California Employment Contracts: Arbitration Clauses

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You may have heard the term “arbitration” or seen an arbitration clause in an employment contract. While this type of clause may seem simple on its face, in practice agreeing to arbitration can have a substantial effect on your rights if you have a dispute with your employer. Read on to learn more about arbitration clauses.

What is Arbitration?

Arbitration is a method of private dispute resolution outside of the courts. Instead of a judge, an impartial third person known as an arbitrator decides a dispute.[1] The arbitrator’s decision is usually binding on the parties. Also, the decision can later be enforced in court.[2]

What is an Arbitration Clause?

Many contracts for employment contain arbitration clauses requiring that if the parties have a dispute arising under the contract, they resolve the dispute before an arbitrator. Here is an example of an arbitration clause:

Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be determined by arbitration in Los Angeles County, California before one arbitrator. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures. Judgment on the Award may be entered in any court having jurisdiction. This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from a court of appropriate jurisdiction.”[3]

Enforceability of Arbitration Clauses

Arbitration clauses in written agreements are generally enforceable under California and federal law.[4] This means that, should a dispute arise regarding the contents of an agreement that has an arbitration clause, one of the parties to the agreement cannot sue the other party in court. Instead, the party must make a demand for arbitration.

Often, in order to accept a job, an employee must sign a contract containing an arbitration clause. The employee is faced with little choice but to accept the clause or lose the job.[5] However, signing an arbitration agreement does not necessarily mean it is enforceable in a court of law. There are certain requirements that must be met in order for an arbitration clause to be deemed enforceable. First, arbitration agreements may not contain certain “unwaivable” rights, such as minimum wage requirements. Second, arbitration agreements may be unenforceable in California if they are 1) unconscionable[6] and 2) do not meet four additional criteria for enforceability.[7]

Agreements Usually Must Be in Writing

An arbitration agreement must be in writing to be enforceable in court.[8] But if an employee orally agrees to extend or renew an arbitration agreement that is expiring, the agreement can still be enforceable in court.[9] In addition, arbitrators can still decide employment disputes if the employer and employee voluntarily agree to arbitrate without a written agreement.

Hidden Arbitration Agreements

Since employers almost always draft employment contracts, employees often sign a contract containing an arbitration provision without realizing it.

Often, employers include an arbitration clause in an employee handbook rather than in an employment contract itself. In some cases, even job applications have arbitration clauses. The content of the handbook or application, location of the clause, and timing of receiving the handbook or application can all affect enforceability of an arbitration clause.

Content of Arbitration Clauses

Arbitration clauses usually mention a specific set of rules to follow and often list procedures to use during an arbitration. For example, a contract might require that the parties arbitrate disputes arising under the contract using the “AAA employment arbitration rules” (AAA stands for the American Arbitration Association and is one of several private organizations of arbitrators.) A contract might also require a panel of three arbitrators and allow two depositions prior to an arbitration hearing. If the contract is silent on rules or procedures, a party has more leeway to negotiate with the other party regarding which rules and procedures apply.

Which Law Governs Arbitration Clauses?

The language of an arbitration clause and the contract containing it greatly affects which laws are used to interpret the clause.

If the Contract Specifies the Law

Generally, the parties agree that a particular set of laws (for example, California law) will govern interpretation of the contract or interpretation of just the arbitration clause.[10] Checking the specific language used in the contract is key to determining this. Surprisingly, even if the contract says that it is governed by California law, the arbitration clause itself is not necessarily interpreted under California law.

If the Contract Doesn’t Specify the Law

If no law is specified, either the California Arbitration Act or the Federal Arbitration Act may apply when a party seeks to enforce arbitration clauses in California employment contracts. Generally, California law applies to interpret the contract itself, and it may also be used to interpret the arbitration clause. If the contract involves interstate or foreign commerce or maritime transactions, then the Federal Arbitration Act likely applies to interpret the arbitration clause instead.

For example, an account executive’s employment contract with a stock brokerage was found to involve interstate commerce, and thus the FAA applied to the arbitration clause.[11] One consequence of the FAA applying is that the employee may not be able to pursue class arbitration, meaning employees may not participate in arbitration as a combined group against an employer.[12] There are numerous other differences between California and federal law on arbitration clauses.

Defenses to Forced Arbitration of Employment Disputes

A number of defenses may apply if an employee decides to challenge whether he must arbitrate a dispute falling under his employment contract. First, unfortunately it is no defense for the employee to claim that he did not read or understand an arbitration clause.[13] However, he instead might claim one of the following:

  • Fraud in the inception:
    • The employee did not intend to enter into an employment contract containing an arbitration clause at all, did not know what he was signing, and was deceived. This defense is decided by a court, not an arbitrator.[14]
  • Fraud in the inducement:
    • The employee knew what he was signing, but the employer got the employee to sign the employment contract containing an arbitration clause by fraud. This defense is decided by an arbitrator.[15]
  • Duress:
    • The employee was coerced into signing the employment contract containing an arbitration clause.
  • Illegal agreement:
    • The goals of the employment contract are illegal. For example, in some instances waiver of an employee’s right to fees, waiver of the right to file charges with an administrative agency, or waiver of the right to seek public injunctive relief may be illegal.[16]
  • Unconscionability:
    • An agreement to arbitrate may be unconscionable, meaning unreasonably favorable to one party considering the agreement’s terms and the circumstances of entering into the agreement. This defense is generally decided by a court.[17]

