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California Employers Must Promptly Seek Arbitration of Labor Commissioner Claims in Court

When California employers have arbitration agreements with employees, those agreements may encompass a dispute concerning wages. If an employee sues for wages, the employer can petition the court to compel arbitration based on the agreement. 

But what should the employer do if the employee files a claim with the California Labor Commissioner instead? To seek arbitration, as the California Court of Appeal’s recent decision in Fleming Distribution Co. v. Younan makes clear, an employer must petition a court to compel arbitration – and do so promptly. Delay or other actions may result in waiver of the right to arbitration.

Two Established Avenues to Pursue Wages

California employees have two options to seek wages, business expenses, and certain penalties available under the Labor Code, such as waiting time penalties under Labor Code section 203. First, an employee may file a lawsuit in court. Second, or alternatively, the employee may file a claim with the Labor Commissioner’s office, formally known as the Division of Labor Standards Enforcement (DLSE). The Labor Code provides for an administrative hearing process as an alternative to suing in court. Under that process, the DLSE reviews the claim and determines whether to take jurisdiction. It may conduct an informal conference and explore a possible settlement. If the agency allows the case to proceed, the complaint goes to a formal hearing before a hearing officer, where the employee and employee may present evidence and testimony. After, the hearing officer issues a decision, which may or may not include an award to the employee.

Either side may appeal the decision into court for a trial de novo. If neither side does so, the order becomes final. It may be recorded in court as a judgment.

What If An Employee Has an Arbitration Agreement?

A California employer may seek arbitration of a wage claim if the arbitration agreement covers such a claim and the Federal Arbitration Act (FAA) applies to the agreement. On its face, Labor Code section 229 allows an employee to pursue a wage claim in court or before the Labor Commissioner regardless of an arbitration agreement. However, the United States Supreme Court held in 1987 that the FAA preempts Labor Code section 229 and allows arbitration if the FAA applies. For the FAA to govern, an employer’s business must involve or affect interstate commerce. It also helps if the agreement expressly states that the FAA applies if the parties so intend.

The California Supreme Court also has held that a Labor Commissioner wage claim can be subject to arbitration if the FAA applies. Under direction from the United States Supreme Court based on that court’s FAA holdings, the California Supreme Court rejected its previous holding that requiring waiver of the Labor Commissioner process in favor of arbitration was unconscionable in all cases. Sonic-Calabasas A, Inc. v. Moreno, 57 Cal.4th 1109 (2013). Instead, it held that certain agreements still may be unconscionable even though the FAA applies, but no categorical bar prohibits arbitration instead of the Labor Commissioner’s process. To pass muster, agreements to arbitrate wage claims still must provide for an accessible, affordable, and effective process to pursue such claims.

So, what if an employee files a wage claim with the Labor Commissioner, but has an arbitration agreement covering those issues and the employer wishes to move the claim to arbitration? The first step usually would be to remind the employee of the arbitration agreement (or inform the employee’s attorney, if represented) and demand that the employee voluntarily dismiss the Labor Commissioner's claim and submit the dispute to arbitration. Otherwise, or if that step is unsuccessful, the employer immediately should petition the local court with jurisdiction for an order compelling arbitration.

An employer would be wise to inform the Labor Commissioner of any agreement and the intent to seek arbitration. Yet, that notice will not end the matter as far as the agency is concerned. Traditionally, the DLSE has maintained that it can continue to process and proceed with a claim, unless and until a court order compels arbitration and that the Labor Commissioner stay or cease its jurisdiction. The agency will not determine whether an arbitration agreement applies to a dispute or is legally valid to compel arbitration.

The Fleming Distribution Decision

The California Court of Appeal’s decision in Fleming Distribution demonstrates the need to petition to compel arbitration in court – and to do so promptly. If not, an employer can be held to have waived its right to arbitration, as happened in that case.

In Fleming Distribution, a former employee filed a claim with the Labor Commissioner. Two months later, the employer sent a letter to the DLSE, attaching an arbitration agreement and asserting that the claim should be dismissed. The employer stated that, if the agency “is unwilling” to dismiss the case, it “is prepared” to seek a court order compelling arbitration. The Labor Commissioner did not dismiss, but the employer also did not petition to compel arbitration.

The DLSE ultimately conducted a hearing. Before, the employer answered the complaint, asserting a defense that arbitration was the proper forum. It also made a motion to dismiss based on the arbitration agreement and repeated it “is prepared” to petition in court. The hearing officer denied the motion because the employer failed to obtain a court order. The hearing proceeded, with both parties presenting their cases.

The Labor Commissioner awarded the employee over $27,000 in wages and interest. The employer appealed into court. During that stage, some 20 months after the matter started, the employer finally petitioned to compel arbitration, stay proceedings, and vacate the Labor Commissioner’s award.

On appeal, the court in Fleming Distribution upheld the denial of arbitration on the ground that the employer waived its right to arbitration. As for the proper step to take, the court was clear: “The proper step for halting Labor Commissioner proceedings is to file a petition to compel arbitration and request a stay of the Labor Commissioner proceedings in the superior court.” It held that “[m]ere announcement of the right to compel arbitration is not enough,” but rather a party must take active and timely steps consistent with the intent to arbitrate.

To determine waiver of the right to arbitrate, California courts consider several factors. They include whether a party’s actions were consistent with the right to arbitrate, how far a case proceeded before a party sought arbitration, and whether a party delayed for a long period. In Fleming Distribution, the court found waiver because the employer – despite maintaining from the start that the claim must be arbitrated – took no action to move to compel arbitration throughout the Labor Commissioner’s proceedings and even afterward. Its “full participation in the Labor Commissioner proceedings” further allowed the employer to obtain the employee’s testimony, exhibits, and strategies from the Labor Commissioner hearing before seeking arbitration later. Not only did the employer not properly seek arbitration or act consistently with the intent to seek arbitration, the court concluded that the delay before eventually seeking arbitration was “not reasonable.”

Practical Considerations

The Fleming Distribution decision sheds further light on how and when an employer must act to seek to compel arbitration of a wage claim pending before the Labor Commissioner. As for timing, the court did not set a bright line for how long is too long to wait. Yet, although some participation in litigation of an arbitrable claim does not result in waiver (for example, answering a lawsuit in court before petitioning to compel arbitration), the court held that “at some point continued litigation of the dispute justifies a finding of waiver.” The main lesson from the decision, however, should be that an employer should petition to compel arbitration promptly and as soon as possible. Most definitely, an employer also should not go so far as to participate in the determinative hearing before seeking arbitration, either.

Further, this decision is an occasion to consider whether wage and other claims brought through the Labor Commissioner’s administrative process necessarily should be subject to arbitration in an employment arbitration agreement or, if they are, whether it makes sense to petition the court to compel arbitration. Not all employment claims have to be arbitrated, and an arbitration agreement defines which claims are subject to arbitration. The Labor Commissioner’s process is designed to provide an informal and cost-effective alternative process. The court petition costs an employer. Even more, under the California Supreme Court’s arbitration decisions, an employer must pay all arbitration costs, including the arbitrator’s fees – which can be considerable. Depending on the amount at stake or other issues, it thus may make more economic or other sense to have at least some claims decided through the Labor Commissioner rather than in arbitration anyway.

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