Calif. Supreme Court qualifies enforcement of class action waivers

The California Supreme Court has ruled that class action waivers in arbitration agreements are unenforceable if a court determines “that a class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.”

In Gentry v. Superior Court, Robert Gentry filed a class action lawsuit in superior court against Circuit City Stores Inc., seeking damages for violating the labor code and business and professions code. As a salaried customer service manager, he said he and others in similar positions had been “illegally misclassified” as “exempt managerial/executive employees” not entitled to overtime pay, when in fact, they were “‘non-exempt’ non-managerial employees” entitled to be compensated for hours worked in excess of eight hours per day and 40 hours per week.

Circuit City attempted to have the matter settled by mandatory, binding arbitration, based on an arbitration agreement Gentry had signed during his employment, and to prevent him from pursuing a class action on behalf of others.

Yet the high court said, “class actions play an important function in enforcing overtime laws by permitting employees who are subject to the same unlawful payment practices a relatively inexpensive way to resolve their disputes.” The court noted that some employees “may not be in a position to pursue individual litigation against a former employer,” in which case class actions may be useful.

“We cannot say categorically that all class arbitration waivers in overtime cases are unenforceable,” the court wrote. “Nonetheless, when it is alleged that an employer has systematically denied proper overtime pay to a class of employees and a class action is requested notwithstanding an arbitration agreement that contains a class arbitration waiver, the trial court must consider: the modest size of the potential individual recovery, the potential for retaliation against members of the class, the fact that absent members of the class may be ill informed about their rights, and other real world obstacles to the vindication of class members’ right to overtime pay through individual arbitration.

“If it concludes, based on these factors, that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver to ensure that these employees can ‘vindicate [their] unwaivable rights in an arbitration forum,'” the court concluded.