of the Lord of the Rings movies, who intended to cast her, until comments by Weinstein to them about her being a “nightmare to work with” caused them to rethink working with her. 

Under “the facts as alleged, the relationship between Judd and Weinstein was characterized by a considerable imbalance of power substantially similar to the imbalance that characterizes the enumerated relationships in section 51.9.”  Rejecting Weinstein’s argument that the relationships enumerated in section 51.9(a)(1) did not all share a power imbalance as an element, the Court explained that “the fact that the traditional balance of power in a relationship may be flipped in some scenarios does not negate the reality that a power imbalance nevertheless tends to exist in these relationships under normal circumstances.” 

The allegations of Judd’s complaint also met the third element, “an inability by the plaintiff to easily terminate the relationship without tangible hardship,” given “Weinstein’s highly influential and ‘unavoidable’ presence in the film industry . . . .”  Addressing the District Court’s conclusion that section 51.9 did not apply because Weinstein and Judd’s relationship “centered around employment or potential employment,” and section 51.9 applies only to relationships outside the workplace, the Court of Appeals held that the issue whether it was an employment relationship is a question of fact that cannot be resolved on a motion to dismiss. 


[1]           The other issue certified by the Ninth Circuit to the California Supreme court was whether section 226 of the Labor Code applies to wage statements issued to an employee who works under a collective bargaining agreement.  The Court held that the section 226 requirements applied to such employees, because the explicit exemption from wage statement requirements in California Wage Order No. 9, for employees who had entered into a collective bargaining agreement, applies only to the wage statement requirements under that Wage Order and not to such requirements stated in the Labor Code. 

Two Recent Ninth Circuit Cases Apply Rights under the U.S. Constitution to Preclude a Claim for Equitable Consumer Remedies and Restrictions on Website Content

Standard

I. Introduction – Constitutional Principles Offer Businesses Potential Defenses

In two cases decided in June 2020, the Ninth Circuit U.S. Court of Appeals applied federal law and constitutional protections to limit state law rights and remedies.  In Sonner v. Premier Nutrition Corp., 2020 WL 3263043 (9th Cir. June 17, 2020), the Court held that where a plaintiff in federal court dismisses her state law causes of action for damages, the court must employ federal equitable principles, in part to protect the Seventh Amendment right to trial by jury, in determining the viability of the remaining state statutory equitable cause of action.  In IMDb.com Inc. v. Becerra, 2020 WL 3396306 (9th Cir. June 19, 2020), the Court held that a state statute that prohibits a specific category of publicly accessible websites from publishing age-related information is subject to a First Amendment free speech challenge, where the state fails to show that the statute is narrowly tailored and the least restrictive means of achieving the compelling governmental interest in reducing incidents of age discrimination. 

These cases teach the following lessons for plaintiffs, defendants, and businesses in general:

  1. When bringing state law consumer claims in federal court, plaintiffs must carefully consider when and how doctrines under federal law will apply to impact their claims in that forum differently from how state law doctrines would apply.  Likewise, defendants should explore whether such doctrines could benefit them in such cases filed in federal court or in determining whether to remove a case filed in state court. 
  2. The right to freedom of expression prohibits a legislature from adopting a law imposing content restrictions on a publicly accessible website even where the restrictions further a compelling governmental interest, like reducing incidents of age discrimination, where protections against age discrimination may be enforced without impacting speech rights. 
  3. A law ostensibly directed toward such a content restriction on a membership-subscription website could escape strict scrutiny by the courts, but if the law extends beyond the bounds of that website to include an affiliated, but publicly accessible site, strict scrutiny will apply, with the results noted above. 

II. Sonner v. Premier Nutrition – Federal Equitable Principles Govern the Viability of Equitable Claims under State Law in Federal Court

In the consumer case, Sonner v. Premier Nutrition Corp., plaintiff had filed an amended complaint containing a consumer class claim for damages under California’s Consumer Legal Remedies Act, Civ. Code § 1782 (“CLRA”), and a class claim for restitution and injunctive relief under California’s Unfair Competition Law, Bus. & Prof. Code § 17200 et seq. (“UCL”).  Desiring to try the class claims to the court rather than a jury, plaintiff filed a second amended complaint dismissing the CLRA damages claim two months before trial. 

In its opposition to plaintiff’s motion for leave to file the second amended complaint, defendant argued that, if the legal claim were dismissed, the court would have to dismiss the equitable restitution claims under the UCL, because the plaintiff had an adequate remedy, for damages, at law.  At the hearing on the motion for leave, plaintiff received another warning that dismissal of the damages claim could result in dismissal of the equitable claim if defendant filed a motion to dismiss based on the adequate-legal-remedy doctrine, but plaintiff forged ahead.  In granting defendant’s subsequent motion to dismiss without leave to amend, the Court found that the UCL claims were subject to California’s adequate-legal-remedy doctrine. 

On appeal, plaintiff argued that the court had to apply state law in determining whether she had to show she lacked an adequate legal remedy as a condition to pursuing the UCL claims.  And she maintained that the California legislature had eliminated the requirement to show an inadequate remedy at law in pursuing equitable remedies under the UCL.  Defendant contended that federal equitable principles, including the requirement that a party pursuing equitable relief show it lacks an inadequate remedy at law, governed the court in a diversity case. 

