In Lane v. Francis Capital Mgmt. LLC (Cal. Ct. App. Mar. 11, 2014), a California Court of Appeal held a former employee’s claim for unpaid wages were exempted from arbitration by California Labor Code section 229.

Section 229 provides that employee wage claims may be brought by an individual “without regard to the existence of any private agreement to arbitrate.” However, in Perry v. Thomas, the U.S. Supreme Court held that section 229 is preempted by the Federal Arbitration Act (FAA). Under the FAA, states may not pass laws that interfere with the FAA’s central purpose, which is to ensure agreements to arbitrate are enforced according to their terms. To ensure FAA coverage, however, employers must affirmatively establish that the agreement to arbitrate involves a transaction in interstate commerce. Absent FAA coverage, there is no FAA preemption, and absent FAA preemption, statutes such as Labor Code section 229 will be enforced.

Following his termination, the plaintiff in Lane brought a claim for wrongful termination, breach of contract, and various other California Labor Code violations, including a claim for unpaid wages.  The employer moved to compel arbitration, alleging that the parties were signatories to a valid, binding arbitration agreement that covered all of the causes of action, including the one for unpaid wages.  The plaintiff opposed the motion, arguing in part that California Labor Code Section 229 precluded arbitration of his wage claims. In response, the employer argued that Section 229 was preempted by the FAA.  The trial court agreed with the plaintiff, rejecting the employer’s preemption argument because it failed to establish that the arbitration agreement was part of a transaction in interstate commerce and thus covered by the FAA.  The trial court observed that reviewing courts have “declined to consider the issue of FAA preemption where the issue was not addressed or fully developed in the trial court.”

The Court of Appeal Decision

The Court of Appeal agreed with the trial court and held that the party seeking to enforce an arbitration agreement has the burden of showing FAA preemption.  In support of its conclusion the court noted that, according to the complaint, the plaintiff was a California resident and the employer a California corporation with its principal place of business in California.  The employer did not provide declarations or other evidence to show the employment relationship involved interstate commerce. Accordingly, the court held, the employer failed to satisfy its burden to show that the FAA applied.

Given the broad definition of interstate commerce, it normally is not difficult for an employer to establish that an arbitration agreement falls within the scope of the FAA. However, employers and their counsel must be mindful of their burden to establish a factual basis for such coverage.  FAA coverage not only affects the applicability of statutes like Labor Code section 229 but also the rules a court will be required to follow when asked to enforce an agreement to arbitrate any dispute.

In addition to including a provision in an arbitration agreement stating  that the employer operates in interstate commerce, and that the FAA governs the agreement, in motions to compel arbitration, employers should make an affirmative showing of involvement in interstate commerce. Such a showing can be based on admissions in the pleadings or by declarations or affidavits showing the scope of the employer’s operations.