The California Supreme Court issued several important decisions in 2023 about issues such as COVID-19 take-home exposure and arbitrating Private Attorney General Act (PAGA) claims.

Employers should continue to be aware of several cases pending before the state’s high court. Here are the highlights and what these cases could mean for California employers.

PAGA & Arbitration

Estrada v. Royalty Carpet Mills

Do California courts have discretion to strike or narrow a Private Attorneys General Act (PAGA) claim that is unmanageable?

In Estrada, there were a number of individualized issues and the court dismissed the plaintiff’s PAGA claims for meal and rest period violations as unmanageable. On appeal, the Court of Appeal held that California courts do not have discretion to strike PAGA claims that are unmanageable. Specifically, it held that such discretion would place an extra burden on PAGA plaintiffs that the state need not satisfy, interfering with the purposes of PAGA.

The Court of Appeal in Estrada ruled opposite another district in the California Court of Appeal, which held that trial courts do have inherent authority to strike or narrow unmanageable PAGA claims. The California Supreme Court will now remedy the split between districts and, if it reverses Estrada, employers will have a powerful new tool in PAGA actions.

Quach v. California Commerce Club, Inc.

Must a party opposing a motion to compel arbitration show prejudice to establish that the party who filed the motion to compel waived its right to arbitrate?

In Quach, the defendant waited 13 months into discovery before filing a motion to compel arbitration. Quach argued that the Commerce Club had waived its right to arbitrate by waiting 13 months to move to compel arbitration. Quach further claimed that Commerce Club’s delay forced him to expend time and money preparing for litigation, causing him prejudice.

The trial court agreed, finding Commerce Club had waived the right to arbitrate by propounding a “large amount of written discovery,” taking Quach’s deposition, and expending “significant time meeting and conferring.”

The Court of Appeal disagreed with the trial court, following California Supreme Court precedent that participation in litigation alone cannot support a finding of waiver and that fees and costs incurred in litigation alone will not establish prejudice on the part of the party resisting arbitration.

Meanwhile, the United States Supreme Court has held, in Morgan v. Sundance, Inc., that a party is not required to show prejudice to establish an opposing party’s waiver of its right to arbitrate. The California Supreme Court will provide clarity and may reduce the expense of litigating motions to compel arbitration.

Ramirez v. Charter Communications, Inc.

Is it permissible for an arbitration agreement to allocate interim fees for a motion to compel arbitration to the prevailing party?

Here, Ramirez and Charter Communications, Inc. (Charter) were parties to an arbitration agreement. Charter fired Ramirez and Ramirez sued, alleging claims under the Fair Employment and Housing Act. Charter moved to compel arbitration. The trial court denied Charter’s motion, finding the arbitration agreement substantively unconscionable because it provided for interim fees to be awarded to the prevailing party on a motion to compel arbitration.

The Court of Appeal affirmed the trial court’s order denying the motion to compel arbitration as unconscionable due to the provision at issue, declining Charter’s request to sever that provision and compel arbitration under the remaining agreement.

The California Supreme Court will consider whether parties can agree to arbitration agreements that include interim fee-shifting provisions in favor of a party prevailing on a motion to compel arbitration. Moreover, it will consider whether such a provision is so unconscionable that it invalidates the entire agreement or whether courts may sever those provisions.

Employers should pay close attention to this case, as well as the courts’ recent attitudes towards arbitration agreements. Specifically, if the Court upholds the Court of Appeal’s order, employers may need to remove interim fee-shifting provisions. Regardless of the outcome, employers should review their arbitration agreements to ensure that courts would not interpret their terms as unfairly one-sided and that their agreements contain legally compliant severability clauses.

Fuentes v. Empire Nissan, Inc.

Where an arbitration agreement is fair in substance, is it nevertheless unenforceable for unconscionability where it is a one-page form with tiny, seemingly blurred print, largely unreadable, and presented on a take-it-or-leave-it basis?

Here, the trial court held the arbitration agreement procedurally unconscionable. The Court of Appeal reversed, holding that the substance of the arbitration agreements was fair and there was therefore no reason to invalidate the agreements for unconscionability.

The result of this case will shape the future of employment arbitration agreement enforceability which has been changing dramatically in recent years.

Zhang v. Superior Court

If a party moves to compel arbitration in a non-California forum pursuant to a forum-selection clause and seeks to stay related California litigation under Section 1281.4, can the opposing party preempt the court’s “competent jurisdiction” requiring a stay of the California litigation by merely invoking Labor Code, section 925? Moreover, can a party to an arbitration agreement circumvent the arbitration agreement’s delegation of all issues to an arbitrator by invoking Labor Code, section 925?

Plaintiff Zhang is a former Dentons law firm partner who worked in California. After Dentons removed him from the partnership for diverting money owed to the firm, they initiated arbitration in New York pursuant to a signed arbitration agreement. Zhang then filed suit in California, arguing that he was an employee and that Labor Code, section 925, preempted arbitration in New York. Dentons sought a stay under Section 1281.4. The trial court granted Denton’s motion for a stay. After the Court of Appeal denied Zhang’s petition for a writ and the Supreme Court ordered the Court of Appeal to review, it denied Zhang’s petition on the merits.

