U.S. District Court Prohibits Enforcement of AB 51, the New CA Law that Would Ban Arbitration Agreements as a Condition of Employment


In my post on November 12, 2019, I described new California laws impacting employers as of January 1, 2020.  See https://weinbergerlawblog.com/2019/11/12/preventive-maintenance-to-avoid-expanded-liability-risks-from-new-california-employment-laws-effective-january-2020/.  One of those laws, AB 51, prohibits employers from requiring new and current employees to enter into arbitration agreements as a condition of employment.

On December 6, 2019, the U.S. and California Chambers of Commerce, along with other business associations, filed a lawsuit in the U.S. District Court in Sacramento, asking the Court to declare AB51 is preempted by the FAA and therefore unenforceable as applied to arbitration agreements governed by the FAA and to enjoin California governmental from enforcing AB51 as applied to such agreements.

The plaintiffs filed a motion for temporary restraining order (TRO), which was heard on December 23, 2019.  On December 30, 2019, the Court granted the motion and issued a TRO prohibiting enforcement of AB51, because of the serious concerns raised about whether the statute is preempted by the FAA.  The Court also set a hearing for January 10, 2020 on a preliminary injunction.

In light of the Court’s ruling, AB51 cannot be enforced against employers that require current or new employees to sign an arbitration agreement as a condition of employment.  Employers should stay informed about the status of this case, and in particular the outcome of the January 10, 2020 hearing.



I.  Introduction

New laws that take effect at the turn of the year increase the risk of liability to those employers that do not plan for compliance.  Some steps that employers should consider include:

  1. Taking a close look at how they classify workers, either as independent contractors or as employees, and determining whether, under the ABC test (see part II, below), if applicable to the employer’s industry, previously classified contractors need to be reclassified as employees.
  2. Assessing, on one hand, the risk of continuing to include arbitration agreements in employment arrangements against, on the other hand, the value of such agreements and the possibility that the law prohibiting such agreements will ultimately be struck down as preempted by the Federal Arbitration Act.
  3. Improving documentation of grounds for termination, changes in terms or conditions of employment or decisions not to hire an applicant, in light of the tripling of the length of the statute of limitation to bring a claim for discrimination, harassment or retaliation under the Fair Employment and Housing Act.
  4. Modifying settlement agreements to eliminate “no rehire” clauses, and improving documentation of determinations not to rehire former employees who have brought claims against the employer.
  5. Implementing measures to comply with those provisions of the California Consumer Privacy Act for which the effective date was not extended to January 1, 2021, including notice of personal information an employer is gathering from employees and applicants resident in California and bolstering security measures for such data, to avoid the private right of action for unauthorized access caused by a security breach. 

II.  AB5 – The Enshrinement of the Dynamex Decision in the Labor Code—with Exceptions

Building on the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (see https://weinbergerlawblog.com/2018/05/09/the-abcs-of-the-worker-classification-the-california-supreme-courts-new-dynamex-standard-expands-employee-protections/), the California legislature passed AB 5, enshrining the ABC test for independent contractor/employee classification in the California statutes.

AB5 makes clear that the ABC test for worker classification applies to the California Labor Code, the California Unemployment Insurance Code, and California Wage Orders.  Under the ABC test, a worker is “considered an employee rather than an independent contractor” unless the hiring entity sustains its burden to show all of the following factors are met:

A. The worker “is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.”

B.  The worker “performs work that is outside the usual course of the hiring entity’s business.”

C.  The worker “is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

AB5 contains a host of exceptions – specified industries in which the ABC test does not apply to classification of workers.  Most of those industries had heavily lobbied the Legislature for an exception.  In many instances, where the statute states that the ABC test does not apply, it states that the long-time multifactor test for classifying a worker as a contractor or an employee, as stated in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, will apply.

Under Borello, the main factor in the classification determination is whether the person to whom the worker renders services has control or the right to control the worker with regard to the work done and the manner and means in which it is performed.  Other factors considered include: whether the person performing services is engaged in an occupation or business distinct from that of the person for whom the work is performed; whether the work is a part of the regular business of the latter person; which party supplies the instrumentalities, tools, and the place for the person doing the work; the level of skill required for the services rendered; whether in the locality, the work done by the worker is usually done under the direction of the person for whom the work is performed or by a specialist without supervision; the worker’s opportunity for profit or loss depending on the work performed; the length of the work relationship; and whether the work is paid by time or by the job.

One or more ride-share companies are organizing to place an initiative on the California ballot to make AB5 and the ABC test inapplicable to their drivers.  And some industries that the Legislature did not except from AB5 are contemplating constitutional challenges to the statute.  For now, on or before January 1, 2020, companies treating workers as independent contractors will need to consider seriously whether to change their classification to employees.

III.  AB51 – No Forced Arbitration Clauses with Employees

AB51, effective January 1, 2020, adds section 432.6 to the Labor Code to prohibit employers “as a condition of employment, continued employment, or the receipt of any employment-related benefit” from “requir[ing] any applicant for employment or any employee to waive any right, forum, or procedure for a violation of” the California Fair Employment and Housing Act (“FEHA”) or the Labor Code.  The statute’s nonexhaustive list of rights, forums or procedures that an employer is prohibited from requiring an employee or applicant to waive includes “the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any violation.”  The prohibition extends to any agreement that would require an employee “to opt out of a waiver”.  The legislation also adds section 12953 to the California Government Code (where the FEHA is located), to make it “an unlawful employment practice for an employer to violate section 432.6 of the Labor Code.”

The legislation contains a savings clause, stating that it is not “intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act. . . .”  And it excepts from the prohibition “postdispute settlement agreements or negotiated severance agreements.”

