What is an Employment Arbitration Agreement?
An employment arbitration agreement is a written contract between an employer and the employee that requires any employment disputes between the two of them to be decided in arbitration. In California, this is an increasingly common way to resolve disputes arising out of employment contracts. Yet, it is not necessarily what happens when an employee believes he has been wrongfully terminated. A former employee, who believes he has been wrongfully terminated, may file a lawsuit against the former employer. In this court proceeding, the employee outlines all of the legal theories he believes the employer violated, as the evidence is presented to a judge or jury who will decide which party was right . But with an employment arbitration agreement the employee must go before an "arbiter" or "arbitrator" who will listen to the parties and make a decision.
This decision can be binding on both parties and cannot be appealed unless fraud or corruption can be shown. There are several provisions that an arbitration agreement can have that may be beneficial to an employee. For example, some agreements will provide for the employees attorney’s fees to be paid if the employee prevails and recover a certain amount (typically around $25,000). Or, the agreement might state that if the employee prevails, then the employer must promote him to which he believes he is entitled. Usually the arbitration agreement will just be presented to the employee by the employer as a take-it-or-leave-it type of proposition.
Statutory Framework: What California law says about Arbitration
At the end of the day, the enforceability of an employment arbitration agreement is a matter of contract law. However, when interpreting California’s arbitration laws, we must also be aware that the United States Supreme Court has upheld the Federal Arbitration Act’s ("FAA") broad preemptive force over state law. This preemptive force requires courts to place arbitration agreements on equal footing with all other contracts, effectively invalidating state laws limiting the enforceability of employment arbitration agreements.
California Labor Code Section 925, which went into effect on January 1, 2020, invalidates any contractual provision that requires an employee who resides and works in California to agree to the application of any other state’s law, or the resolution of any claims arising in California to be adjudicated outside of California, unless the employee is directly employed by the company in another state, or the company’s principal place of business is located outside of California. (Cal. Lab. Code § 925)
However, Section 925(d)(4) provides that nothing in Section 925 shall be construed as invalidating a choice of law provision that would be enforceable under California law if the choice of law provision did not designate the law of a foreign state to govern the agreement and the claims thereunder.
Section 925 also permits an employee—within 30 days of his or her executing an employment agreement with a choice-of-law provision or arbitration agreement—to request a "neutral third party" to advise the employer in writing that the choice of law provision or arbitration agreement is unenforceable against the employee. The employer will be given the opportunity to withdraw the provision or agreement, but if the employer refuses to withdraw it, the employee may file suit to rescind the provision or agreement; and if the employee is the prevailing party, shall be awarded reasonable attorney’s fees, costs, and expenses pursuant to Section 925(e).
On September 15, 2020, Governor Gavin Newsom signed AB 51, which also became effective on January 1, 2020. AB 51 attempts to invalidate any waiver of a judicial forum for claims arising under the Fair Employment and Housing Act ("FEHA") and other labor and civil rights laws that includes, without the possibility of revocation, an employee’s claims brought under the FEHA or other civil rights laws.
However, courts have issued conflicting rulings on how AB 51 must be implemented. Some courts have refused to issue a temporary restraining order, holding that AB 51 did not implicate the Supremacy Clause and that AB 51 applied equally to employers and employees. But other courts have issued statewide injunctions because they have deemed Section 925, "a de facto amendment to the FAA, ‘aimed at altering the allocational of rights between [parties to an arbitration agreement] pursuant to the State’s own public policy.’"
At present, the conflict between AB 51 and FAA simply holds the potential for conflict because AB 51 has not been implemented. A legal battle over the interplay of AB 51 and the FAA has been avoided for now. However, while no litigated cases are yet addressing the issue, it does not mean AB 51 is "toothless." Employers are not allowed to require applicants to sign an arbitration agreement or contract of employment containing a choice of law provision stating that another state’s laws apply or that resolution of disputes arising in California must be adjudicated outside of California. An employer facing this issue needs to have counsel weigh the risks associated with requiring California employees to enter into arbitration agreements.
