Not All Wage Cases Subject to Armendariz Arb Requirements

Under California law, wages "are jealously protected by statutes for the benefit of employees." Boothby v. Atlas Mechanical, Inc. (1992) 6 Cal.App.4th 1595. Public policy has long favored the full and prompt payment of wages due an employee. Wages are not ordinary debts. Because of the economic position of the average worker and, in particular, his dependence on wages for the necessities of life for himself and his family, it is essential to the public welfare that he receive his pay promptly. Mamika v. Barca (1998) 68 Cal.App.4th 487. Wages are preferred over all other claims because of the economic position of the average worker, who depends upon the regular payment of wages for the necessities of life. I.W.C. v. Superior Court Kern County (1980) 27 Cal.3d 690. But what about the wages of a rich guy? Is the payment of a fat bonus to a well-to-do employee as important under the law? One Court of Appeal says no.

In California, if an employment case involves discrimination or matters of important public policy, under Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, any agreement to arbitrate will be deemed substantively unconscionable unless the agreement has mutuality (meaning it also requires the employer to arbitrate any claims it would likely want to bring against its employees) and it complies with five procedural requirements, including a neutral arbitrator, adequate discovery, a written award, all of the types of relief that would otherwise be available in court and no provision or condition that requires employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum. Common provisions that violate Armendariz include waivers of punitive damages or tort remedies; shortened statutes of limitation; complete or partial unilaterality (i.e., providing that "either party" reserves the right to litigation in Superior Court over the theft or disclosure of trade secrets); requirements that claimants exhaust remedies under internal company ADR plans; splitting of arbitration costs; or rights to appeal large arbitration awards.

Arbitration agreements governing wage and hour disputes are generally considered to be subject to Armendariz's requirements. However, in Giuliano v. Inland Empire Personnel, Inc., the Second District Court of Appeal held that not all wage and hour cases involve such important public policy issues as to trigger the safeguards of Armendariz. In Giuliano, B190771, the plaintiff was an executive vice president and chief financial officer of the defendant. He alleges that Inland Empire Personnel owes him a $5 million to $8 million profit-sharing bonus and a $500,000 severance payment under his employment agreement. His complaint alleges claims for statutory wages under Labor Code § 200; breach of contract; and declaratory relief regarding the arbitration agreement and a requirement that he sign a waiver and release in order to receive a severance payment. The defendant argued that his claim was a “garden variety” breach of contract action, not subject to Armendariz. The trial court invalidated the arbitration agreement, and Inland Empire Personnel appealed.

The Court of Appeal reversed, finding that Armendariz only applies to unwaivable claims that are “carefully tethered to statutory or constitutional provisions;” and that Giuliano didn't present such a claim. Thus, the employer's failure to comply with Armendariz did not render the arbitration agreement unconscionable, and the order denying the motion to compel arbitration was error. The opinion also contains a good discussion of FAA preemption of the Labor Code, and specifically, section 229, with regard to arbitration agreements which involve or affect interstate commerce, which, oddly enough, appears to be about the only ground on which Giuliano opposed the motion. The opinion notes that Giuliano did not argue that the arbitration agreement was unconscionable or unenforceable under Armendariz, or that the arbitration agreement was ambiguous as to which parties were bound by the agreement, but both of those grounds were cited by the trial court in its order denying the motion.

On the Armendariz issue, the opinion focuses upon whether the claims present unwaivable rights involving public policy matters. "If a right or duty can be waived by agreement, it is not rooted in a substantial public policy, absent other factors to the contrary.” Giuliano argued that his statutory wage claim is an unwaivable claim because “[t]he right to be paid wages earned is part of the public policy of the State of California and is not waivable.”  However, the Court of Appeal found that Giuliano’s contract claim for a $5 million to $8 million bonus and a $500,000 severance payment is distinguishable from the statutory overtime or minimum wage claims that were at issue in the cases cited by Giuliano.

We distinguish the above cases because they involved unwaivable statutory claims for federally mandated overtime and minimum wage payments, whereas this case involves a breach of contract claim for a multimillion dollar bonus and severance payment. ... As we have concluded that Armendariz does not apply to this case, Giuliano’s claim of procedural unconscionability fails.

The case was decided in March, and ordered published on April 19. Petitions for review and/or depublication are likely. If reviewed, the case would present plenty of fascinating issues for the Supreme Court and its many friends. You can download Giuliano v. Inland Empire Personnel, Inc. here in pdf or word format.

Comments

[Steve Kane]

This is a puzzling and troubling ruling.

To support its finding that "Arminderez does not apply to this case because it is not based on the FEHA or a fundamental public policy that is tied to a constitutional or statutory provision," the Court says that: "In this case, Giuliano argues that his statutory wage claim is an unwaivable Tameny claim because '[t]he right to be paid wages earned is part of the public policy of the State of California and is not waivable.' But Giuliano's contract claim for a $5 million to $8 million bonus and a $500,000 severance payment is distinguishable from the statutory overtime or minimum wage claims that were at issue in the cases cited by Giuliano...We distinguish the above cases because they involved unwaivable statutory claims for federally mandated overtime and minimum wage payments, whereas this case a breach of contract claim for a multimilion dollar bonus and severance payment.

Is the Court saying that the "multimillion dollar bonus and severance payment" is not wages? What is the authority for that? The court appears to make this ruling based on the size of the compensation, but I know of no statute or case authority that compensation for services ceases to be wages when it reaches and exceeds some unstated amount. Indeed, there is case authority that bonuses and commissions are wages although they may be very large in some cases. Certainly, the Legislature and Congress could have imposed such limits, but have not done so.

The Court also seems to say that only "federally mandated overtime and minimum wage payments" are non-waivable, but, again, this contention is without authority. The Labor Code explicitly makes the right to payment of all wages non-waivable, not just overtime and minimum wages. It would seem that payment of the bonus and severance pay to Giuliani is mandated by strong public policy unless the payments are not wages, which the Court does not explicitly find.

Also, characterization of the plaintiff's claim as "a breach of contract claim" which does not involve an important public interest protected by wage and hour laws is a very questionable formulation. Fundamentally, all wage and hour claims are "breach of contract" claims because they involve enforcement of contracts with conditions imposed by law. The Court seems to find that the claim is just too big to be characterized as wages so there is no public interest in protecting it.

In my opinion, the Court is starting down a slippery slope in refusing to characterize Giuliani's bonus and severance payments as wages based on a finding that the payment is just too big. Where is the line to be drawn for this test? It is surprising to see the Court apply a "reverse means test" to wages for the purpose of applying statutory protections when the Legislature has not done so. Does this case create a "too much money" defense against wage and hour claims?

Thoughts on this?

Hopefully, the Supreme Court will grant review and clear this up because we will certainly start to see this as a defense to high value wage claims.

[michael walsh]

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