While the U.S. Supreme Court has ruled heavily in favor or enforcement under the Federal Arbitration Act of arbitration agreements between employers and employees, as well as class action waivers, it has based such ruling in large part on upholding the intention of the parties as disclosed in the arbitration agreements.  It has not ruled on state laws that prohibit compelled arbitration agreements.  How the Court views this new law may depend upon (1) whether it accepts the premise that, under the FAA, one condition of employment, that is, an arbitration agreement, can be singled out for prohibition, and (2) whether it sees the law as having a “disproportionate impact” on arbitration, which could make it subject to preemption by the FAA.

Pending a ruling on the statute’s enforceability, an employer runs the risk of liability under the FEHA for including as a condition of employment, the employee’s acceptance of an arbitration agreement.

IV.  AB9 – Lengthened Statute of Limitations for Discrimination and Harassment Claims under the Fair Employment and Housing Act

AB9, effective January 1, 2020, amends the FEHA, in particular section 12960 of the Government Code, increasing from one year to three years the statute of limitations for filing with the Department of Fair Employment and Housing (“DFEH”) a complaint alleging discrimination, harassment or retaliation in violation of the FEHA.  Filing a complaint with the DFEH and obtaining notice from that department that it will not pursue a civil action with regard to the complaint is a necessary prerequisite to a plaintiff filing a civil action in court for FEHA violations.

AB9 does not revive claims that have lapsed under the current statute of limitations, and it does not change the one-year limitations period for a plaintiff to file a civil action for FEHA violations, which starts to run from the date of the DFEH’s notice that it will not pursue a civil action.

Because a complaint for FEHA violations may now be filed up to four years after an alleged violation of that statute, employers should take greater care to document all decisions and actions taken with regard to hiring, discipline, promotions, demotions, termination and other terms and conditions of employment.  Statutes of limitation are adopted to provide sufficient time for an injured party to bring a lawsuit to seek redress and at the same time place an outer limit on such claims, to avoid the fading of memories, loss of records and other impacts on evidence that parties may need to offer to pursue or defend against a claim.  AB9 resets the balance in favor of allowing later claims over the risk that evidence will be lost by the passage of time.

V.  AB749 – Prohibition on “No Rehire” Provisions in Settlement Agreements

AB749 adds section 1002.5 to the California Code of Civil Procedure effective January 1, 2020, to ban inclusion in an agreement settling an employment dispute of any provision that “prohibit[s], prevent[s], or otherwise restrict[s] a settling party that is an aggrieved person from obtaining future employment with the employer against which the aggrieved person has filed a claim, or any parent company, subsidiary, division, affiliate, or contractor of the employer.”  Any provision that violates this provision is void.

The new law will not prohibit an agreement between an employer and aggrieved employee to end an employment relationship or a provision to prohibit the aggrieved employee from further employment, where “the employer has made a good faith determination that the person engaged in sexual harassment or sexual assault.”  In addition, the new law will not require an employer “to continue to employ or rehire a person if there is a legitimate non-discriminatory or non-retaliatory reason for terminating the employment relationship or refusing to rehire the person.”

In light of this law, where an employer is considering terminating employment of an employee who has filed a claim against the employer in court, before an administrative agency, in an alternative dispute resolution forum, or through the employer’s internal complaint process, the employer should be even more careful to assure that it has documented defensible reasons to terminate the employee.  Likewise, if a former employee who has filed such a claim applies for re-employment, the employer should have documented defensible reasons not to employ him or her.

VI.  SB688 – Expansion of Labor Commissioner Authority to Issue Citations for Failure to Pay Wages

SB688 amends section 1197.1 of the Labor Code to expand the Labor Commissioner’s Authority to issue a citation for underpaid wages.  In addition to the Labor Commissioner’s authority to issue a citation to an employer for having paid less than the minimum wage to its employees, the Commissioner is empowered, effective January 1, 2020, to issue a citation to an employer that has “paid a wage less than the wage set by contract in excess of the applicable minimum wage” in order to obtain restitution of the amounts underpaid.  This amendment provides an additional means for employees to recover wages they allege an employer failed to pay in accordance with a contract.

The law requires an employer that challenges a Labor Commissioner finding of unpaid wages in court to post a bond for the amount of found by the Commissioner to be due and owing.  The bond is forfeited to the Labor Commissioner if the court affirms or modifies the Commissioner’s finding and the employer fails to pay that amount within 10 days of the court’s ruling.

VII.  SB778 – Extension of Deadline to Provide Harassment and Abusive Conduct Training

This legislation extends the time from January 1, 2020 to January 1, 2021 for employers with five or more employees to provide at least two hours of classroom or other effective interactive training and education regarding sexual harassment to all supervisory employees and at least one hour of classroom or other effective interactive training and education regarding sexual harassment to all nonsupervisory employees in California.

VIII.  AB25 – Partial Reprieve on Applicability of the California Consumer Privacy Act (“CCPA”) to Employers

AB25 gives employers with employees who reside in California limited breathing room to prepare for the full application of the new law to data they gather from such employees.  For an employer to which the CCPA applies – that is, a for-profit entity that either (1) has annual gross revenues over $25 million; or (2) alone or in combination, annually buys, receives for its commercial purposes, sells, or shares for commercial purposes, alone or in combination, the personal information of 50,000 or more consumers, households, or devices; or (3) derives 50 percent or more of its annual revenues from selling consumers’ personal information – the application to employees’ personal information is delayed until January 1, 2021, but only to the extent that such information is used for purposes of the employment relationship.

