Are your Employment Arbitration Agreements Still Enforceable?

By Christopher W. Olmsted, Esq.

Employment arbitration agreements have been the subject of continuing refinement by California courts. As discussed below, recent case law should prompt employers to review their arbitration agreements to minimize the risk that a court will find the agreements unenforceable.

Background
In the last few decades, employee lawsuits have increased exponentially. In response to the expense and uncertainty of jury trials, employers have resorted to contractual arbitration as a less-expensive and timesaving alternative. Typically, employers have required new hires to sign arbitration contracts as a condition of employment. The parties agree to waive the right to a jury trial, and submit specified legal claims to an arbitrator, who is usually a retired judge.

State and federal courts have, for the most part, been willing to enforce employment arbitration agreements. For public policy reasons, arbitration is an accepted and favored alternative to the overburdened court system. As explained below, however, an increasing number of arbitration agreements have been found to be unenforceable in light of recent court decisions.

Basic Requirements For An Enforceable Employment Arbitration Agreement
In a year 2000 landmark California Supreme Court case, Armendariz v. Foundation Health Psychare Services, Inc., the court upheld the enforceability of agreements requiring employees to arbitrate Fair Employment and Housing Act (FEHA) claims as long as the agreements are not “unconscionable.”

In a nutshell, the court set forth the following requirements:

• The agreement must be bilateral—employer must agree to submit its claims to arbitration, just as it requires employees to do so, absent a legitimate commercial need to exempt a particular right.
• Neutral arbitrator.
• Employer pays arbitrator’s fees and all costs unique to arbitration.
• Adequate discovery permitted.
• No limits on damages or other relief.
• Written award that permits limited judicial review.

• Provision allowing appeal of awards over $50,000 is unconscionable (it is onesided, benefiting only the employer).
• “Severing” unfair terms in agreements is possible where a single provision can simply be eliminated and no redrafting is necessary.

• Prohibition of discovery was unconscionable.
• Incorporation of AAA rules requiring an equal fee split was unconscionable.
• Employer’s right to proceed in court for all injunctive relief was not supported by business justification (the arbitrator can provide injunctive relief).
• Unconscionable terms could not be severed (unlike Little) because there was more than one unfair provision, and the agreement would have to be redrafted to make it compliant with Armendariz.

• Agreement does not specify all types of employee claims subject to arbitration (including statutory claims).
• Arbitration terms are found in the company handbook and are not properly incorporated into an employee contract.
• Employer is not required to arbitrate its claims against employee. For example, older agreements commonly reserve the right of the employer to seek injunctive relief against former employees to prevent misuse of trade secrets or customer lists. These provisions should be revised to carve out only temporary emergency relief rather than all injunctive relief.
• Arbitrators are pre-selected by the employer or selected from a trade group or other limited pool. These arbitrators may not be “neutral.”
• Parties split costs.
• No discovery permitted or unreasonable restrictions such as “one deposition per side.”
• Incorporation of arbitration rules from an outside source (such as AAA) that may or may not be compliant with recent case law.