Arbitration Agreements: Michael Adreani on Costs, Risks, and PAGA

Michael Adreani is a partner at Roxborough, Pomerance, Nye & Adreani, where he advises employers on employment and labor law and disputes involving workers’ compensation carriers.

In this episode, you’ll learn:

• What arbitration agreements do and why employers use them to limit class-action exposure
• Why an individual arbitration can still cost an employer six figures
• When Michael recommends compelling arbitration and when he prefers court
• How the 2024 PAGA reforms affect the arbitration decision
• What the pending Leeper case could mean for representative PAGA claims
• Why restaurant employers should have arbitration agreements reviewed regularly
• Which documentation and payroll records can help reduce employment-law risk

Chapters

00:00 Introduction & Guest Overview

01:33 What Is Arbitration & Why It Matters

02:12 Class Actions, Runaway Juries & Cost of Arbitration

04:23 When to Compel Arbitration vs. Go to Court

08:28 PAGA Reform & The Leeper Case

11:57 Who Pays for Arbitration & Employer Pressure

12:49 Best Practices & Key Takeaways

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Topic requests: info@crmbc.com

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Transcript

0:00

You have arbitration agreements where each side chips in and it's, they split the cost. In employment, that's not the case. The employer pays the entire cost Welcome to the Self-Insurance Podcast, brought to you by CRMBC. Today we're joined by attorney Michael Adreani, and we're going to talk to you about arbitration agreements. Welcome back, Michael. Thank you so much for joining the Self-Insurance podcast. Great to be here, Kaya. So give us a little bit of an intro about you before we dive into the topic of arbitration. Well, my name is Michael Adreani. I'm a partner at Roxborough, Pomerance, Nye & Adreani. We are a firm based in Los Angeles. We specialize in employment and labor law, as well as dealing with employers', uh, complex disputes involving their workers' compensation carriers. Michael, it's always a pleasure to have you on because you give us the perspective of boots on the ground because you're actually living this stuff every day. And in, I think, every single one of our podcasts, we've talked about arbitration, and we've just touched on it here and there. And so today I thought it'd be good for us to dive into arbitration, arbitration agreements as they relate to PAGA, other areas of employment, and just your advice and best practices around arbitration. So I'm gonna turn it over to you. And first give us a, give us a bigger picture of why these arbitration agreements are so important, and what is arbitration? Arbitration is a private, uh, agreement, a contract to litigate disputes between employees and employers privately with a, a paid, uh, service or a paid panel, or usually just a paid individual. It's a retired judge, longtime retired lawyer, somebody qualified. It is a binding contract. It is a contract that has been upheld by the US Supreme Court many, many times, as well as the California Supreme Court. The reason that they are important in the employment context is that it, it avoids the dreaded class action. Class actions are truly dangerous and can be scary, expensive things whether they have merit or not. Arbitration agreements require that an employee litigate their individual claims and typically forgo any representative action. So it, i-i-if, if their arbitration agreement is valid, if it's not too one-sided, and if it's upheld, it should do away with class actions for your clients. So that is the most important part of it. The other side in an individual case, um, a lot of people like arbitration agreements because it- Uh, because of the belief that it likely does away with what we call punitive damages. You don't have a jury involved, uh, in a sensitive matter and what they call runaway juries. It takes that aspect away. So some companies, restaurants, employers like to use arbitration agreements to avoid that potential pitfall. So those are the main reasons. So arguably, so arguably, having an arbitration agreement should save a, a business owner money compared to going into full-on litigation or being subject to a class action. That's a great question. In a class action, yes, it should definitely save you money. In an individual case, I would not say that. It can be extremely expensive to, to do an arbitration. And I, for one, and I think a lot of defense attorneys are coming around to this, I do not always recommend using the arbitration agreement in response to a lawsuit by an individual because it is extremely expensive. Before you know it, you will be paying, uh, that company, the, the service, usually AAA or JAMS or one of these services who, who has the m- uh, arbitrators, you'll be paying them six figures before you know it, even in an individual case. So you have to pick and choose which ones you'd like to be in arbitration. So walk us through your decision-making process. Mm-hmm. When, when do you recommend that an employer go the route of arbitration? Great question. So if, if the lawsuit that comes in or the threat that comes in is a class action, which would have a four-year statute of limitations, maybe even more sometimes, uh, usually on wage and hour issues, so sort of like the PAGA case, but instead of one year, it's four years, you would 100% want to enforce the arbitration agreement. And, and in response to that lawsuit, you would make what's called a motion to compel arbitration, and if you have a, a decent or halfway decent arbitration agreement, it will be upheld. The courts are very good about that. So you would, every single time if, if you see class action, you would litigate and, and compel that case to arbitration. If it's a lawsuit that's just PAGA, you still might do that, especially with new PAGA, because in new PAGA, the, the-- after the reforms from June of 2024, arbitration can whittle down a case and make it, uh, more beneficial to you if you can show that that plaintiff didn't actually suffer all of the violations that they're claiming. It can be a good thing to do. In an individual case, I typically don't recommend it. So I find them too expensive. I find that they move too fast for employers, uh, when you have a, a free court system that, that you're already paying for. Uh, and I like the process of the courts better. I like the slowness of it to get your defenses going. And of course, for, for my clients, I like the cost. Arbitrations are extremely expensive. As I said before, you can get up to six figures just for the arbitrator, and you haven't even won yet. Yeah. So, right. So, so when would I recommend it? I would recommend it in an individual case if you have a very sensitive… perhaps a case where you do see some liability that could give rise to what they call a runaway jury. If you're worried about emotions, if you're worried about, um, highly