Employers to which the CCPA is applicable must still be prepared for the law as of January 1, 2020, because of the following provisions:

  1. Absent adoption of a further delay in the CCPA’s applicability to employers, as of January 1, 2021, businesses will be required to disclose data collected during the prior 12 months upon a request. Tracking of such data should start on January 1, 2020.
  2. AB25 does not delay the January 1, 2020 implementation date for the requirement that a company notify its employees resident in California of the categories of personal information to be collected and the purposes for which that personal information will be used. Likewise, without further notice to employees of additional data to be collected or other uses to which the information collected will be used, the company will be limited to collecting the data and using it as described in the notice.
  3. AB25 does not delay the January 1, 2020 implementation date for the requirement that employers comply with the other CCPA requirements if they use employee data for non-employment purposes, for example, to market goods or services to employees; those requirements include disclosure and right to opt out of sales of personal information.
  4. AB25 does not delay the January 1, 2020 date authorizing an employee to bring a private right of action for data breaches impacting his or her data.


Summer California Supreme Court Decisions Ease Procedural Thresholds for Consumer Claims


I.  Introduction: An Eased Standing Requirement for Unruh Act Claims against Web-Based Businesses, a Lower Bar to Show a Class is Ascertainable in Class Actions, and What Businesses Need to Know

In two cases decided in July and August of this year, the California Supreme Court struck a balance in consumer claims between easing access to the courts for such claims and protecting defendants’ rights to due process.  In White v. Square, Inc. (Aug. 12, 2019), the Court held that a person who seeks access to an online service but does not attempt to register for it after reading terms that exclude him or her may bring a claim under California’s Unruh Civil Rights Act, even absent an attempt to register for the service.  In Noel v. Thrifty Payless, Inc. (July 29, 2019), the Court settled a split in authority on the requirement in class action suits that the class members be ascertainable, landing on the side of the less stringent interpretation of the requirement.

For companies doing business with California consumers, these holdings mean:

  1. Web-based companies should assure that their terms of service do not unduly exclude consumers or businesses on bases that are not easily justified by reasoning that is consistent with California law requiring non-discriminatory access to accommodations, facilities, privileges or business services.
  2. Consumers in California may seek relief on a class-wide basis against consumer-oriented businesses even where a representative plaintiff cannot identify each individual consumer who is a potential member of the class, provided that members can be identified through objective characteristics and common transactional facts, and the other class certification criteria are met. Therefore, businesses need to assure that low-value high-volume products are marketed truthfully and meet applicable safety and other standards.
  3. If a business is served with an action asserting class claims, then, when the class certification motion is filed, the business may still raise the issue of the feasibility of contacting class members, but must do so in the context of other applicable class action criteria, such as the manageability of the class, and/or the lack of superiority of a class proceeding to alternative means of resolving the claims.

II.  White v. Square, Inc.: A Plaintiff Need not Plead an Attempt to Use a Website to Bring a Claim for Discrimination under the Unruh Act.

Square, Inc. offers an online service through which subscribers, for a per-transaction fee, may accept electronic payments without opening up a merchant account with a Visa or MasterCard member bank.  Its terms of service require a user, when creating an account, to confirm that the user will not accept payments for bankruptcy attorneys or collection agencies.  In White v. Square, Inc., a bankruptcy attorney alleged that Square’s agreement discriminates against bankruptcy attorneys in violation of the California’s Unruh Civil Rights Act.  In his second amended complaint, he claimed that he accessed the Square website intending to register for use of its services for his bankruptcy practice, but after reviewing its terms of services, he did not click the button “Continue” to register, because he believed that he could not do so without committing fraud.

The Unruh Act prohibits discrimination on the basis of 14 enumerated categories, in “accommodations, advantages, facilities, privileges or services in all business establishments,” and authorizes a private right of action for damages, injunctive relief and attorneys’ fees.  The non-discrimination categories in the Act are not exclusive.

The case raised the issue of whether a plaintiff “has standing to bring a claim under the Unruh Civil Rights Act when the plaintiff visits a business’s website with the intent of using its services, encounters terms and conditions that allegedly deny the plaintiff full and equal access to its services and then leaves the website without entering into an agreement with the service provider”.  The Court held that the plaintiff need not have entered into an agreement with the business to bring a claim under the Unruh Act.  The general rule that a person “suffers discrimination under the Act when he or she “presents himself or herself to a business with an intent to use its services but encounters an exclusionary policy or practiced that prevents him or her from using those services,” applies to online businesses.

In reaching this determination, the Court viewed the issue in light of the legislative intent and statutory purpose.  The Court explained that the Unruh Act has a “broad remedial purpose and overarching goal of deterring discriminatory practices by businesses.”  Courts are required to construe the Act liberally to carry out its purpose.

Thus, there is no requirement that a plaintiff ask the business for an exception to the stated restriction or to verify that the restriction applies to him or her.  “Such a requirement would limit a business’s liability only to individuals who inquire and would potentially enable a business to make exceptions to its stated policies in order to avoid suit . . . .”

In pleading a claim under the Unruh Act, a plaintiff “must allege, for purposes of standing, that he or she visited the business’s website, encountered discriminatory terms, and intended to make use of the business’s services.”

III.  Noel v. Thrifty Payless, Inc.: Class Action Plaintiffs Need Not Show that Class Members May Be Individually Identified to Meet the “Ascertainability” Requirement for Certification of the Class, provided objective characteristics can be used to identify class members when necessary.

To seek certification of a class in a class action under section 382 of the California Code of Civil Procedure, a class representative plaintiff must meet criteria established by the courts.  One of the criteria is that the class is ascertainable.  (The other criteria are that the class is “sufficiently numerous, [and has] a well-defined community of interest, and [that] substantial benefits from certification . . . render proceeding as a class superior to the alternatives.”)

California courts had not applied the ascertainability standard consistently – some required that, among other things, the representative plaintiff show that the individual members of the proposed class can be readily identified without unreasonable expense or time, while other courts employed a less stringent requirement that the plaintiff define the class “in terms of objective characteristics and common transactional facts” that make identification of class members possible when that becomes necessary.

