California Employers: Another Reminder to Review Your Employment Arbitration Agreement

A recent Court of Appeal decision reminds California employers to review severability provisions within employment arbitration agreements. In Nichole Kec v. Superior Court, a former employee (Kec) brought individual, class and Private Attorneys General Act (PAGA) claims against her former employer, R.J. Reynolds Tobacco Company and Reynolds American Inc. (Reynolds). Kec alleged she was misclassified as exempt and sued for Labor Code violations.

Reynolds moved to compel arbitration of Kec’s individual claims and stay the action and the PAGA claim until conclusion of the arbitration pursuant to the parties’ arbitration agreement. Section 5 of the agreement contained the following representative waiver:

“The Parties waive the right to bring, join, participate in, or opt into, a class action, collective action, or other representative action whether in court or in arbitration. This Section (Section 5) may not be modified or severed from this Agreement for any reason.”

The trial court granted Kec’s motion and Reynolds appealed.

Reversing the trial court, the Court of Appeal found the representative waiver within Section 5 is void. The Court reasoned that the term “representative action” covers PAGA actions, and an “employee’s right to bring a PAGA action in unwaivable” under the California Supreme Court’s decision in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 378.

Reynolds argued it was not attempting to enforce the representative action waiver. Rather, the motion to compel sought to arbitrate the individual Labor Code claims and allow Kec to litigate her PAGA claim in court after the resolution of the arbitration. The Court rejected this argument finding that under the terms of the parties’ arbitration agreement, Reynolds could not do this.

Although a severability clause can generally save an agreement containing an illegal provision, where “severability is not found, the contract is void.” And while the arbitration agreement contained a severability clause in Section 16, the Court found that particular clause made the representative waiver provision not severable. Section 16 stated in part:

“Except for Section 5, if any provision of this Agreement is held by a court of competent jurisdiction or an arbitrator to be invalid, void, or unenforceable, the remaining provisions shall, nevertheless, continue in full force without being impaired or invalidated in any way. If Section 5 is found by a court of competent jurisdiction to be, in any way, unlawful, invalid, void or otherwise unenforceable, the Agreement becomes null and void as to employee(s) who are parties to that particular dispute, for purposes of that dispute in the jurisdiction of the court delivering the ruling.”

Ultimately, the Court of Appeal held Reynolds’ “attempt to selectively enforce section 5 amounts to an attempt to unilaterally modify the contract provision by allowing its severance.” Since the agreement prohibits this, and instead calls for the entire agreement to be voided where “any provision” of the agreement is found to be “invalid, void, or unenforceable,” the Court of Appeal ruled that all claims, both individual and representative, must be litigated in court.

This case serves as an important reminder to carefully review all aspects of employment arbitration agreements. Since many arbitration agreements contain representative action waivers, in light of Kec, it is important to make sure the agreement allows for modification and enforcement in the event a provision is found to be unenforceable.