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The California Court of Appeal, breaking from rulings issued by California federal courts, recently ruled that agreements shortening the period in which to bring wage and hour claims pursuant to the California Labor Code are unenforceable. See Pellegrino v. Robert Half Int’l, Inc., 2010 WL 316808 (Cal. App. 4th Dist. Jan. 28, 2010).

This decision has broad implications for employment agreements and the analysis California courts employ in determining whether to enforce waivers in such agreements.

Legal Background

Individuals and corporate entities regularly attempt to avoid or limit exposure to litigation costs contractually, including through arbitration provisions, agreements to waive the ability to use the class action process and agreements to shorten the applicable statue of limitations. Under federal and California law, such agreements are valid and enforceable, except when there are grounds for revocation of the contract. Unconscionability is the most frequent basis for revoking such contracts.

Unconscionability includes procedural and substantive elements. Procedural unconscionability focuses on the circumstances of making the agreement and the relative bargaining strengths of the parties. In short, it focuses on whether the agreement is a contract of adhesion, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it. The substantive unconscionability element focuses on terms that are overly harsh or one-sided.

Because these two factors are interrelated, courts balance them in determining the enforceability of an agreement. Essentially, a sliding scale is employed. The more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.

In the past, and until Pellegrino v. Robert Half International, Inc., California and federal courts used this analysis to determine whether to enforce an agreement shortening the applicable statute of limitations.

Pellegrino v. Robert Half International, Inc.

The Pellegrino plaintiffs sued their former employer, a temporary staffing firm, for its alleged failure to comply with California Labor Code provisions pertaining to overtime compensation, commissions, meal periods and itemized wage statements. The plaintiffs also alleged violations of California’s unfair competition law, California Business & Professions Code section 17200 et seq., based on the alleged violations of the Labor Code.

Moving for summary judgment, the defendant pointed to employment agreements with the plaintiffs that shortened the statute of limitations for such claims to six months. Because the plaintiffs had not filed their lawsuits within six months of the termination of their employment, the defendant asserted, they could not prosecute their claims.

The trial court, however, denied this motion concluding that the employment agreements’ provision shortening the applicable statute of limitations was void and unenforceable because it was unconscionable, violated public policy and California Labor Code section 219’s (“Section 219”) prohibition against private agreements contravening statutory remedies. The relevant provision in Section 219 reads: “[N]o provision of this article can in any way be contravened or set aside by a private agreement, whether written, oral, or implied.” (Emphasis added).

Without ever addressing whether the agreement was unconscionable, the California Court of Appeal affirmed the lower court’s ruling reasoning that the bases for the plaintiffs’ claims were “unwaivable and fundamental statutory rights.” Notably, the Pellegrino court recognized that, in certain circumstances, California law permits parties to agree to shorten the statute of limitations. In fact, the defendant cited one California Supreme Court decision, two decisions from the Ninth Circuit Court of Appeals, and a decision from a district court in the Northern District of California upholding agreements between employer and employee shortening the statute of limitations. The Pellegrino court, however, concluded that the California Supreme Court decision (published in 1920) was not applicable because it predated the wage and hour statutes underlying the plaintiffs’ claims. One of the Ninth Circuit Court of Appeals’ decisions the defendant cited involved federal and California statutory wage and hour claims, including claims alleged by the Pellegrino plaintiffs. But the Pellegrino court concluded that this authority was not applicable because these courts did not specifically address whether the agreements violated Section 219 or public policy.

The district court decision the defendant cited, however, squarely referenced Section 219. See Perez v. Safety-Kleen Sys., 2007 WL 1848037 (N.D. Cal. June 27, 2007). That court concluded that an agreement that was nearly identical to the agreement at issue in Pellegrino was valid and enforceable, notwithstanding Section 219. The Perez court reasoned that Section 219 was not applicable because the contractual provision merely shortened the time to file a claim. It therefore did not “contravene” or “set aside” the plaintiff’s right to prosecute his claims.¹

The Pellegrino court, however, explicitly concluded that it would not follow this reasoning, ruling that shortening the time to file such a claim does “contravene” and “obstruct” such claims: “We disagree with this interpretation of the meaning of section 219 and believe it misstates California law…. One very effective way to obstruct the operation of the wage and hour statutes is to radically reduce the time period in which employees may assert claims enforcing them. The limitation on claims provision here imposes such a radical reduction by seeking to reduce three-and four-year statutes of limitations to only six months.”

Implications:

The Pellegrino decision has broad implications for the litigation of disputes between employers and employees. In the past, the analysis of whether agreements limiting the applicable statute of limitations was largely factually, focusing on whether the agreement at issue is unconscionable. Now, apparently as a matter of law, agreements that limit the statute of limitations for wage and hours claims arising from the California Labor Code are unenforceable.

In addition, Pellegrino opens the door for other courts to conclude that similar agreements are unenforceable purely on public policy grounds. In the past, for example, California courts have analyzed whether agreements waiving the right to use the class action process are enforceable based on whether they are unconscionable. But based on the Pellegrino court’s repeated reference to public policy as an alternate basis to Section 219 for its ruling, courts may conclude that, in certain circumstances, such agreements are unenforceable as a matter of law.

For more information about this ruling, please contact:

Luanne Sacks
Co-Chair
Class Action Practice

Keara Gordon
Co-Chair
Class Action Practice

Carter W. Ott
Associate
Class Action Practice

Bob Shuman
Partner
Labor and Employment Practice