Reviewing the California and federal case law on the ascertainability standard, the Court held that the less stringent standard best achieved “the limited but important function of the ascertainability requirement,” to protect “the due process interests of all parties and absent class members without unduly impairing the efficacy of the class action mechanism.”  The Court identified two ways in which the requirement that a class definition be framed in objective terms promotes due process:  First, it “puts members of the class on notice that their rights may be adjudicated in the proceeding, so they must decide whether to intervene, opt out, or do nothing and live with the consequences.”  Second, it supplies “a concrete basis of determining who will and will not be bound by (or benefit from) any judgment.”

An ascertainability requirement that is focused on objective criteria and common transactional facts assures that high-volume low-individual-value claims can proceed without undue administrative burdens that would preclude such claims from being adjudicated – either on an individual or class basis.  Quoting from the case of Mullins v. Direct Digital, LLC, 795 F.3d 654 (7th Cir. 2015), the Noel Court explained the detrimental impact that a heightened ascertainability approach would have on the viability of such class actions:

“‘More broadly,’ the court wrote, ‘the stringent version of ascertainability loses sight of a critical feature of class actions for low-value claims . . . .  In these cases, “only a lunatic or a fanatic” would litigate the claim individually, [citation], so opt-out rights are not likely to be exercised by anyone planning a separate individual lawsuit.  When this is true, it is particularly important that the types of notice that courts require correspond to the value of the absent class members’ interests.  [Citation.] . . . .  [¶] The heightened ascertainability approach upsets this balance.  It comes close to insisting on actual notice to protect the interests of absent class members, yet overlooks the reality that without certification, putative class members with valid claims would not recover anything at all.’”

California case law “has adopted a . . . practical approach” to the question of what notice to class members will be required in a particular case: “the circumstances of each case determine what forms of notice will adequately address due process concerns.”  Therefore, “due process does not demand that the proponent of class treatment demonstrate, as a prerequisite of certification, that (much less how) class members eventually will receive individual notice of the action.”  (Emphasis in original.)  And when the time comes in a case to determine what notice is appropriate, “individual notice may not always be required even for absent class members whose whereabouts are known”.  A representative plaintiff “is not required to notify individually every readily ascertainable member of his class without regard to the feasibility of such notice; he need only provide meaningful notice in a form that ‘should have a reasonable chance of reaching a substantial percentage for the class members.’”

Since due process does not always require personal notice to all members of a class for the class action to proceed or for an individual member of a certified class to be bound by the judgment, “a construction of the ascertainability requirement that presumes such notice is necessary to satisfy due process, and demands that the plaintiff show how it can be accomplished, threatens to demand too much, too soon.”  Therefore, “as a rule, a representative plaintiff in a class action need not introduce evidence establishing how notice of the action will be communicated to individual class members in order to show an ascertainable class.”  As explained above, the representative plaintiff need only define the class based on objective characteristics and common transactional facts.

The impact of the Court’s decision in Noel is unclear because of the Court’s comments that the issue of whether a plaintiff can show a feasible means to identify and contact class members may be raised and considered in reviewing other requirements for class certification, for example, the requirements that the plaintiff show that the proposed class is manageable and that the class proceeding is superior to alternative means of resolving claims.  But based upon the Court’s in depth analysis of the ascertainability requirement and the impact of that requirement on low individual-value claims, it is likely that, even if the feasibility of notifying all class members is raised in connection with other class action criteria, the Court will lower the bar for such claims.

Ninth Circuit Enforces California Protections for Consumers and Workers in the Intersection of Federal and State Laws on Arbitration and Wages


I.     Summary of the Court Decisions, and Suggested Action Steps for Companies

In two decisions in June 2019, the U.S. Ninth Circuit Court of Appeals (1) reinforced that California does not recognize the federal de minimis doctrine, which relieves employers of paying wages to employees for work that lasts only a few seconds or minutes before or after regular working hours, and (2) held that the Federal Arbitration Act does not preempt a California Supreme Court decision that holds unenforceable an agreement purporting to waive a party’s right to seek public injunctive relief in any forum.  The first case requires California employers to pay their employees for the limited time that they are subject to inspections after they clock out at work.  The second prohibits companies from insisting that consumers waive their right to seek public injunctive relief in an arbitral forum.

In light of these decisions, companies should consider taking the following steps:

  1. Employers with workers in California should work out the administrative and logistical means to compensate employees for minimal post-clock-out or pre-clock-in work.
  2. If an employer determines that it is not reasonably possible to compensate employees for such work, then it should make sure that it maintains a record of its diligent efforts to work out the means to pay employees for such work.
  3. Companies that have arbitration agreements with consumers or workers in California should review the agreements to assure that they do not contain a waiver of the right to seek public injunctive relief.

II.     Rodriguez v. Nike: An employer must pay an employee for the time the employer’s work rules require the employee to stay after regular working hours.

Rodriguez v. Nike Retail Stores, Inc. 928 F.3d 810 (9th Cir. 2019), involved a work rule at Nike’s 34 retail stores in California requiring employees “to submit to exit inspections each time they leave the store on a break or at the end of the day.”  Non-exempt employees, who tracked their hours via a punch-clock, had to punch out before undergoing such inspections, precluding them from being compensated for that time.  Rodriguez filed a class action wage and hour lawsuit seeking monetary relief and penalties under several provisions of the California Labor Code.

Nike filed a motion for summary judgment on the basis of the federal de minimis doctrine, which “precludes recovery for otherwise compensable amounts of time that are small, irregular, or administratively difficult to record.”  The precise amount of time employees spent in such inspections was disputed, but the federal trial court found that the range of time that the exit inspections each lasted – between zero seconds and several minutes – was undisputed.  That court granted Nike’s motion based upon that doctrine.

