Perry v. Thomas

1987-06-15

Headline: Federal arbitration law overrides California rule protecting wage suits, requiring arbitration of commission and wage disputes and making it harder for employees to keep those cases in state court.

Holding: The Court held that the Federal Arbitration Act’s §2 overrides California Labor Code §229, so arbitration agreements covering wage and commission disputes must be enforced instead of state-court wage suits.

Real World Impact:

Allows employers to enforce arbitration clauses in commission and wage disputes.
Prevents employees from pursuing some wage claims in California courts when arbitration agreements apply.
Sends unresolved questions about who may invoke arbitration back to lower courts.

Topics: arbitration agreements, wage and commission disputes, state vs federal law, employment rights

Summary

Background

An employee sued his former employer and two employees over unpaid commissions, bringing claims for breach of contract, conversion, conspiracy, and breach of fiduciary duty. The employee had signed a securities industry form agreeing to arbitrate disputes under the New York Stock Exchange rules, but California law (§229) says wage collection lawsuits may proceed in court despite any private arbitration agreement. Lower California courts relied on an earlier decision and refused to force arbitration.

Reasoning

The Supreme Court considered whether the Federal Arbitration Act’s national policy favoring enforcement of arbitration agreements overrides California’s §229 rule. The Court held that §2 of the Federal Arbitration Act creates a federal rule requiring enforcement of arbitration agreements and that this federal policy conflicts with California’s law that guarantees a judicial forum for wage claims. Because of that conflict, the federal statute controls and California §229 must yield.

Real world impact

The decision sends this dispute to arbitration procedures rather than to state court and requires lower courts to enforce arbitration clauses that fall under the Federal Arbitration Act. The Court did not decide related questions about whether the two individual employees could themselves invoke the arbitration agreement or whether the agreement was unconscionable; those issues were left for the lower courts to address on remand.

Dissents or concurrances

Two Justices dissented, arguing that the Court should respect the State’s policy protecting workers and that the Arbitration Act should not automatically displace state rules allowing wage claims to be heard in court.