Arbitration Agreements in California Employment Cases

California law permits employers not to hire you if you refuse to sign an arbitration agreement. An arbitration agreement is where you waive your right to sue in the event of a dispute.

Here are five key things to know:

1. Arbitration is where you resolve differences in front of a private arbitrator rather than a lawsuit in a civil court.
2. Arbitration agreements are typically found in your employment contract when you first get hired.
3. Employers tend to view arbitration as being a more efficient, cheaper, and faster way to resolve disputes.
4. Arbitrators often side with employers and may not take your rights as seriously as would a California court.
5. Arbitration is governed by both state and federal law, which frequently conflict with each other.

Below, our California labor and employment attorneys address frequently asked questions about arbitration agreements and how they may affect your case:

• 1. What is an arbitration agreement?
• 2. Why do employers require employees to sign arbitration agreements?
• 3. What laws govern?
• 4. What types of claims can be subject to arbitration?
• 5. When is it enforceable?
• 6. How do arbitration agreements affect class action lawsuits in California?
• 7. Is mandatory employment arbitration legal?
• Addition resources

An arbitration agreement is an agreement between employers and their employees to resolve any differences in front of a private arbitrator rather than a lawsuit in a civil trial court.

1. What is an arbitration agreement?

An employment arbitration agreement is a contract signed between you and your employer where any dispute is held

• in front of a private arbitrator and
• not a California court.

Such agreements are typically found inside of a larger agreement and are rarely their own document. Agreements to arbitration can be short, and hidden in a larger document.

What is the arbitration process like?

Arbitration is a type of alternative dispute resolution. It is a simpler, more streamlined process than civil court litigation. It is also usually less expensive, one of the reasons employers like it so much. Arbitration is similar to court litigation in the following ways:

• You and your employer may be represented by lawyers;
• Information is exchanged between the parties;
• Witnesses may be called and questioned; and
• A hearing is held before a decision-maker.

Differences between arbitration and the court setting include:

• Right to obtain documents is typically more limited;
• Hearings typically occur in a conference room rather than a courtroom; and
• The arbitrator might be a retired judge, a lawyer, or a person with particular experience who is a licensed arbitrator.

2. Why do employers require employees to sign arbitration agreements?

There are many reasons that employers prefer arbitration to civil litigation. First and foremost, arbitration is a cheaper process than civil litigation. They tend to proceed much more quickly and are therefore cheaper because they save a great deal on attorney’s fees.

The discovery process, or the exchange of information between the parties, also occurs much more quickly. Document exchange is usually more limited and therefore can proceed more quickly with fewer documents to review and consider.

Who picks the arbitrator?

One of the key aspects of the flexibility of the arbitration process is picking the arbitrator. Unlike a civil court case, where the parties are stuck with the judge to which they are assigned, arbitration allows the parties to choose an arbitrator who is experienced in the area of dispute.

A drawback to this, however, is that employers often try to pick arbitrators they feel are favorable to their case.

Who pays for arbitration fees?

One positive aspect of arbitration for employees is that California law requires employers to pay for the costs of arbitration. This is good because while arbitration is usually less expensive than civil litigation, it can still range in the tens of thousands of dollars in some cases.

3. What laws govern?

There are two major laws that govern arbitration: one created by the California legislature and the other a product of the federal government:

• The California Arbitration Act (CAA), ¹ and
• The Federal Arbitration Act (FAA). ²

The specific requirements of each law can differ, and conflicts between California and federal law often occur. Federal law trumps state law, and any inconsistencies will be struck in favor of federal law.

California employers may no longer make arbitration agreements a condition of employment.

4. What types of claims can be subject to arbitration?

Nearly any legal claim can be subject to an arbitration agreement if it arises out of the employment relationship between you and your employer.

Examples of claims that could be subject to arbitration include:

• Employment disputes over back pay;
• Harassment allegations;
• Retaliation claims;
• Discrimination claims;
• Wrongful termination claims;
• Failure to promote lawsuits; and
• Personal injury lawsuits arising from employment.

This is simply a small sample, and many other areas of dispute between you and your employer may be subject to a valid arbitration agreement.

5. When is it enforceable?

Arbitration agreements are subject to certain rules in order to have enforceability under California and federal law.