After the motion was granted and while the plaintiff’s appeal was pending, the California Supreme Court issued its Troester decision.  In Troester v. Starbucks Corp., 5 Cal.5th 829 (2018), the Court clarified that, where an employer requires an employee to perform several minutes of compensable work after the employee has clocked out for the day, California law requires the employer to pay the employee for the work, even if the additional time may be administratively difficult to capture.  California case law does not support the application of the “de minimis” rule, which is applicable under the federal Fair Labor Standards Act, to avoid payment.  See the discussion of Troester at https://weinbergerlawblog.com/2018/10/23/troester-v-starbucks-the-ca-supreme-court-holds-routine-tasks-that-take-minutes-to-perform-are-not-too-minute-to-evade-compensation/.

In light of Troester, the appellate court held that the trial court erred in granting summary judgment to Nike based on the de minimis doctrine.  The Court of Appeals declined to establish a 60-second threshold under which a California de minimis doctrine would apply, because Troester emphasized that California labor laws require employees to be paid for all hours worked.

Therefore, “where employees are required to work for more than trifling amounts of time ‘on a regular basis or as a regular feature of the job,’ [Troester, 5 Cal.5th] at 1125, Troester precludes an employer from raising a de minimis defense under California law.”  Summary judgment was error because there was a dispute of fact regarding whether the exit inspections lasted for more than a minute, were brief or were trifling.

The Rodriguez Court left unanswered in what circumstances work off-the-clock could be so irregular that it would be unreasonable to expect the time to be recorded.

III.     Blair v. Rent-a Center: The FAA does not preempt California law prohibiting waiver of the right to public injunctive relief, even in an arbitral forum.

In Blair v. Rent-a-Center, Inc., 928 F.3d 819 (9th Cir. 2019) the Ninth Circuit addressed whether the Federal Arbitration Act, which has been held to strongly favor enforcement of arbitration agreements, preempts the California Supreme Court’s holding in McGill v. Citibank, N.A., 2 Cal.5th 945 (2017).  In McGill, the California Supreme Court held that, under California law, an agreement waiving a party’s right to seek public injunctive relief in any forum is unenforceable.  The McGill rule was not preempted, because it is “a generally available contract defense” – that any contract, including those that contained and those that did not contain an arbitration provision, could not provide for a waiver of public injunctive relief.  Under the “savings clause” in section 2 of the FAA, the McGill rule was permissible.  The rule “expresses no preference as to whether public injunction claims are litigated or arbitrated, it merely prohibits the waiver of the right to pursue those claims in any forum.”

The Court acknowledged the U.S. Supreme Court’s admonition in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011), that even a generally applicable contract defense could be preempted by the FAA if it is “an obstacle to the accomplishment of the FAA’s objectives,” one of which is to “facilitate streamlined proceedings.”

Applying the Concepcion doctrine, the Ninth Circuit Court of Appeals had considered in Sakkab v. Luxotica Retail N. Am., Inc., 803 F.3d 425, 427 (9th Cir. 2015), the rule in Iskanian v. CLS Transp. L.A., LLC, 59 Cal.4th 348 (2014), which “bars contractual waiver in any fora of representative claims under California’s Private Attorneys General Act of 2004 (‘PAGA’), Cal. Lab. Code §§ 2698 et seq.”  The Sakkab Court concluded that the Iskanian rule does not conflict with the FAA, because it “is generally applicable,” barring “any waiver of PAGA claims, regardless of whether the waiver appears in an arbitration agreement or a non-arbitration agreement;” and does “not ‘prohibit the arbitration of any type of claim’” or “‘diminish the parties’ freedom to select informal arbitration procedures,’” since PAGA actions, unlike class actions, are not concerned with the claims of other employees and so do not implicate absent employees’ due process rights.  Sakkab, 803 F.3d at 432, 434-36, 439.

Applying these principles to the rule in McGill, the Court noted initially that the rule was generally applicable, holding unenforceable under California law “any contract – even a contract that has no arbitration provision”.  As a “ground[] . . . for the revocation of any contract,” the McGill rule “falls within the FAA’s savings clause at the first step of the preemption analysis.  9 U.S.C. § 2.”

Taking the next step in the analysis, the Court determined that the McGill rule, like the rule in Iskanian, does not “deprive parties of the benefits of arbitration.”  The laws governing public injunctive relief do not require procedural formality that is inconsistent with arbitration.  As with representative PAGA claims, “public injunction claims are brought for the benefit of the general public, not on behalf of specific absent parties.”  Likewise, prohibiting waiver of public injunctive relief in the arbitration context does not require that a bilateral agreement for arbitration be expanded to arbitration of multi-party claims.

The possible complexity that a public injunction case may present in arbitration as compared to a conventional individual claim does not preclude arbitration.  “[A]s with PAGA actions, the complexity involved in resolving a request for a pubic injunction ‘flows from the substance of the claim itself rather than any procedures required to adjudicate it (as with class actions).’”  (Citing Sakkab.)

The high stakes nature of some public injunction requests also does not preclude arbitration.  Provided a public injunction does not interfere with the informal, bilateral nature of arbitration, FAA preemption is not triggered by the high stakes of such a claim.

The U.S. Supreme Court Strengthens the Hand of Employers to Compel Individual Arbitration of Claims, while Public and Business Attitudes Towards Arbitration Are in Ferment


Opposition to arbitration clauses by consumers and employees is growing, some employers, in response to that opposition, are taking actions to eliminate arbitration clauses in employment agreements or employee policies, and support is growing in Congress to rein in the ambit of arbitration.  In the midst of this political and cultural ferment over arbitration, the United States Supreme Court continues its years-long trend to enforce arbitration clauses in a manner that favors employers and consumer-focused companies.

In Lamps Plus, Inc. v. Varela, __ U.S. __, 139 S.Ct. 1407 (Apr. 24, 2019), the Court sided with employers to prevent class arbitration where the arbitration agreement was ambiguous as to whether class arbitration was contemplated.  Explaining that the Court’s “normal practice” is to defer to the Circuit Court on “interpretation and application of state law,” it adopted the Ninth Circuit’s conclusion, applying California contract law, that the “agreement was ambiguous on the availability of class arbitration.”

