In an opinion welcomed by many multi-state employers with employees and operations in California, the California Court of Appeal yesterday ruled that a former employee's wage claims for an unpaid profit-sharing bonus and severance pay were subject to mandatory and binding arbitration pursuant to the terms of an employer-mandated arbitration agreement. The Court of Appeal held that the employee's right to a judicial forum for his unpaid wage claims under California Labor Code Section 229 is preempted by Section 2 of the Federal Arbitration Act (9 U.S.C. Section 1, et seq.)("FAA"), which mandates the enforcement of arbitration clauses in contracts involving interstate commerce. Giuliano v. Inland Empire Personnel, Inc., No. B190771, California Court of Appeal (pub. order April 19, 2007).

Factual Background

In 2003, James Giuliano moved from Indiana to California to become executive vice president and chief financial officer of Inland Empire Personnel, Inc. ("Empire"). In connection with his new job, Giuliano signed an employment contract containing an arbitration clause which provided for final and binding arbitration of all disputes relating to his employment. Pursuant to the terms of his employment contract, Giuliano also agreed to be bound by the terms of the applicable employee handbook, which contained an arbitration clause which provided, in part, that any dispute regarding his employment or its termination, "shall be resolved by final and binding arbitration... Such arbitration shall be the sole remedy for you as to any such dispute, and shall be in lieu of any rights you or we may otherwise have had to have a court or jury decide the disputed issues." In addition, Giuliano signed a bonus plan upon accepting the offer of employment containing a similar arbitration clause which specifically covered any claims involving compensation.

After Giuliano left Empire in 2005, he sued his former employer for statutory wages under the California Labor Code, claiming that a $5 to $8 million dollar profit-sharing bonus and a $500,000 severance payment were owed to him under his employment agreement. In his complaint, Giuliano asserted that the arbitration clauses were "invalid and unenforceable" under California Labor Code Section 229, which provides a judicial forum for statutory wage claims despite the existence of any private agreement to arbitrate such disputes.

Empire moved to compel arbitration, contending that Labor Code Section 229 was preempted by Section 2 of the FAA. The trial judge denied Empire's motion to compel arbitration on the grounds that the FAA "did not preempt Guiliano's statutory wage claim because his employment contract did not involve interstate commerce," and that the arbitration agreement was "unconscionable and invalid" under Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000). In Armendariz, the California Supreme Court held that employer-mandated arbitration agreements that cover claims for discrimination, harassment and retaliation under the California Fair Employment and Housing Act ("FEHA") are enforceable only if such agreements provide for neutral arbitrators, more than minimal discovery, a written arbitration award, and the same types of relief that would otherwise be available to the employee in court, and that the costs and fees of arbitration are covered by the employer.

Legal Analysis

The California Court of Appeal reversed the trial judge's order denying the motion to compel arbitration. The Court of Appeal ruled that the arbitration agreement was in fact governed by the FAA because it indeed constituted a contract "evidencing a transaction involving commerce." Notwithstanding Giuliano's contention to the contrary, the court found the nature of Guiliano's employment to have an "interstate nature" because he had "attended meetings, site visits and grand opening ribbon cuttings" in other states and had negotiated "multi-million dollar loan agreements" with a bank that was headquartered in another state. The fact that the arbitration agreement itself did not specifically mention interstate commerce was irrelevant, the court continued, because "...a contract involves interstate commerce under Section 2 of the FAA simply if the transaction, in fact, involves interstate commerce, regardless of the parties' subjective intent when they signed the agreement." The California Court of Appeal also held that the arbitration agreements in this case were not subject to the Armendariz requirements because Armendariz applies only to unwaivable claims that arise under FEHA or are tied to a fundamental public policy. Guiliano argued that his statutory wage claim was, in fact, an unwaivable public policy claim because "[t]he right to be paid wages earned is part of the public policy of the State of California and is not waivable." The Court of Appeal, however, disagreed with Giuliano, finding his contract claims for the alleged $5 to $8 million dollar bonus and $500,000 severance payment were distinguishable from cases involving unwaivable statutory claims for mandated overtime and minimum wage payments.

Practical Impact

For employers with operations and employees in California, as well as outside of California, this ruling confirms that employer-mandated arbitration agreements covering claims for unpaid bonuses or severance pay brought by an employee who is involved in interstate commerce are preempted by the FAA and are not precluded by California Labor Code Section 229.

The impact of the Giuliano decision for employers is that claims for unpaid bonuses and severance, which are not covered by the Armendariz requirements, as opposed to statutory claims for mandated overtime and minimum wage payments, may be subject to mandatory and binding arbitration where the employee is engaged in activity on behalf of his or her employer that affects interstate commerce. Accordingly, employers that utilize arbitration agreements should review their agreements and make certain that such provisions cover disputes regarding compensation including claims for unpaid bonuses and severance. In addition, for those employers that do not presently utilize arbitration agreements, they may wish to consider requiring their employees to execute a binding arbitration agreement in light of this decision.