Alert - Drafting a Valid Employment Arbitration Provision

June 13, 2016

            Over the last two years, the California courts have reaffirmed that the law favors enforcement of arbitration contracts.  At the same time, the number of wage and hour and other class action lawsuits against employers in California has been steadily rising.  Properly drafted arbitration clauses in employment contracts can help protect employers from the huge costs associated with defending class actions; even successful defenses come at enormous cost.  However, there are several steps involved in drafting an arbitration provision that the courts will uphold as valid.

            Under California law, arbitration is recognized as a matter of contract – the validity of such a clause initially turns on a showing that the parties have entered into an agreement to arbitrate.  California Code of Civil Procedure § 1281 (“A written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract”); Ajida Technologies, Inc. v. Roos Instruments, Inc., 87 Cal.App.4th 534, 541-2 (2001) (“arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.”).  California law, like federal law, favors enforcement of valid arbitration agreements.  Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83, 97 (2000). Any doubts regarding the arbitrability of a dispute are resolved in favor of arbitration.  Coast Plaza Doctors Hospital v. Blue Cross of California, 83 Cal.App.4th 677, 6868 (2000). 

            As a practical matter, this means that the first step is to prepare an acknowledgement of an agreement to arbitrate all disputes arising out of employment that the employee is required to sign.  Older cases have refused to uphold arbitration provisions buried in an employee handbook, where the employee acknowledged receipt and understanding of the handbook but did not specifically acknowledge their agreement to arbitrate disputes.  In Sparks v. Vista Del Mar Child and Family Services, 207 Cal.App.4th 1511 (2012), the Court of Appeal held that an arbitration provision contained in an employee handbook was not enforceable.  The opinion cited the following factors:

  • The arbitration provision was not specifically highlighted;
  • There was no place for the employee to specifically acknowledge receipt of the arbitration provision;
  • The acknowledgement indicated the the employee "understood" that he was governed by the contents of the handbook (as opposed to agreeing to be bound by the provisions);
  • A later revision to the handbook indicated that the employee would be required to sign a full arbitration agreement, which the employee never signed; and
  • The employer retained the right to unilaterally modify the terms of the handbook.

  In sum, the Court held that “merely agreeing to be ‘governed by the contents’ of the Handbook that contains ‘important information’ about defendant’s ‘general personnel policies and on [plaintiff’s] privileges and obligations’ – all of which could unilaterally be changed – does not constitute a contract and does not bind plaintiff to arbitration.”  Id. at 1521.  The Court also held that the agreement was “illusory” because the employer could unilaterally modify the handbook.  Id. at 1523.  The Court also held that the failure to provide the employee with a copy of the AAA rules governing the arbitration, and the fact that the provision was not subject to negotiation, both supported a finding of procedural unconscionability.  Id.  The initial step to avoid this pitfall is to have the employee sign a separate agreement acknowledging the contract to arbitrate disputes. 

            The second step is to make sure that the arbitration agreement applies equally to the employer and the employee.  Courts refuse to uphold agreements that are overly harsh or one sided in the employer’s favor.   For example, because courts see employers and employees as being in unequal financial positions, arbitration agreements and/or clauses that require the employee to advance half of the arbitrator’s fees and costs have been struck down as overly harsh.  Other examples include agreements and/or clauses requiring the employee to arbitrate the case in a location distant from the place of employment; requiring the arbitrator to award attorney’s fees and costs to the prevailing party; agreements and/or clauses that reserve for the employer the right to appoint the arbitrator; agreements and/or clauses requiring the employee to arbitrate all potential claims against the employer while reserving for the employer the right to bring some cases into court; and agreements and/or clauses limiting the employee’s right to discovery.  The best practice is to state in the arbitration agreement and/or clause that arbitration will be conducted in the same jurisdiction as the employee’s place of employment, under the rules established by AAA, JAMS, or another accredited alternative dispute resolution ("ADR") provider, and that the employer will bear the arbitration costs. 

            The third step is to exempt from arbitration those claims that the Legislature or the courts have determined may not be arbitrated.  The courts have held repeatedly that representative actions brought pursuant to California’s Private Attorneys General Act (“PAGA”) may not be resolved through arbitration.  Similarly, Labor Code § 229 provides that

“Actions . . .  for the collection of due and unpaid wages claimed by an individual may be maintained without regard to the existence of any private agreement to arbitrate. This section shall not apply to claims involving any dispute concerning the interpretation or application of any collective bargaining agreement containing such an arbitration agreement.”

As such, claims for due and unpaid wages are not arbitrable, unless the employee is involved in interstate commerce.  [The Federal Arbitration Act preempts this Labor Code section when the employment at issue involves interstate commerce.]  Also, this statute is limited to claims for unpaid wages, and does not apply to causes of action for failure to provide mandated meal and rest breaks, waiting time penalties, and/or failure to provide itemized wage statements.  Lane v. Francis Capital Management LLC, 224 Cal.App.4th 676 (2014).    

            The fourth step is to make sure that the arbitration provision includes an express statement that the employee gives up any right to bring or to join in a class action, and a specific acknowledgement that any claim will be asserted only on an individual basis (except for a PAGA claim, as noted above).  The National Labor Relations Board ("NLRB") continues to assert that waivers of the right to pursue collective actions are invalid (since its decision in the D.R. Horton matter, 357 NLRB 184), but California law holds that such waivers are valid.  Franco v. Arakelian Enterprises, Inc., 234 Cal.App.4th 947 (2015).  This is important because the number of wage and hour class action lawsuits being filed has continued to rise over the last three years, with the Ninth Circuit (along with the Second Circuit) having more cases filed and more classes certified than any other area of the country.  

            The final step in the process is to make sure that the arbitration agreement and/or clause clearly delegates to the arbitrator the authority to make all determinations with respect to the dispute, including the validity of the arbitration provision itself.  The United States Supreme Court has held that parties may agree to delegate questions of arbitrability to the arbitrator, and where they have done so, any challenge to the validity of the arbitration agreement and/or clause as a whole is left to the arbitrator.  Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 72 (2010).  It is important, however, that the delegation be clear and unmistakable.

Your Buchman Provine Brothers Smith LLP employment attorney can assist you in drafting an arbitration agreement that will provide your company with the protection that the law provides.  Please feel free to contact the Firm with any questions that you may have regarding arbitration agreements and any other employment related matters.

Authored by:
Horace W. Green, Esq.
T: (925) 944-9700
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