Arbitration has always been a controversial issue in California employment law. State judges are typically more hostile towards private arbitration agreements than federal courts. This puts a burden on employers, who must fight just to enforce arbitration agreements that their employees agreed to. But even when employers offer arbitration agreements under clear terms it can take a trip to federal court just to settle the question of how far such an agreement may extend.
Can Your Business Arbitrate the Decision to Arbitrate?
Employees frequently try to get out of arbitration agreements they signed by challenging the validity or interpretation of the agreement itself. A smart employer will anticipate such a contingency by including language in the agreement requiring arbitration of any dispute over the scope of arbitration. In effect, the employee agrees to arbitrate the need to arbitrate.
It is essential to include such language, because as the U.S. Supreme Court explained in a 1986 decision, “Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.” Without such “clear and unmistakable” language that the arbitrator decides whether the parties agreed to arbitrate, you may end up wasting your money and years in court litigating this issue, which largely negates the benefits of arbitration.
Unfortunately, even when there is such clear and unmistakable language in an employment contract, litigious employees and their counsel will still attempt to mount a courtroom attack. All it takes is a sympathetic judge who is willing to overlook the law. Then an employer can find itself fighting to enforce its contractual and legal right to arbitrate. This was the situation one of the country’s best known companies found itself in recently.
Uber Accused of Violating California Labor Laws, Credit Reporting
Most California residents are familiar with Uber, the “ride-sharing” service that allows users to order a taxicab-style ride using a smartphone app. Uber offers both a commercial livery service and a low-cost alternative where individual drivers use their own cars to transport customers. Drivers register to provide Uber services by logging into the app on their phone.
No doubt as a result of its success and popularity with customers, Uber has become a target for disgruntled drivers (and plaintiffs’ attorneys) looking to make easy money by suing the company.
In November 2014, two former Uber drivers filed class actions against the company. Both plaintiffs said their access to the Uber app was terminated—in effect, they were fired as drivers—after the company learned of “negative information” on their respective credit reports. The lawsuits alleged that Uber, and a third-party company that conducted credit checks on Uber’s behalf, violated multiple federal and state laws regarding the handling of consumer credit reports.
In addition, one of the lawsuits also accused Uber of “misclassifying” its drivers as independent contractors under California labor law and violating various California labor codes. California has a special law known as the Private Attorney General Act (PAGA), which basically deputizes every employee in the state to act as the state attorney general. Under PAGA, any aggrieved employee who claims to have suffered a California labor code violation may sue the employer.
On top of that the aggrieved employee gets to sue as a representative on behalf of all other aggrieved employees who suffered the same labor code violation. And if the lawsuit results in a monetary judgment, the “private attorney general” gets to keep 25 percent as a bounty, in addition to any actual damages such as unpaid minimum and overtime wages, rest/meal period penalties, Labor Code section 226 and 203 penalties, among many others, and may recover their attorneys’ fees.
The Importance of Changing Language in Uber’s Arbitration Agreements
In both lawsuits, Uber moved to compel arbitration. The company pointed to a pair of agreements that all drivers had to accept before they could access the Uber smartphone app. Both agreements contained nearly identical arbitration clauses.
The agreements said that all “disputes” arising from the use of the Uber app would be settled by binding arbitration. Furthermore, “[s]uch disputes include without limitation disputes arising out of or relating to interpretation or application of this Arbitration Provision, including the enforceability, revocability or validity of the Arbitration Provision or any portion of the Arbitration Provision.”
Both agreements contained waivers of class actions and PAGA claims in arbitration. This means the employees agreed to arbitrate their claims as individuals only and not as a representative of a class action or PAGA action.
Now there was one key difference between the two arbitration agreements. The first agreement, adopted by Uber in 2013, had a “carve out” as to who would decide whether the class action and PAGA waivers were valid. The 2013, but not the 2014, agreement said the validity of the class action or PAGA waivers would be determined by a judge only, not an arbitrator.
Ninth Circuit Holds Validity of PAGA Waivers May Be Arbitrated
Although the arbitration agreements clearly said that only the arbitrator could determine whether the parties agreed to arbitrate, including whether they agreed to waive class actions and PAGA representative actions, a federal district court in San Francisco took that decision away from the arbitrator. In doing so it decided that the agreements were “unconscionable” and void under California law. Understandably, Uber disagreed and appealed the judge’s decision.