If an arbitration agreement fails to meet these requirements, it can be held unenforceable. This means that you will be allowed to file a claim in court, rather than be obligated under the contractual agreement to arbitrate.

What contract law requirements exist for arbitration agreements?

In California, all contracts (including arbitration provisions), must be:

• “conscionable,”
• supported by consideration, and
• drafted and signed without fraud, duress, mistake, or lack of capacity.

Conscionability has to do with fairness in the negotiation of the contract. Terms of an agreement are considered unconscionable if they unreasonably favor one side over the other, especially if the party favored is considered the more powerful party, such as an employer.

Consideration is an exchange of value for giving up the right to file a lawsuit in court. For most newly hired employees, the offer of a job is considered sufficient consideration for the contract.

Other forms of consideration could be:

• Contract renewal;
• Bonus;
• Raise;
• Promotion;
• Additional vacation days; or
• Other forms of reasonable compensation.

Fraud and duress are illegal pressure to sign a contract. If found, the contract will not be enforced. A mistake is an accidental signing or other error that could invalidate the contract. Lack of capacity refers to a person who is unable to sign a contract such as:

• A person who lacks the mental capacity to understand what he or she is signing; or
• A person under the age of 18 (minority).

What case law requirements exist for an arbitration agreement to be enforceable?

The California Supreme Court ruled in Armendariz v. Foundation Health Psychare Services, Inc. that five factors must be present for arbitration agreements to be enforced, in addition to contract law requirements. ³

These requirements are:

1. The agreement requires neutral arbitrators;
2. It allows for more than minimal discovery;
3. A written decision by the arbitrator is required;
4. The agreement must allow all types of relief that would otherwise be available in court; and
5. It may not require you to pay either unreasonable costs or any arbitrators’ fees or expenses as any form of condition for access to the arbitration process.

While these conditions are in place, they are not always clear in how they are applied to each individual case. For example, what qualifies as “minimal discovery” is often open for interpretation, and sometimes results in a dispute over this issue.

Hasty v. AAA of Northern California, Nevada & Utah

In this 2023 case, the California Court of Appeal Third Appellate District held that AAA’s arbitration agreement was unenforceable because it was both procedurally unconscionable as well as substantively unconscionable.

The arbitration agreement was procedurally unconscionable because:

• it was presented to the employee on a smartphone, so the employee had a harder time reading it that he would have on a desktop or on paper; and
• it gave the employee the option to click “I agree” without actually accessing – and therefore reading – the arbitration agreement.

The agreement was also substantively unconscionable because:

• its confidentiality clause was overly broad;
• it waived the employee’s rights to bring claims under California’s Private Attorneys General Act (PAGA);
• it waived the employee’s right to “any remedy or right,” which is overly broad; and
• it included a broken link to the relevant arbitration rules.

This case serves as a warning to employers to make sure their arbitration agreements are narrowly-tailored, fair, and presented to employees in a way easy for them to access and understand.⁴

6. How do arbitration agreements affect class action lawsuits in California?

An employer may require you to sign waivers of a wage and hour class action as part of the arbitration agreement. This

• requires you to have your action heard on a singular basis, and
• you cannot participate in a group effort to file a lawsuit or arbitrate.

California has attempted to limit and sometimes ban class action waivers multiple times, and in nearly as many times the federal courts have held that federal law has preemption over California law, permitting class action waivers.⁵ Whether a class action waiver is enforceable often depends on the type of claim at issue, and the facts and circumstances of the case.

With the help of an experienced employment attorney, you can know whether your waiver of a class-action lawsuit is enforceable.

7. Is mandatory employment arbitration legal?

Yes. In general, California employers can condition your employment on you giving up your right to sue them. Therefore if you refuse to agree to arbitration, employers do not have to:

• hire you,
• retain you as an employee, and/or
• give you certain employment benefits.

There is a 2020 California law – Assembly Bill 51 – which tried to ban mandatory employment arbitration. However on February 15, 2023, the Ninth Circuit Court of Appeals held that AB 51 is inapplicable to any arbitration agreements covered by the Federal Arbitration Act (FAA) – which is most arbitration agreements. Then on January 1, 2024, the United States District Court Eastern District of California imposed a permanent injunction prohibiting the State of California from enforcing AB 51 at all.⁶