Creating an "Enforceable" Employment Arbitration Agreement Under California Law Is Becoming More of a Challenge


May 01, 2008
Over the last few years, many California employers have sought some refuge from the high cost and drawn out impact of employment litigation in state and federal courts by imposing employment arbitration agreements on employees to resolve work-related disputes through arbitration. In many instances, employers have made employment arbitration agreements mandatory for all employees as a condition of employment.

While California and federal law have generally been construed to protect an employer’s ability to use an employment arbitration agreement in the workplace, recent cases from both California and federal courts appear to further limit the scope of these employment arbitration agreements and the means an employer can use to implement such agreements among their employees. As a result, the odds of finding an employment arbitration agreement that will hold up to these strict standards are not improving.

Below is a summary of the court cases reviewing employment arbitration agreements under California law which have led to this dilemma.

California’s Armendariz Standard for Employment Arbitration Agreements

The prevailing California Supreme Court case reviewing mandatory employment arbitration agreements is Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83. In Armendariz, the court reviewed a case involving a mandatory employment arbitration agreement that had been challenged as being unconscionable because the agreement was alleged to have been too one-sided towards the employer, therefore taking away from an employee’s ability to properly adjudicate an employment-related dispute that may arise in the workplace.

While the Armendariz court eventually found the employment arbitration agreement to be unconscionable and therefore unenforceable, the court also discussed a minimum set of guidelines that employers must follow for a mandatory employment arbitration agreement to be valid under California law, including the following provisions:

  • Provides for a neutral arbitrator;
  • Provides for more than minimal discovery;
  • Requires a written award;
  • Provides for all types of relief that would otherwise be available in court; and
  • Does not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.

However, to compound these minimum standards, the Armendariz court also held that there has to be both "procedural" unconscionability and "substantive" unconscionability in the terms of a mandatory employment arbitration agreement for a court to have the ability to refuse to enforce the agreement in whole or in part.

Procedural unconscionability arises when there is oppression or surprise in the means of executing an arbitration agreement between the parties. For example, a mandatory arbitration agreement where an employee must consent to the agreement as a condition of employment is generally going to be procedurally unconscionable. Substantive unconscionability occurs where the agreement is overly harsh to one party (usually the employee) or one-sided in favor of a particular party (usually the employer). In addition to the minimum requirements listed above, substantive unconscionability can also be found in an agreement where only an employee is required to use arbitration while an employer can go to court instead of arbitration.

While both procedural and substantive unconscionability must be present to find a mandatory employment arbitration agreement to be unenforceable, the Armendariz court also noted that both forms of unconscionability need not be present to the same degree for the agreement to be unenforceable - thus, a "sliding scale" analysis can be used. If an agreement is permeated with procedural unconscionability, there only need be some form of substantive unconscionability present for a court to find the agreement unenforceable in whole or in part. As a result, Armendariz implies that a mandatory employment arbitration agreement may be valid even where it is procedurally unconscionable because of its mandatory nature, so long as the terms of the agreement are not substantively unconscionable in favor of the employer.

? Judicial Review of Employment Arbitration Agreements Since Armendariz

This obscure "sliding scale" of procedural and substantive unconscionability of mandatory employment arbitration agreements set forth by the California Supreme Court in Armendariz has led to a number of interpretations by both federal and state courts that tend to be less in favor of mandatory arbitration agreements. Unfortunately the court decisions following Armendariz have not provided much clarification of when a mandatory arbitration agreement can be found to be valid.

Federal Court Decisions

The U.S. Ninth Circuit Court of Appeals has interpreted California law in reviewing the legality of employment arbitration agreements in a number of decisions since Armendariz. Most notable are the following decisions:

Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) - The Ninth Circuit ruled that an arbitration agreement was both procedurally and substantively unconscionable. All job applicants were required to submit to the arbitration agreement as a condition of employment which constituted procedural unconscionability. The terms of the agreement were substantively unconscionable because they were one sided in favor of the employer, including limitations on claims and remedies available, and a cost-splitting provision which would make it difficult for employees to redress their claims.

EEOC v. Luce, Forward, Hamilton & Scripps, 345 F.3d 742 (9th Cir. 2003) - In an interesting case, the Ninth Circuit en banc overruled previous precedent and held that an employer can implement a mandatory arbitration agreement of Title VII claims as a condition of employment. However, the holding in this case was limited to the ability to institute mandatory arbitration agreements under Title VII, and did not review the procedural/substantive unconscionability of the agreement under California law.

Davis v. O’Melveny & Meyers, 485 F.3d 1066 (9th Cir. 2007) - Similar to Ingle, the Ninth Circuit held an arbitration agreement to be both procedurally and substantively unconscionable where the agreement was imposed on all employees as a condition of employment (procedural unconscionability), and where it imposed unduly burdensome notice and confidentiality provisions and an exemption from arbitration for attorney-client privilege disputes (substantive unconscionability).

California State Court Decisions

Recent California appellate court rulings have also taken a closer look at employment arbitration agreements:

Gentry v. Superior Court (2007) 42 Cal. 4th 443 - In this case, the California Supreme Court found an employment arbitration agreement used by Circuit City that included a class arbitration waiver to be substantively unconscionable. As well, the court found that Circuit City’s policy of allowing an employee 30 days to opt-out of the arbitration agreement following presentation of the agreement was still procedurally unconscionable because it kept the employee bound to the agreement by default unless the employee acted to opt-out of the agreement. As a result, parts of the arbitration agreement were found to be unenforceable.

Metters v. Ralphs Grocery Company (2008) 74 Cal. Rptr. 3d 210 - Although not reviewing a procedural/substantive unconscionability analysis of an arbitration agreement, the court found an arbitration agreement to be invalid where an employee raised a discrimination complaint and the employer unfairly insisted on the employee’s agreement to arbitrate the dispute. In this case, the facts indicated that the employer implied to an employee that the employee must sign an arbitration agreement before the company would review his discrimination complaint. The court refused to compel arbitration because the agreement was unfairly imposed and lacked a "meeting of the minds".

Conclusion - Be Careful in Using Employment Arbitration Agreements

As a result of the unclear status of employment arbitration agreements, California employers who use such agreements should have legal counsel review the agreements to determine their validity. Employers may also want to reconsider the use of an employment arbitration agreement as the potential advantages sought may now be outweighed by the negative impact of such agreements in a judicial environment where they are held to strict scrutiny.

This article was written by Gage C. Dungy, an attorney with the labor and employment law firm of Liebert Cassidy Whitmore (LCW). Mr. Dungy is an Associate in the Fresno office and can be reached at (559) 256-7800 or at gdungy@lcwlegal.com. For more information regarding the information above or our firm please visit our website at www.lcwlegal.com, or contact one of our offices below.

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