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California Employment News: Recent California Decisions Clarify Enforceability of Arbitration Agreements Required as a Condition of Employment

Table of Contents

Overview
Recent California Decisions
FEHA Agreement Criteria
Procedural Skirmishes
Court of Appeals Decision Increases Employee Risks
Conclusion
Disclosure

Overview

Many employers require as a condition of employment that employees agree in advance to arbitrate employment disputes. A well-crafted arbitration agreement can provide a vehicle for reducing the time, expense, disruption to the employer's business, and publicity often associated with litigating employment disputes in court. Arbitration also eliminates an employer's exposure to runaway jury verdicts. Recent California decisions have clarified the enforceability of arbitration agreements required as a condition of employment.

Recent California Decisions

In Armendariz v. Foundation Health Psychcare Services, 2000 Cal. LEXIS 6120, the California Supreme Court analyzed the enforceability of arbitration agreements and added a new criterion for determining whether arbitration agreements required as a condition of employment are enforceable. In Armendariz, two employees who had signed arbitration agreements filed suit alleging wrongful termination because of actual or perceived heterosexual orientation in violation of the California Fair Employment and Housing Act (FEHA). The employer responded by filing a petition to compel arbitration. The trial court refused to enforce the arbitration agreements.

On appeal, the California Supreme Court held that mandatory arbitration agreements are enforceable, but employees alleging FEHA violations could not be required to pay a portion of the arbitrator's fee. The Court reasoned that the specter of incurring arbitration costs would have a chilling effect on an employee's exercise of his or her statutory rights.

Following existing precedent, the Court also ruled that certain features of the arbitration agreements at issue in Armendariz were unconscionable and that the agreements were therefore unenforceable. The Court ruled that the agreements impermissibly required employees to submit claims to arbitration while permitting the employer to bring suit in court and impermissibly limited the damages available to aggrieved employees.

FEHA Agreement Criteria

While it is too early to be certain whether courts will require employers to bear the cost of arbitration in cases that do not involve alleged FEHA violations, California employers wishing to increase the probability that existing or future arbitration agreements will be enforced should ensure that such agreements meet the following criteria:

1. The agreement should require both the employer and the employee to submit employment-related disputes to arbitration.

2. The agreement should contain a mechanism for selecting a neutral arbitrator.

3. The agreement should provide for adequate discovery, including reasonable access to documents and witnesses.

4. The agreement should require the arbitrator to issue a written award setting forth the essential findings and conclusions on which the award is based.

5. The agreement should permit the arbitrator to award the same relief as would be available if the claim were brought in court, including punitive damages.

6. The agreement should require the employer to bear the cost of the arbitrator's fee.

7. The agreement should exempt claims for workers' compensation benefits, unemployment insurance benefits, and actions solely for collection of allegedly due and unpaid wages.

An arbitration agreement satisfying all of the above criteria will stand the best chance of withstanding challenges to its enforceability.

Procedural Skirmishes

Closely related to the rules governing the enforceability of mandatory arbitration agreements are the procedural skirmishes that frequently take place at the outset of employment disputes. Often, an employee asserting a claim against an employer will file a lawsuit and refuse to comply voluntarily with an arbitration agreement. The employer is then put to the choice of waiving its right to arbitrate or incurring the expense of seeking a court order compelling arbitration.

Court of Appeals Decision Increases Employee Risks

A recent Court of Appeal decision substantially increases the risks incurred by employees who repudiate enforceable arbitration agreements. In Martinez v. Scott Specialty Gases, 2000 Cal. LEXIS 757, the California Court of Appeal held that an unqualified refusal to comply with an enforceable arbitration agreement can be fatal to whatever claims an employee might otherwise have been entitled to assert.

At the time he was hired in 1997, the employee in Martinez received an employee handbook containing an arbitration agreement. The employee signed an acknowledgment, confirming in writing that he had read the handbook and agreed to arbitrate employment-related claims. The arbitration provisions of the handbook stated that any failure to seek arbitration within one year would constitute a waiver of the right to raise any claims subject to the arbitration agreement. In 1998, the employer published a revised handbook and acknowledgment form, but the employee never signed the new acknowledgment form. Three months later, the employee was terminated for reasons unrelated to his failure to sign the acknowledgment form.

When the employee filed suit alleging wrongful termination, the employer demanded that the employee dismiss the lawsuit and submit his claims to arbitration. The employee refused and asserted that he was not required to arbitrate his claims because the revised handbook and acknowledgment form he did not sign superseded the earlier handbook and acknowledgment form he did sign. The employer thereafter brought a motion arguing two alternative theories: (1) that it was entitled to summary judgment because the employee had repudiated the arbitration agreement and thereby waived the sole means for him to pursue his claims; and (2) that the employer was, at a minimum, entitled to an order staying the lawsuit and ordering the employee to submit his claims to arbitration. The trial court held that the 1997 agreement remained in effect and controlled the employee's claims. The trial court also ruled that the employee's repudiation of that agreement entitled the employer to summary judgment.

Undoubtedly concerned that the summary judgment might be affirmed, the employee argued for the first time on appeal that the trial court should have stayed the lawsuit and ordered the parties to arbitration. The Court of Appeal disagreed. It affirmed the trial court's ruling that the 1997 agreement remained in effect and that the employee's repeated refusal to submit his dispute to arbitration constituted a waiver of his right to arbitrate his claims against the employer. The Court remarked, "[p]laintiffs waived their right to arbitrate as a matter of law and, while perhaps genuinely regretting this now that they find themselves without any recourse against defendants, they have themselves to blame for their predicament."

Conclusion

The result in Martinez should deter unfounded refusals to comply with arbitration agreements. For employees who are not deterred, the Martinez decision provides employers with authority to seek summary judgment based on an employee's refusal to comply with an enforceable arbitration agreement.

Disclosure

This newsletter has been prepared by Arter & Hadden LLP for the information of our clients and friends. Although prepared by professionals, this newsletter should not be utilized as a substitute for legal counseling in specific situations. Readers should not act upon the information contained herein without professional guidance. The hiring of a lawyer is an important decision that should not be based on advertisements. Before you decide, ask us to send you free written information about our qualifications and experience.

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