California Supreme Court

OTO, LLC v. KHO

Here, our Supreme Court invalidated an arbitration agreement with what it termed excessive procedural unconscionability. Of particular importance was the fact that the employee was pursuing a wage claim, which has special administrative options under California law. If the arbitration agreement causes the employee to waive these options, it must provide an alternatively accessible and affordable procedure in exchange.

PLAINTIFF KHO WAS PRESENTED WITH AN ARBITRATION AGREEMENT

Plaintiff Ken Kho worked as a service technician for One Toyota of Ontario, licensed as OTO LLC. In 2012, Kho was presented with an arbitration agreement.

The circumstances of the arbitration agreement figured heavily into the court’s analysis. Plaintiff Kho, whose first language is Chinese, was given the agreement only in English. He was not given a copy after he signed it. The agreement was given to him in a stack of other employment-related papers. A document runner provided it to him, and waited by for him to sign it.

The agreement itself was prolix and impenetrable. Although the parties disagreed whether the font was 7 or 8.5 points, the Court stated that regardless it was “quite small.” It made numerous references to statutory provisions without providing the language of those statutes.

THE AGREEMENT WAS PROCEDURALLY UNCONSCIONABLE

Our Supreme Court re-affirmed that unconscionability analysis still applies to arbitration agreements, even after the US Supreme Court’s decision in AT&T Mobility LLC v. Concepcion.

All of the factors discussed above, other than the language issue which was not sufficiently developed in the courts below, were considered in the court’s analysis. Finding that the agreement was “extraordinarily high” in its level of procedural unconscionability, the court followed established precedent that only a low level of substantive unconscionability need be present for the agreement to be unenforceable.

THE AGREEMENT WAS SUBSTANTIVELY UNCONSCIONABLE

The OTO court did find substantive unconscionability, and a significant part of its analysis relied on the fact that Kho was pursuing a wage claim.

The Supreme Court discussed the vacation of its decision in Sonic-Calabasas A, Inc,. v. Moreno by Concepcion in 2012. The following year, it decided Sonic II.

In Sonic I, our Supreme Court ruled that an arbitration agreement that required the waiver of administrative procedures, like the Berman Hearing that California law provides for wage claims, was sufficiently substantively unconscionable to invalidate an arbitration agreement. Concepcion vacated that decision, and upon remand, in Sonic II, the court ruled that waiver of a Berman Hearing by an arbitration was not per se substantively unconscionable.

Nonetheless, in exchange for such a waiver, Sonic II ruled that an employer must provide an “accessible and affordable” procedure for pursuing wage claims. Thus, wage and hour plaintiffs have access to an important analysis when deciding on the enforceability of arbitration agreements: there must be a sufficient exchange for the waiver of the Berman Hearing, and the OTO court re-affirmed that.

Here, the exchange was not sufficient. The arbitration agreement here instituted a litigation-like process that was not as procedurally streamlined as a Berman Hearing. It allowed demurrers, summary judgment motions, applied the rules of Civil Procedure and Evidence, and generally was so impenetrable to a layperson that any wage claimant would need a lawyer. Thus, the process was not sufficiently “accessible and affordable” and did not represent an adequate exchange for the waiver of the Berman Hearing.

The OTO court therefore ruled the arbitration agreement unenforceable on the grounds of unconscionability.

THE COURT REINSTATED THE LABOR COMMISSIONER FINDING

Plaintiff Koh had originally filed his claim with the Labor Commissioner. The day before the Berman Hearing, Defendant OTO faxed a letter to the hearing officer, requesting that the hearing be taken off calendar pending a petition to compel arbitration. The hearing officer refused, and held the Berman Hearing anyway, even though OTO did not appear. Koh was allowed a substantial award of $158,546.

The trial court vacated the award, and the appellate court affirmed. Both courts found that the hearing officer should not have had the hearing in OTO’s absence.

The California Supreme Court reversed, and reinstated the award. It held that Defendant OTO had not properly requested a stay when it filed the arbitration petition, and made a strategic decision not to appear at the Berman Hearing. It would not be relieved of its strategic error, and the award would be reinstated pending subsequent appeal.

CONCLUSION

This is an important and terrific case for wage-and-hour practitioners, as well as employment lawyers generally. Here, our Supreme Court explicitly affirmed that unconscionability analysis applies to arbitration agreements. It went on to find that special issues adhere to wage claims, meaning that arbitration agreements must provide for an accessible and affordable alternative to the Berman Hearing.

CELA also extends its thanks to Miles Locker of the Division of Labor Standards Enforcement of the Department of Industrial Relations for his work on this matter.

Cal. Supreme Court, filed Aug. 29, 2019. Opinion by Justice Corrigan.

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As the legislative session comes to an end, we can once again report back on another year of tremendous success in passing bold, progressive worker protections for California workers. Capitalizing on our momentum from earlier in the year, CELA’s robust legislative agenda eventually received majority support from both houses of the Legislature and now heads to the Governor’s desk to await his signature.