This case is crucial for employers because it may affect who can benefit from the Labor Code, section 925, and therefore preempt forum-selection clauses.

Discrimination, Harassment & Retaliation

Bailey v. San Francisco District Attorney’s Office, et al.

Is summary judgment appropriate for the employer on discrimination, harassment, and derivative claims where a non-supervisor used a highly offensive racial slur on one occasion?

The trial court awarded summary judgment to the employer. The Court of Appeal affirmed summary judgment. Now, in a rare less-than-unanimous vote, the California Supreme Court granted review. This case may affect the standards for hostile work environment claims and the level of severity an employee must show to establish a hostile work environment. Employers should continue to be proactive in training employees to avoid the appearance of impropriety in the work environment.

Wage and Hour

Huerta v. CSI Electrical Contractors, Inc.

The U.S. Court of Appeals for the 9th Circuit certified three questions in this case to the California Supreme Court:

(1) Is time spent on an employer’s premises in a personal vehicle, waiting to scan an identification badge, having security guards peer into the vehicle, and exiting a security gate compensable as “hours worked” under California Industrial Welfare Commission Wage Order 16?

(2) Is time spent on the employer’s premises in a personal vehicle driving between the security gate and the employee parking lots, while subject to certain rules from the employer, compensable as “hours worked” or as “employer-mandated travel” under Wage Order 16?

(3) Is time spent on the employer’s premises, when workers are prohibited from leaving by the fact of the location but not required to engage in employer-mandated activities, compensable as “hours worked” within the meaning of Wage Order 16 or Labor Code, section 1194 when the relevant collective bargaining agreement designated that time as an unpaid “meal period”?

In the underlying case, employees commuted to a remote work site to build solar panels. Once they left the highway, they had to drive forty minutes to the muster point, sometimes at a speed as slow as five miles an hour to minimize the disturbance of endangered kit fox species in the area.  Sometimes they had to wait outside the gate off the highway while a biologist cleared the road. Employees were also required to stop at a security gate (the location of which moved during the project) for identification.  Due to the times employees came and left, the lines at the security gate could be five to twenty minutes long.

This case will provide further guidance for what counts as hours worked under California law. The case will also provide guidance on the CBA exception for meal periods contained in Wage Order 16.

Iloff v. LaPaille

For an employer to establish its “good faith” defense to liquidated damages, must it demonstrate that it took affirmative steps to ascertain whether its pay practices complied with the Labor Code and Industrial Welfare Commission Wage Orders? May a wage claimant prosecute a paid sick leave claim in a de novo wage claim trial conducted pursuant to Labor Code section 98.2?

In this case, the plaintiffs filed wage claims with the Division of Labor Standards Enforcement (DLSE) against defendants Cynthia LaPaille and Bridgeville Properties, Inc. (BPI) for unpaid wages in violation of the Labor Code. The plaintiffs received a favorable order from the Labor Commissioner, and BPI appealed to the superior court. In the subsequent superior court action, the plaintiffs were represented by the Labor Commissioner’s office.

Following a de novo trial on the wage claims, the court found that plaintiffs were entitled to unpaid wages and certain penalties but rejected the plaintiffs’ unfair competition law claims under Business and Professions Code § 17200 (the UCL). The court declined to award the plaintiffs liquidated damages, penalties for violations of sick leave notice requirements, and did not impose personal liability on BPI’s CEO, Cynthia LaPaille.

The issues here are the Court of Appeal’s holdings that liquidated damages were not appropriate for failure to pay minimum wages under Labor Code, section 1194.2(a), and that plaintiffs do not have private rights of action for sick leave penalties.

Section 1194.2(a) allows courts to reduce or eliminate liquidated damages where an employer can show that it acted in “good faith” with “reasonable grounds” for believing it did not violate the law. Here, because the plaintiffs initiated the idea of working in exchange for rent, rather than wages, as an independent contractor, and the unsettled status of the law on this subject at the time, the trial court acted within its discretion in finding the defendants acted in good faith.

Moreover, sick leave penalties require independent actions by the Labor Commissioner or Attorney General’s office. Even though the plaintiffs were represented by the Labor Commissioner in their superior court action, this did not suffice to permit their pursuit of sick leave penalties.

Separately, and not at issue with the Supreme Court, the Court of Appeal held that LaPaille may be held personally liable due to her managerial role with BPI under Labor Code § 558.1(a), which expressly permits personal liability for individuals “acting on behalf of an employer.” It further held that the trial court had discretion as to whether equitable relief for unfair business practices would be in the interest of justice, even where Labor Code violations exist. Because the parties appeared to lack understanding as to the plaintiff’s entitlement to wages for the services they performed for BPI, the Court of Appeal found the trial court properly exercised its discretion in denying equitable relief.

Employers should watch this matter for not only how it may affect potential damages in wage and hour litigation for seemingly innocent violations, but also the effect it could have on appeals from Labor Commissioner decisions.

Jackson Lewis continues to track California case law affecting employers. If you have questions about any of the cases pending before the California Supreme Court or related issues, contact a Jackson Lewis attorney to discuss.