Employee Arbitration Agreements in California Explained

What is an Employee Arbitration Agreement?

Employee arbitration agreements are contracts between an employer and an employee in which the employee agrees to waive the right to bring a lawsuit in court in exchange for the employer’s promise to submit the dispute to a neutral third party arbitrator. An arbitration agreement is a legally binding contract whereby both parties agree to a means by which to resolve their disputes outside of court. A skilled attorney can explain what exactly that means.
Generally speaking, an arbitration agreement will provide for either "final and binding" arbitration or "non-binding" arbitration. Final and binding arbitration is precisely what it says. It is final and the arbitrator’s decision is binding upon both parties. Non binding arbitration, however, is merely an advisory opinion provided by the arbitrator, and it is not binding to either party.
Although it may seem like an arbitrary legal term, the term "arbitration" comes from the Latin root palabra arbiter which means "one who renders a judgment" or "a judge." Accordingly, an arbitrator is one who renders a judgment, like a judge.
According to the United States Supreme Court in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 400 (1967), arbitration is "a matter of contract between the parties to that [a]greement." Essentially, the agreement to arbitrate is part of the employment contract. A typical employee arbitration agreement states something like:
Employee agrees to fully submit to the arbitration process outlined in this section and Employee specifically understands and agrees to this alternative method of dispute resolution as a condition of employment with Employer. This policy governs all of Employee’s rights, including, but not limited to, the right to file suit in court. Thereafter , an arbitration proceeding will be conducted in place of a court proceeding. The parties agree that any disputes arising out of or relating to Employee’s employment with the Employer, regardless of the nature of the complaint or claim, shall be submitted to binding arbitration in accordance with the following terms…
Essentially, the arbitration agreement is a condition of employment, but one that must be signed before the employee can start work. It is not, however, a blanket waiver of all claims. Although the waiver of a jury trial and the right to sue for claims that arise after the signing is generally enforceable, waiver of future claims is not. For example, if an employee signs an arbitration agreement, only to later be sexually harassed, she can still go to court to pursue her sexual harassment claim, but her other claims arising out of the employment relationship (combating wage claims, disability issues and so on) are subject to be heard in front of a private arbitrator. The employee cannot, however, sue her employer for retaliation and still maintain claims, such as attacks on the enforceability of the agreement.
The main reason why employers use employee arbitration agreements in California is because they have found that arbitration is generally faster and less expensive than pursuing the exact same dispute through our California court system.
In California, there are many private businesses, organizations, and proceedings that use and rely on private, final and binding arbitration. For example, the Better Business Bureau, the Department of Financial Protection & Innovation, the Judicial Arbitration and Mediation Service, the American Arbitration Association, the National Association of Securities Dealers, and the Financial Industry Regulatory Authority to name a few.

Overview of Arbitration Agreements in California

California’s policy towards arbitration agreements in the workplace has experienced a number of ups and downs. However, some important legal principles continue to remain in effect. For example, while it was once believed that arbitration agreements were basically unenforceable in CA, that is just not the case any longer. The law is now fairly well settled that employees may agree to arbitrate employment claims, meaning that they cannot file certain lawsuits against their employer. Such employment claims include things like workplace torts, discrimination claims, and wage and hour claims. Even though arbitration is a consensual process – there must be an agreement between the parties – California courts will still enforce these so-called forced arbitration agreements. Of course, there are some caveats to this and some exceptions. In fact, arbitration agreements in an employment contract can be unlawful. There are some provisions in contracts that are considered anathema to the law and public policy in California. So, here are some basic legal principles that are still true with regard to the enforcement of arbitration agreements in the employment context in California:
• The Federal Arbitration Act applies to arbitrations regarding interstate commerce, but California’s laws apply to intrastate commerce.
• An arbitration agreement does not have to be valid under the Civil Code to be enforced. It is governed by the Federal Arbitration Act, which is independent from state law.
• Employers must provide an arbitration agreement in a format that is easily readable, such as 12 point font, and the language must be easily understandable. Employers may not conceal the terms of the arbitration agreement so it is ineffective.
• An employer cannot prevent an employee from filing discrimination, harassment or retaliation claims with the Fair Employment and Housing Department (FEHD) or the Equal Employment Opportunity Commission (EEOC). That would be contrary to public policy.
• Employees maintain the right to pursue PAGA claims, pursuant to Iskanian v. CLS Transportation L.A., LLC (2014) 59 Cal. 4th 348, 382: In Iskanian, our Supreme Court held that: "We now hold that, as a matter of state law, PAGA actions do not constitute ‘private[ ] attorney general] suit[s]’ within the meaning of § 16(b) of the FAA." This means that it is now mandatory for employers to include the Iskanian waiver in their arbitration agreements.

