Review your arbitration programs now, and consider making changes by year-end.

(Part 1 of a two-part series.)

In August, the California Supreme Court held that an employer's litigation-like arbitration process was substantively unconscionable when applied to certain wage claims.

In California, certain wage claims are subject to an informal “Berman hearing” process before the state Labor Commissioner. The California Supreme Court found in OTO v. Kho that the employer's arbitration procedure, when applied to "Berman claims," "is so inaccessible and unaffordable . . . that it does not offer an effective means for resolving wage disputes” and is therefore substantively unconscionable.

In effect, OTO established a double standard for the procedural rules governing different types of employment disputes: One for wage disputes that would be subject to a Berman hearing, and another for wrongful termination, discrimination, and harassment claims.

Employers with arbitration programs that apply in California need to act now. Many arbitration programs contains broad class relief provisions that facially apply to representative actions under California’s Labor Code Private Attorneys General Act. That language is unenforceable under a 2014 decision by the state Supreme Court.

Many employers have chosen to leave such language alone in the hope that the 2014 court decision is someday found to be preempted by the Federal Arbitration Act. They've also relied on the courts’ presumed willingness to sever the offending language and enforce the remainder of the agreement.

But after OTO, these programs potentially have not one, but two, problems: (1) The representative relief language, and (2) the absence of language providing for an appropriately-informal process for Berman claims.

When faced with an agreement with one or more unconscionable terms, California courts have two options: They can invalidate the entire agreement if they consider it to be "permeated by . . . unconscionability," or they can strike the offending clause but enforce the rest of the agreement. Two or more unconscionable terms permit the court to conclude that unconscionability “permeates” the agreement, which could result in invalidation of the entire agreement.

In light of OTO, employers should consider doing the following with their arbitration programs: (1) review and revise any language relating to the waiver of "representative relief," (2) modify the agreement to deal with Berman claims (more on this below); and (3) if needed, add express language providing that any invalid terms in the program or agreement should be severed and the rest of the agreement left in force.

As for Berman claims, employers have four options:

  • Exempt "Berman claims" from the arbitration process. This can be risky. First, claims subject to a Berman hearing -- claims related to wages or working conditions -- are almost always the subjects of class, collective, or representative litigation. Language excluding such claims could neutralize a class relief waiver. Employers who choose this option should adopt language excluding such claims while they are in the Berman hearing process, but then preserving the ability to compel arbitration when the employer seeks de novo review.
  • Establish a formal two-track process for Berman claims and other claims. (Or demand that your provider do it.)
  • Adopt a less-formal arbitration process. As a practical matter, the rules of the major institutional providers already do this. But the risk is that the enforcement of your arbitration agreement turns on a line-drawing exercise, the results of which may vary from judge to judge.
  • Expressly require the arbitrator to tailor the process depending on the type of claim asserted. Such a provision could even expressly require the arbitrator to consider OTO. This approach combines elements of the other three, and may represent the best compromise among a series of alternatives, none of which is an ideal solution.