In a September 7 decision, a three-judge panel of the U.S. Ninth Circuit Court of Appeals largely sided with Uber and reversed the San Francisco district court’s decision. The Ninth Circuit agreed with Uber that lower court “erred in assuming the authority to decide whether the parties’ arbitration agreements were enforceable.” Only the arbitrator could decide that based on the “clear and unmistakable” terms of the arbitration agreement itself. More critically the Ninth Circuit ruled this sole authority of the arbitrator extended to whether the PAGA waivers were enforceable.
Why This Matters for Employers.
Prior to the Uber decision, California and federal courts had ruled PAGA waivers in arbitration agreements were unlawful. Thus if a California court (state or federal) could decide whether a PAGA waiver in an arbitration agreement is valid, guess how it would rule? That’s right; the court would invalidate the PAGA waiver, and possibly the entire arbitration agreement as well because of it. This is what the San Francisco federal court did.
But if only the arbitrator can rule on the validity of the PAGA waiver, then it’s up to the arbitrator to decide the issue. The Ninth Circuit rule means a court cannot decide the issue. Whereas an employer would likely be dead in the water in court, it might prevail before the private arbitrator on the validity of PAGA waivers in arbitration agreements.
Now the Ninth Circuit still ruled against Uber under the 2013 arbitration agreement and said the PAGA claims could be heard by a court. Reason: the 2013 agreement contained language “carving out” challenges to the arbitration agreement based on the PAGA waiver. The 2013 agreement specifically stated only a court could rule on any challenge to the PAGA waiver.
This is exactly what the plaintiff did in the Uber case. The lower court had power to rule on the PAGA waiver, declared it invalid, and the Ninth circuit agreed.
Therefore another lesson learned here of course is to make the arbitrator’s authority as broad as possible. Certainly allow the arbitrator to rule on whether PAGA waivers are valid and do not carve them out.
Third-Party May Not “Piggy Back” on Arbitration Agreement
One final issue the Ninth Circuit addressed was whether the arbitration agreements applied to the third-party company Uber hired to perform credit checks on the plaintiffs.
This company, Hirease, LLC, did not have an arbitration agreement with the plaintiffs who sued it (along with Uber). Even though Hirease had no binding arbitration agreement, it attempted to “piggy back” onto Uber’s arbitration agreements with the plaintiffs.
The Ninth Circuit noted there may be grounds for a third party like Hirease to use another’s arbitration agreement even if they were not a party to it. That might be the case if Hirease was an “agent” of Uber. Or if Hirease had an “identity of interest” with Uber or if the claims against Hirease were founded in and intertwined with the claims against Uber, that might fly.
But the Ninth Circuit said Hirease failed to satisfy any of the above. The plaintiff claimed Hirease violated Massachusetts law regarding the handling of credit reports. The court ruled this claim was “independent of any actions Uber may or may not have taken” relating to the plaintiff’s California labor code claims and there was no evidence Hirease was Uber’s “agent.”
The Ninth Circuit’s Uber decision may seem complicated (and it is), but we can boil it down to a few basic points:
- A California employer can enforce arbitration agreements signed by employees.
- If your business wishes to avoid being sued in court (before a jury) you might consider using binding arbitration agreements with its employees and independent contractors.
- Make clear in your agreement to arbitrate only the arbitrator can rule on the interpretation and validity of the agreement itself.
- Preserve to the maximum extent the arbitrator’s power and use broad language. Don’t “carve out” any issue regarding the arbitrator’s scope of authority, including whether PAGA or class action waivers are valid.
- Courts have ruled class action waivers in arbitration agreements are valid, but not PAGA waivers. At Vision Law® we disagree with this distinction and believe under current United States Supreme Court rulings, PAGA waivers are no different than class action waivers and should be enforced. At the current time, employers who want a shot at having a PAGA waiver enforced should consult experienced labor and employment counsel to craft an arbitration agreement to maximize the odds of that result.
- A third party enforcing another’s arbitration agreement is tricky. There are ways, however, to increase the odds of your arbitration agreement applying to third parties, if desired. Consult an experienced labor and employment lawyer to discuss your options.
And if you are an employer who is facing a labor lawsuit or related claim, you need to work with an experienced California employment lawyer who will fight for your rights. Contact the offices of Vision Law® today if you require immediate assistance.