The finding of ambiguity teed up the issue of “whether, consistent with the [Federal Arbitration Act], an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.”   (Citing Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010).)  Relying on Stolt-Nielsen and Epic Systems Corp. v. Lewis, 584 U.S. ___, 138 S.Ct. 1612 (2018), decided last term, the Court held that “it cannot” provide such supports, because “[c]lass arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration.”

The Court rejected the Ninth Circuit’s application of California’s rule of contractual interpretation, under which an ambiguous contractual provision is construed against the party that drafted the contract.  It found the interpretive principle inconsistent with the FAA, because it undermines the foundational principle that arbitration is a matter of consent.  This rule of contractual construction, “[u]nlike contract rules that help to interpret the meaning of a term, and thereby uncover the intent of the parties” is “triggered only after a court determines that it cannot discern the intent of the parties.”  (Emphasis in original.)

In Epic Systems, the Court had admonished courts not to “rely on state contract principles to ‘reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent.’”  Explaining that “the FAA provides the default rule for resolving ambiguity here,” the Court determined that the California rule of construction could not be “applied to impose class arbitration in the absence of the parties’ consent.”  Neither silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself.”

Lamps Plus further closes the loop to prevent employees and consumers from evading individual arbitration of their claims.  Companies can rest assured that employees and consumers will not be able to rely on arbitration agreements that do not clearly prohibit class arbitration to compel class arbitration.

What is next for arbitration in the appellate courts?  In California, the California Supreme Court will soon address the issue of whether its decision in Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014), holding that arbitration agreements are not enforceable in claims under California’s Labor Code Private Attorneys General Act (“PAGA”), applies to a claim for wages under section 558(a) of the California Labor Code.  Section 558(a) states that the unpaid wage claim penalty is recoverable 100 percent by the employee,[1] unlike other PAGA claims, for which the employee receives only 25 percent, the other 75 percent going to the state.  The U.S. Supreme Court has not yet taken up a case raising the issue of the enforceability of an arbitration agreement in a PAGA claim.  Meanwhile, the California Supreme Court recently reminded parties to an arbitration that court review of erroneous decisions by an arbitrator is extremely limited – in keeping with the notion that arbitration is designed to be a streamlined process.  Heimlich v. Shivji, __ Cal.5th __, 2019 WL 2292828 (May 30, 2019).  Be careful what you wish for.

In sticking to its established unwavering support of arbitration clauses, the Court may further fuel the flame for legislative reform of the arbitration process.  But any such reform will have to come from Congress, because efforts by state legislatures to adopt laws restricting arbitration will run afoul of FAA preemption.  Companies need to consider whether the benefits of enforcing agreements or policies requiring individual arbitration of claims outweigh the growing public backlash against such policies.

[1]               One California appellate court has held that the employee is entitled to only 25 percent of the recovery under section 558(a), because the same split must be applied to this claim as is applied to other PAGA claims.  Zakaryan v. Men’s Wearhouse, Inc., 33 Cal.App.5th 659, 674-75 (2019).

Timbs v. Indiana: The Potential Impact on PAGA Penalties of the Supreme Court’s Decision that the Eighth Amendment Excessive Fines Clause Applies to the States


I.  Introduction – Timbs, the Excessive Fines Clause, and a Potential Defense to PAGA Penalties

The U.S. Supreme Court’s recent decision in Timbs v. Indiana (Feb. 20, 2019) 2019 WL 691578, holding that the Eighth Amendment’s Excessive Fines Clause applies to the states through the Fourteenth Amendment’s Due Process Clause, could offer support for a defense to the large monetary penalties sought in representative claims against employers under the California Labor Code Private Attorneys General Act (“PAGA”) (Cal. Labor Code §§ 2698 – 2699.6).

II.  The Timbs Decision and the Eighth Amendment Excessive Fines Clause

Under the Eighth Amendment to the U.S. Constitution, “[e]xcessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”  The portion of the amendment prohibiting excessive fines “limits the government’s power to extract payments, whether in cash or in kind ‘as punishment for some offense.’”  (Id. at *3 (citing United States v. Bajakajian (1998) 524 U.S. 321, 327-28).)  The restrictions imposed by the Excessive Fines Clause are not limited to criminal statutes; they cut across the division between criminal and civil law.  Civil proceedings may advance criminal and remedial goals.  The question is not whether a civil or criminal law is involved, but whether the purpose of the fine is punishment, in which case the clause applies, or remedial, in which case it does not.  (Austin v. United States (1993) 509 U.S. 602, 609-10.)

In explaining why the Excessive Fines Clause applies to the states, the Court noted:

“For good reason the protection against excessive fines has been a constant shield throughout Anglo-American history:  Exorbitant tolls undermine other constitutional liberties.  Excessive fines can be used, for example, to retaliate against or chill the speech of political enemies . . . .  Even absent a political motive, fines may be employed ‘in a measure out of accord with the penal goals of retribution and deterrence,” for ‘fines are a source of revenue,’ while other forms of punishment ‘cost a State money.’”

(Id. at *4 (citing Harmelin v. Michigan, 501 U.S. 957, 979, n.9 (1991) (opinion of Scalia, J.) (“it makes sense to scrutinize governmental action more closely when the State stands to benefit”).)

In applying the Eighth Amendment’s Excessive Fines Clause, “[t]he touchstone of the constitutional inquiry . . . is the principle of proportionality: The amount of the forfeiture must bear some relationship to the gravity of the offense that it is designed to punish. [Citations.] … [A] punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant’s offense.”  (United States v. Bajakajian, 524 U.S. at 334; People v. Urbano (2005) 128 Cal.App.4th 396, 406 (citing Bajakajian).)