California lawyers often find themselves in a unique position to help employers navigate employment agreements. We have the ability to analyze whether an employment arbitration agreement is enforceable under California law and work with out-of-state counsel to ensure employment agreements do not run afoul of California law.
Advantages and Disadvantages of Arbitration v. Litigation
Employment disputes in California can be resolved in a variety of ways, including through arbitration and traditional court litigation. Understanding the pros and cons of employment arbitration agreements is important for employers and employees alike.
The Alleged Efficiency of Arbitration Resembles a Microeconomics 101 Fairytale
Proponents of arbitration in the employment context tout as one of its benefits the presumed efficiency of the process. However, without real support, this imagined efficiency is little more than a microeconomics 101 fairytale. Absent truly "fast-track" procedures and a relatively simple dispute, arbitration in the employment context is no substitute for expedient court proceedings. In general, while arbitration does provide for streamlined procedures, the cost saving potential of such proceedings is abrogated by the parties typically rehashing issues about which they have already argued numerous times during the discovery process.
Additionally, parties to arbitration may request judicial intervention to resolve issues, including interventions to enforce subpoenas, compel or stay arbitration, and enforce arbitration provisions. Some parties use these roundabout requests to get themselves to a court before the case has even begun. Others argue that the discovery procedures available through arbitration are considerably more limited and often unworkable. Thus, the potential cost savings of arbitration, at least when it comes to employment cases, are nonexistent.
Arbitration Is Not Taht Simple
In arbitration, the parties must submit their entire case to the arbitrator for resolution. Once an arbitrator’s award is issued, it is enforceable by a court, just like a court’s award. However, reviews of arbitration awards by the court are very limited. In other words, the court is not able to conduct a de novo review of the merits of the case and is generally very limited in the factual review it is able to conduct. California Code of Civil Procedure section 1286.2 enumerates the limited bases through which an arbitration award can be vacated, which include instances when the arbitrator exceeded available powers, did not use correct legal procedures or was not impartial. Because the court is unable to provide full and meaningful judicial review of arbitrators’ decisions, and in fact is only supposed to determine if arbitrators followed applicable public policy, arbitration is arguably no more efficient than judicial litigation.
Arbitration Has Its Downsides
Arbitration is unlike judicial litigation in several important ways. In arbitration, there are no right to a jury trial or a court reporter. Additionally, there is no pre-hearing motion practice—the hearing is typically the first opportunity for the parties to present their case. Another potential downside of the arbitration process is that it is shielded from public view. In other words, what happens in arbitration stays in arbitration. Many employers prefer the secrecy of arbitration. The name of arbitration—adjudication in private—says it all. Indeed, the advantages of the secrecy of arbitration are among the reasons why many employers have been successful at convincing their employees to agree to arbitration provisions, despite their downsides. From an employee perspective, given the downsides of arbitration, it is typically in his or her best interests to avoid arbitration of claims against an employer, especially if arbitration is forced upon him or her through an arbitration agreement.
How to Create an Enforceable Arbitration Agreement in California
In California, a mandatory employment arbitration agreement must meet certain requirements to be enforceable. In addition to being mutual, meaning that both parties are required to arbitrate their claims, the agreement must also demonstrate adequate notice and informed consent, as well as compliance with fairness standards. These follow established principles of contract law. Regarding adequate notice, an employer must provide sufficient information so that an employee can make an informed decision about whether or not to sign their dispute away to arbitration. This includes a description of the arbitration proceedings and the risks involved. The informed consent requirement helps ensure that employees understand the terms of the arbitration agreement, including the fact that they may be relinquishing the right to bring their claims in court and the potential limitations on discovery, evidence, and motion practice. A common pitfall for employers is failing to inform employees of the impact of the waiver of a jury trial in litigation. Non-disclosure of the waiver of jury trial is a common reason courts have denied enforcement of arbitration agreements.
