Wage Law

The California Supreme Court has ruled that Code of Civil Procedure § 1281.2(c) permits a trial court to stay arbitration pending the outcome of related litigation. Cronus Investments v. Concierge Services (--- Cal.4th ---), March 10, 2005.

Section 1281.2(c) requires a court to order arbitration upon petition by one of the parties to an arbitration agreement,

“unless [the court] determines that:[¶] . . .[¶] (c) A party to the arbitration agreement is also a party to a pending court action . . . with a third party, arising out of the same transaction or series of related transactions and there is a possibility of conflicting rulings on a common issue of law or fact.” If the court makes such a determination, it: “(1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action . . . ; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action . . . pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action . . . .”

The Federal Arbitration Act (the "FAA", 9 U.S.C. §§ 1 et. seq.) preempts all state laws that apply of their own force to limit those agreements against the parties’ will or to withdraw the power to enforce them. (Perry v. Thomas (1987) 482 U.S. 483, 490-491) So why didn't the FAA preempt section 1281.2(c)?

Because of a 1989 United States Supreme Court case called Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ. (1989) 489 U.S. 468. In Volt, the Supreme Court had held that FAA did not preempt the application of section 1281.2(c) if the parties had agreed that their arbitration agreement would be governed by the law of California. In Cronus Investments, the parties did just that. Since the parties intended to bind themselves to state law, the Code of Civil Procedure applies. In fact, the court so held even though the agreement also provided that the designation of California law “shall not be deemed an election to preclude application of the [FAA], if it would be applicable.”

You can view the full opinion in Cronus Investments by opening or downloading the file in pdf or word format.

Cronus Investments is an employment case, but is not a wage and hour case. However, the rationale behind the Cronus Investments holding is quite interesting to anyone who faces an arbitration demand in an overtime, minimum wage, prevailing wage or similar cases.

The Perry case mentioned above involved California Labor Code § 229, which provides that private agreements to arbitrate wage collection claims are unenforceable. "Actions . . . for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate." Perry found this to be preempted by the FAA, and specifically, 9 USCA § 2, which provides for enforcement of arbitration provisions in agreements affecting interstate commerce.

But what if, as they often do, the parties have a provision in the "agreement" (usually an employee handbook) that says California law governs the agreement? Perry did not address any such facts, and under Cronus Investments and Volt, an argument could be made that Section 229 applies, and the case can go to court.