Pros and Cons for Employees and Employers

There are pros and cons for both sides when it comes to arbitration. For employers, the main statutory policies that are being violated in California include the need for reasonable predictability in outcomes; the need for publication of decisions; and the need for the judicial branch to have the final say over employees’ claims. Put simply, arbitration can make it easier to defend against claims, lead to the resolution of many claims, and is typically much faster than a lawsuit. Arbitration agreements can also benefit employers by lumping together many claims that might be difficult to sort out into separate damages categories under normal litigation rules. This allows an employer to avoid long and costly processes related to each type of claim. Often, being able to resolve many claims quickly is enough of a plus to outweigh the cost of arbitral forum fees (which can be in the thousands of dollars), and the risk of losing a decision maker who is more familiar with the litigation process.
For employees, the disadvantage to arbitration is usually that they have limited access to discovery (questions that are usually allowed by a court but not by an arbitrator). They don’t have the same opportunity to file claims in a public action where the decision may create a precedent of a positive result that future Plaintiffs can rely on. Some employees, such as those in professional fields, are also notably happy to save expensive overhead because the employer is not forced to defend against baseless and inflated claims. It also can be less time-consuming for the employee to pursue a claim. For example, according to the American Arbitration Association, in 2012 an arbitration, on average, took 5.8 months to resolve, while the case took an average of 13.4 months in the courts. However, the disadvantages of arbitration can be severe; arbitration agreements might limit recovery of punitive damages, for example, or attorneys’ fees. Employees also might not receive as much for their claim because the decision maker is not a Judge and there is no due process given for termination of employment, thereby making discrimination claims more difficult to prove.

Recent Developments and Court Cases

Despite the pro-arbitration federal policy, California continues to produce an onslaught of restrictions on the enforceability and scope of employee arbitration agreements under state law. These restrictions and prohibitions include laws that ban or limit the employer’s ability to request or require arbitration as a term of employment, require the arbitration agreement itself to be conscionable, and that require certain language or conditions to be included in the agreement. And California courts often add to the complexity, applying strict scrutiny to arbitration agreements.
Notable recent changes:
AB 51 – makes it an unlawful employment practice to require as a condition of employment that an employee sign an arbitration agreement or otherwise waive a right for example for sexual harassment claims. (But it is unclear what impact the Federal Arbitration Act will have on this law).
AB 749 – was passed in 2018 and prohibits agreements for settlements of disputes between an employee and employer regarding sex discrimination, harassment, retaliation, and related terms and conditions of employment.
AB 1008 – bans pre-employment inquiries or criminal background checks until after a conditional offer of employment has been made (in CNB v. Superior Court, the court held such a ban does not apply if the employer is a peace officer or works for a law enforcement agency).
If an arbitration agreement covers the entire employment relationship, California Courts may not enforce such an agreement. The court may only enforce a portion of the agreement that covers the wage-hour claims. If that is the case, a court order must be obtained to sever the unenforceable portions of the agreement and stay the wage-hour claims pending arbitration or the remainder of the action.