sensitive information getting out and causing a ripple effect, then arbitration might be the, the better option. And we talk a lot about what, uh, action steps an employer needs to take, and we have some employers, and we're in-- our insurance company is all restaurant operators. So we have some restaurant operators that every employee that comes in signs an arbitration agreement. We have some that do not. Do you have a recommendation that for, for employers of different sizes, particularly in the restaurant industry? Uh, it, it's the same recommendation. They should all have them. Uh, just, uh, for nothing else, the protection against class actions. I, I, I believe everybody should sign one when they come in the door And what, what are you seeing with the-- after the PAGA reform with regard to employers that have it and don't have it? Have you seen enough examples to see the downfalls of not having it? Well, if you don't have it and you get hit with a PAGA case, you m-might find that the attorney and the plaintiff are going to amend and make it a class action. Because I, I-- if they just filed a PAGA case, uh, without knowing what was in the personnel file, and they find out you don't have an arbitration agreement, that may be a big problem. They, they might change it into a class action. So wh-what usually happens is a plaintiff lawyer will write a letter in advance of the lawsuit, "I want the personnel file." They'll know if there is a, an arbitration agreement or not in advance. And if there is, they-- these days, they won't even bother with the, with the class action aspect. Now, with new PAGA, since June of twenty twenty-four, I believe it's even more important to compel arbitration and get that individual plaintiff into an arbitration setting because you have the opportunity to say, "Look, you have-- you're claiming ten different violations here. At best, uh, you were only subject to one or two of them." So, you know, it is worthwhile to go to arbitration, more worthwhile than it used to be. Now, I will say that there is a case-- There's always something new, right, Kaya? Mm-hmm. So there is a Supreme Court, California Supreme Court case, um, running through the court right now, uh, where I think there'll be an decision by the end of this year, by the end of twenty twenty-six. It's called Leeper, L-E-E-P-E-R. And that will determine whether after you go to arbitration, can that plaintiff nonetheless come back and be a representative? The plaintiffs are trying to distinguish between an individual PAGA case and a representative PAGA case. Mm-hmm. So what if that employee says, "You know, I'm, I'm suing on behalf of the state. I'm a valid PAGA plaintiff, but I'm not pursuing my own individual damages. I'm only here to represent the others." Well, then what good is arbitration i- i- if that's the case? Right. Let's say you win and the plaintiff take-- gets a, like in work comp parlance, you get a take nothing. Mm-hmm. You-- The plaintiff gets nothing at arbitration. The argument now is that that plaintiff nonetheless gets to go back to court and represent all these other people. Now, I don't think that's the law, but that issue is before the Supreme Court of California now, and will be decided hopefully by the end of the year. I think it will go our way, and our way would mean you just lost your individual case. Mm-hmm. There's a determination that you don't have any individual claims. You therefore do not have any standing to come back and represent anybody. That's how I believe it will go. But because that's, that's a thing, that, that-- it's-- I believe it's likely that you lose standing if you lose at arbitration. To me, that makes it worthwhile to pursue the arbitration on behalf of the employer. That makes sense. Yeah. And fingers crossed that that, that case goes the way that we want it to. I, I know it's so-- it's important and, and tempting to spend a-- so much time on PAGA because it's the elephant in the room. But there's-- it's not the only issue out there that, that your clients are facing and that our members are facing. What are some of the other hot, hot topics that our employers need to know about right now in the employment law realm? Well, I think, I think staying with arbitration, I would say that I've found that more and more plaintiffs, uh, and their attorneys are willing to just go to arbitration. Mm-hmm. And it's because these costs have gotten out of control. The, the cost of the arbitrator, as I've said a couple of times, can get into the six figures, even on an individual case. Mm-hmm. So a plaintiff might say, "I'm not gonna go to court. I'm going to go to arbitration." And of course, I've-- I haven't mentioned the, the, the big factor there, which is guess who pays for the arbitration? Right. Right. Only the employer. In a business case, in, in your insurance matters, you have arbitration agreements where each side chips in and it, it's-- they split the cost. In employment, that's not the case. The employer pays the entire cost. So imagine the pressure that the plaintiff can put on you, whether the case has merit or not. For you to win, to win the case, for the privilege of, uh, you know, getting a take nothing, you're gonna spend six figures. I… A- and I wish, I, I wish I wasn't, uh-- I was embellishing on that. Yeah. Yeah. So that- What's the- That seems to be a new thing for me, that, that they're willing to do that. Uh, and, and frankly, I'm not sure I blame them. Yeah. Yeah. What's the, uh… So if you could summarize for our, our audience in a couple of sentences, what are the biggest risks and, and what can arbitration help them with? The risks usually involve not having right, the right documentation. So again, I'm gonna beat this drum. Make sure you document everything, employment files are up to date, the timing, the pay stubs, the payment systems, all of that, to avoid this situation entirely. In terms of having or not having an arbitration agreement, I gotta say always have them. Uh, it's, it's just, it's just too much of a risk to put yourself out there on, on a class action liability. So always have them. Uh, the law on arbitration tends to change, so get them updated every couple of years at least. Um, get with your counsel and say, "Hey, does this pass muster? Uh, do I need to add anything?" For example, sexual harassment claims are no longer arbitrable. Hmm. Uh, that's been a couple years now, so. Mm-hmm. We, we have, we have, uh, lots of movement in employment law. It's a dynamic subject. Yes, absolutely. So I guess you have to have me on, uh, uh, again soon. Exactly. That's what I was just gonna say. That's why we have you on often- Yeah… and we'll have you on again in the future. Thank you so much for your time again, Michael. I appreciate your time. Thank you, Kaya. For more webinar sessions and resources, visit us at crmbc.com. If you have an idea for a future topic or you'd like to be a guest, please email us at info@crmbc.com.