When it comes to labor and employment law, California may as well be its own country. The intricacies of the Golden State’s worker-protection laws–from strictly enforced lunch and break periods to mandatory harassment training for all managers–are well documented. On Aug. 30 California’s Supreme Court added yet another wrinkle to the numerous dangers employers with operations in California face.

In Gentry v. Superior Court (Circuit City), the Supreme Court found that even if employees sign an otherwise valid, enforceable arbitration clause that bars them from bringing class claims, they might still be able to pursue wage-and-hour claims on a class basis if the court determines class arbitration is a better way to resolve the dispute.

“In some cases, the prohibition on class-wide relief would undermine the vindication of employees’ unwaivable statutory rights,” wrote Justice Carlos R. Moreno for a sharply divided panel. “[C]lass arbitration waivers should not be enforced if a trial court determines that class arbitration would be a significantly more effective way of vindicating the rights of affected employees.”

Many employers worry the decision means arbitration agreements will no longer be a practicable way to manage the risk of employment disputes in the state. If the plaintiff’s attorney’s reaction to the decision is any indication, they may be exactly right.

“This decision could be the death blow to mandatory arbitration clauses,” says Michael Rubin, the partner at Altshuler Berzon who represented Robert Gentry. “Employers will no longer be able to force workers into arbitration on their terms.”

Judicial Preference
Gentry was a customer service representative in a California Circuit City store who sued in 2002 on behalf of a class of employees for violations of the state’s wage-and-hour laws. He alleged the electronics retailer deliberately misclassified customer service representatives as managerial employees exempt from overtime pay.

Circuit City successfully moved the case to arbitration after the trial court and court of appeals both found Gentry had voluntarily accepted the company’s arbitration clause, which sent all employment disputes to arbitration and prohibited class claims. On appeal the California Supreme Court ruled that even if Gentry accepted the agreement, the court could override the arbitration clause to make it easier for workers to enforce their rights under overtime laws. The court remanded the case to the trial court to determine whether it would be more efficient for the employees to pursue their claims in class arbitration.

“The decision makes it very difficult, if not impossible, to structure an arbitration agreement that will be upheld in a wage-and-hour case in California state court,” says Jamerson Allen, a partner at Jackson Lewis in San Francisco.

The decision expanded the court’s controversial 2005 holding in Discover Bank v. Superior Court, in which the California Supreme Court found that waivers of class actions in consumer contracts were unenforceable if they made it too burdensome for customers to redress wrongful conduct by a company. In Gentry the court reasoned that unless class-wide relief was available, many employees with legitimate claims would not bring suit because the actual damages of each employee would be modest, and individual workers may be unaware of their rights or fearful of retaliation.

Judge Marvin Baxter strongly criticized the majority ruling in his dissent, saying it undermined the Federal Arbitration Act, which requires courts to enforce arbitration contracts according to their terms in the absence of a clear violation of law or public policy.

“In effect, the majority holds that, despite [a valid arbitration] agreement, the trial court may certify a class in an overtime wage case in any circumstance where it could otherwise do so,” he wrote.

Arbitration Dangers
In the next stage of the case Circuit City may yet be able to enforce its arbitration clause if the trial court finds it doesn’t substantially burden Gentry’s rights under the wage-and-hour laws, and according to Circuit City spokeswoman Jackie Foreman, the company plans to ask the trial court to enforce it.

California courts now have free rein to alter or override employee arbitration agreements in wage-and-hour cases. This leaves employers uncertain about whether, and to what extent, the courts will enforce their agreements.

For instance, a court may agree that an arbitration clause is acceptable but that employees should be allowed to arbitrate as a class–even if the agreement expressly bars class claims.

Rubin predicts most employers would rather defend a large class action in court than before an arbitrator, and thus many will rethink whether it makes sense to subject employment claims to an arbitration agreement at all.

Allen agrees that unless they secure jurisdiction in federal court, employers in California will be unable to subject wage claims to individual arbitration.

“The California Supreme Court indicated it is prepared to not enforce arbitration agreements in wage-and-hour cases,” he says. “But arbitration is still a useful tool to resolve other types of employment claims asserted by individual employees.”