Our success would not have been possible without the help of key allies, including Equal Rights Advocates, Legal Aid at Work, Center for Workers’ Rights, California Legal Assistance Foundation, the Coalition for Humane Immigrant Rights, SEIU, Consumer Attorneys of California, and the California Labor Federation. Together, we have fought to deter gamesmanship in the arbitration process (SB 707); ban punitive “no re-hire” clauses in settlement agreements (AB 749); extend the time period workers can sue for discrimination and harassment (AB 9); provide remedies for workers who aren’t paid on time (AB 673); allow workers to recover their attorney’s fees in whistleblower actions and give them more time to file an administrative claim (AB 403); and, finally, strengthen protections for victims of domestic violence and sexual assault (AB 1478).

Despite the Democratic supermajorities in both houses, the end of this year’s session contained its fair share of drama, due mostly to the titanic battle between labor and businesses on AB 5, the bill codifying the ABC test for worker misclassification. Even though we continued to face fierce resistance from the business lobby, we managed to shepherd all but one of our sponsored bills through the second house of the Legislature. Unfortunately, SB 171, our pay data reporting bill that would have enshrined the Obama-era reporting requirements was held in the Assembly Appropriations committee.

Now that our bills have passed the last hurdle in the Legislature, they only need the Governor’s signature before becoming law. Thank you to the CELA members who have joined us in our efforts thus far, sharing crucial worker testimonials, writing letters, sharing posts about our bills on social media, calling legislators, rallying with our allies, and testifying, either themselves or with clients, at the Capitol on these very important measures.

CELA-Sponsored and Priority Bills

Strategic Non-Payment of Arbitration Fees: SB 707 (Wieckowski, Hertzberg) provides procedural remedies for consumers and employees when companies strategically withhold payment of arbitration fees in order to stall or impede the arbitration proceedings. The bill allows arbitrators and courts to impose appropriate sanctions on the defaulting party, up to and including terminating sanctions. This bill also address the issue of diversity in the arbitration industry by requiring arbitration companies to report the same kind of demographic information about their arbitrators as the Judicial Council is required to report about state court justices and judges.  Headed to the Governor’s Desk!

Harassment and Discrimination Statute of Limitations: AB 9 (Reyes, Friedman, and Waldron) extends the filing period with the Department of Fair Employment and Housing (DFEH) for complaints of unlawful employment practices from one to three years. This is the same bill that was vetoed by Governor Brown last year. Headed to the Governor’s Desk!

Protections for victims of Domestic Violence and Sexual Assault: AB 1478 (Carrillo) Provides a private right of action and remedies for an employee who is discriminated or retaliated against by their employer due to their status as a victim of domestic violence, sexual assault, and stalking. This bill also entitles a prevailing plaintiff to reasonable attorney’s fees. Headed to the Governor’s Desk!

Retaliation and Whistleblower Protections: AB 403 (Kalra) extends the statute of limitations for retaliation claims under Labor Code Section 98.7 from 6 months to 2 years and allows prevailing plaintiffs to recover their attorney’s fees under Section 1102.5. This is the same bill that was held in the Assembly last year. Headed to the Governor’s Desk!

Late Paychecks: AB 673 (Carrillo) allows workers to recover penalties through the Labor Commissioner for late paychecks. Current law sets out penalties for late paychecks that can only be recovered by the Labor Commissioner on behalf of the state. AB 673 allows the worker to recover this penalty through the Labor Commissioner while also preserving the ability to enforce the penalty through PAGA. Headed to the Governor’s Desk!

“No Rehire” Clauses: AB 749 (Stone) prohibits blanket “No Rehire” provisions in settlement agreements where a worker has filed a claim against an employer. This bill would not prohibit an agreement to end a current employment relationship. Headed to the Governor’s Desk!

Pay Data Transparency: SB 171 (Jackson) would have adopted the federal pay data reporting requirements previously issued by the Obama administration that has since been rescinded and suspended by the Trump administration. SB 171 would have required employers with 100 employees or more to submit a pay data report annually to the DFEH, outlining the compensation and hours worked of its employees by gender, race, ethnicity, and job category. Held in the Assembly Appropriations Committee.

Codification of Dynamex: AB 5 (Gonzalez Fletcher) codifies the ABC test, as set out in Dynamex, as the standard for determining whether a worker is an employee or an independent contractor under all provisions of the Labor Code and the Unemployment Insurance Code. This bill has been the major battleground between business and labor that will determine the fate of millions of workers, including those in the “gig economy.” This bill has been amended to exempt specific professions from the ABC test (and restoring the Borello test for these professions), including professionals in the financial services industry (insurance agents, accountants, securities brokers, investment advisors), direct sales salespersons, real estate licensees, workers providing hairstyling or barbering services, and those performing work under a contract for professional services that require an active license, like law, dentistry, architecture, engineering, or accounting. There are also several exemptions that sunset in due time, such as commercial fisherman and newspaper distributors. Exemptions aside, this bill retains its core function of clarifying the proper test for misclassification and presuming employment status for workers who are most vulnerable to abuse. Headed to the Governor’s Desk!

Forced Arbitration: AB 51 (Gonzalez Fletcher) prohibits employees from being forced to waive their rights under the FEHA or the Labor Code as a condition of employment. This bill is similar to a bill that was vetoed last year by Governor Brown. Headed to the Governor’s Desk!

For a full list of bills we are tracking, click here.

As we cross the finish line, we will continue to need your help in the coming weeks. Please contact us (mariko@cela.org and ken@cela.org) with your first-hand experiences and your clients’ stories about why these bills are necessary. Your stories and perspectives are essential for making these bills become law.

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