Nuts and Bolts of Arbitration Agreements

Arbitration agreements are common in the employment context. There has been much recent activity in the courts regarding what an employer can and cannot include in such an agreement. This is significant for employers, who should be aware of and understand these developments to ensure any arbitration agreement they use is enforceable under current state and federal law.

Should You Have an Arbitration Agreement?

There are many reasons an employer may favor arbitration over litigating employee disputes in court. The parties avoid having their dispute decided by a jury of randomly-selected people who are unfamiliar with the case or the law. They avoid the danger of a deadlocked jury and mistrial, which will require the case be retried at significant expense to both parties. Arbitration is more private in that it does not become part of the public record in the same way court proceedings and orders do. The parties select the arbitrator, versus being randomly assigned to a judge, and often have some control over the rules of procedure the arbitrator will use. Matters may be resolved more quickly than in court. To the extent employers can require an employee waive class arbitration, employers are able to settle disputes individually, which can greatly reduce the potential liability the employer faces when there is an unfavorable result. These are just some of the numerous advantages arbitration can provide.

Employers should also be aware, however, that there can be numerous disadvantages to arbitration. For example, while arbitration has traditionally been considered less costly, this may not be the case in the employment context because the employer will be required to pay all costs the employee would not have had to bear if they had proceeded in court. This includes the arbitrator’s fees, which can be significant. As another example, the legal standard of review one must meet to set aside an arbitration award is much more stringent than the standard of review that would apply in a traditional appeal, and the arbitrator’s decision may stand even if the arbitrator misapplied the law.

An employer should consider the advantages and disadvantages of arbitration before deciding to utilize an arbitration agreement.

What Is Required for an Arbitration Agreement to Be Enforceable?

An employer may require an employee sign an arbitration agreement as a condition of employment. However, there are certain minimum requirements necessary for such an agreement to be enforceable. A valid arbitration agreement must be in writing. Also, there are certain minimum protections for the employee that the employer must put in place so the arbitration agreement is not found unconscionable and thus unenforceable. Namely, in Armendariz v. Foundation Health Psychare Services, 24 Cal.4th 83 (2000), the California Supreme Court held that at a minimum an employee is entitled to 1) a neutral arbitrator, 2) sufficient discovery to vindicate their claims, 3) a written decision and judicial review, 4) all remedies available in court, and 5) and no responsibility for costs they would not have incurred had they proceeded in court.

Even if these minimum standards are met, a court may still refuse to enforce an arbitration agreement if it is otherwise procedurally and substantively unconscionable. There are many things an employer can do to avoid such an outcome. For example, make the agreement clear—the employee should understand what they are signing, and the grievance process should be outlined. It should state that the employer will take on any costs associated with the arbitration, and all other protections required by Armendariz should also be explicitly guaranteed. The employer should make any procedural rules it identifies as governing arbitration accessible to the employee. The employer should allow the employee adequate time to review the agreement, with a lawyer if necessary, and decide whether to accept it. The obligations under the arbitration agreement should, to the extent possible, apply equally to employee and employer.

Recent Developments in the Law Governing Arbitration Agreements.

There have been multiple decisions by California and federal courts recently regarding what an employer can and cannot include in an arbitration agreement and how such agreements will be interpreted. Some of the more important decisions are…

Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010) – The United States Supreme Court held that a party may not be compelled under the Federal Arbitration Act to submit to class arbitration unless there is a contractual basis for concluding the party agreed to do so, which there is not if the agreement is silent on the issue.

*The Ninth Circuit Court of Appeals later held in Varela v. Lamps Plus, Inc., in 2017, that where an arbitration agreement was ambiguous as to whether class-wide arbitration was permitted, the agreement would be construed against the employer to allow class-wide arbitration. However, this case arguably conflicts with the Supreme Court’s holding in Stolt-Nielsen, it was not selected for publication, and the Supreme Court has granted certiorari to review the holding such that the case may likely be overturned.

AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) – The United States Supreme Court held the Federal Arbitration Act preempts California’s judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts.

Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014) – The California Supreme Court held the Federal Arbitration Act does not preempt state law as to enforceability of an employee’s waiver of representative Private Attorney General Act claims, and such a waiver violates public policy in California.

Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) – The United States Supreme Court held that the Federal Arbitration Act’s savings clause does not provide a basis for refusing to enforce arbitration agreements waiving collective action procedures for claims under the Fair Labor Standards Act and class action procedures for claims under state law.  Further, such waivers do not violate the provision of the National Labor Relations Act guaranteeing workers the right to engage in concerted activities.

Is Your Arbitration Agreement Valid?

If you are an employer and would like an attorney to review your existing arbitration agreement or prepare an arbitration agreement for you, the attorneys at Palmer Kazanjian Wohl Hodson LLP specialize in employment law and can customize an agreement that is tailored to your unique circumstances and comports with state and federal law.