Labor & Employment Law Daily Former worker who signed arbitration agreement at 17 not indisputably required to arbitrate wage-hour action
Friday, September 27, 2019

Former worker who signed arbitration agreement at 17 not indisputably required to arbitrate wage-hour action

By Marjorie Johnson, J.D.

Too many issues were disputed to say as a matter of law that the fast-food restaurant employee should be compelled to arbitrate, including whether there was fraud at its inception, whether she effectively disavowed it once she turned 18, and whether it was unconscionable.

Triable issues existed as to whether a former “Jack In the Box” employee who signed an arbitration agreement when she began working for the restaurant as a minor must arbitrate her putative class action asserting wage and hour violations under California law. The parties disputed whether she was rushed and misled into signing the agreement, at what point she discovered its “nature and significance,” and whether the time it later took her to disaffirm it once she turned 18 years old was reasonable. Denying the employer’s motion for summary judgment, a federal district court in California also ruled that a recently settled PAGA action brought against the same employer alleging similar violations did not have res judicata effect (Garcia v. Central Coast Restaurants, Inc., September 23, 2019, Seeborg, R.).

Signed agreement upon hire. The employee signed the arbitration agreement on her first day of work in May 2015, when she was 17 years old. She claimed she was rushed through signing the paperwork, tricked as to its contents, and taken advantage of because she was a minor. She stopped working for the restaurant in April 2016 and turned 18 years old the following month. In December 2017, about 18 months after the termination of her employment, she filed this putative class action against two California corporations engaged in the operation of the restaurants in the chain at issue (collectively, “the employer”), alleging various wage and hour violations under California state law.

PAGA lawsuit by others. Meanwhile, in October 2015, two other plaintiffs represented by the same attorneys sued the employer in California state court asserting similar wage-hour claims under the California Labor Code’s Private Attorneys General Act (PAGA). These plaintiffs recently reached a $400,000 settlement, which provided for payment to the California Labor and Workforce Development Agency (CLWDA), payment to the named plaintiffs, and attorneys’ fees and costs. The remainder was allocated to aggrieved employees “as penalties and to recover underpaid wages as penalties.”

Challenges agreement’s enforceability? The employer first argued that the employee must be compelled to arbitrate her claims. In response, she argued that the agreement was unenforceable under three separate contractual theories: fraud in the inception, disaffirmance of a contract signed as a minor, and unconscionability. Because her defenses raised triable issues, the court held that arbitration could not be compelled at the summary judgment stage.

Fraud in the inception. Accepting the employee’s version of events, it was “entirely possible that a reasonable reader in her position would not have understood the nature of the contract’s terms,” and thus triable issues existed as to whether fraud existed in the inception of the arbitration agreement. In particular, she claimed that she had difficulty reading English, particularly complicated words of which the arbitration agreement contained “plenty.” She also alleged that her manager rushed her through signing the paperwork, did not give her a copy to review later, and misrepresented the contents. She also claimed she was told the forms informed of her rights, not that they waived them. Though the employer denied that her manager misled her, triable issues existed.

Disaffirmation. Under California law, an individual who enters into a contract as a minor but disaffirms it within a “reasonable time” after reaching the age of majority has voided the contract. The time to be evaluated for its reasonableness is the time between when the individual “discovers” the nature and significance of the contract and when the she disaffirms it—not the time between signing and disaffirming. Here, the employee undisputedly signed the arbitration agreement in May 2015 and reached the age of majority a year later.

However, triable issues existed as to how much time elapsed between when she discovered the nature and significance of the contract and when she disaffirmed it. She claimed that she prospectively disavowed any arbitration agreement she might have signed in her December 2017 complaint, but did not know about the definitive existence of this agreement until the employer attached it to its summary judgment motion. The employer countered that she knew about the agreement when she signed it, and did not disaffirm it until 18 months later.

Unconscionability. A triable issue also existed as to the agreement’s validity since there was evidence of both procedural and substantive unconscionability. The employee alleged that the agreement was procedurally unconscionable for many of the same reasons she alleged fraud in the inception: her manager rushed her to sign it, did not give her a copy for later review, and misrepresented the terms. Insofar as the agreement was imposed on her as a condition of employment and there was no opportunity to negotiate, her allegations also raised questions as to substantive unconscionability.

Res judicata didn’t bar lawsuit. Because the employee did not assert the same primary right and was not adequately represented by the PAGA plaintiffs, res judicata did not limit her ability to proceed in this case. The court rejected the employer’s contention that because she claimed the same violations of the labor code as the PAGA plaintiffs, she was asserting the same primary right. The employee noted a “subtle but important difference.” While her putative class action was filed to redress the injuries of former employees of the employer—being deprived of their wages and breaks, and other labor law violations—the PAGA lawsuit was filed on behalf of the state of California.

Not same primary right. The California Supreme Court reaffirmed as recently as this month that an employee bringing a PAGA action represents “the same legal right and interest as” state labor law enforcement agencies, not aggrieved employees. Because the employee sought to remedy the injury sustained by former employees of the employer, while the PAGA plaintiffs sued to protect the state’s interests—albeit with some incidental benefit to aggrieved employees—they were not asserting the same primary right.

Not in privity. The employee was not in privity with the PAGA plaintiffs for the same reason that she was not asserting the same right that they were: the PAGA plaintiffs were representing the interests of the State of California, not of this plaintiff and other fellow employees. Indeed, she and other putative class members had not yet been given notice of the PAGA case, let alone the settlement, and it was unclear how their interests could be represented by an action about which they might not have knowledge.

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