III.  The California Constitution’s Excessive Fines Clause and Litigation Challenging PAGA

California has its own Excessive Fines Clause in Article I, section 17 of the California Constitution.  Even before Timbs was decided, the California Business & Industrial Alliance had filed a lawsuit in Orange County Superior Court against California Attorney General Xavier Becerra, seeking declaratory and injunctive relief against PAGA, in part based upon the state’s constitutional prohibition against excessive fines.  (California Business & Industrial Alliance v. Becerra, Orange County Sup. Ct. Case No. 30-2018-01035180-CU-JR-CXC (filed Nov. 28, 2018).)  The Attorney General filed a demurrer to the complaint, which is scheduled for hearing on March 28, 2019.

IV.  Timbs and PAGA

By encouraging PAGA lawsuits by private parties and their counsel, the PAGA statute raises one of the concerns on which the Court’s Timbs decision was based – that excessive fines might be used “in a measure out of accord” with the goal of retribution and deterrence, to promote increased revenues to the state.  Under PAGA, violations of Labor Code provisions governing, among other wage and hour issues, overtime, meal and rest breaks and payroll records, can result in large civil penalties that far exceed the value of the unpaid or underpaid wages.  In representative actions filed by private attorneys, 25 percent of the penalties recovered are paid to the State, without the state having expended any amount in fees to recover them.  The State of California has established a system to raise revenues via penalties imposed on employers without having appropriated any funds for an enforcement infrastructure and with minimal to no oversight of how those enforcement measures are used on its behalf.

Granted that PAGA penalties can have a significant deterrent effect on companies bent on what has been characterized as “wage theft”.  But they also can wreak havoc on companies that have inadvertently violated wage and hour laws and are prepared to correct and pay any erroneously unpaid wages, but are hit with the prospect of also incurring multiples of the amount of the unpaid wages in penalties.  The prospect of representative lawsuits by private counsel alleging hundreds of thousands to millions of dollars of such penalties, for which attorneys’ fees are also recoverable, can create harrowing concerns for companies.

Beginning in 1996, with the case of BMW North America, Inc. v. Gore (1996) 517 U.S. 559, the United States Supreme Court began to establish, based upon due process concerns, limitations on the amount of punitive damages that could be awarded against a defendant.  The Court set bounds on such awards, requiring the amount of the award to bear some relationship to the gravity of the defendant’s conduct.  “Perhaps the most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant’s conduct.”  (Id. at 575.)

The Court also looked at the ratio of punitive to compensatory damages, which was 500 to one in that case, and noted that, while that ratio cannot be the deciding criteria, “[w]hen the ratio is a breathtaking 500 to 1, . . . the award must surely “raise a suspicious judicial eyebrow.”  (Id. at 583 (citation omitted).)  Moreover, the penalty that could have been imposed by statute for the conduct involved in BMW was only $2,000.  “The sanction imposed in this case cannot be justified on the ground that it was necessary to deter future misconduct without considering whether less drastic remedies could be expected to achieve that goal.”  (Id. at 584.)  In subsequent cases, the Court established further bounds on awards of punitive damages.

Are we on the brink of other judicially crafted principles, based upon the Excessive Fines Clause of the Eighth Amendment, to reign in PAGA penalties?  The Court’s prior treatment of punitive damages, together with the excesses of some representative PAGA penalty claims, and the gathering of a solid conservative majority on the Court makes it more likely that the issue will be taken up.  However, the question of whether the Court will be able to draw definite bounds on such penalties will most likely take several cases and years to resolve.

Recent California Appellate Cases Continue Trend of Increased Scrutiny of Employer Pay Practices


Two decisions from the California appellate courts in late December and early January reemphasize that employers must keep meticulous records to comply with the often complicated wage and hour laws governing compensation of their employees.  In particular:

  1. Employers must keep accurate records of all hours worked by employees. Failure to keep accurate records of hours worked by an employee relaxes the burden on that employee to prove he or she worked unpaid time.  While the employer has the opportunity to present evidence disputing the employee’s proof, the lack of accurate records works strongly in the employee’s favor.
  2. Employers must comply with section 226.2 of the California Labor Code, to pay piece-rate employees on an hourly basis for rest and recovery periods and other nonproductive time separate from any piece-rate compensation. According to the Court of Appeal, which rejected a constitutional challenge to the statute, the statutory definition of “other nonproductive time” as “time spent under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis,” is sufficiently clear for employer compliance.

Furry v. East Bay: Keep Accurate Records of Hours Worked to Avoid More Easily Provable Overtime Claims by Employees

In a case decided in December 2018 and ordered published in January 2019, Furry v. East Bay Publishing, LLC (Dec. 12, 2018) 2018 WL 6930903, the California Court of Appeal reinforced the legal principle that an employer’s failure to keep accurate and precise records of a non-exempt employee’s hours worked relaxes the employee’s burden of proving unpaid time worked.  At the same time, the court affirmed a judgment denying the employee regular or premium pay for meal periods, during which the employee had worked, because the employer had provided appropriate meal periods, and the employee had failed to show that the employer was aware or reasonably should have been aware that the employee was working through the meal periods.

With regard to the legal principle governing proof of unpaid hours worked, Furry’s evidence during a four-day bench trial established that the East Bay Publishing, LLC had not kept track of the hours that Furry worked, and that Furry had performed work during evenings and on weekends at employer-sponsored events and promotions.  Both a subordinate and a supervisor of Furry knew he was performing that work at times outside of normal business hours.