Timing After a Dispute Arises

Parties to an arbitration agreement must make a timely demand for arbitration. Whether a demand is “timely” depends on if the parties agreed to a deadline to seek arbitration after a dispute arises. If there is no deadline, then the employer or employee can demand arbitration within a “reasonable time”. How long that is depends on 1) the parties’ situation, 2) the nature of the transaction, and 3) the facts of the particular case.[18] If you think you might have a claim against an employer and you have an arbitration agreement with the employer, check for any applicable deadlines.

If you receive an arbitration demand from an employer, make sure to determine how long you have to respond and then respond in a timely fashion. If you do not, it is possible for the arbitrator to decide the dispute without your participation. In addition, seek legal representation as soon as possible to learn more about your rights.

Why Should Employees Care About Arbitration?

Some may ask why it matters if a dispute is heard by an arbitrator versus a judge, or why understanding arbitration clauses before disputes arise matters. It matters because employees’ unfamiliarity with the arbitration process, the defenses available, and the timelines involved may skew arbitration in the employers’ favor.

Possibility of Arbitrator Bias

Public perception of arbitration for employment contract disputes leans towards arbitration being better for employers, not employees. Arbitrators are paid by the parties to resolve a dispute. If an employer repeatedly pays the same arbitrator or firm for handling various disputes, the arbitrator may have an incentive to find in favor of the employer or to decide that a dispute is arbitrable in the first place.[19] Further, arbitrators are chosen by the parties, not elected or appointed like judges, and there is no requirement that an arbitrator be an expert in a dispute’s subject matter.

In addition to possible arbitrator bias, employees who do not have an attorney are more likely than employers to be unfamiliar with the arbitration process and thus be blindsided by hidden costs or be unaware of how best to use the arbitration process to their advantage. In addition, defenses to arbitrating disputes or enforcing an arbitration clause may be difficult for employees to show, or they may have missed a crucial deadline in the process.

Final Thoughts

Employment agreements that contain agreements to arbitrate have many pitfalls and are often more complicated than they seem. Reading and understanding what an arbitration clause means is critical in case of future disputes with an employer.

Employment lawyers, like Attorneys for Employee Rights, can help you understand your rights if your employment contract has an arbitration clause. Time is always important in legal matters and could be critically short in your case, so contact a licensed attorney today.

[1] Herman Feil, Inc. v. Design Center of Los Angeles (1988) 204 Cal.App.3d 1406, 1414.

[2] A decision can be enforced in court to, for example, collect any monetary award made by the arbitrator. However, the law greatly limits courts’ abilities to change or vacate an arbitrator’s decision. See Code of Civil Procedure § 1286.2; 9 U.S.C. § 10.

[3] See “JAMS Clause Workbook: A Guide to Drafting Dispute Resolution Clauses for Commercial Contracts”, effective April 1, 2015, JAMS, http://www.jamsadr.com/clauses/.

[4] California Arbitration Act, Code of Civil Procedure §1280 et seq.; Federal Arbitration Act, 9 U.S.C. § 1 et seq.

[5] To be explored in more depth in a future article.

[6] Discussed briefly below.

[7] To be explored in more depth in a future article. The key case explaining the four criteria is Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83.

[8] See Code of Civil Procedure § 1281; 9 U.S.C. § 2.

[9] Code of Civil Procedure § 1280(f).

[10] See Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ. (1989) 489 U.S. 468, 479; see also Pinela v. Neiman Marcus Group, Inc. (2015) 238 Cal.App.4th 227, 246-48.

[11] See Perry v. Thomas (1987) 482 U.S. 483, 490; Thorup v. Dean Witter Reynolds, Inc. (1986) 180 Cal.App.3d 228, 233.

[12] To be explored in more depth in a future article.

[13] See, e.g., Madden v. Kaiser Found. Hosps. (1976) 17 Cal.3d 699, 710.

[14] Rosenthal v. Great Western Fin’l Securities Corp. (1996) 14 Cal.4th 394, 415

[15] Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 395, 402-404.

[16] Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th at pp. 103-104; see Davis v. O’Melveny & Myers (9th Cir. 2007) 485 F.3d 1066, 1083, 1082 (applying California law) (overruled on other grounds in Kilgore v. KeyBank, Nat’l Ass’n (9th Cir. 2012) 673 F.3d 947, 960).

[17] Doctor’s Assocs., Inc. v. Casarotto (1996) 517 U.S. 681, 686-87; Ajamian v. CantorCO2e, L.P. (2012) 203 Cal.App.4th 771, 787-88.

[18] Spear v. California State Auto. Ass’n (1992) 2 Cal.4th 1035, 1043; Sawday v. Vista Irrig. Dist. (1966) 64 Cal.2d 833, 836-37.

[19] Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494, 505; see Armendariz v. Foundation Health Psychcare Services, Inc., supra, 24 Cal.4th 83 at pp. 115, 119.

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