Arbitration Or Labor Commissioner Berman Hearing?

Can an employer and employee agree to litigate wage claims before an arbitrator rather than the Labor Commissioner?

Two days ago, the California Supreme Court issued its Sonic-Calabasas II decision that was supposed to answer that question.  But the case creates more confusion in an already uncertain and hotly litigated area of law.   

Why Is Sonic-Calabasas A, Inc. v. Moreno So Important For Small/Medium Employers? 

If an employer can defend an employee wage claim before a neutral decision maker in arbitration versus the Labor Commissioner, it’s likely to choose arbitration.  Most employers would say the Labor Commissioner process “favors” employees over them.

Others would say the Labor Commissioner process and hearing, called a “Berman” hearing, “protects” rather than “favors” employees.  They would say those “protections” cannot be waived through an arbitration agreement.

Arbitration or Berman Hearing, Who Cares?

Both California and federal law strongly favor arbitration.  Parties may agree to arbitrate their disputes as a matter of contract.  When parties agree to arbitration, they are supposed to be able to make the rules.  Arbitration was created as a faster, streamlined, efficient and less expensive alternative to the judicial or administrative hearing process.  All arbitration does is change who decides a dispute.  When parties agree to arbitration they agree to have a neutral arbitrator decide the dispute, not a jury, judge or administrative law judge.

There are many employee protections (or advantages depending on your viewpoint) built into the Berman hearing and appeal process.

A Berman hearing is an administrative hearing before an administrative law judge who is a deputy labor commissioner.  There is no pre-hearing discovery and the rules of evidence do not apply.  Either party may appeal the decision within 10 days.

The appeal is before a superior court judge who is supposed to make an independent determination; however, the trial judge knows the Labor Commissioner’s ruling because it must be filed with the appeal paperwork.  This makes it less likely for the trial judge to have a truly fresh perspective.

An employer who appeals must post a bond or a cash deposit in the amount of the Labor Commissioner’s award.  In reality it’s always a cash bond.  If the award is for $20k, a cash bond must be posted for $20k.  No bond, no appeal.

The Labor Commissioner appoints one of its attorneys to represent the employee.  But employee doesn’t pay for the attorney; your tax dollars do.    The “unsuccessful” party on appeal must pay the other-side’s attorney’s fees.  If the employee is awarded at least 1¢ employee is “successful” and employer must pay the employee’s attorneys’ fees, fees they did not actually pay.  Employer might appeal and reduce a Labor Commissioner’s award from $20,000 to $500 but still be “unsuccessful” as defined by the Labor Code and owe $3,500 in attorney’s fees.

The California Supreme Court Sonic Decisions

In Sonic I, the Court said an arbitration agreement that forces an employee to arbitrate over a Berman hearing is automatically “unconscionable” and unenforceable.  Such an agreement “shocks the conscience” or “unreasonably favors” the employer, i.e. is “unconscionable.”

Then the United States Supreme Court issued its AT&T Mobility LLC v. Concepcion opinion and directed the California Supreme Court to reconsider its decision in light of Concepcion.  Concepcion ruled that if a state rule (whether statute or judge made) gets in the way of enforcing arbitration agreements according to their terms, the state rule must bow to federal law.  The state law is “preempted” by federal law under the Federal Arbitration Act.  Other recent US Supreme Court decisions send the same undeniable message.

In Sonic II, the California Supreme Court considered Concepcion as directed and changed its answer, sort of.  Recognizing Concepcion’s mandate, the Sonic II Court acknowledged a waiver of employee claims before the Labor Commissioner is not automatically “unconscionable” . . . but might be.  And – in a significant departure from prior rulings – the court established new “rules” “intended to guide” lawyers and judges in determining when an arbitration agreement is “unconscionable.”

New (Or Additional) Rules For Analyzing Employee Arbitration Agreements

The new – or perhaps additional, it’s not clear – rule instructs lawyers and judges to evaluate the details of the “specific arbitral scheme” against the procedure to be replaced, in this case the Berman hearing procedure, to decide whether an arbitration agreement is “unconscionable,” and therefore enforceable or not.

The Court’s rule and underlying rationale appear to say if the arbitration procedure is more cumbersome than the Berman hearing procedure then a court may rule the arbitration agreement is “unconscionable.”  That’s because arbitration is supposed to be more streamlined, efficient, and less expensive.  If it’s not compared to the procedure to be replaced then arbitration is “unconscionable.”  But this new rule and the pre-arbitration litigation that will result will simply have the opposite effect – more costs, less efficiency, and more delay.

The Sonic II Court cautions, “We emphasize that there is no single formula for designing an arbitration process . . .” and that, “The unconscionability inquiry is not a license for courts to impose their renditions of an ideal arbitral scheme.”  Yet the rule by definition allows just that.  One is left shaking their head in mass confusion.

Does Sonic II Square With Concepcion?

The majority in the Sonic II case appears to be at odds with the US Supreme Court’s directive and decisions.  By definition, if one must look to state court rules, e.g. Berman hearing procedures in the Labor Code, to determine whether a “specific arbitral scheme” is valid, then those state rules stand in the way of the arbitration agreement and must stand down.  The state rules, no matter how different or “more protective,” cannot be the basis for invalidating the arbitration agreement.  But that’s what the Sonic II rule allows.

What Now?

For now, there is even more uncertainty in arbitration law post Sonic II.

The California Supreme Court seems to be in conflict with the United States Supreme Court directives.

The new Sonic II rule creates expense and delay frustrating the goals of arbitration.  Litigators will have to argue and judges will have to decide what the Sonic II rule means and how it’s supposed to work.

The continuing validity of Armendariz, which laid down no such rule and which actually conflicts with Sonic II with respect to Armendariz’s arbitration procedural requirement of “sufficient discovery,” is in question.

Sonic II and other California arbitration cases that show an ongoing “hostility to arbitration” will be subject to further challenge and review before the United States Supreme Court.

And until the dust settles, California employers are caught in the middle of it all.