Arbitration Agreements in California: Are they enforceable or not?

A constant question posed by employers is whether an arbitration provision in an employment contract is enforceable in California. Recently, much of the discussion on this topic has been focused on the enforceability of class action waivers in arbitration provisions which are generally not applicable to small and medium sized employers. In light of this point, it is helpful to go back and discuss the basic principles and requirements which are utilized in determining whether a general arbitration provision in an employment contract is enforceable in California.

The first question which must be addressed is whether the arbitration provision covers unwaivable public rights (typically those rights afforded by statute such as minimum wage, overtime and discrimination claims) or waivable private rights (such as confidentiality agreements and ownership of work product created during employment). Both types of claims require that an arbitration provision not be unconscionable (discussed below). In addition, for claims arising from unwaivable public rights, the arbitration provision must also contain four additional elements in order to be deemed enforceable.

Unconscionable

Determining whether an arbitration provision is unconscionable requires both a procedural and substantive analysis. “Both procedural and substantive unconscionability must be present before a court can refuse to enforce an arbitration provision based on unconscionability. However, the two elements need not be present in the same degree.” Courts use a sliding scale approach in assessing the two elements. “In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” Abramson v. Juniper Networks, Inc. (2004) 115 Cal.App.4th 638, 656.

Procedural unconscionability concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. The relevant factors are oppression and surprise. Id. “Procedural unconscionability turns on adhesiveness—a set of circumstances in which the weaker or adhering party is presented a contract drafted by the stronger party on a take it or leave it basis.” Id. at 662. When an arbitration agreement is required by an employer as a condition of employment, the arbitration agreement is deemed to be adhesive. Amendariz v. Foundation Healthy Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114-115. In such circumstances, an arbitration agreement is deemed to be procedurally unconscionable even if no element of surprise is presented. Juniper, 115 Cal.App.4th at 662. The employee’s ability to negotiate other parts of his/her employment contract does not alter this conclusion. Id.

In the context of employment contracts, arbitration agreements are almost always presented in the “take it or leave it” fashion. As such, it is almost certain that an arbitration provision in an employment contract will be deemed to be procedurally unconscionable. The only exception being if the arbitration provision is a voluntary provision in the contract that the employee can opt out of when he/she signs the contract. When an arbitration is procedurally unconscionable, the question then turns to whether the arbitration provision is also substantively unconscionable.

Substantive unconscionability focuses on the terms of the agreement and whether those terms are so one-sided as to shock the conscience. Courts have identified a number of factors that may result in substantive unconscionability. (See; e.g., Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1072–1074 [provision for appeal of arbitration awards exceeding $50,000, which the court found unduly one-sided in employer’s favor]; McManus v. CIBC World Markets Corp. (2003) 109 Cal.App.4th 76, 93 [imposition of forum costs on employee, which the court found unconscionable]; Pinedo v. Premium Tobacco Stores, Inc. (2000) 85 Cal.App.4th 774, 781 [three factors: limitation on employee’s damage recovery, requirement that arbitration be heard in Oakland, California, and proviso that employee pay all costs, which together made the agreement “at least equally unconscionable to the one presented in Armendariz ”]; Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1542 [provision for employee’s loss of job, salary, and benefits during pendency of arbitration, which the court characterized as the “most extreme burden” among several unconscionable clauses].)

But the paramount consideration in assessing substantive conscionability is mutuality. “Substantively unconscionable terms may take various forms, but may generally be described as unfairly one-sided.” Agreements to arbitrate must contain at least a modicum of bilaterality to avoid unconscionability. Armendariz, supra, 24 Cal.4th at 119. When only the weaker party’s claims are subject to arbitration, and there is no reasonable justification for that lack of symmetry, the agreement lacks the requisite degree of mutuality. Id. at 119–120. As the California Supreme Court recognized in Armendariz, “an arbitration agreement imposed in an adhesive context lacks basic fairness and mutuality if it requires one contracting party, but not the other, to arbitrate all claims arising out of the same transaction or occurrence or series of transactions or occurrences.” Id. at 120. As the court also recognized, “lack of mutuality can be manifested as much by what the agreement does not provide as by what it does.” Id.

To summarize, in order to increase the chance that an arbitration provision is not deemed to be substantively unconscionable, it must be as neutral and mutual as possible. Any restrictions placed on the employee should also be placed on the employer. Any benefits, rights or remedies provided to the employer should also be given to the employee.

Arbitration of Unwaivable Public Rights

As stated above, in order for an arbitration provision which covers unwaivable public rights to be deemed enforceable, in addition to not being unconscionable, it must also contain the following four elements which were set forth by the California Supreme Court in Amendariz:

  • No Limitation of Remedies: The arbitration provision must not limit any statutorily imposed remedies that may be available to the employee. For example, various Labor Code statutes provide than an employee who brings wage claims may recover their attorneys fees. Other codes provide that an employer may be liable for punitive damages in certain cases. Arbitration agreements which state that both parties will bear their own attorneys fees or that punitive damages will not be available are examples of impermissible restrictions on remedies.
  • Adequate Discovery: The arbitration provision must allow the parties to obtain a full range of discovery. Arbitration provisions should not include restrictions which prevent the parties from taking depositions or obtaining documents from the adverse party.
  • Written Arbitration Award: The arbitration award must call for the arbitrator to issue a written decision which reveals the essential findings and conclusions which form the basis of the award.
  • Employee Cannot Be Required to Pay Any Costs of Arbitration: The arbitration provision cannot place the burden of paying the costs of arbitration upon the employee in any fashion. In order for an arbitration provision to be deemed enforceable, the employer must pay all costs associated with arbitration.

In deciding whether to include an arbitration provision in an employment contract, employers must weigh the costs and benefits of doing so and ensure that the language contained therein does not run afoul of California’s strict rules on this issue.

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