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. 

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