Common Provisions in CA Arbitration Agreements
Under California law, a number of provisions are well-accepted in an arbitration agreement. The DFT contends that the following are the most common ones, and all should be considered. 1. Choosing the Arbitrator – This can be accomplished by selecting the arbitrator from an agreed-upon list, or by having arbitration companies designate it. There is no auto-assign of an arbitrator simply because he/she does not have close ties to one of the parties . 2. Confidentiality Agreement – Employers are protective of their privacy and wish to keep claims against them out of the public eye. The agreement may also provide for closure of the arbitration testimony to keep confidentiality. 3. Cost-Sharing Provisions – Traditionally, parties have shared costs related to arbitrations. The DFT advises that a person drafting an arbitration agreement instead should split costs with the employer.
Ways to challenge an Arbitration Agreement in Court
Notwithstanding the strong public policy encouraging the enforcement of arbitration agreements, California courts are not shy about invalidating agreements when it finds truly unconscionable terms. For example, California courts have deemed arbitration provisions unenforceable because they are so unilaterally favorable to the employer that the employee did not knowingly agree to them. If the agreement appears on its face to be one that both parties had a fair opportunity to negotiate, the court will generally enforce it. If the agreement is "adhesionary," however, requiring the employee to give up substantive rights without an equivalent trade off, this will also go to the issue of enforceability. Although the defense of unconscionable conduct can be applied to bar enforcement of an arbitration agreement, under the estoppel doctrine the inequitable behavior of the employee will not allow for the employee to run away from the enforcement of the arbitration agreement. In other words, if an employee sues in court and tries to avoid the arbitration agreement, yet still demands the benefits of arbitration if he were to lose in the trial court, the doctrine of equitable estoppel applies and will bar his lawsuit. In addition to the doctrines of unconscionability and equitable estoppel, failure to sign an arbitration agreement does not invalidate it. An employee who received a handbook or some other document containing an arbitration agreement is bound by its terms, regardless of whether he actually signed it. A proper disclaimer page stating that the employment handbook is not a contract and does not modify at-will employment is always helpful. Likewise, an acknowledgment page signed by the employee verifying receipt of the handbook and all of its terms is beneficial. In addition, agreements signed as a condition of employment, for example a nondisclosure agreement or a severance agreement, may be sufficient to bind the employee to the arbitration agreement for the duration of his employment, even if it appears to waive his right to file a claim against the company after he leaves employment. Sometimes additional actions taken by the employer could be construed as reducing any expectation of privacy that the former employee had, thereby allowing him to be estopped from asserting a cause of action or, in our view, enforcing the arbitration agreement. If the employer provides, for example, a laptop computer for the employee’s use and permits him to use it for personal business, and the employee conducts personal business on the laptop which could be grounds for terminating him, then he should not be allowed to argue that his expectation of privacy was not violated when the employer reviews personal documents from the laptop. He will likely be equitably estopped from objecting to the use of such evidence to challenge the enforceability of the arbitration agreement. The notion of an employee being able to assert one cause of action support a finding of contrario vertero judgment renders the employee’s own position as a barrier in the enforcement and implementation of an employment arbitration agreement. Rejected with the often-used phrase, the employee cannot be heard to maintain his cause of action in court, only to assert the need for an arbitrator to dispose of this very same action.
Employer’s Steps to Create an Enforceable Arbitration Agreement
Employers should always consult with their lawyers prior to implementing an employment arbitration agreement, or using an existing agreement, to ensure that the agreement is compliant with the current rules of California law. Moreover, even those employers who have existing contracts should be wary: the case law with regard to arbitration, and the public policy arguments surrounding arbitration, are not static, but are constantly evolving. What was legal yesterday may well be illegal tomorrow . Important provisions that you should include in your arbitration agreements, either separately or as part of an "incorporation by reference" clause, include the following: The waiver of rights to a jury trial, or of the right to proceed in court, should be made explicit, and employees should be required to initial at the end of each passage so that it cannot be later denied that the terms of the agreement were understood and agreed to.