How to Enforce or Vacate an Arbitration Agreement

In California, if an employer wishes to enforce the arbitration agreement against its employee, then it must move the court to compel arbitration. On the other hand, if the employee wishes to challenge the agreement, then he or she must oppose a motion to compel arbitration brought by the employer.
A party’s request to compel the enforcement of an arbitration agreement must be made within a four-year limitations period set forth in California Code of Civil Procedure §343. Under this four year statute of limitations, the employee may oppose a motion to compel arbitration and/or move the court to invalidate an arbitration agreement within four years of when an employee knew or should have known the rights purportedly waived by the agreement were violated. Like the employee’s opposition to arbitrability , an employee’s request to invalidate an arbitration agreement can be brought in any court in California under the "forum selection" provision of the agreement. As with the request to compel, the employee may also choose to bring the challenge in federal court. Any counterclaim brought by the employee based on complaints arising out of the dispute with the employer will also likely be subject to the arbitration agreement, as federal law has expressly sanctioned allowing parties to consolidate their claims where they relate to the same transaction at issue in the case.
Some arbitration agreements may contain a provision that allows employees to initiate their claims in an administratively supervised arbitration in lieu of a court action. This means the parties will initiate a claim with an arbitral forum such as AAA or JAMS, and pay the administrative filing fee, but will be subject to an arbitral panel’s review of the dispute that is supervised by that forum.

Best Practice Tips for Drafting an Arbitration Agreement

While it is clear that an employee cannot "agree" to be bound by an arbitration provision that is not compliant with state law, many practitioners and employers do not understand what this means in practice. In order to ensure compliance with California law, at the very least, the following provisions should be incorporated into any agreement in California for it to be enforceable pursuant to state policy: For any arbitration agreement to be enforceable, the employee must be provided a meaningful opportunity to review the terms in full, and have an opportunity to obtain counsel if they wish. Therefore, it is good practice to identify the relevant arbitration forum in the agreement, and give the employee a business day to review the rules of that forum to make sure they understand the process. A company may not place the onus to initiate arbitration on the employee, or ignore the arbitration provision when a dispute does arise. A best practice is to specify who is responsible for initiating the arbitration and pay all arbitration expenses (other than the filing fee), including arbitrator and hearing costs. The employer should promise in writing to waive actual malice standard for punitive damages, or in other words, promise not to seek punitive damages against the employee unless they can prove the case by clear and convincing evidence. Since the California Supreme Court has held that where there is a pending claim in court, prejudgment interest is not available in arbitration "unless demanded by the prevailing party", a good practice is to specify which party is responsible for paying prejudgment interest and how much. The parties should agree to limits on time and length of arbitration. Determining reasonable limits depends on the nature of the claim, but the important part is to make sure the agreement states the parties’ expectations. A final effective tool in making an arbitration agreement more binding on the employee, and more difficult for them to argue against its validity, is to provide a consideration in addition to employment or continued employment. Such an addition could take the form of a signing bonus, forsaking of a right to sign up bonus that has already accrued, or some other valuable consideration in return for the employee’s agreement.

Commonly Asked Questions

In an effort to help fully inform you on the ins and outs of employee arbitration agreements in California, we have put together a list of some of the most frequently asked questions we have received.
Q: My employees are not all based in California. Do I still need an arbitration agreement?
A: Possibly. If you have employees that work in California, you are subject to California employment laws. Thus, the overriding principles of California employment law, including those discussed in this post, apply to your California employees.
Q: If I have a former employee still working under California law for a common employer that has agreed to arbitrate, can I sue the former employee directly?
A: For the most part, the answer is generally no. When an employee signs an arbitration agreement, they are agreeing to arbitrate all claims against you, which includes those brought by common employers . In arbitration, they are prohibited from joining you in a suit and if they do, then you have the right at your sole discretion to file a motion to compel arbitration to dismiss that claim.
Q: Do I have to allow employees to opt-out of mandatory arbitration?
A: No, not if the opt-out opportunity is provided as part of the offer package to join the company. However, if the onerous provisions outlined earlier in the article are included in the agreement, then you may want to reconsider this practice of compelling team members to arbitrate.
Q: I have included an arbitration clause in my employment document. Do I need to have a separate agreement?
A: In general, your arbitration agreement should be a standalone agreement so that it is unambiguous. Having provisions regarding arbitration in your overall employment agreement can lead to unintended consequences. Specifically, employers should not include arbitration in post-termination settlement agreements. Doing so has been found to be unconscionable and therefore unenforceable if challenged.