In these circumstances, the appellate court held that the trial court erred in completely denying to Furry relief on his overtime compensation claim, because imprecise evidence by an employee of hours worked can form a sufficient basis for damages when the employer fails to keep accurate records of the employee’s work hours.  Relying on Hernandez v. Mendoza (1988) 199 Cal.App.3d 721, 727, the Court explained that the failure of an employer to keep records of hours worked by an employee results in the application of a relaxed standard of proof for the employee to show the number of hours worked.  Once the employee has made this showing, the burden then shifts to the employer to produce evidence of the precise amount of work performed or to negate the reasonableness of the inference of the number of hours worked that could be drawn from the evidence the employee provided.

Because Furry’s work beyond normal work hours was established by his and others’ testimony, the fact of damage was established and, consequently, his estimates of hours worked were sufficient to prove the amount of damage.  The trial court erred in holding that he had failed to account for hours worked for which he was not compensated by sales commissions he received.  According to the Court of Appeal, the trial court should have used the evidence of amount of commissions paid to calculate the regular rate of pay, and therefore, the overtime rate and pay, not as a basis for denying relief.

Nisei v. California LWDA:  The Law Requiring Hourly Compensation to Piece-Rate Workers Is Sufficiently Clear to Withstand Constitutional Challenge

In Nisei Farmers League v. California Labor and Workforce Development Agency (Jan. 4, 2019) 2019 WL 99087, the California Court of Appeal denied a challenge to the constitutionality of a Labor Code provision effective January 1, 2016, which codified case law requiring employers with piece-rate workers to pay those workers separately on an hourly basis at a rate not less than minimum wage for rest and recovery periods and other nonproductive time.  The employers groups that brought the case had argued that their piece-rate compensation system took account of nonproductive time to pay sufficient compensation, and challenged the constitutionality of the statute on the grounds that it (1) was void for vagueness, and (2) retroactive and therefore a violation of due process as well as a taking of property.

The appellate court held that the plaintiffs failed to allege an adequate basis to find the statute, section 226.2 of the Labor Code, unconstitutional.  The Legislature had enacted section 226.2 to codify the case law in Gonzales v. Downtown LA Motors, LP (2013) 215 Cal.App.4th 36, and Bluford v. Safeway Inc. (2013) 216 Cal.App.4th 8644, which had “upended” the expectations of employers who had assumed that a piece-rate system that allegedly took account of and compensated for nonproductive work periods by the way the piece-rate was set complied with California’s wage and hour laws.

In Gonzales, 215 Cal.App.4th at 40-41, the Court of Appeal had held that automobile service employees were “entitled to separate hourly compensation for time spent waiting for repair work or performing non-repair tasks directed by the employer during their work shifts”.  Such compensation was required to comply with minimum wage, because the minimum wage law applies to each hour an employee works.  For similar reasons, the Court in Bluford, 216 Cal.App.4th at 872, held that employers must separately pay piece-rate employees at the rate of at least minimum wage for rest periods.  Both cases relied on the earlier case of Armenta v. Osmose, Inc. (2005) 135 Cal.App.4th 314, 317-24, in which the Court had held that, because California’s minimum wage law applies to each hour worked, an employer could not withhold payment of wages to an hourly employee for nonproductive time and average the wages paid over productive and non-productive time to assure that the average met minimum wage requirements.

In codifying Gonzales and Bluford in section 226.2 of the Labor Code, the California Legislature also, in section 226.2(b), created a safe harbor affirmative defense for employers that had previously failed to pay on an hourly basis for rest periods and nonproductive work by employees who were otherwise paid on a piece-rate basis.  The affirmative defense was only available to those employers that, (1) by December 15, 2016, made payments of actual sums not paid (or underpaid) for rest and recovery periods and other nonproductive work (or based upon an alternative payment calculation) during the period July 1, 2012 through December 31, 2015, and (2) had provided notice by July 1, 2016 to the Department of Industrial Relations of their election to make those payments.

The trial court had sustained demurrers to the employer groups’ complaint without leave to amend, and the Court of Appeal affirmed.  It agreed with the trial court that the statute was not void for vagueness.  Section 226.2 clarified the statutory requirements for piece-rate compensation by confirming, as of January 1, 2016, that employers were required to compensate piece-rate employees for rest and recovery periods and other nonproductive time separate from any piece-rate compensation.  Neither the term “other nonproductive time” nor the term “actual sums due” in the statute were unconstitutionally vague.

The statutory definition of “other nonproductive time” as “time spent under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece-rate basis,” was “reasonably clear and specific and provide[d] adequate notice of the nature of the conduct that is being described.”  Moreover, section 226.2 was enacted to codify Gonzales, which, like Bluford, relied on Armenta.  This context of case law lent clarity to the statute.  In particular, Gonzales provided “fact-based concrete illustrations of what was meant by the term ‘other nonproductive time’”.  The phrase in the definition, “not directly related” was not unconstitutionally vague: many statutes have used the phrase “directly related”.  The constitution did not require the statute’s terms to contemplate all possible circumstances in which it would be applied.

The second ground for the employers’ constitutional challenge, that the statute was retroactive, also was without merit.  The safe-harbor affirmative defense, which required payment by employers of pre-January 1, 2016 unpaid compensation, did not constitute an unconstitutionally retroactive statute, because the compensation for prior rest periods and nonproductive work, on which the affirmative defense was conditioned, was based upon the law that was in effect at the time, before the adoption of section 226.2—i.e., the case law of Gonzales, Bluford and Armenta.  When the Gonzales and Bluford decisions were final, employers were required to separately compensate piece-rate employees for nonproductive uncompensated time and for rest periods.

The Nisei Farmers League case makes clear that employers cannot expect a judicial reprieve from the requirement of separate hourly compensation of piece-rate employees for rest periods and other nonproductive time.  The workability of such a compensation system remains in question.  Tracking nonproductive time will continue to be cumbersome.  And the potential liability exposure for failing to track and pay for it properly may continue to shift employers away from any piece-rate compensation in California.  This development could adversely impact employees who, in some circumstances, can earn higher pay on a piece-rate basis than as an hourly employee.