Following the admonitions in U.S. Supreme Court Justice Felix Frankfurter’s opinion for the Court in Guaranty Trust Co. of New York v. York, 326 U.S. 99 (1945), the Ninth Circuit held that “a federal court must apply traditional equitable principles before awarding restitution under the UCL and the CLRA.”  For over a century, federal courts had adhered to the “fundamental principle . . . that state law cannot expand or limit a federal court’s equitable authority.”  This principle applies even where the outcome of a case under state law would be different if brought in federal court from the outcome in state court. 

The requirement under federal common law to show an inadequate remedy at law as a condition to pursuing equitable remedies “implicates the well-established federal policy of safeguarding the constitutional right to a trial by jury in federal court.”  Therefore, even assuming California made the policy decision to streamline UCL and CLRA claims by eliminating that showing for equitable claims under those statutes, “the strong federal policy protecting the constitutional right to a trial by jury outweighs that procedural interest.” 

In the procedural context of the case in the trial court, where, despite ample warning that doing so could jeopardize the viability of her UCL claims, the plaintiff had sought to dismiss the statutory damage claims “on the eve of trial,” the Court of Appeal held that the District Court had not abused its discretion in denying plaintiff leave to amend to reassert her damage claim when it granted dismissal of the UCL equitable claims. 

III. IMDb.com Inc. v. Becerra – Preventing Age Discrimination Cannot Justify Restriction of Speech Where Other Remedies Are Available

In IMDb.com Inc. v. Becerra, IMDb.com Inc., “a free, publicly available website that offers a comprehensive database of information about movies, television shows and video games,” filed an action to prevent enforcement of Assembly Bill 1687, Cal. Civ. Code § 1798.83.5, mainly on the grounds that it infringed its First Amendment speech rights.  AB 1687 prohibits “a commercial online entertainment employment service provider,” which offers services to paid subscribers, from publishing the subscriber’s date of birth or age information in the subscriber’s online profile or sharing that information with any internet website for publication, where the subscriber has asked the provider to remove that information.  The statute also requires the provider to “remove from public view in an online profile of the subscriber the subscriber’s date of birth and age information on any companion Internet Web sites under its control.”  The Court noted that the legislation at issue was directed at one website only, IMDb.com, and its subscriber employment service, IMDbPro. 

The challenge to the statute was focused on the latter requirement.  The issue was whether the part of the statute that required IMDb.com to remove from the public website age and birthdate information of a subscriber to IMDbPro, upon the subscriber’s request, and regardless of the source of that information, violated constitutional freedom of speech protections.  As a first step in its analysis, the Court concluded that AB 1687 “[o]n its face . . . restricts speech because of its content….  It prohibits the dissemination of one type of speech: ‘date of birth or age information.’…  And, perhaps more troubling, it restricts only a single category of speakers.”  Because it imposes “direct and significant restrictions” on a category of speech and does not apply generally, the First Amendment required that the statute be subjected to strict scrutiny. 

Rejecting the state’s contention that AB 1687 “merely regulates contractual obligations between IMDb and subscribers to IMDbPro,” the Court noted that “the statute reaches far beyond the terms of any subscriber agreement.”  It also applies to information on the publicly available IMDb.com website, to “prohibit[] the publication of information submitted by members of the public with no connection to IMDb.” 

Reviewing the categories of speech that, according to case law developed over the past few years, are not subject to such exacting scrutiny, the Court determined that AB 1687 did not fit in any of them.  First, the portion of the statute on which the case focused does not seek to regulate “commercial speech,” because “public profiles on IMDb.com do not ‘propose a commercial transaction.’”  The content on that database “is encyclopedic, not transactional.” 

Second, the challenged portion of the statute does not seek to “regulate activity that facilitates illegal conduct.”  This category of speech, as to which courts apply a lower level of scrutiny, involves “only those instances when the state restricts speech that itself that proposes an illegal transaction,” for example, advertising that discriminates by its language on the basis of sex or offers illegal transactions.  There was nothing “illegal about truthful, fact-based publication of an individual’s age and birthdate when that information was lawfully obtained.”  Rather than restricting such speech because of a concern about age discrimination, the state could provide for remedies to those who were damaged by such conduct or enforce remedies that already exist. 

Third, the Court found no case law to support a lower level of scrutiny for laws restricting content of “public speech touching on private concerns.”  The law at issue was not a law that would “regulate data collection and disclosure,” which would not trigger First Amendment concerns, such as statutes that prohibit “the misuse of information by entities that obtain that information from individuals through some exchange.” 

The state could not sustain its burden to show AB 1687 furthered a compelling governmental interest in the least restrictive manner narrowly tailored to that end.  It had failed to show that measures less restrictive of speech would be ineffective to further the compelling governmental interest in reducing incidents of age discrimination.  The evidence presented about increased incidents of age discrimination was generalized and murky; it did not show that “the current law, or another speech-neutral law, would be insufficient to address the problem.”  The underinclusiveness of the law was evidence that it was not narrowly tailored.  AB 1687 “restricts only websites like IMDb.com while leaving unrestricted every other avenue through which age information might be disseminated.”  The statute’s focus of its restrictions on those “who both (1) subscribe to IMDbPro and (2) request that IMDb remove his or her information from its public website,” called into question the state’s true motives in enacting the statute.  That underinclusiveness showed that it was not narrowly tailored.